Building an even better bank
2015 ANNUAL REPORT
SCOTIABANK IS CANADA’S
INTERNATIONAL BANK
and a leading financial
services provider in North
America, Latin America,
the Caribbean and Central
America, and parts of Asia.
We are dedicated to helping
our 23 million customers
become better off through
a broad range of advice,
products and services,
including personal and
commercial banking,
wealth management and
private banking, corporate
and investment banking,
and capital markets.
C O N T E N T S
1
Message from President and
Chief Executive Officer Brian J. Porter
(cid:2)
6
Executive Management Team
(cid:2)
7
Message from Chairman of the Board
Thomas C. O’Neill
(cid:2)
8
Board of Directors
(cid:2)
10
Management’s Discussion and Analysis
(cid:2)
127
Consolidated Financial Statements
(cid:2)
W H Y I N V E S T I N S C O T I A B A N K ?
Our unique, straightforward and successful bank model is based
on diversified and growing businesses, each providing sustainable
and profitable revenue growth. We have a track record of delivering
consistent earnings and dividend growth, proven execution capabilities
and we are well positioned for continued success.
RAISED DIVIDEND 48 OUT OF 50 YEARS
SOLID TRACK RECORD OF EARNINGS
AND DIVIDEND GROWTH
Earnings per share
Diluted, dollars per share
$5.67
Dividend growth
Dollars per share
$2.72
CAGR = 6%
CAGR = 7.5%
05 07 09 11 13 15
05 07 09 11 13 15
STRONG
RISK MANAGEMENT
CULTURE
STRONG
CAPITAL POSITION
FOCUSED ON ATTRACTIVE
PACIFIC ALLIANCE
MARKETS
SIGNIFICANT, THOUGHTFUL
INVESTMENTS IN
TECHNOLOGY
CLEAR STRATEGY:
(cid:129) Maintain high degree of diversification
(cid:129) Balance earnings from Canada/International
(cid:129) Pursue selective acquisitions
(cid:129) Deliver on our strategic agenda (see page 5)
NEED MORE REASONS? SEE MD&A EXECUTIVE SUMMARY ON PAGE 9
B R I A N J . P O R T E R
P R E S I D E N T A N D C H I E F E X E C U T I V E O F F I C E R
C E O ’ S M E S S A G E T O S H A R E H O L D E R S
Dear Fellow Shareholders,
While the pace of change in the banking industry
continued to accelerate in 2015, Scotiabank responded
with a comprehensive set of efforts to build an even
better bank. Our strategic agenda is set, and will
position Scotiabank to continue to adapt and thrive
in an increasingly competitive and evolving industry.
Our solid results this year were delivered by a strong and growing
foundation in Canada, diversified through our priority international
markets of Mexico, Peru, Colombia and Chile. Our results reinforce the
benefits of a well-diversified business model, where we have consciously
chosen a prudent mix of geographies and businesses.
While we have seen modest improvement in some of the markets we
operate in, market volatility, historically low interest rates and uneven
global growth may in fact constitute the “new normal”.
We are adapting to these operating conditions with increased
investments in technology, to transform and simplify the customer
experience. These investments will also help to enhance our growth and
reduce our structural costs.
I strongly believe that building an even better bank for the long term
is the best way for us to enhance shareholder value. In that context,
I am pleased to share some of the significant progress we’ve made.
Financial Results
Despite the volatile operating environment, your Bank delivered more
than $24 billion of revenue and $7.2 billion of net income. Diluted
Earnings per Share were $5.67, representing growth of 4.4%. In
addition, return on equity was solid at 14.6% and we maintained strong
capital levels with a Common Equity Tier 1 ratio of 10.3%. Earnings
growth was driven by strength in our personal, commercial and wealth
businesses in both Canada and internationally.
The Bank’s earnings growth and strong capital position allowed us
to continue investing in our businesses. We have increased investments
in technology, alongside continuing investments in organic growth
initiatives, such as commercial banking, credit cards, payments
and new deposit-type products. And we have done all of this within
our risk appetite.
1 (cid:3) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
L E V E R A G I N G S C O T I A B A N K ’ S I N T E R N A T I O N A L F O O T P R I N T
We also announced several acquisitions – such as the credit
card business in Canada from JP Morgan, and Citibank’s
retail & commercial banking operations in Peru, Panama
and Costa Rica. Our acquisition of Cencosud’s credit card
business in Chile, and these transactions will continue to
help us build scale and offer customers more products
and services.
We also maintained our longstanding track record of
returning capital to you through dividends – with two
quarterly dividend increases this year, up 6% from 2014.
Operating earnings from our Canadian Banking division,
which includes our personal and commercial businesses,
grew 10% in 2015. This performance was underpinned
by prudent retail asset growth, strong deposit growth,
and an eight basis point increase in margin. This improved
margin reflects our conscious effort to deepen customer
relationships and broaden our suite of products.
The result is a more balanced asset mix and a better
return on your capital.
Commercial lending results were also higher on solid asset
growth of $4 billion or 13%. Wealth management also
continued to deliver strong results in 2015.
Operating earnings from our International Banking division
grew 10% in 2015. The division includes all of our personal
and commercial businesses in Latin America, Central
America and the Caribbean – as well as our investments
in personal and commercial banking operations in Asia.
Results here strengthened in the second half of the year
due to strong asset growth, steady margins and stable
credit losses; earnings also benefitted from a weaker
Canadian dollar relative to international currencies. Our
performance in the Pacific Alliance region was particularly
strong, with asset growth of 12%. These businesses
represent more than 60% of International Banking’s
earnings and have the greatest growth potential; as a
result, they are the bellwether for the division.
AVERAGE ASSETS BY GEOGRAPHY
C A N A D A
59%
PA CI F IC ALLIAN C E
9%
MEXIC O, PERU,
C HILE, C O L O M B I A
15%
U.S.
17%
A S I A / E U R O P E /
OTHER INTERNATIONAL
2 (cid:3) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Our Global Banking and Markets division provides corporate
loans, capital markets products, and investment banking
solutions to customers across our entire global footprint.
For the year, operating earnings declined by 8% from 2014.
This decline resulted from several factors, including lower
investment banking revenue – mainly due to challenging
market conditions in the energy and mining sectors –
margin compression in our lending business – which offset
stronger loan growth – and a lower contribution from Asia.
In the case of Asia, the repositioning of this business is
mostly complete, and performance there is expected to
improve in 2016.
The results in Global Banking and Markets are disappointing,
and we are accountable for our performance and are
committed to improving these results.
Strategic Agenda
Much has been written recently about threats to the
‘traditional’ banking industry. There is no single game
changer – no one company or technology is driving this.
Rather, we are seeing a confluence of events that are
creating some fundamental shifts in the competitive
landscape. Of particular note, we see rapidly evolving
customer expectations, innovative digital technologies
and new service models – all of which are changing
how customers are served.
The effect of these shifts is powerful, driving a fundamental
transformation of the banking industry in customer-facing
applications, end-to-end processes and cost structures.
The digital transformation is being led by both financial
technology players – known as “FinTech” – and established
industry players. In the case of FinTech, there are some who
seek to disrupt incumbent banks, while many others seek to
actively partner with them. As a result, FinTech represents
both threats and opportunities. We are investing in our own
digital strategies and partnering with some FinTech players.
“ Scotiabank is a great bank,
with a well-recognized global
brand. We have an attractive
geographic footprint that is
valued by our stakeholders.”
Through both of these approaches, we expect to improve
our customers’ experience and reduce our structural costs.
We are operating in a different environment than we were
just a few years ago. It is clear that the financial services
industry continues to evolve rapidly, and Scotiabank is
embracing the change. Your Board and Management Team
have been working diligently over the past year to adapt
and evolve our enterprise-wide strategic agenda. This
medium-term agenda clearly articulates those areas where
we must be sharply focused going forward.
As an overall strategy, we continue to believe strongly in
our diversified business model, and our geographic mix.
We have well-defined growth plans for Canada, and are
focused on growing in our priority international markets.
As part of our strategic agenda, we have identified five
important priorities to guide the Bank’s efforts:
Customer Focus: we are shifting to a much more
customer-centric model, where a sharper focus on the
customer informs all decision-making, operations and
investments across the Bank.
Leadership: we are adapting our leadership team to reflect
the skills and diversity we need going forward.
Low Cost by Design: We are shifting to a “low cost by
design” approach, which will benefit our customers,
employees and shareholders.
% OF INCOME CANADA, U.S., PACIFIC ALLIANCE & OTHER INTERNATIONAL
C A N A D A
58%
PA CI F IC ALLIAN C E
17%
MEXIC O, PERU, C HILE, CO L O M B I A
6%
U.S.
19%
A S I A / E U R O P E /
OTHER INTERNATIONAL
3 (cid:3) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T A K I N G D I G I T A L I N N O V A T I O N T O T H E N E X T L E V E L
Digital: we have embarked upon a digital transformation
of the Bank to ensure a consistently excellent customer
experience and highly efficient operations.
Business Mix: we are evolving our business mix to align
with opportunities where we have, and can build, deeper
relationships with our customers.
There is a lot of work to be done, without question.
We have made solid progress, and we know that
Scotiabank is very good at execution. We will have more
to say on our transformational journey over the next year,
and I look forward to sharing more with you about
our continuing progress.
Outlook
In addition to shifting competitive dynamics in our industry,
we also expect that uneven economic conditions will likely
persist in 2016. Both of these will present challenges for us
at times, but 2016 will also be filled with opportunities for
us to continue building an even better bank.
We will continue to partner with our customers – whether
they are in our higher growth markets, or those that are
facing challenging economic conditions. In Canada, we
provided more than $5 billion in loans to help small
BRANCHES
& OFFICES
EMPLOYEES
More than
2,000
INTERNATIONAL
More than
1,100
CANADA
More than
37,000
CANADA
More than
52,000
INTERNATIONAL
4 (cid:3) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
businesses grow and create jobs; and we also helped many
Canadians finance their homes, valued at $400 billion. At
the end of the year, we had $1.3 billion in consumer and
micro-finance loans outstanding in Peru. And in Mexico,
we financed $1 billion worth of auto loans. These activities
are fundamental to our role as a bank, and they
demonstrate our commitment to banking the real
economy, wherever we operate.
We will also continue to give back to the communities
in which we live and work. Scotiabank employs
approximately 90,000 people around the world, with each
Scotiabanker contributing in their own way to the local
community and economy. Your Bank also provided
approximately $70 million in donations and sponsorships,
helping to promote education, active lifestyles and the arts
across more than 50 countries. We believe in strong
communities, and will continue this strong tradition
of giving back.
At the end of the day, banking is all about trust.
Our customers must believe that we truly have their
best interests in mind. Scotiabankers believe deeply
in helping our customers become better off; in fact, that
is “why we bank”.
All in all, we have a lot to be proud of. Scotiabank is a
great bank, with a well-recognized global brand. We have
an attractive geographic footprint that is valued by our
stakeholders. We have a strong financial position, great
people and a highly motivated team of leaders. We also
have supportive shareholders, who are ably represented by
your Board of Directors. I thank you for that support, and
for the Board’s guidance and high level of engagement.
Thank You
In closing, I would like to thank our 23 million customers
around the world for their business and – just as
importantly – for their trust. I would also like to thank
Scotiabankers all around the world for the work they do
day-in and day-out to earn this trust, and to help our
customers become better off. I am proud of our team
and confident in the Bank’s future.
S T R A T E G I C A G E N D A
(cid:2) Be more focused on our customers:
we aim to deliver a consistently excellent
customer experience, and will do so by putting
our customers at the centre of every decision
we make across the Bank.
(cid:2) Enhance our leadership depth,
diversity and deployment:
we are building more diverse leadership teams
to better reflect and understand our customers
and employees.
(cid:2) Better serve our customers, while
reducing structural costs:
we aim to become more efficient and “low
cost by design”, so that we can deliver a better
customer experience and create good
shareholder value over the long term.
(cid:2) Drive a digital transformation:
we are pursuing a comprehensive plan to
digitize the Bank; by doing so, we will enhance
our customers’ experience, make it easier for
Scotiabankers to serve our customers and
become a more efficient bank.
(cid:2) Align our business mix with deeper
customer relationships:
quite simply, this means doing more business
with customers where we have deep
relationships, and working hard to broaden
relationships with all customers.
5 (cid:3) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M E D I U M - T E R M F I N A N C I A L O B J E C T I V E S
RETURN ON EQUITY OF
EARNINGS PER SHARE GROWTH
14+%
5-10%
ACHIEVE POSITIVE
OPERATING LEVERAGE
MAINTAIN STRONG
CAPITAL RATIOS
(cid:2) Brian J. Porter
President and
Chief Executive Officer
(cid:2) Michael Durland
Group Head and
Chief Executive Officer,
Global Banking and Markets
(cid:2) Dieter W. Jentsch
Group Head,
International Banking
(cid:2) James O’Sullivan
Group Head,
Canadian Banking
(cid:2) Stephen P. Hart
Chief Risk Officer
(cid:2) Barbara Mason
Group Head and
Chief Human Resources Officer*
(cid:2) Sean D. McGuckin
Group Head and
Chief Financial Officer*
E X E C U T I V E M A N A G E M E N T T E A M
(cid:2) Deborah M. Alexander
(cid:2) Kyle McNamara
Executive Vice President and
General Counsel
(cid:2) Andrew Branion
Executive Vice President
and Group Treasurer
(cid:2) John Doig*
Executive Vice President and
Chief Marketing Officer
(cid:2) Terry Fryett
Executive Vice President,
Chief Credit Officer
(cid:2) Marianne Hasold-Schilter
Executive Vice President and
Chief Administrative Officer,
International Banking
(cid:2) Mike Henry*
Executive Vice President, Retail
Payments, Deposits and
Unsecured Lending
(cid:2) Marian Lawson
Executive Vice President,
Global Financial Institutions
and Transaction Banking
Executive Vice President
and Co-Head Information
Technology, Business Systems
(cid:2) James McPhedran
Executive Vice President,
Canadian Banking
(cid:2) James Neate*
Executive Vice President,
International Corporate and
Commercial Banking
(cid:2) Gillian Riley*
Executive Vice President,
Canadian Commercial Banking
(cid:2) Maria Theofilaktidis
Executive Vice President,
Retail Distribution,
Canadian Banking
(cid:2) Michael Zerbs
Executive Vice President
and Co-Head Information
Technology,
Enterprise Technology
* as at December 1, 2015
6 (cid:3) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T H O M A S C . O ’ N E I L L
C H A I R M A N O F S C O T I A B A N K ’ S B O A R D O F D I R E C T O R S
C H A I R M A N ’ S M E S S A G E T O S H A R E H O L D E R S
Dear Fellow Shareholders,
2015 has been a year of evolution and continued progress
for your Bank that led to solid results.
With our focused strategic agenda, we spent this year re-imagining the customer
experience and positioning the Bank for success, as we respond to the accelerated pace
of change across the global financial services industry.
Customer focus and building a culture of innovation underpin our work to build an
even better bank. Earlier this year, your Board of Directors joined the executive
leadership team in Silicon Valley to meet with organizations that are focused on
simplicity, agility and the customer experience. The visit challenged us to think of
technology as more than just the latest gadgets, but rather as a way to improve
how we interact with and serve our customers.
With Management’s commitment to delivering on strategies that centre on the
customer needs today and into the future, we are confident Scotiabank has the
talent, strategy and infrastructure to drive the long-term value of our stakeholders.
Accountability starts at the top
Each Scotiabanker is accountable for your Bank’s actions and results, but ultimately this
accountability rests with the Board of Directors. During the year, three new directors
were appointed to further strengthen the Board’s oversight role.
(cid:129) William Fatt brings extensive expertise in leading and growing a Canadian-based
customer service organization with global operations;
(cid:129) Tiff Macklem brings extensive risk management experience and in-depth knowledge
of the financial services industry in Canada and internationally; and,
(cid:129) Eduardo Pacheco brings extensive financial services experience and deep regional and
business & customer insights as Scotiabank continues its focus on the Pacific Alliance
countries of Mexico, Colombia, Peru and Chile.
How we govern
Your Board is committed to the highest levels of governance, ensuring we balance
and protect the long-term interests of our many stakeholders, including shareholders,
customers, the broader community and our team.
We believe that strong governance is an important foundation of Scotiabank’s performance,
and that an independent Board with the right balance of qualified people with diversity of
gender, age, background, geography and thought, bolster our continued success.
7 (cid:3) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Currently, 13 of your Bank’s 15 directors are independent,
Our industry is seeing unprecedented change and
including a diverse contingent of female directors – who
Management has done tremendous work to build an
represent more than 30% of your Board – as well as
even better bank, including significant and thoughtful
directors of varying age, ethnicity and geographical
investments in technology to enable and simplify the
background.
Building an even better bank
I am excited about the future as we look ahead to
your Bank’s 185th year. Scotiabank has a clear strategy
predicated on a highly diversified, well-balanced business
model within a clearly defined global footprint, and your
Board is fully supportive of the strategic direction that
management has set.
customer experience. This unwavering focus on our
customers is the foundation for our ongoing success
in the long term.
Thank you to our President and CEO, Brian Porter, his
leadership team and thousands of Scotiabankers who
work hard to deliver strong results. And thank you, our
shareholders, for your continued confidence and support.
(cid:2) Thomas C. O’Neill
Chairman of the Board. Scotiabank
director since May 26, 2008.
COMMITTEE CHAIRS
(cid:2) Ronald A. Brenneman
Corporate director. Risk Committee
Chair. Scotiabank director since
March 28, 2000.
(cid:2) Aaron W. Regent
Founding Partner of Magris Resources
Inc. Human Resources Committee
Chair. Scotiabank director since
April 9, 2013.
(cid:2) Susan L. Segal
President and Chief Executive Officer
of the Americas Society and Council of
the Americas. Corporate Governance
Committee Chair. Scotiabank director
since December 2, 2011.
(cid:2) Paul D. Sobey
Corporate director. Audit and Conduct
Review Committee Chair. Scotiabank
director since August 31, 1999.
B O A R D O F D I R E C T O R S
BOARD OF DIRECTORS
(cid:2) Nora A. Aufreiter
Corporate director. Scotiabank
director since August 25, 2014.
(cid:2) Guillermo E. Babatz
Managing Partner of Atik
Capital, S.C. Scotiabank director
since January 28, 2014.
(cid:2) Charles H. Dallara, Ph.D.
Executive Vice Chairman of the
Board of Directors of Partners Group
Holding AG and Chairman of the
Americas. Scotiabank director since
September 23, 2013.
(cid:2) N. Ashleigh Everett
President, Corporate Secretary and a
director of Royal Canadian Securities
Limited. Scotiabank director since
October 28, 1997.
(cid:2) William R. Fatt
Chairman and Chief Executive Officer
of FRHI Hotels & Resorts. Scotiabank
director since January 27, 2015.
(cid:2) Tiff Macklem, Ph.D.
Dean of the Rotman School of
Management at the University of
Toronto. Scotiabank director since
June 22, 2015.
(cid:2) Eduardo Pacheco
Chief Executive Officer and a
director of Mercantil Colpatria S.A.
Scotiabank director since
September 25, 2015.
(cid:2) Brian J. Porter
President and Chief Executive Officer
of Scotiabank. Scotiabank director
since April 9, 2013.
(cid:2) Indira V. Samarasekera, O.C., Ph.D.
Senior advisor at Bennett Jones LLP
and a corporate director. Scotiabank
director since May 26, 2008.
(cid:2) Barbara S. Thomas
Corporate director. Scotiabank director
since September 28, 2004.
Go online for more information about Scotiabank’s Corporate Governance at www.scotiabank.com/ca/en/0,,465,00.html
8 (cid:3) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
E X E C U T I V E S U M M A R Y O F M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S
TOTAL ASSETS
$856 BILLION
LOANS
$459 BILLION
DEPOSITS
$601 BILLION
NET INCOME
$7.2 BILLION
REVENUE
$24 BILLION
TOTAL TAXES PAID
$2.9 BILLION
300
250
200
150
100
TOTAL RETURN TO COMMON SHAREHOLDERS
Share price appreciation plus dividends reinvested, 2005 = 100
Scotiabank
S&P/TSX Banks Total Return Index
S&P/TSX Composite Total Return Index
2005
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
For more information, please see page 16.
EARNINGS BY
BUSINESS LINE
%
COMMON EQUITY TIER 1
CAPITAL RATIO
%
REVENUE BY
TYPE OF BUSINESS
%
10.8
10.3
9.1
12
8
4
50
23
27
Canadian Banking
International Banking
Global Banking and Markets
For more information, please see page 54.
For more information, please see page 39.
13
14
15
17
16
67
Total Personal and Commercial
Wealth
Wholesale
9 (cid:3) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Enhanced Disclosure Task Force (EDTF) Recommendations
The Enhanced Disclosure Task Force (EDTF) was established by the Financial Stability Board in May 2012 with the goal of developing fundamental
disclosure principles. On October 29, 2012 the EDTF published its report, “Enhancing the Risk Disclosures of Banks”, which sets forth
recommendations around improving risk disclosures and identifies existing leading practice risk disclosures.
Below is the index of all these recommendations to facilitate easy reference in the Bank’s annual report and other public disclosure documents
available on www.scotiabank.com/investor relations.
Reference Table for EDTF
Type of risk
Number Disclosure
MD&A
Financial Statements
Supplementary
Regulatory
Capital
Disclosures
Pages
General
Risk governance,
risk management
and business
model
Capital
Adequacy and
risk-weighted
assets
Liquidity Funding
Market Risk
Credit Risk
Other risks
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
The index of risks to which the business is exposed.
The Bank’s risk to terminology, measures and key parameters.
Top and emerging risks, and the changes during the reporting period.
Discussion on the regulatory development and plans to meet new regulatory ratios.
71, 73, 78
68
26-30, 53
40, 88, 105-106
The Bank’s Risk Governance structure.
Description of risk culture and procedures applied to support the culture.
Description of key risks from the Bank’s business model.
Stress testing use within the Bank’s risk governance and capital management.
Pillar 1 capital requirements, and the impact for global systemically important banks.
a) Regulatory capital components.
b) Reconciliation of the accounting balance sheet to the regulatory balance sheet.
Flow statement of the movements in regulatory capital since the previous reporting
period, including changes in common equity tier 1, additional tier 1 and tier 2 capital.
Discussion of targeted level of capital, and the plans on how to establish this.
Analysis of risk-weighted assets by risk type, business, and market risk RWAs.
Analysis of the capital requirements for each Basel asset class.
Tabulate credit risk in the Banking Book.
Flow statements reconciling the movements in risk-weighted assets for each risk-
weighted asset type.
Discussion of Basel III Back-testing requirement including credit risk model performance
and validation.
Analysis of the Bank’s liquid assets.
Encumbered and unencumbered assets analyzed by balance sheet category.
Consolidated total assets, liabilities and off-balance sheet commitments analyzed by
remaining contractual maturity at the balance sheet date.
Analysis of the Bank’s sources of funding and a description of the Bank’s funding
strategy.
Linkage of market risk measures for trading and non-trading portfolios and the balance
sheet.
Discussion of significant trading and non-trading market risk factors.
Discussion of changes in period on period VaR results as well as VaR assumptions,
limitations, backtesting and validation.
Other risk management techniques e.g. stress tests, stressed VaR, tail risk and
market liquidity horizon.
Analysis of the aggregate credit risk exposures, including details of both personal
and wholesale lending.
Discussion of the policies for identifying impaired loans, defining impairments and
renegotiated loans, and explaining loan forbearance policies.
Reconciliations of the opening and closing balances of impaired loans and impairment
allowances during the year.
Analysis of counterparty credit risk that arises from derivative transactions.
Discussion of credit risk mitigation, including collateral held for all sources of credit risk.
Quantified measures of the management of operational risk.
Discussion of publicly known risk items.
66-67
68-69
71-72
70
39-40
41
42-43
39-40
181
2
4, 5, 7
6
7, 8
45-49, 72, 113-114 161, 199-203, 207-208
161, 199-203
202-203
45-49
45-49
45, 49
11-13, 24-27
11-20, 24-27
17-20
10
47-48
85-89
87-89
93-94
89-92
84
79-85
79-85
79-85
204-207
204-207
207
25-28, 108-114
167-168, 201-202
12-20, 16-22(1)
142-143, 168
24, 109, 111, 113
168
17-18(1)
159, 161
76
25, 75-76
49, 95-96
53
(1) In the Supplementary Financial Information Package
10 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S
T A B L E O F C O N T E N T S
Forward-looking statements
12
13 Non-GAAP measures
14
Financial highlights
(cid:3) Overview
15
16
16
16
16
Financial results
Economic outlook
Shareholder returns
Impact of foreign currency translation
Impact of acquisitions
(cid:3) Group Financial Performance
17 Net income
17 Net interest income
19 Non-interest income
21 Non-interest expenses
22
Income taxes
22 Credit quality
31
33
34
Fourth quarter review
Summary of quarterly results
Financial results review: 2014 vs 2013
(cid:3) Group Financial Condition
Statement of financial position
38
39 Capital management
49 Off-balance sheet arrangements
52
53
Financial instruments
Selected credit instruments – publically known
risk items
(cid:3) Business Lines
54
56
59
62
65
Overview
Canadian Banking
International Banking
Global Banking and Markets
Other
(cid:3) Risk Management
Overview
Credit risk
66
73
78 Market Risk
Liquidity risk
85
Other risks
95
Operational risk
95
Reputational risk
96
Environmental risk
97
Insurance risk
97
Strategic risk
98
(cid:3) Controls and Accounting Policies
99
99
105
105
107
Controls and procedures
Critical accounting estimates
Future accounting developments
Regulatory developments
Related party transactions
(cid:3) Supplementary Data
108 Geographic information
110 Credit risk
115
117
118
Revenues and expenses
Selected quarterly information
Eleven-year statistical review
11 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Our public communications often include oral or written forward-looking statements. Statements of this type are included in this document, and may
be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such
statements are made pursuant to the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995 and any applicable
Canadian securities legislation. Forward-looking statements may include, but are not limited to, statements made in this Management’s Discussion
and Analysis in the Bank’s 2015 Annual Report under the headings “Overview – Outlook,” for Group Financial Performance “Outlook,” for each
business segment “Outlook” and in other statements regarding the Bank’s objectives, strategies to achieve those objectives, the regulatory
environment in which the Bank operates, anticipated financial results (including those in the area of risk management), and the outlook for the Bank’s
businesses and for the Canadian, U.S. and global economies. Such statements are typically identified by words or phrases such as “believe,” “expect,”
“anticipate,” “intent,” “estimate,” “plan,” “may increase,” “may fluctuate,” and similar expressions of future or conditional verbs, such as “will,”
“may”, “should,” “would” and “could.”
By their very nature, forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and
the risk that predictions and other forward-looking statements will not prove to be accurate. Do not unduly rely on forward-looking statements, as a
number of important factors, many of which are beyond the Bank’s control and the effects of which can be difficult to predict, could cause actual
results to differ materially from the estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited
to: the economic and financial conditions in Canada and globally; fluctuations in interest rates and currency values; liquidity and funding; significant
market volatility and interruptions; the failure of third parties to comply with their obligations to the Bank and its affiliates; changes in monetary
policy; legislative and regulatory developments in Canada and elsewhere, including changes to, and interpretations of tax laws and risk-based capital
guidelines and reporting instructions and liquidity regulatory guidance; changes to the Bank’s credit ratings; operational (including technology) and
infrastructure risks; reputational risks; the risk that the Bank’s risk management models may not take into account all relevant factors; the accuracy
and completeness of information the Bank receives on customers and counterparties; the timely development and introduction of new products and
services in receptive markets; the Bank’s ability to expand existing distribution channels and to develop and realize revenues from new distribution
channels; the Bank’s ability to complete and integrate acquisitions and its other growth strategies; critical accounting estimates and the effects of
changes in accounting policies and methods used by the Bank (See “Controls and Accounting Policies – Critical accounting estimates” in the Bank’s
2015 Annual Report, as updated by quarterly reports); global capital markets activity; the Bank’s ability to attract and retain key executives; reliance on
third parties to provide components of the Bank’s business infrastructure; unexpected changes in consumer spending and saving habits; technological
developments; fraud by internal or external parties, including the use of new technologies in unprecedented ways to defraud the Bank or its
customers; increasing cyber security risks which may include theft of assets, unauthorized access to sensitive information or operational disruption;
consolidation in the Canadian financial services sector; competition, both from new entrants and established competitors; judicial and regulatory
proceedings; natural disasters, including, but not limited to, earthquakes and hurricanes, and disruptions to public infrastructure, such as
transportation, communication, power or water supply; the possible impact of international conflicts and other developments, including terrorist
activities and war; the effects of disease or illness on local, national or international economies; and the Bank’s anticipation of and success in
managing the risks implied by the foregoing. A substantial amount of the Bank’s business involves making loans or otherwise committing resources to
specific companies, industries or countries. Unforeseen events affecting such borrowers, industries or countries could have a material adverse effect on
the Bank’s financial results, businesses, financial condition or liquidity. These and other factors may cause the Bank’s actual performance to differ
materially from that contemplated by forward-looking statements. For more information, see the “Risk Management” section starting on page 66 of
the Bank’s 2015 Annual Report.
Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2015 Annual Report
under the heading “Overview – Outlook,” as updated by quarterly reports; and for each business segment “Outlook”. The “Outlook” sections in this
document are based on the Bank’s views and the actual outcome is uncertain. Readers should consider the above-noted factors when reviewing these
sections.
The preceding list of factors is not exhaustive of all possible risk factors and other factors could also adversely affect the Bank’s results. When
relying on forward-looking statements to make decisions with respect to the Bank and its securities, investors and others should carefully consider the
preceding factors, other uncertainties and potential events. The Bank does not undertake to update any forward-looking statements, whether written
or oral, that may be made from time to time by or on its behalf.
Additional information relating to the Bank, including the Bank’s Annual Information Form, can be located on the SEDAR website at
www.sedar.com and on the EDGAR section of the SEC’s website at www.sec.gov.
December 1, 2015
12 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Non-GAAP Measures
The Bank uses a number of financial measures to assess its performance. Some of these measures are not calculated in accordance with Generally
Accepted Accounting Principles (GAAP), which are based on International Financial Reporting Standards (IFRS), are not defined by GAAP and do not
have standardized meanings that would ensure consistency and comparability between companies using these measures. These non-GAAP measures
are used throughout this report and defined below.
Assets under administration (AUA)
AUA are assets administered by the Bank which are beneficially owned by clients and therefore not reported on the Bank’s Consolidated Statement of
Financial Position. Services provided for AUA are of an administrative nature, such as trusteeship, custodial, safekeeping, income collection and
distribution, securities trade settlements, customer reporting, and other similar services.
Assets under management (AUM)
AUM are assets managed by the Bank on a discretionary basis and in respect of which the Bank earns investment management fees. AUM are
beneficially owned by clients and are therefore not reported on the Bank’s Consolidated Statement of Financial Position. Some AUM are also
administered assets and are therefore included in assets under administration.
Adjusted diluted earnings per share
The adjusted diluted earnings per share is calculated by adding back the non-cash, after-tax amortization of intangible assets related to acquisitions
(excluding software) to diluted earnings per share.
Core banking assets
Core banking assets are average earning assets excluding bankers’ acceptances and average trading assets within Global Banking and Markets.
Core banking margin (TEB)
This ratio represents net interest income (on a taxable equivalent basis) divided by average core banking assets. This is consistent with the Bank’s
Consolidated Statement of Income presentation where net interest income from trading operations is recorded in trading revenues included in
non-interest income.
