Annual Report
2023
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® NATIONAL BANK and the NATIONAL BANK logo are registered trademarks of National Bank of Canada.
© NATIONAL BANK OF CANADA, 2023. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without prior written consent of National Bank of Canada.
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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 19, 2024.
CCoorrppoorraattee SSoocciiaall RReessppoonnssiibbiilliittyy SSttaatteemmeenntt
The information will be available in March 2024 on the Bank’s website
at nbc.ca.
CCoommmmuunniiccaattiioonn wwiitthh SShhaarreehhoollddeerrss
For information about stock transfers, address changes, dividends, lost
certificates, tax forms and estate transfers, shareholders of record may
contact the transfer agent at the following address:
CCoommppuutteerrsshhaarree TTrruusstt CCoommppaannyy ooff CCaannaaddaa
Share Ownership Management
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1 Canada
Telephone: 1-888-838-1407
1-888-453-0330
Fax:
E-mail:
service@computershare.com
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. These statements are made
pursuant to the Canadian and American securities legislation.
The Caution Regarding Forward-Looking Statements section can be
found on page 13 of this Annual Report.
TTrraaddeemmaarrkkss
The trademarks belonging to National Bank of Canada and used in this
report include National Bank of Canada, National Bank, NBC, NBC
Financial Markets, National Bank Financial, NAventures, National Bank
Financial-Wealth Management, Private Banking 1859, National Bank
Direct Brokerage, National Bank Investments, NBI, 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 978-2-921835-79-4
Legal deposit – Bibliothèque et Archives nationales du Québec, 2023
Legal deposit – Library and Archives Canada, 2023
PPrriinnttiinngg
L’Empreinte
National Bank of Canada 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 globally
in terms of 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,
where most of our branches are located, 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
7 Members of the Board of Directors
8 Our One Mission
9 How We Support Sustainable Development
12 Risk Disclosures
13 Management’s Discussion and Analysis
129 Audited Consolidated Financial Statements
234 Statistical Review
236 Information for Shareholders
2.8 million Clients(1)
31,243 Employees(2)
$10.2 B Total Revenue
$3.3 B Net Income
$424 B Total Assets
$29.2 B Market Capitalization
2023 Total Revenue — Adjusted
by Business Segment (3)
11%
Personal and Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance
and International
24%
42%
23%
2023 Total Revenue — Adjusted
by Geographic Distribution(3)
19%
Province of Quebec
Other Canadian provinces
Outside Canada
51%
30%
(1 ) Clients of the Personal and Commercial segment
(2) Worldwide
(3) Excluding the Other heading. See the Financial Reporting Method section
on pages 14 to 19 for additional information on non-GAAP financial measures.
Investing in National Bank
OUR PILLARS
Our Culture
› Entrepreneurial
› Agile
› Collaborative
› Diverse and inclusive
OUR PERFORMANCE IN 2023
Superior ROE (1)
Reported
16.5%
16.8%(2)
Adjusted
Strong Earnings
Power
(1.2%)
6.7%
Reported
(4)
Adjusted
Our Strategic
Positioning
Our Discipline
› Canadian bank with leading
› Strong risk management culture
franchise in Quebec
› Differentiated positioning
in Financial Markets and
Wealth Management
› Focused strategy outside
Canada
› Disciplined cost management
› Solid capital levels
Solid Credit
Performance
11 bps
PCL on Impaired
Loans (excl. POCI)
Ratio(3)(6)
Robust Capital
Position
13.5%
CET1 Ratio(2) as at
October 31, 2023
Sound Liquidity
Profile
155%
Liquidity coverage
ratio(2) as at
October 31, 2023
2023 ROE (3)
PTPP(5) Growth
(2023/2022)
Sustainable Dividend Growth
($ per share)
8.9% 10-year CAGR(7)
Leading Total Shareholder Returns(3)
CAGR(7) for the periods ended October 31, 2023
3.98
3.58
Ranking(9)
National
Bank
Canadian
Peers(9)
Adjusted
Dividend
Payout Ratio(2)
42% 10-year
average
40–50%
medium-term
objective
2.84
2.84
2.66
2.44
2.04
1.88
1.70
2.18
2.28
3 years
5 years
10 years
# 1
# 1
# 1
15%
12%
11%
10%
4%
7%
2013
2014
2015
2016
2017
2018
2019
2020
2021(8)
2022
2023
Source: Nasdaq IR Insight via Factset
(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 Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios and for additional information on capital-management measures.
(3) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(4) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.
(5) Pre-Tax Pre-Provision earnings (PTPP) refers to income before provisions for credit losses and income taxes.
(6) Provisions for credit losses (PCL) on impaired loans excluding purchased or originated credit impaired (POCI) loans as a percentage of average loans and acceptances.
(7) Compound annual growth rate.
(8) Interruption of dividend increases, as prescribed by the Office of the Superintendent of Financial Institutions (Canada) (OSFI) between March 13, 2020, and November 4, 2021.
(9) Among Canadian peers, as defined above.
National Bank of Canada
2023 Annual Report
1
TSX
10%
8%
7%
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(2)
Leverage ratio(2)
Financial Highlights
Medium-Term Objectives
2023 Results
5–10%
15–20%
40–50%
Strong
Strong
(0.1%)
16.8%
41.1%
13.5%
4.4%
As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)
2023
2022
Operating results
Total revenue
Income before provisions for credit losses and income taxes
Net income
Diluted earnings per share
Return on common shareholders’ equity(3)
Dividend payout ratio(3)
Operating results – Adjusted (1)
Total revenue – 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
10,170
4,369
3,335
$ 9.38
16.5 %
42.0 %
10,658
5,018
3,409
$ 9.60
52.9 %
$ 3.98
9,652
4,422
3,383
$ 9.61
18.8 %
36.8 %
9,934
4,704
3,383
$ 9.61
52.6 %
$ 3.58
423,578
403,740
(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.
(2) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios and for additional information on capital management measures.
(3) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
2
National Bank of Canada
2023 Annual Report
Message From the President
and Chief Executive Officer
At National Bank, we have a strong track record of creating
sustainable value for our stakeholders while operating in
dynamic environments. Our agility, focus, and discipline are
core to who we are and who we aim to be as a Bank that
Puts People First. These attributes are steeped in our nearly
165-year history and continue to be key in helping the Bank,
our clients, our employees, and our communities navigate
every stage of the economic cycle and thrive over the long
term.
Throughout 2023, tighter monetary policy and cost inflation
put increasing pressure on Canadian consumers and
businesses alike. Ongoing geopolitical tensions further
fuelled market volatility and macroeconomic uncertainty.
Despite an increasingly complex environment, the Bank
delivered organic growth across its business segments and
a strong return on equity for 2023, while prudently
managing expenses.
Our ability to generate solid returns over the long term is a
result of our diversified business mix and defensive
positioning as well as our team’s flexibility and focus on
strategic priorities. Our disciplined approach to credit,
capital, and costs enables us to invest in organic growth
and to deliver a strong return of capital to shareholders
through sustainable dividend increases, while providing
flexibility.
A Strong and Diversified Banking Franchise
In 2023, our Personal and Commercial segment, which
enjoys a very strong presence in Quebec and a growing
presence in the rest of Canada, continued to deliver on its
client acquisition and enhanced engagement objectives.
This was achieved through quality advice and solutions as
well as digital platform improvements, which will be areas of
continued focus going into 2024.
As a leading Canadian full-service brokerage and private
bank, our Wealth Management segment delivered record
revenue performance in 2023, benefitting from our strong
client franchise. We maintained our position as Canada’s
top solutions provider to independent advisors. Our client-
facing strategy and open-architecture approach continues
to gain traction as we grow our client base in selected
activities across Canada.
Our Financial Markets segment also delivered strong results
thanks to a differentiated and diversified business mix,
sound risk profile, and client-first focus. This was reflected in
the record revenues generated by our corporate and
investment banking activities as well as solid performance
by Global Markets. Our Financial Markets teams have a
solid track record of consistently performing through all
market cycles while maintaining disciplined risk
management.
Our U.S. specialty finance business, Credigy, generated
solid growth in 2023, reflecting its ability to execute in any
macro environment. We anticipate ongoing momentum for
Credigy to deploy capital in 2024 to continue generating
high-quality earnings in the future.
In Cambodia, ABA Bank continued to solidify its leadership
position as the preferred bank for individuals and small to
medium enterprises with a focus on everyday banking
services and secured lending. While the Cambodian
economy continues to adjust to softer external demand
and a slower recovery in tourism, the long-term outlook for
this market is highly attractive. The country’s fundamentals
are strong with a high-growth economy, favourable
demographics, and an underbanked population. This
presents substantial growth opportunity for ABA Bank in the
future.
National Bank of Canada
2023 Annual Report
3
Message From the President and Chief Executive Officer (cont.)
Supporting Canadians and the Canadian Economy
Focused Growth and Simplification
By supporting our communities and helping our over
2.8 million clients to achieve their financial goals, we play a
crucial role in the economy. This responsibility is reflected in
our One Mission to have a Positive Impact in People’s Lives
by building long-term relationships.
As a bank founded by entrepreneurs, we are passionate
about helping Canadian entrepreneurs and businesses
invest in innovation and grow their businesses. Fostering
entrepreneurship and facilitating the creation of businesses
are cornerstones of a healthy and resilient economy. This
year, we welcomed new clients to our community following
the acquisition of the commercial loan portfolio of Silicon
Valley Bank’s Canadian branch. In doing so, we
strengthened our bond with the Canadian technology and
innovation industry, which is critical to solving many of our
social and environmental challenges.
A sustainable economy also means supporting our clients in
the pursuit of energy transition opportunities. Being among
North America’s top financial institutions in renewable
energy financing, we believe in a balanced approach and
have an established energy and natural resources
franchise.
As part of our commitment to enriching our communities, we
support a broad range of initiatives to empower our
stakeholders, from financial education for women to
facilitating access to banking services for Indigenous
communities. As the first bank to finance the First Nations
Finance Authority in 2013, we have helped Indigenous
communities invest in housing, health care, and energy
projects for a decade and will continue to do so.
We also have a key role to play to help address Canada’s
housing shortage as one of the country’s leading affordable
and social-housing lenders. Much more needs to be done
on this front, but we are proud to be leading the way in our
industry.
These are but a few examples of what we are doing to
support our clients and our communities. We will continue to
do our part to stimulate the creation of a sustainable and
growing Canadian economy. We also support government
policy and a regulatory environment that remains
conducive to stimulating investments and business growth
here in Canada and for Canadians.
With persistent macroeconomic uncertainty and restrictive
monetary policy, the outlook for economic growth remains
challenging. Canadian consumers and businesses will
continue to face higher borrowing costs. During these
uncertain times, our goal is, first and foremost, to guide and
support our clients.
We remain positive regarding the untapped potential
across our Canadian franchise, including wealth
management and private and commercial banking. These
ambitions are further supported by our now well-
entrenched collaborative model across our teams and
businesses, enabling us to deepen existing client
relationships. Increasing client connectivity is even more
important in a challenging economic and market
environment.
As a team, we are also prioritizing investments that will
simplify our operations to gain efficiencies, while also
improving the client experience. Bringing together our
information technology and operations under one
leadership was a major step in facilitating this work. More
broadly, we must ensure that, as we develop processes,
solutions, and services, that can be leveraged across our
businesses. While this has long been an area of focus, we
are further concentrating on simplification and automation.
As we balance investing in organic growth with tight
expense management, we believe it is essential to continue
investing in our more than 31,000 employees. Ensuring we
have the right team in the right place at the right time to
offer our clients the advices and solutions they need when
they need them is our first responsibility as leaders.
A Strong and Renewed Senior Leadership Team
In 2023, we made key senior leadership appointments in
support of our strategic priorities and as part of our
succession planning processes.
4
National Bank of Canada
2023 Annual Report
At the beginning of the year, Étienne Dubuc, Co-Head of
Financial Markets since 2022 and with the Bank for 25 years,
was named sole head of the franchise. Michael Denham
was named head of Commercial and Private Banking after
a highly successful stint as President and Chief Executive
Officer of the Business Development Bank of Canada,
where he was instrumental in doubling its commercial
franchise. Finally, Nancy Paquet, with the Bank since 2007 in
a range of strategic senior leadership roles, was tapped as
the ideal candidate to lead our Wealth Management
business.
Today, I am proud to be able to count on a highly
experienced and skilled Senior Leadership Team that brings
the right combination of continuity and fresh perspective to
our work and as we pursue the Bank’s strategy for long-
term growth.
Agility, Focus and Discipline
In a complex environment, we remain steadfast in our
longstanding and proven approach to prudent capital,
credit, and cost management. We will pursue our business
objectives shrewdly, remaining focused on areas where we
have expertise and can be competitive, and by actively
seeking and capitalizing on new opportunities.
We will also continue to simplify our operations and
processes by focusing on the right priorities, always with a
client-first and long-term perspective. In all areas, we work
to make a meaningful impact to create a sustainable
economy for all our stakeholders.
We have a strong team with a proven ability to create
sustainable value and adapt to change. I am confident that
our agility, focus, and discipline will continue to serve our
clients, our communities, our growth and, ultimately, our
shareholders.
Laurent Ferreira
President and Chief
Executive Officer
Members of the Senior Leadership Team
Laurent Ferreira
President and
Chief Executive Officer
Michael Denham
Executive Vice-President,
Commercial and
Private Banking
Lucie Blanchet
Executive Vice-President,
Personal Banking and
Client Experience
Étienne Dubuc
Executive Vice-President,
Financial Markets
Brigitte Hébert
Executive Vice-President,
Employee Experience
Julie Lévesque
Executive Vice-President,
Technology and Operations
William Bonnell
Executive Vice-President,
Risk Management
Marie Chantal Gingras
Chief Financial Officer and
Executive Vice-President,
Finance
Nancy Paquet
Executive Vice-President,
Wealth Management and
Co-President and Co-Chief
Executive Officer, National Bank
Financial
National Bank of Canada
2023 Annual Report
5
Message From the Chairman
of the Board
Fiscal 2023 ended against a backdrop of economic
uncertainty. Thanks to our ambitious, balanced business
plan, National Bank was able to come through in good
shape and deliver solid performance. In a highly uncertain
macroeconomic environment, we maintained prudent
positioning. Our credit portfolios continued to do well, and
our solid capital levels are giving us the flexibility needed to
invest in our operations and future growth. Moreover, we
have deployed a variety of communication methods and
equipped our teams to reassure clients and maintain close
relationships with them.
A Renewed Board of Directors
At the last Annual Meeting of Holders of Common Shares
held in April 2023, we had the pleasure of welcoming Annick
Guérard, President and Chief Executive Officer of
Transat A.T., and Pierre Pomerleau, Executive Chair of the
Board of Directors of Pomerleau, to the Board. Their
impressive wealth of professional experience, their
leadership, and their combined expertise in risk
management, information technology, client experience,
entrepreneurship, and sustainable development will be
immense assets to the Board.
At the same time, Jean Houde ended a chapter of his
professional life, completing his mandate as director and
Chairman of the Board of Directors. I would like to thank him
for his invaluable contribution to the Bank’s success and
applaud his leadership as Chairman of the Board of
Directors over the last nine years and his commitment as a
director for the last 12 years.
New Faces on the Senior Leadership Team
During the year, the composition of the Senior Leadership
Team changed. Étienne Dubuc now leads the Financial
Markets segment, Michael Denham now heads up
Commercial and Private Banking, while Nancy Paquet has
been given responsibility for the Wealth Management
segment. Their knowledge of the organization and their
professional experiences in various fields are valuable
assets for our Senior Leadership Team. These appointments,
some of which are the result of internal succession, further
bolster the strength of our team and the talent pool depth
that we are proud to be able to count on.
On behalf of the Board of Directors, I would like to thank our
almost 31,000 employees for their consistent daily
commitment and our shareholders for their constantly
renewed trust.
I would also like to thank my colleagues and the members
of the Senior Leadership Team, who generously supported
me as I integrated into my new role.
My colleagues on the Board of Directors and I look forward
to 2024 with optimism and confidence, as we continue to
deepen our knowledge of the Bank and build closer bonds
with its officers.
Robert Paré
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.
6
National Bank of Canada
2023 Annual Report
Members of the Board of Directors
Robert Paré
Quebec, Canada
Chairman of the Board of
Directors,
National Bank of Canada
and Corporate Director
Director since April 2018
Maryse Bertrand
Quebec, Canada
Corporate Director
Director since April 2012
Pierre Blouin
Quebec, Canada
Corporate Director
Director since September 2016
Pierre Boivin
Quebec, Canada
President and Chief Executive
Officer, Claridge Inc.
Director since April 2013
Yvon Charest
Quebec, Canada
Corporate Director
Director since April 2020
Patricia Curadeau-Grou
Quebec, Canada
Corporate Director
Director since April 2019
Laurent Ferreira
Quebec, Canada
President and Chief Executive
Officer,
National Bank of Canada
Director since February 2021
Annick Guérard
Quebec, Canada
President and Chief Executive
Officer,
Transat A.T. Inc.
Director since April 2023
Karen Kinsley
Ontario, Canada
Corporate Director
Director since December 2014
Lynn Loewen
Quebec, Canada
Corporate Director
Director since April 2022
Rebecca McKillican
Ontario, Canada
Corporate Director
Director since October 2017
Pierre Pomerleau
Quebec, Canada
Executive Chair of the Board of
Directors,
Pomerleau Inc.
Director since April 2023
Lino A. Saputo
Quebec, Canada
President and Chief Executive
Officer and Chair of the
Board of Directors,
Saputo Inc.
Director since April 2012
Macky Tall
Florida, United States
Partner and Chair of the Global
Infrastructure Group
The Carlyle Group Inc.
Director since April 2021
Board Committees
Audit Committee
Lynn Loewen (Chair)
Maryse Bertrand
Pierre Blouin
Patricia Curadeau-Grou
Risk Management Committee
Patricia Curadeau-Grou (Chair)
Yvon Charest
Annick Guérard
Karen Kinsley
Pierre Pomerleau
Lino A. Saputo
Macky Tall
Technology Committee
Pierre Blouin (Chair)
Pierre Blouin (Chair)
Maryse Bertrand
Lynn Loewen
Rebecca McKillican
Human Resources Committee
Pierre Boivin (Chair)
Maryse Bertrand
Pierre Blouin
Yvon Charest
Rebecca McKillican
Conduct Review and Corporate
Governance Committee
Yvon Charest (Chair)
Patricia Curadeau-Grou
Karen Kinsley
Robert Paré
Macky Tall
National Bank of Canada
2023 Annual Report
7
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.
8
National Bank of Canada
2023 Annual Report
How We Support
Sustainable Development
Our ESG Principles
Supporting sustainable development is an intrinsic part of our One Mission.
Environmental, social and governance (ESG) considerations play a key role in our business
and operational decisions.
The ESG principles adopted by our Board of Directors 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
National Bank of Canada
2023 Annual Report
9
Our Commitments
In accordance with our principles and to help the Bank achieve its ESG objectives, we have
notably 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 LGBTQ2+ 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 visible minorities by the end of 2023
Reduce greenhouse gas emissions from
our activities by 25% by the end of 2025
Reduce the intensity of the Commercial
Real Estate sector portfolio by 50% by 2030
Reduce portfolio intensity for the
Canadian Oil and Gas Producers
subsector by 31% by 2030
Reduce the intensity of the Power Generation
sector portfolio by 33% by 2030
Achieve net zero emissions for our operations
and our financing activities by 2050
In 2023, the Bank also pursued its commitment to the following initiatives:
DISCLOSURE INSIGHT ACTION
Principles
For more information about our targets and commitments, see our publications at nbc.ca/esg.
10
National Bank of Canada
2023 Annual Report
Our Impact
ENVIRONMENT
2
new interim reduction targets
for financed GHG emissions.
$11 B
in capital made available for
renewable energy projects
in North America since 2019,
as at October 31, 2023.
10
employee resource groups (ERGs)
that bring together hundreds
of employees representing
various diversity segments.
SUSTAINABLE FINANCE
One dedicated team
that supports clients during
their transition.
$3.2 B
sustainability bonds in
circulation, the proceeds
of which were used to
finance sustainable
development projects,
as at October 31, 2023.
$4.1 B
volume in assets under
management in
National Bank Investments’
sustainable investments
as at October 31, 2023.
98%
of NBI assets under
management managed
by United Nations Principles
for Responsible Investment
(PRI) signatories as at
October 31, 2023.
SOCIAL
87
With 87 branches in Cambodia,
the Bank serves as a driver of
economic and social development
for individuals and businesses
across the country.
Year 1
The Bank completed the
first year of certification for
the Progressive Aboriginal
Relations program rolled out
by the Canadian Council for
Aboriginal Business.
GOVERNANCE
ESG governance
Changes to the governance structure:
ESG committee and working groups made up
of leaders from various sectors responsible
for ESG strategy.
ESG at the Board
ESG responsibilities integrated into the mandate
of the Board of Directors and all of its committees.
Accountability
ESG criteria integrated into executive
compensation.
National Bank of Canada
2023 Annual Report
11
Risk Disclosures
In 2012, the Financial Stability Board (FSB) formed a working group, the Enhanced Disclosure Task Force (EDTF), that was mandated to develop principles for
enhancing the risk disclosures of major banks, to recommend improvements to current risk disclosures, and to identify risk disclosure best practices used by
major financial institutions. The EDTF published a report entitled Enhancing the Risk Disclosures of Banks, which contains 32 recommendations. The Bank
makes every effort to ensure overall compliance with those recommendations and is continuing to enhance its risk disclosures to meet the best practices on
an ongoing basis. The risk disclosures required by the EDTF are provided in this Annual Report and in the document entitled Supplementary Regulatory Capital
and Pillar 3 Disclosure available on the Bank’s website at nbc.ca.
Annual
Report
Pages
Supplementary
Regulatory Capital
and Pillar 3 Disclosure(1)
General
1
2
3
4
Location of risk disclosures
Management’s Discussion and Analysis
Consolidated Financial Statements
Supplementary Financial Information
Supplementary Regulatory Capital and Pillar 3 Disclosure
Risk terminology and risk measures
Top and emerging risks
New key regulatory ratios
Risk governance and risk management
5
6
7
8
Risk management organization, processes and key functions
Risk management culture
Key risks by business segment, risk management
and risk appetite
Stress testing
9
10
11
12
13
Capital adequacy and risk-weighted assets (RWA)
Minimum Pillar 1 capital requirements
Reconciliation of the accounting balance sheet to
the regulatory balance sheet
Movements in regulatory capital
Capital planning
RWA by business segment
and by risk type
Capital requirements by risk and RWA calculation method
Banking book credit risk
Movements in RWA by risk type
Assessment of credit risk model performance
14
15
16
17
Liquidity
18
Funding
19
20
21
Market risk
22
23
24
25
Credit risk
26
27
28
29
30
Other risks
31
32
Liquidity management and components of the liquidity buffer
Summary of encumbered and unencumbered assets
Residual contractual maturities of balance sheet items and
off-balance-sheet commitments
Funding strategy and funding sources
Linkage of market risk measures to balance sheet
Market risk factors
VaR: Assumptions, limitations and validation procedures
Stress tests, stressed VaR and backtesting
Credit risk 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
Other risks: Governance, measurement and management
Publicly known risk events
(1)
(2)
Fourth quarter 2023.
These pages are included in the document entitled Supplementary Financial Information – Fourth Quarter 2023.
12
National Bank of Canada
2023 Annual Report
22 to 37(2)
5 to 71
11 to 17, 20 and 21
7 and 8
7 and 8
7 and 8
7 and 8
47
12
53 to 106, 119 and 121 to 123
Notes 1, 7, 16, 23 and 29
62 to 106
24 and 67 to 73
54 to 57, 91 and 95 to 98
62 to 85, 91 to 93 and 98
62 and 63
61 to 63 and 67
53, 63, 79, 89, 90 and 93
54 to 57
59
53 to 61
61
74 to 78
60
66, 75 to 78 and 84
91 to 98
94 and 95
224 to 228
98 to 100
86 and 87
84 to 90, 212 and 213
88
84 to 90
83 and 173 to 184
80, 81, 147 and 148
119, 122, 123 and 173 to 184
80 to 82 and 192 to 195
77 to 82, 170 and 178
22 to 58 and 22 to 30(2)
27 to 30(2)
48 to 58, 31(2) and 32(2)
24, 28 to 30 and 56 to 67
72 to 74 and 100 to 106
24, 100 and 101
National Bank of Canada
Management’s Discussion
and Analysis
NNoovveemmbbeerr 3300,, 22002233
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, 2023 (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, 2023. 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 sedarplus.ca. 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 2023 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
1144
2200
2211
2255
2288
2299
3333
3366
4411
4466
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
4477
4488
5511
5533
6622
110077
111133
111133
111144
112244
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. The forward-looking
statements in this document may include, but are not limited to, statements made in the Message From the President and Chief Executive Officer and other statements about the economy, market changes, the
Bank’s objectives, outlook, and priorities for fiscal year 2024 and beyond, the strategies or actions that will be taken to achieve them, expectations for the Bank’s financial condition, its activities, the regulatory
environment in which it operates, its environmental, social, and governance targets and commitments, and certain risks to which the Bank is exposed. 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 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. 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 performance targets will not
be achieved. 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. Thus, the Bank recommends that readers not place undue reliance on these 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. Investors and others who rely on the Bank’s forward-looking statements should carefully consider the factors listed below 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.
Assumptions about the performance of the Canadian and U.S. economies in 2024 and how that performance will affect the Bank’s business are among the factors considered in setting the Bank’s strategic
priorities and objectives, including provisions for credit losses. These assumptions appear in the Economic Review and Outlook section and, for each business segment, in the Economic and Market Review
sections, and may be updated in the quarterly reports to shareholders.
The forward-looking statements made in this document 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 the other countries where the Bank operates; the impact of
upheavals in the U.S. banking industry; exchange rate and interest rate fluctuations; inflation; global supply chain disruptions; 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; climate change, including physical risks and those related to 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 key short-term priorities and long-term strategies; the timely development and launch of new products and services; the Bank’s
ability to recruit and retain key personnel; technological innovation, including advances in artificial intelligence and the open banking system, 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; 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 by financial and extra-
financial rating agencies; potential disruptions to key suppliers of goods and services to the Bank; the potential impacts of disruptions to the Bank’s information technology systems, including cyberattacks as
well as identity theft and theft of personal information; the risk of fraudulent activity; and possible impacts of major events affecting the economy, market conditions, or the Bank's outlook, including international
conflicts, natural disasters, public health crises, and the measures taken in response to these events.
The foregoing list of risk factors is not exhaustive, and the forward-looking statements made in this document are also subject to credit risk, market risk, liquidity and funding risk, operational risk, regulatory
compliance risk, reputation risk, strategic risk, and social and environmental risk as well as certain emerging risks or risks deemed significant. Additional information about these risk factors is provided in the
Risk Management section beginning on page 62 of the 2023 Annual Report and may be updated in the quarterly shareholder’s reports subsequently published.
Management’s Discussion and Analysis
Financial Reporting Method
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, 2022. This
presentation reflects a revision to the method used for the sectoral allocation of technology investment expenses, which are now immediately allocated to the
various business segments, whereas certain expenses, notably costs incurred during the research phase of projects, had previously been recorded in the
Other heading of segment results. This revision is consistent with the accounting policy change related to cloud computing arrangements applied in fiscal
2022. For fiscal 2022, certain amounts in the Business Segment Analysis section were adjusted to reflect this revision.
Non-GAAP and Other Financial Measures
The Bank uses a number of financial measures when assessing its results and measuring overall performance. Some of these financial measures are not
calculated in accordance with GAAP. 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.
Non-GAAP Financial Measures
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
revenues taxed at lower rates (notably dividends) by the income tax to a level that would make it comparable to revenues from taxable sources in Canada. 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
irrespective 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 18 and 19 and in the Consolidated Results table on page 25.
Note that, for the year ended October 31, 2023, the following items were excluded from results: a $91 million gain ($67 million net of income taxes) related to
the fair value remeasurement of an equity interest, $86 million in impairment losses ($62 million net of income taxes) on intangible assets and premises and
equipment, $35 million in litigation expenses ($26 million net of income taxes), a $25 million expense ($18 million net of income taxes) related to the
retroactive impact of changes to the Excise Tax Act, $15 million in provisions for contracts ($11 million net of income taxes), and a $24 million income tax
expense related to the Canadian government’s 2022 tax measures. No specified items had been excluded from results for the year ended October 31, 2022.
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.
14
National Bank of Canada
2023 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
Reconciliation of Non-GAAP Financial Measures section on page 19 and in Table 5 on page 117.
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 and certain interest income related to the financing of these financial assets and liabilities, net of interest expenses. 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, realized and unrealized gains and losses as well as interest expense on obligations related to securities sold short, certain commission
income as well as 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 irrespective of their tax treatment.
National Bank of Canada
2023 Annual Report
15
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. These revenues comprise dividends related to financial assets and liabilities
associated with trading activities; certain interest income related to the financing of these financial assets and liabilities, net of interest expenses; 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; realized and unrealized gains and losses as well as interest expense on obligations related to securities sold short; certain
commission income as well as 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.
Non-GAAP Ratios
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.
Supplementary Financial Measures
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 124 to 127 of this MD&A.
16
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
d
Capital Management Measures
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.
OSFI guideline or advisory
Capital Adequacy Requirements
Leverage Requirements
Total Loss Absorbing Capacity (TLAC)
Liquidity Adequacy Requirements
Global Systemically Important Banks (G-SIBs) –
Public Disclosure Requirements
Measure
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
National Bank of Canada
2023 Annual Report
17
Management’s Discussion and Analysis
Financial Reporting Method
Reconciliation of Non-GAAP Financial Measures
Presentation of Results – Adjusted
Year ended October 31
(millions of Canadian dollars)
Net interest income
Taxable equivalent
Net interest income – Adjusted
Non-interest income
Taxable equivalent
Gain on the fair value remeasurement of an equity interest(1)
Non-interest income – Adjusted
Total revenues – Adjusted
Non-interest expenses
Impairment losses on intangible assets and premises and equipment(2)
Litigation expenses(3)
Expense related to changes to the Excise Tax Act(4)
Provisions for contracts(5)
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
Taxable equivalent
Income taxes on the gain on the fair value remeasurement
of an equity interest(1)
Income taxes on the impairment losses on intangible assets and
premises and equipment(2)
Income taxes on the litigation expenses(3)
Income taxes on the expense related to changes to the Excise Tax Act(4)
Income taxes on the provisions for contracts(5)
Income taxes related to the Canadian government's 2022 tax
measures(6)
Income taxes – Adjusted
Net income – Adjusted
Specified items after income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s shareholders
and holders of other equity instruments
Net income attributable to the Bank’s shareholders
and holders of other equity instruments – Adjusted
Dividends on preferred shares and distributions on
limited recourse capital notes
Net income attributable to common shareholders – Adjusted
Personal and
Commercial
3,321
−
3,321
1,195
−
−
1,195
4,516
2,510
(59)
−
−
(9)
2,442
2,074
238
1,836
486
−
Wealth
Management
778
−
778
1,743
−
−
1,743
2,521
1,534
(8)
(35)
−
−
1,491
1,030
2
1,028
271
−
−
17
−
−
2
−
505
1,331
(49)
1,282
−
1,282
1,331
−
2
9
−
−
−
282
746
(32)
714
−
714
746
Financial
Markets
(1,378)
324
(1,054)
3,463
247
−
3,710
2,656
1,161
(7)
−
−
−
1,154
1,502
39
1,463
(170)
571
−
2
−
−
−
−
403
1,060
(5)
1,055
−
1,055
1,060
USSF&I
1,132
−
1,132
77
−
−
77
1,209
402
−
−
−
−
402
807
113
694
146
−
−
−
−
−
−
−
146
548
−
548
−
548
548
2023
2022
Other
(267)
8
(259)
106
−
(91)
15
(244)
194
(12)
−
(25)
(6)
151
(395)
5
(400)
(96)
8
3,586
332
3,918
6,584
247
(91)
6,740
10,658
5,801
(86)
(35)
(25)
(15)
5,640
5,018
397
4,621
637
579
(24)
(24)
3
−
7
2
(24)
(124)
(276)
12
(264)
(2)
24
9
7
4
(24)
1,212
3,409
(74)
3,335
(2)
5,271
234
5,505
4,381
48
−
4,429
9,934
5,230
−
−
−
−
5,230
4,704
145
4,559
894
282
−
−
−
−
−
−
1,176
3,383
−
3,383
(1)
(262)
3,337
3,384
(274)
3,411
3,384
141
3,270
107
3,277
(1)
(2)
(3)
(4)
(5)
(6)
During the year ended October 31, 2023, the Bank concluded that it had lost significant influence over TMX Group Limited (TMX) and therefore ceased using the equity method to account for
this investment. The Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Upon the fair
value measurement, a gain of $91 million ($67 million net of income taxes) was recorded.
During the year ended October 31, 2023, the Bank recorded $75 million in intangible asset impairment losses ($54 million net of income taxes) on technology development for which the
Bank has decided to cease its use or development, and it recorded $11 million in premises and equipment impairment losses ($8 million net of income taxes) related to right-of-use assets.
During the year ended October 31, 2023, the Bank recorded $35 million in litigation expenses ($26 million net of income taxes) to resolve litigations and other disputes arising from ongoing
or potential claims against the Bank.
During the year ended October 31, 2023, the Bank recorded a $25 million expense ($18 million net of income taxes) related to the retroactive impact of changes to the Excise Tax Act,
indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax (HST).
During the year ended October 31, 2023, the Bank recorded $15 million in charges ($11 million net of income taxes) for contract termination penalties and for provisions for onerous
contracts.
During the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million tax recovery related to the 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred
taxes for fiscal 2022. For additional information on these tax measures, see the Income Taxes section on page 50.
18
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
Presentation of Basic and Diluted Earnings per Share – Adjusted
Year ended October 31
(Canadian dollars)
Basic earnings per share
Gain on the fair value remeasurement of an equity interest(1)
Impairment losses on intangible assets and premises and equipment(2)
Litigation expenses(3)
Expense related to changes to the Excise Tax Act(4)
Provisions for contracts(5)
Income taxes related to the Canadian government's 2022 tax measures(6)
Basic earnings per share – Adjusted
Diluted earnings per share
Gain on the fair value remeasurement of an equity interest(1)
Impairment losses on intangible assets and premises and equipment(2)
Litigation expenses(3)
Expense related to changes to the Excise Tax Act(4)
Provisions for contracts(5)
Income taxes related to the Canadian government's 2022 tax measures(6)
Diluted earnings per share – Adjusted
2023
9.47
(0.20)
0.19
0.08
0.05
0.03
0.07
9.69
9.38
(0.20)
0.19
0.08
0.05
0.03
0.07
9.60
$
$
$
$
2022
9.72
−
−
−
−
−
−
9.72
9.61
−
−
−
−
−
−
9.61
$
$
$
$
(1)
(2)
(3)
(4)
(5)
(6)
During the year ended October 31, 2023, the Bank concluded that it had lost significant influence over TMX and therefore ceased using the equity method to account for this investment. The
Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Upon the fair value measurement, a
gain of $91 million ($67 million net of income taxes) was recorded.
During the year ended October 31, 2023, the Bank recorded $75 million in intangible asset impairment losses ($54 million net of income taxes) on technology development for which the
Bank has decided to cease its use or development, and it recorded $11 million in premises and equipment impairment losses ($8 million net of income taxes) related to right-of-use assets.
During the year ended October 31, 2023, the Bank recorded $35 million in litigation expenses ($26 million net of income taxes) to resolve litigations and other disputes arising from ongoing
or potential claims against the Bank.
During the year ended October 31, 2023, the Bank recorded a $25 million expense ($18 million net of income taxes) related to the retroactive impact of changes to the Excise Tax Act,
indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax (HST).
During the year ended October 31, 2023, the Bank recorded $15 million in charges ($11 million net of income taxes) for contract termination penalties and for provisions for onerous
contracts.
During the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million tax recovery related to the 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred
taxes for fiscal 2022. For additional information on these tax measures, see the Income Taxes section on page 50.
Presentation of Non-Trading Net Interest Income – Adjusted
Year ended October 31
(millions of Canadian dollars)
Net interest income − Adjusted
Less: Net interest (loss) income related to trading activities on a taxable equivalent basis
Net interest income, non-trading − Adjusted
2023
3,918
(1,495)
5,413
2022
5,505
911
4,594
National Bank of Canada
2023 Annual Report
19
Management’s Discussion and Analysis
Financial Disclosure
Disclosure Controls and Procedures
The Bank’s financial information is prepared with the support of a set of disclosure controls and procedures (DC&P) that are implemented by the President and
Chief Executive Officer (CEO) and by the Chief Financial Officer and Executive Vice-President, Finance (CFO). During the year ended October 31, 2023, in
accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (National Instrument 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, 2023, 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.
Internal Control Over Financial Reporting
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 14 to
19 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 National Instrument 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 information
technology general controls.
Based on the evaluation results, the CEO and CFO concluded, as at October 31, 2023, 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.
Changes to Internal Control Over Financial Reporting
The CEO and CFO also undertook work that enabled them to conclude that, during the year ended October 31, 2023, no changes were made to the ICFR that
have materially affected, or are reasonably likely to materially affect, the design or operation of the ICFR.
Disclosure Committee
The 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.
20
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Overview
Highlights
As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)
Operating results
Total revenues
Income before provisions for credit losses and income taxes
Net income
Net income attributable to the Bank’s shareholders and holders of other equity instruments
Return on common shareholders’ equity(1)
Dividend payout ratio(1)
Earnings per share
Basic
Diluted
Operating results – Adjusted(2)
Total revenues – Adjusted(2)
Income before provisions for credit losses and income taxes – Adjusted(2)
Net income – Adjusted(2)
Return on common shareholders’ equity – Adjusted(3)
Dividend payout ratio – Adjusted(3)
Operating leverage – Adjusted(3)
Efficiency ratio – Adjusted(3)
Earnings per share – Adjusted(2)
Basic
Diluted
Common share information
Dividends declared
Book value(1)
Share price
High
Low
Close
Number of common shares (thousands)
Market capitalization
Balance sheet and off-balance-sheet
Total assets
Loans and acceptances, net of allowances
Deposits
Equity attributable to common shareholders
Assets under administration(1)
Assets under management(1)
Regulatory ratios under Basel III(4)
Capital ratios
Common Equity Tier 1 (CET1) capital ratio
Tier 1
Total
Leverage ratio
TLAC ratio(4)
TLAC leverage ratio(4)
Liquidity coverage ratio (LCR)(4)
Net stable funding ratio (NSFR)(4)
Other information
Number of employees – Worldwide (full-time equivalent)
Number of branches in Canada
Number of banking machines in Canada
2023
2022
% change
$
$
$
10,170
4,369
3,335
3,337
16.5 %
42.0 %
9.47
9.38
$
10,658
5,018
3,409
16.8 %
41.1 %
(0.5) %
52.9 %
$
$
9.69
9.60
3.98
60.68
103.58
84.97
86.22
338,285
29,167
423,578
225,443
288,173
20,526
652,631
120,858
13.5 %
16.0 %
16.8 %
4.4 %
29.2 %
8.0 %
155 %
118 %
28,916
368
944
9,652
4,422
3,383
3,384
18.8 %
36.8 %
9.72
9.61
9,934
4,704
3,383
18.8 %
36.8 %
2.1 %
52.6 %
9.72
9.61
3.58
55.24
105.44
83.12
92.76
336,582
31,221
403,740
206,744
266,394
18,594
616,165
112,346
12.7 %
15.4 %
16.9 %
4.5 %
27.7 %
8.1 %
140 %
117 %
27,103
378
939
5
(1)
(1)
(1)
(3)
(2)
7
7
1
−
−
11
5
9
8
10
6
8
7
(3)
1
(1)
(2)
(3)
(4)
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.
See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
National Bank of Canada
2023 Annual Report
21
Management’s Discussion and Analysis
Overview
About National Bank
The Bank carries out its activities in four business segments: Personal and Commercial, Wealth Management, Financial Markets 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.
Objectives and 2023 Results
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.
For fiscal 2023, the Bank recorded $3,335 million in net income compared to $3,383 million in fiscal 2022, and its diluted earnings per share stood at $9.38
compared to $9.61 in fiscal 2022. The Bank’s return on common shareholders’ equity (ROE) was 16.5% in fiscal 2023 versus 18.8% in fiscal 2022. As for its
adjusted diluted earnings per share, it stood at $9.60 in fiscal 2023, relatively stable compared to the $9.61 posted in fiscal 2022. Furthermore, adjusted ROE
was 16.8% in fiscal 2023 compared to 18.8% in fiscal 2022.
The following table compares the Bank’s medium-term objectives with its fiscal 2023 results.
Growth in diluted earnings per share Adjusted(1)
ROE Adjusted(2)
Dividend payout ratio Adjusted(2)
CET1 capital ratio(3)
Leverage ratio(3)
Medium-Term
Objectives (%)
5 – 10
15 – 20
40 – 50
Strong capital level
Strong capital level
2023
Results
(0.1)%
16.8%
41.1%
13.5%
4.4%
The Bank’s financial results met all of its medium-term objectives, except for growth in adjusted diluted earnings per share. Adjusted diluted earnings per
share for fiscal 2023 did not increase year over year and is below target due to higher provisions for credit losses, which more than offset the strong
performance by all the business segments. For fiscal 2023, adjusted ROE was in the lower range of the target. The adjusted dividend payout ratio fell within the
target distribution range as a result of higher dividends paid during the fiscal year. The CET1 capital ratio and the leverage ratio, at 13.5% and 4.4%,
respectively, also met the objectives.
The Bank also examines its performance using the efficiency ratio and operating leverage. For fiscal 2023, the efficiency ratio was 57.0% compared to 54.2%
in fiscal 2022, a deterioration that was notably due to the adverse effect of the specified items reported in Non-interest expenses in 2023. As for the adjusted
efficiency ratio, it stood at 52.9% in fiscal 2023 compared to 52.6% in fiscal 2022, demonstrating disciplined expense management by all the Bank’s
segments in a more difficult economic environment. Also for fiscal 2023, operating leverage and adjusted operating leverage were (5.5)% and (0.5)%,
respectively.
Net Income
Year ended October 31
(millions of Canadian dollars)
3
8
3
3
,
3
8
3
3
,
5
3
3
,
3
9
0
4
,
3
Diluted Earnings Per Share
Year ended October 31
(Canadian dollars)
1
6
9
.
1
6
9
.
0
6
.
9
8
3
.
9
Efficiency Ratio(4)
Year ended October 31
(%)
58.9
58.2
55.5
54.6
57.0
54.2
54.9
53.7
52.6
52.9
2022
2023
Reported as per IFRS
Adjusted(1)
2022
2023
2019
2020
2021
2022
2023
Reported as per IFRS
Adjusted(1)
Reported as per IFRS
Adjusted(2)
(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.
(2) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.
(3) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
(4) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
22
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Overview
Dividends
For fiscal 2023, the Bank declared $1,344 million in dividends to common shareholders (2022: $1,206 million), representing 42.0% of net income attributable
to common shareholders (2022: 36.8%) and representing 41.1% of adjusted net income attributable to common shareholders (2022: 36.8%).
Solid Capital Levels(1)
As at October 31, 2023, the Bank’s CET1, Tier 1, and Total capital ratios were, respectively, 13.5%, 16.0% and 16.8%, compared to ratios of, respectively,
12.7%, 15.4% and 16.9% as at October 31, 2022. The CET1 and Tier 1 capital ratios increased since October 31, 2022, essentially due to the contribution from
net income net of dividends, to common share issuances under the Stock Option Plan, and to the positive impact from the implementation of the Basel III
reforms related to the credit and operational risk frameworks. These factors were partly offset by growth in RWA and by the end of the transitional measures
applicable to expected credit loss provisioning implemented by OSFI at the beginning of the COVID-19 pandemic. The Total capital ratio increased due to the
same factors mentioned above, but the increase was more than offset by the $750 million redemption of medium-term notes on February 1, 2023.
As at October 31, 2023, the leverage ratio was 4.4% compared to 4.5% as at October 31, 2022. The decrease in the leverage ratio was essentially due to the
growth in total exposure and to the end of the temporary measure permitted by OSFI with respect to the exclusion of central bank reserves from the leverage
exposure calculation. These factors were partly offset by the growth in Tier 1 capital.
High-Quality Loan Portfolio
Loans and acceptances, net of allowances for credit losses, accounted for 53% of the Bank’s total assets and amounted to $225.4 billion as at October 31,
2023. For fiscal 2023, the Bank recorded $397 million in provisions for credit losses compared to $145 million in fiscal 2022. This increase was due to higher
provisions for credit losses on non-impaired loans resulting from loan portfolio growth, from the migration of credit risk, and from updates and revisions to the
probability weightings of scenarios, reflecting uncertainty in the macroeconomic outlook, uncertainties such as high inflationary pressure, high interest rates,
and geopolitical instability. As for provisions for credit losses on impaired loans excluding POCI(1) loans, they increased year over year; these increases came
from Personal Banking (including credit card receivables) and Commercial Banking, reflecting a normalization of credit risk, and from the USSF&I segment,
essentially attributable to the Credigy subsidiary. Provisions for credit losses on POCI loans were down year over year due to favourable remeasurements of
certain Credigy portfolios as well as to recoveries of credit losses following repayments of Commercial Banking POCI loans. Gross impaired loans totalled
$1,584 million as at October 31, 2023 compared to $1,271 million as at October 31, 2022 and represented 0.70% of total loans and acceptances.
Risk Profile
As at October 31 or for the year ended October 31
(millions of Canadian dollars)
Provisions for credit losses
Provisions for credit losses as a % of average loans and acceptances(2)
Provisions for credit losses on impaired loans excluding POCI loans as a % of average loans and acceptances(2)
Net write-offs excluding POCI loans 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
2023
397
0.18 %
0.11 %
0.07 %
0.70 %
1,584
1,276
2022
145
0.07 %
0.07 %
0.10 %
0.61 %
1,271
1,030
Annual Dividend Per
Common Share
Year ended October 31
(Canadian dollars)
Evolution of Regulatory
Ratios Under Basel III(1)
As at October 31
Gross Impaired Loans
As at October 31
(millions of Canadian dollars)
3.98
3.58
2.66
2.84
2.84
%
9
6
1
.
%
4
5
1
.
%
7
2
1
.
%
8
.
6
1
%
0
6
1
.
%
5
.
3
1
%
5
4
.
%
4
.
4
120
45
6
6
1
,
1
4
8
6
101
49
5
5
8
7
1
8
61
36
4
6
4
2
6
6
61
39
9
5
4
2
1
8
70
45
0
6
5
4
2
0
,
1
2019
2020
2021
2022
2023
2022
2023
2019
2020
2021
2022
2023
CET1
Tier 1
Total
Leverage ratio
Impaired loans – Stage 3
Impaired loans – POCI
Gross impaired loans as a % of total loans
and acceptances (bps)(2)
Gross impaired loans exlcuding POCI as a %
of total loans and acceptances (bps)(2)
(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
(2) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
National Bank of Canada
2023 Annual Report
23
Management’s Discussion and Analysis
Overview
Economic Review and Outlook
Global Economy
Global manufacturing activity has slowed considerably of late, which appears to be impacting European plants in particular. Unfortunately, this weakness has
been exacerbated by the European Central Bank’s efforts to bring inflation down to the targeted level. These combined factors explain why the eurozone’s GDP
contracted during the third quarter of 2023. However, given that the non-annualized decrease of 0.1% came on the heels of mediocre results in previous
quarters, it led to zero annual growth. In the past, such lacklustre growth over a 12-month period tended to herald a recession. This is what we expect to see
again. Meanwhile, China continues to suffer setbacks due to a real estate crisis although it would appear that the Chinese government has finally decided to
take the necessary steps to boost demand and avoid a deflationary spiral. On October 24, 2023, the authorities approved the issuance of an additional one
thousand billion yuan (0.8% of GDP) of central government bonds to fund various recovery initiatives. Despite these announcements, we remain prudent and
believe that after barely achieving its 5.0%(1) growth objective this year, China will see somewhat weaker growth in 2024. The global economy, for its part, is
expected to grow by 3.0%(1) this year, followed by only 2.2%(1) growth next year.
U.S. GDP figures for the third quarter of 2023 point to 4.9% annualized growth—the best result in two years. While we recognize that the U.S. economy is
showing surprising resilience in the face of the significant U.S. Federal Reserve (the Fed) monetary tightening, we still have some reservations regarding how
long the current growth trend will last. Our doubts are largely attributable to the fact that higher household spending in the third quarter was not accompanied
by an equivalent increase in disposable income, instead resulting from the sharp decline in the savings rate—which is counterintuitive in an environment with
higher interest rates. This decline suggests that consumers have been forced to live beyond their means in the third quarter. The most recent credit data
confirm this assumption, with a significant increase in the percentage of consumer loans that fell into serious delinquency in the third quarter, even before the
resumption of student loan payments in the fourth quarter. A slowdown in consumer spending therefore seems inevitable, although the extent will depend on
the resilience of the labour market. While the labour market has remained quite solid until now, a number of leading indicators point to a slowdown in the
months to come, with sharp declines in hours worked and the job vacancy rate. We have some reservations regarding the scenario presented by the Fed, in
which a mere slowdown would rebalance supply and demand. While the previous interest rate hikes will continue to impact the U.S. economy, we expect U.S.
GDP to contract in the first half of 2024—a scenario that would result in only 0.3%(1) growth next year.
Canadian Economy
In Canada, it appears that the rate hikes announced since the start of the monetary tightening cycle are starting to produce results. Preliminary data published
by Statistics Canada suggest zero growth in the third quarter of 2023—a particularly weak performance when soaring demographic growth is taken into
consideration. In the past four quarters, per capita GDP decreased by 2.4%, something which, historically, was only seen in a recession. A slowing labour
market is also evident, with hiring not keeping pace with demographic growth. As a result, after reaching a cyclical low of 4.9%, the unemployment rate
jumped eight-tenths of a percentage point to 5.7% in October. An increase of such magnitude, other than in a recessionary period in Canada, has been seen
once since the early 1980s, that is, when the tech bubble burst in 2001. This is even more concerning in a broader context where the rate hikes announced
until now have not produced their full impact on the economy. According to our calculations, no less than 42% of the impacts of interest rate hikes have yet to
be felt in terms of consumption. Moreover, with no apparent signs of an economic recovery in the months to come, the level of confidence among consumers
and small and medium-sized businesses will be more akin to levels seen during a recession. In this broader context, a contraction in GDP cannot be ruled out
in the months to come, which would lead to a stagnant economy in 2024(1).
Quebec Economy
The Quebec economy experienced a difficult second quarter compared to the rest of the country in terms of economic growth, which declined by 1.9%
compared to a slight decline for Canada as a whole (-0.2%). In the next few quarters, weaker demographic growth than in the rest of Canada and the growing
impact of interest rate hikes will continue to temper growth. We nonetheless remain confident that this sluggish performance is temporary and believe that
Quebec’s economy could be more resilient relatively speaking. Quebec households are carrying less debt than in the rest of Canada and, therefore, are less
susceptible to interest payment shock. Moreover, housing is more accessible in Quebec compared to elsewhere in Canada, and the predominant use of
hydroelectricity means that households are less exposed to soaring electricity costs. Quebec also has a highly diversified economy and the government
provides a series of fiscal support measures. Finally, Quebec’s real policy rate (defined as the policy rate minus inflation and not including groceries and
energy) was the lowest among all provinces in September, indicating that Quebec’s monetary policy is less restrictive. When all these factors are taken into
account, we predict that Quebec’s economy will not grow in 2024(1), which is consistent with the rest of Canada in spite of less favourable demographic growth.
According to these same predictions, Quebec’s unemployment rate should remain among the lowest of all ten provinces.
(1)
Real GDP growth forecasts, National Bank Financial’s Economics and Strategy group
24
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Financial Analysis
Consolidated Results
Year ended October 31
(millions of Canadian dollars)
Operating results
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Diluted earnings per share (dollars)
Taxable equivalent basis(1)
Net interest income
Non-interest income
Income taxes
Impact of taxable equivalent basis on net income
Specified items(1)
Gain on the fair value remeasurement of an equity interest
Impairment losses on premises and equipment and intangible assets
Litigation expenses
Expense related to changes to the Excise Tax Act
Provisions for contracts
Specified items before income taxes
Income taxes related to the Canadian government's 2022 tax measures
Income taxes on specified items
Specified items after income taxes
Operating results – Adjusted(1)
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(2)
Average loans and acceptances(2)
Average deposits(2)
Operating leverage(3)
Operating leverage – Adjusted(4)
Efficiency ratio(3)
Efficiency ratio – Adjusted(4)
Net interest margin, non-trading – Adjusted(4)
2023
2022
% change
3,586
6,584
10,170
5,801
4,369
397
3,972
637
3,335
9.38
332
247
579
−
91
(86)
(35)
(25)
(15)
(70)
24
(20)
(74)
3,918
6,740
10,658
5,640
5,018
397
4,621
1,212
3,409
9.60
430,646
215,976
284,570
(5.5) %
(0.5) %
57.0 %
52.9 %
2.15 %
5,271
4,381
9,652
5,230
4,422
145
4,277
894
3,383
9.61
234
48
282
−
−
−
−
−
−
−
−
−
−
5,505
4,429
9,934
5,230
4,704
145
4,559
1,176
3,383
9.61
393,847
194,340
258,929
1.4 %
2.1 %
54.2 %
52.6 %
1.96 %
(32)
50
5
11
(1)
(7)
(29)
(1)
(2)
(29)
52
7
8
7
1
3
1
−
9
11
10
(1)
(2)
(3)
(4)
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.
Represents an average of the daily balances for the period.
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.
National Bank of Canada
2023 Annual Report
25
Management’s Discussion and Analysis
Financial Analysis
Analysis of Consolidated Results
Financial Results
For fiscal 2023, the Bank’s net income totalled $3,335 million, down 1% from $3,383 million in fiscal 2022. Revenue growth in all of the business segments
was more than offset by higher non-interest expenses (partly due to the specified items(1) recorded during fiscal 2023) and by significantly higher provisions
for credit losses. The fiscal 2023 income before provisions for credit losses and income taxes was down 1% compared to fiscal 2022.
As for adjusted net income, it totalled $3,409 million in fiscal 2023, up 1% from $3,383 million in fiscal 2022. The fiscal 2023 specified items had a
$74 million unfavourable impact on net income in fiscal 2023. Revenue growth in all of the business segments was offset by higher non-interest expenses and
higher provisions for credit losses. As for adjusted income before provisions for credit losses and income taxes, it rose 7% year over year.
Total Revenues
For fiscal 2023, the Bank’s total revenues amounted to $10,170 million versus $9,652 million in fiscal 2022, a $518 million or 5% increase that was driven by
total revenue growth in all of the Bank’s business segments. For additional information on total revenues, see Table 2 on page 116. As for adjusted total
revenues, they amounted to $10,658 million in fiscal 2023, up $724 million or 7% from $9,934 million in fiscal 2022.
Net Interest Income
For fiscal 2023, the Bank’s net interest income totalled $3,586 million, down 32% from $5,271 million in fiscal 2022 (see Table 3, page 116). Adjusted net
interest income was $3,918 million in fiscal 2023, down 29% from $5,505 million in fiscal 2022.
In the Personal and Commercial segment, net interest income totalled $3,321 million in fiscal 2023, a $456 million or 16% year-over-year increase that was
essentially driven by a higher net interest margin (owing to interest rate hikes), which was 2.35% in 2023 versus 2.15% in 2022 and mainly due to the deposit
margin. The increase was also driven by year-over-year growth in loans and deposits, which rose 6% and 5%, respectively. The loan growth came mainly from
mortgage credit and business and government lending. In the Wealth Management segment, net interest income totalled $778 million, a 31% year-over-year
increase that was attributable to the interest rate hikes that occurred in fiscal years 2023 and 2022.
In the Financial Markets segment, net interest income on a taxable equivalent basis was down considerably from fiscal 2022, 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 $42 million or 4% year
over year, essentially due to business growth at the ABA Bank subsidiary, notably sustained growth in loans.
Non-Interest Income
For fiscal 2023, the Bank’s non-interest income totalled $6,584 million, up 50% from $4,381 million in fiscal 2022. For additional information on non-interest
income, see Table 4 on page 117. As for adjusted non-interest income, it totalled $6,740 million in fiscal 2023, up 52% year over year.
The fiscal 2023 revenues from underwriting and advisory fees were up 17% year over year, notably due to capital markets activities and merger and acquisition
activity in the Financial Markets segment. Revenues from securities brokerage commissions were down 15% year over year, essentially due to a decrease in
commissions on transactions in the Wealth Management segment. Combined, mutual fund revenues and revenues from investment management and trust
service fees totalled $1,583 million, down $1 million year over year.
Combined, the fiscal 2023 credit fee revenues and revenues from acceptances and letters of credit and guarantee rose $84 million year over year owing to
growth in credit lending at Commercial Banking, in the Financial Markets segment, and at Credigy. In addition, card revenues grew 9% year over year due to a
notable increase in purchasing volume, and revenues from deposit and payment service charges rose 1%.
(1)
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.
26
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Financial Analysis
Non-interest income related to trading activity on a taxable equivalent basis totalled $2,943 million in fiscal 2023, up from $596 million in fiscal 2022 (Table 5,
page 117). Including the portion recorded in net interest income, trading activity revenues on a taxable equivalent basis amounted to $1,448 million in fiscal
2023, a $59 million year-over-year decrease that was attributable to equity securities revenues, whereas there were increases in revenues from fixed-income
securities and revenues from commodities and foreign exchange activities in the Financial Markets segment. The trading activity revenues on a taxable
equivalent basis from the Bank’s other business segments decreased year over year.
The fiscal 2023 gains on non-trading securities were down $43 million year over year, mainly due to business activity at Financial Markets and to Treasury
activities. Insurance revenues were up $13 million year over year, reflecting revisions to actuarial reserves. Foreign exchange revenues and the share in the net
income of associates and joint ventures decreased by $28 million and $17 million, respectively, year over year. Lastly, other revenues amounted to
$261 million in fiscal 2023, a $19 million year-over-year increase that was notably due to a $91 million gain recorded upon the fair value remeasurement of an
equity interest, partly offset by a higher unfavourable impact of a fair value remeasurement of certain Credigy portfolios during fiscal 2022.