Economic equity and return on economic equity
For internal reporting purposes, the Bank attributes capital to its business segments based on their risk profile and uses a methodology that considers
credit, market, operational and other risks inherent in each business segment. The amount of risk capital attributed is commonly referred to as
economic equity. The economic equity methodology, models and assumptions are updated annually and applied prospectively. Return on economic
equity for the business segments is calculated as a ratio of net income attributable to common shareholders of the business segment and the
economic equity attributed.
Operating leverage (TEB)
The Bank defines operating leverage as the rate of growth in total revenue (on a taxable equivalent basis), less the rate of growth in non-interest
expenses.
Productivity ratio (TEB)
Management uses the productivity ratio as a measure of the Bank’s efficiency. This ratio represents non-interest expenses as a percentage of total
revenue (TEB).
Return on equity
Return on equity is a profitability measure that presents the net income attributable to common shareholders as a percentage of common
shareholders’ equity. The Bank calculates its return on equity using average common shareholders’ equity.
Regulatory capital and liquidity ratios
Regulatory capital ratios, such as Common Equity Tier 1 (CET1), Tier 1, Total Capital, Leverage and Liquidity coverage ratios, have standardized
meanings as defined by the Office of the Superintendent of Financial Institutions, Canada.
Taxable equivalent basis
The Bank analyzes net interest income, non-interest income, and total revenue on a taxable equivalent basis (TEB). This methodology grosses up tax-exempt
income earned on certain securities reported in either net interest income or non-interest income to an equivalent before tax basis. A corresponding increase is
made to the provision for income taxes; hence, there is no impact on net income. Management believes that this basis for measurement provides a uniform
comparability of net interest income and non-interest income arising from both taxable and non-taxable sources and facilitates a consistent basis of
measurement. While other banks also use TEB, their methodology may not be comparable to the Bank’s methodology. For purposes of segmented reporting,
a segment’s revenue and provision for income taxes are grossed up by the taxable equivalent amount. The elimination of the TEB gross up is recorded in the
Other segment. The TEB gross up to net interest income, non-interest income, total revenue, and provision for income taxes are presented below:
T1 TEB gross up
For the year ended October 31 ($ millions)
Net interest income
Non-interest income
Total revenue and provision for income taxes
2015
2014
2013
$
14
376
$
17
337
$
15
297
$ 390
$ 354
$ 312
Tax normalization adjustment of net income from associated corporations
For business line performance assessment and reporting, net income from associated corporations, which is an after-tax number, is adjusted to
normalize for income taxes.
The tax normalization adjustment grosses up the amount of net income from associated corporations and normalizes the effective tax rate in the
business lines to better present the contribution of the associated corporations to the business line results.
13 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T2 Financial highlights
As at and for the years ended October 31
2015
2014
2013(1)
2012(1)
2011
Operating results ($ millions)
Net interest income
Net interest income (TEB(2))
Non-interest income
Non-interest income (TEB(2))
Total revenue
Total revenue (TEB(2))
Provision for credit losses
Non-interest expenses
Provision for income taxes
Provision for income taxes (TEB(2))
Net income
Net income attributable to common shareholders
Operating performance
Basic earnings per share ($)
Diluted earnings per share ($)
Adjusted diluted earnings per share(1)(2) ($)
Return on equity(2) (%)
Productivity ratio (%)(TEB(2))
Operating leverage (%)
Core banking margin (%)(TEB(2))
Financial position information ($ millions)
Cash and deposits with financial institutions(1)
Trading assets
Loans(1)
Total assets
Deposits(1)
Common equity
Preferred shares
Assets under administration(2)
Assets under management(2)
Capital and liquidity measures(3)
Common Equity Tier 1 (CET1) capital ratio (%)
Tier 1 capital ratio (%)
Total capital ratio (%)
Leverage ratio (%)(4)
CET1 risk-weighted assets ($ millions)(5)
Liquidity coverage ratio (LCR) (%)(6)
Credit quality
Net impaired loans ($ millions)(7)
Allowance for credit losses ($ millions)
Net impaired loans as a % of loans and acceptances(1)(7)
Provision for credit losses as a % of average net loans and acceptances (annualized)(1)
Common share information
Share price ($)(TSX)
High
Low
Close
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends per share ($)
Dividend yield (%)(8)
Market capitalization ($ millions)(TSX)
Book value per common share ($)
Market value to book value multiple
Price to earnings multiple
Other information
Employees
Branches and offices
13,092
13,106
10,957
11,333
24,049
24,439
1,942
13,041
1,853
2,243
7,213
6,897
5.70
5.67
5.72
14.6
53.4
(1.5)
2.39
73,927
99,140
458,628
856,497
600,919
49,085
2,934
453,926
179,007
10.3
11.5
13.4
4.2
357,995
124
2,085
4,197
0.44
0.43
71.18
52.58
61.49
1,210
1,232
1,203
2.72
4.4
73,969
40.80
1.5
10.8
89,214
3,177
12,305
12,322
11,299
11,636
23,604
23,958
1,703
12,601
2,002
2,356
7,298
6,916
5.69
5.66
5.72
16.1
52.6
2.8
2.39
56,730
113,248
424,309
805,666
554,017
44,965
2,934
427,547
164,820
10.8
12.2
13.9
N/A
312,473
N/A
2,002
3,641
0.46
0.40
74.93
59.92
69.02
1,214
1,222
1,217
2.56
3.8
83,969
36.96
1.9
12.1
86,932
3,288
11,350
11,365
9,949
10,246
21,299
21,611
1,288
11,664
1,737
2,049
6,610
6,162
5.15
5.11
5.17
16.6
54.0
(3.4)
2.31
53,338
96,489
402,215
743,644
517,887
40,165
4,084
377,766
145,470
9.1
11.1
13.5
N/A
288,246
N/A
1,808
3,273
0.44
0.32
64.10
52.30
63.39
1,195
1,209
1,209
2.39
4.1
76,612
33.23
1.9
12.3
9,970
9,987
9,676
9,947
19,646
19,934
1,252
10,436
1,568
1,856
6,390
5,974
5.27
5.18
5.23
19.9
52.4
3.2
2.31
47,337
87,596
352,578
668,225
465,689
34,335
4,384
327,977
114,694
N/A
13.6
16.7
N/A
253,309
N/A
2,005
2,977
0.55
0.36
57.18
47.54
54.25
1,133
1,160
1,184
2.19
4.2
64,252
28.99
1.9
10.3
86,690(1)
3,330
81,497
3,123
9,014
9,035
8,296
8,562
17,310
17,597
1,076
9,481
1,423
1,710
5,330
4,965
4.63
4.53
4.58
20.3
53.9
(5.6)
2.32
38,723
75,799
319,056
594,423
421,234
26,356
4,384
297,668
102,733
N/A
12.2
13.9
N/A
233,970
N/A
1,957
2,689
0.60
0.34
61.28
49.00
52.53
1,072
1,108
1,089
2.05
3.7
57,204
24.20
2.2
11.3
75,362
2,926
(1) Certain prior period amounts have been restated to conform with current period presentation.
(2) Refer to page 13 for a discussion of non-GAAP measures.
(3) Effective November 1, 2012 regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (refer to page 39). Comparative amounts for prior periods were determined in accordance with Basel II rules
and have not been restated.
(4) Effective November 1, 2014 the Bank is subject to OSFI’s Leverage Requirement Guideline. (refer to Note 25 in the Consolidated Financial Statements).
(5) As at October 31, 2015, credit valuation adjustment (CVA) risk-weighted assets were calculated using scalars of 0.64, 0.71 and 0.77 to compute CET1, Tier 1 and Total Capital ratios, respectively.
(6)
(7) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(8) Based on the average of the high and low common share price for the year.
LCR is based on OSFI’s guideline, Liquidity Adequacy Requirement (LAR), effective commencing in 2015.
14 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Overview
Financial Results
Scotiabank had net income of $7,213 million in 2015, compared to $7,298 million last year and
diluted earnings per share (EPS) of $5.67 compared to $5.66 in 2014. Return on Equity was
14.6% compared to 16.1% last year. Adjusting for notable items in 2014 (refer T23), diluted
earnings per share growth was 4.4%.
Current year net income was positively impacted by an increase in net interest income, favourable
impact of foreign currency translation and lower income taxes. Mostly offsetting these positive
impacts were higher provision for credit losses and higher non-interest expenses. The current
year’s net income included the following, largely offsetting items, comprised of a reduction in the
pension benefit accrual related to modifications made to the Bank’s main pension plan of $151
million ($204 million pre-tax, approximately 3% of the pension liability), an increase to the
collective allowance against performing loans of $44 million ($60 million pre-tax) to support the
growing loan portfolio, and reorganization costs related to the consolidation of Canadian shared
services operations of $45 million ($61 million pre-tax). These items were recorded in the Other
segment.
Net interest income on a taxable equivalent basis (TEB) increased $784 million or 6% to
$13,106 million, primarily from growth in core banking assets and the favourable impact of
foreign currency translation. The core banking margin was stable.
Non-interest income (TEB) was $11,333 million, a decrease of $303 million from the prior year.
Adjusting for the notable items in 2014 (refer T23), non-interest income grew 2%. The increase
was primarily due to wealth management and banking revenues, and the positive impact of
foreign currency translation, partly offset by lower underwriting and advisory fees, and net gains
on investment securities.
The total provision for credit losses was $1,942 million in 2015, up $239 million from last year.
Adjusting for the 2014 notable item, provisions were higher by $301 million. This was primarily
from increased provisions in the Canadian and International retail portfolios, as well as higher
Global Banking and Markets corporate loan provisions in Canada and Europe. These higher
provisions were partially offset by lower commercial provisions in Canadian Banking. This year’s
provision also included a $60 million increase in the collective allowance against performing
loans.
Non-interest expenses were $13,041 million this year, an increase of $440 million or 3% over last
year. Adjusting for the notable items from the prior year, expenses increased $643 million or 5%.
The increase reflects higher technology, business development and reorganization costs and the
negative impact of foreign currency translation. These were partly offset by lower pension benefit
costs. Adjusting for the 2014 notable items, operating leverage was negative 0.7%, or negative
1.5% on a reported basis for the year.
The provision for income taxes was $1,853 million, a decrease of $149 million from last year. The
Bank’s overall effective tax rate for the year was 20.4% compared to 21.5% in 2014. The
decrease in the effective tax rate was due primarily to higher tax-exempt income and lower
earnings in higher tax jurisdictions.
The all-in Basel III Common Equity Tier 1 ratio was 10.3% as at October 31, 2015, compared to
10.8% last year, and remained well above the regulatory minimum.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
O
V
E
R
V
I
E
W
C1 Earnings per share (diluted)(1)
6
5
4
3
2
05
07
09
11
13
15
(1) Amounts prior to 2011 calculated under CGAAP
C2 Closing common share price
as at October 31
70
60
50
40
30
05
07
09
11
13
15
C3 Return on equity(1)
24
20
16
12
05
07
09
11
13
15
(1) Amounts prior to 2011 calculated under CGAAP
C4 Return to common shareholders
Share price appreciation plus dividends reinvested,
2005=100
260
220
180
140
05
07
09
11
13
15
Scotiabank
S&P/TSX Banks Total Return Index
S&P/TSX Composite Total Return Index
15 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Economic Outlook
The global economy continues to post moderate growth. A pick-up in the U.S. and other developed economies, are supporting growth in other
advanced nations. However, there continues to be uneven global economic growth. While economies like China and India are posting relatively solid
growth, although China has slowed in part from the implementation of structural and institutional reforms, a number of countries such as Russia and
Brazil are in recession.
The U.S. economy is getting a renewed lift from stronger consumer spending and housing activity, although the pace of overall U.S. output growth is
being tempered by cautious business investment and the drag on net trade imposed by reduced exports and a stronger dollar. Canadian real GDP is
showing signs of regaining traction as improving U.S. demand along with the more competitive currency boost the country’s non-resource exports,
while household spending and housing activity remain fairly resilient.
In many countries, oversupply conditions are continuing to negatively impact industrial production and business investment, a dynamic that is
weighing on international trade. With commodity markets bearing a large part of the adjustment, growth in the Pacific Alliance countries of Mexico,
Peru, Chile and Colombia is expected to be in the range of 2-3%. Growth in the region will come in large part from infrastructure investments, and in
the case of Mexico, increasing exports to the U.S. and other markets as well as relatively solid consumer spending.
We expect stronger momentum in global growth over the course of 2016. Support will be provided by a number of factors including continued low
borrowing costs, low energy and other commodity prices, the continued strengthening of the U.S. economy, the realigning of many currencies relative
to the U.S. dollar, and additional policy stimulus in a number of countries.
Shareholder Returns
In fiscal 2015 the total shareholder return on the Bank’s shares was negative 7.0%, while the total return of the S&P/TSX Composite Index was
negative 4.6%.
The total compound annual shareholder return on the Bank’s shares over the past five years was 6.5%, and 7.8% over the past 10 years. This
exceeded the total return of the S&P/TSX Composite Index, which was 4.3% over the past five years and 5.6% over the last ten years, as shown in
Chart 4.
Quarterly dividends were raised twice during the year – a 2 cents increase effective the second quarter and a further 2 cents increase in the fourth
quarter. As a result, dividends per share totaled $2.72 for the year, up 6% from 2014. With a payout ratio of 47.7% for the year, the Bank was within
its target payout range of 40-50%.
The Bank’s Return on Equity was 14.6% for fiscal 2015 compared to 16.1% in 2014.
T3 Shareholder returns
For the years ended October 31
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)(1)
Increase (decrease) in share price (%)
Total annual shareholder return (%)(2)
(1) Dividend yield is calculated as the dividend paid divided by the average of the high and low common share price for the year.
(2) Total annual shareholder return assumes reinvestment of quarterly dividends, and therefore may not equal the sum of dividend and share price returns in the table.
Impact of Foreign Currency Translation
The impact of foreign currency translation on net income is shown in Table 4.
T4 Impact of foreign currency translation
Average exchange rate
U.S. dollar/Canadian dollar
% change
Impact on income(1) ($ millions except EPS)
Net interest income
Non-interest income(2)
Non-interest expenses
Other items (net of tax)
Net income
Earnings per share (diluted)
Impact by business line ($ millions)
Canadian Banking
International Banking(2)
Global Banking and Markets
Other(2)
(1) Includes impact of all currencies.
(2) Includes the impact of foreign currency hedges.
2015
2014
2013
2012
2011
61.49
2.72
4.4
(10.9)
(7.0)
69.02
2.56
3.8
8.9
13.2
63.39
2.39
4.1
16.8
21.7
54.25
2.19
4.2
3.3
7.6
52.53
2.05
3.7
(3.9)
(0.4)
2015
1.24
2014
1.09
2013
1.02
13.9%
6.9%
2.5%
2015
vs. 2014
2014
vs. 2013
2013
vs. 2012
$ 232
243
(151)
(62)
$ 262
$ 0.21
$
20
84
110
48
$ 191
195
(134)
(70)
$ 182
$ 0.15
$
8
80
85
9
$
71
13
(65)
(10)
$
9
$ 0.01
$
1
18
12
(22)
$ 262
$ 182
$
9
Impact of Acquisitions
There was no significant impact to the Bank’s reported net income in 2015 or 2014 from acquisitions.
16 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
GROUP FINANCIAL PERFORMANCE
C5 Net interest income by business line(1)
TEB, $ millions
Net Income
Net income was $7,213 million, down 1% compared to $7,298 million last year. Adjusting for
the 2014 notable items of $290 million (refer T23), net income increased $205 million or 3%.
Net Interest Income
Net interest income (TEB) was $13,106 million, an increase of $784 million or 6% from the prior
year. This increase was driven by a 6% increase in core earning assets and the favourable impact
of foreign currency translation of $232 million.
Canadian Banking’s net interest income was up $419 million or 7% driven by an increase in both
average earning assets and margins. Net interest income increased $551 million or 11% in
International Banking primarily due to strong asset growth in Latin America and the impact of
acquisitions, slightly offset by margin compression. Partially offsetting these increases was lower
asset/liability management income reflected in the Other segment.
Core banking assets increased $33 billion to $548 billion. Approximately half of this increase was
from the positive impact of foreign currency translation. Asset growth in Canadian Banking was
driven by strong growth in automotive loans, credit cards, and commercial loans. International
Banking asset growth was across both retail and commercial loans.
The core banking margin of 2.39% was in line with the previous year. The margin increase in
Canadian Banking was offset by the impact of higher volumes of lower yielding deposits with
financial institutions and lower asset/liability management income reflected in the Other
segment.
Outlook
The Bank’s net interest income is expected to increase in 2016 mainly from growth in core
banking assets. The core banking margin is expected to remain in line with 2015 as the full year
impact of acquisitions made in 2015 and those expected to close in 2016, are partly offset by
continued deposit margin compression in an expected low rate environment.
T5 Net interest income and core banking margin(1)
($ billions, except percentage amounts)
Total average assets and net interest income
Less: total assets in Capital Markets(2)
Banking margin on average total assets
Less: non-earning assets and customers’ liability under acceptances
$ 860.6
258.1
$ 602.5
54.4
$ 13.1
–
$ 13.1
Average
balance
$ 795.6
232.5
2.18% $ 563.1
48.0
2015
Average
balance Interest
Average
rate
14000
12000
10000
8000
6000
4000
2000
13
14
15
Global Banking and Markets
International Banking
Canadian Banking
(1) Excludes Other segment
C6 Non-interest income by business line(1)
$ millions
14000
12000
10000
8000
6000
4000
2000
13
14
15
Global Banking and Markets
International Banking
Canadian Banking
(1) Excludes Other segment
2014
Interest
$12.3
–
$12.3
Average
rate
Average
balance
$ 748.9
212.0
2.19% $ 536.9
47.4
2013
Interest
$11.3
–
$11.3
Average
rate
2.11%
Core banking assets and margin
$ 548.1
$ 13.1
2.39% $ 515.1
$12.3
2.39% $ 489.5
$11.3
2.31%
(1) Taxable equivalent basis. Refer to non-GAAP measures on page 13.
(2) Net interest income from Capital Markets trading assets is recorded in trading revenues in non-interest income.
17 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T6 Average balance sheet(1) and net interest income
For the fiscal years ($ billions)(2)
Assets
Deposits with financial institutions
Trading assets
Securities purchased under resale agreements and securities
borrowed
Investment securities
Loans:
Residential mortgages
Personal and credit cards
Business and government
Allowance for credit losses
Total loans
Total earning assets
Customers’ liability under acceptances
Other assets
Total assets
Liabilities and equity
Deposits:
Personal
Business and government
Financial institutions
Total deposits
Obligations related to securities sold under repurchase
agreements and securities lent
Subordinated debentures
Other interest-bearing liabilities
Total interest-bearing liabilities
Other liabilities including acceptances
Equity(3)
Total liabilities and equity
Net interest income
2015
2014
2013
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
$ 71.1
111.2
$ 0.3
0.2
0.41% $ 60.1
113.3
0.17%
$ 0.3
0.1
0.44% $ 55.6
105.1
0.12%
$ 0.3
0.1
99.9
43.7
214.4
87.5
142.2
(4.0)
$ 440.1
$ 766.0
11.4
83.2
0.2
0.7
7.5
6.6
4.6
0.16%
1.69%
3.51%
7.52%
3.25%
91.1
41.2
210.9
79.6
128.5
(3.6)
0.2
0.8
7.6
6.1
4.3
0.20%
1.91%
3.60%
7.61%
3.39%
80.0
40.3
206.6
72.1
116.9
(3.3)
$ 18.7
$ 20.1
4.26% $ 415.4
$ 18.0
4.34% $ 392.3
2.63% $ 721.1
$ 19.4
2.69% $ 673.3
0.2
0.8
7.4
5.6
4.4
$17.4
$18.8
10.4
64.1
10.2
65.4
0.50%
0.12%
0.24%
2.20%
3.59%
7.70%
3.76%
4.42%
2.80%
$ 860.6
$ 20.1
2.34% $ 795.6
$ 19.4
2.43% $ 748.9
$18.8
2.52%
$ 181.4
368.1
37.3
$ 586.8
90.7
5.6
50.1
$ 2.3
3.4
0.3
$ 6.0
0.2
0.2
0.6
1.27% $ 172.6
339.7
0.91%
38.4
0.85%
$ 2.4
3.5
0.3
1.42% $ 167.2
314.0
1.02%
35.7
0.77%
1.02% $ 550.7
$ 6.2
1.13% $ 516.9
0.26%
3.33%
1.20%
87.3
5.3
50.2
0.3
0.2
0.4
0.32%
3.84%
0.72%
77.7
7.8
44.5
$ 2.6
3.5
0.3
$ 6.4
0.3
0.3
0.5
$ 733.2
$ 7.0
0.96% $ 693.5
$ 7.1
1.02% $ 646.9
$ 7.5
75.9
51.5
$ 860.6
$ 7.0
$ 13.1
54.4
47.7
59.4
42.6
0.81% $ 795.6
$ 7.1
0.89% $ 748.9
$ 12.3
$ 7.5
$11.3
1.57%
1.12%
0.69%
1.24%
0.37%
4.37%
1.02%
1.16%
1.00%
(1) Average of daily balances.
(2) On a taxable equivalent basis. Refer to non-GAAP measures on page 13.
(3) Includes non-controlling interests of $1.3 billion in 2015, $1.2 billion in 2014 and $1.1 billion in 2013.
18 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T7 Non-interest income
For the fiscal years ($ millions)
2015
2014
2013
2015
versus
2014
$
1,089
$
933
$
816
17%
Banking
Card revenues
Deposit and payment services
Deposit services
Other payment services
Credit fees
Commitment and other credit fees
Acceptance fees
Other
Banking fee related expenses
Total banking revenues
Wealth management
Mutual funds
Brokerage fees
Investment management and trust
Investment management and custody
Personal and corporate trust
Total wealth management revenues
Underwriting and other advisory
Non-trading foreign exchange
Trading revenues(1)
Net gain on sale of investment securities
Net income from investments in associated
corporations
Insurance underwriting income, net of claims
Other
928
307
901
282
865
257
$
1,235
$
1,183
$
1,122
787
266
778
236
$
1,053
$
1,014
$
406
423
379
339
717
226
943
416
297
$
3,360
$
3,170
$
3,000
$
1,619
1,006
$
1,468
942
$
1,280
847
$
$
440
204
644
3,269
525
492
1,185
639
405
556
526
$
$
419
194
613
3,023
712
420
1,114
741
428
474
1,217
$
$
365
173
538
2,665
503
404
1,300
375
681
448
573
Total non-interest income
Taxable equivalent basis
$ 10,957
$ 11,299
$
376
$
337
$
$
9,949
297
Total non-interest income (TEB)(2)
$ 11,333
$ 11,636
$ 10,246
(1) On a taxable equivalent basis, trading revenues were $1,561 (2014 – $1,451; 2013 – $1,597).
(2) Refer to non-GAAP measures on page 13.
3
9
4%
1
13
4%
7%
25%
6%
10%
7
5
5
5
8%
(26)%
17
6
(14)
(5)
17
(57)
(3)%
12%
(3)%
C7 Sources of non-interest income
19%
10%
11%
10%
15%
Underwriting and
other advisory fees
Non-trading foreign
exchange fees
Trading revenues
Other non-interest
income
11%
4%
5%
6%
9%
Card revenues
Deposit and
payment services
and other banking
fees
Credit fees
Mutual funds
Brokerage fees
Investment
management and
trust
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
Non-Interest Income
Non-interest income (TEB) was $11,333 million, down $303 million or 3% from $11,636 million last year. Adjusting for the notable items in 2014 of
$566 million (refer T23), non-interest income increased $263 million or 2%. Growth in banking and wealth management revenues and the positive
impact of foreign currency translation were mostly offset by lower underwriting and advisory fees and net gains on investment securities.
Banking revenues, excluding related expenses, grew $274 million or 8% to $3,783 million mainly from strong growth in card revenues reflecting
higher transaction fees and the impact of the Cencosud acquisition. Both Canadian Banking and International Banking contributed to the increase
in deposit and payment services revenue, while the increase in cash management fees was primarily in International Banking. Credit fees were up
$39 million or 4% with growth in both Canadian Banking and International Banking. Banking fee related expenses rose $84 million or 25%, due
primarily to increases in card expenses in Canadian Banking and International Banking, reflecting higher transaction volumes, acquisitions, and the
impact of foreign currency translation.
Wealth management revenues were up $246 million or 8% from prior year. Mutual fund fees increased $151 million or 10% reflecting higher
average assets under management due to strong net sales, the full year impact of implementation of fixed administration fees, and favourable market
conditions. Brokerage fees were up $64 million, primarily from fee-based assets in the retail brokerage business.
Underwriting and other advisory fees were down $187 million or 26% year over year, reflecting a decline in new issues and investment advisory fees
in Global Banking and Markets from a strong performance in the prior year.
Non-trading foreign exchange fees were $492 million, up $72 million mainly from higher revenues in Latin America and the Caribbean.
Trading revenues of $1,185 million increased $71 million mainly related to equities.
Net income from investments in associated corporations was $405 million, down from $428 million last year. Higher contributions from Thanachart
Bank, Bank of Xi’an and the full year impact of the Bank’s investment in Canadian Tire Financial Services business was more than offset by the impact
of the CI disposition and lower contributions from Banco del Caribe.
Insurance underwriting income was higher by $82 million, primarily from strong premium growth and lower claims, across both Latin America and the
Caribbean.
Other income was lower by $691 million, primarily due to the impact of 2014 notable items of $596 million.
19 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Outlook
Non-interest income is expected to experience good growth in 2016 in card revenues, mutual fund management fees and brokerage revenues. Card
revenues will benefit from recent acquisitions in International Banking and Canadian Banking. Gains on investment securities are expected to be
lower.
T8 Trading revenues
For the fiscal years ($ millions)(1)
By trading products:
Interest rate and credit
Equities
Commodities
Foreign exchange
Other
Sub-total
Taxable equivalent adjustment
Total trading revenues (TEB)(1)
% of total revenues
(1) On a taxable equivalent basis. Refer to non-GAAP measures on page 13.
2015
2014
2013
$
400
177
345
201
62
1,185
376
$
415
92
359
208
40
1,114
337
$
596
120
338
198
48
1,300
297
$ 1,561
$ 1,451
$ 1,597
6.4%
6.1%
7.4%
20 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
T9 Non-interest expenses and productivity
For the fiscal years ($ millions)
Salaries and employee benefits
Salaries
Performance-based compensation
Share-based payments(2)
Other employee benefits
Premises and technology
Premises
Net rent
Property taxes
Other premises costs
Technology
Depreciation and amortization
Depreciation
Amortization of intangible assets
Communications
Advertising and business development
Professional
Business and capital taxes
Business taxes
Capital taxes
Other
2015
2014(1)
2013(1)
$
4,019
1,438
220
1,004
$
3,680
1,473
270
1,124
$
3,552
1,390
222
1,075
$
6,681
$
6,547
$
6,239
433
89
421
943
1,143
2,086
303
281
584
434
592
548
319
42
361
1,755
$
$
$
$
$
$
$
$
$
392
82
415
889
1,047
1,936
297
229
526
417
571
471
276
38
314
1,819
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
378
83
400
861
954
1,815
297
219
516
409
505
432
234
40
274
Non-interest expenses
$ millions
C8
14000
12000
10000
8000
6000
4000
2000
13
14
15
Salaries & employee benefits
Premises & technology
Depreciation and amortization
Communications & advertising
Professional & taxes
Other
Direct and indirect taxes
$ millions
11
12
13
14
15
Provision for income taxes
Total other taxes
C9
3000
2500
2000
1500
1000
500
0
2015
versus
2014
9%
(2)
(19)
(11)
2%
10
9
1
6%
9%
8%
2
23
11%
4%
4%
16%
16
11
15%
1,474
(4)%
Total non-interest expenses
Productivity ratio (TEB)(3)
$ 13,041
$ 12,601
$ 11,664
3%
53.4%
52.6%
54.0%
(1) Certain prior period amounts are retrospectively adjusted to reflect current period presentation.
(2) Excludes Employee Share Ownership Plans.
(3) Taxable equivalent basis. Refer to Non-GAAP measures on page 13.
Non-interest expenses
Total non-interest expenses in 2015 were $13,041 million, an increase of $440 million or 3% from last year. Adjusting for the 2014 notable items
(refer T23), the increase was $643 million or 5%.
Salaries and employee benefits were $134 million or 2% higher. Salaries increased $339 million, primarily due to annual pay increases, inflationary
adjustments in International Banking, reorganization of Canadian shared services and the negative impact of foreign currency translation. This was
partly offset by decreases in share-based payments of $50 million primarily due to lower grants and lower performance-based bonuses of $35 million.
As well, employee benefit costs were $120 million lower primarily due to the reduction in pension benefit accrual related to modifications made to the
Bank’s pension plan. Savings relating to the 2014 restructuring charges were in line with management’s expectations.
Premises costs rose by $54 million or 6% primarily relating to the reorganization of Canadian shared services, the negative impact of foreign currency
translation and the impact of acquisitions. Higher rent and other property-related expenses also contributed to the increase.
Technology costs were up $96 million or 9% mainly relating to higher software licensing and maintenance costs, increased technology project spend
in line with the Bank’s strategic initiatives, and the negative impact of foreign currency translation.
Professional expenses rose $77 million or 16% primarily relating to higher technology investments and regulatory initiatives, higher legal fees, and the
negative impact of foreign currency translation.
Business and capital taxes were up $47 million or 15% mainly due to higher deposit insurance in some International markets and Canada, reflecting
growth in deposit volumes and higher insurance rates.
The productivity ratio in 2015 was 53.4% compared to 53.0% adjusted for 2014 notable items, or 52.6% on a reported basis in the previous year.
Operating leverage was a negative 0.7% adjusted for the 2014 notable items, or a negative 1.5% on a reported basis.
Outlook
Non-interest expenses are expected to rise in the coming year reflecting business volume growth and ongoing technology investments, partly offset by
savings from structural cost reduction initiatives.
21 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Income Taxes
The provision for income taxes was $1,853 million, a decrease of $149 million from last year. The Bank’s effective tax rate for the year was 20.4%
compared to 21.5% for 2014. The decrease in the effective tax rate was due primarily to lower taxes in foreign jurisdictions and higher tax-exempt
income this year, partially offset by a lower tax rate on the disposition gain in the prior year.
Outlook
The Bank’s effective tax rate is expected to be in the range of 22% to 25% in 2016.
Credit Quality
Provision for credit losses
The total provision for credit losses was $1,942 million in 2015, up $239 million from last year. The provision for credit losses ratio was 43 basis points
compared to 40 basis points in the prior year. Adjusting for the 2014 notable item (refer T23), provisions were higher by $301 million. This was
primarily from increased provisions in the Canadian and International retail portfolios, as well as increased Global Banking and Markets corporate loan
provisions in Canada and Europe. These higher provisions were partially offset by lower commercial provisions in Canadian Banking. As well, this
year’s provision included a $60 million increase in the collective allowance against performing loans.
The provision for credit losses in Canadian Banking was $687 million, an increase of $24 million. Adjusting for the 2014 notable item of $62 million,
the provision for credit losses was up $86 million due to growth in retail portfolios, primarily in credit cards and auto loans, offset by lower commercial
provisions. The provision for credit losses ratio was 23 basis points in Canadian Banking, unchanged from last year, or up 2 basis points, adjusting for
the 2014 notable item.