Non-Interest Expenses
For fiscal 2023, the Bank’s non-interest expenses stood at $5,801 million, up $571 million or 11% from fiscal 2022 (Table 6, page 118). They included the
following specified items: $86 million in impairment losses on premises and equipment and intangible assets, $35 million in litigation expenses, a $25 million
expense related to changes to the Excise Tax Act,and $15 million in provisions for contracts. As for adjusted non-interest expenses, they stood at
$5,640 million in fiscal 2023, up $410 million or 8% from non-interest expenses of $5,230 million in fiscal 2022.
Compensation and employee benefits stood at $3,452 million in fiscal 2023, a 5% year-over-year increase that was mainly due to wage growth and a greater
number of employees. Occupancy expense, including amortization expense on premises and equipment, was also up, partly due to the expanding banking
network at ABA Bank, to expenses related to the Bank's new head office building, and to impairment losses on premises and equipment. An increase in
technology expenses, including amortization, came from the significant investments made to support the Bank's technological evolution and business
development plan as well as from the intangible asset impairment losses recorded in fiscal 2023. The fiscal 2023 communication expenses remained relatively
stable year over year, whereas professional fees were up slightly. In addition, higher advertising and business development expenses came from travel
expenses, as activities with clients resumed, and from an increase in advertising expenses. Other expenses were also up year over year due in part to litigation
expenses, an expense related to changes to the Excise Tax Act, and provisions for contracts recorded during fiscal 2023.
Provisions for Credit Losses
For fiscal 2023, the Bank recorded $397 million in provisions for credit losses compared to $145 million in fiscal 2022 (Table 7, page 119). The increase came
mainly from a $174 million increase in provisions for credit losses on non-impaired loans resulting from growth in the loan portfolios, a migration of credit risk,
a recalibration of certain risk parameters, and updates and revisions to the probability weightings of scenarios, reflecting the uncertainties in the
macroeconomic outlook, uncertainties such as rising inflationary pressure, high interest rates, and geopolitical instability. As for provisions for credit losses
on impaired loans excluding POCI(1) loans, they stood at $245 million, rising $107 million year over year; these increases came from Personal Banking
(including credit card receivables) and Commercial Banking, which rose $44 million and $35 million, respectively, reflecting a normalization of credit risk, and
from the USSF&I segment, which rose $28 million, essentially attributable to the Credigy subsidiary. Provisions for credit losses on POCI loans were down
$29 million year over year due to favourable remeasurements of certain Credigy portfolios during fiscal 2023 as well as to recoveries of credit losses following
repayments of POCI loans at Commercial Banking. For fiscal 2023, the provisions for credit losses on impaired loans excluding POCI loans(1) represented
0.11% of average loans and acceptances compared to 0.07% in fiscal 2022.
Income Taxes
Detailed information about the Bank’s income taxes is provided in Note 24 to the consolidated financial statements. For fiscal 2023, income taxes stood at
$637 million, representing an effective income tax rate of 16%, which compares to income taxes of $894 million and a 21% effective income tax rate in fiscal
2022. The change in effective income tax rate stems mainly from a higher level and proportion of tax-exempt dividend income and from higher income in lower
tax-rate jurisdictions during fiscal 2023. These factors were partly offset by the impact of the Canadian government’s 2022 tax measures recorded in the first
quarter of 2023, namely, the Canada Recovery Dividend and the additional 1.5% tax on banks and life insurers.
(1)
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
National Bank of Canada
2023 Annual Report
27
Management’s Discussion and Analysis
Business Segment Analysis
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other
heading of segment results. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy.
National Bank of Canada
Business
Segments
Personal and
Commercial
Wealth
Management
Financial
Markets
U.S. Specialty
Finance and
International
Banking services
Credit services
Financing
Investment solutions
Insurance
Core
Activities
Full-service brokerage
Private banking
Direct brokerage
Investment solutions
Administrative and
trade execution
services
Transaction products
Trust and estate
services
Equities, fixed-income,
U.S. Specialty Finance
commodities and
foreign exchange
Corporate banking
Investment banking
Credigy
International
ABA Bank
(Cambodia)
Minority interests in
emerging markets
Other: Treasury activities, liquidity management, Bank funding, asset/liability management, Flinks Technology Inc. subsidiary activities (a fintech
specialized in financial data aggregation and distribution), and corporate units.
Total Revenues by
Business Segment(1)
Year ended October 31, 2023
Income Before Provisions for
Credit Losses and Income Taxes by
Business Segment(1)
Year ended October 31, 2023
Net Income by Business Segment(1)
Year ended October 31, 2023
11%
15%
15%
24%
42%
38%
36%
28%
29%
23%
19%
20%
Personal and Commercial (2022: 40%)
Wealth Management (2022(cid:855) 24%)
Financial Markets (2022: 25%)
USSF&I (2022: 11%)
Personal and Commercial (2022: 36%)
Wealth Management (2022: 20%)
Financial Markets (2022: 29%) USSF&I
(2022: 15%)
Personal and Commercial (2022: 35%)
Wealth Management (2022: 20%)
Financial Markets (2022: 30%)
USSF&I (2022: 15%)
(1)
Excluding the Other heading.
28
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Personal and Commercial
The Personal and Commercial segment meets the financial needs of close to 2.7 million individuals and over 147,000 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, 368 branches, and
944 banking machines across Canada, clients can do their daily banking whenever and wherever they wish.
Total Revenues by Category
Year ended October 31, 2023
43%
41%
5%
11%
Retail (2022: 42%)
Payment Solutions (2022: 11%)
Insurance (2022: 5%)
Commercial Banking (2022: 42%)
$4,516 million
Total revenues
$2,006 million
Income before provisions for
credit losses
and income taxes
Total Revenues by Geographic Distribution
Year ended October 31, 2023
23%
77%
$1,282 million
Net income
Province of Quebec (2022: 76%)
Other provinces (2022: 24%)
Personal Banking
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.
Commercial Banking
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 entrepreneur community for
over 160 years, Commercial Banking is the leading bank in the Quebec market.
Economic and Market Review
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.
Ability to meet all the needs facing businesses and entrepreneurs in
collaboration with other Bank segments.
In Canada, signs of an economic slowdown in response to rapidly rising
interest rates are evident, with GDP essentially stagnating in recent months. Against a backdrop of galloping population growth, this is a major setback,
reflected in a seven-tenths rise in the unemployment rate since April 2023. The impact of restrictive monetary policy has been particularly visible in the
housing market, where sales are contracting due to deteriorating affordability despite strong population growth. In this context, and with purchasing power
reduced by the recent surge in inflation, household confidence is at a lower level than in the last two recessions. According to surveys, businesses also share
this pessimism, with a large proportion reporting weak domestic demand and a less optimistic sales outlook for the year ahead. This situation is reflected in a
rapid slowdown in investment and hiring intentions. Given the lags in monetary policy transmission, the economy is set to weaken further in 2024. In Quebec,
economic growth is also expected to be sluggish in 2024, but the province has the strengths to weather the current headwinds, including households with
lower debt levels and a greater proportion of dual-income households.
The economic environment in 2023 and the outlook for 2024 are discussed in more detail in the Economic Review and Outlook section on page 24.
National Bank of Canada
2023 Annual Report
29
Management’s Discussion and Analysis
Business Segment Analysis
Objectives and Strategic Priorities
The Personal and Commercial segment is targeting growth by becoming a more simple, efficient bank focused on constantly improving the client experience.
2023 Achievements and Highlights
2024 Priorities
Enhance the visibility of our brand image
across Canada by accentuating our
distinguishing characteristics.
Focus on our priority clientele and high-
potential niche markets outside Quebec by
developing our digital acquisition capabilities
and by building on our personalized advice.
Expand our sales and sales support teams in
Western Canada for key sectors.
Continue developing our offerings and joint
Commercial Banking and PB1859 advice to
generate business and market opportunities.
Expand client support by improving the
customer journey through innovative
technological capabilities.
Maintain a good proportion of our growth in
CMHC insured loans in the Commercial Banking
segment and maintain our mix of business
activities.
Strengthen the ESG culture and performance of
our own activities in order to leverage client
acquisition.
Continue to improve our advisory services by
focusing on learning and skills development for
all our banking advisors.
Develop new, modernized technological
interfaces to provide our Commercial Banking
clients with an enhanced, high-performance
digital experience.
Engage clients by relying on our conversational
capabilities, personalized customer journeys,
and proactive advice.
Finalize the deployment of the New Experience
across all our branches, supporting our experts
and promoting digital engagement.
Enhance our payment offering by modernizing
our digital payment ecosystem.
Delivered unparalleled performance in terms of total
client acquisition, notably through:
Targeted strategies aimed at priority markets
and our differentiated offerings to the
professional, newcomer and young client
segments.
Greater contact frequency and more joint
meetings with clients by our Commercial
Banking and Private Banking 1859 (PB1859)
sales forces to better serve entrepreneur
clients and meet their business, family, and
personal needs.
Adopted more competitive pricing following a review
of banking packages, the purpose being to meet our
clients’ digital needs.
Launched a unique, digital appointment-booking
capability free of any geographical constraints.
Acquired the loan portfolio of the Canadian branch of
the Silicon Valley Bank, thereby enhancing our
Technology Activities and Health Sciences sector of
activity.
Enhanced our ESG impact by taking concrete action to
promote the transition of clients to a sustainable
environment and social inclusion.
Accelerated our shift to advice and synergy initiatives,
resulting in more core clients and more clients
conducting business with more than one segment of
the Bank.
Promoted savings among our clients by being the first
bank to offer them a first home savings account
(FHSA).
Deployed significantly enhanced client interaction
capabilities, enabling us to offer proactive advice
through customer journeys and personalized advice
banners.
Enhanced our digital capabilities in order to improve
the ability of clients to independently manage their
personal finances, transactions, and personal profiles.
Enhanced user experience and autonomy by
modernizing the cash management features most
used by our clients.
Implemented a series of initiatives to ensure
accessibility to our Client Contact Centres, in
particular by setting up a dedicated, no-wait
telephone line for joint Commercial Banking and
PB1859 clients.
Implemented a strategy of proactive support and
advice for our clients most affected by the market
fluctuations caused by rapidly rising rates, in
particular to help them meet their mortgage
obligations.
Accelerate net client acquisition
Improve client engagement
30
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Leverage our simplification, and
enhance operational efficiency
2023 Achievements and Highlights
2024 Priorities
Continuously improved our customer journey, notably
by:
Simplifying the experience when opening a
bank account 100% remotely, thereby
providing greater flexibility to clients.
Reducing disbursement times for commercial
financing thanks to a reorganization of our
work, streamlined business processes, and
simplified support models.
Modernized our more sophisticated cash management
product line to suit the needs of large Corporate
Banking clients.
Simplified our support to clients in Western Canada
with self-service solutions, flexible advisory services
integrated into our virtual branch, and cashless
branches.
Operate closer to clients by reviewing our
branch operational support structure and
maximize sales force activities.
Modify our support model to better serve our
Commercial Banking and PB1859 clients
according to their needs.
Capitalize on our acceleration of digital
services to simplify the transactional offering
across all our channels.
Emphasize our high-potential investments in
terms of operational efficiency and
effectiveness.
Focus on the modernization and transformation
of our Client Contact Centres to improve
accessibility and client experience.
Continue automating our business processes
and thereby enhance operational efficiency.
nking
e of
r
al
g our experts
Segment Results – Personal and Commercial
Year ended October 31
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Less: Specified items after income taxes(2)
Net income – Adjusted(2)
Net interest margin(3)
Average interest-bearing assets(3)
Average assets(4)
Average loans and acceptances(4)
Net impaired loans(3)
Net impaired loans as a % of total loans and acceptances(3)
Average deposits(4)
Efficiency ratio(3)
Efficiency ratio – Adjusted(5)
2023
3,321
1,195
4,516
2,510
2,006
238
1,768
486
1,282
(49)
1,331
2.35 %
141,458
148,511
147,716
285
0.2 %
85,955
55.6 %
54.1 %
2022(1)
2,865
1,169
4,034
2,241
1,793
97
1,696
449
1,247
−
1,247
2.15 %
133,543
140,300
139,538
193
0.1 %
81,996
55.6 %
55.6 %
% change
16
2
12
12
12
4
8
3
7
6
6
6
48
5
(1)
(2)
(3)
(4)
(5)
For the year ended October 31, 2022, certain amounts were reclassified, notably due to a revised method for the sectoral allocation of technology investment expenses.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures. During fiscal 2023, the segment recorded, in the Non-interest
expenses item, $59 million in intangible asset impairment losses ($42 million net of income taxes) on technology development as well as charges of $9 million ($7 million net of income
taxes) for contract termination penalties.
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
Represents an average of the daily balances for the period.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.
National Bank of Canada
2023 Annual Report
31
Management’s Discussion and Analysis
Business Segment Analysis
Financial Results
In the Personal and Commercial segment, net income totalled $1,282 million in fiscal 2023, a 3% increase from $1,247 million in fiscal 2022 that was due to
growth of $482 million in the segment's total revenues, partly offset by higher non-interest expenses (including the fiscal 2023 specified items) and by
significantly higher provisions for credit losses. As for the segment's adjusted net income in fiscal 2023, it totalled $1,331 million, up 7% year over year. For
fiscal 2023, the segment’s income before provisions for credit losses and income taxes amounted to $2,006 million, up 12% year over year, while its adjusted
income before provisions for credit losses and income taxes rose 16%. The segment's total revenues grew year over year, essentially due to a $456 million
increase in net interest income that was driven mainly by a higher deposit margin (partly offset by a lower loan margin) given the interest rate hikes that
occurred during fiscal 2023. This increase had a favourable impact on the segment's net interest margin, which stood at 2.35% in fiscal 2023 versus 2.15% in
fiscal 2022. The increase in net interest income also came from growth in personal and commercial loans and deposits.
For fiscal 2023, the Personal and Commercial segment's non-interest expenses stood at $2,510 million, a 12% year-over-year increase that was mainly due to
$68 million in specified items recorded during fiscal 2023 as well as to higher compensation and employee benefits (resulting from wage growth), to greater
investments made as part of the segment's technological evolution, and to increases in operations support charges. At 55.6%, the segment's efficiency ratio
remained stable compared to October 31, 2022. As for the segment's adjusted non-interest expenses for fiscal 2023, they stood at $2,442 million, up 9% year
over year. At 54.1%, the segment’s 2023 adjusted efficiency ratio improved by 1.5 percentage points from 55.6% in 2022.
The segment recorded $238 million in provisions for credit losses in fiscal 2023, which is $141 million more than the $97 million recorded in fiscal 2022. This
increase was mainly due to higher provisions for credit losses on impaired Personal Banking loans (including credit card receivables) and impaired Commercial
Banking loans, reflecting a normalization of credit performance. As for the segment's provisions for credit losses on non-impaired loans, they were up due to
growth in the loan portfolios, to the migration of credit risk, and to a less favourable macroeconomic outlook during fiscal 2023. Also during fiscal 2023, the
segment recorded recoveries of credit losses on Commercial Banking's POCI loans as a result of loan repayments.
Personal Banking
Personal Banking’s total revenues amounted to $2,539 million in fiscal 2023, an 8% increase from $2,360 million in fiscal 2022. Its net interest income
increased, as there was 3% growth in loan volumes, 5% growth in deposit volumes, and a higher deposit margin that was partly offset by a lower loan margin.
Non-interest income was also up, rising $17 million year over year, essentially due to higher credit card revenues given a notable increase in purchasing
volume and higher insurance revenues (reflecting revisions to actuarial reserves). Personal Banking's non-interest expenses rose $188 million in fiscal 2023,
mainly due to the fiscal 2023 specified items as well as to higher compensation and employee benefits (resulting from wage growth), to greater investments
made as part of the segment's technological evolution, and to an increase in operations support charges.
Commercial Banking
Commercial Banking’s total revenues amounted to $1,977 million in fiscal 2023, rising 18% from $1,674 million in fiscal 2022. Net interest income was up,
essentially due to an improved net interest margin on deposits given the interest rate hikes that occurred in fiscal 2023 as well as to 11% growth in loans and
5% growth in deposits. Non-interest income was also up, rising $9 million compared to fiscal 2022, mainly due to increases in revenues from bankers’
acceptances, partly offset by a decrease in revenues from foreign exchange activities. Commercial Banking's non-interest expenses rose $81 million in fiscal
2023, mainly due to higher compensation and employee benefits (resulting from wage growth), to the fiscal 2023 specified items, and to an increase in
operations support charges.
Average Loans and Acceptances
Year ended October 31
(millions of Canadian dollars)
Average Deposits
Year ended October 31
(millions of Canadian Dollars)
+6%
6
1
7
,
7
4
1
+3%
5
0
1
,
5
9
+11%
1
1
6
,
2
5
8
3
5
9
3
1
,
8
3
1
,
2
9
0
0
4
7
4
,
6
9
9
,
1
8
4
7
9
3
4
,
2
2
0
8
3
,
+5%
5
5
9
,
5
8
+5%
6
8
9
,
5
4
+5%
9
6
9
,
9
3
2022
2023
2022
2023
Total – Personal and Commercial Banking
Personal Banking
Commercial Banking
Total – Personal and Commercial Banking
Personal Banking
Commercial Banking
32
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Wealth Management
As a leader in Quebec and firmly established across Canada, the Wealth Management segment serves all market segments by emphasizing advisory-based
service and close client relationships. It delivers a full range of wealth management products and solutions through an omnichannel distribution network and a
differentiated business model. Wealth Management also provides services to independent advisors and institutional clients.
Total Revenues by Category
Year ended October 31, 2023
12%
31%
57%
Total Revenues by Geographic Distribution
Year ended October 31, 2023
37%
63%
$2,521 million
Total revenues
$987 million
Income before provisions for
credit losses and
income taxes
$714 million
Net income
Net interest income (2022: 25%)
Fee-based services (2022: 60%)
Transaction-based and other revenues (2022: 15%)
Province of Quebec (2022: 63%)
Other provinces (2022: 37%)
Full-Service Brokerage
Drawing on the largest network of investment advisors in Quebec, National
Bank Financial Wealth Management (NBFWM) provides wealth management
advisory services through 800-plus advisors at close to 100 service points
across Canada. Its advisors serve their clients, proposing portfolio
management services, financial and succession planning services, and
insurance services while working in close collaboration with other segments of
the Bank.
Private Banking
Private Banking 1859 (PB1859) offers highly personalized wealth
management services and advice across Canada, helping affluent clients
benefit from comprehensive management of their personal and family
fortunes. As a true market leader in Quebec, PB1859 is continuing to expand
throughout Canada with its extensive range of banking services, financial
solutions and strategies for the protection, growth, and transmission of
wealth.
Key Success Factors
Leadership in Canada in securities custody and brokerage services for
independent wealth management firms.
Firmly established across Canada in full-service brokerage services.
Ability to forge strong and lasting client relationships and help their assets
grow with personalized solutions and advice at every life stage.
High rate of satisfaction across our distribution channels.
Proven track record and excellent reputation as a business partner to non-
banking financial institutions.
Strong synergies with the Personal and Commercial and Financial Markets
segments, allowing a holistic service offering.
Direct Brokerage
National Bank Direct Brokerage (NBDB) offers a multitude of financial products and investment tools to self-directed investors across Canada through its online
investment solution. NBDB helps customers manage their investments through digital platforms or by speaking directly to a representative on the phone.
Investment Solutions
National Bank Investments Inc. (NBI) manufactures and offers mutual funds, exchange-traded funds (ETFs), investment solutions, and services to consumers
and institutional investors through the Bank’s extended network. Thanks to its open architecture model, NBI is Canada’s largest investment fund manager to
entrust the management of its investments exclusively to external portfolio managers.
Administrative and Trade Execution Services
National Bank Independent Network (NBIN) is a Canadian leader in providing administrative services such as trade execution, custodial services, and
brokerage solutions to many independent financial services firms across Canada, in particular to introducing brokers, portfolio managers, and investment fund
managers.
Transaction Products
The Wealth Management segment provides independent advisors across Canada with 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.
National Bank of Canada
2023 Annual Report
33
Management’s Discussion and Analysis
Business Segment Analysis
Trust and Estate Services
Through National Bank Trust Inc. (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.
Economic and Market Review
While the U.S. Federal Reserve's aggressive tightening of monetary policy appears to be coming to an end, the U.S. economy has been surprisingly resilient.
The confluence of good economic growth and weakening price pressures has convinced proponents of the "immaculate disinflation" scenario that it is
materializing. This has spurred gains in equity markets, notably the S&P 500, which has risen sharply since the start of the year. In Canada, the transmission
of monetary policy to the economy has been more rapid, and S&P/TSX performance has therefore been more modest. However, it is premature to assert that
the fight against inflation is over and that there is no longer any risk of economic damage. Given the lags in transmission and the low savings rate of U.S.
households, the risks of recession remain high for 2024. On the housing front, signs of a slowdown are already noticeable on both sides of the border, as high
interest rates have caused a sharp deterioration in affordability. Under the weight of declining purchasing power caused by high interest rates and inflation,
consumer confidence has plummeted in recent months. Businesses share this sentiment, forecasting fewer sales and hiring in the months ahead.
The economic environment in 2023 and the outlook for 2024 are discussed in more detail in the Economic Review and Outlook section on page 24.
Objectives and Strategic Priorities
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. Wealth Management distinguishes itself in the market through its strategic positioning, offering an
outstanding client experience with its advisory services, innovative solutions, and exceptional service delivered by agile and aligned multifunctional teams.
This segment aims to continue penetrating this market across Canada through organic growth, targeted initiatives, and its unique market positioning.
2023 Achievements and Highlights
2024 Priorities
Create highly engaged clients
thanks to an exceptional
advisory-based experience
Leveraged our growth strategies (intersegment
synergies, high-potential segments and markets).
Further developed a distinctive offering for clients
who are in both our PB1859 and Commercial Banking
sectors by adding differentiating revenue-generating
components.
Continued to see improved results from our client
satisfaction surveys.
Increased net client acquisition, exceeding forecasts
in most areas of activity.
Developed new tools to help manage client
relationships.
Have best-in-class investment
and digital solutions
Encourage entrepreneurial culture
and talent development
Continued to develop new investment solutions to
meet client needs (with an emphasis on responsible
investing, ETFs and alternative solutions).
Continually simplified and improved digital solutions
to reflect client needs, in particular brokerage clients.
Continued to improve our advisory solutions.
Created a team composed of members from all
segments to propose major Diversity and Inclusion
initiatives.
Apply client knowledge to help meet
expectations and use data responsibly.
Continue developing analytic foundations in
order to put data (360-degree holistic view) at
the service of clients.
Foster strong client engagement with an
advisory-driven experience.
Increase client acquisition activities in
promising markets and rapidly growing
segments.
Simplify our IT ecosystem and automate
certain operating processes more quickly.
Foster client engagement with enhanced
digital capabilities.
Improve the advisor experience by developing
and improving available digital capabilities.
Strengthen the client/advisor relationship
through responsible investing and meet the
growing appetite among investors for this type
of investment.
Continue to develop fully integrated solutions
to support advisors and independent firms.
Leverage our culture of integration to attract
and retain talent.
Foster a culture of continuous professional
development.
34
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Segment Results – Wealth Management
Year ended October 31
(millions of Canadian dollars)
Net interest income
Fee-based revenues
Transaction and other revenues
Total revenues
Non-interest expenses
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Less: Specified items after income taxes(2)
Net income – Adjusted(2)
Average assets(3)
Average loans and acceptances(3)
Net impaired loans(4)
Average deposits(3)
Efficiency ratio(4)
Efficiency ratio – Adjusted(5)
Assets under administration(4)
Assets under management(4)
Individual
Mutual funds
2023
778
1,432
311
2,521
1,534
987
2
985
271
714
(32)
746
8,560
7,582
8
40,216
2022(1)
594
1,429
352
2,375
1,417
958
3
955
254
701
−
701
8,440
7,343
15
35,334
60.8 %
59.1 %
59.7 %
59.7 %
652,631
72,245
48,613
120,858
616,165
65,214
47,132
112,346
% change
31
−
(12)
6
8
3
(33)
3
7
2
6
1
3
(47)
14
6
11
3
8
(1)
(2)
(3)
(4)
(5)
For the year ended October 31, 2022, certain amounts were reclassified, notably due to a revised method for the sectoral allocation of technology investment expenses.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures. During fiscal 2023, the segment recorded, in the Non-interest
expenses item, $8 million in intangible asset impairment losses ($6 million net of income taxes) on technology development as well as $35 million in litigation expenses ($26 million net of
income taxes) to resolve litigations and other disputes on various ongoing or potential claims against the Bank.
Represents an average of the daily balances for the period.
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.
Financial Results
In the Wealth Management segment, net income totalled $714 million in fiscal 2023 compared to
$701 million in fiscal 2022, a 2% increase that was due to growth in the segment's total revenues,
partly offset by higher non-interest expenses (including the specified items recorded in fiscal
2023). As for the segment's adjusted net income in fiscal 2023, it totalled $746 million, up 6%
from $701 million in fiscal 2022. The segment's total revenues amounted to $2,521 million in
fiscal 2023, up 6% from $2,375 million in fiscal 2022. The segment's net interest income was up,
rising $184 million or 31% as a result of the interest rate hikes that occurred during fiscal years
2023 and 2022. The fiscal 2023 fee-based revenues remained relatively stable compared to fiscal
2022. As for transaction and other revenues, they were down 12% year over year given a decrease
in trading commissions during fiscal 2023.
The segment's non-interest expenses stood at $1,534 million in fiscal 2023 versus $1,417 million
in fiscal 2022, for an 8% increase that was due to higher compensation and employee benefits, to
higher technology expenses related to the segment's initiatives, and to $43 million in specified
items recorded in fiscal 2023. At 60.8% in fiscal 2023, the segment's efficiency ratio deteriorated,
essentially due to the fiscal 2023 specified items. As for the segment's adjusted non-interest
expenses, they stood at $1,491 million, up 5% from $1,417 million in fiscal 2022. At 59.1%, the
adjusted efficiency ratio improved by 0.6 percentage points from 59.7% in fiscal 2022.
Wealth Management recorded $2 million in provisions for credit losses in fiscal 2023 compared to
$3 million recorded in fiscal 2022.
Assets Under Administration
and Assets Under Management
Year ended October 31
(millions of Canadian dollars)
5
6
1
,
6
1
6
1
3
6
,
2
5
6
6
4
3
2
1
1
,
8
5
8
0
2
1
,
2022
2023
Assets under administration
Assets under management
National Bank of Canada
2023 Annual Report
35
Management’s Discussion and Analysis
Business Segment Analysis
Financial Markets
The Financial Markets segment offers a complete suite of products and services to corporations, institutional clients, and public-sector entities. Whether
providing comprehensive advisory services and research or capital markets products and services, 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.
Total Revenues by Category
Year ended October 31, 2023
Total Revenues by Geographic Distribution
Year ended October 31, 2023
44%
56%
$2,656 million
Total revenues
$1,495 million
Income before provisions for
credit losses and
income taxes
Global Markets (2022: 61%)
Corporate and Investment Banking (2022: 39%)
$1,055 million
Net income
19%
32%
49%
Province of Quebec (2022: 31%)
Other provinces (2022: 52%)
Outside of Canada (2022: 17%)
Global Markets
Financial Markets is a Canadian leader in risk management solutions,
structured products, and market-making in 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.
Corporate and Investment Banking
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.
Economic and Market Review
In an attempt to curb inflation, central banks have tightened monetary policy considerably in recent months, historically the main cause of recessions in the
G7 countries. Since this tightening has been highly synchronized, and the impact of interest rate hikes is usually felt with a lag, the risks of lackluster
economic performance are high for the global economy in 2024. Slowing inflation means that interest rates are becoming increasingly restrictive in real terms.
With the exception of the U.S., several economies are already showing signs of significant weakening, notably the eurozone and China. What's more, the
geopolitical context remains uncertain, with rising tensions in the Middle East and the continuing war in Ukraine. Given this highly uncertain backdrop and the
high cost of capital, North American companies are likely to be very cautious about investing and hiring, pointing to a sluggish year marked by high market
volatility.
The economic environment in 2023 and the outlook for 2024 are discussed in more detail in the Economic Review and Outlook section on page 24.
36
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Objectives and Strategic Priorities
Maintain our leadership in
established businesses and
leverage our strengths onto other
businesses
2023 Achievements and Highlights
2024 Priorities
Ranked number one in Canadian government debt underwriting
for a ninth consecutive year.
First leading role for a public sector client in the U.S. market with a
joint lead role on an Ontario Teachers’ Finance Trust
US$1.5 billion 5-year bond offering.
Won the coveted 1-month and 3-month CORRA market-making
mandates, which enabled us to participate in the Montréal
Exchange’s panel discussions on CORRA in various cities around
the world.
Won Best Client Service at the 2023 Structured Products
Maintain our leadership through
quality and innovation.
Intelligence Awards.
Received five awards at the inaugural Canadian ETF Express
awards:
Best ETF Research Provider in Canada
Best Institutional ETF Broker in Canada
Best Market Maker/Authorised Participant – Equity ETFs in
Canada
Best Market Maker/Authorised Participant – Fixed Income
ETFs in Canada
Best Overall ETF Liquidity Provider/Market Maker in Canada
Continued U.S. coverage enhancement in key sectors and
distribution of select products.
Assist our clients in their growth
ambitions and funding needs.
rsified revenue mix.
debt
and
nt
Carry on international expansion
supported by an innovative offering
National Bank Financial’s inaugural role as a joint bookrunner on a
World Bank (International Bank for Reconstruction and
Development (IBRD)) US$500 million 7-year sustainable
development floating-rate note.
Exclusive financial advisor to Triple Flag Precious Metals Corp. on
its combination with Maverix Metals Inc. for a total consideration
of US$606 million. The transaction positioned Triple Flag as a
gold-focused, emerging senior streaming and royalty company,
with a portfolio of 229 streams and royalties on 29 producing
mines and 200 development- and exploration-stage projects,
predominantly located in the Americas and Australia.
Financial advisor to Alpha Auto Group on its acquisition, by its
related company Global Auto Holdings Limited, of UK-listed
Lookers plc for £504 million.
Exclusive financial advisor to North American Construction
Group Ltd. on its $395 million acquisition of Australian-based
MacKellar Group.
National Bank of Canada
2023 Annual Report
37
Management’s Discussion and Analysis
Business Segment Analysis
2023 Achievements and Highlights
2024 Priorities
Strengthen our leadership role in
sustainable financing solutions
Ensure continued growth by
recruiting, coaching, and retaining
a diversified workforce
Further strengthen information
technology to enhance and
accelerate our execution
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.
Guided and advised our clients in their energy transitions.
Created the role of Head of Sustainable Finance in order to better
spearhead our vision and strategy with the rest of the Bank.
Exclusive financial advisor, lead left underwriter, joint
bookrunner, and co-sustainability advisor for $1.45 billion of
green bonds and construction revolver facilities to support the
Connect 6ix(1) $9.0 billion, 39-year public-private partnership for
the Ontario Line Rolling Stock, Systems, Operations and
Maintenance project in Toronto, Ontario.
Co-financial advisor to Certarus Ltd. on its $1.05 billion sale to
Superior Plus Corp. The transaction establishes a lower carbon
and renewable fuels platform via the addition of compressed
natural gas, renewable natural gas, and hydrogen to Superior’s
extensive distribution platform.
Joint lead placement agent, joint bookrunner, and financial
advisor on Nautilus Solar Energy, LLC’s inaugural
US$202.3 million institutional investment-grade community solar
private placement issuance. The issuance was backed by a
185 megawatt portfolio of 58 operating community solar projects
located across the Northeastern United States, Colorado, and
Minnesota.
Exclusive financial advisor to Eavor Technologies Inc. on its latest
financing round, which will enable Eavor to accelerate the
development and deployment of its revolutionary geothermal
technology.
Sustainability swap provider to Bell Canada on its first
sustainability-linked derivative to support its ESG objectives.
Continued to advance our Inclusion and Diversity strategy through
scholarship and sponsorship programs.
Coached and retained our talent at all levels through mentorship
and executive development programs.
Launched an employee development roadmap to help make
career paths clearer.
Invested in technology and talent to deploy technology
enhancements.
Improved alignment of IT projects through a newly created project
governance committee.
Implement innovative practices
for employee recruitment,
coaching, and retention while
fostering inclusion.
Continue to create differentiated
technology across all Financial
Markets’ business lines.
Used the latest advances in deep learning to automate and scale
our platform.
(1)
The members are: Plenary Americas LP, Hitachi Rail STS S.p.A, Webuild – Canada Holding Inc., and Transdev Canada Inc.
38
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Strengthen our ability to deliver
integrated advice and solutions to
clients
2023 Achievements and Highlights
2024 Priorities
Deepen our relationships with
corporations, institutional clients,
and public-sector entities and
help support their growth.
Through collaborative efforts within Corporate and Investment
Banking and a focus on energy infrastructure, acted as joint
bookrunner on $4.4 billion of senior, hybrid and sustainability-
linked debt offerings for Enbridge Inc., Enbridge Gas Inc., and
Enbridge Pipelines Inc. for acquisition and ongoing capital needs.
Exclusive financial advisor to Sun Life Financial Inc. in the
divestiture of its association and affinity and group creditor
business in Canada to Canadian Premier Life Insurance Company.
Exclusive financial advisor to Dialogue Health Technologies Inc. in
its acquisition by Sun Life Financial Inc. for $365 million.
Exclusive financial advisor to Northleaf Capital Partners on its
majority acquisition of Provident Energy Management Inc.;
administrative agent, sole bookrunner, and lead arranger of
senior secured credit facilities to finance the acquisition.
Sponsored the annual Bloomberg Canadian Finance Conference
for the eleventh year in a row.
Segment Results – Financial Markets
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Global markets
Equities
Fixed-income
Commodities and foreign exchange
Corporate and investment banking
Total revenues(1)
Non-interest expenses
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes(1)
Net income
Less: Specified items after income taxes(3)
Net income – Adjusted(3)
Average assets(4)
Average loans and acceptances(4) (Corporate Banking only)
Net impaired loans(5)
Net impaired loans as a % of total loans and acceptances(5)
Average deposits(4)
Efficiency ratio(5)
Efficiency ratio – Adjusted(6)
2023
904
417
173
1,494
1,162
2,656
1,161
1,495
39
1,456
401
1,055
(5)
1,060
180,837
29,027
30
0.1 %
57,459
43.7 %
43.4 %
2022(2)
979
367
156
1,502
966
2,468
1,029
1,439
(23)
1,462
388
1,074
−
1,074
154,349
22,311
91
0.4 %
47,242
41.7 %
41.7 %
% change
(8)
14
11
(1)
20
8
13
4
−
3
(2)
(1)
17
30
(67)
22
(1)
(2)
(3)
(4)
(5)
(6)
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 revenues taxed at lower rates by the income tax to a level that would make it comparable to revenues from taxable sources in Canada. For the year ended October 31,
2023, Total revenues were grossed up by $571 million ($277 million in 2022), and an equivalent amount was recognized in Income taxes. The effect of these adjustments is reversed under
the Other heading of segment results.
For the year ended October 31, 2022, certain amounts were reclassified, notably due to a revised method for the sectoral allocation of technology investment expenses.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures. During fiscal 2023, the segment recorded, in the Non-interest
expenses item, $7 million in intangible asset impairment losses ($5 million net of income taxes) on technology development.
Represents an average of the daily balances for the period.
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.
National Bank of Canada
2023 Annual Report
39
Management’s Discussion and Analysis
Business Segment Analysis
Financial Results
In the Financial Markets segment, net income totalled $1,055 million in fiscal 2023, down 2% year
over year. Growth in the segment's total revenues was more than offset by higher non-interest
expenses and higher provisions for credit losses. As for adjusted net income, which excludes
intangible asset impairment losses, it totalled $1,060 million, down 1% from $1,074 million in
fiscal 2022. The segment’s income before provisions for credit losses and income taxes stood at
$1,495 million in fiscal 2023, up $56 million or 4% from fiscal 2022. Its fiscal 2023 total revenues
on a taxable equivalent basis amounted to $2,656 million, a $188 million or 8% year-over-year
increase. Global markets revenues were down 1% due to an 8% decrease in revenues from equity
securities, whereas revenues from fixed-income securities rose 14% and revenues from
commodities and foreign exchange activities rose 11%. As for the fiscal 2023 corporate and
investment banking revenues, were up 20% year over year given growth in banking service
revenues, revenues from capital markets activity, and revenues from merger and acquisition
activity.
For fiscal 2023, the segment's non-interest expenses rose 13% year over year. This increase was
due to higher compensation and employee benefits (notably wage growth and the variable
compensation associated with revenue growth), to higher technology investment expenses, and to
expenses related to the segment’s business growth. At 43.7%, the fiscal 2023 efficiency ratio
deteriorated when compared to 41.7% in fiscal 2022. As for the segment's adjusted non-interest
expenses, they stood at $1,154 million in fiscal 2023 versus $1,029 million in fiscal 2022. And as
for the adjusted efficiency ratio, it was 43.4% versus 41.7% in fiscal 2022.
Financial Markets recorded $39 million in provisions for credit losses during fiscal 2023 compared
to $23 million in recoveries of credit losses in fiscal 2022. This increase was mainly due to a
$60 million increase in provisions for credit losses on non-impaired loans, as there was loan
portfolio growth in fiscal 2023 and the fiscal 2023 macroeconomic conditions were less favourable
than those of fiscal 2022. As for provisions for credit losses on impaired loans, they were up
slightly year over year.
Total Revenues by Category
Year ended October 31
(millions of Canadian dollars)
1,502
1,494
1,162
966
2022
2023
Global markets – Equities
Global markets – Fixed income
Global markets – Commodities and
foreign exchange
Corporate and investment banking
40
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
U.S. Specialty Finance and International
The Bank complements its Canadian growth with a targeted, disciplined international strategy that aims for superior returns. The Bank is currently focused on
specialty finance in the U.S. through 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 2023, 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
$483 million
Total revenues
$343 million
Income before provisions for
credit losses and
income taxes
Breakdown of Total Revenues
Year ended October 31, 2023
40%
60%
$207 million
Net income
Credigy (2022: 40%)
ABA Bank (2022: 60%)
ABA Bank
$726 million
Total revenues
$466 million
Income before provisions for
credit losses and
income taxes
$343 million
Net income
U.S. Specialty Finance — Credigy
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 best-in-class modelling
expertise, flexibility, and client-centric approach, Credigy is a partner of
choice for financial services institutions.
Key Success Factors
Proven investment strategy that is adaptable to rapidly changing market
conditions.
Diversification across several classes of performing assets.
Economic and Market Review
Market credibility achieved through 370-plus transactions and over
US$25 billion in total investments life-to-date.
Rigorous underwriting approach with continuous refinement of modelling
and analytics capabilities.
The progress made in recent months in the United States towards achieving
the Federal Reserve's dual mandate of maintaining full employment and
keeping inflation stable around 2% has certainly been greeted with
enthusiasm. Indeed, there seems to be a growing number of investors who
now expect a greater possibility of a soft landing for the economy. But the
fact that inflation has so far fallen without too much damage to growth does
not guarantee that future progress towards price stability will be painless.
It's a safe bet that inflation will continue to fall in 2024, as the U.S. central
bank believes, but there's a significant risk that this will be to the detriment of
economic activity. It turns out that rate hikes tend to affect the economy with a long lag, especially in the U.S. where most mortgages are fixed over a long
period. But with the cost of servicing non-mortgage debt rising, consumers may well have to show more restraint in the quarters ahead, especially as the
excess savings accumulated during the pandemic may have been fully deployed. This hypothesis seems to be borne out by data already showing a significant
increase in the percentage of consumer loans that have fallen into serious delinquency (90 days or more overdue) in the third quarter of 2023. High interest
rates are likely to dissuade consumers from making major purchases, and cause businesses to postpone investments as they face an interest payment shock
for refinancing. In such a context, the U.S. economy is expected to slide into contraction in the first half of 2024, a scenario that would translate into growth of
just 0.3% next year.
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 2023 and the outlook for 2024 are discussed in more detail in the Economic Review and Outlook section on page 24.
National Bank of Canada
2023 Annual Report
41
Management’s Discussion and Analysis
Business Segment Analysis
Objectives and Strategic Priorities – Credigy
Credigy aims to provide customized solutions for the acquisition or financing of consumer assets in pursuit of the best risk-adjusted returns and a pre-tax
return on assets (ROA) of at least 2.5%.
2023 Achievements and Highlights
2024 Priorities
Sustain deal flow by being a
partner of choice for institutions
facing complex challenges and
strategic changes
Achieved balance sheet growth through a disciplined
investment approach.
Invested by establishing new relationships and
leveraging existing partners.
Maintained average assets of approximately
$9.8 billion.
Maintain a diversified mix of
performing assets
Achieve best risk-adjusted returns
Invested in prime performing secured assets that
lengthened the average life of the business book.
Continued asset class diversification that is focused
on high-quality consumer, mortgage, and insurance
assets.
Leveraged flexibility to invest via financing and direct
acquisitions.
Leverage relationships with current and
prospective partners.
Remain prepared to seize opportunities in
rapidly evolving markets.
Favour asset diversification and a prudent
investment profile.
Maintain a stable risk-reward balance while
optimizing for capital efficiency.
Actively monitored the economy for opportunities.
Refined and calibrated credit models to target the
best risk-return investments.
Actively monitor macroeconomic conditions to
implement risk mitigation strategies.
Deliver asset growth through a balanced mix of
Maintained a prudent approach to achieve a risk-
financing and direct acquisitions.
return balance.
International – ABA Bank
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 87 branches, 43 self-banking units, 1,395 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 (ninth
consecutive year), Euromoney (tenth consecutive year) and Asiamoney.
Economic and Market Review
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.
Signs of economic slowdown in China continue to affect Cambodia’s tourism
industry as well as foreign direct investments. Garment and textile exports are
impacted by weakening global external demand from the U.S. and Europe,
while regional exports continue to benefit from recent free-trade agreements(1)
and from the diversification of the manufacturing sector. The highly dollarized
nature of the Cambodian economy (80%+) helps to keep the inflation under
control. After peaking at around 8% in mid-2022, economic growth currently
stands at around 2.5%. The economy grew by 5.2% in 2022 and is expected to
grow between 5.5% and 6.0% in 2023. In 2024, growth rates should remain
between 5% and 6%, as tourism and investments trend towards 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.
Governance structure based on rigorous international standards while
providing local management with the autonomy to pursue strategic
priorities and business objectives.
Leveraging National Bank’s reputation as a world-class financial
institution.
International recognition of ABA Bank.
(1)
Regional Comprehensive Trade Partnership between the Association of Southeast Asian Nations (ASEAN), Australia, New Zealand, Brunei Darussalam, China and Japan, Cambodia-China,
Cambodia-South Korea.
42
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Objectives and Strategic Priorities – ABA Bank
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
Maintain credit quality
Sustain growth in deposits and
transactional services
2023 Achievements and Highlights
2024 Priorities
Achieved 27% growth in loan volumes.
Maintained its leading market position while
continuing to grow the business.
Continued to adapt the MSME lending strategy to
support the growing needs of customers as their
businesses become more mature.
Opened six new branches, bringing the total to
87 throughout the country.
Open 8 branches and 15 self-banking units in
2024 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 (98% of
Maintain strong governance, disciplined risk
loans are secured with an average loan-to-value
between 40 and 50).
At 3.3% of the loan portfolio as at October 31,
2023, non-performing loans were below market
average.
Closely monitored clients that are impacted by the
current economic slowdown.
Standard & Poor’s maintained ABA Bank’s long-
term credit rating at B+ with a “Stable” outlook,
based on its strong financial profile underpinned
by its advanced digital platforms and
transactional banking.
Grew deposit volume by 25% from fiscal 2022.
Continued to enhance self-banking capabilities,
including the market-leading full-scale mobile
banking application in Cambodia.
Self-banking transactions made up 99% of total
transactions.
Further expanded ABA 24/7, a network of
standalone self-banking locations that provide
customers with round-the-clock access to their
accounts and that now has 43 locations
throughout the country.
management, and sound business processes.
Ensure good credit quality across the loan
portfolio to keep non-performing loan levels
below market averages.
Continue to focus on secured lending.
Further develop the transactional banking model
to accelerate the migration of cash transactions,
payments, and money transfers to self-service
and digital banking channels.
Adapt the product offering to support the growth
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.
a
rds while
ic
National Bank of Canada
2023 Annual Report
43
Management’s Discussion and Analysis
Business Segment Analysis
Segment Results – USSF&I
Year ended October 31
(millions of Canadian dollars)
Total revenues
Credigy
ABA Bank
International
Non-interest expenses
Credigy
ABA Bank
International
Income before provisions for credit losses and income taxes
Provisions for credit losses
Credigy
ABA Bank
Income before income taxes
Income taxes
Credigy
ABA Bank
Net income
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 124 to 127 for details on the composition of these measures.
2023
483
726
−
1,209
140
260
2
402
807
81
32
113
694
55
91
146
207
343
(2)
548
23,007
18,789
511
283
10,692
2022
% change
439
669
2
1,110
131
212
1
344
766
35
31
66
700
57
86
143
216
340
1
557
18,890
15,283
459
180
8,577
10
9
9
7
23
17
5
3
71
(1)
(4)
6
2
(4)
1
(2)
22
23
11
25
33.3 %
31.0 %
44
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Financial Results
In the USSF&I segment, net income totalled $548 million in fiscal 2023 compared to $557 million in fiscal 2022, as growth in total revenues was more than
offset by higher non-interest expenses and higher provisions for credit losses. The segment's total revenues amounted to $1,209 million in fiscal 2023 versus
$1,110 million in fiscal 2022, a 9% increase driven by a $44 million increase in Credigy's revenues and a $57 million increase in ABA Bank's revenues.
For fiscal 2023, the segment’s non-interest expenses stood at $402 million compared to $344 million in fiscal 2022, a 17% increase attributable mainly to
higher non-interest expenses at ABA Bank resulting from business growth.
The segment’s fiscal 2023 provisions for credit losses were up $47 million year over year, with the increase being essentially attributable to Credigy.
Credigy
For fiscal 2023, the Credigy subsidiary's net income totalled $207 million, a 4% year-over-year decrease that was due to significantly higher provisions for
credit losses. The subsidiary’s income before provisions for credit losses and income taxes totalled $343 million in fiscal 2023, up 11% year over year. Its total
revenues amounted to $483 million in fiscal 2023, up from $439 million in fiscal 2022. A decrease in net interest income was more than offset by growth in
non-interest income, as there was a higher unfavourable impact from fair value remeasurements of certain portfolios during fiscal 2022. For fiscal 2023,
Credigy’s non-interest expenses rose $9 million year over year, mainly due to compensation and employee benefits. Its provisions for credit losses increased
by $46 million year over year, due to an increase in provisions for credit losses on non-impaired loans (associated with growth in the loan portfolio and a
deterioration in certain risk parameters) and on impaired loans. These increases were partly offset by a decrease in provisions for credit losses on POCI loans,
as there were favourable remeasurements of certain portfolios during fiscal 2023.
ABA Bank
For fiscal 2023, the ABA Bank subsidiary's net income totalled $343 million, up $3 million or 1% from fiscal 2022. Growth in the subsidiary’s business
activities, mainly sustained loan growth, drove total revenues up 9% year over year. This increase was, however, partly offset by higher interest rates on
deposits and lower interest rates on loans given a competitive environment in Cambodia. ABA Bank’s fiscal 2023 non-interest expenses stood at $260 million,
a 23% year-over-year increase resulting from higher compensation and employee benefits (notably higher wage expense given a greater number of
employees), from higher occupancy expenses given business growth and the opening of new branches, and from higher advertising expenses. Its provisions
for credit losses stood at $32 million in fiscal 2023, a $1 million year-over-year increase that stems from higher provisions for credit losses on non-impaired
loans, partly offset by lower provisions for credit losses on impaired loans.
Average Loans and Receivables – Credigy
Year ended October 31
(millions of Canadian dollars)
Average Loans and Average Deposits – ABA Bank
and International
Year ended October 31
(millions of Canadian dollars)
9,543
7,988
2
9
6
0
1
,
6
4
2
,
9
7
7
5
8
,
5
9
2
7
,
2022
2023
Loans
POCI loans
2022
2023
Loans
Deposits
National Bank of Canada
2023 Annual Report
45
Management’s Discussion and Analysis
Business Segment Analysis
Other
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.
Segment Results – Other
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)
Net loss
Non-controlling interests
Net loss attributable to the Bank’s shareholders and holders of other equity instruments
Less: Specified items after income taxes(3)
Net loss − Adjusted(3)
Average assets(4)
2023
(591)
(141)
(732)
194
(926)
5
(931)
(667)
(264)
(2)
(262)
12
(276)
69,731
2022(1)
(536)
201
(335)
199
(534)
2
(536)
(340)
(196)
(1)
(195)
−
(196)
71,868
(1)
(2)
(3)
(4)
For the year ended October 31, 2022, certain amounts were reclassified, notably due to a revised method for the sectoral allocation of technology investment expenses.
For the year ended October 31, 2023, Net interest income was reduced by $332 million ($234 million in 2022), Non-interest income was reduced by $247 million ($48 million in 2022), and
an equivalent amount was recorded in Income taxes (recovery). 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 of grossing up certain revenues taxed at lower rates by the income tax to a level that would make it comparable to revenues
from taxable sources in Canada.
See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures. The Bank recorded a $91 million gain ($67 million net of income
taxes) upon the fair value measurement of an equity interest, a $25 million expense ($18 million net of income taxes) related to the retroactive impact of changes to the Excise Tax Act,
$12 million in impairment losses ($9 million net of income taxes) on premises and equipment and intangible assets, $6 million in charges ($4 million net of income taxes) related to
penalties on onerous contracts, and a $24 million income tax expense related to the Canadian government’s 2022 tax measures.
Represents an average of the daily balances for the period.
Financial Results
For the Other heading of segment results, there was a net loss of $264 million in fiscal 2023 compared to a net loss of $196 million in fiscal 2022. The change
in net loss was notably attributable to lower gains on investments in fiscal 2023, partly offset by a higher contribution from Treasury activities and a
$91 million gain recorded upon the fair value measurement of an equity interest during fiscal 2023. For fiscal 2023, non-interest expenses were down slightly
year over year, mainly due to variable compensation, partly offset by certain specified items recorded in fiscal 2023, notably a $25 million expense related to
the retroactive impact of changes to the Excise Tax Act, $12 million in impairment losses on premises and equipment and intangible assets, and $6 million in
charges related to penalties on onerous contracts.
The fiscal 2023 specified items had a $12 million favourable impact on net loss. As for adjusted net loss, it stood at $276 million in fiscal 2023 compared to a
$196 million net loss in fiscal 2022.
46
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Quarterly Financial Information
Several trends and factors have an impact on the Bank’s quarterly net income, revenues, non-interest expenses and provisions for credit losses. The following
table presents a summary of results for the past eight quarters.
Quarterly Results Summary(1)
(millions of Canadian dollars)
Statement of income data
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Income before provisions for credit losses and
income taxes
Provisions for credit losses
Income taxes
Net income
Q4
Q3
Q2
735
1,859
2,594
1,607
987
115
104
768
870
1,645
2,515
1,417
1,098
111
148
839
882
1,597
2,479
1,374
1,105
85
173
847
2023
Q1
1,099
1,483
2,582
1,403
1,179
86
212
881
Q4
Q3
Q2
1,207
1,127
2,334
1,346
988
87
163
738
1,419
994
2,413
1,305
1,108
57
225
826
1,313
1,126
2,439
1,299
1,140
3
248
889
2022
Q1
1,332
1,134
2,466
1,280
1,186
(2)
258
930
(1)
For additional information about the 2023 fourth-quarter results, visit the Bank’s website at nbc.ca or the SEDAR+ website at sedarplus.ca to consult the Bank’s Press Release for the Fourth
Quarter of 2023, published on December 1, 2023. Also, a summary of results for the past 12 quarters is provided in Table 1 on pages 114 and 115 of this MD&A.
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 2023, the Bank’s net income results increased year over year owing to
growth in total revenues, partly offset by higher non-interest expenses and higher provisions for credit losses. Conversely, in the first two quarters of fiscal
2023, net income was down year over year due to net income decreases in the Financial Markets and USSF&I segments as well as to higher provisions for
credit losses during those quarters of fiscal 2023, as there were more favourable macroeconomic conditions during the same quarters of fiscal 2022.
Year over year, net interest income was down in every quarter of fiscal 2023. These decreases were essentially due to the trading activity revenues of the
Financial Markets segment. However, the fiscal 2023 net interest income generated by all the other business segments was up year over year in every quarter
(except the second quarter for USSF&I). These increases were driven by loan and deposit growth in both the Personal and Commercial and Wealth Management
segments, by loan portfolio growth and by the good performance of certain Credigy portfolios, and by an increase in ABA Bank’s net interest income owing to
sustained business growth. Moreover, the interest rate hikes that occurred in fiscal 2023 and 2022 had a favourable impact on net interest income in every
quarter of fiscal 2023.
For fiscal 2023, non-interest income increased year over year in every quarter, essentially due to the trading activity revenues of the Financial Markets
segment, which had a favourable impact on non-interest income in every quarter of fiscal 2023. These increases were also due to 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, as well as to
revenues from bankers' acceptances. In the Wealth Management segment, non-interest income experienced notable year-over-year decreases in the first and
second quarters of fiscal 2023 due to a decrease in fee-based revenues, as stock market performance was weaker compared to the same quarters of fiscal
2022, as well as to a decrease in transaction-based and other revenues. The third-quarter increase in non-interest income was notably due to a $91 million
gain recorded upon a fair value remeasurement of an equity interest.
For fiscal 2023, 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. Occupancy
expense was also up in every quarter of fiscal 2023, due to expansion of the ABA Bank network and to expenses arising from the Bank's new head office
building. Travel and business development expenses were also up in every quarter of fiscal 2023 as activities with clients resumed. In the third quarter of fiscal
2023, non-interest expenses included a $25 million expense related to the retroactive impact of changes to the Excise Tax Act, and in the fourth quarter of
fiscal 2023, the Bank recorded $86 million in impairment losses on premises and equipment and intangible assets, $35 million in litigation expenses, and
$15 million in provisions for contracts.
Year over year, provisions for credit losses were up in every quarter of fiscal 2023. These increases were due to higher provisions for credit losses on impaired
loans at Personal Banking and Commercial Banking, reflecting a normalization of credit risk, as well as to higher provisions for credit losses on Credigy's
impaired loans. However, in the first quarter of fiscal 2023, provisions for credit losses on impaired loans were down year over year, as the Financial Markets
segment recorded higher recoveries of credit losses in the first quarter. Year over year, provisions for credit losses on non-impaired loans were up in every
quarter of fiscal 2023 due to growth in the loan portfolios, to the migration of credit risk, and to updates and revisions to the probability weightings of
scenarios, reflecting uncertainties in the macroeconomic outlook. In the first and second quarters of fiscal 2022, the Bank had posted reversals of allowances
for credit losses on non-impaired loans to reflect improvements in both the macroeconomic outlook and credit conditions at that time.
National Bank of Canada
2023 Annual Report
47
Management’s Discussion and Analysis
Quarterly Financial Information
For fiscal 2023, the year-over-year change in effective income tax rate stems essentially from a higher level and proportion of tax-exempt dividend income and
from higher income in lower tax-rate jurisdictions, factors that were partly offset by the additional 1.5% tax. In addition, in the first quarter of fiscal 2023, the
tax rate reflects the impact of the Canadian government's 2022 tax measures, namely, the Canada Recovery Dividend and the $24 million impact related to
current and deferred taxes for fiscal 2022.
Analysis of the Consolidated Balance Sheet
Consolidated Balance Sheet Summary
As at October 31
(millions of Canadian dollars)
Assets
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase agreements and securities borrowed
Loans and acceptances, net of allowances
Other
Liabilities and equity
Deposits
Other
Subordinated debt
Equity attributable to the Bank’s shareholders and holders of other equity instruments
Non-controlling interests
2023
2022
% change
35,234
121,818
11,260
225,443
29,823
423,578
288,173
110,979
748
23,676
2
423,578
31,870
109,719
26,486
206,744
28,921
403,740
266,394
114,101
1,499
21,744
2
403,740
11
11
(57)
9
3
5
8
(3)
(50)
9
−
5
As at October 31, 2023, the Bank had total assets of $423.6 billion, up $19.9 billion or 5% from $403.7 billion since the end of fiscal 2022.
Cash and Deposits With Financial Institutions
At $35.2 billion as at October 31, 2023, cash and deposits with financial institutions were up $3.3 billion since October 31, 2022, mainly due to an increase in
deposits with the U.S. Federal Reserve, partly offset by a decrease in deposits with the Bank of Canada. 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.
Securities
Securities rose $12.1 billion since October 31, 2022, due to a $12.6 billion or 14% increase in securities at fair value through profit or loss, an increase that
was essentially attributable to equity securities and securities issued or guaranteed by the Canadian government, partly offset by a decrease in securities
issued or guaranteed by U.S. Treasury, other U.S. agencies, and other foreign governments. As for securities other than those measured at fair value through
profit or loss, they decreased by $0.5 billion. Securities purchased under reverse repurchase agreements and securities borrowed decreased by $15.2 billion
since October 31, 2022, mainly due to the activities of the Financial Markets segment and Treasury. The Bank’s market risk management policies are
described on pages 84 to 90 of this MD&A.
Loans and Acceptances
As at October 31, 2023, loans and acceptances, net of allowances for credit losses, accounted for 53% of total assets and totalled $225.4 billion, rising
$18.7 billion or 9% since October 31, 2022.
Residential mortgage loans outstanding amounted to $86.8 billion as at October 31, 2023, rising $6.7 billion or 8% since October 31, 2022. 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 $46.4 billion at year-end 2023, rising $1.1 billion from $45.3 billion since October 31,
2022. This increase came mainly from business growth at Personal Banking and ABA Bank. At $2.6 billion, credit card receivables rose $0.2 billion since
October 31, 2022.
As at October 31, 2023, loans and acceptances to business and government totalled $90.8 billion, a $10.9 billion or 14% increase since October 31, 2022 that
was mainly due to business growth at Commercial Banking, in corporate financial services, and at ABA Bank.
48
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
Table 9 (page 121) shows, among other information, gross loans and acceptances by borrower category as at October 31, 2023. At $99.9 billion as at
October 31, 2023, residential mortgages (including home equity lines of credit) have posted strong growth since 2019 and accounted for 44% 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 $20.7 billion as at
October 31, 2023, rising $2.0 billion since October 31, 2022. As for loans to businesses, the key increases were recorded in the utilities, communications,
financial services, real estate and real-estate-construction, professional services, and other services categories. As at October 31, 2023, certain sectors were
down year over year, notably non-real-estate construction and manufacturing. POCI loans rose since October 31, 2022, an increase that was due to portfolios
acquired by Credigy and Commercial Banking during fiscal 2023.
Impaired Loans
Impaired loans include all loans classified in Stage 3 of the expected credit loss model and POCI loans.
As at October 31, 2023, gross impaired loans stood at $1,584 million compared to $1,271 million as at October 31, 2022 (Table 10, page 122). As for net
impaired loans, they totalled $1,276 million as at October 31, 2023 compared to $1,030 million as at October 31, 2022. Net impaired loans excluding POCI
loans amounted to $606 million, rising $127 million from $479 million as at October 31, 2022. This increase was due to an increase in the net impaired loans
of the loan portfolios of Personal and Commercial Banking and of the Credigy (excluding POCI loans) and ABA Bank subsidiaries, partly offset by a decrease in
the net impaired loans of the loan portfolios of the Wealth Management and Financial Markets segments. The net POCI loans stood at $670 million as at
October 31, 2023 compared to $551 million as at October 31, 2022, an increase due to portfolio acquisitions conducted by Credigy and Commercial Banking
during fiscal 2023.
A detailed description of the Bank’s credit risk management practices is provided on pages 74 to 83 of this MD&A as well as in Note 7 to the consolidated
financial statements.
Other Assets
As at October 31, 2023, other assets totalled $29.8 billion compared to $28.9 billion as at October 31, 2022, a $0.9 billion increase that was mainly due to a
$1.9 billion increase in other assets, notably receivables, prepaid expenses and other items; interest and dividends receivable; and current tax assets, with
these increases being partly offset by a decrease in amounts due from clients, dealers and brokers. Furthermore, derivative financial instruments were down
$1.0 billion, with this result being related to the activities of the Financial Markets segment.
Deposits
As at October 31, 2023, deposits stood at $288.2 billion, rising $21.8 billion or 8% since the end of fiscal 2022. At $87.9 billion, personal deposits, as
presented in Table 12 (page 123), accounted for 31% of all deposits, and had increased $9.1 billion since October 31, 2022. This increase was driven by
business growth at 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 $197.3 billion as at October 31, 2023, rising $13.1 billion from $184.2 billion as at
October 31, 2022. This increase came from the funding activities of the Financial Markets segment and of Treasury, including $4.9 billion in deposits subject to
bank recapitalization (bail-in) conversion regulations, as well as from Commercial Banking activities. Deposits from deposit-taking institutions totalled
$3.0 billion as at October 31, 2023, declining $0.4 billion since the end of fiscal 2022.
Other Liabilities
Other liabilities, totalling $111.0 billion as at October 31, 2023, decreased $3.1 billion since October 31, 2022, resulting essentially from an $8.1 billion
decrease in obligations related to securities sold short and a $1.3 billion decrease in liabilities related to transferred receivables. These decreases were partly
offset by a $4.8 billion increase in obligations related to securities sold under repurchase agreements and securities loaned and a $1.1 billion increase in
other liabilities, notably interest and dividends payable.
Subordinated Debt and Other Contractual Obligations
Subordinated debt decreased since October 31, 2022 as a result of the Bank’s redemption, on February 1, 2023, of $750 million in medium-term notes. The
contractual obligations are presented in detail in Note 29 to the consolidated financial statements.
Equity
As at October 31, 2023, equity attributable to the Bank’s shareholders and holders of other equity instruments totalled $23.7 billion, rising $2.0 billion from
$21.7 billion since October 31, 2022. This increase was due to net income net of dividends; to the issuances of common shares under the Stock Option Plan;
and to accumulated other comprehensive income, notably net unrealized foreign currency translation gains on investments in foreign operations and net gains
on instruments designated as cash flow hedges. These increases were partly offset by remeasurements of pension plans and other post-employment benefit
plans as well as by the net fair value change attributable to the credit risk on financial liabilities designated at fair value through profit or loss.
The Consolidated Statements of Changes in Equity on page 138 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.
National Bank of Canada
2023 Annual Report
49
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
Related Party Transactions
In the normal course of business, the Bank provides various banking services and enters into contractual agreements and other transactions with associates,
joint ventures, directors, key officers and other related parties. These agreements and transactions are entered into under conditions similar to those offered
to non-related third parties.
In accordance with the Bank Act (Canada), the aggregate of loans granted to key officers of the Bank, excluding mortgage loans granted on their principal
residence, cannot exceed twice the officer’s annual salary.
Loans to eligible key officers are granted under the same conditions as those granted to any other employee of the Bank. The main conditions are as follows:
the employee must meet the same credit requirements as a client;
mortgage loans are offered at the preferential employee rate;
home equity lines of credit bear interest at Canadian prime less 0.5%, but never lower than Canadian prime divided by two;
personal loans bear interest at a risk-based regular client rate;
credit card advances bear interest at a prescribed fixed rate in accordance with Bank policy;
personal lines of credit bear interest at Canadian prime less 0.5%, but never lower than Canadian prime divided by two.
The Bank also offers a deferred stock unit plan to directors who are not Bank employees. For additional information, see Note 22 to the consolidated financial
statements. Additional information about related parties is presented in Notes 9, 27 and 28 to the consolidated financial statements.
Income Taxes
Notice of Assessment
In March 2023, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $90 million (including
estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2018 taxation year.
In prior fiscal years, the Bank had been reassessed for additional income tax and interest of approximately $875 million (including provincial tax and interest)
in respect of certain Canadian dividends received by the Bank during the 2012-2017 taxation years.
In the reassessments, the CRA alleges that the dividends were received as part of a “dividend rental arrangement”.
In October 2023, the Bank filed a notice of appeal with the Tax Court of Canada, and the matter is now in litigation. The CRA may issue reassessments to the
Bank for taxation years subsequent to 2018 in regard to certain 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, 2023.
Canadian Government’s 2022 Tax Measures
On November 4, 2022, the Government of Canada introduced Bill C-32 – An Act to implement certain provisions of the fall economic statement tabled 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 April 7, 2022 budget. 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, as well as a 1.5% increase in the statutory tax rate. On
December 15, 2022, Bill C-32 received royal assent. Given that these tax measures were in effect at the financial reporting date, a $32 million tax expense for
the CRD and an $8 million tax recovery for the tax rate increase, including the impact related to current and deferred taxes for fiscal 2022, were recognized in
the consolidated financial statements for the year ended October 31, 2023.
50
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
Proposed Legislation
On November 28, 2023, the Government of Canada released draft legislation entitled An Act to implement certain provisions of the fall economic statement
tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023 to implement tax measures
applicable to the Bank. The measures include the denial of the deduction in respect of dividends received after 2023 on shares that are mark-to-market
property for tax purposes (except for dividends received on “taxable preferred shares” as defined in the Income Tax Act), as well as the application of a 2% tax
on the net value of equity repurchases occurring as of January 1, 2024.
In its March 28, 2023 budget, the Government of Canada also proposed to implement the Pillar 2 rules (global minimum tax) published by the Organisation for
Economic Co-operation and Development (OECD) for fiscal years beginning as of December 31, 2023. To date, the Pillar 2 rules have not yet been included in a
bill in Canada. During fiscal 2023, the Pillar 2 rules were included in a bill in certain jurisdictions where the Bank operates.
The federal budget of March 28, 2023 also included another tax measure on amendments to the Excise Tax Act, indicating that payment card clearing services
rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax (HST). On April 20, 2023, the
Government of Canada tabled Bill C-47 – An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023 to implement, among
other things, these amendments to the GST/HST for payment cards. On June 22, 2023, Bill C-47 received royal assent. Given that the amendment to the Excise
Tax Act had been adopted at the reporting date, an expense of $25 million was recognized in the consolidated financial statements for the year ended
October 31, 2023.
Event After the Consolidated Balance Sheet Date
Repurchase of Common Shares
On November 30, 2023, the Bank’s Board of Directors approved a normal course issuer bid, beginning December 12, 2023, to repurchase for cancellation up to
7,000,000 common shares (representing approximately 2.07% of its then outstanding common shares) over the 12-month period ending December 11, 2024.
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).
Securitization and Off-Balance-Sheet Arrangements
In the normal course of business, the Bank is party to various financial arrangements that, under IFRS, are not required to be recorded on the Consolidated
Balance Sheet or are recorded under amounts other than their notional or contractual values. These arrangements include, among others, transactions with
structured entities, derivative financial instruments, the issuance of guarantees, credit instruments, and financial assets received as collateral.
Structured Entities
The Bank uses structured entities, among other means, to diversify its funding sources and to offer services to clients, in particular to help them securitize their
financial assets or provide them with investment opportunities. Under IFRS, a structured entity must be consolidated if the Bank controls the entity. Note 1 to
the consolidated financial statements describes the accounting policy and criteria used for consolidating structured entities. Additional information on
consolidated and non-consolidated structured entities is provided in Note 27 to the consolidated financial statements.
Securitization of the Bank’s Financial Assets
Mortgage Loans
The Bank participates in two Canada Mortgage and Housing Corporation (CMHC) securitization programs: the Mortgage-Backed Securities (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, 2023, the outstanding
amount of NHA securities issued by the Bank and sold to CHT was $23.2 billion. The mortgage loans sold consist of fixed- or variable-rate residential loans that
are insured against potential losses by a loan insurer. In accordance with the NHA-MBS Program, the Bank advances the funds required to cover late payments
and, if necessary, obtains reimbursement from the insurer that insured the loan. The NHA-MBS and CMB programs do not use liquidity guarantee
arrangements. The Bank uses these securitization programs mainly to diversify its funding sources. In accordance with IFRS, because the Bank retains
substantially all of the risks and rewards of ownership of the mortgage loans transferred to CHT, the derecognition criteria are not met. Therefore, the insured
mortgage loans securitized under the CMB Program continue to be recognized in Loans on the Bank’s Consolidated Balance Sheet, and the liabilities for the
considerations received from the transfer are recognized in Liabilities related to transferred receivables on the Consolidated Balance Sheet. For additional
information, see Note 8 to the consolidated financial statements.
National Bank of Canada
2023 Annual Report
51
Management’s Discussion and Analysis
Securitization and Off-Balance-Sheet Arrangements
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, 2023, the credit card receivables portfolio held by CCCT II represented an amount outstanding of $2.3 billion. CCCT II issued notes to
investors, $0.1 billion of which is held by third parties and $0.8 billion is held by the Bank. CCCT II also issued a bank certificate held by the Bank that stood at
$1.4 billion as at October 31, 2023. New receivables are periodically sold to the structure on a revolving basis to replace the receivables reimbursed by clients.
Every series of notes is 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.
Securitization of Third-Party Financial Assets
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the
acquired assets. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs while continuing to service the financial
assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The
Bank acts as a financial agent and provides administrative and transaction structuring services to these conduits. The Bank provides backstop liquidity and
credit enhancement facilities under the commercial paper program. These facilities are presented and described in Notes 26 and 27 to the consolidated
financial statements. The Bank has entered into 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.
Derivative Financial Instruments
The Bank uses various types of derivative financial instruments to meet its clients’ needs, generate trading activity revenues, and manage its exposure to
interest rate, foreign exchange, and credit risk as well as other market risks. All derivative financial instruments are accounted for at fair value on the
Consolidated Balance Sheet. Transactions in derivative financial instruments are expressed as notional amounts. These amounts are not presented as assets
or liabilities on the Consolidated Balance Sheet. They represent the face amount of the contract to which a rate or price is applied to determine the amount of
cash flows to be exchanged. Notes 1 and 16 to the consolidated financial statements provide additional information on the types of derivative financial
instruments used by the Bank and their accounting basis.
Guarantees
In the normal course of business, the Bank enters into various guarantee contracts. The principal types of guarantees are 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.
Credit Instruments
In the normal course of business, the Bank enters into various off-balance-sheet credit commitments. The credit instruments used to meet the financing needs
of its clients represent the maximum amount of additional credit that the Bank could be required to extend if the commitments were fully drawn. For additional
information on these off-balance-sheet credit instruments and other items, see Note 26 to the consolidated financial statements.
Financial Assets Received as Collateral
In the normal course of business, the Bank receives financial assets as collateral as a result of transactions involving securities purchased under reverse
repurchase agreements, securities borrowing and lending agreements, and derivative financial instrument transactions. For additional information on financial
assets received as collateral, see Note 26 to the consolidated financial statements.
52
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Capital Management
Capital management has a dual role of ensuring a competitive return to the Bank’s shareholders while maintaining a solid capital foundation that covers the
risks inherent to the Bank’s business activities, supports its business segments, and protects its clients.
Capital Management Framework
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 must 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.
Structure and Governance
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 capital-related measures and decisions. The
Enterprise-Wide Risk Management Committee oversees capital management, which consists of reviewing the capital plan and strategy and implementing
significant capital-related measures, including contingency measures, and making recommendations about these measures.
National Bank of Canada
2023 Annual Report
53
Management’s Discussion and Analysis
Capital Management
Basel Accord and Regulatory Environment
Basel Accord
The Basel Accord proposes a range of approaches of varying complexity, the choice of which determines the sensitivity of capital to risks. A less complex
approach, such as the Standardized Approach, uses regulatory weightings, while a more complex approach uses the Bank’s internal estimates of risk
components to establish risk-weighted assets (RWA) and calculate regulatory capital.
As required under Basel, risk-weighted assets are calculated for each credit risk, market risk, and operational risk. Some of OSFI’s revision to its capital,
leverage, liquidity, and disclosure rules, made as part of the Basel III reforms, took effect during the second quarter of 2023, notably the implementation of the
revised Standardized Approach and IRB Approach to credit risk, the revision of the operational framework of the leverage ratio framework, and the introduction
of a more risk-sensitive capital floor. The Bank uses the Internal Ratings-Based (IRB) Approaches for credit risk to determine minimum regulatory capital
requirements for most of its portfolios. The Bank must use the Foundation Internal Ratings-Based (FIRB) Approach for certain specific exposure types such as
large corporates and financial institutions. For all other exposure types treated under an IRB Approach, the Bank uses the Advanced Internal Ratings-Based
(AIRB) Approach. Under the FIRB Approach, the Bank can use its own estimate of probability of default (PD) but must also rely on OSFI estimates for loss given
default (LGD) and exposure at default (EAD) risk parameters. Under the AIRB Approach, the Bank can use its own estimates for all risk parameters: PD, LGD,
EAD. Under both IRB Approaches, the risk parameters are subject to specific input floors. The credit risk of certain portfolios considered to be less significant is
weighted according to the revised Standardized Approach, which uses prescribed regulatory weightings. Exposure to banking book equity securities is also
weighted according to the revised Standardized Approach.
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 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.
For operational risk, the Bank applies the revised Standardized Approach, which now incorporates the Bank’s internal operational risk loss experience in the
RWA calculation.
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. Credit valuation adjustment (CVA) risk-weighted assets are determined under a prescribed Standardized Approach. In the first quarter of
2024, the Bank will implement the revised market risk and CVA frameworks in accordance with the Basel III reforms.
54
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Capital Management
The Bank must also meet the requirements of an updated capital output floor that will ensure that its total calculated RWA is not below 72.5% of the total RWA
as calculated under the Basel III Standardized Approaches. OSFI is allowing a three-year phase-in of the floor factor, starting at 65.0% in the second quarter of
2023 and rising 2.5% per year to reach 72.5% in fiscal 2026. If the capital requirement is less than the capital output floor requirement after applying the floor
factor, the difference is added to total RWA.
Capital ratios are calculated by dividing capital by RWA. Credit, market, and operational risks are factored into the RWA calculation for regulatory purposes.
Basel rules apply at the consolidated level of the Bank. The assets of non-consolidated entities for regulatory purposes are therefore excluded from the RWA
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.
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, 2023, 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 effective date of the Bail-In
Regulations 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 11.0%,
a Tier 1 capital ratio of at least 12.5%, and a Total capital ratio of at least 14.5%. 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 3.0% domestic stability buffer (DSB) established by OSFI. On
December 8, 2022, OSFI expanded the DSB range, setting it at 0% to 4.0% instead of the previous range of 0% to 2.5%, and it announced that the DSB would
rise from 2.5% to 3.0% effective February 1, 2023. On June 20, 2023, OSFI raised the DSB by 50 bps to 3.5% effective November 1, 2023. The DSB 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. Additionally, OSFI requires D-SIBs to meet a Basel III leverage ratio of at least 3.5%. Effective February 1, 2023, OSFI
increased the leverage ratio minimum requirement by imposing a Tier 1 capital buffer of 0.5% applicable only to D-SIBs. 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 instrument 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. OSFI requires D-SIBs to maintain a risk-based TLAC ratio of at
least 24.5% (including the DSB) of risk-weighted assets and a TLAC leverage ratio of at least 7.25% (increased by 0.5% effective February 1, 2023). As at
October 31, 2023, outstanding liabilities of $17.7 billion ($12.8 billion as at October 31, 2022) were subject to conversion under the Bail-In Regulations.
National Bank of Canada
2023 Annual Report
55
Management’s Discussion and Analysis
Capital Management
Requirements – Regulatory Capital(1), Leverage(1), and TLAC(2) Ratios
Minimum
Capital
conservation
buffer
Minimum
set by
BCBS
D-SIB
surcharge
Minimum
set by
OSFI(3)
Requirements as at October 31, 2023
Minimum set
by OSFI(3),
including
the domestic
stability buffer
Domestic
stability
buffer(4)
Capital ratios
CET1
Tier 1
Total
Leverage ratio
TLAC ratio
TLAC leverage ratio
4.5 %
6.0 %
8.0 %
3.0 %
21.5 %
6.75 %
2.5 %
2.5 %
2.5 %
n.a.
n.a.
n.a.
7.0 %
8.5 %
10.5 %
3.0 %
21.5 %
6.75 %
1.0 %
1.0 %
1.0 %
0.5 %
n.a.
0.5 %
8.0 %
9.5 %
11.5 %
3.5 %
21.5 %
7.25 %
3.0 %
3.0 %
3.0 %
n.a.
3.0 %
n.a.
11.0 %
12.5 %
14.5 %
3.5 %
24.5 %
7.25 %
Ratios as at
October 31,
2023
13.5 %
16.0 %
16.8 %
4.4 %
29.2 %
8.0 %
n.a. Not applicable
(1)
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.
The TLAC ratio and the TLAC leverage ratio are calculated in accordance with OSFI's Total Loss Absorbing Capacity Guideline.
The capital ratios and the TLAC ratio include the capital conservation buffer and the D-SIB surcharge. On February 1, 2023, OSFI raised the minimum leverage ratio and the TLAC leverage
ratio by imposing a Tier 1 capital buffer of 0.5% (surcharge related to D-SIBs).
On December 8, 2022, OSFI announced that the DSB would rise from 2.5% to 3.0%, effective February 1, 2023. On June 20, 2023, OSFI announced that the DSB will rise from 3.0% to 3.5%
effective November 1, 2023.
(2)
(3)
(4)
The Bank ensures that its capital levels are always above the minimum capital requirements set by OSFI, including the DSB. By maintaining a strong capital
structure, the Bank can cover the risks inherent to its business activities, support its business segments, and protect its clients.
Other disclosure requirements pursuant to Pillar 3 of the Basel Accord and a set of recommendations defined by the EDTF are presented in the Supplementary
Regulatory Capital and Pillar 3 Disclosure report published quarterly and available on the Bank’s website at nbc.ca. Furthermore, a complete list of capital
instruments and their main features is also available on the Bank’s website.
Regulatory Context
The Bank closely monitors regulatory developments and participates actively in various consultative processes. 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. Listed
below are the OSFI measures that had an impact during fiscal 2023 but that are no longer applicable as at October 31, 2023.
Capital floor: OSFI lowered the capital floor factor from 75% to 70% in accordance with the Basel II Standardized Approach; this factor stayed in place until
the domestic implementation of the Basel III capital floor in the second quarter of 2023.
Leverage ratio: OSFI continued to allow banks to temporarily exclude exposures from central bank reserves for leverage ratio purposes until April 1, 2023.
A brief description of ongoing regulatory projects is presented below.
Basel III Reforms
In the second quarter of 2023, the Bank implemented OSFI’s finalized guidance relating to the Basel III reforms, consisting primarily of:
a revised Standardized Approach and Internal Ratings-Based (IRB) Approach for credit risk;
a revised Standardized Approach for operational risk;
a revised capital output floor;
a revised Leverage Ratio Framework; and
revised Pillar 3 disclosure requirements.
The Basel III reforms also affect the market risk and CVA risk frameworks, which will take effect in the first quarter of 2024.
56
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Capital Management
Other Projects
On September 12, 2023, OSFI released the final Parental Stand-Alone (Solo) TLAC Framework for Domestic Systemically Important Banks Guideline. This
guideline focuses on the loss-absorbing capacity of Canadian parent banks rather than its consolidated operations, allowing OSFI to assess the stand-alone
financial strength of the parent bank and its ability to act as a source of financial strength for its subsidiaries and branches. The framework complements
OSFI’s existing TLAC guideline for D-SIBs on a group consolidated basis, providing an additional layer of protection to safeguard the rights and interests of
depositors, policyholders, and creditors. D-SIBs must adhere to this guideline effective November 1, 2023.
Capital Management in 2023
Management Activities
On December 12, 2022, the Bank began a normal course issuer bid to repurchase for cancellation up to 7,000,000 common shares (representing
approximately 2.1% of its then outstanding common shares) over the 12-month period ending no later than December 11, 2023. During the year ended
October 31, 2023, the Bank did not repurchase any common shares.
On February 1, 2023, the Bank redeemed $750 million of medium-term notes maturing on February 1, 2028. These instruments were excluded from the capital
ratio calculations as at January 31, 2023.
As at October 31, 2023, the Bank had 338,284,629 issued and outstanding common shares compared to 336,582,124 a year earlier. It also had 66,000,000
issued and outstanding preferred shares and 1,500,000 LRCN, unchanged from October 31, 2022. For additional information on capital instruments, see
Notes 15 and 18 to the consolidated financial statements.
Dividends
The Bank’s strategy for common share dividends is to aim for a dividend payout ratio 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 2023, the Bank declared $1,344 million in dividends to common shareholders, representing 42.0% of net income attributable to common
shareholders (2022: 36.8%) and representing 41.1% of adjusted net income attributable to common shareholders (2022: 36.8%). The declared dividends are
within the target payout range as a result of the dividend increase during the fiscal year. Given the economic conditions during fiscal 2023, the Bank has taken
a prudent approach to managing regulatory capital and remains confident in its ability to increase earnings going forward.
Shares, Other Equity Instruments, and Stock Options
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
Number of shares or LRCN
$ million
As at October 31, 2023
14,000,000
12,000,000
16,000,000
12,000,000
12,000,000
66,000,000
500,000
500,000
500,000
1,500,000
67,500,000
338,284,629
11,546,688
350
300
400
300
300
1,650
500
500
500
1,500
3,150
3,294
As at November 24, 2023, there were 338,269,824 common shares and 11,534,768 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 a capital injection. If an NVCC trigger event were to occur, all of the Bank’s preferred shares, LRCNs, and medium-term
notes maturing on 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 868 million Bank common shares, which would have a 72.0%
dilutive effect based on the number of Bank common shares outstanding as at October 31, 2023.
National Bank of Canada
2023 Annual Report
57
Management’s Discussion and Analysis
Capital Management
Regulatory Capital Ratios, Leverage Ratio, and TLAC Ratios
As at October 31, 2023, the Bank’s CET1, Tier 1, and Total capital ratios were, respectively, 13.5%, 16.0% and 16.8%, compared to ratios of, respectively,
12.7%, 15.4% and 16.9% as at October 31, 2022. The CET1 and Tier 1 capital ratios increased since October 31, 2022, essentially due to the contribution from
net income net of dividends, to common share issuances under the Stock Option Plan, and to the positive impact from the implementation of the Basel III
reforms related to the credit and operational risk frameworks. These factors were partly offset by growth in RWA and by the end of the transitional measures
applicable to ECL provisioning implemented by OSFI at the beginning of the COVID-19 pandemic. The Total capital ratio increased due to the same factors
mentioned above, but the increase was more than offset by the $750 million redemption of medium-term notes on February 1, 2023.
As at October 31, 2023, the leverage ratio was 4.4% compared to 4.5% as at October 31, 2022. The decrease in the leverage ratio is essentially due to the
growth in total exposure and to the end of the temporary measure permitted by OSFI with respect to the exclusion of central bank reserves from the leverage
exposure calculation. These factors were partly offset by the growth in Tier 1 capital.
As at October 31, 2023, the Bank’s TLAC ratio and TLAC leverage ratio were, respectively, 29.2% and 8.0%, compared with 27.7% and 8.1%, respectively, as at
October 31, 2022. The increase in the TLAC ratio was due to the same factors described for the Total capital ratio as well as to the net instrument issuances
that met the TLAC eligibility criteria during the period. The decrease in the TLAC leverage ratio was due to the same factors as those provided for the leverage
ratio, partly offset by the net TLAC instrument issuances.
During the year ended October 31, 2023, the Bank was in compliance with all of OSFI’s regulatory capital, leverage, and TLAC requirements.
Regulatory Capital(1), Leverage Ratio(1), and TLAC(2)
As at October 31
Capital
CET1
Tier 1
Total
Risk-weighted assets
Total exposure
Capital ratios
CET1
Tier 1
Total
Leverage ratio
Available TLAC
TLAC ratio
TLAC leverage ratio
2023
2022
16,920
20,068
21,056
125,592
456,478
13.5 %
16.0 %
16.8 %
4.4 %
36,732
29.2 %
8.0 %
14,818
17,961
19,727
116,840
401,780
12.7 %
15.4 %
16.9 %
4.5 %
32,351
27.7 %
8.1 %
(1)
(2)
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. The calculation of the figures as at October 31, 2022 had included the transitional measure applicable to expected credit loss
provisioning and the temporary measure regarding the exclusion of central bank reserves implemented by OSFI in response to the COVID-19 pandemic. These provisions ceased to apply on
November 1, 2022 and April 1, 2023, respectively.
Available TLAC, the TLAC ratio, and the TLAC leverage ratio are calculated in accordance with OSFI's Total Loss Absorbing Capacity Guideline.
58
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Capital Management
Movement in Regulatory Capital(1)
Year ended October 31
(millions of Canadian dollars)
Common Equity Tier 1 (CET1) capital
Balance at beginning
Issuance of common shares (including Stock Option Plan)
Impact of shares purchased or sold for trading
Repurchase of common shares
Other contributed surplus
Dividends on preferred and common shares and distributions on other equity instruments
Net income attributable to the Bank’s shareholders and holders of other equity instruments
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
Additional Tier 1 capital
Balance at beginning
New Tier 1 eligible capital issuances
Redeemed capital
Other, including regulatory adjustments and transitional arrangements
Balance at end
Total Tier 1 capital
Tier 2 capital
Balance at beginning
New Tier 2 eligible capital issuances
Redeemed capital
Tier 2 instruments issued by subsidiaries and held by third parties
Change in certain allowances for credit losses
Other, including regulatory adjustments and transitional arrangements
Balance at end
Total regulatory capital
2023
2022
14,818
85
3
−
22
(1,507)
3,337
232
(226)
103
(1)
1
37
101
−
−
(25)
(60)
−
16,920
3,143
−
−
5
3,148
20,068
1,766
−
(750)
−
(54)
26
988
21,056
12,973
54
(1)
(245)
16
(1,325)
3,384
(733)
448
333
(105)
(2)
(67)
145
−
−
(5)
(52)
−
14,818
2,649
500
−
(6)
3,143
17,961
1,021
750
−
−
21
(26)
1,766
19,727
(1)
(2)
See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
As at October 31, 2022, this item included the transitional measure applicable to expected credit loss provisioning implemented by OSFI in response to the COVID-19 pandemic. This
provision ceased to apply on November 1, 2022.
National Bank of Canada
2023 Annual Report
59
Management’s Discussion and Analysis
Capital Management
RWA by Key Risk Drivers
Risk-weighted assets (RWA) amounted to $125.6 billion as at October 31, 2023 compared to $116.8 billion as at October 31, 2022, an $8.8 billion increase
resulting mainly from organic growth in RWA, a deterioration in the credit quality of the loan portfolio, and by foreign exchange movements, partly offset by
methodology changes related to the implementation of the Basel III reforms, notably for operational risk and credit risk. Changes in the Bank’s RWA by risk
type are presented in the following table.
Risk-Weighted Assets Movement by Key Drivers(1)
Quarter ended
(millions of Canadian dollars)
Credit risk – Risk-weighted assets at beginning
Book size
Book quality
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements
Credit risk – Risk-weighted assets at end
Market risk – Risk-weighted assets at beginning
Movement in risk levels(2)
Model updates
Methodology and policy
Acquisitions and disposals
Market risk – Risk-weighted assets at end
Operational risk – Risk-weighted assets at beginning
Movement in risk levels
Methodology and policy
Acquisitions and disposals
Operational risk – Risk-weighted assets at end
Risk-weighted assets at end
October 31, 2023
July 31, 2023
April 30, 2023
January 31, 2023 October 31, 2022
Total
102,087
2,288
1,045
(107)
−
−
1,832
107,145
5,985
(323)
−
−
−
5,662
12,490
295
−
−
12,785
125,592
Total
101,986
578
467
−
−
−
(944)
102,087
5,060
925
−
−
−
5,985
12,065
425
−
−
12,490
120,562
Total
100,820
572
951
116
(1,051)
−
578
101,986
5,960
(900)
−
−
−
5,060
15,033
93
(3,061)
−
12,065
119,111
Total
96,141
4,439
697
172
106
−
(735)
100,820
6,025
(65)
−
−
−
5,960
14,674
359
−
−
15,033
121,813
Total
91,229
2,405
93
300
339
−
1,775
96,141
5,696
329
−
−
−
6,025
14,452
222
−
−
14,674
116,840
(1)
(2)
See the Financial Reporting Method section on pages 14 to 19 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 the 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, 2023, the Bank updated the models used for certain retail exposures, mortgages, and non-retail exposures.
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 quarter ended April 30, 2023, the Bank finalized the implementation of the Basel III reform requirements related to credit risk, operational risk, and
capital output floor.
60
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Capital Management
Allocation of Economic Capital and Regulatory RWA
Economic capital is an internal measure that the Bank uses to determine the capital it needs to remain solvent and to pursue its business operations. Economic
capital takes into consideration the credit, market, operational, business, and other risks to which the Bank is exposed as well as the risk diversification effect
among them and among the business segments. Economic capital thus helps the Bank to determine the capital required to protect itself against such risks and
ensure its long-term viability. The by-segment allocation of economic capital and regulatory RWA was carried out on a stand-alone basis before attribution of
goodwill and intangible assets. The method used to assess economic capital is reviewed regularly in order to accurately quantify these risks.
The Risk Management section of this MD&A provides comprehensive information about the main types of risk. The “Other risks” presented below include risks
such as business risk and structural interest rate risk in addition to the benefit of diversification among types of risk.
Allocation of Risks by Business Segment
As at October 31, 2023
(millions of Canadian dollars)
National Bank of Canada
Business
segments
Personal and Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance
and International
Other
Banking services
Credit services
Financing
Private banking
Direct brokerage
Major activities
Investment solutions
Investment solutions
Insurance
Administrative and
trade execution
services
Transaction products
Trust and estate
services
Full-service brokerage
Equities, fixed-income,
U.S. Specialty Finance
Treasury activities
commodities and
foreign exchange
Corporate banking
Investment banking
• Credigy
International
• ABA Bank
(Cambodia)
• Minority interests in
emerging markets
Liquidity management
Bank funding
Asset and liability
management
Corporate units
Fintech services
• Flinks Technology Inc.
Economic capital
by type of risk
Risk-weighted
assets(1)
Credit
Market
Operational
Other risks
Total
Credit
Market
Operational
Total
3,781
–
410
403
4,594
48,479
–
5,120
53,599
Credit
Market
Operational
Other risks
Total
Credit
Market
Operational
Total
86
–
183
564
833
1,833
–
2,281
4,114
Credit
Market
Operational
Other risks
Total
Credit
Market
Operational
Total
3,116
314
394
968
4,792
32,042
5,524
4,928
42,494
Credit
Market
Operational
Other risks
Total
Credit
Market
Operational
Total
1,330
1
36
102
1,469
16,100
–
456
16,556
Credit
Market
Operational
Other risks
Total
Credit
Market
Operational
Total
202
(128)
–
(1,125)
(1,051)
8,691
138
–
8,829
(1)
See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
National Bank of Canada
2023 Annual Report
61
Management’s Discussion and Analysis
Risk Management
In this section of the MD&A, grey-shaded text and tables marked with an asterisk (*) are integral parts of the consolidated financial statements. They
represent the Bank’s objectives, its risk management policies and procedures, and the methods it applies to measure credit risk, market risk as well as
liquidity and funding risk, as required by IFRS 7 – FinancialInstruments:Disclosures.
Risk-taking is intrinsic to a financial institution’s business. The Bank views risk as an integral part of its development and the diversification of its activities. It
advocates a risk management approach 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.
Risk Management Framework
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 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: a good understanding and an integrated view of risk are 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.
Risk Appetite
Risk appetite represents how much risk an organization is willing to assume to achieve its business strategy. The Bank defines its risk appetite by setting
tolerance thresholds, by aligning those thresholds with its business strategy, and by integrating risk management throughout its corporate culture. Risk
appetite is built into decision-making processes as well as into strategic, financial, and capital planning.
The Bank’s risk appetite framework consists of principles, statements, metrics as well as targets and is reinforced by policies and limits. When setting its risk
appetite targets, the Bank considers regulatory constraints and the expectations of stakeholders, in particular customers, employees, the community,
shareholders, regulatory agencies, governments, and rating agencies. The risk appetite framework is defined by the following principles and statements:
The Bank’s 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 liquidity position;
rigorous management of risks, including information security, regulatory compliance, and sales practices;
attainment of environmental, social, and governance objectives.
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.
62
National Bank of Canada
2023 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.
Enterprise-Wide Stress Testing
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.
Incorporation of Risk Management Into the Corporate Culture
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.
First Line of Defence
Risk Owner
Business Units
Second Line of Defence
Independent Oversight
Risk Management
and Oversight Functions
Third Line of Defence
Independent Assurance
Internal Audit
•
•
Identify, manage, assess and mitigate risks
in day-to-day activities.
• Oversee risk management by setting
policies and standards.
Ensure activities are in alignment with the
Bank’s risk appetite and risk management
policies.
•
•
Provide independent oversight of
management practices and an independent
challenge of the first line of defence.
Promote sound and effective risk
management at the Bank.
• Monitor and report on risk.
•
•
Provide the Board and management with
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.
National Bank of Canada
2023 Annual Report
63
Management’s Discussion and Analysis
Risk Management
Governance Structure(1)*
The following chart shows the Bank’s overall governance architecture and the governance relationships established for risk management.
Shareholders
Elect
Board of Directors
nomme
Appoints
Appoint
Appoints and mandates
Independent
Auditor
Reports
to
Audit
Committee
Risk Management
Committee
Human Resources
Committee
Conduct Review and
Corporate Governance
Committee
Technology
Committee
President
and CEO
Appoints
Senior
Leadership
Team
Report to
Report to
Report to
Advises
Reports to
Report to
Business
Units
Asset Liability
Committee
Reputation
Risk
Committee
Internal Audit
Oversight
Function
Finance
Oversight
Function
Risk
Management
Oversight
Function
Compliance
Oversight
Function
Global Risk
Committee
Compensation Risk Oversight
Working Group
ESG Committee
IT Risk
Management
Strategic
Committee
Privacy
Office
Report to
Operational
Risk
Management
Committee
Financial
Markets Risk
Committee
Enterprise-
Wide Risk
Management
Committee
The Board of Directors (Board)
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
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)
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
The Human Resources Committee examines and approves the Bank’s total compensation policies and programs, taking into consideration the risk appetite 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, safety and well-being, talent management matters such as succession planning for management and oversight functions, as well as diversity, equity and
inclusion.
The Conduct Review and Corporate Governance Committee
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
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.
(1)
Additional information about the Bank’s governance structure can be found in the Management Proxy Circular for the 2024 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 sedarplus.ca. The mandates of the Board and of its committees are available in their entirety at nbc.ca.
64
National Bank of Canada
2023 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 business 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 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 risks. 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 using the limits set out in the Credit Risk Management Policy. 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 Model 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 Committee
Under the leadership of the Chief Financial Officer and Executive Vice-President, Finance and of the Senior Vice-President, Communications, Public Affairs and
ESG, and made up of several officers from different areas of the Bank, the ESG Committee’s main role is to develop and support the Bank’s environmental,
social and governance initiatives and strategies. The ESG Committee 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 Committee reports to the Conduct Review and Corporate Governance Committee on the progress made and on ongoing and upcoming
ESG projects. In addition, and in a timely fashion, the ESG Committee makes presentations on topics of particular interest, such as extra-financial and climate
risk disclosures, to the Audit Committee and the RMC.
The IT Risk Management Strategic Committee (ITRMSC)
The Bank's senior management entrusts the ITRMSC with overseeing the implementation of technology risk and cyberrisk management to ensure that the
Bank is compliant with the regulations, policies, and protocols related to managing such risks. Under the leadership of the Executive Vice-President, Risk
Management and the Executive Vice-President, Technology and Operations, this committee approves the policies related to technology risk and cyberrisk
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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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.
Asset Liability Committee
The Asset Liability Committee is composed of members of the Bank's Senior Leadership Team, Risk Management officers, and officers from the business units.
It monitors and provides strategic actions on structural interest rate risk, structural foreign exchange risk, and liquidity risk. It is also charged with strategic
coordination of the annual budget plan with respect to the balance sheet, capital, and funding.
Reputation Risk Committee (RRC)
The Reputation Risk Committee is the central point for sharing information on the Bank's reputation risk practices. In particular, it ensures that appropriate
frameworks are in place and being applied, that higher reputation risks are being adequately monitored, and that mitigation plans are in place. It sets risk
appetite levels and proposes guidance and alignments that match this risk appetite. The RRC reports to the Senior Leadership Team and the RMC.
Risk Management Policies
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.
Governance of Model Risk Management
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 Model 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.
Independent Oversight by the Compliance Service
Compliance is an independent oversight function within the Bank. Its Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer
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.
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Independent Assessment by Internal Audit
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.
Top and Emerging Risks
Managing risk requires a solid understanding of every type of risk faced by 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 risk management approach, 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 be exposed.
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.
Risk and
Trend
Information
security and
cybersecurity
Description
Technology, which is now omnipresent in our daily lives, is at the heart of banking services and has become the main driver of
innovation in the financial sector. While this digital transformation meets the growing needs of customers 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 still prime targets for criminals. These criminals, who are increasingly well organized and
employing ever more sophisticated schemes, try to use technology to steal information.
Faced with a resurgence of cyberthreats and the sophistication of cybercriminals, the Bank is exposed to the risks associated with
data breaches, malicious software, unauthorized access, hacking, phishing, identity theft, intellectual property theft, asset theft,
industrial espionage, and possible denial of service due to activities causing network failures and service interruptions.
Cyberattacks, as with 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; and 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.
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Risk Management
Risk and
Trend
Information
security and
cybersecurity
(continued)
Geopolitical
risks
Description
It is also possible for the Bank to be unable to 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. Multidisciplinary teams consisting of cybersecurity and fraud prevention
specialists focus specifically on anticipating this type of threat. 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 the risks, particularly risks related to cybersecurity and the protection of personal information.
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
can 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 were to end, the shattered trust suggests that Europe and Russia will
continue to take measures to become less dependent on one another, notably regarding energy matters. In addition, the recent clashes
between Hamas and Israel add a new risk of regional escalation in the Middle East. The greatest risk is that this conflict spreads and
develops into a more direct confrontation between Iran and Israel, which could ultimately disrupt oil deliveries in the Persian Gulf.
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 United States 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. Tensions between
China and the United States on the subject of Taiwan is another 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).
Closer to home, Canada is also dealing with some tensions. Until recently, India represented an alternative to China as a potential
trading partner against a backdrop of persistent tensions with the Middle Kingdom (detention of two Canadians in China and Chinese
interference in Canadian elections). However, Ottawa's accusations that the Indian government was involved in the murder of a
Canadian citizen have soured relations with India, and the conflict could affect companies that have forged trade links or made
investments there. But the potential for confrontation does not end there, 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.
In addition, the combined effect of climate change and armed conflict could lead to massive involuntary migration, which has already
risen sharply in recent years. This could have economic and political repercussions, with Europe being particularly vulnerable. Lastly,
with rising debt levels and interest rates, some governments could face a dilemma as they try to satisfy public demands to maintain
social safety nets and respond to pressure from the financial markets to improve their fiscal balance, causing political tensions in the
developed countries. 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.
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Risk and
Trend
Description
Although the economy recovered quickly during the pandemic, a number of risks still remain while others emerge. The extremely
aggressive fiscal stimulus in North America at the start of the pandemic, supply chain issues, and the war in Ukraine led to a resurgence
in inflation in 2022 to levels not seen since the early 1980s. The central banks, guarantors of price stability, are determined to curb
inflation and have pushed interest rates to the highest levels seen in over two decades. At a time when investors are wondering about
future interest rates, which could stay high for a prolonged period, financial conditions have deteriorated substantially worldwide,
heightening the risk of recession. Central banks continue to show concern about inflation, while the economy has yet to feel the full
impact of previous rate hikes. In an environment characterized by high interest rates, companies may be reluctant to invest, and this
does not usually bode well for hiring. Corporate profit margins are under pressure in a context of rising employee compensation and
interest expense, which could lead to difficult decisions about staffing levels. Consumers, on the other hand, are likely to limit spending
when faced with high prices, amplifying the risks of an economic recession. The global economy could also face a situation not seen
since the 1970s: stagflation. Such a period, characterized by both economic weakness and high inflation, would place central banks in a
dilemma, making them reluctant to support a moribund economy.
Many governments became much more indebted during the pandemic and are now facing an interest payment shock as bonds come
due. Government financing needs will be considerable in the years to come, with demographic changes, the fight against climate
change, and reindustrialization all risking to exacerbate the pressure on public finances. There is reason to believe that investors could
demand compensation for financing more fragile governments. This could limit the power of governments to act in the event of
economic weakness.
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 economic environment, the Bank remains vigilant in the face of numerous factors and
will continue to rely on its strong risk management framework to identify, assess, and mitigate the negative impacts while also
remaining within its risk appetite limits.
With interest rates up sharply and inflation still high, it is normal to wonder how these circumstances are affecting Canadian
households, which have high levels of debt. Canadian household debt, when compared internationally, is high in relation to disposable
income, much like other countries with strong social safety nets. In recent years, policymakers have introduced a number of financial
stability measures to limit Canadian household debt. This has paid off, as shown by the debt ratio, which has been relatively unchanged
since 2016. Nonetheless, indebted households are feeling the impact of the current monetary tightening. The labour market has proved
resilient for now, and this has limited late payments on loans, but we are not immune to a potential recession that could make matters
worse. The Bank offers variable rate/variable payment mortgage loans. This means that clients in this situation have been able to
gradually adjust their budgets since the start of the multiple rate hikes and avoid overly high payment shock when they renew their
mortgage term, as is the case for borrowers that have variable rate/fixed payment mortgages with other lenders.
Soaring house prices have been one of the causes of the country's high indebtedness. For the time being, property prices have been
resilient in the face of rising interest rates, since their impact has been offset by record population growth over the past few quarters.
But, as mentioned above, a less buoyant job market could push the real estate sector into another slump. A severe recession could
cause house prices to plunge, potentially prompting some borrowers to default strategically. Quebec's lower indebtedness compared
with the rest of the country, from more affordable housing, combined with the fact that the province has a higher percentage of
households in which both spouses are employed, helps to limit the Bank's exposure against a significant increase in credit risk.
The Bank takes all these risks into account when establishing lending criteria and estimating credit loss allowances. It should be noted
that borrowers are closely monitored on an ongoing basis, and portfolio stress tests are conducted periodically to detect any vulnerable
borrowers. The Bank proactively contacts those identified and proposes appropriate solutions to enable them to continue to meet their
commitments.
Economic risk
Real estate
and
household
indebtedness
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Management’s Discussion and Analysis
Risk Management
Risk and
Trend
Description
Risks related to protecting personal information exist throughout the entire lifecycle of information and arise, in particular, from new
control measures and processes as well as from ever-evolving legislative requirements. Such risks could also arise from information
being improperly created, collected, used, communicated, stored, or destroyed. Exposure to such risks may increase when the Bank
uses external service providers to process personal information. The collection, use, and communication of personal information as well
as the management and governance thereof are receiving increasing attention, and the Bank is investing in technological solutions and
innovations according to the evolution of its commercial activities.
These risks could lead to the loss or theft of personal information; 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.
Protection of
personal
information
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. The Act to modernize legislative provisions as regards the protection of personal
information, adopted by the Government of Quebec in September 2021, is progressively coming into force until 2024. It gives new
powers to regulatory agencies to impose administrative and monetary penalties. 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 and sets out new regulatory powers and fines.
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.
The Bank’s clients have high expectations regarding the accessibility to products and services on various platforms that house
substantial amounts of data. In response to those client expectations, to the rapid pace of technological change, and to the growing
presence of new actors in the banking sector, the Bank 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.
Reliance on
technology
and third-
party
providers
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 clients and on its operational resilience, not to mention the impact that such events
would have on the Bank’s reputation. The geographical concentration of third parties and subcontractors of our third parties also
increases the risk of disruption arising from other risks, such as natural disasters and weather and geopolitical events. To mitigate this
risk, the Bank has a third-party risk management framework that includes various information security, financial health, and
performance verifications that are carried out both before entering into an agreement and throughout its life. It also includes business
continuity and technological succession 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. Faced with a greater ecosystem of third parties across the industry, in April 2023 OSFI
tabled a new version of its Third-Party Risk Management Guideline (B-10), which will come into effect on May 1, 2024.
Mindful of the significance of third-party risk, the Bank makes sure that its third-party management practices and policies evolve in
collaboration with its financial sector partners and with regulatory authorities.
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Risk Management
Risk and
Trend
Description
Rapid changes in the technology used by financial system participants could affect the Bank's financial performance and reputation,
which depend in part on its ability to develop and market new product and service offerings to satisfy changing customer needs, adopt
and develop new technologies that help differentiate its products and services in the market, and generate cost savings. In addition, the
Bank must adequately assess the impacts of any changes arising from the deployment of key technological systems before they are
implemented and on an ongoing basis during their deployment.
Technological
innovation and
competition
The transition to new digital solutions and channels has accelerated greatly in recent years, leading to major developments in the areas of
digital currencies, the open banking system, and financial services from non-bank providers. The arrival of new, non-conventional players
in the market has intensified competition, as they are proposing to enhance client experience with new technologies, data analysis tools,
and customized solutions. 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.
Furthermore, to promote digital innovation and improve the client experience, the Bank continues to incorporate artificial intelligence into
its business processes. It designs and continuously applies a set of practices aimed at ensuring the development of equitable solutions,
in addition to rigorous monitoring during the production stage. The Bank also continues to participate in the industry’s work to implement
a regulatory framework for the open banking system.
The Bank remains alert to the risks that could arise from the transformation of financial services and continues to invest in the
development of its operational and technological capabilities. Also, the Bank maintains a strong commitment in favour of innovation
through its specialized venture capital arm, NAventuresTM, which makes strategic investments in emerging technologies.
The Bank has identified two types of direct climate-change-related risks, 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, other physical aspects, etc. 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.
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. In addition, a rapidly evolving global regulatory environment,
the commitments and frameworks to which we adhere, and stakeholder expectations concerning disclosures could lead to reputation
risks and regulatory compliance risk, particularly due to potential imbalances among their requirements, in addition to increasing the risk
of lawsuits. The publication of many regulatory standards and projects, such as OSFI’s guideline B-15, Climate Risk Management; the
standards of the International Sustainability Standards Board (ISSB), designed to establish a financial disclosure framework addressing
sustainability and climate; and the CSA’s proposed National Instrument 51-107 – Disclosure of Climate–related Matters, are an
illustration.
Climate
change
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 objectives within the predetermined deadlines. 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 impacts of these risks will depend on future events that are beyond the Bank's control, such as the effectiveness of targets set
by government climate strategies or regulatory developments. The Bank must therefore devote special attention to reducing its exposure
to these 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 strives to support and advise its clients in
their own transition. From this perspective, we continue to deliver climate risk management training across the organization, in particular
among front-line employees who have direct contact with clients.
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Risk and
Trend
Climate
change
(continued)
Ability to
recruit and
retain key
resources
Description
To better understand and mitigate climate change risks, the Bank also takes part in major national and international initiatives, including
TCFD, the United Nations Principles for Responsible Banking (UNPRB), the United Nations Principles for Responsible Investing (UNPRI), and
others.
The Bank continues to closely monitor regulatory developments, evolving frameworks, commitments, and stakeholder expectations, so
that it can enhance its climate change risk management framework and further adapts its disclosures. For additional information, see the
Environmental and Social Risk section of this MD&A.
The Bank’s future performance depends greatly on its ability to recruit, develop, and retain key resources. In the financial services sector,
there is strong competition, partly supported by a relatively low unemployment rate, 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. In addition,
inflationary pressures are amplifying wage expectations, which have already been affected by competitive pressures. 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. In particular, the Bank monitors,
on a quarterly basis, critical workforce segments where the attraction and retention challenges are greatest. This work also covers the
associated action plans. The Bank has also made improvements to its recruitment platform, offering a simplified experience to candidates.
There is no assurance that the Bank or a business acquired by the Bank will be able to continue recruiting or retaining people with specific
expertise.
Other Factors That Can Affect the Bank’s Business, Operating Results, Financial Position, and Reputation
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 socioeconomic 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.
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National Bank of Canada
2023 Annual Report
uding
d
rvices sector,
d
ploy
rs,
s.
with specific
,
Management’s Discussion and Analysis
Risk Management
Intellectual Property
The Bank adopts various strategies to protect its intellectual property rights. However, the protection measures that it may obtain or implement do not
guarantee that it will be able to dissuade or prevent anyone from infringing on its rights or to obtain compensation when infringement occurs. 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 addition, financial technologies are the subject of numerous developments in intellectual property and patent applications, both in Canada and
internationally. Therefore, in certain situations, the Bank could be limited in its ability to acquire intellectual property rights, develop tools, or market certain
products and services. It could also infringe on the rights of third parties. In such situations, one of the risks could be an out-of-court claim or legal action
brought against the Bank.
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 50 of this MD&A, the Critical Accounting Policies and Estimates section on page 111 of this MD&A, and Note 24 to the consolidated financial statements.
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 pandemics; and the Bank’s ability to foresee and effectively manage the risks resulting from these factors through rigorous risk
management.
National Bank of Canada
2023 Annual Report
73
Management’s Discussion and Analysis
Risk Management
Credit Risk
Credit risk is the risk of incurring a financial loss if an obligor does not fully honour its contractual commitments to the Bank. Obligors may be debtors, issuers,
counterparties, or guarantors. Credit risk is the most significant risk facing the Bank in the normal course of 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.
Governance
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 risk appetite is allocated based on the setting of 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.
Reporting
Every quarter, an integrated risk management report is presented to senior management and the RMC. It presents changes in the credit portfolio and
highlights on the following matters:
•
•
•
•
•
credit portfolio volume growth by business segment;
a breakdown of the credit portfolio according to various criteria for which concentration limits have been set;
changes in provisions and allowances for credit losses;
changes in impaired loans;
follow-up of monitored accounts.
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Management’s Discussion and Analysis
Risk Management
Credit Risk Rating and Assessment
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 risk 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 to
determine minimum regulatory capital requirements for most of its portfolios, the Internal Ratings-Based (IRB) Approach and the revised Standardized
Approach, as defined by the Basel Accord. The IRB Approach applies to most of its credit portfolios. Since the implementation of the Basel III reforms in April
2023, the Bank must use the Foundation Internal Ratings-Based (FIRB) Approach for certain specific exposure types such as financial institutions, including
insurance companies, or large corporations that belong to a group whose consolidated annual sales exceed $750 million. For all other exposure types treated
under an IRB Approach, the Bank uses the Advanced Internal Ratings-Based (AIRB) Approach.
The main parameters used to measure credit risk in accordance with the IRB 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.
Under the FIRB approach, the Bank provides its own estimates of PD and applies OSFI's estimates for LGD and EAD. Under both IRB Approaches, risk
parameters are subject to specific input floors.
The methodology as well as the data and the downturn periods used to estimate LGD under the AIRB Approach are described in the table below.
AIRB APPROACH
DATA(1)
DOWNTURN PERIOD(1)
METHODOLOGY FOR CALCULATING LGD
Retail
The Bank’s internal historical data from 1996 to 2022
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 2022
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.
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2023 Annual Report
75
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.
Between March 2, 2022 and July 12, 2023, the Bank of Canada raised its policy rate ten times; the rate has thus risen from 0.25% to 5%. During the
September 6 and October 25, 2023 announcements, the central bank opted for a pause, holding the policy rate steady. This rapid increase in rates,
undertaken primarily to counter inflation in Canada, is putting pressure on the ability of borrowers to make payments, notably borrowers with variable-rate
mortgages or for whom the mortgage term is up for renewal.
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2023 Annual Report
Management’s Discussion and Analysis
Risk Management
New Regulatory Developments
On June 28, 2022, OSFI published a new advisory that complements the expectations set out in guideline B-20. This advisory addresses combined loan plans
(CLPs). CLPs are an innovative product that have become the main uninsured real estate secured lending offering. The most significant concern with these
products is the re-advanceability of credit above the 65% loan-to-value ratio. To satisfy OSFI’s regulatory expectations, on August 27, 2023 the Bank made
changes to its All-In-One (AIO) line of credit for circumstances where the authorized credit limit exceeds 65% of the value of the financed property at the time of
granting. Holders of certain AIO products can no longer access, on a revolving credit basis, the full principal paid on their mortgage loan.
On December 15, 2022, 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 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 January 1, 2023, the Prohibition on the Purchase of Residential Property by Non-Canadians Act came into effect. The purpose of this law, which will be in
effect until January 1, 2025, is to help Canadians access the property market and to reduce speculative purchasing that risks raising the prices of properties in
some already overheated markets. On March 27, 2023, the Act was amended to relax rules and conditions permitting non-Canadians who want to live in
Canada to purchase a residential building.
In January 2023, OSFI launched a public consultation on Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures, starting with an initial
consultation on debt servicing measures in order to mitigate the risk arising from the high consumer debt levels. As a follow-up to the public consultation, an
industry response coordinated by the Canadian Bankers Association was submitted to OSFI on April 14, 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 funds, 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.
Internal Default Risk Ratings*
Description(1)
portfolios Description(1)
Personal credit
Excellent
Good
Satisfactory
Special mention
Substandard
Default
PD (%) – Retail
0.000–0.144 Excellent
0.145–0.506 Good
0.507–2.681 Satisfactory
2.682–9.348 Special mention
9.349–99.999 Substandard
100 Default
Business and government
credit portfolios
PD (%) –
Corporate and
financial institutions
0.000–0.111
0.112–0.383
0.384–4.234
4.235–10.181
10.182–99.999
100
Ratings
1–2.5
3–4
4.5–6.5
7–7.5
8–8.5
9–10
PD (%) –
Sovereign
0.000–0.059
0.060–0.330
0.331–5.737
5.738–17.963
17.964–99.999
100
Standard
& Poor's
AAA to A-
BBB+ to BBB-
BB+ to B
B- to CCC+
CCC & CCC-
CC, C & D
Moody's
Aaa to A3
Baa1 to Baa3
Ba1 to B2
B3 to Caa1
Caa2 & Caa3
Ca, C & D
(1)
Additional information is provided in Note 7 – Loans and Allowances for Credit Losses to the consolidated financial statements.
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2023 Annual Report
77
Management’s Discussion and Analysis
Risk Management
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.
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 validation, which is a responsibility shared between the
development and validation teams, 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 Model 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.
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Management’s Discussion and Analysis
Risk Management
Assessment of Economic Capital
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.
Stress Testing
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. During fiscal years 2022 and 2023, several simulations were carried out to
assess the impact of rising interest rates and inflation on the financial positions of borrowers. Based on these simulations, the Bank was able to test the
resilience of customers, and, in turn, the resilience of the Bank’s loan portfolio.
Credit-Granting Process
Credit-granting decisions are based first and foremost on the results of the risk assessment. Aside from an obligor’s solvency, credit-granting decisions are
also influenced by factors such as available collateral 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 various authorities within the risk management teams and management, who are
independent of the business units and are at a reporting level commensurate with the size of the proposed credit transaction and the associated risk. Decision-
making authority is determined in compliance with the delegation of authority set out in the Credit Risk Management Policy. A person in a senior position in the
organization approves credit facilities that are substantial or carry a higher risk for the Bank. The GRC approves and monitors all substantial credit facilities.
Credit applications that exceed management’s latitudes are submitted to the Board for approval. The credit-granting process demands a high level of
accountability from managers, who must proactively manage the credit portfolio.
Review and Renewal Processes
The Bank periodically reviews credit files. The review process enables the Bank to update information on the quality of the facilities and covers, among other
things, risk ratings, compliance with credit conditions, collateral, 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.
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79
Management’s Discussion and Analysis
Risk Management
Risk Mitigation
The Bank also controls credit risk using various risk mitigation techniques. In addition to the standard practice of requiring collateral to guarantee repayment
of the credit it grants, the Bank also uses protection mechanisms such as credit derivative financial instruments, syndication, and loan assignments as well as
an orderly reduction in the amount of credit granted.
The most common method used to mitigate credit risk is 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:
accounts receivable;
inventories;
•
•
• 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.
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Management’s Discussion and Analysis
Risk Management
Follow-Up of Monitored Accounts and Recovery
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.