The provision for credit losses in International Banking increased $104 million to $1,128 million. In the retail portfolio, acquisitions and related benefits
accounted for almost two thirds of the increase in provisions. Adjusting for these benefits, growth in provisions was slightly below overall retail asset
growth. Retail provision increases in Mexico, Colombia and the Caribbean were partly offset by lower provisions in Peru. In the commercial portfolio,
provisions were primarily lower in the Caribbean, mostly as the fourth quarter last year included $83 million in provisions mainly relating to a small
number of accounts in the hospitality portfolio, partly offset by higher provisions in Peru. Overall, the provision for credit losses ratio was down 3 basis
points to 1.24% relative to last year, or 22 basis points excluding the impact of acquisitions.
The provision for credit losses in Global Banking and Markets was $67 million in 2015, an increase of $51 million from last year primarily due to
higher provisions in Canada and Europe. The provision for credit losses ratio was up 7 basis points to 10 basis points.
Outlook
The quality of the Bank’s credit portfolio is expected to remain strong given its broad global diversification and low exposure to areas and regions of
concern.
Domestically, retail provisions for credit losses are expected to increase from asset growth and changes in the business mix particularly with respect to
credit cards and auto loans. This growth is well within the Bank’s risk appetite and aligned with its strategy. Internationally, provisions for credit losses
are expected to increase in line with organic asset growth and through acquisitions. After several years of historically low credit losses in the Corporate
and Commercial portfolios, we expect credit losses to increase modestly in 2016.
T10 Provisions against impaired loans by business line
For the fiscal years ($ millions)
Canadian Banking
Retail
Commercial
International Banking
Caribbean and Central America
Latin America
Mexico
Peru
Chile
Colombia
Other Latin America
Total Latin America
Global Banking and Markets
Canada
U.S.
Asia and Europe
Total
2015
2014(1)
2013(1)
2012(1)
2011(1)
$ 642
45
$ 607
56
$ 423
57
$ 419
91
$ 466
128
$ 687
$ 663
$ 480
$ 510
$ 594
$ 184
$ 248
$ 171
$ 191
$ 209
260
265
108
247
64
944
240
267
74
146
49
776
130
244
100
101
28
603
91
180
82
22
38
413
141
80
55
–
20
296
$ 1,128
$ 1,024
$ 774
$ 604
$ 505
$
$
42
4
21
67
$
$
3
2
11
16
$
$
(7)
38
3
34
$
$
7
20
11
38
$
27
(12)
22
$
37
$ 1,882
$ 1,703
$ 1,288
$ 1,152
$ 1,136
(1) Prior periods amounts have been restated to conform with current period presentation.
22 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T11 Provision for credit losses as a percentage of average net loans and acceptances
For the fiscal years (%)
Canadian Banking
Retail
Commercial
International Banking
Retail
Commercial
Global Banking and Markets
Provisions against impaired loans
Provisions against performing loans
Total
(1) Prior period amounts have been restated to conform with current period presentation.
T12 Net charge-offs(1) as a percentage of average loans and acceptances
For the fiscal years (%)
Canadian Banking
Retail
Commercial
International Banking
Retail
Commercial
Global Banking and Markets
Total
(1) Write-offs net of recoveries.
(2) Prior period amounts have been restated to conform with current period presentation.
2015
2014(1)
2013
2012
2011
0.25%
0.12
0.24%
0.17
0.18% 0.21% 0.25%
0.18
0.31
0.50
0.23
0.23
0.18
0.23
0.28
2.33
0.26
1.24
0.10
0.42
0.01
2.13
0.51
1.27
0.03
0.40
0.00
2.06
0.15
0.86
0.07
0.32
0.00
1.93
0.09
0.75
0.09
0.33
0.03
1.88
0.09
0.75
0.11
0.36
(0.02)
0.43%
0.40%
0.32% 0.36% 0.34%
2015
2014(2)
2013
2012
2011
0.26%
0.20
0.21%
0.24
0.18% 0.22% 0.24%
0.26
0.23
0.31
0.25
0.21
0.19
0.23
0.24
1.99
0.30
1.10
0.01
1.66
0.14
0.70
0.11
1.51
(0.06)
0.52
0.13
1.28
0.05
0.49
0.01
1.61
0.07
0.64
0.11
0.39%
0.33%
0.25% 0.27% 0.31%
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
23 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T13 Impaired loans by business line(1)
As at October 31
($ millions)
Canadian Banking
Retail
Commercial
International Banking
Caribbean and Central America
Latin America
Mexico
Peru
Chile
Colombia
Other Latin America
Total Latin America
Global Banking and Markets
Canada
U.S.
Asia and Europe
Totals
Gross impaired loans
Allowance for
credit losses
Net impaired loans
2015
2014(2)
2015
2014(2)
2015
2014(2)
$ 843
208
$ 887
207
$ (543)
(157)
$ (550)
(185)
$ 300
51
$ 337
22
$ 1,051
$ 1,094
$ (700)
$ (735)
$ 351
$ 359
$ 1,588
$ 1,474
$ (647)
$ (520)
941
$ 954
271
603
405
356
117
314
423
381
332
102
(186)
(422)
(175)
(235)
(117)
1,752
1,552
(1,135)
(192)
(304)
(132)
(203)
(84)
(915)
85
181
230
121
–
617
122
119
249
129
18
637
$ 3,340
$ 3,026
$ (1,782)
$ (1,435)
$1,558
$1,591
$ 138
11
118
$ 267
$
$
22
11
47
80
$
$
(39)
(6)
(46)
(91)
$
$
(3)
–
(25)
(28)
99
5
72
$ 176
$
$
19
11
22
52
$ 4,658
$ 4,200
$ (2,573)
$ (2,198)
$2,085
$2,002
Allowance for credit losses against performing loans
(1,404)
(1,272)
Impaired loan metrics
As at October 31 ($ millions)
Net impaired loans as a % of loans and acceptances
Allowance against impaired loans as a % of gross impaired loans
Net impaired loans
2015(1)
2014(1)
0.44%
55%
0.46%
52%
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(2) Prior period amounts have been restated to conform with current period presentation.
Allowance for credit losses
The total allowance for credit losses was up $507 million to $3,977 million as at October 31, 2015 (excluding $220 million related to loans acquired
under FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico), from $3,470 million (excluding $171 million related to R-G
Premier Bank) last year.
Allowances in Canadian Banking decreased by $35 million, in line with the reduction in gross impaired loans.
In International Banking, allowances increased by $347 million to $1,782 million mainly in Peru, the Caribbean and Central America.
Global Banking and Markets’ allowances increased to $91 million from $28 million, in line with the increase in gross impaired loans.
The collective allowance against performing loans increased by $132 million to $1,404 million due to $72 million re-allocation from the reserves
against unfunded commitments and other off-balance sheet items, and a $60 million increase in the collective allowance against performing loans.
24 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
Impaired loans
Gross impaired loans increased to $4,658 million as at October 31, 2015 (excluding $157 million related to loans purchased under FDIC guarantee
related to the acquisition of R-G Premier Bank of Puerto Rico), from $4,200 million (excluding $154 million related to R-G Premier Bank of Puerto Rico)
last year.
Impaired loans in Canadian Banking decreased by $43 million, primarily in the retail portfolio.
In International Banking, impaired loans increased by $314 million largely due to increases in Latin America and the Caribbean and Central America
regions.
Impaired loans in Global Banking and Markets increased by $187 million, primarily in Canada and Europe.
Net impaired loans, after deducting the allowance for credit losses, were $2,085 million as at October 31, 2015, an increase of $83 million from a
year ago. Net impaired loans as a percentage of loans and acceptances were 0.44% as at October 31, 2015, in line with 0.46% a year ago.
Acquisition-related purchased loans
All purchased loans are initially measured at fair value on the date of acquisition, with no allowance for credit losses recorded in the Consolidated
Statement of Financial Position on the date of acquisition. Consequently, none of the purchased loans are considered to be impaired on the date of
acquisition. In arriving at the fair value, the Bank considers interest rate mark and credit rate mark adjustments.
The interest rate mark on the date of acquisition is principally set up for fixed interest rate loans and captures the impact of the interest rate
differential between the contractual rate of interest on the loan and the prevailing interest rate on the loan on the date of acquisition for the
remaining term. The interest rate mark is fully amortized into interest income in the Consolidated Statement of Income over the expected life of the
loan using the effective interest method.
The credit mark captures management’s best estimate of cash flow shortfalls on the loans over their lifetime as determined at the date of acquisition.
Changes to the expected cash flows of these loans are recorded as a charge/recovery in the provision for credit losses in the Consolidated Statement
of Income.
In 2012, a credit mark of $549 million for combined expected and incurred losses was recognized during the acquisition of Banco Colpatria in
Colombia. As at October 31, 2015, the remaining balance of the credit mark was $14 million (October 31, 2014 – $41 million). During the year,
$27 million of the credit mark was utilized. The utilization of the credit mark in the past three years was as follows: $163 million in 2014; $204 million
in 2013; and $141 million in 2012. The remaining credit mark on all acquired loans was $148 million as at October 31, 2015, compared to
$61 million last year.
Portfolio review
Canadian Banking
Gross impaired loans in the retail portfolio decreased by $44 million or 5%. Provision for credit losses in the retail portfolio were $642 million, up $35
million or 6% from last year with increases in credit cards and auto loans driven by growth in these relatively higher spread loans.
In the commercial loan portfolio, gross impaired loans increased by $1 million to $208 million. The provision for credit losses was $45 million, down
$11 million or 20% from last year.
International Banking
In retail, gross impaired loans increased by $307 million to $2,157 million during the year, with an increase attributable mainly to the Caribbean &
Central America, Peru and Colombia. The provision for credit losses in the retail portfolio increased to $1,002 million from $807 million last year, with
acquisitions accounting for almost two thirds of the increase in provisions, with the remaining provisions increasing in line with overall retail asset
growth. Adjusting for the impact of acquisitions, retail provision increases in Mexico, Colombia and Caribbean were offset by lower provisions in Peru.
In commercial banking, gross impaired loans were $1,183 million, a small increase of $7 million over the prior year. The provision for credit losses in
the commercial portfolio was $126 million in 2015, versus $217 million in 2014. The decrease was attributable to lower provisions in the Caribbean,
mostly due to the $83 million provision last year in the hospitality portfolio, partly offset by higher provisions in Peru.
Global Banking and Markets
Gross impaired loans in Global Banking and Markets increased by $187 million in 2015 to $267 million primarily in Canada and Europe. The provision
for credit losses was $67 million in 2015, versus $16 million in 2014. The provisions this year were primarily in Canada and Europe.
Risk diversification
The Bank’s exposures to various countries and types of borrowers are well diversified (see T62 on page 108 and T66 on page 110). Chart 10 shows
loans and acceptances by geography. Ontario represents the largest Canadian exposure at 31.8% of the total. The Caribbean and Central America
was 6.7% of the total exposure and the U.S. was 6.4%.
Chart 11 shows loans and acceptances by type of borrower (see T66 on page 110). Excluding loans to households, the largest industry exposures were
wholesale and retail (4.6%), financial services (4.4% including banks and non-banks), real estate and construction (4.1%), and oil and gas (3.5%).
Risk mitigation
To mitigate exposures in its performing corporate portfolios, the Bank uses diversification by company, industry, and country, with loan sales and
credit derivatives used sparingly. In 2015, loan sales totaled $143 million, compared to $153 million in 2014. The largest volume of loan sales in 2015
related to loans in the transportation and financial services industries. As at October 31, 2015, credit derivatives used to mitigate exposures in the
portfolios totaled $39 million (notional amount), compared to $34 million as at October 31, 2014.
The Bank actively monitors industry and country concentrations. As is the case with all industry exposures, the Bank continues to closely follow
developing trends and takes additional steps to mitigate risk as warranted. Oil and gas and shipping portfolios are being closely managed.
25 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Overview of loan portfolio – Top and emerging risks
While the Bank has a well-diversified portfolio by product, business and geography, details of certain portfolios of current focus are highlighted below.
Oil and gas
The Bank’s outstanding loan exposure to oil and gas was $16.5 billion as at October 31, 2015 (October 31, 2014 – $12.8 billion), reflecting
approximately 3.5% (October 31, 2014 – 2.9%) of the Bank’s total loan portfolio. Approximately 58% of the loan exposures are investment grade.
Adjusting for the impact of foreign currency translation, outstanding loan exposure increased by $2.4 billion relative to last year, reflective of a 17%
increase. In addition, the Bank has related undrawn oil and gas loan commitments amounting to $14.3 billion as at October 31, 2015 (October 31,
2014 – $10.8 billion). The year-over-year increase in related undrawn loan commitments was 20%, excluding the effect of foreign currency
translation, and approximately three quarters of the increase was investment grade.
The Bank continues to evaluate the potential impact of oil price scenarios on exposures through various stress tests. Results continue to be within our
risk tolerance.
Puerto Rico
The Bank’s outstanding loan exposure in Puerto Rico was $5.3 billion as at October 31, 2015, approximately 1% of the Bank’s total loan book.
This includes $3.4 billion in retail loans and $1.9 billion in business and government loans, including loans to government and related entities of
$0.4 billion.
Approximately 60% of the retail loans are subject to a FDIC loss-sharing arrangement.
The Bank believes its outstanding loan exposure in Puerto Rico is manageable.
Residential mortgages
A large portion of the Bank’s lending portfolio is comprised of residential mortgages and consumer loans, which are well diversified by borrower. As
at October 31, 2015, these loans accounted for $309 billion or 65% of the Bank’s total loans and acceptances outstanding (October 31, 2014 - $297
billion or 68%). Of these, $236 billion or 76% are real estate secured loans (October 31, 2014 - $232 billion or 78%).
26 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
Insured and uninsured residential mortgages and home equity lines of credit
The following table presents amounts of insured and uninsured residential mortgages and home
equity lines of credit (HELOCs), by geographic area.
T14 Insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic areas
2015
Residential mortgages
Home equity lines of credit
As at
October 31
Insured(1)
Uninsured
Total
Insured(1)
Uninsured
Total
($ millions)
Amount % Amount % Amount % Amount % Amount % Amount %
Canada:(2)
Atlantic provinces $ 6,758
6,977
Quebec
Ontario
Manitoba &
3.6
3.6
42,645 22.4
$
5,380
8,317
50,372
2.8
4.4
26.5
$ 12,138
15,294
93,017
Saskatchewan
Alberta
British Columbia
& Territories
4,865
17,898
2.6
9.4
3,978
12,098
13,659
7.2
17,176
2.1
6.4
9.0
8,843
29,996
30,835
16.2
6.4
8.0
48.9
4.7
15.8
$ 2
–
2
2
3
–
–
–
–
$ 1,277
6.9
5.5
1,032
9,351 50.2
$ 1,279
1,032
9,353
–
0.1
854
4.6
3,020 16.1
856
3,023
6.9
5.5
50.2
4.6
16.2
–
3,093 16.6
3,093
16.6
Canada(3)
$92,802 48.8% $ 97,321
51.2% $190,123
100% $ 9
0.1% $18,627 99.9% $18,636
100%
International
–
–
27,375
100
27,375
100
–
–
–
–
–
–
C10 Well diversified in Canada and
internationally…
loans and acceptances, October 2015
4%
7%
2%
10%
4%
6%
Canada
United States
Mexico
Latin America
Europe
67%
Caribbean and
Central America
Other
C11 … and in household and business lending
loans & acceptances, October 2015
Total
$92,802 42.7% $124,696
57.3% $217,498
100% $ 9
0.1% $18,627 99.9% $18,636
100%
46%
29%
6%
19%
Corporate
Financial and government
Personal
Residential mortgages
2014
Canada(3)
$97,943 51.9% $ 90,899
48.1% $188,842
100% $12
0.1% $18,946 99.9% $18,958
100%
International
–
–
23,806
100
23,806
100
–
–
–
–
–
–
Total
$97,943 46.1% $114,705
53.9% $212,648
100% $12
0.1% $18,946 99.9% $18,958
100%
(1) Default insurance is contractual coverage for the life of eligible facilities whereby the Bank’s exposure to real estate secured lending is protected
against potential shortfalls caused by borrower default. This insurance is provided by either government-backed entities or private mortgage
insurers.
(2) The province represents the location of the property in Canada.
(3) Includes multi-residential dwellings (4+ units) of $2,104 (October 31, 2014 – $1,518) of which $1,005 are insured (October 31, 2014 – $632).
Amortization period ranges for residential mortgages
The following table presents the distribution of residential mortgages by amortization periods,
and by geographic areas.
T15 Distribution of residential mortgages by amortization periods, and by geographic areas
2015
Residential mortgages by amortization
Less than
20 years
20-24
years
25-29
years
30-34
years
35.6%
66.4%
35.6% 25.7%
20.4% 11.4%
3.0%
1.6%
35 years
and
greater
0.1%
0.2%
Total
residential
mortgage
100%
100%
2014
34.6%
66.6%
34.0% 25.1%
20.5% 11.5%
6.2%
1.2%
0.1%
0.2%
100%
100%
As at October 31
Canada
International
Canada
International
27 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Loan to value ratios
The Canadian residential mortgage portfolio is 51% uninsured (October 31, 2014 – 48%). The average loan-to-value (LTV) ratio of the uninsured
portfolio is 53% (October 31, 2014 – 54%).
The following table presents the weighted average LTV ratio for total newly originated uninsured residential mortgages and home equity lines of
credit during the year, which include mortgages for purchases, refinances with a request for additional funds and transfer from other financial
institutions, by geographic areas.
T16 Loan to value ratios
Canada:
Atlantic provinces
Quebec
Ontario
Manitoba & Saskatchewan
Alberta
British Columbia & Territories
Canada
International
Canada
International
Uninsured LTV ratios(1)
For the year ended October 31, 2015
Residential mortgages
LTV%
Home equity lines of credit(2)
LTV%
67.7%
62.3
62.0
66.8
65.4
60.0
62.5%
68.3%
63.6%
68.8
65.4
66.7
68.9
63.3
65.7%
N/A
For the year ended October 31, 2014
62.0%
69.9%
65.0%
N/A
(1) The province represents the location of the property in Canada.
(2) Includes only home equity lines of credit (HELOC) under Scotia Total Equity Plan. LTV is calculated based on the sum of residential mortgages and the authorized limit for related HELOCs, divided by the value of the related residential
property, and presented on a weighted average basis for newly originated mortgages and HELOCs.
Potential impact on residential mortgages and real estate home equity lines of credit in the event of an economic downturn
The Bank performs stress testing on its portfolio to assess the impact of increased levels of unemployment, rising interest rates, reduction in property
values and changes in other relevant macro-economic variables. Potential losses in the mortgage portfolio under such economic downturn scenarios
are considered manageable given the diversified composition of the portfolio, the high percentage of insured exposures, and the low LTV in the
portfolio. This is further supported by sound risk management oversight and pro-active risk mitigation strategies.
Loans to Canadian condominium developers
With respect to loans to Canadian condominium developers, the Bank had loans outstanding of $927 million as at October 31, 2015 (October 31,
2014 – $978 million). This is a high quality portfolio with well-known developers who have long-term relationships with the Bank.
European exposure
As a result of the Bank’s broad international operations, the Bank has sovereign credit risk exposure to a number of countries. The Bank actively
manages this sovereign risk by using risk limits calibrated to the credit worthiness of the sovereign exposure. The current European exposure is
provided in Table 17 below.
The Bank believes that its European exposures are manageable, are sized appropriately relative to the credit worthiness of the counterparties (80% of
the exposures are to investment grade counterparties based on a combination of internal and external ratings), and are modest relative to the capital
levels of the Bank. The Bank’s European exposures are carried at amortized cost or fair value using observable inputs, with negligible amounts valued
using models with unobservable inputs (Level 3). There were no significant events in the quarter that have materially impacted the Bank’s exposures.
Below are the funded exposures related to all European countries:
T17 European exposure
As at October 31
($ millions)
Gross exposures
Less: Undrawn commitments
Net funded exposure
2015
2014
Loans and Loan Equivalents
Other
Loans
and
acceptances(1)
Letters of
credit and
guarantees(2)
Undrawn
commitments(3)
Securities
and deposits
with
financial
institutions (4)
Securities
Financing
Transactions
(SFT) and
derivatives(5)
Total
European
Exposure
Total
European
Exposure
$ 11,954
$ 2,593
$ 12,409
$ 9,378
$ 2,897
$ 39,231
$ 31,073
–
–
12,409
–
–
12,409
11,187
$ 11,954
$ 2,593
$
–
$ 9,378
$ 2,897
$ 26,822
$ 19,886
(1) Individual allowances for credit loss are $14.9 million.
(2) Letters of credit and guarantees are included as funded exposure as they have been issued.
(3) Undrawn commitments represent an estimate of the contractual amount that may be drawn upon by the obligor.
(4) Exposures for securities are calculated taking into account derivative positions where the security is the underlying reference asset and short trading positions.
(5) SFT comprise of securities purchased under resale agreements, obligations related to securities sold under repurchase agreements and securities lending and borrowing transactions. Gross and net funded exposures represent all net
positive positions after taking into account collateral. Collateral held against derivatives was $2,670 million and collateral held against SFT was $7,734 million.
28 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
T18 Funded exposures
Below are the funded exposures related to all European countries:
As at October 31
($ millions)
Greece
Ireland
Italy
Portugal
Spain
Total GIIPS
U.K.
Germany
France
Netherlands
Switzerland
Other
Total Non-GIIPS
Total Europe
Total Europe as at October 31, 2014
(1) Includes $667 (October 31, 2014 – $397) in exposures to supra-national agencies.
(2) Corporate includes financial institutions that are not banks.
T19 Bank’s exposure distribution by country
The Bank’s Exposures are distributed as follows:
As at October 31
($ millions)
Greece
Ireland
Italy
Portugal
Spain
Total GIIPS
U.K.
Germany
France
Netherlands
Switzerland
Other
Total Non-GIIPS
Total Europe
As at October 31, 2014
Sovereign(1)
Bank
Corporate(2)
Total
2015
$
$
$
$
$
$
–
24
307
–
109
440
2,867
663
1,241
(40)
1
1,042
5,774
6,214
5,159
$
$
$
$
$
$
–
72
187
–
110
369
2,684
824
670
335
380
218
5,111
5,480
4,208
$
$
$
$
$
$
339
332
15
(2)
286
970
7,344
1,360
658
679
661
3,456
14,158
15,128
10,519
$
$
$
$
$
$
339
428
509
(2)
505
1,779
12,895
2,847
2,569
974
1,042
4,716
25,043
26,822
19,886
$
$
$
2014
Total
384
295
271
6
330
1,286
8,072
2,535
3,077
588
969
3,359
$
$
18,600
19,886
2015
Loans and
loan
equivalents
Deposits
with
financial
institutions
Securities
SFT and
derivatives
$
$
$
338
84
252
–
385
1,059
6,649
1,350
723
606
616
3,544
$ 13,488
$ 14,547
$
9,884
$
$
$
$
$
$
–
24
1
–
2
27
1,896
614
9
96
42
25
2,682
2,709
1,932
$
$
$
$
$
$
1
200
254
(2)
108
561
2,766
749
1,455
66
341
731
6,108
6,669
6,170
$
$
$
$
$
$
–
120
2
–
10
132
1,584
134
382
206
43
416
2,765
2,897
1,900
$
$
$
2014
Total
384
295
271
6
330
1,286
8,072
2,535
3,077
588
969
3,359
$
$
18,600
19,886
Total
339
428
509
(2)
505
1,779
12,895
2,847
2,569
974
1,042
4,716
25,043
26,822
19,886
$
$
$
$
$
$
The Bank’s exposure to certain European countries of focus – Greece, Ireland, Italy, Portugal and Spain (GIIPS) – is not significant. As of October 31,
2015, the Bank’s funded exposure to the GIIPS sovereign entities, as well as banks and non-bank financial institutions and corporations domiciled in
these countries, totaled approximately $1.8 billion, up from $1.3 billion last year. Of the $1.8 billion, $1.1 billion related to loans, loan equivalents and
deposits with financial institutions which increased $106 million over last year.
Specific to Sovereign exposures to GIIPS, the Bank’s exposure to Ireland included central bank deposits of $23 million and $1 million in trading book
securities. The Bank was net long securities in sovereign exposures to Italy ($307 million) and Spain ($109 million). The Bank had no sovereign
securities holdings of Greece and Portugal.
The Bank had exposures to Italian banks of $187 million, as at October 31, 2015 (October 31, 2014 – $268 million), primarily related to short-term
precious metals trading and lending activities. Greek exposure of $339 million (October 31, 2014 – $384 million) related primarily to secured loans to
shipping companies.
Securities exposures include European sovereigns and banks (excluding GIIPS) exposure of $5.3 billion as at October 31, 2015 (October 31, 2014 –
$4.9 billion), predominantly related to issuers in the United Kingdom, France, Germany, and Luxembourg. Securities are carried at fair value and
substantially all holdings have strong market liquidity.
The majority of funded credit exposure is in the form of funded loans which are recorded on an accrual basis. As well, credit exposure to clients arises
from client-driven derivative transactions and securities financing transactions (reverse repurchase agreements, repurchase agreements, and securities
lending and borrowing). OTC derivative counterparty exposures are recorded on a fair value basis and security financing transactions are recorded on
an accrual basis. As at October 31, 2015, credit exposure to banks in the form of issued letters of credit amounted to $1.2 billion (October 31, 2014 –
$0.9 billion).
29 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Undrawn commitments of $12.4 billion (October 31, 2014 – $11.2 billion) are comprised of unfunded loan commitments and commitments to issue
letters of credit on behalf of other banks in a syndicated bank lending arrangement. Total unfunded loan commitments to corporations in Europe
(excluding GIIPS) were $8.6 billion as at October 31, 2015 (October 31, 2014 – $7.5 billion). As at October 31, 2015, commitments related to letters
of credit with banks amounted to $3.3 billion (October 31, 2014 – $3.6 billion). Unfunded commitments are detailed further by country in Table 20.
The Bank’s indirect exposure is also detailed in the table below and is defined as:
(cid:129)
(cid:129)
Securities where the exposures are to non-European entities whose parent company is domiciled in Europe, and
Letters of credit or guarantees (included as loan equivalents in the above table).
Included in the indirect exposure was securities exposure of $364 million related to GIIPS, $159 million to the United Kingdom and $34 million to
France. Indirect exposure by way of letters of credit totaled $2,593 million at October 31, 2015 (October 31, 2014 – $1,839 million), of which
$62 million (October 31, 2014 – $43 million) was indirect exposure to GIIPS. Indirect exposure is managed through the Bank’s credit risk management
framework, with a robust assessment of the counterparty.
In addition to the total indirect exposures detailed further below, the Bank had Euro-denominated collateral held for non-European counterparties of
$555 million (October 31, 2014 – $1,371 million).
The Bank may on occasion use credit default swaps (CDS) to partially offset its banking book exposure. As part of the trading portfolio, the Bank may
purchase or sell CDS. Specific to GIIPS as at October 31, 2015, the Bank had no CDS protection on funded loan exposures. All exposures, including
CDS, are subject to risk limits and ongoing monitoring by the Bank’s independent risk management department.
Like other banks, the Bank also provides settlement and clearing facilities for a variety of clients in these countries and actively monitors and manages
these intra-day exposures. However, the Bank has no funded exposure in these countries to retail customers or small businesses.
T20 Undrawn commitments and indirect exposure
As at October 31
($ millions)
Greece
Ireland
Italy
Portugal
Spain
Total GIIPS
U.K.
Germany
France
Netherlands
Switzerland
Other
Total Non-GIIPS
Total Europe
(1) Amounts in brackets represent net short positions arising from trading transactions.
Undrawn Commitments
Indirect Exposure (1)
2015
2014
2015
2014
$
$
$
–
256
53
–
180
489
5,526
607
1,599
1,188
740
2,260
$
$
$
–
87
45
–
57
$
–
(1)
6
–
420
189
$
425
5,662
791
1,269
1,056
806
1,414
$ 1,365
161
338
210
144
554
$
$
$
–
(1)
7
–
490
496
693
313
346
175
172
365
$ 11,920
$ 10,998
$ 2,772
$ 2,064
$ 12,409
$ 11,187
$ 3,197
$ 2,560
30 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Fourth Quarter Review
Q4 2015 vs. Q4 2014
Net income
Net income was $1,843 million compared to $1,438 million last year. Adjusting for the 2014 notable items (refer T23), net income grew by
$140 million or 8%. Strong asset growth and the positive impact of foreign currency translation were partly offset by increased provision for credit
losses and higher non-interest expenses. This quarter included a number of largely offsetting items, comprised of a reduction in pension benefit
accrual related to modifications made to the Bank’s main pension plan of $151 million ($204 million pre-tax), an increase to the collective allowance
for credit losses against performing loans due to the increase in the loan portfolio of $44 million ($60 million pre-tax), and reorganization costs related
to Canadian shared services of $45 million ($61 million pre-tax).
Net interest income
Net interest income (TEB) was $3,373 million, an increase of $268 million or 9%. The increase was attributable to asset growth primarily in retail and
commercial loans in International Banking, automotive and commercial loans in Canadian Banking, corporate loans in Global Banking and Markets,
and the positive impact of foreign currency translation.
The core banking margin was 2.35%, down four basis points driven by lower asset/liability management income, the impact of higher volumes of
lower yielding deposits with financial institutions and a lower margin in Global Banking and Markets. This was partially offset by higher margins in
Canadian Banking and International Banking.
Non-interest income
Non-interest income (TEB) of $2,825 million was up $82 million or 3%. Adjusting for the 2014 notable items (refer T23), non-interest income was in
line with last year. Higher banking fees, wealth management revenues, trading revenues, the positive impact of foreign currency translation, and the
full quarter impact of the Bank’s investment in Canadian Tire Financial Services contributed to the increase. This was offset by lower underwriting and
other advisory fees, and lower net gains on investment securities.
Provision for credit losses
The provision for credit losses was $551 million, down $23 million or 4%. Adjusting for the 2014 notable item (refer T23), provision for credit losses
was up $39 million. This increase was primarily due to an addition of $60 million in the collective allowance against performing loans this year. In
addition, a decrease in International Banking was partly offset by higher provisions in Global Banking and Markets.
Non-interest expenses and productivity
Non-interest expenses were $3,286 million, a decrease of $75 million or 2%. Adjusting for the 2014 notable items (refer T23), non-interest expenses
increased $128 million due to higher advertising, business development and technology costs, the negative impact of foreign currency translation, the
impact of the Cencosud acquisition, and reorganization of Canadian shared services. These were partly offset by lower salaries and employee benefit
costs primarily due to the pension cost reduction.
The productivity ratio in the fourth quarter was 53.0%, a slight improvement versus the productivity ratio of 53.3% last year, adjusted for the 2014
notable items.
Taxes
The tax rate was 19.4% compared to 20.6%, due primarily to higher tax benefits in foreign jurisdictions.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
31 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Q4 2015 vs. Q3 2015
Net income
Net income was $1,843 million, compared to $1,847 million. Higher net interest income and lower non-interest expenses were more than offset by
lower non-interest income and higher provision for credit losses. This quarter included a number of largely offsetting items, comprised of a reduction
in pension benefit accrual related to modifications made to the Bank’s main pension plan of $151 million ($204 million pre-tax), an increase to the
collective allowance for credit losses against performing loans due to the increase in the loan portfolio of $44 million ($60 million pre-tax), and
reorganization costs related to Canadian shared services of $45 million ($61 million pre-tax).
Net interest income
Net interest income (TEB) was $3,373 million, an increase of $16 million. The increase was attributable to asset growth primarily in retail and
commercial loans in International Banking, automotive loans in Canadian Banking, corporate loans in Global Banking and Markets, and the positive
impact of foreign currency translation.