The Work Out units produce a quarterly monitoring report that is submitted to the management of the Credit Risk Management groups. For larger accounts, a
monitoring report is also submitted to a monitoring committee that tracks the status of at-risk obligors and the corrective measures undertaken. At the request
of the monitoring committee, some of the files will be the subject of a presentation. 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.
d
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 2023 and 2022, the amount of distressed loan restructurings was not significant.
Counterparty Risk Assessment
Counterparty risk is a credit risk that the Bank incurs on various types of transactions involving financial instruments. The most significant risks are those it
faces when it trades derivative financial instruments with counterparties on the over-the-counter market or when it purchases securities under reverse
repurchase agreements or sells securities under repurchase agreements. Securities lending transactions and securities brokerage activities involving
derivative financial instruments are also sources of counterparty risk. Note 16 to the consolidated financial statements provides a complete description of the
credit risk for derivative financial instruments by type of traded product.
The Risk Management Group has developed models by type of counterparty through which it applies an advanced methodology for calculating the Bank’s
credit risk exposure and economic capital. The exposures are subject to limits. These 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 on initial margins and variation margins are a
regulatory requirement when financial institutions trade with each other or with governments and central banks on international financial markets because
they limit the extent of credit risk and reduce the idiosyncratic risk associated with trading derivative financial instruments and foreign exchange forwards,
while giving traders additional leeway to continue trading with the counterparty. When required by regulation (notably, by OSFI), the Bank always uses this
type of legal documentation in transactions with financial institutions. 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.
National Bank of Canada
2023 Annual Report
81
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 Canadian Investment Regulatory
Organization (CIRO).
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.
Assessment of Settlement Risk
Settlement risk potentially arises from transactions that feature reciprocal delivery of cash or securities between the Bank and a counterparty. Foreign
exchange contracts are an example of transactions that can generate significant levels of settlement risk. However, the implementation of multilateral
settlement systems that allow settlement netting among participating institutions has contributed greatly to reducing the risks associated with the settlement
of foreign exchange transactions among banks. The Bank also uses financial intermediaries to gain access to established clearing houses in order to minimize
settlement risk for certain financial derivative transactions. In some cases, the Bank may have direct access to established clearing houses for settling
financial transactions such as repurchase agreements or reverse repurchase agreements. In addition, certain derivative financial instruments traded over the
counter are settled directly or indirectly by central counterparties. For additional information, see the table that presents notional amounts in Note 16 to the
consolidated financial statements.
There are several other types of transactions that may generate settlement risk, in particular the use of certain electronic fund transfer services. This risk refers
to the possibility that the Bank may make a payment or settlement on a transaction without receiving the amount owed by the counterparty, and with no
opportunity to recover the funds delivered (irrevocable settlement).
The ultimate means for completely eliminating such a risk is for the Bank to complete no payments or settlements before receiving the funds due from the
counterparty. Such an approach cannot, however, be used systematically. For several electronic payment services, the Bank is able to implement mechanisms
that allow it to make its transfers revocable or to debit the counterparty in the amount of the settlements before it makes its own transfer. On the other hand,
the nature of transactions in financial instruments makes it impossible for such practices to be widely used. For example, on foreign exchange transactions
involving a currency other than the U.S. dollar, time zone differentials impose strict payment schedules on the parties. The Bank cannot unduly postpone a
settlement without facing 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.
Assessment of Environmental Risk
Environmental risk refers to the impacts on credit risk that may lead to reduced repayment capacity, or a lower value of the asset pledged as collateral due to
environmental events, such as soil contamination, waste management, or a spill of materials considered hazardous, to the energy transition, or to extreme
weather events. Ultimately, environmental risk can lead to both a higher probability of default and higher credit loss in cases of default among counterparties.
In addition to the measures and guidelines adopted by the various levels of government, the Bank has a set of protective measures to follow in order to identify
and reduce the potential, current, or future environmental risks to which it is exposed when it grants credit to clients. In recent years, the risk management
framework has been expanded to include new measures for identifying, assessing, controlling, and monitoring climate risk. In addition, the Bank has
developed and is gradually deploying a process used to assess and quantify the impacts of climate change on its strategy and results. For clients operating in
specific industries, the risk analysis framework involves the collection of information on carbon footprint, a classification of climate risks (physical and
transitional) according to business sector and industry, their strategic positioning, and the existence of an energy transition plan (commitments, reduction
targets, diversification of activities). These various subjects are addressed, at least once a year, as part of the credit granting, review, and renewal processes.
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. Moreover, for several
years the Bank has been carrying out climate risk impact analyses using the scenarios recommended by the Network for Greening the Financial System (NGFS).
In doing so, the Bank is able to quantify expected losses related to its loan portfolio. In addition, the Bank periodically assesses the impact of environmental
risk on the loan portfolio concentration risk to ensure that there is no significant impact on this risk. Furthermore, a loan portfolio industry sector matrix has
been developed to provide the Risk Management Group with a clearer vision of the sectors that are most affected by climate-related risks. These initiatives
allow the Bank to take concrete steps in the process used to review sectoral limits, as each business sector or industry now has an ESG section describing its
environmental risk.
82
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Risk Management
Maximum Credit Risk Exposure
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.
Maximum Credit Risk Exposure Under the Basel Asset Categories(1)*
(millions of Canadian dollars)
As at October 31, 2023
Drawn(2)
Undrawn
commitments
Repo-style
transactions(3)
Derivative
financial
instruments
Other
off-balance-
sheet items(4)
Total
Standardized
Approach(5)
IRB
Approach
Retail
Residential mortgage
Qualifying revolving retail
Other retail
Non-retail
Corporate
Sovereign
Financial institutions
Trading portfolio
Securitization
Total – Gross credit risk
Standardized Approach(5)
IRB Approach
Total – Gross credit risk
(millions of Canadian dollars)
Retail
Residential mortgage
Qualifying revolving retail
Other retail
Non-retail
Corporate
Sovereign
Financial institutions
Trading portfolio
Securitization
Total – Gross credit risk
Standardized Approach(5)
AIRB Approach
Total – Gross credit risk
77,073
3,183
16,078
96,334
91,994
61,438
6,719
160,151
−
4,351
260,836
35,461
225,375
260,836
9,094
12,052
2,692
23,838
27,846
5,921
1,002
34,769
−
−
58,607
1,260
57,347
58,607
−
−
−
−
38,549
61,580
98,222
198,351
−
−
198,351
34,717
163,634
198,351
−
−
−
−
385
−
3,013
3,398
13,778
−
17,176
3,211
13,965
17,176
−
−
33
33
6,915
267
1,506
8,688
−
5,318
14,039
5,568
8,471
14,039
86,167
15,235
18,803
120,205
165,689
129,206
110,462
405,357
13,778
9,669
549,009
80,217
468,792
549,009
12 %
− %
13 %
18 %
3 %
23 %
2 %
92 %
15 %
88 %
100 %
87 %
82 %
97 %
77 %
98 %
8 %
85 %
15 %
85 %
As at October 31, 2022
Drawn(2)
Undrawn
commitments
Repo-style
transactions(3)
Derivative
financial
instruments
Other
off-balance-
sheet items(4)
Total
Standardized
Approach(5)
AIRB
Approach
73,324
2,483
17,526
93,333
81,763
56,253
7,200
145,216
−
4,409
242,958
30,704
212,254
242,958
8,616
6,920
2,688
18,224
29,811
5,821
166
35,798
−
−
54,022
311
53,711
54,022
−
−
−
−
36,194
68,906
76,856
181,956
−
−
181,956
24,783
157,173
181,956
−
−
−
−
322
−
1,150
1,472
13,662
−
15,134
1,308
13,826
15,134
−
−
35
35
5,538
326
754
6,618
−
4,373
11,026
4,610
6,416
11,026
81,940
9,403
20,249
111,592
153,628
131,306
86,126
371,060
13,662
8,782
505,096
61,716
443,380
505,096
12 %
− %
25 %
13 %
2 %
19 %
2 %
80 %
12 %
88 %
100 %
75 %
87 %
98 %
81 %
98 %
20 %
88 %
12 %
88 %
(1)
(2)
(3)
(4)
(5)
See the Financial Reporting Method section on pages 14 to 19 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).
National Bank of Canada
2023 Annual Report
83
Management’s Discussion and Analysis
Risk Management
Market Risk
Market risk is the risk of losses arising from movements in market prices. Market risk comes from a number of factors, particularly changes to market variables
such as interest rates, credit spreads, exchange rates, equity prices, commodity prices, and implied volatilities. The Bank is exposed to market risk through its
participation in trading, investment, and asset/liability management activities. Trading activities involve taking positions on various instruments such as
bonds, shares, currencies, commodities, or derivative financial instruments. The Bank is exposed to non-trading market risk through its asset/liability
management and investment portfolios.
The trading portfolios include positions in financial instruments and commodities held either with trading intent or to hedge other elements of the trading
book. Positions held with trading intent are those held for short-term resale and/or with the intent of taking advantage of actual or expected short-term price
movements or to lock in arbitrage profits. These portfolios target one of the following objectives: market making, liquidating positions for clients, or selling
financial products to clients.
Non-trading portfolios include financial instruments intended to be held to maturity as well as those held for daily cash management or for the purpose of
maintaining targeted returns or ensuring asset and liability management.
Governance
A market risk management policy governs global market risk management across the Bank’s units and subsidiaries that are exposed to this type of risk. It is
approved by the GRC. The policy sets out the principles for managing market risk and the framework that defines risk measures, control and monitoring
activities; sets market risk limits; and reports on breaches.
The Financial Markets Risk Committee oversees all Financial Markets segment risks that could adversely affect the Bank's results, liquidity, or capital. This
committee also oversees the Financial Markets segment’s risk framework to ensure that controls are in place to contain risk in accordance with the Bank's risk
appetite framework.
Market risk limits ensure the link and coherence between the Bank’s market risk appetite targets and the day-to-day market risk management by all parties
involved, notably senior management, the business units, and the market risk teams in their 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.
Assessment of Market Risk
The Risk Management Group uses a variety of risk measures to estimate the size of potential losses under more or less severe scenarios, and using both short-
term and long-term time horizons. For short-term horizons, the Bank’s risk measures include Value-at-Risk (VaR), Stressed VaR (SVaR), and sensitivity metrics.
For long-term horizons or sudden significant market moves, including those due to a lack of market liquidity, the risk measures include stress testing across an
extensive range of scenarios.
VaR and SVaR Models
VaR is a statistical measure of risk that is used to quantify market risks by activity and by risk type. VaR is defined as the maximum loss at a specific confidence
level over a certain horizon under normal market conditions. The VaR method has the advantage of providing a uniform measurement of financial-instrument-
related market risks based on a single statistical confidence level and time horizon.
For VaR, the Bank uses a historical price distribution to compute the probable loss levels at 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
2023 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.
Controlling Market Risk
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.
idence
National Bank of Canada
2023 Annual Report
85
Management’s Discussion and Analysis
Risk Management
The following tables provide a breakdown of the Bank’s Consolidated Balance Sheet into assets and liabilities by those that carry market risk and those that do
not carry market risk, distinguishing between trading positions whose main risk measures are VaR and SVaR and non-trading positions that use other risk
measures.
Reconciliation of Market Risk With Consolidated Balance Sheet Items*
(millions of Canadian dollars)
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Defined benefit asset
Other
Liabilities
Deposits
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase
agreements and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Defined benefit liability
Other
Subordinated debt
Balance
sheet
35,234
99,994
9,242
12,582
11,260
225,443
17,516
356
11,951
423,578
288,173
6,627
13,660
38,347
19,888
25,034
94
7,329
748
399,900
Market risk measures
Trading(1)
Non-Trading(2)
Not subject to
market risk
Non-traded risk
primary risk sensitivity
As at October 31, 2023
685
24,950
9,599
Interest rate(3)
98,559
−
−
−
12,739
16,349
−
544
128,876
18,126
−
13,660
−
19,145
9,507
−
−
−
60,438
1,435
9,242
12,582
11,260
212,704
1,167
356
−
273,696
270,047
6,627
−
38,347
743
15,527
94
49
748
332,182
−
−
−
−
−
−
−
11,407
21,006
−
−
−
−
−
−
−
7,280
−
7,280
Interest rate(3) and equity(4)
Interest rate(3) and equity(5)
Interest rate(3)
Interest rate(3)(6)
Interest rate(3)
Interest rate(7) and exchange rate(7)
Other(8)
Interest rate(3)
Interest rate(3)
Interest rate(3)(6)
Interest rate(7) and exchange rate(7)
Interest rate(3)
Other(8)
Interest rate(3)
Interest rate(3)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Trading positions whose risk measures are VaR as well as total SVaR. For additional information, see the table 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
2023 Annual Report
Management’s Discussion and Analysis
Risk Management
(millions of Canadian dollars)
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Defined benefit asset
Other
Liabilities
Deposits
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase
agreements and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Defined benefit liability
Other
Subordinated debt
Balance
sheet
Trading(1)
Non-trading(2)
Not subject to
market risk
Non-traded risk primary
risk sensitivity
Market risk measures
As at October 31, 2022
31,870
87,375
8,828
13,516
26,486
206,744
18,547
498
9,876
403,740
266,394
6,541
21,817
33,473
19,632
26,277
111
6,250
1,499
381,994
837
20,269
10,764
Interest rate(3)
85,805
−
−
−
9,914
16,968
−
405
113,929
15,422
−
21,817
−
18,909
9,927
−
−
−
66,075
1,570
8,828
13,516
26,486
196,830
1,579
498
−
269,576
250,972
6,541
−
33,473
723
16,350
111
77
1,499
309,746
−
−
−
−
−
−
−
9,471
20,235
−
−
−
−
−
−
−
6,173
−
6,173
Interest rate(3) and equity(4)
Interest rate(3) and equity(5)
Interest rate(3)
Interest rate(3)(6)
Interest rate(3)
Interest rate(7) and exchange rate(7)
Other(8)
Interest rate(3)
Interest rate(3)
Interest rate(3)(6)
Interest rate(7) and exchange rate(7)
Interest rate(3)
Other(8)
Interest rate(3)
Interest rate(3)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Trading positions whose risk measures are VaR as well as total SVaR. For additional information, see the table on 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.
National Bank of Canada
2023 Annual Report
87
Management’s Discussion and Analysis
Risk Management
Trading Activities
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.
VaR and SVaR of Trading Portfolios(1)(2)*
Year ended October 31
(millions of Canadian dollars)
Interest rate
Foreign exchange
Equity
Commodity
Diversification effect(3)
Total trading VaR
Total trading SVaR
Low
(5.2)
(0.9)
(5.1)
(0.6)
n.m.
(6.7)
(10.3)
High
(11.3)
(5.9)
(10.8)
(1.6)
n.m.
(12.4)
(25.1)
Average
(7.4)
(2.7)
(7.6)
(1.2)
9.4
(9.5)
(17.2)
2023
Period end
(8.7)
(5.0)
(6.5)
(1.6)
10.4
(11.4)
(17.1)
Low
(3.9)
(0.4)
(4.0)
(0.5)
n.m.
(4.6)
(5.1)
High
(11.3)
(6.9)
(10.6)
(1.6)
n.m.
(11.4)
(26.2)
Average
(5.8)
(2.1)
(7.2)
(0.9)
8.1
(7.9)
(14.6)
2022
Period end
(5.2)
(2.1)
(7.1)
(1.2)
7.3
(8.3)
(18.8)
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 124 to 127 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 $9.5 million for fiscal 2023, up from $7.9 million in fiscal 2022. The average total trading SVaR was also up, increasing
from $14.6 million in fiscal 2022 to $17.2 million in fiscal 2023. These increases were mainly driven by higher equity risk and higher 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 chart below shows daily trading and underwriting revenues and VaR. Daily trading and underwriting revenues were positive on 94% of the days for the year
ended October 31, 2023. Net daily trading and underwriting losses in excess of $1 million were recorded on seven days. None of these losses exceeded the
VaR.
Daily Trading and Underwriting Revenues
Year ended October 31, 2023
(millions of Canadian dollars)
32
28
24
20
16
12
8
4
0
(4)
(8)
(12)
(16)
(20)
(24)
(28)
2
2
.
v
o
N
2
2
.
c
e
D
3
2
.
n
a
J
3
2
.
b
e
F
3
2
.
r
a
M
3
2
.
r
p
A
3
2
y
a
M
3
2
e
n
u
J
3
2
y
l
u
J
3
2
.
g
u
A
3
2
.
t
p
e
S
3
2
.
t
c
O
Trading and underwriting revenues
VaR
88
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Risk Management
R of the
Stress Testing
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:
sharp parallel increases/decreases in interest rates; non-parallel movements of interest rates (flattening and steepening) and increases/decreases
in credit spreads;
sharp stock market crash coupled with a significant increase in volatility of the term structure; increase in stock prices combined with less volatility;
significant increases/decreases in commodity prices coupled with increases/decreases in volatility; short-term and long-term increases/decreases
in commodity prices;
depreciation/appreciation of the U.S. dollar and of other currencies relative to the Canadian dollar.
o
o
o
o
Structural Interest Rate Risk
As part of its core banking activities, such as lending and deposit taking, the Bank is exposed to interest rate risk. Structural 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 an 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 two metrics are calculated daily. They 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 as well as the rate and duration profile of non-maturity deposits. These specific
assumptions were developed based on historical analyses and are regularly reviewed.
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. The Asset Liability Committee and the Financial Markets Risk Committee ensure that senior management monitors structural interest rate risk on an
ongoing basis. The Risk Management Group is responsible for assessing structural interest rate risk, monitoring activities, and ensuring compliance with the
structural interest rate risk management policy. The Risk Management Group ensures that an appropriate risk management framework is in place and ensures
compliance with the risk appetite framework and policy. Structural interest rate risk supervision is mainly provided by the Financial Markets Risk Committee.
This committee reviews exposure to structural interest rate risk, the use of limits, and changes made to assumptions.
National Bank of Canada
2023 Annual Report
89
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.
Interest Rate Sensitivity – Non-Trading Activities (Before Tax)*
As at October 31
(millions of Canadian dollars)
Impact on equity
100-basis-point increase in the interest rate
100-basis-point decrease in the interest rate
Impact on net interest income
100-basis-point increase in the interest rate
100-basis-point decrease in the interest rate
Canadian
dollar
Other
currencies
(297)
272
73
(103)
2
7
1
1
2023
Total
(295)
279
74
(102)
Canadian
dollar
Other
currencies
(191)
179
128
(141)
(24)
27
2
(2)
2022
Total
(215)
206
130
(143)
Investment Governance
The Bank has created securities portfolios in liquid and less liquid securities for strategic, long-term investment, and liquidity management purposes. These
investments carry market risk, credit risk, liquidity risk, and concentration risk.
The investment governance 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.
Structural Foreign Exchange Risk
The Bank’s structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. This risk,
predominantly in U.S. dollars, is measured by assessing the impact of currency fluctuations on 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
2023 Annual Report
Management’s Discussion and Analysis
Risk Management
Liquidity and Funding Risk
Liquidity and funding risk is the risk that the Bank will be unable to honour daily cash and financial obligations without resorting to costly and untimely
measures. Liquidity and funding risk arises when sources of funds become insufficient to meet scheduled payments under the Bank’s commitments. Liquidity
risk stems from mismatched cash flows related to assets and liabilities as well as the characteristics of certain products such as credit commitments and non-
fixed-term deposits.
The Bank’s primary objective as a financial institution is to manage liquidity such that it supports the Bank’s business strategy and allows it to honour its
commitments when they come due, even in extreme conditions. This is done primarily by implementing a policy framework approved by the 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 seven chapters:
overview;
liquidity coverage ratio (LCR);
net stable funding ratio (NSFR);
net cumulative cash flow (NCCF);
operating cash flow statement;
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 November 7, 2022, OSFI published a new 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 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 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 effective dates. For D-SIBs, the internal audit assurance requirements regarding the capital, leverage and liquidity
returns commence as of fiscal 2023, the senior management attestation and internal review requirements apply as of fiscal 2024, and the external audit
assurance requirements apply as of fiscal 2025.
On April 1, 2023, revisions to OSFI's Liquidity Adequacy Requirements Guideline came into effect. OSFI made changes that will improve the sensitivity to risk
and 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 October 31, 2023, OSFI announced its decision on reviewing the Liquidity Adequacy Requirements (LAR) Guideline with respect to wholesale funding
sources with retail-like characteristics, specifically high-interest savings account exchange-traded funds (HISA ETFs). OSFI determined these sources to be
unsecure wholesale funding provided by other legal entities. Despite some retail-like characteristics and term agreements with depositors, the fact that these
products are held directly by fund managers led OSFI to conclude that a 100% run-off factor for these products was appropriate. As a result, deposit-taking
institutions exposed to such funding must hold sufficient high-quality liquid assets to support all HISA ETF balances that can be withdrawn within 30 days. By
January 31, 2024, all deposit-taking institutions will be required to transition the measurement and related reporting to the run-off treatment specified in the
LAR. Moreover, changes for reporting the LCR must be calculated retrospectively to the start of the quarter to account for daily fluctuations in the ratio
(November 1, 2023 for the Bank).
The Bank continues to closely monitor regulatory developments and actively participates in various consultation processes.
National Bank of Canada
2023 Annual Report
91
Management’s Discussion and Analysis
Risk Management
Governance
The Global Funding and Treasury Group is responsible for managing liquidity and funding risk. Although the day-to-day and strategic management of risks
associated with liquidity, funding, and pledging activities is assumed by the Global Funding and Treasury Group, the Risk Management Group is responsible
for assessing liquidity risk and overseeing compliance with the resulting policy. The Risk Management Group ensures that an appropriate risk management
framework is in place and ensures compliance with the risk appetite framework. This structure provides an independent oversight and effective challenge for
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. In addition, the Asset Liability Committee ensures that senior management
monitors liquidity and funding risk on an ongoing basis.
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 in
the event of a Bank downgrade or other unlikely occurrences, such as large market fluctuations.
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.
Liquidity Management
The Bank performs liquidity management, funding, and pledging operations not only from its head office and regional offices in Canada, but also through
certain foreign centres. Although the volume of such operations abroad represents a sizable portion of global liquidity management, the Bank’s liquidity
management is centralized. By organizing liquidity management, funding, and pledging activities within the Global Funding and Treasury Group, the Bank can
better coordinate enterprise-wide funding and risk monitoring activities. All internal funding transactions between Bank entities are controlled by the Global
Funding and Treasury Group.
This centralized structure streamlines the allocation and control of liquidity management, funding, and pledging limits. Nonetheless, the Liquidity, Funding
and Pledging Governance Policy contains special provisions for 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
2023 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. 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 result over a three-
month stress testing period, which is based on contractual maturity and behavioural assumptions applied to balance sheet items and off-balance-sheet
commitments.
Stress Testing
The results over a three-month stress test period measure the Bank's liquidity profile by checking not only its ability to survive a three-month crisis but also the
liquidity buffer it can generate with its liquid assets. This result is measured on a weekly basis using three scenarios that are designed to assess sensitivity to
a crisis specific to the Bank and/or of a systemic nature. Among the assumptions behind these scenarios, 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.
in
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.
National Bank of Canada
2023 Annual Report
93
Management’s Discussion and Analysis
Risk Management
Liquid Asset Portfolio(1)*
As at October 31
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments
Issued or guaranteed by Canadian provincial
and municipal governments
Other debt securities
Equity securities
Loans
Securities backed by insured residential mortgages
As at October 31, 2023
As at October 31, 2022
As at October 31
(millions of Canadian dollars)
Unencumbered liquid assets by entity
National Bank (parent)
Domestic subsidiaries
Foreign subsidiaries and branches
As at October 31
(millions of Canadian dollars)
Unencumbered liquid assets by currency
Canadian dollar
U.S. dollar
Other currencies
Liquid Asset Portfolio(1)* – Average(5)
Year ended October 31
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments
Issued or guaranteed by Canadian provincial
and municipal governments
Other debt securities
Equity securities
Loans
Securities backed by insured residential mortgages
As at October 31, 2023
As at October 31, 2022
Bank-owned
liquid assets(2)
35,234
Liquid assets
received(3)
−
Total
liquid assets
35,234
Encumbered
liquid assets(4)
9,290
2023
Unencumbered
liquid assets
25,944
2022
Unencumbered
liquid assets
24,180
34,292
35,181
69,473
40,411
29,062
25,894
12,130
8,679
66,717
12,836
169,888
153,384
7,128
4,078
41,532
−
87,919
92,257
19,258
12,757
108,249
12,836
257,807
245,641
12,855
2,662
80,996
6,696
152,910
144,464
6,403
10,095
27,253
6,140
104,897
8,421
9,809
27,291
5,582
101,177
2023
2022
55,626
10,013
39,258
104,897
52,544
14,576
34,057
101,177
2023
2022
51,882
35,243
17,772
104,897
49,466
24,871
26,840
101,177
Bank-owned
liquid assets(2)
40,728
Liquid assets
received(3)
−
Total
liquid assets
40,728
Encumbered
liquid assets(4)
8,128
2023
Unencumbered
liquid assets
32,600
2022
Unencumbered
liquid assets
31,369
36,786
37,074
73,860
50,472
23,388
23,701
14,067
10,653
64,439
12,381
179,054
160,463
7,940
3,728
47,099
−
95,841
85,847
22,007
14,381
111,538
12,381
274,895
246,310
14,771
3,116
82,542
7,136
166,165
147,548
7,236
11,265
28,996
5,245
108,730
6,276
8,771
24,427
4,218
98,762
(1)
(2)
(3)
(4)
(5)
See the Financial Reporting Method section on pages 14 to 19 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.
94
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Risk Management
Summary of Encumbered and Unencumbered Assets(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
Encumbered
assets(2)
Unencumbered
assets
As at October 31, 2023
Encumbered
assets as %
of total assets
Total
Other(3)
8,841
−
11,260
−
−
−
−
−
−
−
20,101
Available as
collateral
25,944
72,813
−
6,140
−
−
−
−
−
−
104,897
Other(4)
−
−
−
182,598
17,516
49
1,592
1,521
1,256
7,889
212,421
35,234
121,818
11,260
225,443
17,516
49
1,592
1,521
1,256
7,889
423,578
2.2
11.6
2.6
8.7
−
−
−
−
−
−
25.1
Encumbered
assets(2)
Unencumbered
assets
As at October 31, 2022
Encumbered
assets as %
of total assets
Total
Other(3)
7,395
−
21,818
−
−
−
−
−
−
−
29,213
Available as
collateral
24,180
66,747
4,668
5,582
−
−
−
−
−
−
101,177
Other(4)
−
−
−
163,736
18,547
140
1,397
1,519
1,360
5,958
192,657
31,870
109,719
26,486
206,744
18,547
140
1,397
1,519
1,360
5,958
403,740
1.9
10.6
5.4
9.3
−
−
−
−
−
−
27.2
Pledged as
collateral
449
49,005
−
36,705
−
−
−
−
−
−
86,159
Pledged as
collateral
295
42,972
−
37,426
−
−
−
−
−
−
80,693
(1)
(2)
(3)
(4)
See the Financial Reporting Method section on pages 14 to 19 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.
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.
Other unencumbered assets are assets that cannot be used for collateral or funding purposes in their current form. This category includes assets that are potentially eligible as funding
program collateral (e.g., mortgages insured by the Canada Mortgage and Housing Corporation that can be securitized into mortgage-backed securities under the National Housing Act
(Canada)).
Liquidity Coverage Ratio
The liquidity coverage ratio (LCR) was introduced primarily to ensure that banks could withstand periods of severe short-term stress. LCR is calculated by
dividing the total amount of high-quality liquid assets (HQLA) by the total amount of net cash outflows. OSFI has been requiring Canadian banks to maintain a
minimum LCR of 100%. An LCR above 100% ensures that banks are holding sufficient high-quality liquid assets to cover net cash outflows given a severe,
30-day liquidity crisis. The assumptions underlying the LCR scenario were established by the BCBS and OSFI’s Liquidity Adequacy RequirementsGuideline.
The following table provides average LCR data calculated using the daily figures in the quarter. For the quarter ended October 31, 2023, the Bank’s average
LCR was 155%, well above the 100% regulatory requirement and demonstrating the Bank’s solid liquidity position.
National Bank of Canada
2023 Annual Report
95
Management’s Discussion and Analysis
Risk Management
LCR Disclosure Requirements(1)(2)*
(millions of Canadian dollars)
High-quality liquid assets (HQLA)
Total HQLA
Cash outflows
Retail deposits and deposits from small business customers, of which:
Stable deposits
Less stable deposits
Unsecured wholesale funding, of which:
Operational deposits (all counterparties) and deposits in networks of cooperative banks
Non-operational deposits (all counterparties)
Unsecured debt
Secured wholesale funding
Additional requirements, of which:
Outflows related to derivative exposures and other collateral requirements
Outflows related to loss of funding on secured debt securities
Backstop liquidity and credit enhancement facilities and commitments to extend credit
Other contractual commitments to extend credit
Other contingent commitments to extend credit
Total cash outflows
Cash inflows
Secured lending (e.g., reverse repos)
Inflows from fully performing exposures
Other cash inflows
Total cash inflows
Total HQLA
Total net cash outflows
Liquidity coverage ratio (%)(6)
Total unweighted
value(3) (average)
October 31, 2023
Total weighted
value(4) (average)
For the quarter ended
July 31, 2023
Total weighted
value(4) (average)
n.a.
74,177
73,834
74,934
27,706
47,228
97,158
30,433
57,366
9,359
n.a.
65,937
21,681
1,949
42,307
2,149
134,225
n.a.
113,802
10,243
23,574
147,619
10,934
831
10,103
51,528
7,417
34,752
9,359
24,716
16,774
8,912
1,949
5,913
760
1,968
106,680
27,660
6,669
23,574
57,903
10,515
839
9,676
53,485
7,314
35,640
10,531
22,390
16,327
8,510
1,805
6,012
769
1,941
105,427
26,779
6,634
21,324
54,737
Total adjusted
value(5)
74,177
48,777
Total adjusted
value(5)
73,834
50,690
155 %
146 %
n.a. Not applicable
(1)
(2)
(3)
(4)
(5)
(6)
See the Financial Reporting Method section on pages 14 to 19 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).
Weighted values are calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates.
Total adjusted values are calculated after the application of both haircuts and inflow and outflow rates and any applicable caps.
The data in this table has been calculated using averages of the daily figures in the quarter.
As at October 31, 2023, 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, 2023 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. The 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%.
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National Bank of Canada
2023 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, 2023, the Bank’s NSFR was 118%, well above the 100% regulatory requirement and demonstrating the Bank’s solid liquidity in a
long-term position.
NSFR Disclosure Requirements(1)(2)*
(millions of Canadian dollars)
Available Stable Funding (ASF) Items
Capital:
Regulatory capital
Other capital instruments
Retail deposits and deposits from small business customers:
Stable deposits
Less stable deposits
Wholesale funding:
Operational deposits
Other wholesale funding
Liabilities with matching interdependent assets(4)
Other liabilities(5):
NSFR derivative liabilities(5)
All other liabilities and equity not included in the above categories
Total ASF
Required Stable Funding (RSF) Items
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(4)
Other assets(5):
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(4)(5)
NSFR derivative liabilities before deduction of the variation
margin posted(5)
All other assets not included in the above categories
Off-balance-sheet items(5)
Total RSF
Net Stable Funding Ratio (%)
Unweighted value by residual maturity
As at October 31,
2023
As at July 31,
2023
No
maturity
6 months
or less
23,678
23,678
−
67,049
25,263
41,786
60,916
31,441
29,475
−
17,450
n.a.
17,450
n.a.
n.a.
−
61,863
96
−
−
−
17,292
5,053
12,239
92,294
−
92,294
2,755
2,836
n.a.
n.a.
−
64,837
262
Over
6 months
to 1 year
−
−
−
7,913
3,957
3,956
10,338
−
10,338
2,673
16,672
4,868
150
n.a.
n.a.
−
24,092
−
Over
1 year
Weighted
value(3)
748
748
−
23,768
8,015
15,753
45,691
−
45,691
19,606
8,818
n.a.
n.a.
−
104,639
−
24,425
24,425
−
103,077
40,575
62,502
99,442
15,721
83,721
−
674
n.a.
674
227,618
9,004
−
159,117
18
Weighted
value(3)
23,772
23,772
−
101,196
40,032
61,164
101,485
15,257
86,228
−
674
n.a.
674
227,127
10,714
−
154,770
36
6,697
35,275
1,781
889
6,408
6,295
30,036
23,152
14,633
39,535
79,695
172
9,115
1,473
5,322
449
6,421
742
59,334
1,556
54,184
9,115
5,322
6,421
59,334
54,184
15,919
−
6,082
449
n.a.
n.a.
n.a.
5,633
n.a.
n.a.
n.a.
826
2,755
n.a.
3,562
n.a.
n.a.
1,257
2,673
32,272
n.a.
9,096
1,605
14,658
1,757
112,954
n.a.
n.a.
4,881
19,606
n.a.
1,594
n.a.
n.a.
18,812
−
20,922
449
7,732
−
733
12,008
4,259
193,302
76,011
1,826
53,591
53,533
18,837
−
23,089
423
10,092
−
631
11,943
4,175
192,748
118 %
118 %
See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
OSFI prescribed a table format in order to standardize disclosure throughout the banking industry.
n.a. Not applicable
(1)
(2)
(3) Weighted values are calculated after application of the weightings set out in OSFI’s Liquidity Adequacy RequirementsGuideline.
(4)
As per OSFI’s specifications, liabilities arising from transactions involving the Canada Mortgage Bond program and their corresponding encumbered mortgages are given ASF and RSF
weights of 0%, respectively.
As per OSFI’s specifications, there is no need to differentiate by maturity.
(5)
National Bank of Canada
2023 Annual Report
97
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.
Funding Risk
Funding risk is defined as the risk to the Bank’s ongoing ability to raise sufficient funds to finance actual or proposed business activities on an unsecured or
secured basis at an acceptable price. The Bank maintains a good balance of its funding through appropriate diversification of its unsecured funding vehicles,
securitization programs, and secured funding. The Bank also diversifies its funding by currency, geography, and maturity. The funding management priority is
to achieve an optimal balance between deposits, securitization, secured funding, and unsecured funding. This brings optimal stability to the funding and
reduces vulnerability to unpredictable events.
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 financial instrument 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. As at October 31, 2023, the outlooks of the ratings agencies remained unchanged at “Stable”. The following table presents the Bank’s credit ratings
according to four rating agencies as at October 31, 2023.
The Bank’s Credit Ratings
Short-term senior debt
Canadian commercial paper
Long-term deposits
Long-term non-bail-inable senior debt(1)
Long term senior debt(2)
NVCC subordinated debt
NVCC limited recourse capital notes
NVCC preferred shares
Counterparty risk(3)
Covered bonds program
Rating outlook
Moody’s
P-1
Aa3
Aa3
A3
Baa2 (hyb)
Ba1 (hyb)
Ba1 (hyb)
Aa3/P-1
Aaa
Stable(4)
S&P
A-1
A-1 (mid)
A
BBB+
BBB
BB+
P-3 (high)
Stable
As at October 31, 2023
Fitch
F1+
DBRS
R-1 (high)
AA
AA
AA (low)
A (low)
BBB (high)
Pfd-2
AAA
Stable
AA-
AA-
A+
BBB
AA-
AAA
Stable
(1)
(2)
(3)
(4)
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.
Moody’s uses the term Counterparty Risk Rating while Fitch uses the term Derivative Counterparty Rating.
On November 6, 2023, Moody’s changed the rating trends for the Bank and its related entities to “Positive” from “Stable”. This change reflects Moody’s recognition of the Bank’s solid
performance in recent years.
98
National Bank of Canada
2023 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-, two-, or three-notch downgrade. These additional collateral requirements are presented in the table below.
(millions of Canadian dollars)
Derivatives(1)
One-notch
downgrade
31
Two-notch
downgrade
120
As at October 31, 2023
Three-notch
downgrade
125
(1)
Contractual requirements related to agreements known as initial margins and variation margins.
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.
National Bank of Canada
2023 Annual Report
99
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.
Residual Contractual Maturities of Wholesale Funding(1)*
(millions of Canadian dollars)
As at October 31, 2023
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, 2022
1 month or
less
24
1,966
1,347
−
−
−
−
−
3,337
−
3,337
3,337
6,122
Over 1
month to
3 months
−
3,356
400
−
1,760
1,100
−
−
6,616
2,860
3,756
6,616
8,390
Over 3
months to
6 months
−
11,685
2,686
−
829
−
−
−
15,200
829
14,371
15,200
8,393
Over 6
months to
12 months
−
513
3,595
−
2,760
−
−
−
6,868
2,760
4,108
6,868
7,113
Subtotal
1 year
or less
24
17,520
8,028
−
5,349
1,100
−
−
32,021
6,449
25,572
32,021
30,018
Over 1
year to
2 years
−
−
6,539
40
3,915
1,805
48
−
12,347
5,768
6,579
12,347
9,338
Over 2
years
861
−
6,385
2,613
15,770
7,993
−
748
34,370
23,763
10,607
34,370
32,752
Total
885
17,520
20,952
2,653
25,034
10,898
48
748
78,738
35,980
42,758
78,738
72,108
(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 debts 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.
Operational Risk
Operational risk is the risk of loss resulting from an inadequacy or a failure ascribable to human resources, equipment, processes, technology, or external
events. Operational risk exists for every Bank activity. Theft, fraud, cyberattacks, unauthorized transactions, system errors, human error, misinterpretation of
laws and regulations, litigation or disputes with clients, inappropriate sales practice behaviour, or property damage are just a few examples of events likely to
cause financial loss, harm the Bank’s reputation, or lead to regulatory penalties or sanctions.
Although operational risk cannot be eliminated entirely, it can be managed in a thorough and transparent manner to keep it at an acceptable level. The Bank’s
operational risk management framework is built on the concept of three lines of defence and provides a clear allocation of responsibilities to all levels of the
organization, as mentioned below.
Operational Risk Management Framework
The operational risk management framework is described in the Operational Risk Management Policy, which is derived from the Risk Management Policy. The
operational risk management framework is aligned with the Bank's risk appetite and is made up of policies, standards, and procedures specific to each
operational risk, which fall under the responsibility of specialized groups.
The 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 established 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, manage and monitor their operational risks and control
measures. With these tools and methods, the segments can:
recognize and understand the inherent and residual risks to which their activities and operations are exposed;
identify how to manage and monitor the identified risks to keep them at an acceptable level;
proactively and continuously manage risks;
obtain an integrated view of operational risks by combining the results of these various tools in the risk profile.
Operational Risk Management Tools and Methods
Operational Risk Taxonomy
With the aim of developing a common language for the Bank's operational risk universe, an operational risk taxonomy has been established. It is comparable to
the Basel taxonomy and based on eight risk categories and two risk themes.
100
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Risk Management
Collection and Analysis of Data on Internal 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 Events 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 and periodically identify and assess the
new or major operational risks to which they are exposed, evaluate the effectiveness of monitoring and 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.
Operational Risk Reports and Disclosures
Operational events for which the financial impact exceeds tolerance thresholds or that have a significant non-financial 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.
Regulatory Compliance Risk
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.
Organizational Structure of Compliance
Compliance is an independent oversight function within the Bank. The Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering
Officer serves as both chief compliance officer (CCO) and chief anti-money laundering officer (CAMLO) 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 her at least
once every quarter. She can also communicate directly with senior management, officers, and directors of the Bank and of its subsidiaries and foreign centres.
Regulatory Compliance Framework
The Bank operates in a highly regulated industry. To ensure sound management of regulatory compliance, the Bank favours proactive approaches and
incorporates regulatory requirements into its day-to-day operations.
Such proactive management also provides reasonable assurance that the Bank is in compliance, in all material respects, with the regulatory requirements in
effect where it does business, both in Canada and internationally.
National Bank of Canada
2023 Annual Report
101
o
Management’s Discussion and Analysis
Risk Management
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)
The purpose of 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 is to provide a new legal framework and support the official languages of Canada. It modernizes the Official Languages Act
by giving new powers to the Commissioner (compliance agreements, orders, penalties, etc.) to protect the language rights of Canadians. It also introduces a
new law that confers rights and obligations on federal businesses regarding language of service (consumers) and language of work in Quebec and in other
regions of Canada with a strong francophone presence. The bill was assented to on June 20, 2023. The amendments to the Official Languages Act then came
into effect (the new Act will come into effect by order-in-council at a later date).
Amendments to the Charter of the French Language (Quebec)
Bill 96, An Act respecting French, the official and common language of Québec, made amendments to the Charter of the French Language and other legislation.
The objectives consist mainly of strengthening the presence and use of the French language in Quebec and affirming that French is the only official language of
Quebec. Among the major themes addressed were the language of work, the language of commerce and business (including new requirements for contracts of
adhesion and commercial advertising), the francization committees of businesses, and procedures for publishing rights and disputes. Bill 96 was assented to
on June 1, 2022, when several provisions entered into effect. Other provisions entered into effect on September 1, 2022 (publication of rights and disputes)
and on June 1, 2023 (contracts of adhesion), while certain provisions relating to commercial advertising will come into effect on June 1, 2025.
Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances (Guideline)
On July 5, 2023, the Financial Consumer Agency of Canada (FCAC) published, with immediate effect, its Guideline on Existing Consumer Mortgage Loans in
Exceptional Circumstances. This guideline sets out the FCAC’s expectations for federally regulated financial institutions (FRFIs) to contribute to the protection
of consumers of financial products and services by providing tailored support to natural persons with an existing residential mortgage loan on their principal
residence who are experiencing severe financial stress, as a result of exceptional circumstances, and are at risk of mortgage default. These exceptional
circumstances include the current combined effects of high household indebtedness, the rapid rise in interest rates, and the increased cost of living. The FCAC
expects FRFIs to consider all available mortgage relief measures and to adopt an approach that reflects the personal circumstances of consumers and their
financial needs.
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 notably requires financial institutions to send letters to clients to inform them of the existence of unclaimed
balances. Additional information about clients who have an unclaimed balance will also have to be sent to the Bank of Canada. The bill came into effect on
June 30, 2023, but the first notices are expected to be issued by January 1, 2024.
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.
In addition, the federal government’s budget of March 28, 2023 proposed changes to Canada’s AML/ATF regime (creation of an agency that will become the
main organization for applying the law against financial crimes in Canada, modernizing oversight of the financial sector, strengthening investigative tools,
application of the law, and information sharing), some of which will be implemented through Bill C-47.
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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, most of the
obligations of the new Act 25, An Act to modernize legislative provisions asregards theprotectionof personal information, came into effect in September
2023, 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: theConsumer Privacy ProtectionAct, 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. Still at the federal level, members of industry, regulatory
agencies, and consumer advocates were consulted to help design and establish the pillars of an open banking system, which aims to enable consumers to
transfer their financial data between financial institutions and accredited third parties in a secure and user-friendly manner.
Employment Equity Act
Amendments to theEmployment Equity Regulations introduced new pay transparency reporting obligations, among other things, under the Employment Equity
Act. The amendments came into effect on January 1, 2021 and created new pay gap reporting obligations for affected employers, which were required to be
included in employer annual reports (which were due by June 1, 2022). The aggregate wage gap data for each employer will be publicly posted in the winter of
2023 (and updated annually thereafter). The purpose of the Employment Equity Act is to achieve equality in the workplace so that no person shall be denied
employment opportunities or benefits for reasons unrelated to ability and, in the fulfilment of that goal, to correct the conditions of disadvantage in
employment experienced by women, Indigenous Peoples, persons with disabilities, and members of visible minorities by giving effect to the principle that
employment equity means more than treating persons in the same way but also requires special measures and the accommodation of differences.
Pay Equity Act
Under the federalPay Equity Act, which came into effect on August 31, 2021, employers with more than ten employees are required to develop a pay equity
plan that identifies and corrects gender-based wage gaps within three years (i.e., by September 3, 2024). The purpose of the Act is to achieve pay equity
through proactive means by redressing the systemic gender-based discrimination in the compensation practices and systems of employers that is experienced
by employees who occupy positions in predominantly female job classes. This Act seeks to ensure that employees receive equal compensation for work of
equal value, while taking into account the diverse needs of employers and then to maintain pay equity through proactive means. Employers with over
100 employees must prepare (and maintain) their pay equity plan in a joint employer-employee pay equity committee.
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 resolution 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” are therefore subject to the withholding and reporting requirements. The effective date of certain aspects of
these regulations, as well as some of the obligations of Qualified Derivatives Dealers under section 871(m) of the IRC and the Qualified Intermediary
Agreement, have been postponed until January 1, 2025. Given that the Internal Revenue Service (IRS) is still expected to issue clarifications to enable
institutions to comply with these requirements, the industry will be making efforts to have the effective date postponed further.
U.S. Foreign Account Tax Compliance Act and Common Reporting Standard
The U.S. law addressing foreign account tax compliance (Foreign Account Tax Compliance Act or FATCA) and the international regulation Common Reporting
Standard (CRS), incorporated into the Income Tax Act (Canada), are intended to counter tax evasion by taxpayers through the international exchange of tax
information reported annually by Canadian financial institutions to the Canada Revenue Agency. On August 23, 2023, clarifications were provided regarding
the application of certain guidelines in these regulations.
Publicly Traded Partnership (PTP)
On October 7, 2020, the IRS and the U.S. Department of the Treasury issued new regulations under section 1446(f) of the IRC regarding the application of
withholding tax to non-U.S. persons (individuals and corporations) holding interests in a publicly traded partnership (PTP) related to a trade, business, or
activity in the United States and generating income effectively connected to a U.S. business (US ECI). Under these new rules, which came into effect on
January 1, 2023, a broker carrying out a distribution of a PTP must collect withholding tax on any distribution of US ECI paid to non-U.S. investors as well as on
the proceeds of disposition upon sale or transfer.
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Proposed Rules on Sales and Exchanges of Digital Assets by Brokers
In August 2023, the U.S. Department of the Treasury published proposed regulations on broker sales and exchanges of digital assets. Brokers will be required
to report the gross proceeds from sales of digital assets effected on or after January 1, 2025. Reporting on an adjusted basis will be required for sales effected
on or after January 1, 2026.
Reform of Interest Rate Benchmarks
The reform of interest rate benchmarks is a global initiative that is being coordinated and led by central banks, industry groups, 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) was 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) replaced LIBOR. On December 31, 2021, all LIBOR (London
Interbank Offered Rates) 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 were discontinued as of June 30, 2023. The LIBOR rate administrator (ICE Benchmark Administration Ltd.) will continue to
publish a “synthetic” version of LIBOR in British currency for three-month maturities until March 28, 2024, and in U.S. currency for 1-month, 3-month and
6-month maturities until September 30, 2024, for certain contracts that could not be remedied (commonly known as tough legacy contracts). In Canada,
publication of CDOR (Canadian Dollar Offered Rate) will be discontinued on June 28, 2024 and replaced by the risk-free rate CORRA (Canadian Overnight Repo
Rate Average). A forward-looking rate, the 1-month and 3-month Term CORRA has also been available for certain financial products since September 5, 2023.
For additional information, see the Basis of Presentation section in Note 1 to the consolidated financial statements.
One-Day Settlement Cycle
Canada and the United States have agreed to shorten the standard securities settlement cycle from two days to one day after the trade date (from T+2 to T+1).
The U.S. Securities and Exchange Commission (SEC) has set Tuesday, May 28, 2024 as the transition date to T+1 for U.S. participants. Given the
interconnectedness of North American markets and the scope of interlisted securities traded on the Canadian and U.S. markets, Canadian stakeholders have
chosen Monday, May 27, 2024 as the transition date to T+1 in Canada.
In December 2022, the CSA published for comment proposed amendments toNational Instrument 24-101 – Institutional Trade Matching and Settlement
(NI 24-101) to support the transition to T+1. The goal of the proposed amendments is to shorten the standard settlement cycle and, in particular, permanently
repeal the exception reporting requirements set out in Part 4 of NI 24-101. To this end, in June 2023, the CSA published Coordinated BlanketOrder 24-930,
Exemption from Certain Filing Requirements of National Instrument 24-101.In August 2023, the CSA published Staff Notice24-319 – Regarding National
Instrument 24-101 Institutional Trade Matching and Settlements – Update and Staff Recommendation. The Staff intends to recommend that the respective
decision-makers of the member jurisdictions adopt a revised version of the proposed amendments that would include a trade-matching deadline of 3:59 a.m.
Eastern Time on the day after the trade. The CSA also published Staff Notice 81-335 –InvestmentFund Settlement Cycles, in which it announced that it does
not propose to amend National Instrument 81-102 – Investment Fundsto shorten the settlement cycle so that investment funds will have the flexibility to
determine whether such a cycle is suitable for them. In April 2023, the Canadian Investment Regulatory Organization also published amendments to support
the securities industry’s transition to the T+1 settlement cycle.
Canadian Investment Regulatory Organization (CIRO)
The CSA created a new self-regulatory organization that, among other things, combines the functions of the Investment Industry Regulatory Organization of
Canada and the Mutual Fund Dealers Association of Canada. This new organization has been operating since January 1, 2023. The new organization officially
changed its name to the Canadian Investment Regulatory Organization (CIRO) on June 1, 2023.
Accessible Canada Act
The Act was adopted in June 2019. The purpose of the Act is to make Canada a barrier-free country by January 1, 2040. The Bank published its accessibility
plan on nbc.ca on May 31, 2023.
Client Relationship Model (Phase 3) – Amendments to National Instrument 31-103
In April 2023, the CSA published the final version of changes designed to enhance disclosure requirements on the cost of investment funds and to impose new
disclosure requirements on the cost and performance of individual variable insurance contracts (segregated fund contracts). All dealers, advisers, registered
investment fund managers, and insurers offering segregated fund contracts are affected by these new requirements, which will come into effect on
January 1, 2026.
Reputation Risk
Reputation risk is the risk that the Bank’s operations or practices will be judged negatively by the public, whether that judgment is with or without basis,
thereby adversely affecting the perception, image, or trademarks of the Bank 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. Ethics are at the heart of everything we do. To fulfill
our mission, put people first, and continue to build a strong bank, we must maintain the highest degree of work ethic. 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.
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Reputation Risk Management Policy
Approved by the GRC, the reputation risk policy covers all of the Bank’s practices and activities. It sets out the principles and rules for managing reputation risk
within our risk appetite limits along the following five focal points: clients, employees, community, shareholders and governance, all of which represent Bank
stakeholders. The policy is supplemented by specific provisions of several policies and standards, such as the policy on new products and activities, the
business continuity and crisis management policy, and the investment governance policy.
Strategic Risk
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.
Environmental and Social Risk
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. Environmental risk consists of many aspects, including the use of energy, water, and other resources; climate change; and biodiversity. Social risk
includes, for example, considerations relating to human rights, including those of Indigenous Peoples, accessibility, diversity, equity and inclusion, our human
capital management practices, including work conditions and the health, safety and well-being of our employees.
A rapidly changing global regulatory environment, the commitments and frameworks to which we adhere, and potential imbalances among their requirements
represent challenges, as do the expectations and differing views among stakeholders about the Bank's environmental and social priorities. These
considerations can affect assessments of our exposure to environmental and social risks. An inadequate assessment of the risks and opportunities could
affect our ability to set and achieve our objectives, priorities, and targets. The Bank's reputation could also be affected by its action or inaction or by a
perception of inaction or inadequate action on environmental and social matters, particularly regarding the progress made. Furthermore, the Bank is mindful
about the accuracy of the information it provides in a context of heightened disclosure and the presence of greenwashing and socialwashing risks. All these
factors can lead to greater exposure to reputation risk, regulatory compliance risk, and strategic risk. We monitor the evolution of these factors, analyze them,
and update our procedures on an ongoing basis.
Governance
Our ESG governance structure is based on all levels of the organization being involved in achieving our objectives and meeting our commitments, including the
Board, which exercises an ESG oversight role. Together with management, the Board, through its committees, oversees the execution of the Bank's ESG
strategy, which is structured around nine ESG principles that are approved by the Board. These ESG principles have been incorporated into the Bank's strategic
priorities. In addition, the Board ensures that ESG criteria are incorporated into the Bank's long-term strategic objectives, and it monitors the development and
integration of ESG initiatives and principles into our day-to-day activities. Furthermore, the Board's various committees monitor environmental and social risks
in accordance with their respective mandates. They are supported by management in the performance of their duties. Environmental and social issues are now
central to the Bank’s decision-making process. ESG factors continue to be incorporated into the Bank’s processes, in line with its strategy and the principles
approved by the Board. ESG indicators have been added to the various monitoring dashboards and are gradually being integrated into the Bank’s risk appetite
framework. Reports on the ESG indicators and on the Bank’s ESG commitments are being periodically presented to the internal committees and to the Board
committees tasked with overseeing them.
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. In addition, our Human Rights
Statement sets out our guiding principles, commitments, and expectations. This statement outlines how the Bank applies its principles in its activities and
relationships with stakeholders, in every role it plays in society.
Risk Management
Assessing and mitigating environmental and social risks are integral parts of the Bank’s risk management framework and risk appetite framework. The Bank
has implemented an environmental policy that expresses its determination to protect the environment from human activities, both in terms of our own
operations and the benefits to the community. Effective management of environmental and social risks can create business opportunities for both us and our
clients.
As a key player in the financial industry, the Bank has demonstrated its commitment to environmental and social groups and associations such as the United
Nations Principles for Responsible Banking, the Partnership for Carbon Accounting Financials (PCAF), and the Net-Zero Banking Alliance (NZBA).
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The frameworks and methodologies developed by these groups may evolve, which could lead the Bank to reconsider its membership therein. In addition, their
efforts to develop such frameworks and objectives could raise competition-related concerns.
The Bank works, along with various industry partners, to identify and implement sound management practices to support the transition to a low-carbon
economy. As part of its PCAF and NZBA commitments, the Bank has continued to quantify its financed GHG emissions and to define interim reduction targets
for the commercial property and energy production sectors. However, it should be remembered that the need to make an orderly and fair transition to a low-
carbon economy means that the Bank's decarbonization efforts must be gradual. The Bank takes concrete steps 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 performance reports.
With respect to its own activities, the Bank is pursuing its commitment to carbon neutrality by reducing the carbon footprint and by offsetting its GHG
emissions. Responsible procurement criteria have been incorporated into the procurement 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. We are continuing to
work on the implementation of a global responsible procurement strategy. Moreover, the Bank has adopted a Supplier Code of Conduct that describes its
expectations of suppliers to uphold responsible business practices. By adopting this code, the Bank is manifesting its intention to do business with suppliers
that incorporate environmental, social and governance issues into their operations and throughout their supply chains. Before entering into a relationship with
a third party, the business segment conducts due diligence to assess the risk.
Our ability to achieve our environmental and social objectives, priorities, and targets depends on several assumptions and factors, many of which are beyond
the Bank's control and whose effects are difficult to predict. In addition, we may need to redefine certain objectives, priorities, or targets or revise data to
reflect changes in methodologies or the quality of the available data. It is also possible that the Bank’s predictions, targets, or projections prove to be
inaccurate, that its assumptions may not be confirmed, and that its strategic objectives and performance targets will not be achieved within the deadlines.
These past few years also saw the emergence of a new environmental risk issue, i.e., the potential financial repercussions of climate change on biodiversity,
ecosystems, and ecosystemic services. 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. 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.
This integration of ESG factors into the credit-granting process is conducted with due diligence, starting with the corporate credit portfolio and prioritizing
activity sectors with high GHG emissions. 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. For more information on how climate is integrated into
credit risk management, refer to the Assessment of Environmental Risk heading in the Credit Risk section.
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.
Regulatory Developments
On March 7, 2023, OSFI published guideline B-15 Climate Risk Management, which sets out OSFI’s expectations regarding climate risk. The guideline is OSFI’s
first supervisory framework dedicated to climate change and that addresses the impacts of climate change on managing the risks existing in the country’s
financial system. It covers two main topics: Governance and financial disclosures. The guideline will take effect for D-SIBs at the end of fiscal 2024. OSFI plans
on revising this guideline to incorporate changes in practices and standards, in particular, to reflect the requirements of IFRS S2 – Climate-related Disclosures
published by the International Sustainability Standards Board (ISSB).
On June 26, 2023, the ISSB published IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 – Climate-
related Disclosures. IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors the sustainability-related
risks and opportunities they face over the short-, medium- and long-term. IFRS S2 sets out specific climate-related disclosures and has to be used with
IFRS S1. These standards will be applicable for fiscal years beginning on or after January 1, 2024, and certain relief measures will be available, to be done on a
voluntary basis or according to the requirements of the regulatory agencies.
(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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Critical Accounting Policies and Estimates
A summary of the significant accounting policies used by the Bank is presented in Note 1 to the consolidated financial statements of this Annual Report. The
accounting policies discussed below are considered critical given their importance to the presentation of the Bank’s financial position and operating results
and require subjective and complex judgments and estimates on matters that are inherently uncertain. Any change in these judgments and estimates could
have a significant impact on the Bank’s consolidated financial statements.
The geopolitical landscape (notably the Russia-Ukraine war and the recent clashes between Hamas and Israel), inflation, climate change, and higher interest
rates continue to create 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.
Classification of Financial Instruments
At initial recognition, all financial instruments are recorded at fair value on the Consolidated Balance Sheet. At initial recognition, financial assets must be
classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss. The Bank
determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to manage these
financial assets. At initial recognition, financial liabilities are classified as subsequently measured at amortized cost or 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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Fair Value of Financial Instruments
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction
in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial assets and offered prices for financial liabilities, provide the best evidence of fair
value. A financial instrument is considered quoted in an active market when prices in exchange, dealer, broker or principal-to-principal markets are accessible
at the measurement date. An active market is one where transactions occur with sufficient frequency and volume to provide quoted prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another valuation technique that maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would consider when pricing a
transaction. Judgment is required when applying a large number of acceptable valuation techniques and estimates to determine fair value. The estimated fair
value reflects market conditions on the 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 (receivables).
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.
108
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt instruments
measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that are not measured at
fair value. ECLs are a probability-weighted estimate of credit losses over the remaining expected life of the financial instrument. The ECL model is forward
looking. Measurement of ECLs at each reporting period reflects reasonable and supportable information about past events, current conditions, and forecasts of
future events and economic conditions. Judgment is required in making assumptions and estimates, determining movements between the three stages, and
applying forward-looking information. Any changes in assumptions and estimates, as well as the use of different, but equally reasonable, estimates and
assumptions, could have an impact on the allowances for credit losses and the provisions for credit losses for the year. All business segments are affected by
this accounting estimate. For additional information, see Note 7 to the consolidated financial statements.
Determining the Stage
The ECL three-stage impairment approach is based on the change in the credit quality of financial assets since initial recognition. If, at the reporting date, the
credit risk of non-impaired financial instruments has not increased significantly since initial recognition, these financial instruments are classified in Stage 1,
and an allowance for credit losses that is measured, at each reporting date, in an amount equal to 12-month expected credit losses, is recorded. When there is
a significant increase in credit risk since initial recognition, these non-impaired financial instruments are migrated to Stage 2, and an allowance for credit
losses that is measured, at each reporting date, in an amount equal to lifetime expected credit losses, is recorded. In subsequent reporting periods, if the
credit risk of 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 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.
National Bank of Canada
2023 Annual Report
109
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
Purchased or Originated Credit-Impaired Financial Assets
On initial recognition of a financial asset, the Bank determines whether the asset is credit-impaired. For financial assets that are credit-impaired upon
purchase or origination, the lifetime expected credit losses are reflected in the initial fair value. In subsequent reporting periods, the Bank recognizes only the
cumulative changes in these lifetime ECLs since initial recognition as an allowance for credit losses. The Bank recognizes changes in ECLs in Provisions for
creditlosses 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.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their
carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or
intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not 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 asset or 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.
110
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
Employee Benefits – Pension Plans and Other Post-Employment Benefit Plans
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.
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.
Income Taxes
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.
be
s
s
National Bank of Canada
2023 Annual Report
111
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
Litigation
In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment
portfolios, and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions, or other legal remedies of
varied natures.
More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to
avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal proceeding involving the Bank are
as follows:
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 for which the timing or amount are uncertain. 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 resources embodying economic benefits will be required to settle the obligation, and when the
amount of the obligation can be reliably estimated. The recognition of a litigation provision requires the judgment of the Bank’s management in assessing the
existence of an obligation, the timing and probability of loss, and estimates of potential monetary impact. Provisions are based on the Bank’s best estimates of
the economic resources required to settle the present obligation, given all available information and relevant risks and uncertainties, and, when it is
significant, the effect of the time value of money. However, the actual amount required to settle litigation could be significantly higher or lower than the
amounts recognized, as the actual amounts depend on a variety of factors and risks, notably the degree to which proceedings have advanced when the amount
is determined, the presence of multiple defendants whose share of responsibility is undetermined, including that of the Bank, the types of matters or
allegations in question, including some that may involve new legal frameworks or regulations or that set forth new legal interpretations and theories.
The Bank regularly assesses all litigation provisions by considering the development of each case, the Bank's 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 loss and therefore
the extent to which it adjusts the recorded provision.
Structured Entities
In the normal course of business, the Bank enters into arrangements and transactions with structured entities. Structured entities are entities designed so that
voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate solely to administrative tasks and the
relevant activities are directed by means of contractual arrangements. A structured entity is consolidated when the Bank concludes, after evaluating the
substance of the relationship and its right or exposure to variable returns, that it controls that entity. Management must exercise judgment in determining
whether the Bank controls an entity. Additional information is provided in the Securitization and Off-Balance-Sheet Arrangements section of this MD&A and in
Note 27 to the consolidated financial statements.
112
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Accounting Policy Changes
Amendments to IAS 12 –IncomeTaxes
On May 23, 2023, the IASB issued International Tax Reform – Pillar TwoModel Rules,which amends IAS 12 –Income Taxes. These amendments apply to
income taxes arising from tax law enacted or substantively enacted to implement the Pillar 2 model rules of the OECD. The amendments also introduce a
temporary exception to the accounting of deferred tax assets and liabilities arising from the implementation of these rules as well as related disclosures. These
amendments apply immediately upon issuance and retrospectively in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and
Errors. Additional disclosures of current tax expense (recovery) and other information related to income tax exposures will be provided annually for periods
beginning on or after November 1, 2023. During the year ended October 31, 2023, the Bank applied the exception to the recognition and disclosure of
information about deferred tax assets and liabilities arising from the Pillar 2 rules in the jurisdictions where they have been adopted. To date, these
amendments have had no impact on the Bank’s consolidated results.
Future Accounting Policy Changes
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.
Effective Date – November 1, 2023
IFRS 17 – Insurance Contracts
In May 2017, the IASB published IFRS 17 –Insurance Contracts (IFRS 17), which replaces IFRS 4, the current insurance contract accounting standard. IFRS 17
introduces a new accounting framework that improves the comparability and quality of financial information. IFRS 17 provides guidance on the recognition,
measurement, presentation, and disclosure of insurance contracts. IFRS 17 must 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.
of
IFRS 17 affects 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. The current consolidated balance sheet presentation, whereby the items are included and reported
in Other assets and Other liabilities, respectively, will change.
IFRS 17 introduces three approaches to measure insurance contracts: the general model approach, the premium allocation approach, and the variable fee
approach. The general model approach, which is primarily used by the Bank, measures insurance contracts based on the present value of estimates of the
expected future cash flows necessary to fulfill the contracts, including an adjustment for non-financial risk as well as the contractual service margin (CSM),
which represents the unearned profits that are recognized as services are provided in the future. The premium allocation approach is applied to short-term
contracts, and insurance revenues are recognized systematically over the coverage period. For all measurement approaches, if contracts are expected to be
onerous, losses are recognized immediately.
The Bank is finalizing its analysis of the IFRS 17 adoption impacts on its consolidated financial statements for the annual period beginning on or after
November 1, 2023. At the transition date, November 1, 2022, the Bank applied two of the three transition approaches available under IFRS 17: the full
retrospective approach and the fair value approach. For most groups of contracts, the fair value approach has been applied considering that the full
retrospective approach is impracticable, since reasonable and supportable information for applying this approach is not available without undue cost or effort.
As at October 31, 2023, the Bank’s best estimate of the impact of transitioning to IFRS 17 is a decrease of $48 million, net of income taxes, in equity as at
November 1, 2022, related to the new recognition and measurement principles of insurance and reinsurance contract assets and liabilities, including a net
amount of CSM established at approximately $89 million. The impact on the Common Equity Tier 1 (CET1) capital ratio is not expected to be material.
The estimated impact of applying the new measurement approaches for insurance and reinsurance contracts is not significant. The Bank continues to refine
and validate the new measurement approaches leading up to the disclosure of its 2024 first-quarter results.
National Bank of Canada
2023 Annual Report
113
Management’s Discussion and Analysis
Additional Financial Information
Table 1 – Quarterly Results
(millions of Canadian dollars, except per share amounts)
Statement of income data
Net interest income
Non-interest income(1)
Total revenues
Non-interest expenses(2)
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income taxes(3)
Net income
Non-controlling interests
Net income attributable to the Bank’s shareholders and
holders of other equity instruments
Earnings per common share
Basic
Diluted
Dividends (per share)
Common
Preferred
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Return on common shareholders’ equity(4)
Total assets
Subordinated debt(5)
Net impaired loans excluding POCI loans(4)
Number of common shares outstanding (thousands)
Average – Basic
Average – Diluted
End of period
Per common share
Book value(4)
Share price
High
Low
Number of employees – Worldwide (full-time equivalent)
Number of branches in Canada
$
$
Total
Q4
Q3
Q2
3,586
6,584
10,170
5,801
4,369
397
637
3,335
(2)
3,337
$
9.47
9.38
735
1,859
2,594
1,607
987
115
104
768
−
768
2.16
2.14
$
870
1,645
2,515
1,417
1,098
111
148
839
(1)
840
2.38
2.36
$
882
1,597
2,479
1,374
1,105
85
173
847
(1)
848
2.41
2.38
$
2023
Q1
1,099
1,483
2,582
1,403
1,179
86
212
881
−
881
2.51
2.49
3.98
$
1.02
$
1.02
$
0.97
$
0.97
1.0063
0.9598
−
−
1.7568
1.3023
1.2375
0.2516
0.2400
−
−
0.4392
0.3637
0.3094
0.2516
0.2399
−
−
0.4392
0.3636
0.3093
0.2515
0.2400
−
−
0.4392
0.2875
0.3094
0.2516
0.2399
−
−
0.4392
0.2875
0.3094
16.5 %
14.4 %
16.2 %
17.5 %
17.9 %
423,578
748
606
338,229
341,143
338,285
426,015
748
537
337,916
341,210
338,228
417,684
748
477
337,497
340,971
337,720
418,342
1,497
476
336,993
340,443
337,318
337,660
340,768
$
60.68
$
58.75
$
57.65
$
55.92
$
103.58
84.97
103.58
84.97
28,916
368
103.28
94.62
28,901
372
103.45
92.67
28,170
374
99.95
91.02
27,674
378
(1)
(2)
(3)
(4)
(5)
For fiscal 2023, Non-interest income included a $91 million gain recorded to reflect a fair value remeasurement of the equity interest in TMX (2021: $33 million gain following a
remeasurement of the previously held equity interest in Flinks and a $30 million loss related to the fair value remeasurement of the Bank’s equity interest in AfrAsia).
For fiscal 2023, Non-interest expenses included $86 million in impairment losses on premises and equipment and on intangible assets (2021: $9 million), $35 million in litigation expenses,
a $25 million expense related to changes to the Excise Tax Act and $15 million in provisions for contracts.
Income taxes in fiscal 2023 included an amount of $24 million related to the Canadian government's 2022 tax measures.
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
Long-term financial liabilities.
114
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
Total
Q4
Q3
Q2
5,271
4,381
9,652
5,230
4,422
145
894
3,383
(1)
3,384
$
$
9.72
9.61
1,207
1,127
2,334
1,346
988
87
163
738
–
738
2.10
2.08
1,419
994
2,413
1,305
1,108
57
225
826
–
826
2.38
2.35
1,313
1,126
2,439
1,299
1,140
3
248
889
(1)
890
2.56
2.53
$
$
$
2022
Q1
1,332
1,134
2,466
1,280
1,186
(2)
258
930
–
930
2.67
2.64
$
3.58
$
0.92
$
0.92
$
0.87
$
0.87
Total
Q4
Q3
Q2
4,783
4,144
8,927
4,903
4,024
2
882
3,140
–
3,140
$
8.95
8.85
1,190
1,021
2,211
1,268
943
(41)
215
769
–
769
2.20
2.17
$
1,230
1,024
2,254
1,224
1,030
(43)
240
833
–
833
2.38
2.35
$
1,156
1,082
2,238
1,217
1,021
5
228
788
–
788
2.24
2.21
$
2021
Q1
1,207
1,017
2,224
1,194
1,030
81
199
750
–
750
2.13
2.12
2.84
$
0.71
$
0.71
$
0.71
$
0.71
$
$
1.0063
0.9598
–
–
1.1125
1.1500
1.2375
0.2516
0.2400
–
–
0.2781
0.2875
0.3094
0.2516
0.2399
–
–
0.2781
0.2875
0.3093
0.2515
0.2400
–
–
0.2782
0.2875
0.3094
0.2516
0.2399
–
–
0.2781
0.2875
0.3094
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
18.8 %
15.3 %
17.9 %
20.7 %
21.9 %
20.7 %
18.7 %
21.4 %
21.8 %
21.1 %
403,740
1,499
479
336,530
339,910
336,582
386,833
1,510
301
336,437
339,875
336,456
369,570
764
293
337,381
341,418
336,513
366,680
766
287
338,056
342,318
338,367
337,099
340,837
355,621
768
283
337,779
342,400
337,912
353,873
769
312
337,517
341,818
337,587
350,581
771
349
337,142
340,614
337,372
343,489
773
400
336,408
338,617
336,770
337,212
340,861
$
55.24
$
54.29
$
52.28
$
49.71
$
47.44
$
45.51
$
43.11
$
41.04
$
105.44
83.12
94.37
83.12
27,103
378
97.87
83.33
26,539
384
104.59
89.33
25,823
385
105.44
94.37
25,417
385
$
104.32
65.54
104.32
95.00
24,495
384
96.97
89.47
24,074
389
89.42
72.30
23,865
401
73.81
65.54
23,885
402
National Bank of Canada
2023 Annual Report
115
Management’s Discussion and Analysis
Additional Financial Information
Table 2 – Overview of Results
Year ended October 31
(millions of Canadian dollars)
Net interest income
Non-interest income(1)
Total revenues
Non-interest expenses(2)
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes(3)
Net income
Non-controlling interests
Net income attributable to the Bank’s
shareholders and holders of other equity instruments
2023
3,586
6,584
10,170
5,801
4,369
397
3,972
637
3,335
(2)
3,337
2022
5,271
4,381
9,652
5,230
4,422
145
4,277
894
3,383
(1)
3,384
2021
4,783
4,144
8,927
4,903
4,024
2
4,022
882
3,140
−
3,140
2020
4,255
3,672
7,927
4,616
3,311
846
2,465
434
2,031
42
1,989
2019
3,596
3,836
7,432
4,375
3,057
347
2,710
443
2,267
66
2,201
(1)
(2)
(3)
For fiscal 2023, Non-interest income included a $91 million gain recorded to reflect a fair value remeasurement of the equity interest in TMX (2021: $33 million gain following a
remeasurement of the previously held equity interest in Flinks and a $30 million loss related to the fair value remeasurement 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, a $50 million gain on disposal of premises and
equipment, and a $33 million loss resulting from the fair value measurement of an investment).
For fiscal 2023, Non-interest expenses included impairment losses on premises and equipment and intangible assets of $86 million (2021: $9 million; 2020: $71 million;
2019: $57 million), $35 million in litigation expenses, a $25 million expense related to changes to the Excise Tax Act, and $15 million in provisions for contracts (2019: $45 million). In fiscal
2020, Non-interest expenses had included $48 million in severance pay (2019: $10 million) and a $13 million charge related to Maple Financial Group Inc. (Maple) (2019: $11 million).
Income taxes in fiscal 2023 included an amount of $24 million related to the Canadian government's 2022 tax measures.
Table 3 – Changes in Net Interest Income
Year ended October 31
(millions of Canadian dollars)
Personal and Commercial
Net interest income
Average assets(1)
Average interest-bearing assets(2)
Net interest margin(2)
Wealth Management
Net interest income on a taxable equivalent basis(3)
Average assets(1)
Financial Markets
Net interest income on a taxable equivalent basis(3)
Average assets(1)
USSF&I
Net interest income
Average assets(1)
Other
Net interest income(3)
Average assets(1)
Total
Net interest income
Average assets(1)
2023
2022
2021
2020
2019
3,321
148,511
141,458
2.35 %
2,865
140,300
133,543
2.15 %
2,547
126,637
120,956
2.11 %
2,420
115,716
110,544
2,360
111,140
106,995
2.19 %
2.21 %
778
8,560
(1,054)
180,837
1,132
23,007
(591)
69,731
3,586
430,646
594
8,440
1,258
154,349
1,090
18,890
(536)
71,868
5,271
393,847
446
7,146
1,262
151,240
907
16,150
(379)
62,333
4,783
363,506
442
5,917
455
6,219
971
125,565
498
114,151
807
14,336
(385)
56,553
656
10,985
(373)
43,667
4,255
318,087
3,596
286,162
(1)
(2)
(3)
Represents an average of the daily balances for the period.
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
For fiscal 2023, the Net interest income item of the Financial Markets segment was grossed up by $324 million (2022: $229 million; 2021: $175 million; 2020: $202 million; 2019:
$191 million), the Net interest income item of the Other heading was grossed up by $8 million (2022: $5 million; 2021: $6 million; 2020: $6 million; 2019: $3 million), the Net interest
income item of the Wealth Management segment was grossed up by $1 million in 2019. The effect of these adjustments is reversed under the Other heading.
116
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
Table 4 – Non-Interest Income
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
2023
378
174
578
1,005
183
391
202
300
2,677
70
171
183
11
261
6,584
5,812
98
674
64.7 %
2022
324
204
587
997
155
335
186
298
543
113
158
211
28
242
4,381
4,299
18
64
45.4 %
2021
415
238
563
900
164
342
148
274
268
151
131
202
23
325
4,144
3,992
106
46
46.4 %
2020
314
204
477
735
147
320
138
262
544
93
128
164
28
118
3,672
3,574
5
93
46.3 %
2019
246
166
449
677
134
283
175
271
788
77
136
137
34
263
3,836
3,645
85
106
51.6 %
(1)
For fiscal 2023, the Other item included a $91 million gain recorded to reflect a fair value remeasurement of the equity interest in TMX (2021: $33 million gain following a remeasurement of
the previously held equity interest in Flinks and a $30 million loss related to the fair value remeasurement 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, a $50 million gain on disposal of premises and equipment, and a
$33 million loss resulting from the fair value measurement of an investment).
Table 5 – Trading Activity Revenues
Year ended October 31
(millions of Canadian dollars)
Net interest income (loss) related to trading activity(1)
Taxable equivalent basis(2)
Net interest income (loss) related to trading activity on
a taxable equivalent basis(2)
Non-interest income related to trading activity(1)
Taxable equivalent basis(2)
Non-interest income related to trading activity on
a taxable equivalent basis(2)
Trading activity revenues(1)
Taxable equivalent basis(2)
Trading activity revenues on a taxable equivalent basis(2)
Trading activity revenues by segment
on a taxable equivalent basis(2)
Financial Markets
Equities
Fixed-income
Commodities and foreign exchange
Other segments
2023
(1,816)
321
(1,495)
2,696
247
2,943
880
568
1,448
904
417
173
1,494
(46)
1,448
2022
682
229
911
548
48
596
1,230
277
1,507
979
367
156
1,502
5
1,507
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
(1)
(2)
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
See the Financial Reporting Method section on pages 14 to 19 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 $11 million for fiscal 2023 (2022: $5 million; 2021:
$10 million; 2020: $6 million; 2019: $7 million).
National Bank of Canada
2023 Annual Report
117
Management’s Discussion and Analysis
Additional Financial Information
Table 6 – Non-Interest Expenses
Year ended October 31
(millions of Canadian dollars)
Compensation and employee benefits(1)
Occupancy(2)
Amortization – Premises and equipment(3)
Technology
Amortization – Technology(4)
Communications
Professional fees
Advertising and business development
Capital and payroll taxes
Other(5)
Total
Canada
United States
Other countries
Efficiency ratio(6)
2023
3,452
181
172
653
432
58
257
168
37
391
5,801
5,261
226
314
57.0 %
2022
3,284
157
155
589
326
57
249
144
32
237
5,230
4,760
209
261
54.2 %
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
2,532
254
44
446
332
62
249
128
70
258
4,375
4,005
210
160
58.9 %
For fiscal 2020, Compensation and employee benefits included $48 million in severance pay (2019: $10 million).
(1)
(2) Occupancy expense in fiscal 2019 included $45 million in provisions for onerous contracts.
(3)
(4)
(5)
For fiscal 2023, the Amortization – Premises and Equipment expense included $11 million in impairment losses.
For fiscal 2023, the Amortization – Technology expense included $75 million in intangible asset impairment losses (2021: $9 million; 2020: $71 million; 2019: $57 million).
For fiscal 2023, Other expenses included $35 million in litigation expenses, a $25 million expense related to changes to the Excise Tax Act, and a $15 million in provisions for contracts. For
fiscal 2020, Other expenses had included a $13 million charge related to Maple (2019: $11 million).
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(6)
118
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
Table 7 – Provisions for Credit Losses(1)
Year ended October 31
(millions of Canadian dollars)
Personal Banking(2)
Stage 3
Stages 1 and 2
Commercial Banking
Stage 3
Stages 1 and 2
POCI
Wealth Management
Stage 3
Stages 1 and 2
Financial Markets
Stage 3
Stages 1 and 2
USSF&I
Stage 3
Stages 1 and 2
POCI
Other
Stage 3
Stages 1 and 2
2023
119
38
157
48
40
(7)
81
(1)
3
2
3
36
39
76
53
(16)
113
−
5
5
2022
2021
75
9
84
13
−
−
13
1
2
3
1
(24)
(23)
48
12
6
66
−
2
2
65
(77)
(12)
26
26
−
52
1
−
1
78
(102)
(24)
13
(2)
(26)
(15)
−
−
−
2020
147
121
268
76
103
−
179
4
3
7
99
210
309
46
41
(7)
80
−
3
3
2019
166
8
174
31
19
−
50
−
−
−
22
21
43
94
(24)
10
80
−
−
−
Total provisions for credit losses
Stage 3
Stages 1 and 2
POCI
Average loans and acceptances
Provisions for credit losses on impaired loans
excluding POCI loans(3) as a % of average loans and
acceptances(3)
Provisions for credit losses
as a % of average loans and acceptances(3)
245
175
(23)
397
215,976
138
1
6
145
194,340
183
(155)
(26)
2
172,323
372
481
(7)
846
159,275
313
24
10
347
148,765
0.11 %
0.07 %
0.11 %
0.23 %
0.21 %
0.18 %
0.07 %
− %
0.53 %
0.23 %
(1)
(2)
(3)
The Stage 3 category presented in this table represents provisions for credit losses on loans classified in Stage 3 of the expected credit loss model and excludes POCI loans (impaired loans
excluding POCI loans). The Stages 1 and 2 category represents provisions for credit losses on non-impaired loans. The POCI category represents provisions for credit losses on POCI loans.
Includes credit card receivables.
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
National Bank of Canada
2023 Annual Report
119
Management’s Discussion and Analysis
Additional Financial Information
Table 8 – Change in Average Volumes(1)
Year ended October 31
(millions of Canadian dollars)
Assets
Deposits with financial institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Residential mortgage loans
Personal loans
Credit card receivables
Business and government loans
POCI loans
Average interest-bearing assets(1)
Other assets
Liabilities and equity
Personal deposits
Deposit-taking institutions
Other deposits
Subordinated debt
Obligations other than deposits(2)
Average interest-bearing liabilities(1)
Other liabilities
Equity
Net interest margin(3)
Average
volume
$
2023
Rate
%
Average
volume
$
2022
Rate
%
Average
volume
$
2021
Rate
%
Average
volume
$
2020
Rate
%
Average
volume
$
40,824
126,182
4.09
1.93
42,042
111,863
1.03
1.77
40,294
116,023
0.31
1.25
24,966
97,025
0.44
1.63
13,172
85,772
19,533
82,884
44,829
2,325
69,599
545
386,721
43,925
430,646
84,262
4,997
195,311
284,570
937
90,194
375,701
30,698
24,247
430,646
16,255
75,712
42,723
2,133
58,947
493
350,168
43,679
393,847
72,927
5,695
180,307
258,929
960
81,659
341,548
30,209
22,090
393,847
6.61
3.95
5.44
13.17
6.49
21.98
4.30
3.90
2.03
3.81
4.15
3.51
5.16
3.43
3.51
3.07
0.83
11,559
68,297
38,434
1,864
50,216
686
327,373
36,133
363,506
68,334
6,522
161,373
236,229
758
80,808
317,795
28,195
17,516
363,506
2.08
2.90
3.82
12.81
3.63
32.68
2.69
2.43
0.67
0.88
1.28
1.10
3.70
1.13
1.25
1.09
1.34
16,408
59,801
36,273
1,995
47,272
1,073
284,813
33,274
318,087
63,634
6,494
137,253
207,381
759
70,973
279,113
23,400
15,574
318,087
0.90
2.93
3.16
13.47
3.06
22.64
2.13
1.93
0.42
0.09
0.68
0.58
3.22
0.67
0.69
0.61
1.32
22,472
54,493
35,816
2,221
42,922
1,386
258,254
27,908
286,162
58,680
5,987
119,793
184,460
758
67,638
252,856
18,593
14,713
286,162
1.39
3.13
3.68
14.62
4.13
16.45
2.66
2.38
0.87
0.63
1.26
1.12
3.25
1.12
1.19
1.04
1.34
2019
Rate
%
1.64
1.74
1.60
3.30
4.25
14.06
5.34
13.37
3.17
2.86
1.22
1.80
2.06
1.79
3.25
1.67
1.81
1.60
1.26
(1)
(2)
(3)
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
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.
120
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
Table 9 – Distribution of Gross Loans and Acceptances by Borrower Category Under
Basel Asset Classes
As at October 31
(millions of Canadian dollars)
Residential mortgage(1)
Qualifying revolving retail (2)
Other retail (3)
Agriculture
Oil and gas
Mining
Utilities
Non-real-estate construction(4)
Manufacturing
Wholesale
Retail
Transportation
Communications
Financial services
Real estate and real-estate-construction(5)
Professional services
Education and health care
Other services
Government
Other
POCI loans
$
99,910
4,000
16,696
8,545
1,826
1,245
12,427
1,739
7,047
3,208
3,801
2,631
2,556
11,693
25,967
3,973
3,700
6,898
1,727
6,478
560
226,627
2023
%
44.1
1.8
7.4
3.8
0.8
0.5
5.5
0.8
3.1
1.4
1.7
1.2
1.1
5.1
11.5
1.7
1.6
3.0
0.8
2.9
0.2
100.0
$
95,575
3,801
14,899
8,109
1,435
1,049
9,682
1,935
7,374
3,241
3,494
2,209
1,830
10,777
22,382
2,338
3,412
6,247
1,661
5,790
459
207,699
2022
%
46.0
1.8
7.2
3.9
0.7
0.5
4.6
0.9
3.6
1.6
1.7
1.1
0.9
5.2
10.8
1.1
1.6
3.0
0.8
2.8
0.2
100.0
$
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
2021
%
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
2020
%
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
2019
%
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
(1)
(2)
(3)
(4)
(5)
Includes residential mortgage loans on one- to four-unit dwellings (Basel definition) and home equity lines of credit.
Includes lines of credit and credit card receivables.
Includes consumer loans and other retail loans but excludes SME loans.
Includes civil engineering loans, public-private partnership loans, and project finance loans.
Includes residential mortgages on dwellings of five or more units and SME loans.
National Bank of Canada
2023 Annual Report
121
Management’s Discussion and Analysis
Additional Financial Information
Table 10 – Impaired Loans
As at October 31
(millions of Canadian dollars)
Gross impaired loans
Personal Banking
Commercial Banking
Wealth Management
Financial Markets
USSF&I
Gross impaired loans excluding POCI loans(1)
Gross POCI loans
Net impaired loans(2)
Personal Banking
Commercial Banking
Wealth Management
Financial Markets
USSF&I
Net impaired loans excluding POCI loans(1)
Net POCI loans
Allowances for credit losses on impaired loans
excluding POCI loans(1)
Allowances for credit losses on POCI loans
Allowances for credit losses on impaired loans
Impaired loan provisioning rate excluding POCI loans(1)
Gross impaired loans excluding POCI loans as a %
of total loans and acceptances(1)
Net impaired loans excluding POCI loans as a %
of loans and acceptances(1)
2023
2022
2021
2020
2019
220
296
13
110
385
1,024
560
1,584
145
140
8
30
283
606
670
1,276
418
(110)
308
40.8 %
0.45 %
0.27 %
176
206
21
167
242
812
459
1,271
104
89
15
91
180
479
551
1,030
333
(92)
241
41.0 %
0.39 %
0.23 %
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 %
(1)
(2)
See the Glossary section on pages 124 to 127 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.
122
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
Table 11 – Allowances for Credit Losses
Year ended October 31
(millions of Canadian dollars)
Balance at beginning
Provisions for credit losses
Write-offs
Disposals
Recoveries
Exchange rate 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
2023
1,131
397
(199)
−
47
1
1,377
418
(110)
876
193
2022
1,169
145
(233)
−
40
10
1,131
333
(92)
714
176
2021
1,343
2
(192)
(14)
44
(14)
1,169
379
(89)
708
171
2020
755
846
(294)
−
44
(8)
1,343
352
(66)
872
185
(1)
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
Table 12 – Deposits
As at October 31
(millions of Canadian dollars)
Personal
Business and government
Deposit-taking institutions
Total
Canada
United States
Other countries
Total
Personal deposits as a %
of total assets
$
87,883
197,328
2,962
288,173
257,732
9,520
20,921
288,173
2023
%
30.5
68.5
1.0
100.0
89.4
3.3
7.3
100.0
$
78,811
184,230
3,353
266,394
238,239
9,147
19,008
266,394
2022
%
29.6
69.1
1.3
100.0
89.5
3.4
7.1
100.0
$
70,076
167,870
2,992
240,938
216,906
9,234
14,798
240,938
2021
%
29.1
69.7
1.2
100.0
90.0
3.8
6.2
100.0
$
67,499
143,787
4,592
215,878
195,730
8,126
12,022
215,878
2020
%
31.3
66.6
2.1
100.0
90.7
3.7
5.6
100.0
$
60,065
125,266
4,235
189,566
172,764
6,907
9,895
189,566
20.7
19.5
19.7
20.4
2019
714
347
(351)
(1)
52
(6)
755
234
(57)
501
77
2019
%
31.7
66.1
2.2
100.0
91.1
3.7
5.2
100.0
21.3
National Bank of Canada
2023 Annual Report
123
Management’s Discussion and Analysis
Glossary
Acceptances
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.
Average volumes
Average volumes represent the average of the daily balances for the period of
the consolidated balance sheet items.
Allowances for credit losses
Allowances for credit losses represent management’s unbiased estimate of
expected credit losses as at the balance sheet date. These allowances are
primarily related to loans and off-balance-sheet items such as loan
commitments and financial guarantees.
Assets under administration
Assets in respect of which a financial institution provides administrative
services 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.
Assets under management
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.
Available TLAC
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.
Average interest-bearing assets
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.
Average interest-bearing assets, non-trading
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.
Basic earnings per share
Basic earnings per share is calculated by dividing net income attributable to
common shareholders by the weighted average basic number of common
shares outstanding.
Basis point (bps)
Unit of measure equal to one one-hundredth of a percentage point (0.01%).
Book value of a common share
The book value of a common share is calculated by dividing common
shareholders’ equity by the number of common shares on a given date.
Common Equity Tier 1 (CET1) capital ratio
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.
Compound annual growth rate (CAGR)
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.
Derivative financial instruments
Derivative financial instruments are financial contracts whose value is
derived from an underlying interest rate, exchange rate, equity, commodity
price, 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.
Diluted earnings per share
Diluted earnings per share is calculated by dividing net income attributable
to common shareholders by the weighted average number of common shares
outstanding after taking into account the dilution effect of stock options
using the treasury stock method and any gain (loss) on the redemption of
preferred shares.
Dividend payout ratio
The dividend payout ratio represents the dividends of common shares (per
share amount) expressed as a percentage of basic earnings per share.
124
National Bank of Canada
2023 Annual Report
od of
nt
Management’s Discussion and Analysis
Glossary
Economic capital
Economic capital is the internal measure used by the Bank to determine the
capital required for its solvency and to pursue its business operations.
Economic capital takes into consideration the credit, market, operational,
business and other risks to which the Bank is exposed as well as the risk
diversification effect among them and among the business segments.
Economic capital thus helps the Bank to determine the capital required to
protect itself against such risks and ensure its long-term viability.
Loans and acceptances
Loans and acceptances represent the sum of loans and of the customers’
liability under acceptances.
Loan-to-value ratio
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.
Efficiency ratio
The efficiency ratio represents non-interest expenses expressed as a
percentage of total revenues. It measures the efficiency of the Bank’s
operations.
Master netting agreement
Legal agreement between two parties that have multiple derivative contracts
with each other that provides for the net settlement of all contracts through a
single payment, in the event of default, insolvency or bankruptcy.
Fair value
The fair value of a financial instrument is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction in the
principal market at the measurement date under current market conditions
(i.e., an exit price).
Gross impaired loans as a percentage of total loans and acceptances
This measure represents gross impaired loans expressed as a percentage of
the balance of loans and acceptances.
Gross impaired loans excluding POCI loans
Gross impaired loans excluding POCI loans are all loans classified in Stage 3
of the expected credit loss model excluding POCI loans.
Gross impaired loans excluding POCI loans as a percentage of total loans
and acceptances
This measure represents gross impaired loans excluding POCI loans
expressed as a percentage of the balance of loans and acceptances.
Hedging
The purpose of a hedging transaction is to modify the Bank’s exposure to one
or more risks by creating an offset between changes in the fair value of, or
the cash flows attributable to, the hedged item and the hedging instrument.
Impaired loans
The Bank considers a financial asset, other than a credit card receivable, to
be credit-impaired when one or more events that have a detrimental impact
on the estimated future cash flows of the financial asset have occurred or
when contractual payments are 90 days past due. Credit card receivables are
considered credit-impaired and are fully written off at the earlier of the
following dates: when a notice of bankruptcy is received, a settlement
proposal is made, or contractual payments are 180 days past due.
Leverage ratio
The leverage ratio is calculated by dividing Tier 1 capital by total exposure.
Total exposure is defined as the sum of on-balance-sheet assets (including
derivative financial instrument exposures and securities financing
transaction exposures) and off-balance-sheet items.
Liquidity coverage ratio (LCR)
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.
Net impaired loans
Net impaired loans are gross impaired loans presented net of allowances for
credit losses on Stage 3 loan amounts drawn.
Net impaired loans as a percentage of total loans and acceptances
This measure represents net impaired loans as a percentage of the balance
of loans and acceptances.
Net impaired loans excluding POCI loans
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.
Net interest income from trading activities
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.
Net interest income, non-trading
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.
Net interest margin
Net interest margin is calculated by dividing net interest income by average
interest-bearing assets.
Net stable funding ratio (NSFR)
The NSFR ratio is a measure that helps guarantee that the Bank is
maintaining a stable funding profile to reduce the risk of funding stress.
Net write-offs as a percentage of average loans and acceptances
This measure represents the net write-offs (net of recoveries) expressed as a
percentage of average loans and acceptances.
National Bank of Canada
2023 Annual Report
125
Management’s Discussion and Analysis
Glossary
Non-interest income related to trading activities
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.
Return on average assets
Return on average assets represents net income expressed as a percentage
of average assets.
Return on common shareholders’ equity (ROE)
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.
Office of the Superintendent of Financial Institutions (Canada) (OSFI)
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.
Operating leverage
Operating leverage is the difference between the growth rate for total
revenues and the growth rate for non-interest expenses.
Provisioning rate
This measure represents the allowances for credit losses on impaired loans
expressed as a percentage of gross impaired loans.
Provisioning rate excluding POCI loans
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.
Risk-weighted assets
Assets are risk weighted according to the guidelines established by OSFI. In
the Standardized calculation approach, risk factors are applied directly 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. In the Foundation Internal Ratings-Based
(FIRB) Approach, the Bank can use its own estimate of probability of default
but must rely on OSFI estimates for the loss given default and exposure at
default risk parameters. Off-balance-sheet instruments are converted to
balance sheet (or credit) equivalents by adjusting the notional values before
applying the appropriate risk-weighting factors.
Securities purchased under reverse repurchase agreements
Securities purchased by the Bank from a client pursuant to an agreement
under which the securities will be resold to the same client on a specified
date and at a specified price. Such an agreement is a form of short-term
collateralized lending.
Provisions for credit losses
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.
Securities sold under repurchase agreements
Financial obligations related to securities sold pursuant to an agreement
under which the securities will be repurchased on a specified date and at a
specified price. Such an agreement is a form of short-term funding.
Provisions for credit losses as a percentage of average loans and
acceptances
This measure represents the provisions for credit losses expressed as a
percentage of average loans and acceptances.
Provisions for credit losses on impaired loans as a percentage of average
loans and acceptances
This measure represents the provisions for credit losses on impaired loans
expressed as a percentage of average loans and acceptances.
Provisions for credit losses on impaired loans excluding POCI loans as a
percentage of average loans and acceptances or provisions for credit losses
on impaired loans excluding POCI loans ratio
This measure represents the provisions for credit losses on impaired loans
excluding POCI loans expressed as a percentage of average loans and
acceptances.
Stressed VaR (SVaR)
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.
Structured entity
A structured entity is an entity created to accomplish a narrow and well-
defined objective and is designed so that voting or similar rights are not the
dominant factor in deciding who controls the entity, such as when any voting
rights relate solely to administrative tasks and the relevant activities are
directed by means of contractual arrangements.
Taxable equivalent
Taxable equivalent basis is a calculation method that consists of grossing up
certain revenues taxed at lower rates (notably dividends) by the income tax
to a level that would make it comparable to revenues from taxable sources in
Canada. The Bank uses the taxable equivalent basis to calculate net interest
income, non-interest income and income taxes.
126
National Bank of Canada
2023 Annual Report
Management’s Discussion and Analysis
Glossary
Tier 1 capital ratio
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.
TLAC leverage ratio
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.
TLAC ratio
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.
Total capital ratio
Total capital is the sum of Tier 1 and Tier 2 capital. Tier 2 capital consists of
the eligible portion of subordinated debt and certain allowances for credit
losses. The Total capital ratio is calculated by dividing Total capital, less
regulatory adjustments, by the corresponding risk-weighted assets.
Total shareholder return (TSR)
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.
Trading activity revenues
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.
Value-at-Risk (VaR)
VaR is a statistical measure of risk that is used to quantify market risks
across products, per types of risks, and aggregate risk on a portfolio basis.
VaR is defined as the maximum loss at a specific confidence level over a
certain horizon under normal market conditions. The VaR method has the
advantage of providing a uniform measurement of financial instrument-
related market risks based on a single statistical confidence level and time
horizon.
National Bank of Canada
2023 Annual Report
127
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
130
1 3 1
134
135
136
138
139
Notes to the Audited Consolidated Financial Statements
140
Management’s Responsibility for Financial Reporting
The consolidated financial statements of National Bank of Canada (the Bank) have been prepared in accordance with section 308(4) of the Bank Act (Canada),
which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions (Canada) (OSFI), the financial statements are to be
prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). IFRS
represent Canadian generally accepted accounting principles (GAAP). None of the OSFI accounting requirements are exceptions to IFRS.
Management maintains the accounting and internal control systems needed to discharge its responsibility, which is to provide reasonable assurance that the
financial accounts are accurate and complete and that the Bank’s assets are adequately safeguarded. Controls that are currently in place include quality
standards on staff hiring and training; the implementation of organizational structures with clear divisions of responsibility and accountability for
performance; the Code of Professional Conduct; and the communication of operating policies and procedures.
As Chief Executive Officer and as Chief Financial Officer, we have overseen the evaluation of the design and operation of the Bank’s internal 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, 2023 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.
Laurent Ferreira
President and Chief Executive Officer
Marie Chantal Gingras
Chief Financial Officer and Executive Vice-President, Finance
Montreal, Canada, November 30, 2023
130
National Bank of Canada
2023 Annual Report
Independent Auditor’s Report
To the Shareholders of National Bank of Canada
Opinion
We have audited the consolidated financial statements of National Bank of Canada (the Bank), which comprise the consolidated balance sheets as at
October 31, 2023 and 2022, 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, 2023 and
2022, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards (Canadian GAAS). Our responsibilities under those standards are
further described in theAuditor’s Responsibilities forthe Auditof the Financial Statementssection 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.
Key Audit Matters
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, 2023. 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.
Allowances for credit losses — Refer to Notes 1 and 7 to the financial statements
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 economic recession. Significant
auditor judgment was required in evaluating: (i) the models and methodologies used to measure ECL; (ii) the forecasts of macroeconomic scenarios and
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 ECL included the following, among
others:
With the assistance of professionals with specialized skills in credit risk or economics:
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 economic 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.
o
o
o
o
National Bank of Canada
2023 Annual Report
131
Income taxes – Uncertain tax positions — Refer to Notes 1 and 24 to the financial statements
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:
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.
o
o
o
Other Information
Management is responsible for the other information. The other information comprises:
Management’s Discussion and Analysis; and
The information, other than the financial statements and our auditor’s report thereon, in the Annual Report.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In
connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated.
We obtained Management’s Discussion and Analysis and the Annual Report prior to the date of this auditor’s report. If, based on the work we have performed
on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s
report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as
management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable,
matters related to 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.
132
National Bank of Canada
2023 Annual Report
,
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis
of these financial statements.
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.
fraud or error.
The engagement partner on the audit resulting in this independent auditor’s report is Carl Magnan.
/s/ Deloitte LLP1
November 30, 2023
Montreal, Quebec
1 CPA auditor, public accountancy permit No. A121501
National Bank of Canada
2023 Annual Report
133
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Balance Sheets
As at October 31
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase agreements
and securities borrowed
Loans
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under acceptances
Allowances for credit losses
Other
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
Liabilities and equity
Deposits
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
Equity
Equity attributable to the Bank’s shareholders and holders of other equity instruments
Preferred shares and other equity instruments
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Notes 3, 4 and 6
Note 7
Note 16
Note 9
Note 10
Note 11
Note 11
Note 12
2023
2022
35,234
31,870
99,994
9,242
12,582
121,818
87,375
8,828
13,516
109,719
11,260
26,486
86,847
46,358
2,603
84,192
220,000
6,627
(1,184)
225,443
17,516
49
1,592
1,521
1,256
7,889
29,823
423,578
80,129
45,323
2,389
73,317
201,158
6,541
(955)
206,744
18,547
140
1,397
1,519
1,360
5,958
28,921
403,740
Notes 4 and 13
288,173
266,394
Note 8
Note 16
Notes 4 and 8
Note 14
Note 15
Notes 18 and 22
6,627
13,660
38,347
19,888
25,034
7,423
110,979
748
3,150
3,294
68
16,744
420
23,676
2
23,678
423,578
6,541
21,817
33,473
19,632
26,277
6,361
114,101
1,499
3,150
3,196
56
15,140
202
21,744
2
21,746
403,740
Non-controlling interests
Note 19
The accompanying notes are an integral part of these audited consolidated financial statements.
Laurent Ferreira
President and Chief Executive Officer Director
Lynn Loewen
134
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Income
Year ended October 31
Interest income
Loans
Securities at fair value through profit or loss
Securities at fair value through other comprehensive income
Securities at amortized cost
Deposits with financial institutions
Interest expense
Deposits
Liabilities related to transferred receivables
Subordinated debt
Other
Net interest income(1)
Non-interest income
Underwriting and advisory fees
Securities brokerage commissions
Mutual fund revenues
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
Total revenues
Non-interest expenses
Compensation and employee benefits
Occupancy
Technology
Communications
Professional fees
Other
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Net income attributable to
Preferred shareholders and holders of other equity instruments
Common shareholders
Bank shareholders and holders of other equity instruments
Non-controlling interests
Earnings per share (dollars)
Basic
Diluted
Dividends per common share (dollars)
Note 21
Note 9
Note 9
Note 10
Notes 10 and 11
Note 30
Note 7
Note 24
Note 25
Note 18
The accompanying notes are an integral part of these audited consolidated financial statements.
(1) Net interest income includes dividend income. For additional information, see Note 1 to these audited consolidated financial statements.
2023
2022
12,676
1,681
279
473
1,668
16,777
10,015
633
47
2,496
13,191
3,586
378
174
578
1,005
574
202
300
2,677
70
171
183
11
261
6,584
10,170
3,452
353
1,085
58
257
596
5,801
4,369
397
3,972
637
3,335
141
3,196
3,337
(2)
3,335
9.47
9.38
3.98
7,136
1,548
163
263
435
9,545
3,291
472
28
483
4,274
5,271
324
204
587
997
490
186
298
543
113
158
211
28
242
4,381
9,652
3,284
312
915
57
249
413
5,230
4,422
145
4,277
894
3,383
107
3,277
3,384
(1)
3,383
9.72
9.61
3.58
National Bank of Canada
2023 Annual Report
135
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Comprehensive Income
Year ended October 31
Net income
Other comprehensive income, net of income taxes
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Impact of hedging net foreign currency translation gains (losses)
Net change in debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net (gains) losses on debt securities at fair value through other comprehensive income
reclassified to net income
Change in allowances for credit losses on debt securities at fair value through
other comprehensive income reclassified to net income
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
Share in the other comprehensive income of associates and joint ventures
Items that will not be subsequently reclassified to net income
Remeasurements of pension plans and other post-employment benefit plans
Net gains (losses) on equity securities designated at fair value through other comprehensive income
Net fair value change attributable to credit risk on financial liabilities designated at
fair value through profit or loss
Total other comprehensive income, net of income taxes
Comprehensive income
Comprehensive income attributable to
Bank shareholders and holders of other equity instruments
Non-controlling interests
The accompanying notes are an integral part of these audited consolidated financial statements.
2023
3,335
2022
3,383
155
(52)
103
(87)
85
1
(1)
90
25
115
1
(140)
45
(163)
(258)
(40)
3,295
3,297
(2)
3,295
471
(138)
333
(197)
91
1
(105)
(25)
33
8
(2)
(126)
(27)
601
448
682
4,065
4,066
(1)
4,065
136
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Comprehensive Income (cont.)
Income Taxes – Other Comprehensive Income
The following table presents the income tax expense or recovery for each component of other comprehensive income.
Year ended October 31
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Impact of hedging net foreign currency translation gains (losses)
Net change in debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net (gains) losses on debt securities at fair value through other comprehensive income
reclassified to net income
Change in allowances for credit losses on debt securities at fair value through
other comprehensive income reclassified to net income
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
Share in the other comprehensive income of associates and joint ventures
Items that will not be subsequently reclassified to net income
Remeasurements of pension plans and other post-employment benefit plans
Net gains (losses) on equity securities designated at fair value through other
comprehensive income
Net fair value change attributable to credit risk on financial liabilities designated at
fair value through profit or loss
The accompanying notes are an integral part of these audited consolidated financial statements.
2023
2022
(3)
(14)
(17)
(33)
33
−
−
35
9
44
−
(43)
8
(63)
(98)
(71)
(13)
(28)
(41)
(71)
32
−
(39)
(9)
12
3
−
(45)
(10)
216
161
84
National Bank of Canada
2023 Annual Report
137
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Changes in Equity
Year ended October 31
Preferred shares and other equity instruments at beginning
Issuances of preferred shares and other equity instruments
Preferred shares and other equity instruments at end
Common shares at beginning
Issuances of common shares pursuant to the Stock Option Plan
Repurchases of common shares for cancellation
Impact of shares purchased or sold for trading
Common shares at end
Contributed surplus at beginning
Stock option expense
Stock options exercised
Other
Contributed surplus at end
Retained earnings at beginning
Net income attributable to the Bank’s shareholders and holders of other equity instruments
Dividends on preferred shares and distributions on other equity instruments
Dividends on common shares
Premium paid on common shares repurchased for cancellation
Issuance expenses for shares and other equity instruments, net of income taxes
Remeasurements of pension plans and other post-employment benefit plans
Net gains (losses) on equity securities designated at fair value through other comprehensive income
Net fair value change attributable to the credit risk on financial liabilities designated at fair value
through profit or loss
Impact of a financial liability resulting from put options written to non-controlling interests
Other
Retained earnings at end
Accumulated other comprehensive income at beginning
Net foreign currency translation adjustments
Net change in unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net change in gains (losses) on cash flow hedges
Share in the other comprehensive income of associates and joint ventures
Accumulated other comprehensive income at end
Equity attributable to the Bank’s shareholders and holders of other equity instruments
Non-controlling interests at beginning
Net income attributable to non-controlling interests
Other
Non-controlling interests at end
Equity
Note 18
Note 18
Note 22
Note 18
Note 18
Note 18
Note 14
Note 19
Accumulated Other Comprehensive Income
As at October 31
Accumulated other comprehensive income
Net foreign currency translation adjustments
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net gains (losses) on instruments designated as cash flow hedges
Share in the other comprehensive income of associates and joint ventures
The accompanying notes are an integral part of these audited consolidated financial statements.
2023
3,150
−
3,150
3,196
95
−
3
3,294
56
18
(10)
4
68
15,140
3,337
(163)
(1,344)
−
−
(140)
45
(163)
10
22
16,744
202
103
(1)
115
1
420
23,676
2
(2)
2
2
23,678
2023
307
(35)
146
2
420
2022
2,650
500
3,150
3,160
61
(24)
(1)
3,196
47
17
(7)
(1)
56
12,854
3,384
(119)
(1,206)
(221)
(4)
(126)
(27)
601
(8)
12
15,140
(32)
333
(105)
8
(2)
202
21,744
3
(1)
−
2
21,746
2022
204
(34)
31
1
202
138
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Cash Flows
Year ended October 31
Cash flows from operating activities
Net income
Adjustments for
Provisions for credit losses
Depreciation of premises and equipment, including right-of-use assets
Amortization of intangible assets
Impairment losses on premises and equipment and on intangible assets
Notes 10 and 11
Note 9
Deferred taxes
Losses (gains) on sales of non-trading securities, net
Share in the net income of associates and joint ventures
Stock option expense
Gain on the fair value remeasurement of an equity interest
Change in operating assets and liabilities
Securities at fair value through profit or loss
Securities purchased under reverse repurchase agreements and securities borrowed
Loans and acceptances, net of securitization
Deposits
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements and securities loaned
Derivative financial instruments, net
Securitization – Credit cards
Interest and dividends receivable and interest payable
Current tax assets and liabilities
Other items
Cash flows from financing activities
Issuances of preferred shares and other equity instruments
Issuances of common shares (including the impact of shares purchased for trading)
Repurchases of common shares for cancellation
Issuance of subordinated debt
Repurchase of subordinated debt
Issuance expenses for shares and other equity instruments
Repayments of lease liabilities
Dividends paid on shares and distributions on other equity instruments
Cash flows from investing activities
Net change in investments in associates and joint ventures
Purchases of non-trading securities
Maturities of non-trading securities
Sales of non-trading securities
Net change in premises and equipment, excluding right-of-use assets
Net change in intangible assets
Impact of currency rate movements on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning
Cash and cash equivalents at end(1)
Supplementary information about cash flows from operating activities
Interest paid
Interest and dividends received
Income taxes paid
2023
2022
3,335
3,383
397
211
313
88
(229)
(70)
(11)
18
(91)
(12,619)
15,226
(20,252)
21,779
(8,157)
4,874
1,287
(29)
407
(313)
(998)
5,166
−
88
−
−
(750)
−
(102)
(1,503)
(2,267)
−
(8,846)
4,249
5,168
(352)
(299)
(80)
545
3,364
31,870
35,234
12,236
16,228
741
145
202
279
8
110
(113)
(28)
17
−
(2,564)
(18,970)
(23,354)
25,456
1,551
16,180
(1,798)
(37)
150
(437)
(2,102)
(1,922)
500
53
(245)
739
−
(4)
(99)
(1,325)
(381)
202
(9,307)
2,050
6,269
(296)
(374)
(1,456)
1,750
(2,009)
33,879
31,870
3,763
9,184
1,118
The accompanying notes are an integral part of these audited consolidated financial statements.
(1)
This item is the equivalent of Consolidated Balance Sheet item Cash and deposits with financial institutions. It includes an amount of $9.3 billion as at October 31, 2023 ($7.7 billion as at
October 31, 2022) for which there are restrictions and of which $6.5 billion ($5.3 billion as at October 31, 2022) represent the balances that the Bank must maintain with central banks,
other regulatory agencies, and certain counterparties.
National Bank of Canada
2023 Annual Report
139
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Notes to the Audited Consolidated Financial Statements
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Basis of Presentation and Summary of Significant Accounting Policies
Future Accounting Policy Changes
Fair Value of Financial Instruments
Financial Instruments Designated at Fair Value Through Profit or Loss
Offsetting Financial Assets and Financial Liabilities
Securities
Loans and Allowances for Credit Losses
Financial Assets Transferred But Not Derecognized
Investments in Associates and Joint Ventures
Premises and Equipment
Goodwill and Intangible Assets
Other Assets
Deposits
Other Liabilities
Subordinated Debt
Derivative Financial Instruments
140
157
158
169
170
171
173
185
186
187
188
190
190
191
191
192
Note 17
Note 18
Note 19
Note 20
Note 21
Note 22
Note 23
Note 24
Note 25
Note 26
Note 27
Note 28
Note 29
Note 30
Note 31
Hedging Activities
Share Capital and Other Equity Instruments
Non-Controlling Interests
Capital Disclosure
Trading Activity Revenues
Share-Based Payments
Employee Benefits – Pension Plans and Other
Post-Employment 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
Event After the Consolidated Balance Sheet Date
195
201
204
205
206
207
210
214
217
217
220
223
224
229
231
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies
National Bank of Canada (the Bank) is a financial institution incorporated and domiciled in Canada and whose shares are listed on the Toronto Stock Exchange.
Its head office is located at 600 De La Gauchetière Street West in Montreal, Quebec, Canada. The Bank is a chartered bank under Schedule 1 of the Bank Act
(Canada) and is regulated by the Office of the Superintendent of Financial Institutions (Canada) (OSFI). The Bank 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 30, 2023, 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, 2023.
Basis of Presentation
The Bank’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the
International Accounting Standards Board (IASB). The financial statements also comply with section 308(4) of the Bank Act (Canada), which states that, except
as otherwise specified by 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.
Unless otherwise indicated, all amounts are expressed in Canadian dollars, which is the Bank’s functional and presentation currency.
Interest Rate Benchmark Reform
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.
On December 31, 2021, all LIBOR (London Interbank Offered Rates) 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 were discontinued as of June 30, 2023. In Canada, publication of the
CDOR (Canadian Dollar Offered Rate) will be discontinued on June 28, 2024 and will be replaced by the risk-free rate CORRA (Canadian Overnight Repo Rate
Average) and a term CORRA rate, which has been available since September 5, 2023. On July 27, 2023, the Canadian Alternative Reference Rate (CARR)
Working Group published its recommendations and set a milestone stipulating that no new CDOR or bankers’ acceptance loan contracts can be entered into
after November 1, 2023. However, this milestone will have no impact on the ability to draw on existing credit facilities that have not yet matured, that have
been extended, or that have been subject to material amendments before this deadline.
140
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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. 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, 2023, 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, 2023 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
As at October 31, 2023
CDOR
Maturing after June 28, 2024
23,968
16,019
425,074
(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 the carrying value of acceptances.
Accounting Policy Changes
Amendments to IAS 12 – IncomeTaxes
On May 23, 2023, the IASB issued International Tax Reform – Pillar Two Model Rules, which amends IAS 12 – Income Taxes. These amendments apply to
income taxes arising from tax law enacted or substantively enacted to implement the Pillar 2 model rules of the Organisation for Economic Co-operation and
Development (OECD). The amendments also introduce a temporary exception to the accounting of deferred tax assets and liabilities arising from the
implementation of these rules as well as related disclosures. These amendments apply immediately upon issuance and retrospectively in accordance with
IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. Additional disclosures of current tax expense (recovery) and other information
related to income tax exposures will be provided annually for periods beginning on or after November 1, 2023. During the year ended October 31, 2023, the
Bank applied the exception to the recognition and disclosure of information about deferred tax assets and liabilities arising from the Pillar 2 rules in the
jurisdictions where they have been adopted. To date, these amendments have had no impact on the Bank’s consolidated results.
National Bank of Canada
2023 Annual Report
141
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Summary of Significant Accounting Policies
Judgments, Estimates and Assumptions
In preparing consolidated financial statements in accordance with IFRS, management must exercise judgment and make estimates and assumptions that affect
the reporting date carrying amounts of assets and liabilities, net income, and related information. Furthermore, certain accounting policies require complex
judgments and estimates because they apply to matters that are inherently uncertain, in particular accounting policies applicable to the following: the fair
value determination of financial instruments, the impairment of financial assets, the impairment of non-financial assets, pension plans and other post-
employment benefits, income taxes, provisions, the consolidation of structured entities, and the classification of debt instruments. Descriptions of these
judgments and estimates are provided in each of the notes related thereto in the consolidated financial statements. Actual results could therefore differ from
these estimates, in which case the impacts are recognized in the consolidated financial statements of future fiscal periods. The accounting policies described
in this note provide greater detail about the use of estimates and assumptions and reliance on judgment.
The geopolitical landscape (notably, the Russia-Ukraine war and the recent clashes between Hamas and Israel), inflation, climate change, and higher interest
rates continue to create uncertainty. As a result, establishing 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.
Basis of Consolidation
Subsidiaries
These consolidated financial statements include all the assets, liabilities, operating results and cash flows of the Bank and its subsidiaries, after elimination of
intercompany transactions and balances. Subsidiaries are entities, including structured entities, controlled by the Bank. A structured entity is an entity created
to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant factor in deciding who controls the
entity, such as when voting rights relate solely to administrative tasks and the relevant activities are directed by means of contractual arrangements.
Management must exercise judgment in determining whether the Bank must consolidate an entity. The Bank controls an entity only if the following three
conditions are met:
it has decision-making authority regarding the entity’s relevant activities;
it has exposure or rights to variable returns from its involvement with the entity;
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.
142
National Bank of Canada
2023 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, thereafter, the carrying amount is increased or decreased by the Bank's proportionate share of net income, recognized in Non-interest
income in the Consolidated Statement of Income, and by the proportionate share in other comprehensive income, recognized in Other comprehensive income
in the Consolidated Statement of Comprehensive Income. Distributions received reduce the carrying amount of the interest.
Translation of Foreign Currencies
The consolidated financial statements are presented in Canadian dollars, which is the Bank’s functional and presentation currency. Each foreign operation
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.
Classification and Measurement of Financial Instruments
At initial recognition, all financial instruments are recorded at fair value on the Consolidated Balance Sheet. At initial recognition, financial assets must be
classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss. The Bank
determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to manage these
financial assets. At initial recognition, financial liabilities are classified as subsequently measured at amortized cost or as at fair value through profit or loss.
For the purpose of classifying a financial asset, the Bank must determine whether the contractual cash flows associated with the financial asset are solely
payments of principal and interest on the principal amount outstanding. The principal is generally the fair value of the financial asset at initial recognition. The
interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period,
and for other basic lending risks and costs as well as of a profit margin. If the Bank determines that the contractual cash flows associated with a financial asset
are not solely payments of principal and interest, the financial assets must be classified as measured at fair value through profit or loss.
When classifying financial assets, the Bank determines the business model used for each portfolio of financial assets that are managed together to achieve a
same business objective. The business model reflects how the Bank manages its financial assets and the extent to which the financial asset cash flows are
generated by the collection of the contractual cash flows, the sale of the financial assets, or both. The Bank determines the business model using scenarios
that it reasonably expects to occur. Consequently, the business model determination is a matter of fact and requires the use of judgment and consideration of
all the relevant evidence available to the Bank at the date of determination.