The core-banking margin was 2.35%, down five basis points, driven by lower asset/liability management income, the impact of higher volumes of
lower yielding deposits with financial institutions and a lower margin in International Banking. This was partially offset by higher margin in Canadian
Banking.
Non-interest income
Non-interest income (TEB) was $2,825 million, down $50 million or 2%. Lower wealth management revenue, trading revenue and contribution from
associated corporations were partly offset by higher net gains on investment securities and the positive impact of foreign currency translation.
Provision for credit losses
The provision for credit losses was $551 million for the fourth quarter compared with $480 million. The increase primarily related to a $60 million
increase in the collective allowance against performing loans this quarter. Higher provisions in Global Banking and Markets and Canadian Banking
were partly offset by lower provisions in International Banking.
Non-interest expenses and productivity
Non-interest expenses were down $48 million or 1%. Lower salaries and employee benefits of $180 million primarily due to the pension benefit
accrual related to modifications made to the Bank’s pension plan were partly offset by costs related to the reorganization of Canadian shared services,
higher technology investment and increased marketing costs.
The productivity ratio was 53.0% compared to 53.5% in the previous quarter.
Taxes
The effective tax rate was 19.4% compared to 20.1% due primarily to lower taxes in foreign jurisdictions and higher tax recoveries partly offset by
lower tax-exempt dividend income.
32 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
Summary of Quarterly Results
T21 Quarterly financial highlights
For the three months ended
Total revenue ($ millions)
Total revenue (TEB(1)) ($ millions)
Net income ($ millions)
Basic earnings per share ($)
Diluted earnings per share ($)
(1) Refer to non-GAAP measures on page 13.
Net income
October 31
2015
July 31
2015
April 30
2015
January 31
2015
October 31
2014
July 31
2014
April 30
2014
January 31
2014
$ 6,125
6,198
$ 6,124
6,232
$ 5,937
6,054
$ 5,863
5,955
$ 5,747
5,848
$ 6,487
6,576
$ 5,725
5,809
$ 5,645
5,725
$ 1,843
$ 1,847
$ 1,797
$ 1,726
$ 1,438
$ 2,351
$ 1,800
$ 1,709
1.46
1.45
1.46
1.45
1.43
1.42
1.36
1.35
1.10
1.10
1.86
1.85
1.40
1.39
1.33
1.32
The Bank reported four quarters of consistent performance, with positive contributions from the Personal and Commercial businesses in Canadian and
International Banking.
Net interest income
Net interest income rose throughout the year. Core banking assets increased steadily during 2015 from continuing strong loan growth in Latin
America, in part from the benefit from the impact of foreign currency translation, and retail loan and commercial loan growth in Canadian Banking,
as well as corporate loan growth in Global Banking and Markets. The average balance of low-spread deposits with banks have increased since the
fourth quarter of last year.
The core banking margin for the year was unchanged at 2.39%. The margin increased during the first quarter, remained stable in the second and
third quarters but declined five basis points in the fourth quarter primarily due to higher volumes of low yielding deposits with financial institutions.
Canadian Banking’s margin improved during the year from higher mortgage, credit card and credit line spreads and strong growth in higher spread
products, including credit cards and consumer automotive. International Banking’s margin remained stable in the first two quarters, increased slightly
in the third quarter from the impact of the Cencosud acquisition, but declined slightly in the fourth quarter due to lower spreads in Mexico and Peru.
Spreads in Global Banking and Markets’ corporate lending portfolio declined slightly during each quarter from lower spreads in the U.S. and European
corporate loan portfolios.
Non-interest income
Non-interest revenues grew during the first three quarters before declining in the fourth quarter. Banking revenues trended upward during the year
with strong growth in card fees in Canada and Latin America. Both mutual fund fees and retail brokerage fees grew steadily throughout the year
reflecting higher average assets under management and a continued shift in fee-based assets under administration but declined in the fourth quarter
due mostly to weaker markets. Quarterly trading revenues reflected the different levels of market opportunities during the year. The level of net gains
on investment securities reflected market opportunities.
Provision for credit losses
Provision for credit losses increased steadily during the year reflecting loan volume growth and the $60 million increase in the collective allowance
against performing loans recognized in the fourth quarter. Loan loss ratios in Canadian Banking were steady during the year, but were up slightly
from last year due mainly to an increased mix of consumer loan and credit card volumes. International Banking experienced fluctuations throughout
the year, with the fourth quarter benefiting from improved credit quality and lower loan loss rates. The provision for credit losses in Global
Banking and Markets continued to be at low levels throughout the year, with an increase in the fourth quarter due to higher provisions in Canada.
Non-interest expenses
Non-interest expenses increased during the year. Non-interest expenses rose in part due to acquisitions as well as continued investment in growth
initiatives, and costs related to the reorganization of Canadian shared services, partly offset by the benefit from modifications made to the Bank’s
main pension plan. The timing of share and performance-based compensation and advertising and business development costs contributed to the
quarterly fluctuations.
Provision for income taxes
The effective tax rate ranged between 19.4% and 21.7% reflecting different levels of income earned in lower tax jurisdictions, as well as the
fluctuation of tax exempt dividend and trading income. The tax rate declined in the third and fourth quarters due to higher tax benefits in certain
International jurisdictions and tax recoveries from prior years.
33 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Results Review: 2014 vs. 2013
In order to identify key business trends between 2014 and 2013, commentary and the related financial results are below.
Net income
Scotiabank had good performance in 2014 with respect to its medium-term financial objectives. Net income was $7,298 million, $688 million or
10% higher than last year’s results. Diluted earnings per share (EPS) were $5.66 as compared to $5.11 in 2013. Return on equity was at 16.1%
compared to 16.6% last year.
The 2014 net income included a non-recurring after-tax benefit of $555 million on the sale of a majority of the Bank’s holding in CI Financial Corp.
(“the disposition”), after-tax restructuring charges of $110 million (“restructuring charges”), and after-tax impact of other notable items of
$155 million, or collectively 23 cents per share (refer T23). The 2013 net income benefited from a non-recurring after-tax benefit of $90 million or
7 cents per share in International Banking. Adjusting for these items, net income grew by $488 million or 7% and diluted earnings per share were
$5.43 as compared to $5.04 in 2013, an increase of 8%. Underlying return on equity was 15.5% compared to 16.3% in 2013.
Total revenue
Total revenues on a taxable equivalent basis (TEB) rose 11% from the 2013 to $23,958 million. Adjusting for the notable items in 2014 of
$566 million and in 2013 of $150 million (refer T23), revenues increased by 9%. The positive impact of foreign currency translation contributed
approximately 2% of this growth.
Net interest income
Net interest income (TEB) increased $957 million or 8% to $12,322 million, primarily from growth in core banking assets and improved margin,
including the favourable impact of foreign currency translation.
Non-interest income
Non-interest income (TEB) was $11,636 million, up $1,390 million or 14% year over year. Adjusting for the notable items in 2014 of $566 million
and $150 million in the prior year (refer T23), the increase was 10%. Growth was primarily in wealth management fees, from higher mutual fund
fees and brokerage commissions. Banking revenue growth was broad-based across all revenue categories.
Provision for credit losses
The total provision for credit losses was $1,703 million in 2014, up $415 million from last year. Adjusting for the notable item of $62 million (refer
T23), the increase was $353 million. Additional loan loss provisions, primarily in the Caribbean hospitality portfolio and a change in loss parameters
in the Canadian retail portfolio, accounted for $109 million of the increase. The remainder of the increase reflected higher provisions in
International and Canadian Banking.
Non-interest expenses
Non-interest expenses rose 8% over last year to $12,601 million. Adjusting for the notable items in 2014 of $203 million and $74 million in the
prior year, expenses increased $808 million or 7%. The negative impact of foreign currency translation contributed to 1% of this growth. The
remaining increase reflects higher compensation costs and initiatives to support business growth. Operating leverage was positive 2.8%, or positive
2.0% after adjusting for the notable items.
Provision for income taxes
The Bank’s overall effective income tax rate was 21.5% compared to 20.8% for 2013. The increase in the effective tax rate was due primarily to
higher taxes in foreign jurisdictions and a proportionately lower benefit from tax-exempt income, partially offset by lower taxes on the disposition
gain in 2014.
T22 Financial Results Review
For the year ended October 31, 2014 ($ millions)(1)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Provision for income taxes
Net income
Canadian
Banking
International
Banking
Global Banking
and Markets
$
5,996
5,263
$ 11,259
663
5,799
1,113
$ 5,155
2,945
$ 8,100
1,024
4,690
544
$ 1,064
3,167
$ 4,231
16
1,880
665
Other(2)
Total
$
$
90
(76)
14
–
232
(320)
$ 12,305
11,299
$ 23,604
1,703
12,601
2,002
$
3,684
$ 1,842
$ 1,670
$ 102
$
7,298
Net income attributable to non-controlling interests
1
226
–
–
227
Net income attributable to equity holders of the Bank
$
3,683
$ 1,616
$ 1,670
$ 102
$
7,071
(1) Taxable equivalent basis. Refer to non-GAAP measures on page 13.
(2) Includes all other smaller operating segments, including Group Treasury, and corporate adjustments, such as the elimination of the tax-exempt gross-up reported in net interest income and non-interest income and provision for
income taxes for the year ended October 31, 2014 ($354 million), and differences in the actual amount of costs incurred and charged to the operating segments.
34 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
For the year ended October 31, 2013 ($ millions)(1)
Canadian
Banking
International
Banking
Global Banking
and Markets
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Provision for income taxes
Net income
Net income attributable to non-controlling interests
$ 5,691
4,230
$ 9,921
480
5,362
1,015
$ 3,064
2
$ 4,756
3,140
$ 7,896
774
4,448
621
$ 2,053
229
$ 1,090
2,882
$ 3,972
34
1,731
554
$ 1,653
Other(2)
$ (187)
(303)
$ (490)
–
123
(453)
Total
$ 11,350
9,949
$ 21,299
1,288
11,664
1,737
$ (160)
$
6,610
–
–
231
Net income attributable to equity holders of the Bank
$ 3,062
$ 1,824
$ 1,653
$ (160)
$
6,379
(1) Taxable equivalent basis. Refer to non-GAAP measures on page 13.
(2) Includes all other smaller operating segments, including Group Treasury, and corporate adjustments, such as the elimination of the tax-exempt gross-up reported in net interest income and non-interest income and provision for
income taxes for the year ended October 31, 2013 ($312 million), and differences in the actual amount of costs incurred and charged to the operating segments.
Notable Items
There were several notable items in 2014 totaling a net benefit of $290 million ($301 million pre-tax), or approximately 23 cents per share as
outlined in the table below.
T23 Notable Items
For the years ended October 31
($ millions, except EPS)
Gain on sale
Sale of holdings in CI Financial Corp.
Sale of subsidiary by Thanachart Bank
Restructuring charges
Provision for credit losses
Unsecured bankrupt retail accounts in Canada
Valuation adjustments
Funding valuation adjustment
Revaluation of monetary assets in Venezuela
Acquisition-related receivables in Puerto Rico
Legal provisions
Total
By Business line
Canadian Banking
International Banking
Global Banking and Markets
Other
Total
By Consolidated Statement of Income line
Trading revenues
Other income
Non-interest income
Provision for credit losses
Non-interest expenses
Total
Notes
(1) Sale of majority of Bank’s holding in CI Financial Corp.
2014
2013
Notes
Pre-tax
After-tax
1
2
3
4
5
6
$ 643
–
(148)
$ 555
–
(110)
(62)
(30)
(47)
–
(55)
(46)
(22)
(47)
–
(40)
EPS
Impact
$ 0.45
–
(0.09)
(0.04)
(0.02)
(0.04)
–
(0.03)
Pre-tax
After-tax
$
–
150
(27)
–
–
–
(47)
–
$
–
150
(20)
–
–
–
(40)
–
EPS
Impact
$
–
0.12
(0.02)
–
–
–
(0.03)
–
$ 301
$ 290
$ 0.23
$ 76
$ 90
$ 0.07
$ 506
(81)
(38)
(86)
$ 301
$ (30)
596
566
(62)
(203)
$ 453
(74)
(27)
(62)
$ 290
$ (22)
508
486
(46)
(150)
$
$
–
76
–
–
$
–
90
–
–
$
$ 0.23
$ 76
$ 90
$ 0.07
$
–
$
–
150
150
–
(74)
$
–
150
150
–
(60)
$
–
$ 301
$ 290
$ 0.23
$ 76
$ 90
$ 0.07
The Bank sold a majority of its holding in CI Financial Corp. resulting in an after-tax gain of $555 million ($643 million pre tax) or 45 cents per share. This included an after-tax unrealized gain of $152
million on the reclassification of the Bank’s remaining investment to available-for-sale securities.
(2) Restructuring charges
The Bank recorded restructuring charges of $148 million ($110 million after tax), the majority relating to employee severance charges. These charges will drive greater operational efficiencies. In Canada,
the charges relate to recent initiatives to centralize and automate several mid-office branch functions, as well as reductions in required wealth management operational support. In International Banking,
the charges are primarily for closing or downsizing approximately 120 branches, which will allow us to focus on high-growth markets, minimize branch overlap, and realize synergies resulting from recent
acquisitions. The Bank also made a series of changes to simplify its leadership structure and operating model, recorded in the Other segment.
(3) Provision for credit losses
The Bank changed its write-off policy on unsecured bankrupt retail accounts in Canada in order to accelerate write-offs upon notification of a bankruptcy filing. As a result, a charge of $62 million
($46 million after tax) was recorded.
(4) Funding valuation adjustment
The Bank enhanced the fair value methodology and recognized a funding valuation adjustment (FVA) charge of $30 million ($22 million after tax), to reflect the implied funding cost on uncollateralized
derivative instruments.
(5) Venezuela
Venezuela was designated as hyper-inflationary and measures of exchange controls have been imposed by the Venezuelan government. These restrictions have limited the Bank’s ability to repatriate cash
and dividends out of Venezuela.
The Bank’s Venezuelan Bolivar (VEF) exposures include its investment in Banco del Caribe, and unremitted dividends and other cash amounts (“monetary assets”) in Venezuela. As at October 31, 2014, the
Bank has remeasured its net investment and monetary assets at the SICAD II rate (1 USD to 50 VEF). As a result, the Bank has recorded a charge of $47 million in the Consolidated Statement of Income
representing the revaluation impact on the monetary assets and a reduction in carrying value of the net investment of $129 million has been charged to Other Comprehensive Income.
(6) Legal provision
The Bank recorded a legal provision of approximately $55 million ($40 million after tax) related to certain ongoing legal claims.
35 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial performance of business lines
Canadian Banking
Canadian Banking’s net income attributable to equity holders was $3,683 million in 2014, $621 million or 20% higher than in 2013. Return on
economic equity was 29.6% versus 24.1% in 2013. Retail, small business, wealth management, and commercial banking all generated solid
performances.
Total revenues were $11,259 million, up $1,138 million or 13% from 2013.
Net interest income increased 5% to $5,996 million. The underlying growth in net interest income was driven by strong asset and deposit
growth. The net interest margin increased six basis points to 2.14% due mainly to higher mortgage and other personal loan spreads, as well as
growth in credit card products.
International Banking
Net income attributable to equity holders was $1,616 million in 2014, down $208 million from 2013 due to notable charges of $74 million in
2014 and a $90 million net benefit after-tax in 2013 (refer T23). Adjusting for these notable items, net income was down $44 million or 3%.
Revenue from strong volume growth and the positive impact of foreign currency translation was offset by margin compression, lower securities
gains, lower contributions from associated corporations, and higher provision for credit losses, which included a $57 million charge related
primarily to the Caribbean hospitality portfolio in the fourth quarter. Adjusting for the notable items, higher earnings in Latin America were more
than offset by lower results in the Caribbean, due to higher provision for credit losses, and in Asia.
Total revenues of $8,100 million increased 3%. Adjusting for notable items in 2014 and 2013 (refer T23), revenues increased $454 million or
6% including the positive impact of foreign currency translation.
Net interest income increased 8% driven by solid loan growth and the acquisition of Credito Familiar in Mexico. This was in part offset by a 2%
decline in the net interest margin from 4.84% to 4.75% as a result of the lowering of interest rates in key markets and changes in asset mix. Net
fee and commission revenues increased 8% to $2,127 million largely driven by higher banking fees, wealth and insurance revenues across Latin
America. Net income from associated corporations decreased by $257 million, or $54 million adjusting for the notable gain (on a tax-normalized
basis) last year, with lower contributions from Thanachart Bank and Banco del Caribe. Non-interest income decreased by $104 million, or
$57 million excluding the notable items (refer T41), due mainly to lower net gains on investment securities and lower gains from financial
instruments used for asset/liability management purposes, partly offset by higher trading revenues.
Global Banking and Markets
Global Banking and Markets reported net income attributable to equity holders of $1,670 million in 2014, a slight increase of $17 million or 1%
from 2013. This result was positively impacted by solid contributions from the diversified client platform. Solid revenue growth across the
business platform led to record revenues; however this was mitigated by growth in expenses. Return on economic equity was 28% compared to
25.9% in 2013.
Total revenues during 2014 were a record $4,231 million compared to $3,972 million in 2013, an increase of 7% as the business continues to
benefit from a diversified products and services platform.
Other
The Other segment had a net income attributable to equity holders of $102 million in 2014, compared to a net loss of $160 million in 2013.
2014 net income was reduced by notable items of $62 million.
Net interest income, non-interest income, and the provision for income taxes in each period include the elimination of tax-exempt income gross-
up. This amount is included in the operating segments, which are reported on a taxable equivalent basis. The elimination was $354 million in
2014, compared to $312 million in 2013.
Net income from investments in associated corporations and the provision for income taxes in each period include the tax normalization
adjustments related to the gross-up of income from associated corporations. This adjustment normalizes the effective tax rate in the divisions to
better present the contribution of the associated corporations to the divisional results.
36 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Financial Position 2014 vs. 2013
Total assets
The Bank’s total assets at October 31, 2014 were $806 billion, up $62 billion or 8% from October 31, 2013. Adjusting for the impact of foreign
currency translation, total assets were up $40 billion or 5%.
Cash and deposits with financial institutions increased $3 billion, due mainly to higher interest bearing deposits with central banks, while precious
metals decreased $2 billion due to lower prices and inventory. Securities purchased under resale agreements and securities borrowed increased
$11 billion.
Trading assets
Trading assets increased $17 billion from October 31, 2013 due primarily to an increase in trading securities of $11 billion from higher holdings of
common equities and Canadian government debt and an increase in trading loans of $3 billion.
Investment securities
Investment securities grew by $4 billion due mainly to increased holdings of U.S. government debt for liquidity management purposes. As at
October 31, 2014, the unrealized gain on available-for-sale securities, after the impact of qualifying hedges is taken into account, was $847 million,
a decrease of $133 million from October 31, 2013. The decrease was due mainly to realized gains on sales in 2014.
Loans
Loans increased $22 billion or 5% from October 31, 2013. Adjusting for the impact of foreign currency translation, loans increased $15 billion or
4%. Residential mortgages increased $3 billion mainly in Latin America and the Caribbean as underlying growth in Canadian residential mortgages
was generally offset by the planned run-off of a component of Tangerine’s mortgage portfolio. Personal and credit card loans rose $8 billion, due
mainly to growth in Canada and Latin America. Business and government loans were up $11 billion mainly in Canada and Latin America.
Other assets
Investments in associates decreased $2 billion due mainly to the partial sale and the reclassification of the Bank’s remaining holdings in CI Financial
Corp. to available-for-sale securities, offset in part by the acquisition of Canadian Tire’s Financial Services business.
Total liabilities
Total liabilities were $756 billion as at October 31, 2014, up $58 billion or 8% from October 31, 2013. Adjusting for the impact of foreign currency
translation, total liabilities increased $38 billion or 5%.
Deposits
Total deposits increased by $36 billion, including the impact of foreign currency translation of $16 billion. Personal deposits grew by $4 billion due
primarily to growth in Canada and Latin America. Business and government deposits increased $29 billion to support asset growth.
Other liabilities
Obligations related to securities sold under repurchase agreements and securities lent grew by $11 billion, in part to finance growth in securities
purchased under resale agreements and securities borrowed. Derivative instrument liabilities increased $7 billion, which was similar to the increase
in derivative instrument assets.
Equity
Total shareholders’ equity increased $3,824 million from October 31, 2013. This increase was driven by internal capital generation of
$3,806 million, issuance of common shares of $771 million mainly through the Dividend Reinvestment Plan and the exercise of options.
Accumulated other comprehensive income increased $561 million due primarily to unrealized foreign currency translation gains on the Bank’s
investments in its foreign operations. These increases were partly offset by the repurchase and cancellation of 4.5 million common shares for
$320 million under the Normal Course Issuer Bid program. The Bank redeemed $1,150 million of preferred shares during the year.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
37 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL CONDITION
T24 Condensed statement of financial position
As at October 31 ($ billions)
2015
2014
2013
Assets
Cash, deposits with financial institutions and precious metals
Trading assets
Securities purchased under resale agreements and securities
borrowed
Investment securities
Loans
Other
Total assets
Liabilities
Deposits
Obligations related to securities sold under repurchase
agreements and securities lent
Other liabilities
Subordinated debentures
Total liabilities
Equity
Common equity
Preferred shares
Non-controlling interests in subsidiaries
Total equity
Total liabilities and shareholders’ equity
Statement of Financial Position
Assets
$
84.5
99.1
$
64.0
113.2
$
62.2
96.5
87.3
43.2
458.6
83.8
93.9
38.7
424.3
71.6
82.5
34.3
402.2
65.9
$
856.5
$ 805.7
$ 743.6
$
600.9
$ 554.0
$ 517.9
77.0
118.9
6.2
89.0
108.6
4.9
77.5
97.0
5.8
$
803.0
$ 756.5
$ 698.2
49.1
2.9
1.5
53.5
45.0
2.9
1.3
40.2
4.1
1.1
$
49.2
$
45.4
856.5
$ 805.7
$ 743.6
$
$
C12 Loan portfolio
loans & acceptances, $ billions, as at October 31
480
400
320
240
160
80
13
14
15
Business & government
Personal & credit cards
Residential mortgages
C13 Deposits
$ billions, as at October 31
600
500
400
300
200
100
13
14
15
Banks
Business & government
Personal
The Bank’s total assets at October 31, 2015 were $856 billion, up $51 billion or 6% from October 31, 2014. Adjusting for the impact of foreign
currency translation, total assets were up $7 billion or 1%.
Cash and deposits with financial institutions increased $17 billion or $9 billion after adjusting for the impact of foreign currency translation, due
mainly to placing excess liquidity with the U.S. Federal Reserve. Securities purchased under resale agreements and securities borrowed decreased
$7 billion or $14 billion after adjusting for the impact of foreign currency translation.
Trading Assets
Adjusting for the impact of foreign currency translation, trading assets decreased $20 billion from October 31, 2014 due primarily to a decrease in
trading securities from lower holdings of Canadian and U.S. government debt and common shares.
Investment Securities
After adjusting for the impact of foreign currency translation, investment securities grew by $2 billion due primarily to an increase in U.S. government
debt. As of October 31, 2015, the unrealized gain on available-for-sale securities, after the impact of qualifying hedges, was $267 million, a decrease
of $580 million from October 31, 2014. The decrease was due mainly to realized gains on disposals.
Loans
Loans increased $34 billion or 8% from October 31, 2014. Adjusting for the impact of foreign currency translation, loans increased $22 billion or 5%.
Residential mortgages increased $4 billion, mainly in Latin America as underlying growth in Canadian residential mortgages was largely offset by the
planned run-off of Tangerine’s broker-originated and white label mortgage portfolio. Personal and credit card loans rose $7 billion, due mainly to
growth in Canada and Latin America. Business and government loans were up $12 billion mainly in the United States and Canada.
Liabilities
Total liabilities were $803 billion as at October 31, 2015, up $47 billion or 6% from October 31, 2014. Adjusting for the impact of foreign currency
translation, total liabilities increased $3 billion.
Deposits
Total deposits increased $47 billion or $14 billion after adjusting for the impact of foreign currency translation. Personal deposits grew by $13 billion
primarily in Canada.
Other Liabilities
After adjusting for the impact of foreign currency translation, obligations related to securities sold under repurchase agreements and securities lent
decreased by $19 billion and obligations related to securities sold short decreased by $8 billion. Derivative instrument liabilities increased $9 billion,
which was similar to the increase in derivative instrument assets.
38 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
Equity
Total shareholders’ equity increased $4,268 million from October 31, 2014. This increase was driven by current year earnings less dividends paid of
$3,807 million and a $1,506 million increase in accumulated other comprehensive income due primarily to unrealized foreign exchange gains on the
Bank’s investments in its foreign operations. This was partly offset by the repurchase and cancellation of approximately 15.5 million common shares or
$955 million under the Normal Course Issuer Bid program.
Outlook
Assets and deposits are expected to continue to grow in 2016 across all business lines. In Canada, while growth in residential mortgages is expected
to remain modest, other retail and commercial lending should continue to have good growth. Internationally, lending assets and deposits are
expected to grow with stronger growth in the Pacific Alliance countries.
Capital Management
Overview
Scotiabank is committed to maintaining a strong capital base to support the risks associated with its diversified businesses. Strong capital levels
contribute to safety for the Bank’s customers, foster investor confidence and support strong credit ratings. It also allows the Bank to take advantage of
growth opportunities as they arise and enhance shareholder returns through increased dividends. The Bank’s capital management framework includes
a comprehensive internal capital adequacy assessment process (ICAAP), aimed at ensuring that the Bank’s capital is adequate to meet current and
future risks and achieve its strategic objectives. Key components of the Bank’s ICAAP include sound corporate governance; creating a comprehensive
risk appetite for the Bank; managing and monitoring capital, both currently and prospectively; and utilizing appropriate financial metrics which relate
risk to capital, including economic and regulatory capital measures.
Governance and oversight
The Bank has a sound capital management framework to measure, deploy and monitor its available capital and assess its adequacy. Capital is
managed in accordance with the Board-approved Capital Management Policy. In addition, the Board reviews and approves the Bank’s annual capital
plan. The Asset-Liability Committee and senior executive management provide governance over the capital management process. The Bank’s Finance,
Treasury and Global Risk Management groups take a coordinated approach to implementing the Bank’s capital plan.
Risk appetite
The risk appetite framework that establishes enterprise wide risk tolerances in addition to capital targets are detailed in the Risk Management section
“Risk appetite framework” on page 66. The framework encompasses medium to long-term targets with respect to regulatory capital thresholds,
earnings, economic capital and other risk-based parameters. These targets ensure the Bank achieves the following overall objectives: exceed regulatory
and internal capital targets, manage capital levels commensurate with the risk profile of the Bank, maintain strong credit ratings and provide the
Bank’s shareholders with acceptable returns.
Regulatory capital
Capital ratios are a means to monitor the capital adequacy and the financial strength of banks. The three primary regulatory risk-based capital ratios,
Common Equity Tier 1, Tier 1 and Total, are determined by dividing capital components by risk-weighted assets.
Capital adequacy standards for Canadian banks are regulated by the Canadian regulator, the Office of the Superintendent of Financial Institutions
(OSFI). These standards are largely consistent with international standards set by the Basel Committee on Banking Supervision (BCBS).
Effective November 1, 2012, Canadian banks are subject to the revised capital adequacy requirements as published by BCBS and commonly referred
to as Basel III. Basel III builds on the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” (Basel II).
To enable banks to meet the new standards, the BCBS Basel III rules contain transitional arrangements commencing January 1, 2013, through January
1, 2019. Transitional requirements result in a phase-in of new deductions to common equity over 5 years, phase-out of non-qualifying capital
instruments over 10 years and a phase-in of a capital conservation buffer over 4 years. As of January 2019, banks will be required to meet new
minimum requirements related to risk-weighted assets of: Common Equity Tier 1 ratio of 4.5% plus a capital conservation buffer of 2.5%, collectively
7%, minimum Tier 1 ratio of 8.5%, and Total capital ratio of 10.5%.
On January 13, 2011, additional guidance was issued by the BCBS, with respect to requirements for loss absorbency of capital at the point of non-
viability. The rules affect the eligibility of instruments for inclusion in regulatory capital and provide for a transition and phase-out of any non-eligible
instruments. At the time these requirements became effective, January 1, 2013 for Canadian banks, all of the Bank’s preferred shares, capital
instruments and subordinated debentures did not meet the additional criteria and were subject to phase-out commencing January 2013. During the
year ended October 31, 2015, the Bank issued $1.25 billion of subordinated debentures which contain non-viability contingent capital (NVCC)
provisions necessary for the debentures to qualify as Tier 2 regulatory capital. The Bank reserves the right to redeem, call or repurchase any capital
instruments within the terms of each offering at any time in the future.
OSFI has issued guidelines, reporting requirements and disclosure guidance which are consistent with the Basel III reforms, except for its deferral of the
Basel III credit valuation adjustment (CVA) related capital charges, requiring they be phased-in over a 5 year period, beginning January 2014. In
accordance with OSFI’s requirements, during 2015, the scalars for CVA risk-weighted assets of 0.64, 0.71 and 0.77 were used to compute the CET1,
Tier 1 and Total capital ratios, respectively (October 31, 2014 – scalars of 0.57, 0.65 and 0.77, respectively).
Commencing the first quarter of 2013, OSFI required Canadian deposit-taking institutions to fully implement the 2019 Basel III reforms, without the
transitional phase-in provisions for capital deductions (referred to as ‘all-in’) and achieve a minimum 7% Common Equity Tier 1 target. Subsequent to
this, OSFI designated the 6 largest banks in Canada as domestic systemically important banks (D-SIBs), increasing its minimum capital ratio
requirements by 1% for the identified D-SIBs. This 1% surcharge is applicable to all minimum capital ratio requirements for CET1, Tier 1 and Total
Capital, by January 1, 2016, in line with the requirements for global systemically important banks. The Bank is expected to maintain a material
operating buffer above the minimum capital ratio requirements.
39 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Regulatory developments related to capital
In addition to risk-based capital requirements, the Basel III reforms introduced a simpler, non risk-based Leverage ratio requirement to act as a
supplementary measure to its risk-based capital requirements. The Leverage ratio is defined as a ratio of Basel III Tier 1 capital to a leverage exposure
measure which includes on-balance sheet assets and off-balance sheet commitments, derivatives and securities financing transactions, as defined
within the requirements. In January 2014, the BCBS issued revisions to the Basel III Leverage ratio framework noting that the final calibration of the
Leverage ratio will be completed by 2017, with a view to migrating to a Pillar 1 (minimum capital requirement) treatment by January 2018.
In October 2014, OSFI released its Leverage Requirements Guideline which outlines the application of the Basel III Leverage ratio in Canada and the
replacement of the former Assets-to-Capital Multiple (ACM), effective the first quarter of 2015. Institutions are expected to maintain a material
operating buffer above the 3% minimum. Leverage ratio disclosures are in accordance with OSFI’s September 2014 Public Disclosure Requirements.
Planning, managing and monitoring capital
Capital is managed and monitored based on planned changes in the Bank’s strategy, identified changes in its operating environment or changes in its
risk profile. As part of the Bank’s comprehensive ICAAP, sources and uses of capital are continuously measured and monitored through financial
metrics, including regulatory thresholds, and economic capital. (These results are used in capital planning and strategic decision-making.)
The Bank’s assessment of capital adequacy is in the context of its current position and its expected future risk profile and position relative to its
internal targets while considering the potential impact of various stress scenarios. Specific scenarios are selected based on the current economic
conditions and business events facing the Bank. In addition, the Bank’s forward looking capital adequacy assessment includes a consideration of the
results of more severe multi-risk scenarios within its enterprise-wide stress testing. This testing is used to determine the extent to which severe, but
plausible events, impact the Bank’s capital.
The Bank sets internal economic and regulatory capital targets to ensure the Bank’s available capital is sufficient within the context of its risk appetite.
For economic capital, the Bank’s medium-term internal target is that common shareholder’s equity should be at least 100% of required economic
capital. However, in the short term, it may be as low as 95% of required economic capital and supported by preferred shares.
For regulatory capital, the Bank’s internal target includes an adequate buffer over the regulatory minimum ensuring sufficient flexibility for future
capital deployment and in consideration of the Bank’s risk appetite, the volatility of planning assumptions, the results from stress testing and
contingency planning.
The Bank has a comprehensive risk management framework to ensure that the risks taken while conducting its business activities are consistent with
its risk appetite, its impact on capital relative to internal targets, and that there is an appropriate balance between risk and return. Refer to the Risk
Management section on page 66 for further discussion on the Bank’s risk management framework. In managing the Bank’s capital base, close
attention is paid to the cost and availability of the various types of capital, desired leverage, changes in the assets and risk-weighted assets, and the
opportunities to profitably deploy capital. The amount of capital required for the business risks being assumed, and to meet regulatory requirements,
is balanced against the goal of generating an appropriate return for the Bank’s shareholders.
Capital generation
Capital is generated internally through net earnings after dividend payments. As well, capital is generated by the issuance of common shares,
preferred shares, and Tier 2 subordinated debentures.
Capital utilization
The Bank deploys capital to support sustainable, long-term revenue and net income growth. The growth can be through existing businesses by
attracting new customers, increasing cross-selling activities to existing customers, adding new products and enhancing sales productivity, or through
acquisitions. All major initiatives to deploy capital are subject to rigorous analysis, validation of business case assumptions and evaluation of expected
benefits. Key financial criteria include impact on earnings per share, capital ratios, return on invested capital, expected payback period and internal
rate of return based on discounted cash flows. Any potential business acquisitions, investments or strategic initiatives are reviewed and approved by
the Bank’s Strategic Transaction Executive Committee, to ensure effective deployment of capital.
Regulatory capital ratios
The Bank continues to maintain strong, high quality capital levels which positions it well for future business growth. The Basel III all-in Common Equity
Tier 1 (CET1) ratio as at year end was 10.3%. Decreases in the CET1 ratio from 2014 were largely due to the acquisitions of Cencosud’s financial
services business in Chile and the operations of Citibank Peru and the impact from the Bank’s share repurchases under its Normal Course Issuer Bid
programs.
The Bank’s Basel III all-in Tier 1 and Total capital ratios were 11.5% and 13.4%, respectively, as at year end. Total Capital increased due to the
issuance of $1.25 billion of NVCC subordinated debentures during the year.
The Bank’s capital ratios continue to be well in excess of OSFI’s minimum capital ratio requirements for 2016 (including the 1% D-SIB surcharge) of 8%, 9.5%
and 11.5% for CET1, Tier 1 and Total Capital respectively.
In addition to the regulatory risk-based capital ratios, banks are also subject to a Leverage ratio, which replaced the Assets-to-Capital multiple (ACM)
in 2015. As at October 31, 2015, the Bank’s Leverage Ratio of 4.2% was well above the regulatory requirement of 3.0%.
Outlook
The Bank will continue to have a strong capital position in 2016. Capital will be prudently managed to support organic growth initiatives and selective
acquisitions that enhance shareholder returns, while maintaining full compliance with evolving regulatory changes.
40 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
T25 Regulatory Capital(1)
IFRS
Basel III All-in
CGAAP
Basel II
As at October 31 ($ millions)
2015
2014
2013
2012
2011
Common Equity Tier 1 capital
Total Common Equity(2)
Qualifying non-controlling interest in common equity of subsidiaries
Goodwill and non-qualifying intangibles, net of deferred tax liabilities(3)
Threshold related deductions
Net deferred tax assets (excluding those arising from temporary differences)(4)
Other Common Equity Tier 1 capital deductions(4)(5)
Common Equity Tier 1
Preferred shares(6)
Capital instrument liabilities – trust securities(6)
Other Tier 1 capital adjustments(7)
Net Tier 1 Capital
Tier 2 capital
Subordinated debentures, net of amortization(6)
Eligible collective allowance for inclusion in Tier 2 and excess allowance (re: IRB
approach)
Qualifying non-controlling interest in Tier 2 capital of subsidiaries
Other Tier 2 capital adjustments(7)
Tier 2 capital
Total regulatory capital
Risk-weighted assets ($ billions)
Credit risk
Market risk
Operational risk
CET1 risk-weighted assets(8)
Capital ratios(9)
Common Equity Tier 1 capital ratio
Tier 1 capital ratio
Total capital ratio
Leverage:
Leverage exposures(10)
Leverage ratio(10)
$ 49,085
557
(11,018)
$ 44,965
514
(10,482)
$ 40,569
479
(9,772)
$ 34,755
966
(7,840)
$ 27,932
640
(6,860)
(664)
(539)
(456)
36,965
2,934
1,400
67
41,366
(305)
(620)
(330)
33,742
2,934
1,400
(3)
38,073
6,182
4,871
486
196
–
6,864
468
180
–
5,519
(3,630)
(752)
(535)
26,359
4,084
1,400
71
31,914
5,841
971
115
–
6,927
4,384
2,150
21
34,436
4,384
2,900
(507)
28,489
9,893
6,723
454
353
(2,590)
7,757
(3,033)
4,043
48,230
43,592
38,841
42,193
32,533
308.0
14.4
35.6
261.9
17.3
33.3
240.9
15.4
31.9
210.0
13.8
29.5
200.8
5.9
27.3
$
358.0
$
312.5
$
288.2
$
253.3
$
234.0
10.3%
11.5%
13.4%
$980,212
4.2%
10.8%
12.2%
13.9%
N/A
N/A
9.1%
11.1%
13.5%
N/A
N/A
N/A
13.6%
16.7%
N/A
N/A
N/A
12.2%
13.9%
N/A
N/A
(1) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (refer to page 39). Prior period amounts have not been restated for new and amended IFRS standards as they
represent the actual amounts reported in that period for regulatory purposes.
(2) Amounts for periods 2012 and prior exclude components of accumulated other comprehensive income not eligible for Basel II Tier 1 Capital.
(3) Reported amounts are based on OSFI’s requirements that goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes beginning Q3 2014.
(4) 2013 has been restated for presentation purposes.
(5) Other CET1 capital deductions under Basel III all-in include gains/losses due to changes in own credit risk on fair valued liabilities, Defined Benefit Pension Fund assets, and other items.
(6) Non-qualifying Tier 1 and Tier 2 capital instruments are subject to a phase-out period of 10 years.
(7) Other Tier 1/Tier 2 capital adjustments under the all-in approach include eligible non-controlling interests in subsidiaries, in addition, Tier 2 includes eligible collective allowance and excess allowance. Basel II deductions include
50/50 deduction of certain investments in associated corporations and other items.
(8) As at October 31, 2015, CVA risk-weighted assets were calculated using scalars of 0.64, 0.71 and 0.77 to compute CET1 , Tier 1 and Total capital ratios, respectively (scalars of 0.57, 0.65, and 0.77 in 2014).
(9) OSFI designated the Bank as a domestic systemically important bank (D-SIB), increasing its minimum capital ratio requirements by 1% for the identified D-SIBs. This 1% surcharge is applicable to all minimum capital ratio
requirements for CET1, Tier 1 and Total Capital, by January 1, 2016, in line with the requirements for global systemically important banks.
(10) Effective November 1, 2014, the leverage ratio replaced the assets-to-capital multiple.
41 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T26 Changes in regulatory capital(1)
For the fiscal years ($ millions)
Total capital, beginning of year
Implementation of Basel III
Changes in Common Equity Tier 1
Net Income attributable to Common Equity Holders of the Bank
Dividends paid to Equity Holders of the Bank
Shares issued
Shares repurchased/redeemed
Gains/losses due to changes in own credit risk on fair valued liabilities
Movements in Accumulated Other Comprehensive Income, excluding Cash Flow
Hedges(2)
Change in Non-controlling interest in Common Equity of Subsidiaries NCIB
Change in Goodwill and other intangible assets (net of related tax liability)(3)
Other changes including regulatory adjustments below:
–Deferred tax assets that rely on future profitability (excluding those arising from
temporary differences)
–Significant investments in the common equity of other financial institutions
(amount above 10% threshold)
–Other capital deductions
–Other
Changes in Common Equity Tier 1
Changes in Additional Tier 1 Capital
IFRS
Basel III All-in
CGAAP
Basel II
2015
2014
2013
2012
2011
$ 43,592
$ 38,841
$ 42,193
$ 32,533
$ 29,599
6,243
(2,713)
4,872
168
339
(577)
5,181
(2,416)
2,657
(624)
62
(1,612)
6,897
(3,289)
104
(955)
(158)
1,451
43
(535)
(335)
6,916
(3,110)
771
(320)
410
35
(710)
3,391
81
132
(317)
44
(143)
2,583
941
(265)
$ (1,906)
6,422
(3,075)
1,404
482
119
(1,928)
(379)
48
(147)
–
(280)
$
3,223
$
7,383
$
3,045
N/A
N/A
Issued
Redeemed
Other changes including regulatory adjustments and phase-out of non-qualifying
instruments
Changes in Additional Tier 1 Capital
Changes in Tier 2 Capital
Issued
Redeemed
Collective allowances eligible for inclusion in Tier 2 and Excess Allowance under AIRB
Other changes including regulatory adjustments and phase-out of non-qualifying
$
–
–
70
70
1,250
–
17
–
(1,150)
–
(1,050)
–
(750)
(74)
23
(1,634)
409
(500)
(3)
$ (1,224)
$ (1,027)
$
5,948
$
3,154
–
(970)
(502)
–
(4,052)
517
3,250
–
101
361
3,712
9,660
–
(67)
(218)
65
(220)
2,934
$
$
78
64
71
$
$
1,345
4,638
$ (1,408)
$ (3,464)
$
4,751
$ (3,352)
$
$
$ 48,230
$ 43,592
$ 38,841
$ 42,193
$ 32,533
instruments
Changes in Tier 2 Capital
Total capital generated (used)
Total capital, end of year
(1) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (refer to page 39). Prior period amounts have not been restated for new and amended IFRS standards as they
represent the actual amounts reported in that period for regulatory purposes.
(2) The Bank implemented IFRS on November 1, 2011, however amounts related to regulatory capital for prior periods have not been restated as they represent the actual amounts in the period for regulatory purposes.
(3) Reported amounts are based on OSFI’s requirements that goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes beginning Q3 2014.
42 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
C14 Tier 1 capital*
%, as at October 31
14
12
10
8
6
4
2
11
12
13
14
15
* Amounts prior to 2013 are calculated under Basel II and
amounts prior to 2012 calculated under CGAAP
C15 Dividend growth
dollars per share
3
2
1
05
07
09
11
13
15
C16 Internally generated capital*
$ billions, for years ended October 31
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
11
12
13
14
15
* Amounts prior to 2012 calculated under CGAAP
Regulatory Capital Components
The Bank’s regulatory capital is divided into three components – Common Equity Tier 1 (CET1),
Tier 1 capital and Tier 2 capital, depending on their degree of permanency and loss absorbency.
All components of capital provide support for banking operations and protect depositors.
CET1, consists primarily of common shareholders’ equity, a proration of non-controlling interests,
and regulatory deductions. These regulatory deductions include goodwill, intangible assets (net
of deferred tax liabilities), deferred tax assets that rely on future profitability, defined-benefit
pension fund net assets, shortfall of allowance for credit losses to expected losses and significant
investments in the common equity of other financial institutions.
Additional Tier 1 capital consists primarily of qualifying non-cumulative preferred shares or
non-qualifying preferred shares and innovative tier 1 instruments subject to phase-out. Tier 2
capital consists mainly of qualifying or non-qualifying subordinated debentures subject to
phase-out and the eligible allowances for credit losses.
The Bank’s Common Equity Tier 1 capital was $37.0 billion as at October 31, 2015, an increase
of $3.2 billion from the prior year primarily from:
(cid:129) $3.6 billion growth from internal capital generation; and,
(cid:129) $1.5 billion increase from movements in Accumulated Other Comprehensive Income, mainly
from foreign currency translation.
Partly offset by:
(cid:129) $0.9 billion decrease from share repurchases under the Banks’ Normal Course Issuer Bid, net of
shares issued through the Bank’s stock option and share purchase plans;
(cid:129) $0.5 billion increases in goodwill and intangibles (net of related tax liability) including the
impacts from the acquisitions of Cencosud’s financial services business in Chile and the
operations of Citibank Peru; and,
(cid:129) $0.5 billion increase in other regulatory capital deductions.
The Tier 1 and Total capital ratios were also impacted by the above changes. In addition, Total
capital increased due to the issuance of $1.25 billion of NVCC subordinated debentures.
Dividends
The strong earnings and capital position of the Bank allowed the Bank to increase its dividends
twice in 2015. The annual dividend payout in 2015 was $2.72, compared to $2.56 in 2014, an
increase of 6%. The dividend payout ratio was 47.7% in line with the Bank’s Board approved
target dividend payout ratio of 40-50%.
T27 Selected capital management activity
For the fiscal years ($ millions)
2015
2014
2013
Dividends
Common
Preferred
Common shares issued(1)(2)
Common shares repurchased for cancellation under the Normal
Course Issuer Bid(2)
Preferred shares redeemed(2)
Subordinated debentures issued(3)
Maturity, redemption and repurchase of subordinated
debentures(3)
Issuance/(redemption) of trust securities
$
3,289
117
104
(955)
–
1,250
(20)
–
$ 3,110
155
771
$ 2,858
217
1,377
(320)
(1,150)
–
(1,000)
–
–
(300)
–
(4,210)
(750)
(1) Represents primarily cash received for stock options exercised during the year, common shares issued pursuant to the Dividend and Share Purchase
Plan and shares issued for acquisitions.
(2) Represents reduction to Common shares and Retained earnings [refer to the Consolidated Statement of Changes in Equity.] Prior period amounts
have been restated to conform with current period presentation.
(3) Represents par value [refer to Note 21 of the consolidated financial statements.]
Normal Course Issuer Bid
On May 27, 2014, the Bank announced that OSFI and the Toronto Stock Exchange (TSX) approved its normal course issuer bid pursuant to which it
may repurchase for cancellation up to 12 million of the Bank’s common shares. On March 3, 2015, the Bank announced that OSFI and the TSX
approved an increase in the bid up to 16 million shares. During the year, the Bank repurchased and cancelled approximately 7.5 million common
shares under this bid at an average price of $63.18 per share for a total amount of approximately $474 million. Under this bid, the Bank repurchased
and cancelled approximately 12 million common shares at an average price of $66.12 per share. The bid ended on May 29, 2015.
On May 29, 2015, the Bank announced that OSFI and the TSX approved a normal course issuer bid pursuant to which it may repurchase for
cancellation up to 24 million of the Bank’s common shares, which represents approximately 2% of the Bank’s common shares issued and outstanding
as of May 25, 2015. The new bid will end on the earlier of June 1, 2016, or the date on which the Bank completes its purchases. On a quarterly basis,
the Bank will consult with OSFI prior to making purchases. Under this bid, the Bank has repurchased and cancelled 8.0 million common shares at an
average price of $60.20 per share for a total amount of approximately $481 million.
During the year ended October 31, 2015, under these two bids the Bank repurchased and cancelled approximately 15.5 million shares at an average
price of $61.64 per share for a total amount of approximately $955 million.
43 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Share data and other capital instruments
The Bank’s common and preferred share data, as well as other capital instruments, are shown in Table 28. Further details, including exchangeability
features, are discussed in Note 24 of the consolidated financial statements.
T28 Shares and other instruments
As at October 31, 2015
Share data
Common shares(1)
Preferred shares
Preferred shares Series 14(2)
Preferred shares Series 15(2)
Preferred shares Series 16(2)
Preferred shares Series 17(2)
Preferred shares Series 18(2)(3)(4)
Preferred shares Series 19(2)(3)(5)
Preferred shares Series 20(2)(3)(6)
Preferred shares Series 21(2)(3)(7)
Preferred shares Series 22(2)(3)(8)
Preferred shares Series 23(2)(3)(9)
Preferred shares Series 30(2)(3)(10)
Preferred shares Series 31(2)(3)(11)
Preferred shares Series 32(2)(3)(12)
Trust securities
Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust(13a,c,d)
Scotiabank Tier 1 Securities – Series 2009-1 issued by Scotiabank Tier 1 Trust(13b,c,d)
NVCC subordinated debentures
Subordinated debentures due March 2027(14)
Options
Outstanding options granted under the Stock Option Plans to purchase common shares(1)(15)
Amount
($ millions)
Dividend
Dividend
rate (%)
Number
outstanding
(000s)
$
15,141
$
0.70
–
1,202,937
345
345
345
230
187
158
201
149
234
66
154
111
409
0.281250
0.281250
0.328125
0.350000
0.209375
0.153938
0.225625
0.132063
0.239375
0.143313
0.113750
0.088313
0.231250
Amount
($ millions)
750
650
Distribution
28.25
39.01
4.50
4.50
5.25
5.60
3.35
2.46
3.61
2.11
3.83
2.29
1.82
1.41
3.70
Yield
(%)
5.650
7.802
Amount
($ millions)
1,250
13,800
13,800
13,800
9,200
7,498
6,302
8,039
5,961
9,377
2,623
6,143
4,457
16,346
Number
outstanding
(000s)
750
650
Interest
Rate (%)
2.58
Number
outstanding
(000s)
22,957
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Dividends on common shares are paid quarterly. As at November 20, 2015, the number of outstanding common shares and options was 1,203,079 thousand and 22,809 thousand, respectively.
These shares are entitled to non-cumulative preferential cash dividends payable quarterly.
These preferred shares have conversion features (refer to Note 24 of the Consolidated Financial Statements for further details).
Subsequent to the initial five-year fixed rate period which ended on April 25, 2013, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of
Canada Yield plus 2.05%, multiplied by $25.00.
Dividends, if and when declared, are determined by the sum of the three-month Government of Canada Treasury Bill Yield plus 2.05%, multiplied by $25.00, which will be reset quarterly until April 25, 2018.
Subsequent to the initial five-year fixed rate period which ended on October 25, 2013, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of
Canada Yield plus 1.70%, multiplied by $25.00.
Dividends, if and when declared, are determined by the sum of the three-month Government of Canada Treasury Bill Yield plus 1.70%, multiplied by $25.00, which will be reset quarterly until October 25, 2018.
Subsequent to the initial five-year fixed rate period which ended on January 25, 2014, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of
Canada Yield plus 1.88%, multiplied by $25.00.
Dividends, if and when declared, are determined by the sum of the three-month Government of Canada Treasury Bill Yield plus 1.88%, multiplied by $25.00, which will be reset quarterly until January 25, 2019.
Subsequent to the initial five-year fixed rate period which ended on April 25, 2015, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of
Canada Yield plus 1.00%, multiplied by $25.00.
Dividends, if and when declared, are determined by the sum of the three-month Government of Canada Treasury Bill Yield plus 1.00%, multiplied by $25.00, which will be reset quarterly until April 25, 2020.
Dividends, if and when declared, are for the initial five-year period ending on February 1, 2016. Subsequent to the initial five-year fixed rate period, and resetting every five years thereafter, the dividends will be determined by the
sum of the five-year Government of Canada Yield plus 1.34%, multiplied by $25.00.
(13)(a) On September 28, 2006, Scotiabank Capital Trust issued 750,000 Scotiabank Trust Securities – Series 2006-1 (Scotia BaTS II Series 2006-1). The holders of Scotia BaTS II Series 2006-1 are entitled to receive non-cumulative
fixed cash distributions payable semi-annually in an amount of $28.25 per security. With regulatory approval, these securities may be redeemed in whole upon the occurrence of certain tax or regulatory capital changes, or in
whole or in part on December 30, 2011 and on any distribution date thereafter at the option of Scotiabank Capital Trust. The holder has the right at any time to exchange their security into Non-cumulative Preferred Shares
Series S of the Bank. The Series S shares will be entitled to cash dividends payable semi-annually in an amount of $0.4875 per $25.00 share [refer to Note 24 – Restrictions on dividend payments]. Under the circumstances
outlined in 13(c) below, the Scotia BaTS II Series 2006-1 would be automatically exchanged without the consent of the holder, into Non-cumulative Preferred Shares Series T of the Bank. The Series T shares will be entitled to
non-cumulative cash dividends payable semi-annually in an amount of $0.625 per $25.00 share. If there is an automatic exchange of the Scotia BaTS II Series 2006-1 into Preferred Shares Series T of the Bank, then the Bank
would become the sole beneficiary of the Trust.
(13)(b) On May 7, 2009, Scotiabank Tier 1 Trust issued 650,000 Scotiabank Tier 1 Securities Series 2009-1 (Scotia BaTS III Series 2009-1). Interest is payable semi-annually in an amount of $39.01 per Scotia BaTS III Series 2009-1 on
the last day of June and December until June 30, 2019. After June 30, 2019 and on every fifth anniversary thereafter until June 30, 2104, the interest rate on the Scotia BaTS III Series 2009-1 will be reset at an interest rate per
annum equal to the then prevailing 5-year Government of Canada Yield plus 7.05%. On or after June 30, 2014, the Trust may, at its option redeem the Scotia BaTS III Series 2009-1, in whole or in part, subject to regulatory
approval. Under the circumstances outlined in 13(c) below, the Scotia BaTS III Series 2009-1, including accrued and unpaid interest thereon, would be exchanged automatically without the consent of the holder, into newly
issued Non-cumulative Preferred Shares Series R of the Bank. In addition, in certain circumstances, holders of Scotia BaTS III Series 2009-1 may be required to invest interest paid on the Scotia BaTS III Series 2009-1 in a series of
newly-issued preferred shares of the Bank with non-cumulative dividends (each such series is referred to as Bank Deferral Preferred Shares). If there is an automatic exchange of the Scotia BaTS Preferred Shares, then the Bank
would become the sole beneficiary of the Trust.
(13)(c) The Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 may be automatically exchanged, without the consent of the holder, into Non-cumulative Preferred Shares of the Bank in the following circumstances:
(i) proceedings are commenced for the winding-up of the Bank; (ii) the Superintendent takes control of the Bank or its assets; (iii) the Bank has a Tier 1 Capital ratio of less than 5% or a Total Capital ratio of less than 8%; or
(iv) the Superintendent has directed the Bank to increase its capital or provide additional liquidity and the Bank elects such automatic exchange or the Bank fails to comply with such direction.
(13)(d) No cash distributions will be payable on the Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 in the event that the regular dividend is not declared on the Bank’s preferred shares and, if no preferred shares are
outstanding, the Bank’s common shares. In such a circumstance the net distributable funds of the Trust will be payable to the Bank as the holder of the residual interest in the Trust. Should the Trust fail to pay the semi-annual
distributions on the Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 in full, the Bank will not declare dividends of any kind on any of its preferred or common shares for a specified period of time [refer to Note 24 –
Restrictions on dividend payments].
On March 30, 2015, the Bank issued $1.25 billion subordinated debentures due March 30, 2027, which contain non-viability contingent capital (NVCC) provisions [refer to Note 21 – Subordinated debentures].
Included are 175,876 stock options with tandem stock appreciation rights (Tandem SAR) features.
(14)
(15)
44 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Credit ratings
Credit ratings affect the Bank’s access to capital markets and borrowing costs, as well as the terms on which the Bank can conduct derivatives and
hedging transactions and obtain related borrowings. The Bank continues to have strong credit ratings. The current ratings are Aa2 by Moody’s, A+
by Standard and Poor’s (S&P), AA by DBRS and AA- by Fitch.
On November 2, 2015, Moody’s placed the Bank’s long term ratings of Aa2 on review for downgrade, while affirming the Bank’s short term deposit
rating of P-1. Moody’s will conclude its review over a 90-day period. On October 14, 2015, S&P confirmed the Bank’s A+ rating for Deposits and
Senior Debt, as well as the A-1 rating for short-term instruments. The outlook remains unchanged at negative. And similarly, on July 28, 2015, DBRS
also confirmed its rating of the Bank including a negative outlook. The rating agencies cite the uncertainty around the federal government’s proposed
new “bail-in” regime for senior unsecured debt as the principal reason for the recent system-wide changes in outlook in order to reflect the greater
likelihood that such debt may incur losses in the unlikely event of a distress scenario.
Risk-weighted assets
Regulatory capital requirements are based on OSFI’s target minimum percentage of risk-weighted assets (RWA). RWA represent the Bank’s exposure
to credit, market and operational risk and are computed by applying a combination of the OSFI approved Bank’s internal risk models and OSFI
prescribed risk-weights to on- and off-balance sheet exposures. Common Equity Tier 1 (CET1), Tier 1 and Total Capital RWA were $358.0, $358.8 and
$359.5 billion, respectively at year end, representing increases from 2014 of approximately $45.5 billion. The increases are due to higher credit risk
RWA of approximately $46.1 billion (including the impact of foreign currency translation of $15.2 billion) and operational risk RWA of $2.3 billion,
partly offset by lower market risk RWA of $2.9 billion.
CET1 Credit risk-weighted assets
CET1 credit risk-weighted assets of $308.0 billion increased $46.1 billion as shown in Table 29 from the following components:
(cid:129) Retail and business lending growth added $24.3 billion to RWA.
(cid:129) Changes in book quality resulted in a $3.6 billion increase in RWA.
(cid:129) Model enhancements to retail AIRB models increased RWA by $0.8 billion.
(cid:129) Methodology and policy changes of $0.9 billion are a result of the phase-in adoption of the Basel III CVA capital requirements based on the increase
in OSFI prescribed scalar for CET1 RWA from 57% in 2014 to 64% in 2015. The scalar will increase to 100% by 2019.
(cid:129) Higher RWA of $1.3 billion due to the acquisitions of Cencosud’s financial services business in Chile and the operations of Citibank Peru.
(cid:129) The impact of foreign exchange translation added $15.2 billion mainly due to the Canadian dollar weakening against the U.S. dollar. The Bank’s
structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that consolidated capital ratios and the
capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates.
T29 Flow statement for Basel III All-in credit risk-weighted assets ($ millions)
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
Credit risk-weighted assets movement by key driver(1)
($ millions)
CET1 Credit risk-weighted assets as at beginning of year
Book size(2)
Book quality(3)
Model updates(4)
Methodology and policy(5)
Acquisitions and disposals
Foreign exchange movements
Other
CET1 Credit risk-weighted assets as at end of year(6)
Tier 1 CVA scalar
Tier 1 Credit risk-weighted assets as at end of year(6)
Total CVA scalar
Total Credit risk-weighted assets as at end of year(6)
2015
2014
Credit Risk
$ 261,887
24,339
3,575
843
892
1,340
15,159
–
$ 308,035
785
308,820
673
$ 309,493
Of which
Counterparty
Credit Risk
$ 17,935
1,988
181
–
892
–
1,944
–
$ 22,940
785
23,725
673
Credit Risk
$ 240,940
8,546
(5,742)
2,272
5,003
2,144
8,724
–
$ 261,887
790
262,677
1,186
$ 24,398
$ 263,863
Of which
Counterparty
Credit Risk
$ 10,471
2,283
(582)
–
5,003
–
760
–
$ 17,935
790
18,725
1,186
$ 19,911
(1) Includes counterparty credit risk.
(2) Book size is defined as organic changes in book size and composition (including new business and maturing loans).
(3) Book quality is defined as quality of book changes caused by experience such as underlying customer behaviour or demographics, including changes through model calibrations/realignments.
(4) Model updates are defined as model implementation, change in model scope or any change to address model enhancement.
(5) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes, such as new regulation (e.g. Basel III).
(6) As at October 31, 2015, risk-weighted assets were calculated using scalars of 0.64, 0.71, and 0.77 to compute CET1, Tier 1, and Total capital ratios respectively (scalars of 0.57, 0.65, and 0.77 in 2014).
45 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T30 Internal rating scale(1) and mapping to external rating agencies
Equivalent Rating
External Rating – S&P
External Rating – Moody’s
External Rating – DBRS
Grade
IG Code
PD Range(2)
AAA to AA+
AA to A+
A to A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B to B-
CCC+
CCC
CCC- to CC
–
Default
Aaa to Aa1
Aa2 to A1
A2 to A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2 to B3
Caa1
Caa2
Caa3 to Ca
–
AAA to AA (high)
AA to A (high)
A to A (low)
BBB (high)
BBB
BBB (low)
BB (high)
BB
BB (low)
B (high)
B to B (low)
–
–
–
–
Investment grade
Non-Investment
grade
Watch list
Default
99-98
95
90
87
85
83
80
77
75
73
70
65
60
40
30
27-21
0.0000% – 0.0578%
0.0578% – 0.1488%
0.0648% – 0.1657%
0.0997% – 0.2593%
0.1448% – 0.3643%
0.2103% – 0.5116%
0.3277% – 0.5674%
0.5108% – 0.6293%
0.6293% – 0.7962%
0.7962% – 1.5389%
1.5389% – 2.9747%
2.9747% – 10.5529%
10.5529% – 19.5817%
19.5817% – 36.1350%
36.1350% – 60.1124%
100%
(1) Applies to non-retail portfolio.
(2) PD ranges overlap across IG codes as the Bank utilizes two risk rating systems for its AIRB portfolios, and each risk rating system has its own separate IG to PD mapping.
T31 Non-retail AIRB portfolio exposure by internal rating grade(1)(2)
As at October 31 ($ millions)
2015
2014
PD
(%)(5)(8)
LGD
(%)(6)(8)
RW
(%)(7)(8)
Exposure
at default
($)(4)
Grade
IG Code
Investment grade(3)
Non-Investment grade
Watch list
99-98
95
90
87
85
83
80
77
75
73
70
65
60
40
30
Default(9)
27-21
Total, excluding residential
mortgages
Government guaranteed residential
mortgages
Total
Exposure
at default
($)(4)
80,227
40,068
48,131
43,056
33,413
38,499
33,036
20,340
19,589
8,737
4,804
991
1,101
1,454
3
1,093
RWA
($)
423
7,673
9,144
10,137
12,819
20,036
18,735
14,158
14,102
7,414
3,855
1,679
2,287
3,267
5
3,786
374,542
129,520
86,832
–
461,374
129,520
0.00
0.07
0.08
0.14
0.19
0.31
0.41
0.55
0.80
1.54
2.97
10.55
19.42
30.14
69.10
100
0.76
–
0.62
16
37
37
36
42
46
44
45
41
40
34
44
40
43
45
52
35
15
31
1
19
19
24
38
52
57
70
72
85
80
169
208
225
167
346
35
–
28
RWA
($)
399
6,484
7,315
8,750
11,577
15,552
14,914
10,357
11,180
4,401
4,453
1,454
1,101
2,003
77
1,467
61,045
33,352
40,114
33,212
30,343
31,433
27,175
16,253
16,578
5,223
4,556
815
500
816
37
1,018
302,470
101,484
83,446
–
385,916
101,484
PD
(%)(5)(8)
LGD
(%)(6)(8)
RW
(%)(7)(8)
0.01
0.07
0.09
0.14
0.21
0.33
0.42
0.57
0.83
1.64
3.09
10.80
20.34
33.23
59.18
100
0.78
–
0.61
16
37
36
37
42
45
44
43
41
38
37
45
44
47
50
48
35
15
31
1
19
18
26
38
49
55
64
67
84
98
178
220
245
208
144
34
–
26
(1) Refer to the Bank’s Supplementary Regulatory Capital Disclosures for a more detailed breakdown by asset class, exposure at default, probability at default, loss given default and risk weighting.