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2023 Annual Report
143
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 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 interestincome 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 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;
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 related 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.
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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.
National Bank of Canada
2023 Annual Report
145
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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.
Establishing Fair Value
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction
in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial assets and offered prices for financial liabilities, provide the best evidence of fair
value. A financial instrument is considered quoted in an active market when prices in exchange, dealer, broker or principal-to-principal markets are accessible
at the measurement date. An active market is one where transactions occur with sufficient frequency and volume to provide quoted prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another valuation technique that maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would consider when pricing a
transaction. Judgment is required when applying a large number of acceptable valuation techniques and estimates to determine fair value. The estimated fair
value reflects market conditions on the valuation date and, consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration received or
paid. If there is a difference between the fair value at initial recognition and the transaction price, and the fair value is determined using a valuation technique
based on observable market inputs or, in the case of a derivative, if the risks are fully offset by other contracts entered into with third parties, this difference is
recognized in the Consolidated Statement of Income. In other cases, the difference between the fair value at initial recognition and the transaction price is
deferred on the Consolidated Balance Sheet. The amount of the deferred gain or loss is recognized over the term of the financial instrument. The unamortized
balance is immediately recognized in net income when (i) observable market inputs can be obtained and support the fair value of the transaction, (ii) the risks
associated with the initial contract are substantially offset by other contracts entered into with third parties, (iii) the gain or loss is realized through a cash
receipt or payment, or (iv) the transaction matures or is terminated before maturity.
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2023 Annual Report
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.
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt instruments
measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that are not measured at
fair value. The ECL model is forward looking. Measurement of ECLs at each reporting period reflects reasonable and supportable information about past events,
current conditions, and forecasts of future events and 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.
National Bank of Canada
2023 Annual Report
147
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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
creditlosses 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.
Derecognition of Financial Assets and Securitization
A financial asset is considered for derecognition when the Bank has transferred contractual rights to receive the cash flows or assumed an obligation to
transfer these cash flows to a third party. The Bank derecognizes a financial asset when it considers that substantially all the risks and rewards of ownership of
the asset have been transferred or when the contractual rights to the cash flows of the financial asset expire. When the Bank considers that it has retained
substantially all the risks and rewards of ownership of the transferred asset, it continues to recognize the financial asset and, if applicable, recognizes a
financial liability on the Consolidated Balance Sheet. If, due to a derivative financial instrument, the transfer of a financial asset does not result in
derecognition, the derivative financial instrument is not recognized on the Consolidated Balance Sheet.
When the Bank has neither transferred nor retained substantially all the risks and rewards of ownership of the financial asset, it derecognizes the financial
asset it no longer controls. Any rights and obligations retained following the asset transfer are recognized separately as an asset or liability. If the Bank retains
control of the financial asset, it continues to recognize the asset to the extent of its continuing involvement in that asset, i.e., 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.
Derecognition of Financial Liabilities
A financial liability is derecognized when the obligation is discharged, cancelled, or expires. The difference between the carrying value of the financial liability
transferred and the consideration paid is recognized in the Consolidated Statement of Income.
Cash and Deposits With Financial Institutions
Cash and deposits with financial institutions consist of cash and cash equivalents, amounts pledged as collateral as well as amounts placed in escrow. Cash
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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2023 Annual Report
be
s
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Acceptances and Customers’ Liability Under Acceptances
The potential liability of the Bank under acceptances is recorded as a customer commitment liability on the Consolidated Balance Sheet. The Bank’s potential
recourse vis à vis clients is recorded as an equivalent offsetting asset. Fees are recorded in Non-interest income in the Consolidated Statement of Income.
Obligations Related to Securities Sold Short
This financial liability represents the Bank’s obligation to deliver the securities it sold but did not own at the time of sale. Obligations related to securities sold
short are recorded at fair value and presented as liabilities on the Consolidated Balance Sheet. Realized and unrealized gains and losses are recognized in
Non-interest income in the Consolidated Statement of Income.
Derivative Financial Instruments
In the normal course of business, the Bank uses derivative financial instruments to meet the needs of its clients, to generate trading activity revenues, and to
manage its exposure to interest rate risk, foreign exchange risk, credit risk, and other market risks.
All derivative financial instruments are measured at fair value on the Consolidated Balance Sheet. Derivative financial instruments with a positive fair value are
included in assets, 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-interestincome 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.
National Bank of Canada
2023 Annual Report
149
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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 financial 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.
Offsetting of Financial Assets and Liabilities
Financial assets and liabilities are offset, and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable right to
set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
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National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Premises and Equipment
Premises and equipment, except for land and the portion of the head office building under construction, are recognized at cost less accumulated depreciation
and accumulated impairment losses, if any. Land and the portion of 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 annually. The depreciation expense is recorded in Non-interest expenses in the Consolidated Statement of
Income.
Significant components of the head office building
Interior design
Exterior design, roofing and electromechanical system
Structure
Other buildings
Computer equipment
Equipment and furniture
Leasehold improvements
(1)
The depreciation period is the lesser of the estimated useful life or the lease term.
Method
Useful life
Straight-line
Straight-line
Straight-line
5% declining balance
Straight-line
Straight-line
Straight-line
10-20 years
30 years
75 years
3-7 years
8 years
(1)
Leases
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 in the Non-interest expenses
item of the Consolidated Statement of Income 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.
National Bank of Canada
2023 Annual Report
151
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Goodwill
The Bank uses the acquisition method to account for business combinations. The consideration transferred in a business combination is measured at the
acquisition-date fair value, and the transaction costs related to the acquisition are expensed as incurred. When the Bank acquires control of a business, all of
the identifiable assets and liabilities of the acquiree, including intangible assets, are recorded at fair value. The interests previously held in the acquiree are
also measured at fair value. Goodwill represents the excess of the purchase consideration and all previously held interests over the fair value of the
identifiable net assets of the acquiree. If the fair value of the identifiable net assets exceeds the purchase consideration and all previously held interests, the
difference is immediately recognized 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.
Intangible Assets
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.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their
carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or
intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not 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 asset or 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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2023 Annual Report
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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.
Provisions
Provisions are liabilities of uncertain timing and amount. A provision is recognized when the Bank has a present obligation (legal or constructive) arising from a
past event, when it is probable that an outflow of economic resources will be required to settle the obligation and when the amount of the obligation can be
reliably estimated. Provisions are based on the Bank’s best estimates of the economic resources required to settle the present obligation, given all relevant
risks and uncertainties, and, when it is significant, the effect of the time value of money. Provisions are reviewed at the end of each reporting period.
Provisions are presented in Other liabilities on the Consolidated Balance Sheet.
Interest Income and Expense
Interest income and expense, except for the interest income on securities classified as at fair value through profit or loss, are recognized in Net interest income
and calculated using the effective interest 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 gross 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.
Dividend Income
Dividends from an equity instrument are recognized in Net interest income in the Consolidated Statement of Income when the Bank’s right to receive payment
is established.
National Bank of Canada
2023 Annual Report
153
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Fee and Commission Income
Fee and commission income is recognized when, or as, a performance obligation is satisfied, i.e., when control of a promised service is transferred to a
customer and in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for the service. The revenue may
therefore be recognized at a point in time, upon completion of the service, or over time as services are provided.
The Bank must also determine whether its performance obligation is to provide the service itself or to arrange for another party to provide the service (in other
words, whether the Bank is acting as a principal or agent). A principal may itself satisfy its performance obligation to provide the specified good or service or it
may engage another party to satisfy some or all of the performance obligation on its behalf. A principal also has the primary responsibility for fulfilling the
promise to provide the good or service to the customer and has discretion in establishing the price for the service. If the Bank is acting as a principal, revenue
is recognized on a gross basis in an amount corresponding to the consideration to which the Bank expects to be entitled. If the Bank is acting as an agent, then
revenue is recognized net of the service fees and other costs incurred in relation to the commission and fees earned.
Underwriting and Advisory Fees
Underwriting and advisory fees include underwriting fees, financial advisory fees, and loan syndication fees. These fees are mainly earned in the Financial
Markets segment and are recognized at a point in time as revenue upon successful completion of the engagement. Financial advisory fees are fees earned for
assisting customers with transactions related to mergers and acquisitions and financial restructurings. Loan syndication fees represent fees earned as the
agent or lead lender responsible for structuring, arranging, and administering a loan syndication and are recorded in Non-interest income unless the yield on
the loan retained by the Bank is less than that of other comparable lenders involved in the financing. In such cases, an appropriate portion of the fees is
deferred and amortized using the effective interest rate method, and the amortization is recognized in Interest income over the term of the loan.
Securities Brokerage Commissions
Securities brokerage commissions are earned in the Wealth Management segment and are recognized 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.
Insurance Revenues
Insurance contracts, including reinsurance contracts, are arrangements under which one party accepts significant insurance risk by agreeing to compensate
the policyholder if a specified uncertain future event was to occur. Gross premiums, net of premiums transferred under reinsurance contracts, are recognized
when they become due. Royalties received from reinsurers are recognized when earned. Claims are recognized when received and an amount is estimated as
they are being processed. All these amounts are recognized on a net basis in Non-interest income in the Consolidated Statement of Income.
Upon recognition of a premium, a reinsurance asset and insurance liability are recognized, respectively, in Other assets and in Other liabilities on the
Consolidated Balance Sheet. Subsequent changes in the carrying values of the reinsurance asset and insurance liability are recognized on a net basis in
Non-interest income in the Consolidated Statement of Income.
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2023 Annual Report
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Income Taxes
Income taxes include current taxes and deferred taxes and are recorded in net income except for income taxes generated by items recognized in Other
comprehensive income or directly in equity.
Current tax is the amount of income tax payable on the taxable income for a period. It is calculated using the enacted or substantively enacted tax rates
prevailing on the reporting date, and any adjustments recognized in the period for 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.
Financial Guarantee Contracts
A financial guarantee contract is a contract or indemnification agreement that could require the Bank to make specified payments (in cash, financial
instruments, other assets, Bank shares, or provisions of services) to reimburse a beneficiary in the event of a loss resulting from a debtor defaulting on the
original or amended terms of a debt instrument.
To reflect the fair value of 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.
National Bank of Canada
2023 Annual Report
155
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.)
Employee Benefits – Pension Plans and Other Post-Employment Benefit Plans
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 is 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.
Share-Based Payments
The Bank has several share-based compensation plans: the Stock Option Plan, the Stock Appreciation Rights (SAR) Plan, the Deferred Stock Unit (DSU) Plan,
the Restricted Stock Unit (RSU) Plan, the Performance Stock Unit (PSU) Plan, the Deferred Compensation Plan (DCP) of National Bank Financial, and the
Employee Share Ownership Plan.
Compensation expense is recognized over the service period required for employees to become fully entitled to the award. This period is generally the same as
the vesting period, except where the required service period begins before the award date. Compensation expense related to awards granted to employees
eligible to retire on the award date is immediately recognized on the award date. Compensation expense related to awards granted to employees who will
become eligible to retire during the vesting period is recognized over the period from the award date to the date the employee becomes eligible to retire. For all
of these plans, as of the first year of recognition, the expense includes cancellation and forfeiture estimates. These estimates are subsequently revised, as
necessary. The Bank uses derivative financial instruments to hedge the risks associated with some of these plans. The compensation expense for these plans,
net of related hedges, is recognized in the Consolidated Statement of Income.
Under the Stock Option Plan, the Bank uses the fair value method to account for stock options awarded. The options vest at 25% per year, and each tranche is
treated as though it was a separate award. The fair value of each of the tranches is measured on the award date using the Black-Scholes model, and this fair
value is recognized in Compensation and employee benefits and Contributed surplus. When the options are exercised, the Contributed surplus amount is
credited to Equity – Common shares on the Consolidated Balance Sheet. The proceeds received from the employees when these options are exercised are also
credited to Equity – Common shares on the Consolidated Balance Sheet.
SARs are recorded at fair value when awarded, and their fair value is remeasured at the end of each reporting period until they are exercised. The cost is
recognized in Compensation and employee benefits in the Consolidated Statement of Income and in Other liabilities on the Consolidated Balance Sheet. The
obligation that results from the change in fair value at each period is recognized in net income gradually over the vesting period, and periodically thereafter,
until the SARs are exercised. When a SAR is exercised, the Bank makes a cash payment equal to the increase in the stock price since the date of the award.
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2023 Annual Report
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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.
Note 2 – Future Accounting Policy Changes
The Bank closely monitors both new accounting standards and amendments to existing accounting standards issued by the IASB. The following 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.
Effective Date – November 1, 2023
IFRS 17 – Insurance Contracts
In May 2017, the IASB published IFRS 17 – Insurance Contracts (IFRS 17), which replaces IFRS 4, the current insurance contract accounting standard.
IFRS 17 introduces a new accounting framework that improves the comparability and quality of financial information. IFRS 17 provides guidance on the
recognition, measurement, presentation, and disclosure of insurance contracts. IFRS 17 must 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.
IFRS 17 affects 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. The current consolidated balance sheet presentation, whereby the items are included and reported
in Other assets and Other liabilities, respectively, will change.
IFRS 17 introduces three approaches to measure insurance contracts: the general model approach, the premium allocation approach, and the variable fee
approach. The general model approach, which is primarily used by the Bank, measures insurance contracts based on the present value of estimates of the
expected future cash flows necessary to fulfill the contracts, including an adjustment for non-financial risk as well as the contractual service margin (CSM),
which represents the unearned profits that are recognized as services are provided in the future. The premium allocation approach is applied to short-term
contracts, and insurance revenues are recognized systematically over the coverage period. For all measurement approaches, if contracts are expected to be
onerous, losses are recognized immediately.
The Bank is finalizing its analysis of the IFRS 17 adoption impacts on its consolidated financial statements for the annual period beginning on or after
November 1, 2023. At the transition date, November 1, 2022, the Bank applied two of the three transition approaches available under IFRS 17: the full
retrospective approach and the fair value approach. For most groups of contracts, the fair value approach has been applied considering that the full
retrospective approach is impracticable, since reasonable and supportable information for applying this approach is not available without undue cost or effort.
As at October 31, 2023, the Bank’s best estimate of the impact of transitioning to IFRS 17 is a decrease of $48 million, net of income taxes, in equity as at
November 1, 2022, related to the new recognition and measurement principles of insurance and reinsurance contract assets and liabilities, including a net
amount of CSM established at approximately $89 million. The impact on the Common Equity Tier 1 (CET1) capital ratio is not expected to be material.
The estimated impact of applying the new measurement approaches for insurance and reinsurance contracts is not significant. The Bank continues to refine
and validate the new measurement approaches leading up to the disclosure of its 2024 first-quarter results.
National Bank of Canada
2023 Annual Report
157
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments
Fair Value and Carrying Value of Financial Instruments by Category
Financial assets and financial liabilities are recognized on the Consolidated Balance Sheet at fair value or at amortized cost in accordance with the categories
set out in the accounting framework for financial instruments.
Financial
instruments
classified as
at fair value
through profit
or loss
Financial
instruments
designated
at fair value
through profit
or loss
Debt securities
classified as at
fair value
through other
comprehensive
income
Carrying value
and fair value
Equity securities
designated at
fair value
through other
comprehensive
income
As at October 31, 2023
Carrying
value
Fair
value
Financial
instruments
at amortized
cost, net
Financial
instruments
at amortized
cost, net
Total
carrying
value
Total
fair
value
−
758
−
8,583
−
659
35,234
12,582
35,234
35,234
35,234
12,097
121,818
121,333
−
−
−
−
−
−
−
−
−
−
−
−
11,260
212,319
−
4,293
11,260
11,260
11,260
210,088
225,443
223,212
−
4,293
17,516
4,366
17,516
4,366
17,516
73
−
18,275
269,898
269,490
288,173
287,765
−
13,660
−
19,888
−
−
−
−
−
−
−
9,952
−
−
6,627
−
38,347
−
15,082
3,497
748
6,627
−
6,627
13,660
6,627
13,660
38,347
−
14,255
3,494
38,347
19,888
25,034
3,497
38,347
19,888
24,207
3,494
727
748
727
Financial assets
Cash and deposits with financial
institutions
Securities
Securities purchased under reverse
repurchase agreements
and securities borrowed
−
99,236
−
Loans and acceptances, net of allowances
13,124
Other
Derivative financial instruments
Other assets
Financial liabilities
Deposits(1)
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
(1)
Includes embedded derivative financial instruments.
158
National Bank of Canada
2023 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, 2022
Carrying
value
Fair
value
Financial
instruments
at amortized
cost, net
Financial
instruments
at amortized
cost, net
Total
carrying
value
Total
fair
value
−
86,338
−
1,037
−
8,272
−
556
31,870
13,516
31,870
31,870
31,870
13,007
109,719
109,210
Financial assets
Cash and deposits with financial
institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Other
Derivative financial instruments
Other assets
Financial liabilities
Deposits(1)
Loans and acceptances, net of allowances
10,516
−
18,547
87
−
−
−
−
−
−
−
−
−
−
−
−
26,486
26,486
26,486
26,486
196,228
190,955
206,744
201,471
−
3,221
−
3,221
18,547
3,308
18,547
3,308
−
15,355
251,039
249,937
266,394
265,292
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
−
21,817
−
19,632
−
−
−
(1)
Includes embedded derivative financial instruments.
Establishing Fair Value
−
−
−
−
11,352
−
−
6,541
−
33,473
−
14,925
2,632
1,499
6,541
−
6,541
21,817
6,541
21,817
33,473
−
14,137
2,627
33,473
19,632
26,277
2,632
33,473
19,632
25,489
2,627
1,478
1,499
1,478
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, 2023 and may change in the future. Furthermore, there may be measurement uncertainty resulting
from the choice of valuation model used.
National Bank of Canada
2023 Annual Report
159
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments (cont.)
Valuation Governance
Fair value is established in accordance with a rigorous control framework. The Bank has policies and procedures that govern the process for determining fair
value. These policies are documented and periodically reviewed by the Risk Management Group. All valuation models are validated, and controls have been
implemented to ensure that they are applied.
The fair value of existing or new products is determined and validated by functions independent of the risk-taking team. Complex fair value matters are
reviewed by valuation committees made up of experts from various specialized functions.
For financial instruments classified in Level 3 of the fair value hierarchy, the Bank has documented the 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.
Valuation Methods and Assumptions
Financial Instruments Whose Fair Value Equals Carrying Value
The carrying value of the following financial instruments is a reasonable approximation of fair value:
cash and deposits with financial institutions;
securities purchased under reverse repurchase agreements and securities borrowed;
obligations related to securities sold under repurchase agreements and securities loaned;
customers’ liability under acceptances;
acceptances;
certain items of other assets and other liabilities.
Securities and Obligations Related to Securities Sold Short
These financial instruments, except for securities at amortized cost, are recognized at fair value on the Consolidated Balance Sheet. Their fair value is based on
quoted prices in active markets, i.e., bid prices for financial assets and offered prices for financial liabilities. If there are no quoted prices in an active market,
fair value is estimated using prices for securities that 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 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 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 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.
160
National Bank of Canada
2023 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.
National Bank of Canada
2023 Annual Report
161
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments (cont.)
Other Liabilities and Subordinated Debt
The fair value of these financial liabilities is based on quoted market prices in an active market. If there is no active market, fair value is determined by
discounting contractual cash flows using the current market interest rates offered for similar financial instruments that have the same term to maturity.
Hierarchy of Fair Value Measurements
Determining the Levels of the Fair Value Measurement Hierarchy
IFRS establishes a fair value measurement hierarchy that classifies the inputs used in financial instrument fair value measurement techniques according to
three levels. This fair value hierarchy requires observable market inputs to be used whenever such inputs exist. According to the hierarchy, the highest level of
inputs are unadjusted quoted prices in active markets for identical instruments and the lowest level of inputs are unobservable inputs. In some cases, the
inputs used to measure the fair value of a financial instrument might be categorized within different levels of the fair value hierarchy. In those cases, the fair
value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire
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 (receivables) for which fair value is established using internal valuation models that are based on significant unobservable market
inputs.
Transfers Between the Fair Value Hierarchy Levels
Transfers of financial instruments between Levels 1 and 2 and transfers to (or from) Level 3 are deemed to have taken place at the beginning of the quarter in
which the transfer occurred. Significant transfers can occur between the fair value hierarchy levels due to new information on inputs used to determine fair
value and the observable nature of those inputs.
During fiscal 2023, $17 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 ($41 million in securities classified as at fair value through profit or loss and
$3 million in obligations related to securities sold short in fiscal 2022). In addition, during fiscal 2023, $15 million in securities classified as at fair value
through profit or loss and $3 million in obligations related to securities sold short were transferred from Level 1 to Level 2 as a result of changing market
conditions (in 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).
During fiscal years 2023 and 2022, 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.
162
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Financial Instruments Recorded at Fair Value on the Consolidated Balance Sheet
The following tables show financial instruments recorded at fair value on the Consolidated Balance Sheet according to the fair value hierarchy.
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
At fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Loans
Other
Derivative financial instruments
Other assets – Other items
Financial liabilities
Deposits(1)
Other
Obligations related to securities sold short
Derivative financial instruments
Liabilities related to transferred receivables
(1)
The amounts include the fair value of embedded derivative financial instruments in deposits.
Level 1
Level 2
As at October 31, 2023
Total financial
assets/liabilities
at fair value
Level 3
6,403
−
2,781
−
65,018
74,202
73
−
904
−
−
977
−
285
−
75,464
10,872
8,260
2,105
3,450
554
25,241
4,124
1,938
254
1,290
281
7,887
12,907
17,224
−
63,259
−
18,134
8,335
467
−
8,802
5,325
19,399
9,952
52,810
−
−
−
65
486
551
−
−
−
−
378
378
217
7
73
1,226
−
−
22
−
22
17,275
8,260
4,886
3,515
66,058
99,994
4,197
1,938
1,158
1,290
659
9,242
13,124
17,516
73
139,949
18,134
13,660
19,888
9,952
61,634
National Bank of Canada
2023 Annual Report
163
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments (cont.)
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
At fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Loans
Other
Derivative financial instruments
Other assets – Other items
Financial liabilities
Deposits(1)
Other
Obligations related to securities sold short
Derivative financial instruments
Liabilities related to transferred receivables
Level 1
Level 2
As at October 31, 2022
Total financial
assets/liabilities
at fair value
Level 3
4,736
−
10,639
−
45,805
61,180
21
−
1,687
−
−
1,708
−
342
−
63,230
8,186
9,260
4,445
3,324
504
25,719
3,191
1,970
191
1,212
236
6,800
10,272
18,204
−
60,995
−
15,424
15,213
625
−
15,838
6,604
18,989
11,352
52,369
−
−
−
60
416
476
−
−
−
−
320
320
244
1
87
1,128
8
−
18
−
26
12,922
9,260
15,084
3,384
46,725
87,375
3,212
1,970
1,878
1,212
556
8,828
10,516
18,547
87
125,353
15,432
21,817
19,632
11,352
68,233
(1)
The amounts include the fair value of embedded derivative financial instruments in deposits.
Financial Instruments Classified in Level 3
The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the
markets. The valuation technique may also be based, in part, on observable market inputs. The table on the following page shows the significant
unobservable inputs used for the fair value measurements of financial instruments classified in Level 3 of the hierarchy.
164
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Fair
value
Primary
valuation techniques
Significant
unobservable inputs
Low
As at October 31, 2023
Range of input values
High
Financial assets
Securities
Equity securities and other debt securities
929
Loans
Loans at fair value through profit or loss
217
Net asset value
Market comparable
Discounted cash flows
Discounted cash flows
Discounted cash flows
Net asset value
EV/EBITDA(1) multiple
Discount rate
Discount rate
Liquidity premium
100 %
11 x
6.50 %
8.08 %
3.57 %
100 %
14 x
15.10 %
15.99 %
11.32 %
Other
Derivative financial instruments
Equity contracts
Credit derivative contracts
Other assets (cid:884) Other items
Financial liabilities
Other
Derivative financial instruments
Interest rate contracts
Equity contracts
Credit derivative contracts
Financial assets
Securities
Equity securities and other debt securities
Loans
Loans at fair value through profit or loss
Other
Derivative financial instruments
Equity contracts
Other assets (cid:884) Other items
Financial liabilities
Deposits
Structured deposit notes(3)
Other
Derivative financial instruments
Interest rate contracts
Equity contracts
5
Option pricing model
2
73
1,226
Discounted cash flows
Discounted cash flows
Long-term volatility
Market correlation
Credit spread
Discount rate
7 %
15 %
22 Bps(2)
13 %
58 %
94 %
91 Bps(2)
13 %
5
16
1
22
Fair
value
796
244
Discounted cash flows
Option pricing model
Discounted cash flows
Discount rate
Long-term volatility
Market correlation
Credit spread
2.20 %
7 %
(9) %
22 Bps(2)
2.20 %
58 %
94 %
91 Bps(2)
Primary
valuation techniques
Significant
unobservable inputs
Low
As at October 31, 2022
Range of input values
High
Net asset value
Market comparable
Discounted cash flows
Discounted cash flows
Discounted cash flows
1
Option pricing model
87
1,128
Discounted cash flows
Net asset value
EV/EBITDA(1) multiple
Discount rate
Discount rate
Liquidity premium
Long-term volatility
Market correlation
Discount rate
100 %
18 x
4.50 %
7.06 %
2.62 %
21 %
38 %
9 %
100 %
21 x
19.00 %
15.09 %
10.49 %
54 %
95 %
9 %
8
Option pricing model
Long-term volatility
Market correlation
10 %
(3) %
35 %
94 %
8
10
26
Discounted cash flows
Option pricing model
Discount rate
Long-term volatility
Market correlation
2.20 %
9 %
1 %
2.20 %
51 %
95 %
(1)
(2)
(3)
EV/EBITDA means Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization.
Bps or basis point is a unit of measure equal to 0.01%.
Includes embedded derivative financial instruments.
National Bank of Canada
2023 Annual Report
165
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments (cont.)
Significant Unobservable Inputs Used for Fair Value Measurements of Financial Instruments Classified in Level 3
Net Asset Value
Net asset value is the estimated value of a security based on valuations received from the investment or fund managers, the administrators of the conduits, or
the general partners of 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.
Sensitivity Analysis of Financial Instruments Classified in Level 3
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 $155 million increase or decrease in the fair value recorded as at
October 31, 2023 (a $126 million increase or decrease as at October 31, 2022).
For loans, the Bank varies unobservable inputs such as a liquidity premium and establishes a reasonable fair value range that could result in a $25 million
increase or decrease in the fair value recorded as at October 31, 2023 (a $31 million increase or decrease as at October 31, 2022).
For derivative financial instruments and embedded derivative financial instruments related to structured deposit notes, the Bank varies long-term volatility,
market correlation inputs, and credit spread and establishes a reasonable fair value range. As at October 31, 2023, for derivative financial instruments, the net
fair value could result in a $16 million increase or decrease (a $5 million increase or decrease as at October 31, 2022), whereas for structured deposit notes,
the net fair value could have resulted in a $1 million increase or decrease as at October 31, 2022.
For other assets, the Bank varies unobservable inputs such as discount rates and establishes a reasonable fair value range that could result in a $9 million
increase or decrease in the fair value recorded as at October 31, 2023 (a $10 million increase or decrease as at October 31, 2022).
For all Level 3 financial instruments, the reasonable fair value ranges could result in a 6% increase or decrease in net income as at October 31, 2023 (a 5%
increase or decrease in net income as at October 31, 2022).
166
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Change in the Fair Value of Financial Instruments Classified in Level 3
The Bank may hedge the fair value of financial instruments classified in the various levels through offsetting hedge positions. Gains and losses for financial
instruments classified in Level 3 presented in the following tables do not reflect the inverse gains and losses on financial instruments used for economic
hedging purposes that may have been classified in Level 1 or 2 by the Bank. In addition, the Bank may hedge the fair value of financial instruments classified
in Level 3 using other financial instruments classified in Level 3. The effect of these hedges is not included in the net amount presented in the following tables.
The gains and losses presented hereafter may comprise changes in fair value based on observable and unobservable inputs.
Fair value as at October 31, 2022
Total realized and unrealized gains (losses) included in Net income(3)
Total realized and unrealized gains (losses) included in
Other comprehensive income
Purchases
Sales
Issuances
Settlements and other
Financial instruments transferred into Level 3
Financial instruments transferred out of Level 3
Fair value as at October 31, 2023
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2023(4)
Fair value as at October 31, 2021
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
Financial instruments transferred into Level 3
Financial instruments transferred out of Level 3
Fair value as at October 31, 2022
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2022(6)
Securities
at fair value
through profit
or loss
476
33
Securities
at fair value
through other
comprehensive
income
320
−
Year ended October 31, 2023
Loans and
other assets
331
(4)
Derivative
financial
instruments(1)
(17)
(15)
Deposits(2)
(8)
−
−
62
(21)
−
−
1
−
551
62
58
−
−
−
−
−
−
378
−
−
−
(9)
29
(57)
−
−
290
(4)
−
−
−
−
7
8
2
(15)
(15)
−
−
−
−
−
−
8
−
−
Securities
at fair value
through profit
or loss
Securities
at fair value
through other
comprehensive
income
Loans and
other assets
471
21
−
60
(64)
−
−
−
(12)
476
3
306
−
7
7
−
−
−
−
−
320
−
297
(50)
−
71
−
22
(9)
−
−
331
(50)
Year ended October 31, 2022
Derivative
financial
instruments(1)
2
(19)
Deposits(2)
−
3
−
−
−
−
(1)
1
−
(17)
(19)
−
−
−
(3)
−
(8)
−
(8)
3
(1)
(2)
(3)
(4)
(5)
(6)
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 gain of $14 million.
Total unrealized gains (losses) included in Non-interest income was an unrealized gain of $43 million.
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.
National Bank of Canada
2023 Annual Report
167
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments (cont.)
Financial Instruments Not Recorded at Fair Value on the Consolidated Balance Sheet
The following tables show the financial instruments that have not been recorded at fair value on the Consolidated Balance Sheet according to the fair value
hierarchy, except for those whose carrying value is a reasonable approximation of fair value.
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Loans, net of allowances
Financial liabilities
Deposits
Other
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Loans, net of allowances
Financial liabilities
Deposits
Other
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
Level 1
Level 2
Level 3
Total
As at October 31, 2023
−
−
−
−
−
−
−
−
−
−
−
5,935
1,772
593
3,797
12,097
86,887
269,490
14,255
46
727
284,518
−
−
−
−
−
5,935
1,772
593
3,797
12,097
116,627
203,514
−
−
−
−
−
269,490
14,255
46
727
284,518
Level 1
Level 2
Level 3
Total
As at October 31, 2022
−
−
−
−
−
−
−
−
−
−
−
5,439
1,708
140
5,720
13,007
81,828
249,937
14,137
73
1,478
265,625
−
−
−
−
−
5,439
1,708
140
5,720
13,007
102,640
184,468
−
−
−
−
−
249,937
14,137
73
1,478
265,625
168
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 4 – Financial Instruments Designated at Fair Value Through Profit or Loss
The Bank chose to designate certain financial instruments at fair value through profit or loss according to the criteria presented in Note 1 to these consolidated
financial statements. Consistent with its risk management strategy and in accordance with the fair value option, which permits the designation if it eliminates
or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring financial assets and liabilities or recognizing
the gains and losses thereon on different bases, the Bank designated 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.
Financial assets designated at fair value through profit or loss
Securities
Financial liabilities designated at fair value through profit or loss
Deposits(1)(2)
Liabilities related to transferred receivables
Financial assets designated at fair value through profit or loss
Securities
Financial liabilities designated at fair value through profit or loss
Deposits(1)(2)
Liabilities related to transferred receivables
Carrying
value as at
October 31, 2023
Unrealized
gains (losses)
for the year ended
October 31, 2023
758
18,275
9,952
28,227
(5)
493
80
573
Carrying
value as at
October 31, 2022
Unrealized
gains (losses)
for the year ended
October 31, 2022
1,037
15,355
11,352
26,707
(21)
2,888
513
3,401
Unrealized
gains (losses)
since the initial
recognition of
the instrument
(12)
3,546
562
4,108
Unrealized
gains (losses)
since the initial
recognition of
the instrument
(7)
3,062
533
3,595
(1)
(2)
For the year ended October 31, 2023, the change in the fair value of deposits designated at fair value through profit or loss attributable to credit risk, and recorded in Other comprehensive
income, resulted in a loss of $226 million ($817 million gain for the year ended October 31, 2022).
The amount at maturity that the Bank will be contractually required to pay to the holders of these deposits varies and will differ from the reporting date fair value.
National Bank of Canada
2023 Annual Report
169
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 5 – Offsetting Financial Assets and Financial Liabilities
Financial assets and liabilities are offset, and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable right to
set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
Generally, over-the-counter derivative 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.
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
As at October 31, 2023
Amounts
set off on the
Consolidated
Balance Sheet
Net amounts
reported
on the
Consolidated
Balance Sheet
Associated amounts
not set off on the
Consolidated Balance Sheet
Financial assets
received/pledged
as collateral(2)
Financial
instruments(1)
Gross amounts
recognized
20,344
35,404
55,748
47,431
37,776
85,207
9,084
17,888
26,972
9,084
17,888
26,972
11,260
17,516
28,776
38,347
19,888
58,235
2,538
8,032
10,570
2,538
8,032
10,570
8,649
7,065
15,714
35,679
5,703
41,382
Net
amounts
73
2,419
2,492
130
6,153
6,283
As at October 31, 2022
Amounts
set off on the
Consolidated
Balance Sheet
Net amounts
reported
on the
Consolidated
Balance Sheet
Associated amounts
not set off on the
Consolidated Balance Sheet
Financial assets
received/pledged
as collateral(2)
Financial
instruments(1)
Gross amounts
recognized
32,134
33,112
65,246
39,121
34,197
73,318
5,648
14,565
20,213
5,648
14,565
20,213
26,486
18,547
45,033
33,473
19,632
53,105
1,887
9,583
11,470
1,887
9,583
11,470
24,459
6,062
30,521
31,440
4,089
35,529
Net
amounts
140
2,902
3,042
146
5,960
6,106
(1)
(2)
Carrying amount of financial instruments that are subject to an enforceable master netting agreement or similar agreement but that do not satisfy offsetting criteria.
Excludes collateral in the form of non-financial instruments.
170
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 6 – Securities
Residual Contractual Maturities of Securities
As at October 31
Securities at fair value through profit or loss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
Equity securities
Securities at fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
Equity securities
Securities at amortized cost(1)
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
Over 1
year to
5 years
Over
5 years
No
specified
maturity
2023
2022
Total
Total
10,320
1,758
361
2,051
−
14,490
2,719
467
1,150
750
−
5,086
5,263
521
181
2,858
8,823
4,890
5,293
1,452
1,178
−
12,813
685
1,430
8
537
−
2,660
−
1,136
−
216
1,352
−
−
−
−
66,058
66,058
−
−
−
−
659
659
−
−
−
−
−
17,275
8,260
4,886
3,515
66,058
99,994
4,197
1,938
1,158
1,290
659
9,242
6,172
1,932
604
3,874
12,582
12,922
9,260
15,084
3,384
46,725
87,375
3,212
1,970
1,878
1,212
556
8,828
5,737
1,826
150
5,803
13,516
1 year
or less
2,065
1,209
3,073
286
−
6,633
793
41
−
3
−
837
909
275
423
800
2,407
(1)
As at October 31, 2023, securities at amortized cost are presented net of $4 million in allowances for credit losses ($7 million as at October 31, 2022).
Credit Quality
As at October 31, 2023 and 2022, 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.
National Bank of Canada
2023 Annual Report
171
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 6 – Securities (cont.)
Unrealized Gross Gains (Losses) on Securities at Fair Value Through
Other Comprehensive Income(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
Equity securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Amortized
cost
Gross unrealized
gains
Gross unrealized
losses
As at October 31, 2023
Carrying
value(2)
4,406
2,110
1,227
1,423
616
9,782
1
−
−
−
66
67
(210)
(172)
(69)
(133)
(23)
(607)
4,197
1,938
1,158
1,290
659
9,242
Amortized
cost
Gross unrealized
gains
Gross unrealized
losses
As at October 31, 2022
Carrying
value(2)
3,386
2,129
2,022
1,355
570
9,462
1
1
−
−
21
23
(175)
(160)
(144)
(143)
(35)
(657)
3,212
1,970
1,878
1,212
556
8,828
(1)
(2)
Excludes the impact of hedging.
The allowances for credit losses on securities at fair value through other comprehensive income (excluding equity securities), representing $3 million as at October 31, 2023 ($2 million as at
October 31, 2022), are reported in Other comprehensive income. For additional information, see Note 7 to these consolidated financial statements.
Equity Securities Designated at Fair Value Through Other Comprehensive Income
The Bank designated certain equity securities, the main business objective of which is to generate dividend income, at fair value through other comprehensive
income without subsequent reclassification of gains and losses to net income. During the year ended October 31, 2023, a dividend income amount of
$33 million was recognized for these investments ($14 million for the year ended October 31, 2022), including amounts of $2 million for investments that were
sold during the year ended October 31, 2023 ($4 million for investments that were sold during the year ended October 31, 2022).
Fair value at beginning
Change in fair value
Designated at fair value through other
comprehensive income(1)
Sales(2)
Fair value at end
Year ended October 31, 2023
Year ended October 31, 2022
Equity securities
of private companies
320
58
Equity securities
of public companies
236
(5)
−
−
378
314
(264)
281
Total
556
53
314
(264)
659
Equity securities
of private companies
306
7
Equity securities
of public companies
311
(44)
7
−
320
143
(174)
236
Total
617
(37)
150
(174)
556
(1) On May 2, 2023, the Bank concluded that it had lost significant influence over TMX Group Limited (TMX) and therefore, as of this date, ceased using the equity method to account for this
investment. The Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million.
The Bank disposed of private and public company equity securities for economic reasons.
(2)
Gains (Losses) on Disposals of Securities at Amortized Cost
During the years ended October 31, 2023 and 2022, the Bank disposed of certain debt securities measured at amortized cost. The carrying value of these
securities upon disposal was $821 million for the year ended October 31, 2023 ($337 million for the year ended October 31, 2022), and the Bank recognized
negligible gains for the year ended October 31, 2023 ($4 million for the year ended October 31, 2022) in Non-interest income – Gains (losses) on non-trading
securities, net in the Consolidated Statement of Income.
172
National Bank of Canada
2023 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
Loans are recognized either at fair value through profit or loss or at amortized cost using the financial asset classification criteria defined in IFRS 9.
Determining and Measuring Expected Credit Losses (ECL)
Determining Expected Credit Losses
Expected credit losses are determined using a three-stage impairment approach that is based on the change in the credit quality of financial assets since initial
recognition.
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.
Impairment Governance
A rigorous control framework is applied to the determination of expected credit losses. The Bank has policies and procedures that govern impairments arising
from credit risk. These policies are documented and periodically reviewed by the Risk Management Group. All models used to calculate expected credit losses
are validated, and controls are in place to ensure they are applied.
These models are validated by groups that are independent of the team that prepares the calculations. Complex questions on measurement methodologies
and assumptions are reviewed by a group of experts from various functions. Furthermore, the inputs and assumptions used to determine expected credit
losses are regularly reviewed.
Measurement of Expected Credit Losses (ECL)
Expected credit losses are estimated using three main variables: (1) probability of default (PD), (2) loss given default (LGD) and (3) exposure at default (EAD).
For accounting purposes, 12-month PD and lifetime PD are the probabilities of a default occurring over the next 12 months or over the life of a financial
instrument, respectively, based on conditions existing at the balance sheet date and on future economic conditions that have, or will have, an impact on credit
risk. LGD reflects the losses expected should default occur and considers such factors as the mitigating effects of collateral, the realizable value thereof, and
the time value of money. EAD is the expected balance owing at default and considers such factors as repayments of principal and interest between the balance
sheet date and the time of default as well as any amounts expected to be drawn on a committed facility. Twelve-month expected credit losses are estimated by
multiplying 12-month PD by LGD and by EAD. Lifetime expected credit losses are estimated using the lifetime PD.
For most financial instruments, expected credit losses are measured on an individual basis. Financial instruments that have credit losses measured on a
collective basis are grouped according to similar credit risk characteristics such as type of instrument, geographic location, comparable risk level, and
business sector or industry.
Inputs, Assumptions and Estimation Techniques
The Bank’s approach to calculating expected credit losses consists essentially of leveraging existing regulatory models and then adjusting their parameters for
IFRS 9 purposes. These models have the advantage of having been thoroughly tested and validated. In addition, using the same base models, regardless of the
purpose, provides consistency across risk assessments. These models use inputs, assumptions and estimation techniques that require a high degree of
management judgment. The main factors that contribute to changes in ECL that are subject to significant judgment include the following:
calibration of regulatory parameters in order to obtain point-in-time and forward-looking parameters;
forecasts of macroeconomic variables for multiple scenarios and the probability weighting of the scenarios;
determination of the significant increases in credit risk (SICR) of a loan.
National Bank of Canada
2023 Annual Report
173
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
Main Parameters
PD Estimates
Since the objective of the regulatory calibration of PD is to align historical data to the long-run default rate, adjustments are required to obtain a point-in-time,
forward-looking PD, as required by IFRS 9. The Bank performs the following: (1) A point-in-time calibration, where the PD of the portfolio is aligned with the
appropriate default rate. The resulting PD estimate generally equals the prior-year default rate. The prior-year default rate is selected for the calibration
performed at this stage, as it often reflects one of the most accurate and appropriate estimates of the current-year default rate; (2) Forward-looking
adjustments are incorporated through, among other measures, a calibration factor based on forecasts produced by the stress testing team's analyses. The
team considers three macroeconomic scenarios, and, for each scenario, produces a forward-looking assessment covering the three upcoming years.
LGD Estimates
The LGD estimation method consists of using, for each of the three macroeconomic scenarios, expected LGD based on the LGD values observed using
backtesting, the economic LGD estimated and used to calculate economic capital, and lastly, the estimated downturn LGD used to calculate regulatory capital.
EAD Estimates
For term loans, the Bank uses expected EAD, which is the outstanding balance anticipated at each point in time. Expected EAD decreases over time according
to contractual repayments and to prepayments. For revolving loans, the EAD percentage is based on the percentage estimated by the corresponding regulatory
model and, thereafter, is converted to dollars according to the authorized balance.
Expected Life
For most financial instruments, the expected life used when measuring expected credit losses is the remaining contractual life. For revolving financial
instruments where there is no contractual maturity, such as credit cards or lines of credit, the expected life is based on the behavioural life of clients who have
defaulted or closed their account.
Incorporation of Forward-Looking Information
The Bank’s Economy and Strategy Group is responsible for developing three macroeconomic scenarios and for recommending probability weights for each
scenario. Macroeconomic scenarios are not developed for specific portfolios, as the Economy and Strategy Group provides a set of variables for each of the
defined scenarios for the next three years. The PDs are also adjusted to incorporate economic assumptions (interest rates, unemployment rates, GDP forecasts,
oil prices, housing price indices, etc.) that can be statistically tied to PD changes that will have an impact beyond the next 12 months. These statistical
relationships are determined using the processes developed for stress testing. In addition, the group considers other relevant factors that may not be
adequately reflected in the information used to calculate the PDs (including late payments and whether the financial asset is subject to additional monitoring
within the watchlist process for business and government loan portfolios).
Determination of a Significant Increase in the Credit Risk of a Financial Instrument
At each reporting period, the Bank determines whether credit risk has increased significantly since initial recognition by examining the change in the risk of
default occurring over the remaining life of the financial instrument. First, the Bank compares the point-in-time forward-looking remaining lifetime PD at the
reporting date with the expected point-in-time forward-looking remaining lifetime PD established at initial recognition. Based on this comparison, the Bank
determines whether the loan has deteriorated when compared to the initial conditions. Because the comparison includes an adjustment based on
origination-date forward-looking information and reporting-date forward-looking information, the deterioration may be caused by the following factors:
(i) deterioration of the economic outlook used in the forward-looking assessment; (ii) deterioration of the borrower’s conditions (payment defaults, worsening
financial ratios, etc.); or (iii) a combination of both factors. The quantitative criteria used to determine a significant increase in credit risk are a series of relative
and absolute thresholds, and a backstop is also applied. All financial instruments that are over 30 days past due but below 90 days past due are migrated to
Stage 2, even if the other criteria do not indicate a significant increase in credit risk.
Credit Quality of Loans
The following tables present the gross carrying amounts of loans as at October 31, 2023 and 2022, 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 Internal Ratings-Based (IRB) categories, see the Internal Default Risk Ratings table on page 77 in the Credit Risk section of the MD&A for the
year ended October 31, 2023.
174
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Non-impaired loans
Stage 2
Stage 1
Stage 3
Impaired loans
POCI
Loans at fair value
through profit or loss(1)
Total
As at October 31, 2023
Residential mortgage
Excellent
Good
Satisfactory
Special mention
Substandard
Default
IRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Personal
Excellent
Good
Satisfactory
Special mention
Substandard
Default
IRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Credit card
Excellent
Good
Satisfactory
Special mention
Substandard
Default
IRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Business and government(3)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
IRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Total loans and acceptances
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
30,075
17,008
11,795
318
61
−
59,257
9,540
68,797
69
68,728
21,338
7,360
6,497
1,849
29
−
37,073
3,713
40,786
91
40,695
641
380
752
304
37
−
2,114
124
2,238
33
2,205
7,785
28,525
32,095
215
27
−
68,647
9,774
78,421
182
78,239
190,242
375
189,867
13
247
4,118
773
252
−
5,403
218
5,621
93
5,528
120
1,665
2,240
810
224
−
5,059
79
5,138
108
5,030
−
1
68
210
86
−
365
−
365
106
259
−
16
8,400
1,790
290
−
10,496
57
10,553
194
10,359
21,677
501
21,176
−
−
−
−
−
66
66
287
353
87
266
−
−
−
−
−
156
156
71
227
87
140
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
397
397
47
444
244
200
1,024
418
606
−
−
−
−
−
−
−
304
304
(95)
399
−
−
−
−
−
−
−
207
207
(15)
222
−
−
−
−
−
−
−
−
−
−
−
−
−
2
−
−
−
2
47
49
−
49
−
−
−
−
−
−
−
11,772
11,772
−
11,772
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
1,113
53
140
−
−
−
1,306
46
1,352
−
1,352
30,088
17,255
15,913
1,091
313
66
64,726
22,121
86,847
154
86,693
21,458
9,025
8,737
2,659
253
156
42,288
4,070
46,358
271
46,087
641
381
820
514
123
−
2,479
124
2,603
139
2,464
8,898
28,594
40,637
2,005
317
397
80,848
9,971
90,819
620
90,199
560
(110)
670
13,124
−
13,124
226,627
1,184
225,443
(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.
s,
National Bank of Canada
2023 Annual Report
175
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
Non-impaired loans
Stage 2
Stage 1
Stage 3
Impaired loans
POCI
Loans at fair value
through profit or loss(1)
Total
As at October 31, 2022
Residential mortgage
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Personal
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Credit card
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Business and government(3)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Total loans and acceptances
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
30,465
16,351
10,765
609
76
−
58,266
7,266
65,532
53
65,479
22,190
8,792
6,928
358
26
−
38,294
3,837
42,131
67
42,064
600
359
689
287
37
−
1,972
117
2,089
31
2,058
6,140
27,607
26,567
75
41
−
60,430
8,096
68,526
115
68,411
178,278
266
178,012
−
12
3,269
394
140
−
3,815
179
3,994
80
3,914
22
479
1,394
775
203
−
2,873
78
2,951
113
2,838
−
−
51
178
71
−
300
−
300
95
205
2
112
8,803
1,172
272
−
10,361
28
10,389
160
10,229
17,634
448
17,186
−
−
−
−
−
49
49
211
260
61
199
−
−
−
−
−
130
130
36
166
75
91
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
367
367
19
386
197
189
812
333
479
−
−
−
−
−
−
−
384
384
(76)
460
−
−
−
−
−
−
−
75
75
(16)
91
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
9,959
9,959
−
9,959
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
147
53
145
−
−
−
345
212
557
−
557
30,465
16,363
14,034
1,003
216
49
62,130
17,999
80,129
118
80,011
22,212
9,271
8,322
1,133
229
130
41,297
4,026
45,323
239
45,084
600
359
740
465
108
−
2,272
117
2,389
126
2,263
6,289
27,772
35,515
1,247
313
367
71,503
8,355
79,858
472
79,386
459
(92)
551
10,516
−
10,516
207,699
955
206,744
(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.
176
National Bank of Canada
2023 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, 2023 and 2022 according to credit quality and ECL
impairment stage.
As at October 31
Off-balance-sheet commitments(1)
Retail
Excellent
Good
Satisfactory
Special mention
Substandard
Default
Non-retail
Excellent
Good
Satisfactory
Special mention
Substandard
Default
IRB Approach
Standardized Approach
Total exposure
Allowances for credit losses
Total exposure, net of allowances
Stage 1
Stage 2
Stage 3
16,648
3,485
1,268
239
17
−
14,117
21,082
12,258
17
19
−
69,150
18,172
87,322
116
87,206
67
467
285
93
15
−
−
−
4,354
248
33
−
5,562
−
5,562
60
5,502
−
−
−
−
−
2
−
−
−
−
−
10
12
−
12
−
12
2023
Total
16,715
3,952
1,553
332
32
2
14,117
21,082
16,612
265
52
10
74,724
18,172
92,896
176
92,720
Stage 1
Stage 2
Stage 3
15,292
3,316
1,170
193
15
−
13,136
18,723
7,894
12
4
−
59,755
15,432
75,187
99
75,088
13
165
180
68
15
−
−
24
3,488
246
24
−
4,223
−
4,223
63
4,160
−
−
−
−
−
1
−
−
−
−
−
18
19
−
19
−
19
2022
Total
15,305
3,481
1,350
261
30
1
13,136
18,747
11,382
258
28
18
63,997
15,432
79,429
162
79,267
(1)
Represent letters of guarantee and documentary letters of credit, undrawn commitments, and backstop liquidity and credit enhancement facilities.
Loans Past Due But Not Impaired(1)
As at October 31
Past due but not impaired
31 to 60 days
61 to 90 days
Over 90 days(3)
Residential
mortgage
139
58
−
197
Personal
Credit card
2023
Business and
government(2)
Residential
mortgage
Personal
Credit card
102
65
−
167
27
14
30
71
38
21
−
59
106
38
−
144
105
30
−
135
23
11
22
56
2022
Business and
government(2)
23
9
−
32
(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).
National Bank of Canada
2023 Annual Report
177
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
Impaired Loans
As at October 31
Loans – Stage 3
Residential mortgage
Personal
Credit card(1)
Business and government(2)
Loans – POCI
Gross
Allowances for
credit losses
Net
Gross
Allowances for
credit losses
2023
353
227
−
444
1,024
560
1,584
87
87
−
244
418
(110)
308
266
140
−
200
606
670
1,276
260
166
−
386
812
459
1,271
61
75
−
197
333
(92)
241
2022
Net
199
91
−
189
479
551
1,030
(1)
(2)
Credit card receivables are considered impaired, at the latest, when payment is 180 days past due, and they are written off at that time.
Includes customers’ liability under acceptances.
Maximum Exposure to Credit Risk of Impaired Loans
The following table presents the maximum exposure to credit risk of impaired loans, the percentage of exposure covered by guarantees, and the main types of
collateral and guarantees held for each loan category.
As at October 31
2023
Gross
impaired loans
Percentage covered
by guarantees(1)
Gross
impaired loans
2022
Percentage covered
by guarantees(1)
Types of collateral
and guarantees
Loans – Stage 3
Residential mortgage
Personal
Business and government(2)
Loans – POCI
353
227
444
560
97%
59%
51%
36%
260
166
386
459
100%
56%
59%
52%
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.
178
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Allowances for Credit Losses
The following tables present a reconciliation of the allowances for credit losses by Consolidated Balance Sheet item and by type of off-balance-sheet
commitment.
Balance sheet
Cash and deposits with financial institutions(2)(3)
Securities(3)
At fair value through other comprehensive income(4)
At amortized cost(2)
Securities purchased under reverse repurchase
agreements and securities borrowed(2)(3)
Loans(5)
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
Other assets(2)(3)
Off-balance-sheet commitments(6)
Letters of guarantee and documentary letters of credit
Undrawn commitments
Backstop liquidity and credit enhancement facilities
Balance sheet
Cash and deposits with financial institutions(2)(3)
Securities(3)
At fair value through other comprehensive income(4)
At amortized cost(2)
Securities purchased under reverse repurchase
agreements and securities borrowed(2)(3)
Loans(5)
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
Other assets(2)(3)
Off-balance-sheet commitments(6)
Letters of guarantee and documentary letters of credit
Undrawn commitments
Backstop liquidity and credit enhancement facilities
Allowances for
credit losses as at
October 31, 2022
Provisions for
credit losses
Write-offs(1)
Disposals
Year ended October 31, 2023
Recoveries
and other
Allowances for
credit losses as
at October 31, 2023
5
2
7
−
118
239
126
418
54
955
−
13
143
6
162
1,131
5
1
(3)
−
36
114
81
150
(1)
380
−
3
9
2
14
397
−
−
−
−
(3)
(101)
(83)
(12)
−
(199)
−
−
−
−
−
(199)
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
3
19
15
11
−
48
−
−
−
−
−
48
10
3
4
−
154
271
139
567
53
1,184
−
16
152
8
176
1,377
Allowances for
credit losses as at
October 31, 2021
Provisions for
credit losses
Write-offs(1)
Disposals
Year ended October 31, 2022
Allowances for
credit losses as
at October 31, 2022
Recoveries
and other
5
1
3
−
71
202
122
515
88
998
−
13
143
6
162
1,169
−
1
4
−
46
69
49
10
(34)
140
−
−
−
−
−
145
−
−
−
−
(3)
(52)
(62)
(116)
−
(233)
−
−
−
−
−
(233)
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
4
20
17
9
−
50
−
−
−
−
−
50
5
2
7
−
118
239
126
418
54
955
−
13
143
6
162
1,131
(1)
(2)
(3)
(4)
(5)
(6)
The contractual amount outstanding on financial assets that were written off during the year ended October 31, 2023 and that are still subject to enforcement activity was $118 million
($91 million for the year ended October 31, 2022).
These financial assets are presented net of the allowances for credit losses on the Consolidated Balance Sheet.
As at October 31, 2023 and 2022, these financial assets were mainly classified in Stage 1 and their credit quality fell mostly within the Excellent category.
The allowances for credit losses are reported in the Accumulated other comprehensive income item of the Consolidated Balance Sheet.
The allowances for credit losses are reported in the Allowances for credit losses item of the Consolidated Balance Sheet.
The allowances for credit losses are reported in the Other liabilities item of the Consolidated Balance Sheet.
National Bank of Canada
2023 Annual Report
179
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
2023
Residential mortgage
Balance at beginning
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
Balance at end
Includes:
Amounts drawn
Undrawn commitments(5)
Personal
Balance at beginning
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
Balance at end
Includes:
Amounts drawn
Undrawn commitments(5)
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
53
18
52
(12)
(2)
(29)
(7)
(5)
15
−
−
−
1
69
69
−
70
47
91
(25)
(2)
(77)
(11)
1
24
−
−
−
1
95
91
4
80
−
(48)
30
(33)
65
(9)
7
12
−
−
−
1
93
93
−
117
−
(82)
30
(88)
152
(18)
3
(3)
−
−
−
−
114
108
6
61
−
(4)
(18)
35
21
(8)
−
26
(3)
−
2
1
87
87
−
75
−
(9)
(5)
90
23
(4)
−
95
(101)
−
20
(2)
87
87
−
(76)
−
−
−
−
(17)
−
−
(17)
−
−
−
(2)
(95)
(95)
−
(16)
−
−
−
−
1
−
−
1
−
−
−
−
(15)
(15)
−
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
50
19
19
(10)
(1)
(24)
(3)
−
−
−
−
−
3
53
53
−
73
45
61
(21)
−
(72)
(9)
(10)
(6)
−
−
−
3
70
67
3
52
−
(17)
13
(7)
39
(3)
1
26
−
−
−
2
80
80
−
103
−
(56)
23
(31)
85
(15)
6
12
−
−
−
2
117
113
4
29
−
(2)
(3)
8
29
(3)
−
29
(3)
−
3
3
61
61
−
63
−
(5)
(2)
31
28
(5)
−
47
(52)
−
17
−
75
75
−
(60)
−
−
−
−
(9)
−
−
(9)
−
−
−
(7)
(76)
(76)
−
(29)
−
−
−
−
15
−
−
15
−
−
−
(2)
(16)
(16)
−
Total
118
18
−
−
−
40
(24)
2
36
(3)
−
2
1
154
154
−
246
47
−
−
−
99
(33)
4
117
(101)
−
20
(1)
281
271
10
2022
Total
71
19
−
−
−
35
(9)
1
46
(3)
−
3
1
118
118
−
210
45
−
−
−
56
(29)
(4)
68
(52)
−
17
3
246
239
7
(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, 2023 was $93 million ($15 million for the year ended
October 31, 2022). 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.
180
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Year ended October 31
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
Credit card
Balance at beginning
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
Balance at end
Includes:
Amounts drawn
Undrawn commitments(5)
Business and government(6)
Balance at beginning
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
Balance at end
Includes:
Amounts drawn
Undrawn commitments(5)
Total allowances for credit losses at end(7)
Includes:
Amounts drawn
Undrawn commitments(5)
53
11
100
(19)
−
(83)
(3)
−
6
−
−
−
−
59
33
26
177
93
54
(28)
(1)
(24)
(19)
(2)
73
−
−
−
1
251
182
69
474
375
99
112
−
(100)
19
(35)
133
(2)
−
15
−
−
−
−
127
106
21
195
−
(54)
36
(6)
79
(29)
(1)
25
−
−
−
−
220
194
26
554
501
53
−
−
−
−
35
33
−
−
68
(83)
−
15
−
−
−
−
197
−
−
(8)
7
61
(4)
−
56
(12)
−
3
−
244
244
−
418
418
−
2023
Total
165
11
−
−
−
83
(5)
−
89
(83)
−
15
−
186
139
47
569
93
−
−
−
109
(52)
(3)
147
(12)
−
10
1
715
620
95
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
(7)
−
−
(7)
−
−
7
−
−
−
−
57
12
84
(16)
(1)
(80)
(2)
(1)
(4)
−
−
−
−
53
31
22
177
82
67
(27)
−
(93)
(29)
−
−
−
−
−
−
177
115
62
353
266
87
101
−
(84)
16
(23)
104
(1)
(1)
11
−
−
−
−
112
95
17
238
−
(65)
31
(3)
21
(27)
−
(43)
−
−
−
−
195
160
35
504
448
56
−
−
−
−
24
21
−
−
45
(62)
−
17
−
−
−
−
287
−
(2)
(4)
3
24
(4)
−
17
(116)
−
3
6
197
197
−
333
333
−
2022
Total
158
12
−
−
−
45
(3)
(2)
52
(62)
−
17
−
165
126
39
702
82
−
−
−
(48)
(60)
−
(26)
(116)
−
3
6
569
472
97
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
(110)
1,336
(110)
−
1,184
152
(92)
1,098
(92)
−
955
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, 2023 was $93 million ($15 million for the year ended
October 31, 2022). 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.