(2) Excludes securitization exposures.
(3) Excludes government guaranteed residential mortgages of $86.8 billion ($83.4 billion in 2014).
(4) After credit risk mitigation.
(5) PD – Probability of Default.
(6) LGD – Loss Given Default.
(7) RW – Risk Weight.
(8) Exposure at default used as basis for estimated weightings.
(9) Gross defaulted exposures, before any related allowances.
Credit risk-weighted assets – non-retail
Credit risk measures the risk that a borrower or counterparty will fail to honour its financial or contractual obligations to the Bank. The Bank uses the
Advanced Internal Ratings Based (AIRB) approach under Basel III to determine minimum regulatory capital requirements for its domestic, U.S. and
European credit portfolios, and certain international non-retail portfolios. The remaining credit portfolios are subject to the Standardized approach,
which relies on the external credit ratings of borrowers, if available, to compute regulatory capital for credit risk. For AIRB portfolios, the key risk
measures used in the quantification of regulatory capital for credit risk include probability of default (PD), loss given default (LGD) and exposure at
default (EAD).
(cid:129) Probability of default (PD) measures the likelihood that a borrower, with an assigned Internal Grade (IG) code, will default within a one-year time
horizon. IG codes are a component of the Bank’s risk rating system described on page 75. Each of the Bank’s internal borrower IG codes is mapped
to a PD estimate.
(cid:129) Loss given default (LGD) measures the severity of loss on a facility in the event of a borrower’s default. The Bank’s internal LGD grades are mapped
to ranges of LGD estimates. LGD grades are assigned based on facility characteristics such as seniority, collateral type, collateral coverage and other
46 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
structural elements. LGD for a defaulted exposure is based on the concept of economic loss and is calculated using the present value of repayments,
recoveries and related direct and indirect expenses.
(cid:129) Exposure at default (EAD) measures the expected exposure on a facility at the time of default.
All three risk measures are estimated using the Bank’s historical data, as well as available external benchmarks, and are updated on a regular basis.
The historical data used for estimating these risk measures exceeds the minimum 5-year AIRB requirement for PD estimates and the minimum 7-year
AIRB requirement for LGD and EAD estimates. Further analytical adjustments, as required under the Basel III Framework and OSFI’s requirements set
out in its Domestic Implementation Notes, are applied to average estimates obtained from historical data. These analytical adjustments incorporate the
regulatory requirements pertaining to:
(cid:129) Long-run estimation of PD, which requires that PD estimates capture average default experience over a reasonable mix of high-default and low-
default years of the economic cycle;
(cid:129) Downturn estimation for LGD, which requires that LGD estimates appropriately reflect conditions observed during periods where credit losses are
substantially higher than average; and
(cid:129) Downturn estimation for EAD, which requires that EAD estimates appropriately reflect conditions observed during periods of economic downturn;
and
(cid:129) The addition of a margin of conservatism, which is related to the likely range of errors based on the identification and quantification of the various
sources of uncertainty inherent in historical estimates.
These risk measures are used in the calculation of regulatory capital requirements based on formulas specified by the Basel framework. The credit
quality distribution of the Bank’s AIRB non-retail portfolio is shown in Table 31.
The risk measures are subject to a rigorous back-testing framework which uses the Bank’s historical data to ensure that they are appropriately
calibrated. Based on results obtained from the back-testing process, risk measures are reviewed and re-calibrated on at least an annual basis to ensure
that they reflect the implications of new data, technical advances and other relevant information.
(cid:129) As PD estimates represent long-run parameters, back-testing is performed using historical data spanning at least one full economic cycle. Realized
PDs are back-tested using pre-defined confidence intervals, and the results are then aggregated to provide an overall assessment of the
appropriateness of each PD estimate;
(cid:129) The back-testing for LGD and EAD estimates is conducted from both long-run and downturn perspectives, in order to ensure that these estimates
are adequately conservative to reflect both long-run and downturn conditions.
Portfolio-level back-testing results, based on a comparison of estimated and realized parameters for the four-quarter period ended at July 31, 2015,
are shown in Table 32. During this period the actual experience was significantly better than the estimated risk parameter:
T32 Portfolio-level comparison of estimated and actual non-retail percentages
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
Average PD
Average LGD
Average CCF(2)
Estimated(1)
Actual
0.90
41.39
50.50
0.34
32.32
15.14
(1) Estimated parameters are based on portfolio averages at Q3/14, whereas actual parameters are based on averages of realized parameters during the subsequent four quarters.
(2) EAD back-testing is performed through Credit Conversion Factor (CCF) back-testing, as EAD is computed using the sum of the drawn exposure and the committed undrawn exposure multiplied by the estimated CCF.
Credit risk-weighted assets – Canadian retail
The AIRB approach is used to determine minimum regulatory capital requirements for the retail credit portfolio. The retail portfolio is comprised of the
following Basel-based pools:
(cid:129) Residential real estate secured exposures consists of conventional and high ratio residential mortgages and all other products opened under the
Scotia Total Equity Plan (STEP), such as loans, credit cards and secured lines of credit;
(cid:129) Qualifying revolving retail exposures consists of all unsecured credit cards and lines of credit;
(cid:129) Other retail consists of term loans (secured and unsecured), as well as credit cards and lines of credit which are secured by assets other than real
estate.
For the AIRB portfolios, the following models and parameters are estimated:
(cid:129) Probability of default (PD) is the likelihood that the facility will default within the next 12 months.
(cid:129) Loss Given Default (LGD) measures the economic loss as a proportion of the defaulted balance.
(cid:129) Exposure at Default (EAD) is the portion of expected exposures at time of default.
The data observation period used for PD/EAD/LGD estimates meets the five year minimum. Various statistical techniques including predictive modeling
and decision trees were used to develop models. The models assign accounts into homogenous segments using internal and external borrower/facility-
level credit experience. Every month, exposures are automatically re-rated based on risk and loss characteristics. PD, LGD and EAD estimates are then
assigned to each of these segments incorporating the following regulatory requirements:
(cid:129) PD incorporates the average long run default experience over an economic cycle. This long run average includes a mix of high and low default
years.
(cid:129) LGD is adjusted to appropriately reflect economic downturn conditions.
(cid:129) EAD may also be adjusted to reflect downturn conditions when PD and EAD are highly correlated.
(cid:129) Sources of uncertainty are reviewed regularly to ensure uncertainties are identified, quantified and included in calculations so that all parameter
estimates reflect appropriate levels of conservatism.
47 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
The table below summarizes the credit quality distribution of the Bank’s AIRB retail portfolio as at October 31, 2015.
T33 Retail AIRB portfolio exposure by PD range(1)(2)
As at October 31 ($ millions)
2015
2014
RWA
($)
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
RWA
($)
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
Category
PD Range
Exceptionally low 0.0000% – 0.0499%
0.0500% – 0.1999%
Very low
0.2000% – 0.9999%
Low
Medium low
Medium
1.0000% – 2.9999%
3.0000% – 9.9999%
High
Extremely high
10.0000% – 19.9999%
20.0000% – 99.9999%
Default(7)
Total
100%
Exposure
at default
($)(2)
49,414
59,484
53,094
21,545
5,551
2,213
2,521
611
1,154
4,064
12,507
11,558
5,533
3,261
3,914
0.04
0.14
0.54
1.80
5.69
11.36
35.28
–
100.00
28
28
41
53
65
63
52
72
36
2
7
24
54
100
147
155
–
22
Exposure
at default
($)(2)
26,232
70,129
66,984
16,215
7,953
2,307
1,969
644
408
3,277
14,012
8,616
6,186
3,273
3,027
0.04
0.12
0.47
1.80
4.94
12.84
40.40
–
100.00
27
22
39
45
47
59
52
71
33
2
5
21
53
78
142
154
–
20
194,433
41,991
1.46
192,433
38,799
1.47
(1) Refer to the Bank’s Supplementary Regulatory Capital Disclosures for a more detailed breakdown by asset class, exposure at default, probability at default, loss given default and risk-weighting.
(2) After credit risk mitigation.
(3) PD – Probability of Default.
(4) LGD – Loss Given Default.
(5) RW – Risk Weight.
(6) Exposure at default used as basis for estimated weightings.
(7) Gross defaulted exposures, before any related allowances.
All AIRB models and parameters are monitored on a quarterly basis and independently validated annually by the Global Risk Management group.
These models are tested to ensure rank ordering and back testing of parameters is appropriate as described in the Bank’s Validation Guidelines.
Comparison of estimated and actual loss parameters for the period ended July 31, 2015 are shown in Table 34. During this period the actual
experience was significantly better than the estimated risk parameters.
T34 Estimated and actual loss parameters(1)(2)
($ millions)
Residential real estate secured(9)
Residential mortgages
Insured mortgages(10)
Uninsured mortgages
Secured lines of credit
Qualifying revolving retail exposures
Other retail
Average
Estimated
PD(3)(8)
%
Actual
Default
Rate(3)(6)
%
Average
Estimated
LGD(4)(8)
%
Actual
LGD(4)(7)
%
Estimated
EAD(5)(8)
$
Actual
EAD(5)(6)
$
1.01
0.50
0.84
2.09
1.97
0.67
0.39
0.33
1.65
1.42
–
18.34
28.44
78.10
59.42
–
10.60
18.22
66.45
50.37
–
–
107
544
6
–
–
93
486
6
EAD is estimated for revolving products only.
(1) New Revolving Models implemented in Q4 2014 and New BNS and Tangerine Mortgage Models implemented in Q1 2015. All related Estimates and Actual Values are restated historically to reflect new models.
(2) New BNS Retail Term Loan Models were implemented in Q3 2015. All Estimates and Actual Values for Retail Term Loans were restated historically to reflect new models.
(3) Account weighted aggregation.
(4) Default weighted aggregation.
(5)
(6) Actual based on accounts not at default as at four quarters prior to reporting date.
(7) Actual LGD calculated based on 24 month recovery period after default and therefore excludes any recoveries received after the 24 month period.
(8)
(9)
(10) Actual and Estimated LGD for insured mortgages are not shown. Actual LGD includes the insurance benefit, whereas estimated LGD may not.
Estimates are based on the four quarters prior to the reporting date.
Excludes the acquisition of Tangerine Bank (“Tangerine”) prior to January 31, 2015.
Credit risk-weighted assets – International retail
International retail credit portfolios follow the Standardized approach and consist of the following components:
(cid:129) Residential real estate secured lending;
(cid:129) Qualifying revolving retail exposures consisting of all credit cards and lines of credit;
(cid:129) Other retail consisting of term loans.
Under the standardized approach, in general, residential real estate secured lending products are risk-weighted 35% and other retail products receive
a 75% risk-weight.
Market Risk
Market risk is the risk of loss from changes in market prices including interest rates, credit spreads, equity prices, foreign exchange rates, and
commodity prices, the correlations between them, and their levels of volatility.
For all material trading portfolios, the Bank applies its internal models to calculate the market risk capital charge. OSFI has approved the Bank’s
internal VaR, Stressed VaR, Incremental Risk Charge and Comprehensive Risk Measure models for the determination of market risk capital. The
attributes and parameters of these models are described in the Risk Measurement Summary on page 79.
For some non-material trading portfolios, the Bank applies the Standardized Approach for calculating market risk capital. The standardized method
uses a “building block” approach, with the capital charge for each risk category calculated separately.
48 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
Below are the market risk requirements as at October 31, 2015 and 2014.
T35 Total market risk capital
($ millions)
All-Bank VaR
All-Bank stressed VaR
Incremental risk charge
Comprehensive risk measure
CRM surcharge
Standardized approach
Total market risk capital
(1) Equates to $14,350 million of market risk-weighted assets (2014 – $17,251 million).
T36 Risk-weighted assets movement by key drivers
($ millions)
RWAs as at beginning of the year
Movement in risk levels(1)
Model updates(2)
Methodology and policy(3)
RWA as at end of the year
2015
2014
$
141
246
488
201
–
72
$
241
428
396
130
139
46
$
1,148
$ 1,380
Market risk
2015
17,251
2,004
(2,723)
(2,182)
14,350
$
$
2014
$ 15,454
1,986
(189)
–
$ 17,251
(1) Movement in risk levels are defined as changes in risk due to position changes and market movements. Foreign exchange movements are imbedded within Movement in risk levels.
(2) Model updates are defined as updates to the model to reflect recent experience, change in model scope.
(3) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes (eg. Basel III).
Market risk-weighted assets decreased by $2.9 billion to $14.4 billion as shown in Table 36 largely due to VaR model enhancements which more than
offset increases from movements in risk levels.
Operational risk
Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to external events, human error, or the inadequacy or
failure of processes, procedures, systems or controls. The Bank currently applies the Standardized Approach for calculating operational risk capital as
per applicable Basel Standards. Total capital is determined as the sum of capital for each of eight Basel defined business activities. The capital for each
activity is the product of the relevant risk factor, as defined by Basel, applied to the gross income of each respective business activity. The Bank has
submitted its application to OSFI to use the Advanced Measurement Approach (AMA) during 2015. Under AMA, regulatory capital measurement will
more directly reflect the Bank’s operational risk environment through the use of a loss distribution approach model which will use internal loss events,
external loss events, scenario analysis and other adjustments to arrive at a final operational risk regulatory capital calculation.
Operational risk-weighted assets increased by $2.3 billion during the year to $35.6 billion due to organic growth in gross income.
Economic capital
Economic capital is a measure of the unexpected losses inherent in the Bank’s business activities. Economic capital is also a key metric in the Bank’s
ICAAP. The calculation of economic capital relies on models that are subject to independent vetting and validation as required by the Bank’s Model
Risk Management Policy. Management assesses its risk profile to determine those risks for which the Bank should attribute economic capital.
The major risk categories included in economic capital are:
(cid:129) Credit risk measurement is based on the Bank’s internal credit risk ratings for derivatives, corporate and commercial loans, and credit scoring for
retail loans. It is also based on the Bank’s actual experience with recoveries and takes into account differences in term to maturity, probabilities of
default, expected severity of loss in the event of default, and the diversification benefits of certain portfolios.
(cid:129) Market risk for economic capital incorporates models consistent with the regulatory basis, with some exclusions, and calibrated to a higher 99.95%
confidence interval, and models of other market risks, mainly structural interest rate and foreign exchange risks.
(cid:129) Operational risk for economic capital is based on a model incorporating actual losses, adjusted for an add-on for regulatory capital.
(cid:129) Other risks include additional risks for which economic capital is attributed, such as business risk, significant investments, insurance risk and real
estate risk.
In addition, the Bank’s measure of economic capital includes a diversification benefit which recognizes that all of the above risks will not occur
simultaneously.
The Bank also includes the full amount of goodwill and intangible assets in the economic capital amount. The Bank uses its economic capital
framework to attribute capital to the business lines (refer to non-GAAP measures, page 13). Table 46 on page 72 shows the attribution of economic
capital by business line which allows the Bank to appropriately compare and measure the returns from the business lines, based upon their inherent
risk. For further discussion on risk management and details on credit, market and operational risks, refer to the Risk Management section.
Off-balance Sheet Arrangements
In the normal course of business, the Bank enters into contractual arrangements with entities that are either consolidated or not required to be
consolidated in its financial statements, but could have a current or future impact on the Bank’s financial performance or financial condition. These
arrangements can be classified into the following categories: structured entities, securitizations, guarantees and other commitments.
49 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Structured entities
Arrangements with structured entities include structured entities that are used to provide a wide range of services to customers, such as structured
entities established to allow clients to securitize their financial assets while facilitating cost-efficient financing, and to provide certain investment
opportunities. The Bank creates, administers and manages personal and corporate trusts on behalf of its customers. The Bank also sponsors and
actively manages certain structured entities (see discussion on other unconsolidated structured entities on page 51).
All structured entities are subject to a rigorous review and approval process to ensure that all relevant risks are properly identified and addressed. For
many of the structured entities that are used to provide services to customers, the Bank does not guarantee the performance of the structured
entities’ underlying assets, and does not absorb any related losses. For other structured entities, such as securitization and investment vehicles, the
Bank may be exposed to credit, market, liquidity or operational risks. The Bank earns fees based on the nature of its association with a structured
entity.
Consolidated structured entities
The Bank controls its U.S.-based multi-seller conduit and certain funding and other vehicles, and consolidates these structured entities in the Bank’s
consolidated financial statements.
As at October 31, 2015, total assets of consolidated structured entities were $47 billion, compared to $36 billion at the end of 2014. The change was
primarily due to asset purchases by Scotiabank Covered Bond Guarantor Limited Partnership. More details of the Bank’s consolidated structured
entities are provided in Note 15(a) to the consolidated financial statements on page 171.
Unconsolidated structured entities
There are two primary types of association the Bank has with unconsolidated structured entities:
(cid:129) Canadian multi-seller conduits administered by the Bank, and
(cid:129) Structured finance entities.
The Bank earned total fees of $18 million in 2015 (October 31, 2014 - $20 million) from certain structured entities in which it had a significant interest
at the end of the year but did not consolidate. More information with respect to the Bank’s involvement with these unconsolidated structured entities,
including details of liquidity facilities and maximum loss exposure by category is provided below and in Note 15(b) to the consolidated financial
statements on page 172.
Canadian multi-seller conduits administered by the Bank
The Bank sponsors two Canadian-based multi-seller conduits that are not consolidated. The Bank earned commercial paper issuance fees, program
management fees, liquidity fees and other fees from these multi-seller conduits, which totaled $17 million in 2015, compared to $18 million in 2014.
These multi-seller conduits purchase high-quality financial assets and finance these assets through the issuance of highly-rated commercial paper.
As further described below, the Bank’s exposure to these off-balance sheet conduits primarily consists of liquidity support and temporary holdings of
commercial paper. Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns, which
results in the Bank not consolidating the two Canadian conduits. The Bank has a process to monitor these exposures and significant events impacting
the conduits to ensure there is no change in control, which could require the Bank to consolidate the assets and liabilities of the conduits at fair value.
A significant portion of the conduits’ assets have been structured to receive credit enhancements from the sellers, including overcollateralization
protection and cash reserve accounts. Each asset purchased by the conduits is supported by a backstop liquidity facility provided by the Bank in the
form of a liquidity asset purchase agreement (LAPA). The primary purpose of the backstop liquidity facility is to provide an alternative source of
financing in the event the conduits are unable to access the commercial paper market. Under the terms of the LAPA, in most cases, the Bank is not
obliged to purchase defaulted assets.
The Bank’s primary exposure to the Canadian-based conduits is the liquidity support provided, with total liquidity facilities of $3.9 billion as at
October 31, 2015 (October 31, 2014 – $4.1 billion). The year-over-year decrease was due to normal business operations. As at October 31, 2015,
total commercial paper outstanding for the Canadian-based conduits was $2.5 billion (October 31, 2014 – $2.7 billion) and the Bank held less than
0.2% of the total commercial paper issued by these conduits. Table 37 presents a summary of assets purchased and held by the Bank’s two Canadian
multi-seller conduits as at October 31, 2015 and 2014, by underlying exposure.
All of the funded assets have at least an equivalent rating of AA– or higher based on the Bank’s internal rating program. Assets held in these conduits
were investment grade as at October 31, 2015. Approximately 57% of the funded assets have final maturities falling within three years, and the
weighted-average repayment period, based on cash flows, approximates 1.7 years. There is no exposure to the U.S. subprime mortgage risk within
these two conduits.
50 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
T37 Assets held by Scotiabank-sponsored Canadian-based multi-seller conduits
As at October 31 ($ millions)
Auto loans/leases
Trade receivables
Canadian residential mortgages
Equipment loans/leases
Total(3)
As at October 31 ($ millions)
Auto loans/leases
Trade receivables
Canadian residential mortgages
Equipment loans/leases
Total(3)
Funded
assets(1)
$ 1,200
131
1,082
78
$ 2,491
Funded
assets(1)
$ 1,486
171
880
170
$ 2,707
2015
Unfunded
commitments
Total
exposure(2)
$
573
614
193
2
$ 1,773
745
1,275
80
$ 1,382
$ 3,873
2014
Unfunded
commitments
Total
exposure(2)
$
464
556
395
3
$ 1,950
727
1,275
173
$ 1,418
$ 4,125
(1) Funded assets are reflected at original cost, which approximates estimated fair value.
(2) Exposure to the Bank is through global-style liquidity facilities.
(3) These assets are substantially sourced from Canada.
Structured finance entities
The Bank has interests in structured finance entities used to assist corporate clients in accessing cost-efficient financing through their securitization
structures. The Bank’s maximum exposure to loss from structured finance entities was $2,330 million as at October 31, 2015, (October 31, 2014 –
$2,833 million). The year-over-year decrease was due to normal business operations.
Other unconsolidated structured entities
The Bank sponsors unconsolidated structured entities in which it has insignificant or no interest at the reporting date. The Bank is a sponsor when it is
significantly involved in the design and formation at inception of the structured entity, and the Bank’s name is used by the structured entity to create
an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also considers other factors, such as its continuing
involvement and obligations to determine if, in substance, the Bank is a sponsor. The Bank earned $1,977 million income from its involvement with
the unconsolidated Bank-sponsored structured entities for the year ended October 31, 2015 (for the year ended October 31, 2014 – $1,822 million).
Securitizations
The Bank securitizes fully insured residential mortgage loans, Bank originated and others, through the creation of mortgage backed securities (MBS)
that are sold to Canada Housing Trust (CHT) and/or third party investors. The sale of such mortgages does not qualify for derecognition with the
exception of social housing mortgage pools. The outstanding amount of off-balance sheet securitized social housing pools was $1,366 million as at
October 31, 2015, compared to $1,499 million last year. The transferred mortgages sold to CHT and/or third party investors continue to be
recognized on balance sheet along with the proceeds from sale treated as secured borrowings. More details have been provided in Note 14 to the
consolidated financial statements on Page 170.
The Bank securitizes a portion of its unsecured personal line of credit receivables (receivables) on a revolving basis through Hollis Receivables Term
Trust II (Hollis), a Bank-sponsored structured entity. Hollis issues notes to third-party investors and the Bank, and the proceeds of such issuance are
used to purchase a co-ownership interests in the receivables originated by the Bank. The sale of such co-ownership interest does not qualify for
derecognition. Recourse of the note holders is limited to the purchased interest. The subordinated notes issued by the structured entity are held by the
Bank. During the year, $1,144.6 million (October 31, 2014 – $602.4 million) of assets were securitized through Hollis, as a result of higher volume of
note liabilities issued.
Guarantees and other commitments
Guarantees and other commitments are fee-based products that the Bank provides to its customers. These products can be categorized as follows:
(cid:129) Standby letters of credit and letters of guarantee. As at October 31, 2015, these amounted to $31 billion, compared to $26 billion last year. These
instruments are issued at the request of a Bank customer to secure the customer’s payment or performance obligations to a third party. The year-
over-year increase reflects a general increase in customer activity and the impact of foreign currency translation;
(cid:129) Liquidity facilities. These generally provide an alternate source of funding to asset-backed commercial paper conduits in the event a general market
disruption prevents the conduits from issuing commercial paper or, in some cases, when certain specified conditions or performance measures are
not met;
(cid:129) Indemnification contracts. In the ordinary course of business, the Bank enters into many contracts where it may indemnify contract counterparties
for certain aspects of its operations that are dependent on other parties’ performance, or if certain events occur. The Bank cannot estimate, in all
cases, the maximum potential future amount that may be payable, nor the amount of collateral or assets available under recourse provisions that
would mitigate any such payments. Historically, the Bank has not made any significant payments under these indemnities;
(cid:129) Loan commitments. The Bank has commitments to extend credit, subject to specific conditions, which represent undertakings to make credit
available in the form of loans or other financings for specific amounts and maturities. As at October 31, 2015, these commitments amounted to
$166 billion, compared to $137 billion last year. The year-over-year increase reflects a general increase in foreign currency denominated business
activity and fluctuations in foreign currency exchange rates.
These guarantees and loan commitments may expose the Bank to credit or liquidity risks, and are subject to the Bank’s standard review and approval
processes. For the guaranteed products, the dollar amounts represent the maximum risk of loss in the event of a total default by the guaranteed
parties, and are stated before any reduction for recoveries under recourse provisions, insurance policies or collateral held or pledged.
51 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Fees from the Bank’s guarantees and loan commitment arrangements, recorded as credit fees in other income in the Consolidated Statement of
Income, were $489 million in 2015, compared to $465 million in the prior year. Detailed information on guarantees and loan commitments is
disclosed in Note 35 to the consolidated financial statements on pages 197 to 199.
Financial instruments
Given the nature of the Bank’s main business activities, financial instruments make up a substantial portion of the Bank’s financial position and are
integral to the Bank’s business. Assets that are financial instruments include cash resources, securities, securities purchased under resale agreements,
loans and customers’ liability under acceptances. Financial instrument liabilities include deposits, acceptances, obligations related to securities sold
under repurchase agreements, obligations related to securities sold short, subordinated debentures and capital instrument liabilities. In addition, the
Bank uses derivative financial instruments for both trading and hedging purposes.
Financial instruments are generally carried at fair value, except for non-trading loans and receivables, certain securities and most financial liabilities,
which are carried at amortized cost unless designated as fair value through profit and loss at inception.
Unrealized gains and losses on the following items are recorded in other comprehensive income:
(cid:129) available-for-sale securities, net of related hedges,
(cid:129) derivatives designated as cash flow hedges, and
(cid:129) net investment hedges.
Gains and losses on available-for-sale securities are recorded in the Consolidated Statement of Income when realized. Gains and losses on cash flow
hedges and net investment hedges are recorded in the Consolidated Statement of Income when the hedged item affects income.
All changes in the fair value of derivatives, including embedded derivatives that must be separately accounted for, are recorded in the Consolidated
Statement of Income, other than those designated as cash flow and net investment hedges which flow through other comprehensive income. The
Bank’s accounting policies for derivatives and hedging activities are further described in Note 3 to the consolidated financial statements (see
pages 140 and 143).
Interest income and expense on non-trading interest-bearing financial instruments are recorded in the Consolidated Statement of Income as part of
net interest income. Credit losses resulting from loans are recorded in the provision for credit losses. Interest income and expense, as well as gains and
losses, on trading securities and trading loans are recorded in other operating income – trading revenues. Realized gains and losses and writedowns
for impairment on available-for-sale debt or equity instruments are recorded in net gain on investment securities within other operating income.
Several risks arise from transacting financial instruments, including credit risk, liquidity risk, operational risk and market risk. Market risk arises from
changes in market prices and rates including interest rates, credit spreads, foreign exchange rates, equity prices and commodity prices. The Bank
manages these risks using extensive risk management policies and practices, including various Board-approved risk management limits.
A discussion of the Bank’s risk management policies and practices can be found in the Risk Management section on pages 66 to 98. In addition,
Note 36 to the consolidated financial statements on pages 199 to 208 presents the Bank’s exposure to credit risk, liquidity risk and market risks arising
from financial instruments as well as the Bank’s corresponding risk management policies and procedures.
There are various measures that reflect the level of risk associated with the Bank’s portfolio of financial instruments. For example, the interest rate risk
arising from the Bank’s financial instruments can be estimated by calculating the impact of a 100 basis point increase or decrease in interest rates on
annual income, and the economic value of shareholders’ equity, as described on page 82. For trading activities, Table 49 on page 82 discloses the
average one-day Value at Risk by risk factor. For derivatives, based on the Bank’s maturity profile of derivative instruments, only 14% (2014 – 12%)
had a term to maturity greater than 5 years.
Note 10 to the consolidated financial statements (see pages 159 to 163) provides details about derivatives used in trading and hedging activities,
including notional amounts, remaining term to maturity, credit risk and fair values.
The fair value of the Bank’s financial instruments is provided in Note 7 to the consolidated financial statements (see pages 151 to 156) along with a
description of how these amounts were determined.
The fair value of the Bank’s financial instruments was favourable when compared to their carrying value by $2,410 million as at October 31, 2015
(October 31, 2014 – favourable $1,918 million). This difference relates mainly to loan assets, deposit liabilities, subordinated debentures and other
liabilities. The year-over-year change in the fair value over carrying value arose mainly from changes in interest rates since origination. Fair value
estimates are based on market conditions as at October 31, 2015, and may not be reflective of future fair values. Further information on how fair
values are estimated is contained in the section on critical accounting estimates on page 99.
Disclosures specific to certain financial instruments designated at fair value through profit and loss can be found in Note 9 to the consolidated
financial statements (see page 158). These designations were made primarily to significantly reduce accounting mismatches.
52 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
Selected credit instruments – publically known risk items
Mortgage-backed securities
Non-trading portfolio
Total mortgage-backed securities held as available-for-sale securities as a percent of the Bank’s total assets is insignificant as at October 31, 2015, and
are shown in Table 38. Exposure to subprime mortgage risk in the U.S. is nominal.
Trading portfolio
Total mortgage-backed securities held as trading securities represent less than 0.17% of the Bank’s total assets as at October 31, 2015, and are
shown in Table 38.
T38 Mortgage-backed securities
As at October 31
Carrying value
($ millions)
Canadian NHA mortgage-backed securities(1)
Commercial mortgage-backed securities
Other residential mortgage-backed securities
Total
2015
2014
Non-trading
portfolio
Trading
portfolio
Non-trading
portfolio
Trading
portfolio
$ 137
2
206
$ 345
$ 1,335
113
3
$
–
30
107
$ 1,431
132
473
$ 1,451
$ 137
$ 2,036
(1) Canada Mortgage and Housing Corporation provides a guarantee of timely payment to NHA mortgage-backed security investors.
Collateralized debt obligations and collateralized loan obligations
Non-trading portfolio
The Bank has collateralized loan obligation (CLO) investments in its non-trading portfolio. CLOs generally achieve their structured credit exposure by
investing and holding corporate loans or bonds. Cash-based CLOs are classified as loans and are carried at amortized cost. These are assessed for
impairment like all other loans.
As at October 31, 2015, the carrying value of cash-based CLOs reported as loans on the Consolidated Statement of Financial Position was $34 million
(October 31, 2014 - $87 million). The fair value was $28 million (October 31, 2014 - $84 million). The year-over-year decline was due to paydowns.
None of these cash-based CLOs are classified as impaired loans. Substantially all of the referenced assets of the Bank’s CLOs are corporate exposures,
without any U.S. mortgage-backed securities.
Trading portfolio
The Bank also holds synthetic CDOs in its trading portfolio as a result of structuring and managing transactions with clients and other financial
institutions. To hedge its trading exposure, the Bank purchases or sells CDOs to other financial institutions, along with purchasing and/or selling index
tranches or single name credit default swaps (CDSs). The main driver of the value of CDOs and CDSs is changes in credit spreads. Total CDOs
purchased and sold in the trading portfolio are shown in Table 39 below.
T39 Collateralized debt obligations (CDOs)
As at October 31
Outstanding ($ millions)
CDOs – sold protection
CDOs – purchased protection
2015
2014
Notional
Amount
$ 1,977
$ 1,776
Positive/
(negative)
fair value
$ 24
$ (8)
Notional
Amount
$ 2,151
$ 1,973
Positive/
(negative)
fair value
$ 50
$ (4)
The change in the notional amounts of the CDO sold protection is due mainly to trades that were unwound during the year. The change in fair value
of CDOs was due to the reduction of probability of deals experiencing defaults as they approach maturity. Based on positions held at October 31,
2015, a 50 basis point widening of relevant credit spreads in this portfolio would result in a pre-tax decrease of approximately $4.6 million in net
income.
The referenced assets underlying the trading book CDOs are substantially all corporate exposures, with no mortgage-backed securities.
Other
As at October 31, 2015, the Bank has insignificant exposure to highly leveraged loans awaiting syndication, auction-rate securities, Alt-A type loans,
monoline insurance and investments in structured investment vehicles.
53 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS LINE OVERVIEW
Below are the results of the Bank’s three business operating segments for 2015.
CHANGES TO OPERATING SEGMENTS EFFECTIVE NOVEMBER 1, 2014
Effective November 1, 2014, the Canadian and International businesses previously reported in Global Wealth & Insurance are included in Canadian
Banking and International Banking’s results, respectively. As well, certain Asia business activity previously reported in International Banking is now
included in Global Banking and Markets. Prior period comparative results have been restated.
CANADIAN BANKING
Canadian Banking had net income attributable to equity holders of $3,344 million in 2015. Adjusting for the 2014 notable items (refer T41), prior
contribution from CI Financial Corp. (CI) and changes in the Canadian tax legislation, net income grew by $307 million or 10%. This was a result of
solid asset and deposit growth and a widening margin driven mainly from credit cards, mortgages and credit lines, as well as higher non-interest
income. Partly offsetting were higher provision for credit losses and non-interest expenses. Return on economic equity was 29.7% compared to
27.6% last year, adjusted for the items above.
INTERNATIONAL BANKING
International Banking had net income attributable to equity holders of $1,853 million, up $237 million from last year. Adjusting for the 2014 notable
items (refer T41), net income rose by $163 million or 10%. Results benefited from strong asset growth in Latin America, higher fees and contributions
from associated corporations, and the positive impact of foreign currency translation. Partly offsetting were margin compression, lower securities
gains, and higher provision for credit losses. Return on economic equity was 12.8%, unchanged from last year.
GLOBAL BANKING AND MARKETS
Global Banking and Markets reported net income attributable to equity holders of $1,553 million in 2015, a decrease of $117 million from last year.
Strong revenue performances in the equities and fixed income businesses were offset by lower revenues in investment banking and Asia lending.
Reduced expenses were offset by higher provision for credit losses. Return on economic equity decreased to 25.1% from 28.0% last year.
54 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES
Management uses a number of key metrics to monitor business line performance:
(cid:129) Net income
(cid:129) Return on economic equity
(cid:129) Productivity ratio
(cid:129) Provision for credit losses ratio
(cid:129) Employee engagement
T40 2015 financial performance
($ millions)
Net interest income(1)
Non-interest income (1)
Total revenue(2)
Provision for credit losses
Non-interest expenses
Provision for income taxes (1)
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Return on economic equity(3) (%)
Total average assets ($ billions)
Total average liabilities ($ billions)
Canadian
Banking
International
Banking
Global Banking
and Markets
$
6,415
4,832
11,247
687
6,014
1,202
$
3,344
–
$ 5,706
3,137
8,843
1,128
5,095
568
$ 2,052
199
$
$
$
3,344
$ 1,853
29.7%
300
218
12.8%
128
94
$
$
$ 1,071
2,953
4,024
67
1,846
558
$ 1,553
–
$ 1,553
25.1%
342
240
$
$
Other(2)
$ (100)
35
(65)
60
86
(475)
$ 264
–
$ 264
–
$
91
$ 257
Total
$ 13,092
10,957
24,049
1,942
13,041
1,853
$
7,213
199
7,014
14.6%
861
809
$
$
$
(1) Taxable equivalent basis. See non-GAAP measures on page 13.
(2) The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched
maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes, changes in the collective allowance on performing loans, and
differences in the actual amount of costs incurred and charged to the operating segments.
(3) Return on equity for the business lines is based on economic equity attributed. See non-GAAP measures on page 13.
T41 Notable Items
The following is the impact of the 2014 notable items on Business Line results. Refer also to Table 23 for additional details.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
B
U
S
I
N
E
S
S
L
I
N
E
S
For the year ended October 31 ($ millions)
Revenues
Provision for credit losses
Non-interest expenses
Net income before income taxes
Income taxes
Net income
Net income attributable to equity holders of the Bank
Canadian
Banking
International
Banking
Global Banking
and Markets
2014
$
$
$
$
615
62
47
506
53
453
453
$
(47)
–
34
$ (81)
(7)
$ (74)
$
(74)
$ (2)
–
36
$ (38)
(11)
$ (27)
Other
$
–
–
86
$ (86)
(24)
$ (62)
$
(27)
$
(62)
Total
$ 566
62
203
$
$
$
301
11
290
290
55 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian Banking
Canadian Banking provides a full suite of financial advice and banking solutions, supported by an excellent customer experience, to retail, small
business, commercial and wealth management customers in Canada.
2015 Achievements
(cid:129) Delivered an industry-leading customer experience across our businesses and channels
(cid:129)
Tied for first place in 8 of 13 Ipsos Best Banking Awards 2015 among the Big 5 Banks, including for the “Branch Service Excellence”
award, which is a first for the Bank.
(cid:129) Tangerine ranked #1 in customer satisfaction among mid-sized banks in Canada, in J.D. Power 2015 Canadian Retail Banking
Customer Satisfaction Study.
(cid:129) Scotia iTRADE won “Best Customer Service” in MoneySense Report on Canada’s Top Discount Brokerages.
(cid:129)
Scotiabank named the Best Consumer Digital Bank in North America by Global Finance magazine.
(cid:129) Grew Wealth Management
(cid:129)
Launched a new global “Scotia Wealth Management” brand introducing one unified voice, and one focused approach to serving
clients.
(cid:129) Continued launch of Wealth advisor teams in multiple locations across Canada, where advisors are co-located with dedicated wealth
management specialists to meet the comprehensive needs of high net worth clients.
(cid:129) Dynamic Funds strengthened its leadership position in fee-based investing by expanding the Dynamic Private Investment Pools lineup
with the launch of five new investment mandates, and by making broad-based fee reductions across a number of its funds.
(cid:129) Further optimized our business mix by growing our high-return assets, building sticky core deposits, and earning higher
fee income
(cid:129)
(cid:129)
Introduced the Scotiabank Momentum Savings Account, an innovative high-interest savings account that is the first of its kind in
Canada to reward customers for saving by paying them twice and won best savings account with minimum balance for Savings
Accelerator (RateSupermarket.ca).
Launched Right Size Account for Business, which offers market-leading pricing that adjusts to match customers’ transaction volumes
and cash management needs.
(cid:129) Continued executing on Commercial Banking strategy and growing footprint, as evidenced by leading market share gains and double
digit net income, loan, and deposit growth.
(cid:129) Recognized as having “Best Overall Suite of Credit Cards” in Canada (Rewards Cards Canada).
(cid:129)
Partnered with General Motors of Canada and launched the Scotiabank® GM® VISA Cards, allowing customers to earn up to 5% in
GM Earnings on everyday purchases.
Business Profile
Canadian Banking provides a full suite of financial advice and banking solutions to over 10 million customers across Canada, through a network of more
than 1,000 branches, 3,900 ABMs, 400 Commercial Relationship Managers, 100 Wealth Management offices and a strong internet and mobile banking
platform.
Retail and Small Business Banking provides financial advice, solutions and day-to-day banking products, including debit cards, chequing accounts,
credit cards, investments, mortgages, loans, and related insurance products, to individuals and small businesses. Tangerine Bank provides internet,
mobile and telephone banking to self-directed customers.
Commercial Banking delivers advice and a full suite of customized lending, deposit, cash management and trade finance solutions to medium and
large businesses, including automotive dealers and their customers to whom we provide retail automotive financing solutions.
Wealth Management is an integrated business unit composed of asset management and advisory businesses. Asset management business is
focused on investment manufacturing and developing innovative investment solutions for both retail and institutional investors. Our client-facing
wealth businesses, including private client, online and full service brokerage, institutional client services and an independent advisor channel, are
focused on providing advice and solutions to clients in Canada.
Strategy
Canadian Banking is executing on a long term strategy to deliver a best-in-class customer experience, outperform competitors in earnings growth, and
grow primary banking relationships through three areas of strategic focus:
Customer Experience – deliver superior customer interactions that exceed customer expectations across all our businesses
Business Mix – optimize our business mix by growing high-return assets, building sticky core deposits, and earning higher fee income; and by
improving our primary bank standing with existing and new customers
Operational Improvement – continue to reduce structural costs in order to facilitate the capacity to invest in our businesses and the supporting
technology and capabilities to drive customer experience excellence
2016 Priorities
(cid:129) Improve customer experience by transforming the Retail and Small Business Banking distribution network, streamlining end-to-end customer
journeys, and offering customized advice and solutions
(cid:129) Enhance business mix by driving continued growth in Commercial Banking, credit cards, and core deposits
(cid:129) Expand Tangerine: Positioning Tangerine to become the leading everyday direct bank in Canada
(cid:129) Grow & diversify Wealth Management: Targeting double-digit growth in Wealth Management while also increasing diversification of earnings
(cid:129) Reduce structural costs: Deliver sustained cost savings to build the capacity to further invest in our businesses and technology, drive customer
experience excellence, and drive greater efficiency
56 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T42 Canadian Banking financial performance
($ millions)
Net interest income(1)
Non-interest income(1)
Total revenue(1)
Provision for credit losses
Non-interest expenses
Income tax expense
Net income
Net income attributable to non-controlling interests
Net income attributable to equity holders of the Bank
Key ratios
Return on economic equity
Productivity(1)
Net interest margin(2)
Provision for credit losses as a percentage of loans and acceptances
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets
Total assets
Deposits
Total liabilities
Economic equity
Other ($ billions) as at October 31
Assets under administration
Assets under management
(1) Taxable equivalent basis.
(2) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
2015
6,415
4,832
11,247
687
6,014
1,202
3,344
–
3,344
$
$
$
2014
5,996
5,263
11,259
663
5,799
1,113
3,684
1
3,683
$
$
$
2013
5,691
4,230
9,921
480
5,362
1,015
3,064
2
3,062
$
$
$
29.7%
53.5%
2.23%
0.23%
29.6%
51.5%
2.14%
0.23%
24.1%
54.1%
2.08%
0.18%
$ 293,460
299,929
210,241
217,753
11,133
$ 284,966
291,549
202,088
208,354
12,249
$ 277,984
284,225
195,348
199,926
12,352
$
$
310
135
$
$
296
124
$
$
268
109
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
C
A
N
A
D
I
A
N
B
A
N
K
I
N
G
Financial Performance
Canadian Banking’s net income attributable to equity holders was $3,344 million in 2015, a decrease of $339 million or 9% from last year. Adjusting
for the 2014 notable items (refer T41), prior contribution from CI and changes in the Canadian tax legislation, net income attributable to equity
holders increased $307 million or 10% from last year. Return on economic equity was 29.7%, versus 27.6% last year, adjusted for the items above.
Retail and small business banking and wealth management generated strong performances.
Assets and liabilities
Average assets rose $8 billion or 3% from last year. Adjusting for the impact of the Tangerine broker-originated and white-label mortgage run-off
portfolios, assets increased $14 billion or 5%. The growth reflected $6 billion or 10% in personal loans primarily in consumer automotive lending and
credit cards, $5 billion or 3% in residential mortgages, as well as $4 billion or 13% in business loans and acceptances.
Average liabilities rose $9 billion or 5%. Retail banking experienced solid growth in chequing accounts of $1 billion or 9% and savings deposits of
$5 billion or 8%. There was also growth of $4 billion or 9% in small business and commercial banking business operating accounts. This was partially
offset by a decline in lower spread GICs of $2 billion or 3%.
Assets under management (AUM) and assets under administration (AUA)
AUM of $135 billion increased $11 billion or 9% from last year, driven by improved financial markets and strong net sales. AUA increased $14 billion
or 5% to $310 billion driven by new customer assets and improved financial markets.
57 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C17 Total revenue
$ millions
28%
55%
17%
Retail & Small Business Banking
Commercial Banking
Wealth Management
C18 Total revenue by sub-segment
$ millions
12000
10000
8000
6000
4000
2000
13
14
15
Wealth Management
Commercial Banking
Retail & Small Business Banking
C19 Average loans and acceptances
300
$ billions
250
200
150
100
50
13
14
15
Commercial loans/acceptances
Retail loans (except mortgages)
Residential mortgages
Revenues
Canadian Banking reported total revenues of $11,247 million in 2015. Adjusting for the 2014
notable item and contribution from CI, revenues were $773 million or 7% higher than last year.
Net interest income increased $433 million or 7% to $6,415 million, on an adjusted basis. The
increase was driven by good asset and deposit growth and an eight basis point increase in the
margin to 2.23%. The margin increase was primarily driven by higher spreads in mortgage and
other personal lending, as well as growth in higher margin credit cards, lines of credit, core
chequing and savings accounts, and the run-off of lower spread Tangerine mortgages.
Non-interest income was $4,832 million in 2015, up $341 million or 8% from the previous year,
on an adjusted basis. The increase was driven by strong growth across several businesses,
including wealth management, credit cards and insurance. Also contributing was the full year
impact of the Bank’s investment in Canadian Tire Financial Services.
Retail & Small Business Banking
Total retail and small business banking revenues were $6,236 million, up $439 million or 8%
from last year. Net interest income grew $288 million or 7%, primarily driven by a 13 basis point
improvement in the margin and solid growth in mortgages, credit card products and deposits.
Non-interest income increased $151 million or 11%, primarily due to growth in credit card
revenues, deposit payment service fees and insurance revenues.
Commercial Banking
Total commercial banking revenues increased $135 million or 8% to $1,859 million in 2015. Net
interest income rose $123 million or 9% due mainly to growth in loans and business operating
accounts. Non-interest income increased $12 million or 3% mainly driven by higher credit fees,
partly offset by lower gains on investment securities this year.
Wealth Management
Total wealth management revenues were $3,152 million. Adjusting for last year’s notable item
and contribution from CI, revenues increased $199 million or 7%. Net interest income rose
$22 million or 7% mainly due to growth in deposits and loans. Wealth management revenues
increased $203 million or 8% from strong growth in mutual funds, increased brokerage revenues
and higher investment management fees. Higher mutual fund fees were from market
appreciation, net sales and the introduction of the fixed administration fees for ScotiaFunds in the
fourth quarter of 2014. This change had the impact of reporting higher revenues with
corresponding higher expenses. Partly offsetting these increases was lower underwriting fees.
Non-interest expenses
Non-interest expenses were $6,014 million. Adjusting for last year’s notable item, non-interest
expenses were up $262 million or 5% from last year, primarily reflecting higher technology and
project spending, volume and revenue driven expenses and salary increases, partially offset by
benefits realized from structural cost reductions. Operating leverage was positive 2.8% on an
adjusted basis.
Provision for credit losses
The provision for credit losses was $687 million, an increase of $24 million from $663 million last
year. Adjusting for the 2014 notable item, the provision for credit losses was up $86 million from
the prior year due to increases in retail portfolios, primarily in credit cards and automotive loans.
The provision for credit losses ratio was up two basis points to 0.23%, on an adjusted basis.
C20 Canadian wealth management asset growth
$ billions, as at October 31
Provision for income taxes
350
300
250
200
150
100
50
175
150
125
100
75
50
25
13
14
15
Assets under administration (left scale)
Assets under management (right scale)
The effective tax rate increased to 26.4%, compared to 23.2% in the previous year. The increase
was primarily due to lower taxes in the prior year on the notable gain and the changes in the
Canadian tax legislation this year.
Outlook
The outlook for Canadian Banking in 2016 is for continued solid growth. Loan growth will be
driven by retail mortgages, automotive lending, commercial loans and credit cards. Deposit
growth should be robust across retail chequing and savings, small business and commercial.
Margins are expected to rise gradually throughout 2016. Provisions for credit losses are expected
to rise reflecting loan growth and changing portfolio mix. Wealth management is expected to see
continued good growth rates in 2016. Expense management will continue to be an area of focus.
58 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
International Banking
International Banking provides a full range of financial products, solutions and advice to retail and commercial customers in select regions outside of
Canada.
2015 Achievements
(cid:129) Acquisition of 51% of Cencosud’s credit card and consumer loan operations in Chile, including 2.5 million credit cards and close to US$1
billion in outstanding balances, to become the country’s third-largest credit card provider. Cencosud is the largest multi-brand retailer in Chile
and the third-largest in Latin America.
(cid:129) Acquisitions of Citibank’s Retail and Commercial Banking Operations in (1) Peru, as well as in (2) Panama and Costa Rica (the latter of which is
subject to regulatory approval). The company’s operations in Peru include eight branches which serve more than 130,000 Retail and
Commercial banking customers. An agreement was also reached with American Airlines whereby Scotiabank will replace Citibank as American
Airlines’ co-branded credit card partner in Peru. The second acquisition in Panama and Costa Rica will provide a significant lift to Scotiabank’s
market share in credit cards, ranking it number two in both countries in this segment, and will nearly triple the Bank’s customer base in these
markets. The acquisition includes 27 branches which serve more than 250,000 Retail and Commercial banking customers.
(cid:129) Signed a partnership agreement with American Express in Colombia. Signed co-branded credit card partnership agreements with major
retailers PriceSmart in Colombia and Linio in Colombia and Mexico.
(cid:129) Named the 2015 Bank of the Year in Peru by LatinFinance magazine.
(cid:129) Named the 2015 Best Emerging Markets Bank in Barbados, Jamaica, Trinidad and Tobago, Turks and Caicos and US Virgin Islands by Global
Finance magazine.
(cid:129) Named the 2015 Best Consumer Digital Bank in 21 Caribbean and Central American countries, including Jamaica, Trinidad & Tobago, Cayman
Islands and Costa Rica by Global Finance magazine.
(cid:129) The Scotiabank Customer Contact Centre in Jamaica tied for the 2014 Highest Customer Service Award for the Banking Industry, awarded by
the Service Quality Measurement Group.
(cid:129) Recognized as a 2015 Best Multinational Workplace in Latin America, as well as a Great Place to Work in Mexico, Costa Rica, El Salvador and
Panama by the Great Place to Work Institute.
Business Profile
Scotiabank has an international presence unmatched by other Canadian Banks. The International Banking business line encompasses retail and
commercial banking operations in 3 regions outside of Canada, being Latin America, the Caribbean and Central America, and Asia. This business
provides a full range of personal and commercial financial services to over 13 million Scotiabank customers (excluding associated corporations)
through a network of just under 2,000 branches and offices, over 4,600 ABMs, mobile, internet and telephone banking, in-store banking kiosks and
specialized sales forces.
Strategy
The International Banking strategy is aligned with the All-Bank priorities, with primary focus on the following:
(cid:129) Acquiring more sustainable and profitable primary banking customer relationships anchored with easy to use payments solutions and full service
banking capabilities. We are focusing on providing our customers with the right practical advice and the right solutions, through the right channels.
(cid:129) Optimizing our operating model and our footprint to improve our customer experience, lower our structural costs, reduce our complexity and
ultimately to be more efficient.
(cid:129) Making leadership a competitive advantage by actively acquiring, developing and engaging a diverse pool of leaders to deepen our bench strength
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
I
N
T
E
R
N
A
T
I
O
N
A
L
B
A
N
K
I
N
G
of talent.
2016 Priorities
Aligned to our strategy and in addition to the growth in our core business, our primary focus is on the following 4 key growth initiatives over the next
3-5 years:
(cid:129) Improve our Retail Customer Experience to ensure that we maintain relevancy and loyalty with our customers as traditional and non-traditional
competitors aggressively ramp up their efforts to build market share.
(cid:129) Invest in Mexico to drive growth, build greater relevance and presence, and strengthen our foundational capabilities in this key market.
(cid:129) Target Higher Profitability Business across the Pacific Alliance Countries to become the primary bank in selected segments.
(cid:129) Streamline our Operational Infrastructure to be better organized to serve our customers, achieve structural cost reductions, and consolidate our
operations to drive greater efficiency.
59 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T43 International Banking financial performance
($ millions)
Net interest income(1)
Non-interest income(1)
Total revenue(1)
Provision for credit losses
Non-interest expenses
Income tax expense(1)
Net income
Net income attributable to non-controlling interests
Net income attributable to equity holders of the Bank
Key ratios
Return on economic equity
Productivity(1)
Net interest margin(2)
Provision for credit losses as a percentage of loans and acceptances
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets
Total assets
Deposits
Total liabilities
Economic equity
Other ($ millions as at October 31)
Assets under administration
Assets under management
(1) Taxable equivalent basis.
(2) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
2015
5,706
3,137
8,843
1,128
5,095
568
2,052
199
1,853
$
$
$
2014
5,155
2,945
8,100
1,024
4,690
544
1,842
226
2013
$ 4,756
3,140
7,896
774
4,448
621
$ 2,053
229
1,616
$ 1,824
$
$
$
12.8%
57.6%
4.71%
1.24%
12.8%
57.9%
4.75%
1.27%
15.2%
56.3%
4.84%
1.07%
$ 121,130
128,248
73,946
94,340
14,082
$ 108,717
114,996
65,025
84,969
12,232
$ 98,432
99,623
57,484
74,123
11,499
$ 80,606
$ 43,560
$ 71,587
$ 41,125
$ 58,184
$ 36,376
60 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Financial Performance
Net income attributable to equity holders was $1,853 million an increase of $237 million or 15%.
Adjusting for the 2014 notable item (refer T41), net income was up $163 million or 10%. Positive
impacts from foreign currency translation and earnings from strong asset and fee growth were
partly offset by lower securities gains and higher provisions for credit losses. From a regional
perspective, strong underlying asset and fee growth in Latin America complemented solid
underlying earnings in the Caribbean and Asia.
Assets and Liabilities
Average assets of $128 billion increased $13 billion or 12%, driven by strong retail and
commercial loan growth of 13% and 14% respectively, or 10% and 6% adjusting for the impact
of foreign currency translation. Latin America primarily drove the growth in lending assets for the
business with underlying retail and commercial assets increasing 14% and 11%, respectively.
Caribbean and Central America saw retail assets increase by 1% with a decline in commercial
assets of 6%. Average liabilities increased $9 billion or 11% to $94 billion largely due to 14%
growth in deposits, or 9% adjusting for positive foreign currency translation. Similar to assets,
growth was primarily in retail and commercial deposits in Latin America. Core retail deposits in
Latin America rose 15%.
Revenues
Total revenues of $8,843 million increased $743 million or 9%. Adjusting for 2014 notable items
(refer T41), revenues increased $696 million or 9%.
Net interest income increased 11% driven by strong loan growth and recent acquisitions of
Cencosud’s credit card business in Chile and Citibank Peru. This was partly offset by a 1% decline
in the net interest margin from 4.75% to 4.71%. Non-interest income increased $192 million or
7%, or $239 million adjusting for 2014 notable items (refer T41). This increase was largely driven
by higher net fee and commission revenues which increased 10% to $2,335 million primarily due
to higher banking and wealth management fees across Latin America and the Caribbean. Net
income from associated corporations increased by $65 million, with higher contributions from
Thanachart Bank in Thailand and Bank of Xi’an in China, partially offset by a lower contribution
from Banco del Caribe in Venezuela. Other operating income decreased by $81 million, or
$128 million adjusting for 2014 notable items (refer T41), due mainly to lower trading revenues,
lower net gains on investment securities, and the impact of mark-to-market of financial
instruments used for asset/liability management purposes, partly offset by higher insurance
revenues.
Latin America
Total revenues of $5,845 million increased 6% from last year, or 8% excluding the negative
impact of foreign currency translation. Net interest income rose $341 million or 10%, reflecting
the impact of strong asset growth partly offset by a lower net interest margin from Central Bank
rate changes. Net fee and commission revenues increased by $96 million or 6% largely driven by
higher banking fees and higher wealth management and foreign exchange fees. Net income
from associated corporations was down $40 million due to a lower contribution from Banco del
Caribe in Venezuela. Other operating income decreased by $57 million, or $104 million excluding
the 2014 notable items (refer T41), due mainly to lower trading revenues, net gains on
investment securities and last year’s gain on sale of a non-strategic business in Peru, partly offset
by higher insurance revenues.
Caribbean and Central America
Total revenues were $2,604 million, up 14% versus last year or 3% excluding the positive impact
of foreign currency translation. Net interest income increased $209 million or 13%, driven
primarily by positive foreign currency translation. Non-interest income including net fees and
commissions was up 17%, or 7% adjusting for foreign currency translation, as a result of strong
growth in banking, wealth management and foreign exchange fees.
Asia
Total revenues were $394 million, up 25% versus last year, or 22% adjusting for the positive
impact of foreign currency translation. This was primarily driven by higher contributions from
Thanachart Bank in Thailand and Bank of Xi’an in China.
Non-interest expenses
Non-interest expenses of $5,095 million increased $405 million or 9% from last year. Adjusting
for the 2014 notable items of $34 million (refer T41), expenses increased $439 million or 9%.
The increase reflected the negative impact of foreign currency translation, acquisitions, business
volume growth and inflationary increases. Adjusting for the 2014 notable items and the impact
of acquisitions, operating leverage was negative 0.2%.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
I
N
T
E
R
N
A
T
I
O
N
A
L
B
A
N
K
I
N
G
C21 Total revenue
5%
29%
66%
Caribbean and Central America
Latin America
Asia
C22 Total revenue by region
$ millions
9000
8000
7000
6000
5000
4000
3000
2000
1000
13
14
15
Asia
Caribbean and Central America
Latin America
C23 Average loans and acceptances
$ billions
120
100
80
60
40
20
13
14
15
Residential mortgages
Retail loans (except mortgages)
Business loans/acceptances
C24 Average earning assets(1) by region
$ billions
140
120
100
80
60
40
13
Provision for credit losses
The provision for credit losses increased $104 million to $1,128 million. In the retail portfolio,
acquisitions and related benefits accounted for almost two thirds of the increase in provisions.
Adjusting for these benefits, growth in provisions was slightly below overall retail asset growth.
Retail provision increases in Mexico, Colombia and the Caribbean were partly offset by lower
provisions in Peru. In the commercial portfolio, provisions were primarily lower in the Caribbean,
mostly as the fourth quarter last year included $83 million in provisions mainly relating to a
small number of accounts in the hospitality portfolio, partly offset by higher provisions in Peru.
The provision for credit losses ratio was down 3 basis points to 1.24% relative to last year,
or 22 basis points excluding the impact of acquisitions.
Provision for income taxes
The effective tax rate was 21.7% compared to 22.8% last year due primarily to higher tax benefits in Latin America, primarily Mexico.
Outlook
International Banking expects to continue to deliver solid results, leveraging its diversified footprint, with particular focus on the Pacific Alliance
countries. In 2016, the asset growth momentum experienced in 2015 is expected to continue, and margins and credit quality are expected to remain
stable, with provision for credit losses growing in line with asset growth. Investments will be made to optimize International Banking’s business
structure and deliver a stronger customer experience while managing the growth in expenses. While the focus is on organic growth, acquisition
opportunities will continue to be considered that are strategically aligned and complement current operations within the current footprint.
Asia
Caribbean and Central America
Latin America
(1) Average earning assets excluding bankers acceptances
15
14
61 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Global Banking and Markets
Global Banking and Markets (GBM) provides clients with corporate banking, investment banking and capital markets solutions. GBM’s products and
services are offered to corporate, government and institutional clients in Canada, the U.S., Latin America, Europe, Asia and Australia.
2015 Achievements
(cid:129) A Financial Advisor to Emera Inc. on its acquisition of TECO Energy Inc. for an aggregate purchase price of US$10.4 billion. The transaction is expected
to close by mid-2016, and will create a North American energy leader with over US$20 billion of assets. Scotiabank also provided acquisition financing
to Emera in connection with this transaction, and acted as lead Joint Bookrunner for approximately $2.2 billion of contingent equity.
(cid:129) Joint Global Coordinator and Joint Bookrunner on Hydro One Limited’s Initial Public Offering (IPO) of common shares for $1.83 billion. Hydro One is the
largest electricity transmission and distribution company in Ontario and one of the largest in North America. Scotiabank is one of two banks that were
selected to arrange the IPO, the largest IPO in Canada in the last 15 years, the largest Power & Utilities IPO and one of the largest government
privatizations in Canadian history.
(cid:129) Exclusive Financial Advisor to AuRico Gold Inc. on its merger with Alamos Gold Inc. The merger of equals, valued at US$1.6 billion, created a new
leading intermediate gold producer.
(cid:129) Exclusive Financial Advisor to Kuwait Foreign Petroleum Exploration Company (KUFPEC) on its US$1.5 billion acquisition of 30% Interest in Chevron
Corporation’s Duvernay shale position in Alberta, Canada.
(cid:129) Joint Bookrunner for APT Pipelines, APA Group’s financing vehicle, on bond issuances totaling US$1.4 billion. In connection with this transaction,
Scotiabank also provided the Australian company with a USD acquisition loan facility, USD interest rate swaps, foreign exchange hedging, and acted as
co-hedge provider in EUR/USD and GBP/USD cross currency interest rate swaps.
(cid:129) Financial Advisor to Northern Property REIT on its acquisition of True North Apartment REIT and a $535 million institutional multi-family portfolio from
Starlight Investments and Public Sector Pension Investment Board, for an aggregate acquisition value of $1.4 billion. Scotiabank also acted as Lead
Arranger and Administrative Agent in a $350 million bridge loan to facilitate the transaction. The transaction created a leading multi-family REIT with
an enterprise value over $3 billion.
(cid:129) Joint Bookrunner and Placement Agent on a US$1.1 billion (MXN$17 billion) placement of Euroclearable Cebures for Petro´ leos Mexicanos (Pemex),
Mexico’s state-owned oil company.
(cid:129) Joint Bookrunner on the inaugural GBP-denominated fixed rate bond issuances by the Kingdom of Belgium (£500 million) and KommuneKredit (£300
million). Scotiabank is the only bank to have been appointed bookrunner on both of these transactions.
(cid:129) Ranked #1 Wholesale and Commercial Banking Brand in Canada and #7 Globally, The Banker/Brand Finance (2015).
(cid:129) Named Best Foreign Exchange Provider in Canada for the 11th year in a row, Global Finance (2015).
(cid:129) Named Best Investment Bank in Canada, Global Finance (2015).
(cid:129) Named Best Trade Bank in Canada, Trade Finance (2015).
(cid:129) Ranked #1 overall in Equity Research in Canada, earning 15 StarMine Analyst Awards, Thomson Reuters (2015).
(cid:129) Recognized with the SSA Rising Star Bank in Niche Currencies Award, Global Capital (2015).
Business Profile
Global Banking and Markets (GBM) conducts the Bank’s wholesale banking and capital markets business with corporate, public sector and
institutional clients. GBM is a full-service lender and investment dealer in Canada and Mexico, and offers a wide range of products and services in the
United States, Latin America, and in select markets in Europe, Asia and Australia. More specifically, GBM provides customers with: corporate lending;
transaction banking, including trade finance and cash management; investment banking, including corporate finance and mergers & acquisitions;
fixed income and equity underwriting, sales, trading and research; prime finance (prime brokerage and stock lending); foreign exchange sales and
trading; energy and agricultural commodities trading and hedging; precious and base metals sales, trading, financing and physical services
(ScotiaMocatta); and collateral management.
Strategy
GBM’s goal is to build a diversified, low-volatility and profitable customer-focused business that delivers best-in-class performance versus our peers.
GBM seeks to achieve sustainable revenue and net income growth through a strategy focused on maximizing customer relationships both in Canada
and internationally, and expanding business in high-growth regions outside of Canada where we can leverage the Bank’s strong reputation and
presence.