National Bank of Canada
2023 Annual Report
181
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
Distribution of Gross and Impaired Loans by Borrower Category
Under the Basel Asset Classes
As at October 31
Allowances
for credit losses
on impaired
loans(1)(2)
Gross
loans(1)
Impaired
loans(1)
2023
Year ended October 31
Provisions
for credit
losses
Write-offs
Gross
loans(1)
Impaired
loans(1)
As at October 31
Allowances
for credit losses
on impaired
loans(1)(2)
2022
Year ended October 31
Provisions
for credit
losses Write-offs
Retail
Residential mortgage(3)
Qualifying revolving retail(4)
Other retail(5)
Non-retail
Agriculture
Oil and gas
Mining
Utilities
Non-real-estate
construction(6)
Manufacturing
Wholesale
Retail
Transportation
Communications
Financial services
Real estate services and
real estate construction(7)
Professional services
Education and health care
Other services
Government
Other
Excluding POCI loans
POCI
Stages 1 and 2(8)
99,910
4,000
16,696
120,606
8,545
1,826
1,245
12,427
1,739
7,047
3,208
3,801
2,631
2,556
11,693
25,967
3,973
3,700
6,898
1,727
6,478
105,461
226,067
560
226,627
405
24
157
586
67
−
−
−
38
76
51
29
14
17
22
19
8
83
13
−
1
438
1,024
560
1,584
91
18
67
176
4
−
−
−
31
51
40
18
9
14
5
5
3
55
7
−
−
242
418
(110)
308
28
82
81
191
2
(7)
(4)
(35)
−
41
15
(1)
3
5
6
−
(1)
31
−
−
(1)
54
245
(23)
222
175
397
2
96
88
95,575
3,801
14,899
186 114,275
−
−
−
−
−
−
−
−
1
2
2
8,109
1,435
1,049
9,682
1,935
7,374
3,241
3,494
2,209
1,830
10,777
3
2
1
2
−
−
13
22,382
2,338
3,412
6,247
1,661
5,790
92,965
199 207,240
459
−
199 207,699
199
299
16
102
417
31
6
11
35
38
21
35
30
8
11
5
26
9
108
20
−
1
395
812
459
1,271
64
12
58
134
2
6
4
35
32
10
26
19
7
10
3
6
4
25
9
−
1
199
333
(92)
241
31
54
36
121
(1)
(19)
4
(2)
5
(4)
2
2
−
2
−
1
−
25
2
−
−
17
138
6
144
1
145
4
72
41
117
−
26
−
59
−
14
−
−
−
−
−
12
1
2
2
−
−
116
233
−
233
233
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Includes customers’ liability under acceptances.
Allowances for credit losses on drawn amounts.
Includes residential mortgages on one-to-four-unit dwellings (Basel definition) and home equity lines of credit.
Includes lines of credit and credit card receivables.
Includes consumer loans and other retail loans but excludes SME loans.
Includes civil engineering loans, public-private partnership loans, and project finance loans.
Includes residential mortgages on dwellings of five or more units and SME loans.
Includes provisions for credit losses on other financial assets at amortized cost and on off-balance-sheet commitments.
182
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Main Macroeconomic Factors
The following tables show the main macroeconomic factors used to estimate the allowances for credit losses on loans. For each scenario, namely, the base
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.
Macroeconomic factors(1)
GDP growth(2)
Unemployment rate
Housing price index growth(2)
BBB spread(3)
S&P/TSX growth(2)(4)
WTI oil price(5) (US$ per barrel)
Macroeconomic factors(1)
GDP growth(2)
Unemployment rate
Housing price index growth(2)
BBB spread(3)
S&P/TSX growth(2)(4)
WTI oil price(5) (US$ per barrel)
Macroeconomic factors(1)
GDP growth(2)
Unemployment rate
Housing price index growth(2)
BBB spread(3)
S&P/TSX growth(2)(4)
WTI oil price(5) (US$ per barrel)
Next
12 months
Base scenario
Remaining
forecast period
Next
12 months
Upside scenario
Remaining
forecast period
Next
12 months
As at October 31, 2023
Downside scenario
Remaining
forecast period
− %
6.3 %
(1.1) %
2.4 %
(10.0) %
77
1.7 %
6.5 %
1.9 %
2.1 %
3.7 %
80
0.4 %
5.9 %
2.5 %
1.9 %
4.0 %
91
1.9 %
5.9 %
2.4 %
1.8 %
3.0 %
86
(4.9) %
7.7 %
(13.9) %
3.1 %
(25.6) %
46
2.6 %
7.2 %
0.3 %
2.3 %
5.5 %
56
Next
12 months
Base scenario
Remaining
forecast period
Next
12 months
Upside scenario
Remaining
forecast period
Next
12 months
As at July 31, 2023
Downside scenario
Remaining
forecast period
(0.4) %
6.1 %
− %
2.4 %
(5.5) %
67
1.7 %
6.5 %
2.4 %
2.1 %
3.7 %
70
0.4 %
5.7 %
6.1 %
1.9 %
4.0 %
82
1.9 %
5.6 %
2.3 %
1.8 %
3.0 %
77
(4.9) %
7.5 %
(13.9) %
3.1 %
(25.6) %
41
2.6 %
7.0 %
0.3 %
2.4 %
5.5 %
50
Next
12 months
Base scenario
Remaining
forecast period
Next
12 months
Upside scenario
Remaining
forecast period
Next
12 months
As at October 31, 2022
Downside scenario
Remaining
forecast period
0.6 %
6.0 %
(11.2) %
2.4 %
(4.3) %
78
1.7 %
6.1 %
0.7 %
2.1 %
2.4 %
77
1.1 %
5.4 %
− %
2.0 %
5.1 %
102
1.6 %
5.4 %
0.2 %
1.9 %
2.6 %
97
(5.2) %
7.4 %
(13.9) %
3.4 %
(25.6) %
44
2.9 %
6.4 %
0.3 %
2.6 %
5.5 %
51
(1)
(2)
(3)
(4)
(5)
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.
Main stock index in Canada.
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.
National Bank of Canada
2023 Annual Report
183
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, 2023, the macroeconomic outlook remained essentially unchanged and uncertainty remains high.
The economic outlook is still marked by uncertainty, as central banks have become extremely determined to curb inflation, which remains too high in many
countries. With interest rates rising sharply, the year ahead could prove shaky for the global economy. Geopolitical instability could keep energy prices
relatively high, despite an expected economic slowdown. Our baseline forecast shows a few quarters of economic contraction in the United States and Canada
over the coming year. Of all the G7 countries, Canada has the most restrictive monetary policy, and signs of fragility are emerging, in particular as GDP
stagnates over the last two quarters and the unemployment rate rises. Moreover, data from household and business surveys do not suggest an upswing but
rather an economy that continues to deteriorate. As for real estate, the market is showing signs of weakness after a fleeting reversal at the start of the year. In
the base scenario, the unemployment rate stands at 6.5% after 12 months, up 1.0 percentage point, and house prices are down 1.1% year over year. The
S&P/TSX sits at 18,145 points after one year, and the price of oil hovers around US$73.
In the upside scenario, an easing of geopolitical tensions boosts confidence. Inflation continues to subside, as the pressure on supply chains eases without
the restrictive monetary policy having caused too much damage to the economy. The Canadian and U.S. governments continue to expand spending, offsetting
the effects of restrictive monetary policies. With the labour market holding up, consumer spending remains relatively resilient. House prices rise at a moderate
pace against a backdrop of strong demographic growth. After one year, the unemployment rate in this scenario is more favourable than in the base scenario
(four-tenths lower). House prices rise 2.5%, the S&P/TSX is at 20,957 points after one year, and the price of oil hovers around US$81.
In the downside scenario, central banks have underestimated the impact of simultaneous tightening measures, and the global economy sinks into a recession
as falling demand translates into reduced investment by businesses, which also lay off a large number of workers. Given budgetary constraints, governments
are unable to support households and businesses as they did during the pandemic. The geopolitical situation continues to cause concern, with the risk of
conflicts escalating. After 12 months, economic contraction pushes unemployment to 8.5%. House prices fall sharply (-13.9%). The S&P/TSX sits at
14,994 points after one year, and the price of oil hovers around US$40.
Given uncertainty surrounding the key inputs used to measure credit losses, the Bank has applied expert credit judgment to adjust the modelled ECL results.
Sensitivity Analysis of Allowances for Credit Losses on Non-Impaired Loans
Scenarios
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) as at October 31, 2023 based on
the probability weightings of three scenarios with allowances for credit losses resulting from simulations of each scenario weighted at 100%.
Balance as at October 31, 2023
Simulations
100% upside scenario
100% base scenario
100% downside scenario
Allowances for credit losses
on non-impaired loans
1,028
716
824
1,338
Migration
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) as at October 31, 2023 with the
estimated allowances for credit losses that would result if all these non-impaired loans were in Stage 1.
Balance as at October 31, 2023
Simulations
Non-impaired loans if they were all in Stage 1
Allowances for credit losses
on non-impaired loans
1,028
801
184
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 8 – Financial Assets Transferred But Not Derecognized
In the normal course of its business, the Bank enters into transactions in which it transfers financial assets such as securities or loans directly to third parties,
in particular structured entities. According to the terms of some of those transactions, the Bank retains substantially all of the risks and rewards related to
those financial assets. The risks include credit risk, interest rate risk, foreign exchange risk, prepayment risk, and other price risks, whereas the rewards
include 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.
Securities Sold Under Repurchase Agreements and Securities Loaned
When securities are sold under repurchase agreements and securities loaned under securities lending agreements, the Bank transfers financial assets to third
parties in accordance with the standard terms for such transactions. These third parties may have an unlimited right to resell or repledge the financial assets
received. If cash collateral is received, the Bank records the cash along with an obligation to return the cash, which is included in Obligations related to
securities sold under repurchase agreements and securities loaned on the Consolidated Balance Sheet. Where securities are received as collateral, the Bank
does not record the collateral on the Consolidated Balance Sheet.
Financial Assets Transferred to Structured Entities
Under the Canada Mortgage Bond (CMB) program, the Bank sells securities backed by insured residential mortgages and other securities to Canada Housing
Trust (CHT), which finances the purchase through the issuance of insured mortgage bonds. Third-party CMB investors have legal recourse only to the
transferred assets. The cash received for these transferred assets is treated as a secured borrowing, and a corresponding liability is recorded in Liabilities
related to transferred receivables on the Consolidated Balance Sheet.
The following table provides additional information about the nature of the transferred financial assets that do not qualify for derecognition and the associated
liabilities.
As at October 31
Carrying value of financial assets transferred but not derecognized
Securities(1)
Residential mortgages
Carrying value of associated liabilities(2)
Fair value of financial assets transferred but not derecognized
Securities(1)
Residential mortgages
Fair value of associated liabilities(2)
2023
2022
91,097
23,227
114,324
62,295
91,098
22,002
113,100
61,468
76,551
24,102
100,653
56,555
76,551
22,954
99,505
55,767
(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.
Associated liabilities include liabilities related to transferred receivables and obligations related to securities sold under repurchase agreements before the offsetting impact of
$6,994 million as at October 31, 2023 ($3,606 million as at October 31, 2022). 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 $10,171 million before the offsetting impact of $2,090 million as at October 31,
2023 ($8,843 million before the offsetting impact of $2,043 million as at October 31, 2022).
The following table specifies the nature of the transactions related to financial assets transferred but not derecognized.
As at October 31
Carrying value of financial assets transferred but not derecognized
Securities backed by insured residential mortgages and other securities sold to CHT
Securities sold under repurchase agreements
Securities loaned
2023
2022
24,313
40,357
49,654
114,324
25,468
33,880
41,305
100,653
National Bank of Canada
2023 Annual Report
185
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 9 – Investments in Associates and Joint Ventures
As at October 31
Listed associate
TMX Group Limited(1)
Unlisted associates
Business
segment
Other
2023
Carrying
value
−
49
49
2022
Carrying
value
96
44
140
(1)
On May 2, 2023, the Bank concluded that it had lost significant influence over TMX Group Limited (TMX) and therefore, as of this date, ceased using the equity method to account for this
investment. The Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Upon the fair value
measurement, a $91 million gain was recorded in the Non-interest income– Other item of the Consolidated Statement of Income, reported in the Other heading of segment results. As at
October 31, 2022, the Bank was exercising significant influence over TMX, mainly through its equity interest, debt financing, and presence on TMX’s board of directors, and the Bank’s
ownership interest in TMX was 2.5%. During the year ended October 31, 2023, TMX paid $3 million in dividends to the Bank ($7 million for the year ended October 31, 2022).
As at October 31, 2023 and 2022, 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.
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, 2023 and 2022.
2023
6
−
6
2022
5
−
5
186
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 10 – Premises and Equipment
Owned assets held
Right-of-use
assets
Total
Head office
building under
construction(1) Buildings
Land
Computer
equipment
Equipment
and furniture
Leasehold
improvements
Total
Real estate
Cost
As at October 31, 2021
Additions and modifications
Disposals
Fully depreciated assets
Impact of foreign currency translation
As at October 31, 2022
Additions and modifications
Disposals
Transfers(2)
Fully depreciated assets
Impact of foreign currency translation
As at October 31, 2023
Accumulated depreciation
As at October 31, 2021
Depreciation for the year
Disposals
Fully depreciated assets
Impact of foreign currency translation
As at October 31, 2022
Depreciation for the year
Disposals
Impairment losses(3)
Fully depreciated assets
Impact of foreign currency translation
As at October 31, 2023
71
3
−
−
74
−
−
−
−
74
248
183
−
−
431
222
−
(397)
−
256
68
2
(7)
(7)
−
56
3
(7)
386
(2)
−
436
47
2
(4)
(7)
−
38
4
(5)
−
(2)
−
35
Carrying value as at October 31, 2022
Carrying value as at October 31, 2023
74
74
431
256
18
401
255
53
−
(38)
6
276
70
−
4
(35)
2
317
150
48
−
(38)
2
162
55
−
−
(35)
1
183
114
134
110
14
(3)
(7)
3
117
8
(13)
7
(3)
−
116
55
15
(3)
(7)
1
61
10
(13)
−
(3)
−
55
56
61
338
46
(2)
(10)
5
377
53
(27)
−
(8)
1
396
156
32
(2)
(10)
3
179
36
(27)
−
(8)
−
180
1,090
301
(12)
(62)
14
1,331
356
(47)
−
(48)
3
1,595
408
97
(9)
(62)
6
440
105
(45)
−
(48)
1
453
732
69
(8)
12
805
59
−
(4)
3
863
198
105
(8)
4
299
106
11
(4)
1
413
1,822
370
(12)
(70)
26
2,136
415
(47)
−
(52)
6
2,458
606
202
(9)
(70)
10
739
211
(45)
11
(52)
2
866
198
216
891
1,142
506
450
1,397
1,592
(1)
(2)
(3)
As at October 31, 2023, contractual commitments related to the head office building under construction stood at $86 million, covering a period up to 2025.
During the year ended October 31, 2023, the Bank started occupying certain floors of the new head office building under construction. As a result, an amount related to significant
components being utilized was transferred to their corresponding asset categories.
During the year ended October 31, 2023, the Bank recorded $11 million in impairment losses related to right-of-use assets (no amount was recorded during the year ended
October 31, 2022). These impairment losses were recognized in the Non-interest expenses – Occupancy item of the Consolidated Statement of Income and reported in the Other heading of
segment results.
Assets Leased Under Operating Leases
The Bank is a lessor under operating lease agreements for certain buildings. These leases have terms varying from one year to five years and do not contain
any bargain purchase options or contingent rent.
The future minimum payments receivable under these operating leases total $6 million and include sublease revenues of $5 million related to real estate right-
of-use assets.
National Bank of Canada
2023 Annual Report
187
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 10 – Premises and Equipment (cont.)
Leases Recognized in the Consolidated Statement of Income
Year ended October 31
Interest expense
Expense for leases of low-value assets(1)
Expense relating to variable lease payments
Income from leasing and subleasing(2)
(1)
(2)
The expense relates to lease payments for low-value assets that are part of the exemptions permitted by the practical expedients of IFRS 16.
These amounts for the years ended October 31, 2023 and 2022 include variable lease payments of $2 million.
For the year ended October 31, 2023, the cash outflows for leases amounted to $229 million (2022: $218 million).
2023
17
10
100
4
2022
16
9
94
4
Note 11 – Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying amounts of goodwill by cash-generating unit (CGU) and by business segment for the years ended
October 31, 2023 and 2022.
Personal and
Commercial(1)
Wealth
Management
Financial
Markets(1)
Third-Party
Solutions(1)
256
Securities
Brokerage(1)
434
Managed
Solutions(1)
269
−
256
−
256
−
434
−
434
−
269
−
269
54
−
54
−
54
Total
959
−
959
−
959
Credigy
Ltd.(1)
31
Advanced
Bank of Asia
Limited(1)
124
3
34
−
34
12
136
2
138
235
−
235
−
235
USSF&I
Total
155
15
170
2
172
Other
Flinks
Technology
Inc.(1)
101
Total
1,504
−
101
15
1,519
−
101
2
1,521
Balance as at October 31, 2021
Impact of foreign currency
translation
Balance as at October 31, 2022
Impact of foreign currency
translation
Balance as at October 31, 2023
(1)
Constitutes a CGU.
Goodwill Impairment Testing and Significant Assumptions
For impairment testing purposes, goodwill resulting from a business combination must be allocated, as of the acquisition date, to a CGU or 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, 2023 and 2022, 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 after-tax cash flows. Future after-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, 2023, for each CGU or CGU group, the discount rate (after tax) used was 9.78% (9.48% as at October 31,
2022), and the long-term growth rate varied between 2% and 5%, depending on the CGU, as at October 31, 2023 and 2022.
188
National Bank of Canada
2023 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.
Intangible Assets
Cost
As at October 31, 2021
Acquisitions
Impairment losses(3)
Fully amortized intangible assets
Impact of foreign currency translation
As at October 31, 2022
Acquisitions
Disposals
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2023
Accumulated amortization
As at October 31, 2021
Amortization for the year
Impairment losses(3)
Fully amortized intangible assets
Impact of foreign currency translation
As at October 31, 2022
Amortization for the year
Disposals
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2023
Indefinite useful life
Finite useful life
Total
Management
contracts(1)
Trademark
Total
Internally-
generated
software(2)
Other
software
Other
intangible
assets
160
−
(1)
−
159
−
−
(1)
158
9
−
(1)
−
8
−
−
(1)
7
169
−
(2)
−
167
−
−
(2)
165
1,908
346
(7)
(138)
−
2,109
282
(19)
(315)
(168)
1,889
861
253
(2)
(138)
−
974
287
(6)
(240)
(168)
847
120
28
−
(21)
1
128
17
−
−
(18)
127
75
20
−
(21)
2
76
20
−
−
(18)
78
52
49
64
−
(2)
(2)
−
60
−
−
−
−
60
51
6
(1)
(2)
−
54
6
−
−
−
60
6
−
Total
2,092
374
(9)
(161)
1
2,297
299
(19)
(315)
(186)
2,076
987
279
(3)
(161)
2
1,104
313
(6)
(240)
(186)
985
2,261
374
(11)
(161)
1
2,464
299
(19)
(317)
(186)
2,241
987
279
(3)
(161)
2
1,104
313
(6)
(240)
(186)
985
1,193
1,091
1,360
1,256
Carrying value as at October 31, 2022
Carrying value as at October 31, 2023
159
158
8
7
167
165
1,135
1,042
(1)
(2)
(3)
For annual impairment testing purposes, management contracts are allocated to the Managed Solutions CGU.
The remaining amortization period for significant internally-generated software is four years.
During the year ended October 31, 2023, the Bank recorded $2 million in impairment losses resulting from the impairment test carried out on indefinite-life intangible assets ($2 million
during the year ended October 31, 2022) as well as an amount of $75 million related to internally-generated software for which the Bank has decided to cease its use or development
($5 million during the year ended October 31, 2022). The impairment losses related to internally-generated software were recognized in the Non-interest expenses – Technology item of the
Consolidated Statement of Income and reported in the Personal and Commercial ($59 million), Wealth Management ($8 million), Financial Markets ($7 million) segments and in the Other
heading ($1 million) of segment results.
National Bank of Canada
2023 Annual Report
189
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 12 – Other Assets
As at October 31
Receivables, prepaid expenses and other items
Interest and dividends receivable
Due from clients, dealers and brokers
Defined benefit asset (Note 23)
Deferred tax assets (Note 24)
Current tax assets
Reinsurance assets
Insurance assets
Commodities(1)
2023
3,126
1,605
538
356
634
925
14
147
544
7,889
2022
2,186
1,057
842
498
389
471
6
104
405
5,958
(1)
Commodities are recorded at fair value based on quoted prices in active markets and are classified in Level 1 of the fair value measurement hierarchy. The commodities were previously
presented in Receivables, prepaid expenses and other items.
Note 13 – Deposits
As at October 31
Personal
Business and government
Deposit-taking institutions
On demand(1)
4,335
66,823
1,579
72,737
After notice(2)
35,289
32,602
114
68,005
Fixed term(3)
48,259
97,903
1,269
147,431
2023
Total
87,883
197,328
2,962
288,173
2022
Total
78,811
184,230
3,353
266,394
(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 $17.7 billion amount of deposits as at
October 31, 2023 ($12.8 billion as at October 31, 2022) that are subject to the bank bail-in conversion regulations issued by the Government of Canada. These
regulations provide certain powers to the Canada Deposit Insurance Corporation (CDIC), notably the power to convert certain eligible Bank shares and
liabilities into common shares should the Bank become non-viable.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC Covered Bond
Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold
uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. During the year ended October 31, 2023,
the Bank issued 280 million Swiss francs and 1.0 billion euros in covered bonds, and 1.5 billion euros in covered bonds came to maturity (the Bank issued
1.3 billion euros, US$1.5 billion and 750 million pounds sterling in covered bonds, and 1.0 billion euros and US$1.0 billion in covered bonds came to maturity
during the year ended October 31, 2022). The covered bonds totalled $10.9 billion as at October 31, 2023 ($10.4 billion as at October 31, 2022). 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 $20.9 billion as at October 31, 2023 ($18.2 billion as at October 31, 2022), of which $20.6 billion ($17.9 billion as at
October 31, 2022) is presented in Residential mortgage loans on the Bank’s Consolidated Balance Sheet.
190
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 14 – Other Liabilities
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)
2023
2,458
224
2,022
517
669
94
176
28
208
11
1,016
7,423
2022
2,582
156
1,063
552
730
111
162
14
67
10
914
6,361
(1)
(2)
(3)
As at October 31, 2023, Other items included $42 million in litigation provisions ($11 million as at October 31, 2022).
As at October 31, 2023, Other items included $31 million in provisions for onerous contracts ($33 million as at October 31, 2022).
As at October 31, 2023, Other items included the financial liability resulting from put options written to non-controlling interests of Flinks for an amount of $23 million ($33 million as at
October 31, 2022).
Note 15 – Subordinated Debt
The subordinated debt represents direct unsecured obligations, in the form of notes and debentures, to the Bank’s debt holders. The rights of the Bank’s note
and debenture holders are subordinate to the claims of depositors and certain other creditors. Approval from OSFI is required before the Bank can redeem its
subordinated notes and debentures in whole or in part.
On February 1, 2023, the Bank redeemed $750 million of medium-term notes maturing on February 1, 2028 at a price equal to their nominal value plus accrued
interest.
On August 31, 2022, the Bank had 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 had issued medium-term notes for an amount of $750 million, bearing interest at 5.426% and maturing on August 16, 2032.
As at October 31
Maturity date
February 2028
August 2032(1)
Fair value hedge adjustment(4)
Unamortized issuance costs(5)
Total
Interest rate
Redemption date
3.183% February 1, 2023
5.426% (2) August 16, 2027(3)
2023
2022
−
750
750
−
(2)
748
750
750
1,500
2
(3)
1,499
(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 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.
(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)
(5)
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.
National Bank of Canada
2023 Annual Report
191
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 16 – Derivative Financial Instruments
Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, equity price, commodity price,
credit spread, or index.
The main types of derivative financial instruments used are presented below.
Forwards and Futures
Forwards and futures are contractual obligations to buy or 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.
Swaps
Swaps are over-the-counter contracts in which two parties agree to exchange cash flows. The Bank uses the following types of swap contracts:
Cross-currency swaps are transactions in which counterparties exchange fixed-rate interest payments and principal payments in different currencies.
Interest rate swaps are transactions in which counterparties exchange fixed- and floating-rate interest payments based on the notional principal value in
the same currency.
Commodity swaps are transactions in which counterparties exchange fixed- and floating-rate payments based on the notional principal value of a
commodity.
Equity swaps are transactions in which counterparties agree to exchange the return on one equity or group of equities for a payment based on 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.
Options
Options are agreements between two parties in which the writer of the option grants the buyer the right, but not the obligation, to buy or sell, either at a
specified date or dates or at any time prior to a predetermined expiry date, a specific amount of currency, commodity, or financial instrument at an agreed-
upon price upon the sale of the option. The writer receives a premium for the sale of this instrument.
192
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Notional Amounts(1)
As at October 31
Term to maturity
2023
2022
Interest rate contracts
OTC contracts
Forward rate agreements
Not settled by central counterparties
Swaps
Not settled by central counterparties
Settled by central counterparties
Options purchased
Options written
Exchange-traded contracts
Futures
Long positions
Short positions
Options purchased
Options written
Foreign exchange contracts
OTC contracts
Forwards
Swaps
Options purchased
Options written
Exchange-traded contracts
Futures
Long positions
Short positions
Equity, commodity and
credit derivative contracts(2)
OTC contracts
Forwards
Swaps
Not settled by central counterparties
Settled by central counterparties
Options purchased
Options written
Exchange-traded contracts
Futures
Long positions
Short positions
Options purchased
Options written
3 months
or less
Over 3
months to
12 months
Over 1
year to
5 years
Over
5 years
Total
contracts
Contracts held
for trading
purposes
Contracts
designated
as hedges
Total
contracts
8,077
1,035
−
−
9,112
9,112
−
8,505
3,681
192,142
−
602
204,502
12,381
24,066
14
14
36,475
32,985
259,006
16,564
17,596
326,151
69
28
97
11
31,001
176
4,976
51
36,215
1,913
19,161
10,536
10,187
41,797
645,237
10,571
222,675
996
785
236,062
29,624
30,587
−
−
60,211
13,430
98,177
15,029
19,312
145,948
−
−
−
−
19,684
99
315
468
20,566
621
2,135
1,880
2,324
6,960
469,747
72,130
391,902
4,347
5,126
473,505
2,463
8,765
−
−
11,228
7,590
109,135
4,445
4,253
125,423
−
−
−
3,568
20,439
6,417
916
2,459
33,799
411
1,146
2,204
3,677
7,438
651,393
54,055
141,129
2,044
2,106
199,334
140,437
947,848
7,387
8,619
1,113,403
138,135
876,491
7,265
8,088
1,039,091
2,302
71,357
122
531
74,312
121,384
921,657
5,919
9,010
1,066,475
−
−
−
−
−
629
34,523
−
−
35,152
−
−
−
−
9,909
708
12
351
10,980
85
3
−
137
225
245,691
44,468
63,418
14
14
107,914
54,634
500,841
36,038
41,161
632,674
69
28
97
44,468
63,418
14
14
107,914
54,634
480,017
36,038
41,161
611,850
69
28
97
3,579
3,579
81,033
7,400
6,219
3,329
101,560
3,030
22,445
14,620
16,325
56,420
2,012,068
80,889
7,400
6,219
3,329
101,416
3,030
22,445
14,620
16,325
56,420
1,916,788
−
−
−
−
−
−
20,824
−
−
20,824
−
−
−
−
144
−
−
−
144
28,472
62,205
3,000
1,362
95,039
82,172
515,684
34,831
39,477
672,164
72
55
127
3,735
65,569
4,633
1,822
2,371
78,130
−
−
−
−
−
95,280
4,789
13,452
9,142
11,490
38,873
1,950,808
(1)
(2)
Notional amounts are not presented in assets or liabilities on the Consolidated Balance Sheet. They represent the reference amount of the contract to which a rate or price is applied to
determine the amount of cash flows to be exchanged.
Includes precious metal contracts.
National Bank of Canada
2023 Annual Report
193
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 16 – Derivative Financial Instruments (cont.)
Credit Risk
Credit risk on derivative financial instruments is the risk of financial loss that the Bank will have to assume if a counterparty fails to honour its contractual
obligations. Credit risk related to derivative financial instruments is subject to the same credit approval, credit limit, and credit monitoring standards as those
applied to the Bank’s other credit transactions. Consequently, the Bank evaluates the creditworthiness of counterparties and manages the size of the
portfolios as well as the diversification and maturity profiles of these financial instruments.
The Bank limits the credit risk of over-the-counter contracts by dealing with creditworthy counterparties and entering into contracts that provide for the
exchange of collateral between parties where the fair value of the outstanding transactions exceeds an agreed threshold. The Bank also negotiates master
netting agreements that provide for the simultaneous close-out and settling of all transactions with a given counterparty 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.
Terms Used
Replacement Cost
Replacement cost is the Bank’s maximum credit risk associated with derivative financial instruments as at the Consolidated Balance Sheet date. This amount
is the positive fair value of all derivative financial instruments, before all master netting agreements and collateral held.
Credit Risk Equivalent
The credit risk equivalent amount is the total replacement cost plus an amount representing the potential future credit risk exposure, as outlined in OSFI’s
Capital Adequacy Requirements Guideline.
Risk-Weighted Amount
The risk-weighted amount is determined by applying the OSFI guidance to the credit risk equivalent.
Credit Risk Exposure of the Derivative Financial Instrument Portfolio
As at October 31
Interest rate contracts
Foreign exchange contracts
Equity, commodity and credit derivative contracts
Impact of master netting agreements
Replacement
cost
6,708
7,233
3,575
17,516
(8,032)
9,484
Credit risk
equivalent(1)
3,024
5,607
8,544
17,175
2023
Risk-
weighted
amount(1)
457
1,582
1,428
3,467
17,175
3,467
Replacement
cost
5,490
8,775
4,282
18,547
(9,583)
8,964
Credit risk
equivalent(1)
2,639
5,926
6,569
15,134
2022
Risk-
weighted
amount(1)
508
1,847
1,797
4,152
15,134
4,152
(1)
The amounts are presented net of the Impact of master netting agreements.
Credit Risk Exposure of the Derivative Financial Instrument Portfolio by Counterparty
As at October 31
OECD member-country governments
Banks of OECD member countries
Other
Replacement
cost
928
606
7,950
9,484
2023
Credit risk
equivalent
3,052
3,236
10,887
17,175
Replacement
cost
1,342
589
7,033
8,964
2022
Credit risk
equivalent
2,700
3,292
9,142
15,134
194
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Fair Value of Derivative Financial Instruments
As at October 31
Contracts held for trading purposes
Interest rate contracts
Forwards
Swaps
Options
Foreign exchange contracts
Forwards
Swaps
Options
Equity, commodity and credit derivative contracts
Forwards
Swaps
Options
Total – Contracts held for trading purposes
Contracts designated as hedges
Interest rate contracts
Swaps
Options
Foreign exchange contracts
Swaps
Equity, commodity and credit derivative contracts
Swaps
Total – Contracts designated as hedges
Designated as fair value hedges
Designated as cash flow hedges
Total fair value
Impact of master netting agreements
Note 17 – Hedging Activities
Positive
Negative
147
4,753
179
5,079
878
5,550
588
7,016
40
2,573
962
3,575
15,670
1,629
−
1,629
217
217
−
−
1,846
928
918
17,516
(8,032)
9,484
54
4,700
208
4,962
368
6,004
544
6,916
244
3,741
2,424
6,409
18,287
1,384
11
1,395
181
181
25
25
1,601
902
699
19,888
(8,032)
11,856
2023
Net
93
53
(29)
117
510
(454)
44
100
(204)
(1,168)
(1,462)
(2,834)
(2,617)
245
(11)
234
36
36
(25)
(25)
245
26
219
(2,372)
−
(2,372)
Positive
Negative
125
3,267
168
3,560
1,426
6,461
707
8,594
911
1,926
1,440
4,277
16,431
1,930
−
1,930
182
182
4
4
2,116
1,186
930
18,547
(9,583)
8,964
85
3,620
166
3,871
919
7,140
597
8,656
314
3,717
1,793
5,824
18,351
1,137
35
1,172
109
109
−
−
1,281
586
695
19,632
(9,583)
10,049
2022
Net
40
(353)
2
(311)
507
(679)
110
(62)
597
(1,791)
(353)
(1,547)
(1,920)
793
(35)
758
73
73
4
4
835
600
235
(1,085)
−
(1,085)
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, 2023.
The Bank has elected, as permitted under IFRS 9, to continue applying the hedge accounting requirements of IAS 39. Some of the tables present information on
currencies, specifically, the U.S. dollar (USD), the Australian dollar (AUD), the Canadian dollar (CAD), the Hong Kong dollar (HKD), the euro (EUR), the pound
sterling (GBP) and the Swiss franc (CHF).
National Bank of Canada
2023 Annual Report
195
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
Fair value hedges
Interest rate risk
Interest rate swaps
Notional amount – CDOR reform(1)
Notional amount – Other
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount
Average USD-AUD exchange rate
Average CAD-HKD exchange rate
Average USD-EUR exchange rate
Options
Notional amount – CDOR reform(1)
Notional amount – Other
Average fixed interest rate – Purchased
Average fixed interest rate – Written
Cash flow hedges
Interest rate risk
Interest rate swaps
Notional amount – CDOR reform(1)
Notional amount – Other
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount – CDOR reform(1)
Notional amount – Other
Average CAD-USD exchange rate
Average USD-EUR exchange rate
Average USD-GBP exchange rate
Average CHF-USD exchange rate
Equity price risk
Equity swaps
Notional amount – CDOR reform(1)
Average price
Hedges of net investments
in foreign operations(2)
Foreign exchange risk
Cross-currency swaps
Notional amount
Average CAD-USD exchange rate
Average USD-HKD exchange rate
1 year
or less
Over 1
year to
2 years
Over 2
years to
5 years
Over
5 years
Term to maturity
2023
Fair value
2022
Fair value
Total
Assets Liabilities
Total
Assets Liabilities
594
10,515
2,850
2,317
3,527
9,768
638
6,268
7,609
28,868
0.4 %
5.3 %
1.2 %
3.4 %
2.2 %
3.0 %
3.3 %
3.3 %
2.1 %
4.1 %
10,730
11,559
1.7 %
2.0 %
928
858
1,176
527
−
−
−
−
−
−
−
−
−
−
−
−
112
$ 0.6943
−
$ 1.0513
112
$ 0.6943
−
$ 1.0513
−
−
33
11
192
$ 0.7381
$ 0.1621
$ 1.0513
10
24
−
35
−
−
−
11,109
−
−
−
5,167
122
(1.3) %
−
13,417
531
−
2.4 %
−
653
(1.3) %
2.4 %
30
959
(1.2) %
2.8 %
7,549
37,242
928
902
23,470
1,186
586
371
6,020
1,605
3,643
3,693
18,759
1,550
1,541
7,219
29,963
2.8 %
3.1 %
3.5 %
0.7 %
3.4 %
2.5 %
3.5 %
3.4 %
3.3 %
2.6 %
12,400
20,455
1.9 %
1.9 %
701
526
754
610
217
148
172
85
391
3,301
$ 1.3112
$ 1.1534
$ 1.2853
−
1,225
4,337
$ 1.3093
$ 1.1487
−
−
2,297
9,151
$ 1.3161
$ 1.1308
$ 1.1945
$ 1.0064
−
−
−
−
−
−
3,913
16,789
$ 1.3133
$ 1.1402
$ 1.2207
$ 1.0064
3,888
9,202
$ 1.2972
$ 1.1691
$ 1.2375
144
$ 101.63
10,227
−
−
10,810
−
−
33,900
−
−
3,091
144
$ 101.63
58,028
−
25
918
699
136
$ 86.36
46,081
4
−
930
695
10
$ 1.3209
$ 0.1280
10
21,346
−
−
−
−
15,977
−
−
−
−
47,317
−
−
−
−
10,640
10
$ 1.3209
$ 0.1280
10
95,280
−
−
−
1,846
−
1,601
10
$ 1.3802
$ 0.1275
10
69,561
−
−
−
2,116
−
1,281
(1)
(2)
Includes only contracts that reference CDOR and that mature after June 28, 2024.
As at October 31, 2023, the Bank also designated $1,892 million in foreign currency deposits denominated in U.S. dollars as net investment hedging instruments ($1,410 million as at
October 31, 2022).
196
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Fair Value Hedges
Fair value hedge transactions consist of using derivative financial instruments (interest rate swaps and options) to hedge changes in the fair value of a
financial asset or financial liability caused by interest rate fluctuations. Changes in the fair values of 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 assess hedge effectiveness and determine the hedge ratio. For fair value hedges, the main source of potential hedge
ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show amounts related to hedged items as well as the results of the fair value hedges.
Carrying value
of hedged
items
6,068
2,882
17,728
4,155
Carrying value
of hedged
items
6,805
6,488
5,803
682
2
As at October 31, 2023
Cumulative
adjustments
from
discontinued
hedges
(211)
(224)
(168)
13
Cumulative
hedge
adjustments
from active
hedges
(332)
(213)
(606)
(186)
Year ended October 31, 2023
Gains (losses)
on the hedged
items for
ineffectiveness
measurement(1)
(191)
(12)
214
202
213
Gains (losses)
on the hedging
instruments for
ineffectiveness
measurement(1)
189
28
(219)
(202)
(204)
Hedge
ineffectiveness(1)
(2)
16
(5)
−
9
As at October 31, 2022
Cumulative
adjustments
from
discontinued
hedges
(53)
(231)
9
68
2
Cumulative
hedge
adjustments
from active
hedges
(529)
(332)
(595)
(3)
−
Year ended October 31, 2022
Gains (losses)
on the hedged
items for
ineffectiveness
measurement(1)
(588)
(415)
682
3
−
(318)
Gains (losses)
on the hedging
instruments for
ineffectiveness
measurement(1)
589
453
(677)
(3)
−
362
Hedge
ineffectiveness(1)
1
38
5
−
−
44
Securities at fair value through other comprehensive income
Mortgages
Deposits
Liabilities related to transferred receivables
Securities at fair value through other comprehensive income
Mortgages
Deposits
Liabilities related to transferred receivables
Subordinated debt
(1)
Amounts are presented on a pre-tax basis.
National Bank of Canada
2023 Annual Report
197
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
Cash Flow Hedges
Cash flow hedge transactions consist of using interest rate swaps to hedge the risk of changes in future cash flows caused by floating-rate assets or liabilities.
In addition, the Bank sometimes uses cross-currency swaps to hedge the foreign exchange risk caused by assets or liabilities denominated in foreign
currencies. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not
distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this
strategy mainly to its loan, personal credit line, acceptance, and deposit portfolios as well as liabilities related to transferred receivables.
The Bank also uses total return swaps to hedge the risk of changes in future cash flows related to the Restricted Stock Unit (RSU) Plan. Some of these swaps
are designated as part of a cash flow hedge against a portion of the unrecognized obligation of the RSU Plan. In cash flow hedges, the derivative financial
instruments used as hedging instruments reduce the variability of the future cash flows related to the hedged items.
Regression analysis is used to assess hedge effectiveness and to determine the hedge ratio. For cash flow hedges, the main source of potential hedge
ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show the amounts related to hedged items as well as the results of the cash flow hedges.
Interest rate risk
Loans
Deposits
Acceptances
Liabilities related to transferred
receivables
Equity price risk
Other liabilities
As at October 31, 2023
Year ended October 31, 2023
Accumulated
other
comprehensive
incomefrom
active hedges
Accumulated
other
comprehensive
incomefrom
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
incomeas the
effective portion
of the hedging
instrument(1)
Losses (gains)
reclassified to
Netinterest
income(1)
(170)
127
59
11
27
(16)
11
(240)
117
266
49
192
−
192
127
(666)
(54)
6
(587)
17
(570)
(131)
667
52
(6)
582
(17)
565
(3)
8
−
−
5
−
5
(127)
223
52
(6)
142
(17)
125
128
(17)
(52)
(25)
34
−
34
As at October 31, 2022
Year ended October 31, 2022
Accumulated
other
comprehensive
income from
active hedges
Accumulated
other
comprehensive
income from
discontinued
hedges
Gains (losses) on
hedged items for
ineffectiveness
measurement(1)
Gains (losses) on
hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
Unrealized gains
(losses) included
in Other
comprehensive
income as the
effective portion
of the hedging
instrument(1)
Losses (gains)
reclassified to
Net interest
income(1)
Interest rate risk
Loans
Deposits
Acceptances
Liabilities related to transferred
receivables
Equity price risk
Other liabilities
(1)
Amounts are presented on a pre-tax basis.
(169)
28
210
64
133
−
133
(241)
10
115
27
(89)
−
(89)
357
257
(253)
(54)
307
47
354
(356)
(253)
255
55
(299)
(47)
(346)
−
−
2
1
3
−
3
(356)
62
253
54
13
(47)
(34)
33
−
23
(11)
45
−
45
198
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Hedges of Net Investments in Foreign Operations
The Bank’s structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. The Bank
measures this risk by assessing the impact of foreign currency fluctuations and hedges it using derivative and non-derivative financial instruments (cross-
currency swaps and deposits). In a hedge of a net investment in a foreign operation (net investment hedge), the financial instruments used offset the foreign
exchange gains and losses on the investments. When non-derivative financial instruments are designated as foreign exchange risk hedges, only the changes
in fair value that are attributable to foreign exchange risk are taken into account when assessing and calculating the effectiveness of the hedge.
Assessing the effectiveness of net investment hedges consists of comparing changes in the carrying value of the deposits or the fair value of the derivative
attributable to exchange rate fluctuations with changes in the net investment in a foreign operation attributable to exchange rate fluctuations. Inasmuch as the
notional amount of the hedging instruments and the hedged net investments are aligned, no ineffectiveness is expected.
The following tables present the amounts related to hedged items as well as the results of the net investment hedges.
Net investments in foreign
operations denominated in:
USD
As at October 31, 2023
Year ended October 31, 2023
Accumulated
other
comprehensive
incomefrom
active hedges
Accumulated
other
comprehensive
incomefrom
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
incomeas the
effective portion
of the hedging
instrument(1)
Losses (gains)
reclassified to
the Non-interest
income(1)
38
(353)
66
(66)
−
(66)
−
As at October 31, 2022
Year ended October 31, 2022
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(1)
Net investments in foreign
operations denominated in:
USD
(1)
Amounts are presented on a pre-tax basis.
26
(276)
166
(166)
−
(166)
−
National Bank of Canada
2023 Annual Report
199
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
Reconciliation of Equity Components
The following table presents a reconciliation by risk category of Accumulated other comprehensive income attributable to hedge accounting.
As at October 31
Balance at beginning
Hedges of net investments in foreign operations(1)
Gains (losses) included as the effective portion
Net foreign currency translation gains (losses) on investments
in foreign operations
Cash flow hedges(1)
Gains (losses) included as the effective portion
Interest rate risk
Equity price risk
Losses (gains) reclassified to Net interest income
Interest rate risk
Income taxes
Balance at end
(1)
Amounts are presented on a pre-tax basis.
Net gains (losses) on
cash flow hedges
31
2023
Net foreign currency
translation
adjustments
204
Net gains (losses)
on cash flow hedges
23
2022
Net foreign currency
translation
adjustments
(129)
(66)
152
17
307
(166)
458
41
204
13
(47)
45
(3)
31
142
(17)
34
(44)
146
200
National Bank of Canada
2023 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
Authorized
Common Shares
An unlimited number of shares without par value.
First Preferred Shares
An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $5 billion.
First Preferred Shares and Other Equity Instruments
Redemption and
conversion date(1)(2)
Redemption
price per
share or LRCN ($)(1)
Convertible into
preferred shares(2)
Dividend per
share ($) or
interest rate per
LRCN(3)
As at October 31, 2023
Reset premium of
the dividend rate or
interest rate
First preferred shares
issued and outstanding
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, 2027 (5)(6)
May 15, 2028 (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)
0.43919 (7)
0.36363 (7)
0.30938 (8)
Other equity instruments
issued and outstanding
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)
First preferred shares
authorized but not issued
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, 2027 (5)
May 15, 2028 (5)
November 15, 2023 (5)
25.00 (12)
25.00 (12)
25.00 (12)
25.00 (12)
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, on February 16, 2020 for Series 32, on November 16, 2022 for Series 38, and on May 16,
2023 for Series 40 and ending on the redemption date. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per share determined by multiplying the rate
of interest equal to the sum of the five-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00, plus the reset premium.
The dividend amount is set for the initial period ending on the date fixed for redemption. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per share
determined by multiplying the rate of interest equal to the sum of the five-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00, plus the reset
premium.
National Bank of Canada
2023 Annual Report
201
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, 2023, no shares had been issued or
traded.
Shares and Other Equity Instruments Outstanding
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
Number
of shares or LRCN
Shares or LRCN
$
Number
of shares or LRCN
Shares or LRCN
$
2023
2022
14,000,000
12,000,000
16,000,000
12,000,000
12,000,000
66,000,000
500,000
500,000
500,000
1,500,000
67,500,000
336,582,124
1,678,321
−
31,975
(7,791)
338,284,629
350
300
400
300
300
1,650
500
500
500
1,500
3,150
3,196
95
−
3
−
3,294
14,000,000
12,000,000
16,000,000
12,000,000
12,000,000
66,000,000
500,000
500,000
500,000
1,500,000
67,500,000
337,912,283
1,193,663
(2,500,000)
(18,295)
(5,527)
336,582,124
350
300
400
300
300
1,650
500
500
500
1,500
3,150
3,160
61
(24)
(1)
−
3,196
(1)
As at October 31, 2023, a total of 26,725 shares were sold short for trading, representing an amount of $3 million (5,250 shares were held for trading, representing a negligible amount as
at October 31, 2022).
202
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Dividends Declared and Distributions on Other Equity Instruments
Year ended October 31
First Preferred Shares
Series 30
Series 32
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)
(2)
(3)
The LRCN – Series 1 bear interest at a fixed rate of 4.30% per annum.
The LRCN – Series 2 bear interest at a fixed rate of 4.05% per annum.
The LRCN – Series 3 bear interest at a fixed rate of 7.50% per annum.
Dividends or interest
$
14
12
28
16
14
84
21
20
38
79
163
1,344
1,507
2023
Dividends
per share
1.0063
0.9598
1.7568
1.3023
1.2375
3.9800
Dividends or interest
$
14
12
18
14
14
72
21
20
6
47
119
1,206
1,325
2022
Dividends
per share
1.0063
0.9598
1.1125
1.1500
1.2375
3.5800
Issuances of Other Equity Instruments
On September 8, 2022, the Bank had 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.
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 3 are redeemable at maturity or earlier to the extent that the
Bank redeems the 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 3 satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under
Basel III.
National Bank of Canada
2023 Annual Report
203
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 18 – Share Capital and Other Equity Instruments (cont.)
Repurchases of Common Shares
On December 12, 2022, the Bank began a normal course issuer bid to repurchase for cancellation up to 7,000,000 common shares (representing
approximately 2.1% of its then outstanding common shares) over the 12-month period ending on December 11, 2023. On December 10, 2021, the Bank had
begun a normal course issuer bid to repurchase for cancellation up to 7,000,000 common shares (representing approximately 2% of its then outstanding
common shares) over the 12-month period ended December 9, 2022. Any repurchase through the Toronto Stock Exchange is done at market prices. The
common shares may also be repurchased through other means authorized by the Toronto Stock Exchange and applicable regulations, including private
agreements or share repurchase programs under issuer bid exemption orders issued by the securities regulators. A private purchase made under an
exemption order issued by a securities regulator will be done at a discount to the prevailing market price. The amounts that are paid above the average book
value of the common shares are charged to Retained earnings. During the year ended October 31, 2023, the Bank did not repurchase any common shares.
During the year ended October 31, 2022, the Bank had repurchased 2,500,000 common shares for $245 million, which had reduced Common share capital by
$24 million and Retained earnings by $221 million.
Reserved Common Shares
As at October 31, 2023 and 2022, there were 15,507,568 common shares reserved under the Dividend Reinvestment and Share Purchase Plan. As at
October 31, 2023, there were 20,063,688 common shares reserved under the Stock Option Plan (21,742,009 as at October 31, 2022).
Restriction on the Payment of Dividends
The Bank is prohibited from declaring dividends on its common or preferred shares if there are reasonable grounds for believing that the Bank would, by so
doing, be in contravention of the regulations of the Bank Act (Canada) or OSFI’s capital adequacy and liquidity guidelines. In addition, the ability to pay
common share dividends is restricted by the terms of the outstanding preferred shares pursuant to which the Bank may not pay dividends on its common
shares without the approval of the holders of the outstanding preferred shares, unless all preferred share dividends have been declared and paid or set aside
for payment.
Dividend Reinvestment and Share Purchase Plan
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.
Note 19 – Non-Controlling Interests
As at October 31
Flinks Technology Inc.(1)
(1)
As at October 31, 2023 and 2022, the non-controlling interest in Flinks stood at 14.1%.
2023
2
2022
2
204
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 20 – Capital Disclosure
Capital Management Objectives, Policies and Procedures
Capital management has a dual role of ensuring a competitive return to the Bank’s shareholders while maintaining a solid capital foundation that covers the
risks inherent to the Bank’s business, supports its business segments, and protects its clients.
The Bank’s capital management policy defines the guiding principles as well as the roles and responsibilities regarding its internal capital adequacy
assessment process. This process is a key tool in establishing the Bank’s capital strategy and is subject to quarterly reviews and periodic amendments.
Capital Management
Capital ratios are obtained by dividing 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 11.0%,
a Tier 1 capital ratio of at least 12.5%, and a Total capital ratio of at least 14.5%. All of these ratios include a capital conservation buffer of 2.5% established by
the Basel Committee on Banking Supervision and OSFI, a 1.0% surcharge applicable solely to Domestic Systemically Important Banks (D-SIBs), and a 3.0%
domestic stability buffer. On December 8, 2022, OSFI expanded the domestic stability buffer range, setting it at 0% to 4.0% instead of the previous range of
0% to 2.5%, and it announced that the domestic stability buffer would rise from 2.5% to 3.0% effective February 1, 2023. On June 20, 2023, OSFI raised the
buffer by 50 bps to 3.5% effective November 1, 2023. The domestic stability buffer must consist 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 must provide a remediation plan to OSFI. The Bank must also
meet the requirements of an updated capital output floor that will ensure that its total calculated RWA is not below 72.5% of the total RWA as calculated under
the Basel III Standardized Approaches. OSFI is allowing a phase-in of the floor factor over three years, starting at 65.0% in the second quarter of 2023 and
rising 2.5% per year to reach 72.5% in fiscal 2026. If the capital requirement is less than the capital output floor requirement after applying the floor factor, the
difference is added to total RWA. Lastly, OSFI requires D-SIBs to maintain a Basel III leverage ratio of at least 3.5%. Effective February 1, 2023, OSFI increased
the leverage ratio minimum requirement by imposing a Tier 1 capital buffer of 0.5% applicable only to D-SIBs.
OSFI also requires D-SIBs to maintain a risk-based total loss-absorbing capacity (TLAC) ratio of at least 24.5% (including the domestic stability buffer) of risk-
weighted assets and a TLAC leverage ratio of at least 7.25% (increase of 0.5% since February 1, 2023). 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.
In the second quarter of 2023, the Bank implemented OSFI’s finalized guidance relating to the Basel III reforms, consisting primarily of:
a revised Standardized Approach and Internal Ratings-Based (IRB) Approach for credit risk;
a revised Standardized Approach for operational risk;
a revised capital output floor;
a revised Leverage Ratio Framework; and
revised Pillar 3 disclosure requirements.
The Basel III reforms also affected the market risk and credit valuation adjustment (CVA) risk frameworks, which will be implemented in the first quarter of
2024.
During the years ended October 31, 2023 and 2022, the Bank was in compliance with all of OSFI’s regulatory capital, leverage, and TLAC requirements.
National Bank of Canada
2023 Annual Report
205
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 20 – Capital Disclosure (cont.)
Regulatory Capital(1), Leverage Ratio(1) and TLAC(2)
As at October 31
Capital
CET1
Tier 1
Total
Risk-weighted assets
Total exposure
Capital ratios
CET1
Tier 1
Total
Leverage ratio
Available TLAC
TLAC ratio
TLAC leverage ratio
2023
2022
16,920
20,068
21,056
125,592
456,478
13.5 %
16.0 %
16.8 %
4.4 %
36,732
29.2 %
8.0 %
14,818
17,961
19,727
116,840
401,780
12.7 %
15.4 %
16.9 %
4.5 %
32,351
27.7 %
8.1 %
(1)
(2)
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. The calculation of the figures as at October 31, 2022 had included the transitional measure applicable to expected credit loss
provisioning and the temporary measure regarding the exclusion of central bank reserves implemented by OSFI in response to the COVID-19 pandemic. These provisions ceased to apply on
November 1, 2022 and April 1, 2023, respectively.
Available TLAC, the TLAC ratio, and the TLAC leverage ratio are calculated in accordance with OSFI's Total Loss Absorbing Capacity Guideline.
Note 21 – Trading Activity Revenues
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 and certain interest income related to the
financing of these financial assets and liabilities, net of interest expenses.
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, realized and unrealized gains and losses as well as interest expenses on obligations
related to securities sold short, certain commission income as well as other income related to trading activities, and any applicable transaction costs.
Year ended October 31
Net interest income (loss)
Non-interest income
Trading revenues (losses)
Other revenues
2023
(1,816)
2,677
19
2,696
880
2022
682
543
5
548
1,230
206
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 22 – Share-Based Payments
The compensation expense information provided below excludes the impact of hedging.
Stock Option Plan
The Bank’s Stock Option Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, options are awarded annually and
provide participants with the right to purchase common shares at an exercise price equal to the closing price of the Bank’s common share on the Toronto Stock
Exchange on the day preceding the award. The options vest evenly over a four-year period and expire ten years from the award date or, in certain
circumstances set out in the plan, within specified time limits. The Stock Option Plan contains provisions for retiring employees that allow the participant’s
rights to continue vesting in accordance with the stated terms of the award agreement. The maximum number of common shares that may be issued under the
Stock Option Plan was 20,063,688 as at October 31, 2023 (21,742,009 as at October 31, 2022). The number of common shares reserved for a participant may
not exceed 5% of the total number of Bank shares issued and outstanding.
As at October 31
Stock Option Plan
Outstanding at beginning
Awarded
Exercised
Cancelled(1)
Outstanding at end
Exercisable at end
Number of
options
11,861,749
1,416,060
(1,678,321)
(52,800)
11,546,688
7,471,041
2023
Weighted
average
exercise price
$
$
$
$
$
$
64.80
94.05
50.43
87.49
70.37
61.18
Number of
options
11,348,680
1,771,588
(1,193,663)
(64,856)
11,861,749
7,344,536
(1)
Includes 8,096 expired options during the year ended October 31, 2023 (27,714 expired options during the year ended October 31, 2022).
Exercise price
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
$71.86
$71.55
$96.35
$94.05
Options
outstanding
368,469
813,888
727,265
770,928
1,063,142
1,341,590
1,478,183
1,857,658
1,728,733
1,396,832
11,546,688
Options
exercisable
368,469
813,888
727,265
770,928
1,063,142
1,341,590
1,075,695
884,810
425,254
−
7,471,041
2022
Weighted
average
exercise price
$
$
$
$
$
$
57.93
96.35
45.73
76.10
64.80
55.50
Expiry date
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
December 2029
December 2030
December 2031
December 2032
During the year ended October 31, 2023, the Bank awarded 1,416,060 stock options (1,771,588 stock options during the year ended October 31, 2022) with
an average fair value of $14.76 per option ($13.24 for the year ended October 31, 2022).
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
2023
3.25%
7 years
23.13%
4.23%
2022
1.79%
7 years
22.68%
3.88%
National Bank of Canada
2023 Annual Report
207
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, 2023, an $18 million compensation expense related to this plan was recognized in the Consolidated Statement of Income
($17 million for the year ended October 31, 2022).
Stock Appreciation Rights (SAR) Plan
The SAR Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, participants receive, upon exercising the right, a
cash amount equal to the difference between the closing price of the Bank’s common share on the Toronto Stock Exchange on the day preceding the exercise
date and the closing price on the day preceding the award date. SARs vest evenly over a four-year period and expire 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 years ended October 31, 2023 and 2022, a negligible compensation
expense related to this plan was recognized in the Consolidated Statement of Income.
As at October 31
SAR Plan(1)
Outstanding at beginning
Awarded
Exercised
Outstanding at end
Exercisable at end
(1)
No SARs cancelled or expired during the years ended October 31, 2023 and 2022.
Exercise price
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
$71.86
$71.55
$96.35
$94.05
Number
of SARs
207,841
19,072
(41,241)
185,672
124,531
SARs
outstanding
9,886
28,824
19,748
16,320
16,236
16,604
22,266
15,252
21,464
19,072
185,672
2023
Weighted
average
exercise price
$
$
$
$
$
60.73
94.05
55.64
65.29
55.53
SARs
exercisable
9,886
28,824
19,748
16,320
16,236
16,604
11,547
−
5,366
−
124,531
Number
of SARs
266,075
21,464
(79,698)
207,841
130,319
2022
Weighted
average
exercise price
$
$
$
$
$
57.61
96.35
59.89
60.73
51.31
Expiry date
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
December 2029
December 2030
December 2031
December 2032
Deferred Stock Unit (DSU) Plans
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 all units in accordance with the stated terms of the award agreement.
During the year ended October 31, 2023, the Bank awarded 37,477 DSUs at a weighted average price of $97.45 (39,227 DSUs at a weighted average price of
$97.10 for the year ended October 31, 2022). A total of 483,735 DSUs were outstanding as at October 31, 2023 (551,539 DSUs as at October 31, 2022). For
the year ended October 31, 2023, a $3 million compensation expense related to these plans was recognized in the Consolidated Statement of Income
($1 million for the year ended October 31, 2022).
208
National Bank of Canada
2023 Annual Report
sed
n
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Restricted Stock Unit (RSU) Plan
The RSU Plan is for certain officers and other designated persons of the Bank and its subsidiaries. The objective of this plan is to ensure that the compensation
of certain officers and other designated persons is competitive and to foster retention. An RSU represents a right that has a value equal to the average closing
price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December. RSUs
generally vest evenly over three years, although some RSUs vest on the sixth business day of December of the third year following the 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, 2023, the Bank awarded 2,058,936 RSUs at a weighted average price of $96.42 (1,895,489 RSUs at a weighted average
price of $99.59 for the year ended October 31, 2022). As at October 31, 2023, a total of 4,382,431 RSUs were outstanding (4,203,383 RSUs as at
October 31, 2022). For the year ended October 31, 2023, a $173 million compensation expense related to this plan was recognized in the Consolidated
Statement of Income ($172 million for the year ended October 31, 2022).
Performance Stock Unit (PSU) Plan
The PSU Plan is for officers and other designated persons of the Bank. The objective of this plan is to tie a portion of the value of the compensation of these
officers and other designated persons to the future value of the Bank’s common shares. A PSU represents a right that has a value equal to the average closing
price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December,
adjusted upward or downward according to performance criteria, which is based on the Bank’s total shareholder return (TSR) growth index over three years
compared to the average TSR growth index of the comparator group composed of Canadian banks over three years. PSUs vest on the sixth business day of
December of the third year following the 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, 2023, the Bank awarded 234,706 PSUs at a weighted average price of $96.42 (238,082 PSUs at a weighted average price of
$99.59 for the year ended October 31, 2022). As at October 31, 2023, a total of 745,764 PSUs were outstanding (739,359 PSUs as at October 31, 2022). For
the year ended October 31, 2023, a $27 million compensation expense related to this plan was recognized in the Consolidated Statement of Income
($30 million for the year ended October 31, 2022).
Deferred Compensation Plan
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, 2023, the Bank awarded 161,713 share units at a weighted average price of $94.90 (129,464 share units at a weighted
average price of $94.87 for the year ended October 31, 2022). As at October 31, 2023, a total of 2,229,248 share units were outstanding (2,036,524 share
units as at October 31, 2022). For the year ended October 31, 2023, a $3 million compensation expense related to this plan was recognized in the
Consolidated Statement of Income (a $19 million reversal of the compensation expense for the year ended October 31, 2022).
Employee Share Ownership Plan
Under the Bank’s Employee Share Ownership Plan, employees who meet the eligibility criteria can contribute up to 8% of their annual gross salary by way of
payroll deductions. The Bank matches 25% of the employee contribution up to a maximum of $1,500 per annum. Bank contributions vest to the employee after
one year of uninterrupted participation in the plan. Subsequent contributions vest immediately. The Bank’s contributions, amounting to $16 million for the
year ended October 31, 2023 ($15 million for the year ended October 31, 2022), were recognized when paid in the Compensation and employee benefits item
of the Consolidated Statement of Income. As at October 31, 2023, a total of 6,392,648 common shares were held for this plan (6,304,689 common shares as
at October 31, 2022).
Plan shares are purchased on the open market and are considered to be outstanding for earnings per share calculations. Dividends paid on the Bank’s
common shares held for the Employee Share Ownership Plan are used to purchase other common shares on the open market.
Plan Liabilities and Intrinsic Value
Total liabilities arising from the Bank’s share-based compensation plans amounted to $686 million as at October 31, 2023 ($716 million as at
October 31, 2022). The intrinsic value of these liabilities that had vested as at October 31, 2023 was $345 million ($359 million as at October 31, 2022).
National Bank of Canada
2023 Annual Report
209
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
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.
Defined Benefit Obligation, Assets of the Plans, and Funded Status
As at October 31
Defined benefit obligation
Balance at beginning
Current service cost
Interest cost
Remeasurements
Actuarial (gains) losses arising from changes in demographic assumptions
Actuarial (gains) losses arising from changes in financial assumptions
Actuarial (gains) losses arising from experience adjustments
Employee contributions
Benefits paid
Balance at end
Plan assets
Fair value at beginning
Interest income
Administration cost
Remeasurements
Return on plan assets (excluding interest income)
Bank contributions(1)
Employee contributions
Benefits paid
Fair value at end
Defined benefit asset (liability) at end
Pension plans – Defined
benefit component
2022
2023
Other post-employment
benefit plans
2022
2023
3,971
92
218
(40)
(163)
71
72
(201)
4,020
4,469
242
(3)
(329)
126
72
(201)
4,376
356
4,745
129
171
55
(1,063)
95
65
(226)
3,971
5,436
191
(3)
(1,113)
119
65
(226)
4,469
498
111
−
6
1
(3)
(12)
(9)
94
143
1
5
1
(24)
(6)
(9)
111
(94)
(111)
(1)
For fiscal 2024, the Bank expects to pay an employer contribution of $122 million to the defined benefit component of the pension plans.
210
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Defined Benefit Asset (Liability)
As at October 31
Defined benefit asset included in Other assets
Defined benefit liability included in Other liabilities
Pension plans – Defined
benefit component
2022
498
−
498
2023
356
−
356
Other post-employment
benefit plans
2022
2023
(94)
(94)
(111)
(111)
Cost for Pension Plans and Other Post-Employment Benefit Plans
Year ended October 31
Current service cost
Interest expense (income), net
Administration costs
Expense of the defined benefit component
Expense of the defined contribution component
Expense recognized in Netincome
Remeasurements(1)
Actuarial (gains) losses on the defined benefit obligation
Return on plan assets(2)
Remeasurements recognized in Othercomprehensiveincome
2023
92
(24)
3
71
11
82
(132)
329
197
279
Pension plans
2022
129
(20)
3
112
112
(913)
1,113
200
312
Other post-employment benefit plans
2022
1
5
2023
−
6
6
6
(14)
(14)
(8)
6
−
6
(29)
(29)
(23)
(1)
(2)
Changes related to the discount rate and to the return on plan assets are reviewed and updated on a quarterly basis. All other assumptions are updated annually.
Excludes interest income.
Allocation of the Fair Value of the Assets of the Defined Benefit Component of the Pensions
Plans
As at October 31
Asset classes
Cash and cash equivalents
Equity securities
Debt securities
Canadian government(2)
Canadian provincial and municipal governments
Other issuers
Other
Quoted
in an active
market(1)
Not quoted
in an active
market
−
841
(237)
−
−
−
604
378
1,300
−
2,128
171
(205)
3,772
2023
Total
378
2,141
(237)
2,128
171
(205)
4,376
Quoted
in an active
market(1)
Not quoted
in an active
market
−
988
114
−
−
−
1,102
273
1,150
−
1,769
264
(89)
3,367
2022
Total
273
2,138
114
1,769
264
(89)
4,469
(1)
(2)
Unadjusted quoted prices in active markets for identical assets that the Bank can access at the measurement date.
Includes obligations related to securities sold short.
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, 2023 and 2022, the assets of the pension plans do
not include any securities issued by the Bank.
For fiscal 2023, the Bank and its related entities received $20 million ($21 million in fiscal 2022) in fees from the pension plans for related management,
administration, and custodial services.
National Bank of Canada
2023 Annual Report
211
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.)
Allocation of the Defined Benefit Obligation by the Status of the Participants in the Defined
Benefit Component of the Pension Plans
As at October 31
Active employees
Retirees
Participants with deferred vested benefits
Weighted average duration of the
defined benefit obligation (in years)
Pension plans – Defined benefit component
2022
2023
Other post-employment benefit plans
2022
2023
41 %
54 %
5 %
100 %
14
41 %
53 %
6 %
100 %
14
3 %
97 %
7 %
93 %
100 %
100 %
10
10
Significant Actuarial Assumptions (Weighted Average)
Discount Rate
The discount rate assumption is based on an interest rate curve that represents the yields on corporate AA bonds. Short-term maturities are obtained using a
curve based on observed data from corporate AA bonds. Long-term maturities are obtained using a curve based on 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 4.94% as at October 31, 2023 (4.77% as at October 31, 2022). Based
on the assumption retained, this rate is expected to decrease gradually to 3.57% 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
Defined benefit obligation
Discount rate
Rate of compensation increase
Health care cost trend rate
Life expectancy (in years) at 65 for a participant currently at
Age 65
Men
Women
Age 45
Men
Women
Pension plans – Defined benefit component
2022
2023
Other post-employment benefit plans
2022
2023
5.65 %
4.00 %
5.45 %
3.00 %
22.4
24.8
23.4
25.7
22.4
24.7
23.4
25.6
5.65 %
2.00 %
4.94 %
22.4
24.8
23.4
25.7
5.45 %
3.00 %
4.77 %
22.4
24.7
23.4
25.6
212
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Year ended October 31
Pension plan expense
Discount rate – Current service
Discount rate – Interest expense (income), net
Rate of compensation increase
Health care cost trend rate
Life expectancy (in years) at 65 for a participant currently at
Age 65
Men
Women
Age 45
Men
Women
Pension plans – Defined benefit component
2022
2023
Other post-employment benefit plans
2022
2023
5.45 %
5.45 %
4.00 %
3.70 %
3.55 %
3.00 %
22.4
24.7
23.4
25.6
21.4
23.7
22.4
24.7
5.45 %
5.45 %
2.00 %
4.77 %
22.4
24.7
23.4
25.6
3.70 %
3.55 %
3.00 %
4.52 %
21.4
23.7
22.4
24.7
Sensitivity of Significant Assumptions for 2023
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, 2023. These impacts are hypothetical and should be interpreted with caution, as changes in each significant
assumption may not be linear.
As at October 31, 2023
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
Projected Benefit Payments
Year ended October 31
2024
2025
2026
2027
2028
2029 to 2033
Pension plans – Defined
benefit component
Change in the obligation
(509)
642
26
(25)
(81)
78
Other post-employment
benefit plans
Change in the obligation
(3)
3
4
(3)
(1)
1
Pension plans – Defined
benefit component
209
217
226
233
239
1,310
Other post-employment
benefit plans
10
9
9
8
8
41
National Bank of Canada
2023 Annual Report
213
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 24 – Income Taxes
The Bank’s income tax expense reported in the consolidated financial statements is as follows.
Year ended October 31
Consolidated Statement of Income
Current taxes
Current year
Canada Recovery Dividend(1)
Change in income tax rate(1)
Prior period adjustments
Deferred taxes
Origination and reversal of temporary differences
Change in income tax rate(1)
Prior period adjustments
Consolidated Statement of Changes in Equity
Share issuance expenses, other equity instruments and other
Consolidated Statement of Comprehensive Income
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
Income taxes
The breakdown of the income tax expense is as follows.
Year ended October 31
Current taxes
Deferred taxes
2023
2022
776
32
10
48
866
(148)
(18)
(63)
(229)
637
(23)
(43)
44
(63)
(9)
(71)
543
2023
774
(231)
543
803
(19)
784
110
−
110
894
(14)
(45)
3
216
(90)
84
964
2022
933
31
964
(1)
During the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million tax recovery related to the 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred
taxes for fiscal 2022.
214
National Bank of Canada
2023 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.
Deferred tax assets
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(1)
Deferred tax liabilities
Premises and equipment and intangible assets
Defined benefit asset – Pension plans
Investments in associates
Other items
Net deferred tax assets (liabilities)
As at October 31
Consolidated
Balance Sheet
2022
Year ended October 31
Consolidated Statement
of Income
2022
2023
Year ended October 31
Consolidated Statement
of Comprehensive Income
2022
2023
235
317
38
23
118
62
35
32
860
(312)
(127)
(2)
(44)
(485)
375
79
45
2
(23)
(10)
29
15
(1)
136
87
(3)
(2)
11
93
229
10
(37)
(1)
(34)
(14)
11
2
1
(62)
(13)
(2)
(2)
(31)
(48)
(110)
−
−
(4)
−
−
−
−
−
(4)
−
41
(8)
(27)
6
2
−
−
(8)
−
−
−
−
−
(8)
−
53
−
32
85
77
2023
314
362
36
−
108
91
50
31
992
(225)
(89)
(12)
(60)
(386)
606
(1)
As at October 31, 2023, the Consolidated Balance Sheet included a negligible amount of deferred tax asset related to share issuance costs ($2 million as at October 31, 2022) reported in
Retained earnings on the Consolidated Statement of Changes in Equity.
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
2023
634
(28)
606
2022
389
(14)
375
According to forecasts, which are based on information available as at October 31, 2023, 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, 2023, the total amount of temporary differences, unused tax loss carryforwards, and unused tax credits for which no deferred tax asset has
been recognized was $536 million ($561 million as at October 31, 2022).
As at October 31, 2023, 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 $5,762 million ($5,636 million as at October 31, 2022).
National Bank of Canada
2023 Annual Report
215
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 24 – Income Taxes (cont.)
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
Impact of enacted tax measures(1)
Tax rates of subsidiaries, foreign entities and associates
Other items
Income taxes reported in the Consolidated Statement of Income and
effective income tax rate
$
3,972
1,112
(310)
(1)
24
(178)
(10)
(475)
637
2023
%
100.0
28.0
(7.8)
−
0.6
(4.5)
(0.3)
(12.0)
16.0
$
4,277
1,133
(191)
(1)
(71)
24
(239)
894
2022
%
100.0
26.5
(4.5)
−
(1.7)
0.6
(5.6)
20.9
(1)
During the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million tax recovery related to the 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred
taxes for fiscal 2022.
Notice of Assessment
In March 2023, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $90 million (including
estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2018 taxation year.
In prior fiscal years, the Bank had been reassessed for additional income tax and interest of approximately $875 million (including provincial tax and interest)
in respect of certain Canadian dividends received by the Bank during the 2012-2017 taxation years.
In the reassessments, the CRA alleges that the dividends were received as part of a “dividend rental arrangement”.
In October 2023, the Bank filed a notice of appeal with the Tax Court of Canada, and the matter is now in litigation. The CRA may issue reassessments to the
Bank for taxation years subsequent to 2018 in regard to certain 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, 2023.
Canadian Government’s 2022 Tax Measures
On November 4, 2022, the Government of Canada introduced Bill C-32 – An Act to implement certain provisions of the fall economic statement tabled 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 April 7, 2022 budget. 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, as well as a 1.5% increase in the statutory tax rate. On
December 15, 2022, Bill C-32 received royal assent. Given that these tax measures were in effect at the financial reporting date, a $32 million tax expense for
the CRD and an $8 million tax recovery for the tax rate increase, including the impact related to current and deferred taxes for fiscal 2022, were recognized in
the consolidated financial statements for the year ended October 31, 2023.
Proposed Legislation
On November 28, 2023, the Government of Canada released draft legislation entitled An Act to implement certain provisions of the fall economic statement
tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023 to implement tax measures
applicable to the Bank. The measures include the denial of the deduction in respect of dividends received after 2023 on shares that are mark-to-market
property for tax purposes (except for dividends received on “taxable preferred shares” as defined in the Income Tax Act), as well as the application of a 2% tax
on the net value of equity repurchases occurring as of January 1, 2024.
In its March 28, 2023 budget, the Government of Canada also proposed to implement the Pillar 2 rules (global minimum tax) published by the Organisation for
Economic Co-operation and Development (OECD) for fiscal years beginning as of December 31, 2023. To date, the Pillar 2 rules have not yet been included in a
bill in Canada. During fiscal 2023, the Pillar 2 rules were included in a bill in certain jurisdictions where the Bank operates.
216
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 25 – Earnings Per Share
Diluted earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares
outstanding after taking into account the dilution effect of stock options using the treasury stock method and any gain (loss) on the redemption of preferred
shares.
Year ended October 31
Basic earnings per share
Net income attributable to the Bank’s shareholders and holders of other equity instruments
Dividends on preferred shares and distributions on other equity instruments
Net income attributable to common shareholders
Weighted average basic number of common shares outstanding (thousands)
Basic earnings per share (dollars)
Diluted earnings per share
Net income attributable to common shareholders
Weighted average basic number of common shares outstanding (thousands)
Adjustment to average number of common shares (thousands)
Stock options(1)
Weighted average diluted number of common shares outstanding (thousands)
Diluted earnings per share (dollars)
2023
2022
3,337
141
3,196
337,660
9.47
3,196
337,660
3,108
340,768
9.38
3,384
107
3,277
337,099
9.72
3,277
337,099
3,738
340,837
9.61
(1)
For the year ended October 31, 2023, 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. 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.
Note 26 – Guarantees, Commitments and Contingent Liabilities
Guarantees
The maximum potential amount of future payments represents the maximum risk of loss if there were a total default by the guaranteed parties, without
consideration of recoveries under recourse provisions 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
2023
8,339
10,101
147
2022
6,618
8,707
180
(1)
For additional information on allowances for credit losses related to off-balance-sheet commitments, see Note 7 to these consolidated financial statements.
Letters of Guarantee
In the normal course of business, the Bank issues letters of guarantee. These letters of guarantee represent irrevocable commitments that the Bank will make
payments in the event that a client cannot meet its obligations to third parties. The Bank’s policy for requiring collateral security with respect to letters of
guarantee is similar to that for loans. Generally, the term of these letters of guarantee is less than two years.
Backstop Liquidity and Credit Enhancement Facilities
Facilities to Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing asset-backed commercial paper.
The Bank provides backstop liquidity facilities to these multi-seller conduits. As at October 31, 2023, the notional amount of the global-style backstop liquidity
facilities totalled $4.6 billion ($3.2 billion as at October 31, 2022), 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.
National Bank of Canada
2023 Annual Report
217
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, 2023 and 2022, 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., $4.6 billion as at October 31, 2023 ($3.2 billion
as at October 31, 2022). As at October 31, 2023, the Bank held $67 million ($35 million as at October 31, 2022) of this commercial paper and, consequently,
the maximum potential amount of future payments, taking into account the credit enhancement facilities, was $4.5 billion ($3.2 billion as at October 31,
2022).
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 provided a liquidity facility. As at October 31, 2023, the notional amount of the overnight uncommitted liquidity facility amounted to $5.6 billion
($5.6 billion as at October 31, 2022). As at October 31, 2023 and 2022, no amount had been drawn.
Securities Lending
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.
Other Indemnification Agreements
In the normal course of business, including securitization transactions and discontinuances of businesses and operations, the Bank enters into numerous
contractual agreements under which it undertakes to compensate the counterparty for costs incurred as a result of litigation, changes in laws and regulations
(including tax legislation), claims with respect to past performance, incorrect representations or the non-performance of certain restrictive covenants. The Bank
also undertakes to indemnify any person acting as a director or officer or performing a similar function within the Bank or one of its subsidiaries or another
entity, at the request of the Bank, for all expenses incurred by that person in proceedings or investigations to which he or she is party in that capacity.
Moreover, as a member of a securities transfer network and pursuant to the membership agreement and the regulations governing the operation of the
network, the Bank granted collateral in favour of the Bank of Canada to guarantee any obligation of the Bank towards the Bank of Canada that could result from
the Bank’s participation in the securities transfer network. The durations of the indemnification agreements vary according to circumstance; as at
October 31, 2023 and 2022, 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.
Commitments
Credit Instruments
In the normal course of business, the Bank enters into various off-balance-sheet commitments. The credit instruments used to meet the financing needs of its
clients represent the maximum amount of additional credit 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)
2023
8,339
157
9,802
90,706
2022
6,618
161
9,337
82,117
(1)
(2)
(3)
See the Letters of Guarantee item on the previous page.
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.
Financial Assets Received as Collateral
As at October 31, 2023, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge was $87.9 billion ($92.3 billion
as at October 31, 2022). 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.
218
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Other Commitments
The Bank acts as an investor in investment banking activities 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 $127 million as at October 31, 2023 ($102 million as at October 31, 2022). 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, 2023, the Bank had commitments to purchase loans of a
negligible amount ($60 million as at October 31, 2022).
Pledged Assets
In the normal course of business, the Bank pledges securities and other assets as collateral. A breakdown of encumbered assets pledged as collateral is
provided in the following table. These transactions are concluded in accordance with standard terms and conditions.
As at October 31
Assets pledged to
Bank of Canada
Direct clearing organizations(1)
Assets pledged in relation to
Derivative financial instrument transactions
Borrowing, securities lending and securities sold under reverse repurchase agreements
Securitization transactions
Covered bonds(2)
Other
Total
2023
300
3,046
6,628
85,673
25,088
12,120
752
133,607
2022
325
1,634
5,368
68,458
26,361
11,590
159
113,895
(1)
(2)
Includes assets pledged as collateral for activities in the systemically important payment system (designated as Lynx) as at October 31, 2023 and 2022.
The Bank has a covered bond program. For additional information, see Notes 13 and 27 to these consolidated financial statements.
Contingent Liabilities
Litigation
In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment
portfolios, and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions, or other legal remedies of
varied natures.
More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to
avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal proceeding involving the Bank are
as follows:
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.
nk
from
National Bank of Canada
2023 Annual Report
219
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 27 – Structured Entities
A structured entity is an entity created to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant
factor in deciding who controls the entity, such as when any voting rights relate solely to administrative tasks and the relevant activities are directed by means
of contractual arrangements. Structured entities are assessed for consolidation in accordance with the accounting treatment described in Note 1 to these
consolidated financial statements. The Bank’s maximum exposure to loss resulting from its interests in these structured entities consists primarily of the
investments in these entities, the fair value of derivative financial instrument contracts entered into with them, and the backstop liquidity and credit
enhancement facilities granted to certain structured entities.
In the normal course of business, the Bank may enter into financing transactions with third-party structured entities, including commercial loans, reverse
repurchase agreements, prime brokerage margin lending, and similar collateralized lending transactions. While such transactions expose the Bank to the
counterparty credit risk of the structured entities, this exposure is mitigated by the collateral related to these transactions. The Bank typically has neither
power nor significant variable returns resulting from financing transactions with structured entities and does not consolidate such entities. Financing
transactions with third-party-sponsored structured entities are included in the Bank's consolidated financial statements and are not included in the table
accompanying this note on the next page.
Non-Consolidated Structured Entities
Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the
assets acquired. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs, while continuing to manage the financial
assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The
Bank acts as a financial agent and provides these conduits with administrative and transaction structuring services as well as backstop liquidity and credit
enhancement facilities under the commercial paper program. These facilities are presented and described in Note 26. The Bank has concluded derivative
financial instrument contracts with these conduits, the fair value of which is presented on the Bank’s Consolidated Balance Sheet. Although the Bank has the
ability to direct the relevant activities of these conduits, it cannot use its power to affect the amount of the returns it obtains, as it acts as an agent.
Consequently, the Bank does not control these conduits and does not consolidate them.
Investment Funds
The Bank enters into derivative or other financial instrument contracts with third parties to provide them with the desired exposure to certain investment funds.
The Bank economically hedges the risks related to these derivatives by investing in those investment funds. The Bank can also hold economic interests in
certain investment funds as part of its investing activities. In addition, the Bank is sponsor and investment manager of mutual funds in which it has
insignificant or no interest. The Bank does not control the funds where its holdings are not significant 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
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.
220
National Bank of Canada
2023 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.
Assets on the Consolidated Balance Sheet
Securities at fair value through profit or loss
Securities at amortized cost
Derivative financial instruments
As at October 31, 2022
Liabilities on the Consolidated Balance Sheet
Derivative financial instruments
As at October 31, 2022
Maximum exposure to loss
Securities
Liquidity, credit enhancement facilities and commitments
As at October 31, 2022
Total assets of the structured entities
As at October 31, 2022
Multi-seller
conduits(1)
Investment
funds(2)
As at October 31, 2023
Third-party
structured
entities(4)
Private
investments(3)
67
−
−
67
35
(82)
(82)
(71)
67
4,549
4,616
3,190
4,587
3,183
1,042
−
−
1,042
335
−
−
−
1,042
−
1,042
335
2,583
1,772
92
−
−
92
77
−
−
−
92
−
92
77
651
535
−
3,106
341
3,447
5,201
(90)
(90)
(91)
3,447
469
3,916
5,669
11,390
11,197
(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, 2023, the notional
committed amount of the global-style liquidity facilities totalled $4.6 billion ($3.2 billion as at October 31, 2022), 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, 2022). The maximum exposure to loss cannot exceed
the amount of commercial paper outstanding. As at October 31, 2023, the Bank held $67 million in commercial paper ($35 million as at October 31, 2022) and, consequently, the maximum
potential amount of future payments as at October 31, 2023 was limited to $4.5 billion ($3.2 billion as at October 31, 2022), 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.
Consolidated Structured Entities
Securitization Entity for the Bank’s Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II (CCCT II) to continue its credit card securitization program on a revolving basis and to use the entity
for capital management and funding purposes.
The Bank provides first-loss protection against the losses, since it retains the excess spread from the portfolio of sold receivables. The excess spread
represents the residual net interest income after all the expenses related to this structure have been paid. The Bank also provides second-loss protection as it
holds subordinated notes issued by CCCT II. In addition, the Bank acts as an administrative agent and servicer and as such is responsible for the daily
administration and management of CCCT II’s credit card receivables. The Bank therefore has the ability to direct the relevant activities of CCCT II and can
exercise its power to affect the amount of returns it obtains. Consequently, the Bank controls CCCT II and consolidates it.
Multi-Seller Conduit
The Bank administers a multi-seller conduit that purchases 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.
National Bank of Canada
2023 Annual Report
221
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
Consolidated structured entities
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)
Investments
and other assets
2,176
1,655
26
20,458
147
24,462
2023
Total
assets(1)
2,272
1,655
26
20,869
147
24,969
Investments
and other assets
1,916
802
56
17,900
166
20,840
2022
Total
assets(1)
2,073
802
56
18,237
166
21,334
(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 mainly 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, 2023, the total amount of
transferred mortgage loans was $20.6 billion ($17.9 billion as at October 31, 2022), and the total amount of covered bonds of $10.9 billion was recognized in Deposits on the Consolidated
Balance Sheet ($10.4 billion as at October 31, 2022). For additional information, see Note 13 to these consolidated financial statements.
The underlying assets consist of a loan portfolio.
222
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 28 – Related Party Disclosures
In the normal course of business, the Bank provides various banking services to related parties and enters into contractual agreements and other operations
with related parties. The Bank considers the following to be related parties:
its key officers and directors and members of their immediate family, i.e., spouses and children under 18 living in the same household;
entities over which its key officers and directors and their immediate family have control or significant influence through their significant voting power;
the Bank’s associates and joint ventures;
the Bank’s pension plans (for additional information, see Note 23 to these consolidated financial statements).
hip
According to the established definition, the Bank’s key officers are those persons having authority and responsibility for planning, directing, and controlling
the Bank’s activities, directly or indirectly.
Related Party Transactions
As at October 31
Assets
Mortgage loans and other loans
Liabilities
Deposits
Other
Key officers
and directors(1)
2022
22
58
−
2023
24
45
−
2023
223 (2)
230 (3)
3
Related entities
2022
449
(2)
(3)
80
6
(1)
(2)
(3)
As at October 31, 2023, key officers and directors and their immediate family members were holding $28 million of the Bank’s common and preferred shares ($68 million as at
October 31, 2022).
As at October 31, 2023, mortgage loans and other loans consisted of: (i) $7 million in loans to the Bank’s associates ($1 million as at October 31, 2022) and (ii) $216 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 ($448 million as at
October 31, 2022).
As at October 31, 2023, deposits consisted of: (i) $1 million in deposits to the Bank’s associates (nil as at October 31, 2022) and (ii) $229 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 ($80 million as at October 31, 2022).
The contractual agreements and other transactions with related entities as well as with directors and key officers are entered into under conditions similar to
those offered to non-related third parties. These agreements did not have a significant impact on the Bank’s results. The Bank also offers a deferred stock unit
plan to directors who are not Bank employees. For additional information, see Notes 9, 22 and 27 to these consolidated financial statements.
Compensation of Key Officers and Directors
Year ended October 31
Compensation and other short-term and long-term benefits
Share-based payments
2023
24
26
2022
24
21
National Bank of Canada
2023 Annual Report
223
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 28 – Related Party Disclosures (cont.)
Principal Subsidiaries of the Bank(1)
Name
Canada and United States
National Bank Acquisition Holding Inc.
National Bank Financial Inc.
NBF International Holdings Inc.
National Bank of Canada Financial Group Inc.
Credigy Ltd.
National Bank of Canada Financial Inc.
National Bank Investments Inc.
National Bank Life Insurance Company
Natcan Trust Company
National Bank Trust Inc.
National Bank Realty Inc.
NatBC Holding Corporation
Natbank, National Association
Flinks Technology Inc.
Other countries
Natcan Global Holdings Ltd.
NBC Global Finance Limited
NBC Financial Markets Asia Limited
Advanced Bank of Asia Limited
ATA IT Ltd.
Business activity
Principal office address
As at October 31, 2023
Investment
at cost
Voting
shares(2)
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
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
44
144
22
5
941
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.
Note 29 – Management of the Risks Associated With Financial Instruments
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, 2023. 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, 2023 are integral parts of these consolidated
financial statements.
Residual Contractual Maturities of Balance Sheet Items and Off-Balance-Sheet
Commitments
The following tables present balance sheet items and off-balance-sheet commitments by residual contractual maturity as at October 31, 2023 and 2022. 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.
224
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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, 2023
Assets
Cash and deposits
with financial institutions
25,374
448
354
50
216
−
−
−
8,792
35,234
Securities
At fair value through
profit or loss
At fair value through
other comprehensive income
At amortized cost
Securities purchased under
reverse repurchase
agreements and
securities borrowed
Loans(1)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
Other
Derivative financial instruments
Investments in associates and
joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(1)
694
3
4
701
258
30
158
446
1,663
1,758
2,260
3,667
10,823
12,813
66,058
99,994
154
508
2,325
224
338
2,320
426
1,399
4,085
538
4,110
8,315
4,548
4,713
20,084
2,660
1,352
16,825
659
−
66,717
9,242
12,582
121,818
2,275
1,641
716
72
416
693
−
−
5,447
11,260
1,409
613
1,250
637
1,990
1,060
3,126
1,271
2,990
1,396
15,339
6,258
51,112
15,656
9,089
5,713
21,406
4,262
4,007
3,204
2,783
6,695
11,322
5,414
6,191
373
50
13
−
−
−
−
29,619
6,522
7,107
7,614
7,169
28,292
78,090
20,216
542
13,754
2,603
25,099
86,847
46,358
2,603
84,192
−
(1,184)
40,814
6,627
(1,184)
225,443
2,040
1,982
1,367
1,197
611
1,696
2,399
6,224
−
17,516
2,639
4,679
62,648
746
2,728
11,785
166
1,533
12,035
1,206
2,403
12,459
546
1,157
13,043
597
2,293
39,593
249
2,648
100,822
659
6,883
43,924
49
1,592
1,521
1,256
1,081
5,499
127,269
49
1,592
1,521
1,256
7,889
29,823
423,578
(1)
Amounts collectible on demand are considered to have no specified maturity.
National Bank of Canada
2023 Annual Report
225
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.)
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, 2023
Liabilities and equity
Deposits(1)(2)
Personal
Business and government
Deposit-taking institutions
Other
Acceptances
Obligations related
to securities sold short(3)
Obligations related to
securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred
receivables(4)
Securitization – Credit card(5)
Lease liabilities(5)
Other liabilities – Other items(1)(5)
Subordinated debt
Equity
Off-balance-sheet commitments
Letters of guarantee and
documentary letters of credit
Credit card receivables(6)
Backstop liquidity and credit
enhancement facilities(7)
Commitments to extend credit(8)
Obligations related to:
Lease commitments(9)
Other contracts(10)
4,648
32,642
646
37,936
6,191
35
23,041
1,912
−
−
9
1,417
32,605
−
3,722
10,044
408
14,174
373
155
2,719
2,697
1,760
−
28
309
8,041
−
4,491
17,495
32
22,018
50
129
1,040
1,186
829
−
25
174
3,433
−
6,056
4,271
109
10,436
13
73
3,467
1,086
2,142
−
24
7
6,812
−
5,145
3,498
18
8,661
−
76
−
467
618
−
23
27
1,211
−
8,398
9,127
8
17,533
11,635
15,768
15
27,418
4,164
5,058
33
9,255
39,624
99,425
1,693
140,742
87,883
197,328
2,962
288,173
−
−
−
−
6,627
347
2,332
4,123
6,390
13,660
274
2,415
3,915
48
83
37
7,119
−
−
3,068
8,678
−
197
58
14,333
−
−
7,057
7,092
−
128
105
18,505
748
7,806
−
38,347
19,888
−
−
−
4,724
18,920
−
23,678
183,340
25,034
48
517
6,858
110,979
748
23,678
423,578
70,541
22,215
25,451
17,248
9,872
24,652
41,751
28,508
89
1,287
1,975
2,185
1,490
1,165
255
−
3,186
15
10,675
5,552
8,445
15
7,562
−
4,316
−
4,579
1
11
1
22
1
34
2
33
2
36
6
46
−
3,312
7
138
50
−
39
1
13
−
9,802
8,496
9,802
4,519
48,592
10,101
90,706
−
127
21
460
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
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 Otherliabilities 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 $46.7 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.
These amounts include $0.1 billion in contractual commitments related to the portion of the head office building under construction.
226
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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, 2022
(cid:3) (cid:3)
Assets
Cash and deposits
with financial institutions
23,141
142
311
18
685
−
−
−
7,573
31,870
Securities
At fair value through
profit or loss
At fair value through
other comprehensive income
At amortized cost
(cid:3) (cid:3)
Securities purchased under
reverse repurchase
agreements and
securities borrowed
Loans(1)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
(cid:3) (cid:3)
Other
Derivative financial instruments
Investments in associates and
joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(1)
(cid:3) (cid:3)
1,527
6,450
5,405
2,267
2,337
3,369
8,634
10,661
46,725
87,375
5
602
2,134
30
196
6,676
13
1,876
7,294
20
1,032
3,319
46
95
2,478
952
2,840
7,161
4,910
5,802
19,346
2,296
1,073
14,030
556
−
47,281
8,828
13,516
109,719
12,489
1,231
890
−
409
1,044
−
−
10,423
26,486
1,155
423
1,124
449
1,899
878
2,716
1,208
2,364
1,036
8,910
3,701
53,335
17,792
8,059
5,085
19,980
3,491
3,971
3,586
2,604
6,167
11,452
2,985
5,967
554
20
−
−
−
−
−
27,525
5,618
6,768
7,510
6,004
18,778
82,579
16,129
567
14,751
2,389
19,081
80,129
45,323
2,389
73,317
−
(955)
35,833
6,541
(955)
206,744
2,046
2,804
1,853
1,190
698
1,742
5,182
3,032
−
18,547
2,228
4,274
69,563
527
3,331
16,998
472
2,325
17,588
161
1,351
12,198
94
792
10,368
502
2,244
29,227
107
5,289
107,214
491
3,523
33,682
140
1,397
1,519
1,360
1,376
5,792
106,902
140
1,397
1,519
1,360
5,958
28,921
403,740
(1)
Amounts collectible on demand are considered to have no specified maturity.
National Bank of Canada
2023 Annual Report
227
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.)
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, 2022
Liabilities and equity
Deposits(1)(2)
Personal
Business and government
Deposit-taking institutions
Other
Acceptances
Obligations related
to securities sold short(3)
Obligations related to
securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred
receivables(4)
Securitization – Credit card(5)
Lease liabilities(5)
Other liabilities – Other items(1)(5)
Subordinated debt
Equity
Off-balance-sheet commitments
Letters of guarantee and
documentary letters of credit
Credit card receivables(6)
Backstop liquidity and credit
enhancement facilities(7)
Commitments to extend credit(8)
Obligations related to:
Lease commitments(9)
Other contracts(10)
1,482
36,864
724
39,070
5,967
428
16,233
2,584
−
−
8
1,076
26,296
−
1,493
11,605
624
13,722
554
394
5,445
2,302
2,672
−
16
46
11,429
−
2,955
10,644
54
13,653
20
634
1,567
1,640
422
−
23
99
4,405
−
6,013
4,875
122
11,010
−
74
3,406
1,009
1,329
29
23
23
5,893
−
6,141
3,728
30
9,899
6,418
5,988
−
12,406
7,942
13,659
7
21,608
4,252
4,227
36
8,515
42,115
92,640
1,756
136,511
78,811
184,230
3,353
266,394
−
−
−
−
−
6,541
920
1,493
3,948
6,386
7,540
21,817
−
595
2,288
−
24
39
3,866
−
22
2,047
4,558
−
87
27
8,234
−
−
3,570
9,612
49
219
42
17,440
−
−
5,885
5,396
−
152
92
17,911
1,499
6,800
−
33,473
19,632
−
−
−
4,287
18,627
−
21,746
176,884
26,277
78
552
5,731
114,101
1,499
21,746
403,740
65,366
25,151
18,058
16,903
13,765
20,640
39,048
27,925
180
1,451
1,338
982
1,398
1,292
138
−
3,126
15
9,205
5,552
6,179
15
6,678
−
3,270
−
4,066
−
3,186
1
38
1
42
2
47
2
46
2
47
6
21
9
34
−
−
39
8
−
−
9,337
6,779
9,337
3,125
46,368
8,707
82,117
−
102
31
377
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
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 Otherliabilities 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.
These amounts include $0.2 billion in contractual commitments related to the head office building under construction.
228
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 30 – Segment Disclosures
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other
heading. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy. The presentation of segment disclosures is
consistent with the presentation adopted by the Bank for the fiscal year beginning November 1, 2022. This presentation reflects a revision to the method used
for the sectoral allocation of technology investment expenses, which are now immediately allocated to the various business segments, whereas certain
expenses, notably costs incurred during the research phase of projects, had previously been recorded in the Other heading of segment results. This revision is
consistent with the accounting policy change applied in fiscal 2022 related to cloud computing arrangements.
Personal and Commercial
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals, advisors and businesses as well as
insurance operations.
Wealth Management
The Wealth Management segment comprises investment solutions, trust services, banking services, lending services and other wealth management solutions
offered through internal and third-party distribution networks.
Financial Markets
The Financial Markets segment encompasses corporate banking and investment banking and financial solutions for large and mid-size corporations, public
sector organizations, and institutional investors.
U.S. Specialty Finance and International (USSF&I)
The USSF&I segment encompasses the specialty finance expertise provided by 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.
Other
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 of grossing up certain revenues taxed at lower rates (notably dividends) by the income tax to a
level that would make it comparable to revenues from taxable sources in Canada. An equivalent amount is added to income taxes (recovery). 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.
National Bank of Canada
2023 Annual Report
229
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 30 – Segment Disclosures (cont.)
Results by Business Segment
Year ended October 31(1)
Net interest income(2)
Non-interest income(2)(3)
Total revenues
Non-interest expenses(4)(5)(6)(7)
Income before provisions for
credit losses and income taxes
Provisions for credit losses
Income before income taxes
(recovery)
Income taxes (recovery)(2)(8)
Net income
Non-controlling interests
Net income attributable to the
Bank’s shareholders and
holders of other equity
instruments
Average assets(9)
Total assets
Personal and
Commercial
2022
2023
3,321
1,195
4,516
2,510
2,006
238
1,768
486
1,282
−
2,865
1,169
4,034
2,241
1,793
97
1,696
449
1,247
−
Wealth
Management
2022
594
1,781
2,375
1,417
2023
778
1,743
2,521
1,534
987
2
985
271
714
−
958
3
955
254
701
−
Financial
Markets
2022
1,258
1,210
2,468
1,029
1,439
(23)
1,462
388
1,074
−
2023
(1,054)
3,710
2,656
1,161
1,495
39
1,456
401
1,055
−
2023
1,132
77
1,209
402
807
113
694
146
548
−
USSF&I
2022
1,090
20
1,110
344
766
66
700
143
557
−
2023
(591)
(141)
(732)
194
(926)
5
(931)
(667)
(264)
(2)
Other
2022
(536)
201
(335)
199
(534)
2
(536)
(340)
(196)
(1)
2023
3,586
6,584
10,170
5,801
4,369
397
3,972
637
3,335
(2)
Total
2022
5,271
4,381
9,652
5,230
4,422
145
4,277
894
3,383
(1)
1,282
148,511
1,247
140,300
154,728 146,668
714
8,560
8,666
1,055
180,837
3,384
701
8,440
393,847
8,486 178,784 157,803 25,308 21,217 56,092 69,566 423,578 403,740
3,337
430,646
1,074
154,349
(262)
69,731
(195)
71,868
548
23,007
557
18,890
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
For the year ended October 31, 2022, certain amounts were reclassified, notably due to a revised method for the sectoral allocation of technology investment expenses.
For the year ended October 31, 2023,Net interest income was grossed up by $332 million ($234 million in 2022), Non-interest income was grossed up by $247 million ($48 million in
2022), and an equivalent amount was recognized inIncome taxes (recovery). The effects of these adjustments have been reversed under theOther heading.
For the year ended October 31, 2023, the Bank concluded that it had lost significant influence over TMX and therefore ceased using the equity method to account for this investment. The
Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Upon the fair value measurement, a
$91 million gain was recorded in theNon-interest income item of the Other heading.
For the year ended October 31, 2023, the Bank recorded $75 million in intangible asset impairment losses on technology development in theNon-interest expenses item of the following
segments: Personal and Commercial ($59 million), Wealth Management ($8 million), Financial Markets ($7 million), and in the Otherheading ($1 million). Moreover, it recorded $11 million
in premises and equipment impairment losses related to right-of-use assets in theNon-interest expenses item of the Other heading.
For the year ended October 31, 2023, the Bank recorded $35 million in litigation expenses to resolve litigations and other disputes arising from various ongoing or potential claims against
the Bank in theNon-interest expenses item of the Wealth Management segment.
For the year ended October 31, 2023, the Non-interest expenses item of the Otherheading included an expense of $25 million related to the retroactive impact of the changes to theExcise
Tax Act, indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax (HST).
For the year ended October 31, 2023, the Bank recorded in the Non-interest expenses item $15 million in charges for (i) contract termination penalties (Personal and Commercial
segment: $9 million) and for (ii) provisions for onerous contracts (Otherheading: $6 million).
For the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million tax recovery related to a 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred
taxes for fiscal 2022. These items are recorded in the Other heading. For additional information on these tax measures, see Note 24.
Represents an average of the daily balances for the period, which is also the basis on which sectoral assets are reported in the business segments.
230
National Bank of Canada
2023 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Results by Geographic Segment
Year ended October 31
Net interest income
Non-interest income(1)
Total revenues
Non-interest expenses(2)(3)(4)(5)
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes(6)
Net income
Non-controlling interests
Net income attributable to the Bank’s shareholders and
holders of other equity instruments
Average assets(7)
Total assets
2023
1,901
5,812
7,713
5,261
2,452
284
2,168
371
1,797
(2)
Canada
2022
3,758
4,299
8,057
4,760
3,297
79
3,218
723
2,495
(1)
United States
2022
773
18
791
209
582
35
547
67
480
−
2023
1,051
98
1,149
226
923
81
842
68
774
−
2023
634
674
1,308
314
994
32
962
198
764
−
Other
2022
740
64
804
261
543
31
512
104
408
−
2023
3,586
6,584
10,170
5,801
4,369
397
3,972
637
3,335
(2)
Total
2022
5,271
4,381
9,652
5,230
4,422
145
4,277
894
3,383
(1)
1,799
355,337
348,073
2,496
324,415
336,215
774
29,116
29,968
480
29,988
27,986
764
46,193
45,537
408
39,444
39,539
3,337
430,646
423,578
3,384
393,847
403,740
(1)
(2)
(3)
(4)
(5)
(6)
(7)
For the year ended October 31, 2023, the Bank concluded that it had lost significant influence over TMX and therefore ceased using the equity method to account for this investment. The
Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Following the fair value measurement,
a $91 million gain was recorded in the Non-interest income item in Canada.
For the year ended October 31, 2023, the Bank recorded $75 million in intangible asset impairment losses on technology development, and it recorded $11 million in premises and
equipment impairment losses related to right-of-use assets in the Non-interest expenses item in Canada.
For the year ended October 31, 2023, the Bank recorded $35 million in litigation expenses to resolve litigations and other disputes arising from various ongoing or potential claims against
the Bank in the Non-interest expenses item in Canada.
For the year ended October 31, 2023, the Non-interest expenses item in Canada included an expense of $25 million related to the retroactive impact of the changes to the Excise Tax Act,
indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax (HST).
For the year ended October 31, 2023, the Bank recorded, in the Non-interest expenses item in Canada, $15 million in charges for (i) contract termination penalties and for (ii) provisions for
onerous contracts.
For the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million tax recovery related to a 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred
taxes for fiscal 2022. These items are recorded in Canada. For additional information on these tax measures, see Note 24.
Represents an average of the daily balances for the period.
Note 31 – Event After the Consolidated Balance Sheet Date
Repurchase of Common Shares
On November 30, 2023, the Bank’s Board of Directors approved a normal course issuer bid, beginning December 12, 2023, to repurchase for cancellation up to
7,000,000 common shares (representing approximately 2.07% of its then outstanding common shares) over the 12-month period ending December 11, 2024.
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).
National Bank of Canada
2023 Annual Report
231
Supplementary
Information
Statistical Review
Information for Shareholders
234
236
Supplementary Information
Statistical Review
As at October 31 or
for the year ended October 31(1)
(millions of Canadian dollars)
Consolidated Balance Sheet data
Cash and deposits with financial institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Loans and acceptances, net of allowances
Other assets
Total assets
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
Total liabilities and equity
Average assets(2)
Net impaired loans excluding POCI loans(3)(4)
under IFRS 9
Net impaired loans excluding POCI loans(4)
under IAS 39
Consolidated Statement of Income data
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Income before provisions for credit losses
and income taxes
Provisions for credit losses
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s
shareholders and holders of other equity
instruments
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
35,234
121,818
31,870
109,719
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
11,260
225,443
29,823
423,578
288,173
110,979
748
3,150
3,294
68
16,744
420
2
423,578
430,646
26,486
206,744
28,921
403,740
266,394
114,101
1,499
3,150
3,196
56
15,140
202
2
403,740
393,847
7,516
182,689
25,233
355,621
240,938
95,233
768
2,650
3,160
47
12,854
(32)
3
355,621
363,506
14,512
164,740
20,963
331,488
215,878
98,589
775
2,950
3,057
47
10,307
(118)
3
331,488
318,087
17,723
153,251
14,475
281,373
189,566
75,983
773
2,450
2,949
51
9,227
16
358
281,373
286,162
18,159
146,082
15,661
262,441
170,830
76,539
747
2,450
2,822
57
8,442
175
379
262,441
265,940
20,789
136,457
14,433
245,824
156,671
75,589
9
2,050
2,768
58
7,703
168
808
245,824
248,351
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
235,913
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
222,929
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
206,680
606
479
283
465
450
404
206
281
254
248
3,586
6,584
10,170
5,801
4,369
397
637
3,335
(2)
5,271
4,381
9,652
5,230
4,422
145
894
3,383
(1)
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
3,337
3,384
3,140
1,989
2,201
2,118
1,937
1,181
1,549
1,469
(1)
(2)
(3)
(4)
Certain amounts from fiscal years 2017 to 2021 were adjusted in 2022 to reflect an accounting policy change applicable to cloud computing arrangements, aside from the average assets
figures for fiscal years 2017 to 2019.
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.
234
National Bank of Canada
2023 Annual Report
Supplementary Information
Statistical Review
As at October 31(1)
Number of common shares(2)
(thousands)
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 16
Series 20
Series 24
Series 26
Series 28
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
LRCN interests
Series 1
Series 2
Series 3
Financial ratios
Return on common
shareholders’ equity(3)
Return on average assets(3)
Regulatory ratios under
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
336,582
337,912
335,998
334,172
335,071
339,592
338,053
337,236
329,297
338,285
9.47
9.38
3.98
103.58
84.97
86.22
60.68
$
$
$
$
$
$
$
–
–
–
–
–
$
$
$
$
$
1.0063
0.9598
–
–
1.7568
1.3023
1.2375
$
$
$
$
$
$
$
$
$
$
$
$
9.72 $
9.61 $
3.58 $
8.95 $
8.85 $
2.84 $
5.57 $
5.54 $
2.84 $
6.22 $
6.17 $
2.66 $
5.93 $
5.86 $
2.44 $
105.44 $
104.32 $
74.79 $
68.02 $
65.63 $
83.12 $
65.54 $
38.73 $
54.97 $
58.69 $
92.76 $
102.46 $
63.94 $
68.02 $
59.76 $
55.24 $
47.44 $
39.56 $
36.64 $
34.31 $
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– $
0.9500
1.0063 $
1.0063 $
1.0063 $
1.0156 $
1.0250 $
1.0250
0.9598 $
0.9598 $
0.9636 $
0.9750 $
0.9750 $
0.9750
– $
– $
1.1125 $
1.1500 $
0.7000 $
1.0125 $
1.1125 $
1.1500 $
1.4000 $
1.3500 $
1.1125 $
1.1500 $
1.4000 $
1.3500 $
1.1125 $
1.1500 $
1.4000 $
1.3500 $
1.1125 $
0.9310
1.4000
1.3500
0.4724
–
1.2375 $
1.2375 $
1.2375 $
1.2375 $
0.5323
4.30 %
4.05 %
7.50 %
4.30 %
4.05 %
7.50 %
4.30 %
4.05 %
–
4.30 %
–
–
–
–
–
–
–
–
5.43
5.37
2.28
62.74
46.83
62.61
31.50
–
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
3.31 $
3.29 $
2.18 $
47.88 $
35.83 $
47.88 $
28.52 $
4.56
4.51
2.04
55.06
40.75
43.31
28.26
–
–
– $
1.5000
–
–
–
–
0.9500 $
0.9500
1.0250 $
1.0250
0.9750 $
1.0760
1.1373
0.5733
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
4.36
4.32
1.88
53.88
41.60
52.68
25.76
1.2125
1.5000
0.4125
0.4125
0.9500
0.7849
–
–
–
–
–
–
–
–
–
16.5 %
0.77 %
18.8 %
0.86 %
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 %
Basel III(4)
Capital ratios
CET1
Tier 1
Total
Leverage ratio
TLAC ratio(9)
TLAC leverage ratio(9)
Liquidity coverage ratio
(LCR)(10)
Net stable funding ratio
(NSFR)(10)
Other information
Number of employees(11)
Branches in Canada
Banking machines in Canada
13.5 %
16.0 %
16.8 %
4.4 %
29.2 %
8.0 %
12.7 %
15.4 %
16.9 %
4.5 %
27.7 %
8.1 %
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 %(5)
15.1 %(5)
4.0 %
10.1 %
13.5 %
15.3 %
3.7 %
9.9 %
12.5 %(6)
14.0 %(8)
4.0 %
9.2 %
12.3 %(7)
15.1 %(7)
155 %
140 %
154 %
161 %
146 %
147 %
132 %
134 %
131 %
118 %
117 %
117 %
28,916
368
944
27,103
378
939
24,495
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
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Certain amounts from fiscal years 2017 to 2021 have been adjusted to reflect an accounting policy change in 2022 applicable to cloud computing arrangements, aside from the return on
common shareholders’ equity and return on average assets figures for fiscal years 2017 to 2019.
The figures for 2014 have been adjusted to reflect the stock dividend paid in 2014.
See the Glossary section on pages 124 to 127 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 RequirementsGuideline and Leverage
Requirements Guideline, and reflect the transitional measures granted by OSFI.
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.
The TLAC ratio and the TLAC leverage ratio are calculated in accordance with OSFI’s Total Loss Absorbing Capacity Guideline.
The LCR ratio and the NSFR ratio are calculated in accordance with OSFI’s Liquidity Adequacy Requirements Guideline.
Full-time equivalent. The methodology was refined during fiscal 2023 and the fiscal 2022 and 2021 figures have been restated.
National Bank of Canada
2023 Annual Report
235
Supplementary Information
Information for Shareholders
Description of Share Capital
Dividends Declared on Common Shares During Fiscal 2023
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 $300 million. As at
October 31, 2023, the Bank had a total of 338,284,629 common shares and
66,000,000 first preferred shares issued and outstanding.
Stock Exchange Listings
The Bank’s common shares and Series 30, 32, 38, 40 and 42 First Preferred
Shares are listed on the Toronto Stock Exchange in Canada.
Issue or class
Common shares
First Preferred Shares
Series 30
Series 32
Series 38
Series 40
Series 42
Ticker symbol
NA
NA.PR.S
NA.PR.W
NA.PR.C
NA.PR.E
NA.PR.G
Number of Registered Shareholders
As at October 31, 2023, there were 19,881 common shareholders recorded
in the Bank’s common share register.
Dividends
Dividend Dates in Fiscal 2024
(subject to approval by the Board of Directors of the Bank)
Record date
Common shares
December 25, 2023
March 25, 2024
June 24, 2024
September 30, 2024
Preferred shares,
Series 30, 32, 38, 40 and 42
January 8, 2024
April 5, 2024
July 8, 2024
October 7, 2024
Payment date
February 1, 2024
May 1, 2024
August 1, 2024
November 1, 2024
February 15, 2024
May 15, 2024
August 15, 2024
November 15, 2024
Record date
December 26, 2022
March 27, 2023
June 26, 2023
September 25, 2023
Payment date
Dividend per share ($)
February 1, 2023
May 1, 2023
August 1, 2023
November 1, 2023
0.97
0.97
1.02
1.02
Dividends Declared on Preferred Shares During Fiscal 2023
Record
date
Payment
date
Series
30
Series
32
Series
38
Dividend per share ($)
Series
42
Series
40
January 6, 2023
February 15, 2023
0.2516
0.2399
0.4392
0.2875
0.3094
April 5, 2023
July 6, 2023
May 15, 2023
0.2515
August 15, 2023
0.2516
0.2400
0.2399
0.4392
0.4392
0.2875
0.3636
0.3094
0.3093
October 6, 2023
November 15, 2023
0.2516
0.2400
0.4392
0.3637
0.3094
Dividends paid are “eligible dividends” in accordance with the Income Tax
Act (Canada).
Dividend Reinvestment and Share Purchase
Plan
National Bank has a Dividend Reinvestment and Share Purchase Plan for
holders of its common and preferred shares under which they can acquire
common shares of the Bank without paying commissions or administration
fees. Participants acquire common shares through the reinvestment of cash
dividends paid on the shares they hold or through optional cash payments of
at least $1 per payment, up to a maximum of $5,000 per quarter.
For additional information, shareholders may contact National Bank’s
registrar and transfer agent, Computershare Trust Company of Canada, at
1-888-838-1407. To participate in the plan, National Bank’s beneficial or
non-registered common shareholders must contact their financial institution
or broker.
Direct Deposit
Shareholders may elect to have their dividend payments deposited directly
via electronic funds transfer to their bank account at any financial institution
that is a member of the Canadian Payments Association. To do so, they must
send a written request to the transfer agent, Computershare Trust Company
of Canada.
236
National Bank of Canada
2023 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 19, 2024.
CCoorrppoorraattee SSoocciiaall RReessppoonnssiibbiilliittyy SSttaatteemmeenntt
The information will be available in March 2024 on the Bank’s website
at nbc.ca.
CCoommmmuunniiccaattiioonn wwiitthh SShhaarreehhoollddeerrss
For information about stock transfers, address changes, dividends, lost
certificates, tax forms and estate transfers, shareholders of record may
contact the transfer agent at the following address:
CCoommppuutteerrsshhaarree TTrruusstt CCoommppaannyy ooff CCaannaaddaa
Share Ownership Management
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1 Canada
Telephone: 1-888-838-1407
1-888-453-0330
Fax:
E-mail:
service@computershare.com
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. These statements are made
pursuant to the Canadian and American securities legislation.
The Caution Regarding Forward-Looking Statements section can be
found on page 13 of this Annual Report.
TTrraaddeemmaarrkkss
The trademarks belonging to National Bank of Canada and used in this
report include National Bank of Canada, National Bank, NBC, NBC
Financial Markets, National Bank Financial, NAventures, National Bank
Financial-Wealth Management, Private Banking 1859, National Bank
Direct Brokerage, National Bank Investments, NBI, 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 978-2-921835-79-4
Legal deposit – Bibliothèque et Archives nationales du Québec, 2023
Legal deposit – Library and Archives Canada, 2023
PPrriinnttiinngg
L’Empreinte
National Bank of Canada 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 globally
in terms of 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,
where most of our branches are located, 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
7 Members of the Board of Directors
8 Our One Mission
9 How We Support Sustainable Development
12 Risk Disclosures
13 Management’s Discussion and Analysis
129 Audited Consolidated Financial Statements
234 Statistical Review
236 Information for Shareholders
2.8 million Clients(1)
31,243 Employees(2)
$10.2 B Total Revenue
$3.3 B Net Income
$424 B Total Assets
$29.2 B Market Capitalization
2023 Total Revenue — Adjusted
by Business Segment (3)
11%
Personal and Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance
and International
24%
42%
23%
2023 Total Revenue — Adjusted
by Geographic Distribution(3)
19%
Province of Quebec
Other Canadian provinces
Outside Canada
51%
30%
(1 ) Clients of the Personal and Commercial segment
(2) Worldwide
(3) Excluding the Other heading. See the Financial Reporting Method section
on pages 14 to 19 for additional information on non-GAAP financial measures.
Annual Report
2023
3
2
0
2
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o
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e
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a
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n
A
® NATIONAL BANK and the NATIONAL BANK logo are registered trademarks of National Bank of Canada.
© NATIONAL BANK OF CANADA, 2023. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without prior written consent of National Bank of Canada.