2016 Priorities
(cid:129) Enhancing customer focus: Improving our customer coverage and deepening relationships with our most important customers by introducing a
new customer segmentation framework and coverage strategy, and enhancing our coverage for multinational customers.
(cid:129) Leveraging our global footprint: Continuing to grow our business in Latin America, particularly in the Pacific Alliance countries of Mexico, Peru,
Chile and Colombia, and in Asia and Australia, focusing on select local, regional and international customers in strategic sectors and priority
countries.
(cid:129) Strengthening our data and analytics capabilities: Investing in a GBM-wide customer Management Information System (MIS) to enhance our
data & analytics capabilities across all GBM platforms.
(cid:129) Focusing on strategic sectors: Continued focus throughout our businesses and geographies on the key sectors of Energy, Mining, Infrastructure
(including Power & Utilities) and Financial Institutions.
(cid:129) Improving efficiency and effectiveness: Prudently managing expenses and risks through global oversight and governance, while enhancing
infrastructure and operational efficiencies.
(cid:129) Developing a talented workforce and leadership: Attracting, developing and retaining a talented, diverse and collaborative team and building
global leadership capability.
62 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T44 Global Banking and Markets financial performance
($ millions)
Net interest income(1)
Non-interest income
Total revenue(1)
Provision for credit losses
Non-interest expenses
Income tax expense(1)
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Key ratios
Return on economic equity
Productivity(1)
Net interest margin(2)(3)
Provision for credit losses as a percentage of loans and acceptances
Selected Consolidated Statement of Financial Position data (average balances)
Trading assets
Loans and acceptances
Earning assets
Total assets
Deposits
Total liabilities
Economic equity
(1) Taxable equivalent basis.
(2) Global Banking only.
(3) Net interest income (TEB) as % of average earning assets excluding bankers’ acceptances.
2015
1,071
2,953
4,024
67
1,846
558
1,553
–
1,553
$
$
$
2014
1,064
3,167
4,231
16
1,880
665
1,670
–
1,670
$
$
$
2013
1,090
2,882
3,972
34
1,731
554
1,653
–
1,653
$
$
$
25.1%
45.9%
1.65%
0.10%
28.0%
44.4%
1.69%
0.03%
25.9%
43.6%
1.87%
0.06%
$ 108,137
70,103
290,482
342,389
63,308
239,628
6,097
$
$ 110,869
63,818
274,386
311,021
59,273
217,408
5,868
$
$ 102,536
57,974
245,924
274,414
55,454
196,640
6,321
$
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
L
O
B
A
L
B
A
N
K
I
N
G
A
N
D
M
A
R
K
E
T
S
63 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
C25 Total revenue
53%
47%
Capital Markets
Business Banking
C26 Business banking revenue
$ millions
2500
2000
1500
1000
500
13
14
15
Metals
Lending
Financial Performance
Global Banking and Markets reported net income attributable to equity holders of $1,553 million
in 2015, a decrease of $117 million from last year. Adjusting for the 2014 notable items
(refer T41), net income decreased by $144 million or 8% from last year.
Lower results in investment banking, Asia lending and precious metals, as well as lower securities
gains in U.S. lending were only partly offset by growth in other businesses. Return on economic
equity decreased to 25.1% from 28.0% last year.
Average assets
Average assets increased by $31 billion or 10% to $342 billion this year. Adjusting for the
positive impact of foreign currency translation, the increase was $8 billion or 3%. Growth of
$9 billion in derivative-related assets, $4 billion of securities purchased under resale agreements
and $4 billion of corporate loans and acceptances was partly offset by reductions in trading
assets and lower trade finance balances in Asia.
Average liabilities
Average liabilities increased by $23 billion or 11% to $240 billion this year. This was mainly due
to the positive impact of foreign currency translation. Adjusting for the impact of foreign
currency, the increase was $8 billion or 4%, mainly due to growth of $11 billion in derivative-
related liabilities.
Net interest income
Net interest income increased by 1% to $1,071 million, mainly due to higher lending volumes in
Canada, U.S. and Europe, which was mostly offset by lower lending margins and lower trade
finance volumes in Asia.
C27 Capital markets revenue by business line
$ millions
Non-interest income
2500
2000
1500
1000
500
13
14
15
Global Equities & Advisory
Fixed Income & Commodities
Non-interest income of $2,953 million decreased by $214 million or 7% due to lower income
from investment banking and precious metals businesses, as well as lower securities gains in U.S.
and Asia lending. This was partly offset by higher income in the equities, fixed income, foreign
exchange and commodities businesses.
Non-interest expenses
Non-interest expenses decreased by $34 million or 2% to $1,846 million in 2015. Adjusting for
the 2014 notable items, expenses were flat from the prior year as lower performance-related and
share-based compensation were offset by higher technology and regulatory costs, and the
negative impact of foreign currency translation. Operating leverage was negative 3.1%.
Provision for credit losses
C28 Composition of average earning assets
$ billions
The provision for credit losses was $67 million in 2015, up $51 million from 2014, primarily due
to higher provisions in Canada and Europe. The provision for credit losses ratio was up 7 to
10 basis points.
Provision for income taxes
The effective tax rate of 26.4% was lower than the prior year by 2.1%. This was mainly due to a
lower level of income in higher tax jurisdictions.
Outlook
In 2016, Global Banking and Markets will continue to focus on growing its diversified business
platform. While revenue growth may face continued challenges due to market volatility, this
should be mitigated by our highly diversified business platform and by a strong focus on ancillary
customer revenue.
The corporate loan portfolio is expected to continue to grow in 2016. Credit quality of the loan
portfolio should remain strong and loan loss provisions are expected to remain low. There will
also be a continued focus on expense management to maintain a leading productivity ratio, while
investing in the business to position for future growth.
350
300
250
200
150
100
50
13
14
15
Other
Trading assets
Corporate loans and acceptances
C29 Trading day losses
14
12
10
8
6
4
2
14
15
64 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Other
The Other segment includes Group Treasury, smaller operating segments, business line elimination items and other corporate items which are not
allocated to a business line.
Financial Performance
Net interest income, other operating income, and the provision for income taxes in each period include the elimination of tax-exempt income gross-
up. This amount is included in the operating segments, which are reported on a taxable equivalent basis. The elimination was $390 million in 2015,
compared to $354 million in 2014.
Net income from investments in associated corporations and the provision for income taxes in each period include the tax normalization adjustments
related to the gross-up of income from associated corporations. This adjustment normalizes the effective tax rate in the divisions to better present the
contribution of the associated corporations to the divisional results.
The Other segment had a net income attributable to equity holders of $264 million in 2015. Adjusting for 2014 notable items (refer T41), income was
up $100 million.
The current year’s net income included the following largely offsetting items, comprised of a reduction in the pension benefit accrual related to
modifications made to the Bank’s main pension plan of $151 million ($204 million pre-tax), an increase to the collective allowance against performing
loans due to the relative increase in the loan portfolio of $44 million ($60 million pre-tax), and reorganization costs related to the consolidation of
Canadian shared services of $45 million ($61 million pre-tax).
Revenues
Revenues declined by $79 million, of which $36 million related to higher taxable equivalent basis offsets. The balance of the decline was due to lower
net interest income from asset/liability management activities. Partly offsetting were higher net gains on investment securities.
Provision for credit losses
The collective allowance against performing loans increased $60 million this year.
Non-interest expenses
Adjusting for the 2014 notable items, non-interest expenses decreased by $60 million compared to 2014. The decrease was largely due to lower
benefit costs related to the reduction in the accrued pension obligation, partially offset by higher corporate expenses including technology
investments, corporate business development and reorganization costs.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
O
T
H
E
R
T45 Other financial performance
($ millions)
Net interest income(1)
Non-interest income(1)
Total revenue(1)
Provision for (recovery of) credit losses
Non-interest expenses
Income tax expense(1)
Net income
Net income attributable to equity holders of the bank
2015
2014
2013
$ (100)
35
$
(65)
60
86
(475)
90
(76)
14
–
232
(320)
$ (187)
(303)
(490)
–
123
(453)
$ 264
$ 102
$ (160)
$ 264
$ 102
$ (160)
(1) Includes the net residual in matched maturity transfer pricing and the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes in the business segments.
65 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Effective risk management is fundamental to the success of the Bank,
and is recognized as a core deliverable in the Bank’s overall approach
to strategy management. Scotiabank has a strong, disciplined risk
management culture where risk management is a responsibility shared
by all of the Bank’s employees. A key aspect of this culture is
diversification across business lines, geographies, products,
and industries.
Risk management framework
The primary goals of risk management are to ensure that the outcomes
of risk-taking activities are consistent with the Bank’s strategies and risk
appetite, and that there is an appropriate balance between risk and
reward in order to maximize shareholder returns. The Bank’s enterprise-
wide risk management framework provides the foundation for
achieving these goals.
This framework is subject to constant evaluation to ensure that it meets
the challenges and requirements of the global markets in which the
Bank operates, including regulatory standards and industry best
practices. The risk management programs of the Bank’s subsidiaries
conform in all material respects to the Bank’s risk management
framework, although the actual execution of their programs may be
different. For new acquisitions, or situations where control of a
subsidiary has been recently established, the Bank assesses existing risk
management programs and, if necessary, develops an action plan to
make improvements in a timely fashion.
Risk
Governance
Risk Appetite
Risk Capacity
Risk Appetite Statement
Key Risk Appetite Measures
Risk Management Tools
Policies & Limits
Guidelines Processes & Standards
Measuring Monitoring & Reporting
Stress Testing
Risks
Credit Market Liquidity Operational Reputational Environmental Strategic Insurance
Strong Risk Culture
The Bank’s risk management framework is applied on an enterprise-
wide basis and consists of three key elements:
(cid:129) Risk Governance,
(cid:129) Risk Appetite, and
(cid:129) Risk Management Tools.
The Bank’s risk management framework is predicated on the three-lines-of-defence model. Within this model, functional Business Line staff and
management (the first line) incur and own the risks, while Global Risk Management and other control functions (the second line) provide independent
oversight and objective challenge to the first line of defence, as well as monitoring and control of risk. Internal Audit Department (the third line)
provides assurance that control objectives are achieved by the first and second lines of defence.
1 Business Line/Corporate Function
2 Global Risk Management and
Other Control Functions
3 Internal Audit
(cid:129) Own the risks associated with business activities.
(cid:129) Exercise business judgement to evaluate risk.
(cid:129) Ensure activities are within the Bank’s risk
appetite and risk management policies.
(cid:129) Independently facilitate and monitor the
implementation of effective risk management
practices.
(cid:129) Responsible for policy development, measurement &
reporting, limits & controls, oversight & monitoring.
(cid:129) Provide objective challenge to the first line
of defence.
(cid:129) Provide training, tools and advice to support
policy and compliance.
(cid:129) Independent monitoring and oversight function.
(cid:129) Focus on governance framework and control
systems.
(cid:129) Audit findings reported to management and
Audit Committee.
Risk governance
Effective risk management begins with effective risk governance.
The Bank has a well-established risk governance structure, with an active and engaged Board of Directors supported by an experienced senior management
team and a risk management group that is independent of the business lines. Decision-making is highly centralized through a number of senior and
executive risk management committees.
The Board of Directors
The Board of Directors, either directly or through its committees ensures that decision-making is aligned with the Bank’s strategies and risk appetite. The
Board approves key risk policies, limits and risk appetite frameworks, and on a quarterly basis receives a comprehensive summary of the Bank’s risk profile
and performance of the portfolio against defined goals. The Bank’s Internal Audit department reports independently to the Board (through the Audit and
Conduct Review Committee) on the effectiveness of the risk governance structure and risk management framework.
Executive Management
Executive management and in particular, the President and Chief Executive Officer and the Chief Risk Officer (CRO), are responsible for risk
management under the oversight of the Board. The CRO, who oversees the Global Risk Management (GRM) division of the Bank, reports to the
President and Chief Executive Officer but also has direct access to the Risk Committee of the Board. The President and Chief Executive Officer, CRO,
and other senior executives chair the Bank’s senior and executive risk management committees. Committee structures and key accountabilities are
outlined on page 67.
Global Risk Management (GRM)
GRM is responsible for the design and application of the Bank’s risk management framework, and is independent of the Bank’s business units. It
provides oversight of and challenge over a broad range of risks, including (but not limited to) credit, market (including structural foreign exchange and
structural interest rate), liquidity, operational (including model), environmental and insurance risks.
66 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
BANK’S RISK GOVERNANCE STRUCTURE
Risk Committee
of the Board
Board of Directors &
Board Committees
Audit & Conduct
Review Committee
of the Board
(cid:129) Board oversight – Risk appetite, strategies, policies
and limits are subject to Board approval. The Board,
directly or through its committees, receives regular
updates on the key risks of the Bank.
Chief Executive
Officer
(cid:129) Audit review – Internal Audit reports independently
to the Audit and Conduct Review Committee of the
Board on the design and effectiveness of risk management
policies, procedures and internal controls.
Operating
Committee
Asset-Liability
Committee
Risk Policy
Committee
Strategic Transaction
Investment Committee
Human
Capital
Committee
Systems
Planning & Policy
Committee
Stress Testing
Committee
Senior Credit
Committee(s)
Market Risk
Management & Policy
Committee
Operational Risk
Committee
Reputational Risk
Committee
(cid:129) Senior management committee structure is
designed to ensure alignment of business
objectives, risk tolerance and resources.
Model Review
Committee
Insurance Risk
Committee
(cid:129) Business units are responsible and accountable
for managing risks within their portfolios, and
are allocated capital in line with their risk profiles.
Executive Committees:
Operating Committee: sets the Bank’s key strategies, and following Board approval, directs the execution of those strategies; and executes the Bank’s
overall risk strategy and monitors and evaluates the Bank’s ongoing financial performance and how risks are managed across the Bank.
Asset-Liability Committee: provides high level oversight and strategic direction for the management of funding, foreign exchange risk, stock based
compensation hedging, and economic forecasts. Also reviews monthly economic updates and the performance of the key topics noted. The
committee further reviews deposit, liquidity, net interest margin, and capital management topics. Focus is on business line activity (i.e. mortgages and
deposits) as well as funding aspects. Reviews high level strategies, monitors progress and discusses various trends and key issues. As well, it reviews
quarterly capital plans, capital allocation and capital risk indicators.
Risk Policy Committee: reviews key risk exposures and risk policies, and adjudicates risk issues referred by the Senior Credit, Market and Reputational
Risk committees.
Strategic Transaction Investment Committee: provides advice, counsel and decisions on effective allocation and prioritization of resources with respect
to the Bank’s portfolio of businesses and strategic investments, including mergers and acquisitions and divestitures.
Human Capital Committee: reviews and approves all major new and changing Bank-wide Human Resources objectives, strategies, policies and
programs including all compensation matters. As well it reviews and approves all senior management appointments and the staffing of key positions.
Systems Planning and Policy Committee: reviews and approves significant business initiatives involving system and computing investments in excess of
designated executive approval limits.
Senior Management Committees:
Stress Testing Committee: provides high level oversight of stress testing; serves as the most senior point of management that establishes and
enhances policies to develop, review, challenge and communicate stress testing results; and promotes consistent, collaborative application of the
stress testing program Bank-wide.
Senior Credit Committees: adjudicates credits within prescribed limits and establishes the operating rules and guidelines for the implementation of
credit policies. Separate committees cover commercial, international and corporate customers, and Canadian and international retail, small business,
and wealth management.
Market Risk Management and Policy Committee: oversees and establishes standards for market, liquidity and insurance risk management processes
within the Bank, including the review and approval of new products, limits, practices and policies for the Bank’s principal trading and
treasury activities.
Operational Risk Committee: promotes an enterprise-wide operational risk management framework to ensure operational risks are understood,
communicated, and appropriate actions are taken to mitigate related losses.
Reputational Risk Committee: upon referral from business lines or risk committees, reviews business activities, initiatives, products, services,
transactions or processes and recommends either proceeding or not proceeding, based on an assessment of reputational risk, to ensure that the Bank
is, and is seen to be, acting with high ethical standards.
Model Review Committee: oversees model submissions, vetting, approval, and ongoing review processes primarily for market and treasury risk
models.
Insurance Risk Committee: provides risk management direction and oversight on the risk taking activities of the Bank’s enterprise-wide insurance
operations.
67 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk management culture
Effective risk management requires a strong, robust, and pervasive risk management culture.
The business lines are responsible for the development and execution of business plans that are aligned with the Bank’s risk management framework,
and are accountable for the risks they incur. Understanding and managing these risks is a fundamental element of each business plan. Business lines
work in partnership with Global Risk Management and Control Functions to ensure that risks arising from their business are thoroughly evaluated and
appropriately addressed.
Risk education programs, and documented policies and procedures are jointly available to staff in the business lines, Global Risk Management and
Control Functions.
Decision-making on risk issues is highly centralized. The membership of senior and executive management committees responsible for the review,
approval and monitoring of transactions and the related risk exposures, includes business line heads and senior risk officers from Global Risk
Management. The flow of information and transactions to these committees keeps senior and executive management well informed of the risks the
Bank faces, and ensures that transactions and risks are aligned with the Bank’s risk appetite. The interaction between senior risk officers and business
line heads at committee meetings is robust, with constructive discussions and objective challenge by all participants in order to fully identify and
address all relevant risks.
The Bank’s material incentive compensation programs are structured to reflect the Bank’s risk appetite, with a substantial portion deferred for material
risk takers in order to achieve stronger alignment with the results of risk-taking activities. The Bank also has a very stringent Guidelines for Business
Conduct to which all staff must attest on an annual basis. Performance-related compensation is eligible for claw-back where there is a material breach
of compliance rules or Guidelines for Business Conduct, or if there is a material misstatement of results in the fiscal year of the grant.
Risk appetite framework
Effective risk management requires clear articulation of the Bank’s risk appetite and how the Bank’s risk profile will be managed in
relation to that appetite.
The Bank’s Risk Appetite Framework consists of a risk capacity, risk appetite statement and key risk appetite measures. Together, application of the
risk appetite statement and monitoring of the key risk appetite measures help to ensure the Bank stays within appropriate risk boundaries. The Bank’s
Credit Risk Appetite further defines the Bank’s risk appetite with respect to lending, counterparty credit risk, and other credit risks (such as
investments).
Risk Appetite
Risk
Capacity
Risk
Appetite
Statement
Key Risk
Appetite
Measures
(cid:129) The Bank’s Risk Appetite Framework combines qualitative and quantitative terms of
reference to guide the Bank in determining the amount and types of risk it wishes to
prudently undertake in pursuing the Bank’s strategic and financial objectives.
Core Deliverables are a key element of the Bank’s enterprise strategy. Core Deliverables are the things that the Bank must do on a daily basis to
continue to be a leading bank. In particular, the following Core Deliverables inform the risk appetite statement:
1. Maintain appropriate financial strength and liquidity.
(cid:129) Diversity, quality and stability of earnings
(cid:129)
Focus on core businesses, with disciplined and selective strategic investments
(cid:129) Maintain capital adequacy
2. Measure, monitor and manage all aspects of the Bank’s risk appetite and risk profile.
(cid:129) Dedicated attention to credit, market, liquidity, and operational risks
(cid:129) Careful consideration of reputational, environmental, and other risks
(cid:129) No tolerance for reputational risks that could affect our brand
3. Meet the needs and expectations of our customers, employees, shareholders and other key stakeholders.
4.
Ensure a deep, diverse and engaged pool of talented Scotiabankers.
5. Operate in an efficient, secure and compliant manner.
Key risk appetite measures provide clear levels of risk tolerance and risk limits, which are critical in implementing effective risk management. For major
risks (credit, market, liquidity, and operational), the key risk appetite measures are supported by management level limit structures and controls.
Management’s dedicated attention to these risks creates a focus on forward-looking activities that keeps the Bank within its risk appetite on an on-
going basis.
68 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
Risk management tools
Effective risk management includes tools that are guided by the Bank’s Risk Appetite Framework and integrated with the Bank’s
strategies and business planning processes.
Policies
& Limits
(cid:129)
Risk management tools are regularly reviewed and
updated to ensure consistency with risk-taking
activities, and relevance to the business and financial
strategies of the Bank.
Measurement,
Monitoring &
Reporting
Risk
Management
Tools
Stress Testing
Guidelines,
Processes &
Standards
Policies and Limits
Policies
Establish the governance and risk management culture over the Bank’s risk-taking activities, and apply to specific types of risk or to the activities that
are used to measure and control risk exposure. They are based on recommendations from risk management, internal audit, business lines, and senior
executive management. Industry best practices and regulatory requirements are also factored into the policies. Policies are guided by the Bank’s risk
appetite, and set the limits and controls within which the Bank and its subsidiaries can operate.
(cid:129) Key risk policies are approved by the Board of Directors, either directly or through the Board’s Risk Committee or Audit and Conduct Review
Committee (the Board).
(cid:129) Management level risk policies associated with processes such as model development and new products are approved by executive management
and/or key risk committees.
Limits
Control risk-taking activities within the tolerances established by the Board and senior executive management. Limits also establish accountability for
key tasks in the risk-taking process and establish the level or conditions under which transactions may be approved or executed.
Guidelines, Processes and Standards
Guidelines
Are the directives provided to implement policies as set out above. Generally, they describe the facility types, aggregate facility exposures and
conditions under which the Bank is prepared to do business. Guidelines ensure the Bank has the appropriate knowledge of clients, products, and
markets, and that it fully understands the risks associated with the business it underwrites. Guidelines may change from time to time, due to market
or other circumstances. Risk taking outside of guidelines usually requires approval of the Bank’s Senior Credit Committees, Market Risk Management
and Policy Committee, or Risk Policy Committee.
Processes
Are the activities associated with identifying, evaluating, documenting, reporting and controlling risk.
Standards
Define the breadth and quality of information required to make a decision, and the expectations in terms of quality of analysis and presentation.
Processes and standards are developed on an enterprise-wide basis, and documented in a series of policies, manuals and handbooks under the
purview of GRM. Key processes cover the review and approval of new products, model validation and stress testing.
Measurement, Monitoring, and Reporting
Measurement
Global Risk Management is responsible for developing and maintaining an appropriate suite of risk management tools to support the operations of
the various business lines, and for supporting the measurement of economic capital on an enterprise-wide basis. The risk sections explain the
application of these techniques.
Risk measurement tools include the use of models and stress testing. The Bank uses models for a range of purposes including estimating the value of
transactions, measuring risk exposures, determining credit risk ratings and parameters, and calculating economic and regulatory capital. The use of
69 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
quantitative risk methodologies and models is balanced by a strong governance framework and includes the application of sound and experienced
judgement. The development, independent review, and approval of models are subject to formalized policies where applicable, including the
oversight of senior management committees such as the Model Review Committee (for market risk, counterparty credit risk and liquidity risk models).
Regular Monitoring
Ensures that business activities are within approved limits or guidelines, and are aligned with the Bank’s strategies and risk appetite. Breaches, if any,
of these limits or guidelines are reported to senior management, risk committees, and/or the Board depending on the limit or guideline.
Risk Reports
Aggregate measures of risk across products and businesses, and are used to ensure compliance with policies, limits, and guidelines. They also provide
a clear statement of the amounts, types, and sensitivities of the various risks in the Bank’s portfolios. Senior management and the Board use this
information to understand the Bank’s risk profile and the performance of the portfolios.
Control and audit functions are also established that are independent of the organizations whose activities they review, and whose mission is to
provide enterprise-wide independent, objective assurance over the design and operation of the Bank’s controls and operational processes and to
provide advisory services designed to improve the Bank’s operations.
Stress testing
The Bank’s stress testing programs draw upon the principles set out under guidelines issued by the Office of the Superintendent of Financial
Institutions, in particular:
(cid:129) Guideline A-1 Capital Adequacy Requirements (Chapter 9 Stress Testing),
(cid:129) Guideline E-18 Stress Testing – Sound Business and Financial Practices, and
(cid:129) the Internal Capital Adequacy Assessment Process;
as well as international industry groups, in particular:
(cid:129) the Institute of International Finance (Governance for Strengthened Risk Management), and
(cid:129) the International Monetary Fund (Macrofinancial Stress Testing – Principles and Practices), and
(cid:129) the Bank for International Settlements Principles for sound stress testing practices and supervision.
Stress testing programs at both enterprise-wide level and individual risk level allow the Bank to estimate the potential impact on income, capital and
liquidity of significant changes in market conditions, credit environment, liquidity demands, or other risk factors. Enterprise-wide stress testing is also
integrated with both the strategic and financial planning processes, as well as crisis management planning. The development, approval and on-going
review of the Bank’s stress testing programs are subject to formalized policy, and are under the oversight of the Stress Testing Committee. Where
appropriate, the Board of Directors or the Risk Committee of the Board approves stress testing limits for certain risk factors, and receives reports on
performance regularly.
Each stress testing program is developed with input from a broad base of stakeholders, and results are integrated into management decision-making
processes for capital, funding, market risk limits, and credit risk appetite. The stress testing programs are designed to capture a number of enterprise-
wide stress scenarios with differing severities and time horizons which reflect Scotiabank’s risk profile. Recent scenarios include an OSFI Macro-Stress
scenario and an internal China Deflationary Scenario. These scenarios included macro-economic variables, such as: liquidity and commodity price
shocks, declining GDP, declining housing prices, volatile market conditions and other recessionary factors.
70 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
Principal risk types
The principal risk types, their governing documentation, and their applicability to risk appetite are outlined in the table below.
Risk Type
Credit Risk
Governing Documentation
Application to Risk Appetite
Credit Risk Policy
Credit Risk Appetite
Collective Allowance Policy for
Performing Loans
Residential Mortgage Underwriting
Policy
Quantitative limits/tolerances:
(cid:129) Exposure to a single customer or group of related parties (limits differentiated
by customer risk rating and security cover);
(cid:129) Country risk (exposure limits to control transfer/cross-border and sovereign
default risks); and
(cid:129) Industry concentrations (exposure and risk adjusted concentration limits).
Market Risk
Market and Structural Risk
Management Policy
Liquidity and
Funding Risk
Liquidity Risk and Collateral
Management Policy
Other Risks
Operational Risk
Operational Risk Management
Policy and Framework
Internal Control Policy
Fiduciary Risk Management Policy
Model Risk Management Policy
New Products and Services Risk
Management Policy
Information Technology Risk
Management Policy
Outsourcing & Other Arrangements
Risk Management Policy
Quantitative limits/tolerances, such as various VaR limits, stress test results, equity
and debt investment exposures, and structural interest rate and foreign
exchange exposures.
Quantitative limits/tolerances, such as:
(cid:129) Appropriate hold levels of unencumbered high quality liquid assets that can be
readily sold or pledged;
(cid:129) Limits to control the maximum net cash outflow over specified short-term
horizon; and
(cid:129) Diversification of funding by source, type of depositor, instrument, term and
geographic market.
(cid:129) Systematic identification, measurement, mitigation and monitoring of
operational risk, regardless of whether the risk is internal to the Bank or
outsourced to a third party;
(cid:129) Minimization of residual operational risk; and
(cid:129) Expressed quantitatively by an aggregate loss limit.
Reputational Risk
Reputational Risk Policy
(cid:129) Low tolerance for reputational, legal, or taxation risk arising in business
Guidelines for Business Conduct
Compliance Policy
activities, initiatives, products, services, transactions or processes, or from a
lack of suitability of products for clients.
Environmental Risk
Environmental Policy
Strategic Risk
Annual Strategy Report to the
Board of Directors
Insurance Risk
Insurance Risk Policy and
Framework
Consistency with the Equator Principles by requiring provisioning of project
financing only to those projects whose borrowers can demonstrate their ability
and willingness to comply with comprehensive processes aimed at ensuring that
projects are developed in a socially responsible manner and according to sound
environmental management practices.
Strategy report considers linkages between the Bank’s Risk Appetite Framework
with the enterprise strategy, business line strategies and corporate function
strategies; also incorporates linkages to measuring progress against strategic
priorities and implementation.
Maintain minimal exposure to insurance risk; where insurance risks are taken, it
is on a selective basis to achieve stable and sustainable earnings, the risk
assumed is diversified geographically and by product, and the majority is
short-term.
71 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T46 Exposure to risks arising from the activities of the Bank’s businesses
The Bank
Business
Lines
Canadian
Banking
International
Banking
Global Banking
and Markets
Other
(cid:129) Deposits
(cid:129) Accounts
services
(cid:129) Credit and
lending
(cid:129) Commercial banking
(cid:129) Payments and cash
Management
(cid:129) Advisory services
(cid:129) Asset management
(cid:129) Insurance – creditor,
life, home, health,
auto, and travel
(cid:129) Online brokerage
(cid:129) Deposits
(cid:129) Accounts
services
(cid:129) Credit and
lending
(cid:129) Commercial banking
(cid:129) Payments and cash
Management
(cid:129) Advisory services
(cid:129) Asset management
(cid:129) Insurance – creditor,
life, home, health,
auto, and travel
(cid:129) Deposits
(cid:129) Accounts
services
(cid:129) Corporate lending
(cid:129) Equity and debt
underwriting
(cid:129) M&A advisory
services
(cid:129) Capital markets
products & services
(cid:129) Foreign exchange
(cid:129) Precious metals
(cid:129) Payment and cash
management
(cid:129) Group treasury
(cid:129) Other control
functions
(cid:129) Average assets $300bn
(cid:129) Average assets $128bn
(cid:129) Average assets $342bn
(cid:129) Average assets(1) $91bn
(cid:129) Economic Equity $11.1bn
(cid:129) Proportion of Bank
32%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
31%
2%
8%
59%
(cid:129) RWA
$109.3bn
(cid:129) Proportion of Bank 31%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
86%
-%
14%
(cid:129) Economic Equity $14.1bn
(cid:129) Proportion of Bank
40%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
38%
13%
8%
41%
(cid:129) RWA
$119.9bn
(cid:129) Proportion of Bank 33%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
88%
1%
11%
(cid:129) Economic Equity $6.1bn
(cid:129) Proportion of Bank
18%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
59%
18%
13%
10%
(cid:129) RWA
$120.8bn
(cid:129) Proportion of Bank 34%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
83%
11%
6%
(cid:129) Economic Equity $3.4bn
(cid:129) Proportion of Bank
10%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
4%
97%
2%
-3%
(cid:129) RWA
(cid:129) Proportion of Bank
$8.0bn
2%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
100%
-%
-%
Credit, market, liquidity, operational, reputational, environmental, strategic and insurance risk.
Business
activities
Balance
Sheet
Economic
Equity(2)
Risk-
Weighted
Assets(4)
Risk
Profile
(1) Average assets for the Other segment include certain non-earning assets related to the business lines.
(2) Economic equity is reported on a twelve month average basis, consistent with Return on Economic Equity.
(3) Includes economic equity for goodwill and intangibles.
(4) Risk-weighted assets (RWA) are as at October 31, 2015 as measured for regulatory purposes in accordance with the Basel III all-in approach.
72 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
Credit risk
Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to
the Bank. Credit risk arises in the Bank’s direct lending operations, and in its funding, investment and trading activities where
counterparties have repayment or other obligations to the Bank. Credit risk includes settlement risk, suitability risk and wrong way risk.
Index of all credit risk disclosures
Credit risk summary
Credit Risk Management Framework
Risk measures
Corporate and commercial
Risk ratings
Adjudication
Credit Risk Mitigation-Collateral/Security
Traditional Non-Retail Products
Commercial/Corporate Real Estate
Traded products
Credit Risk Mitigation-Collateral/Security
Retail
Adjudication
Risk ratings
Credit Risk Mitigation-Collateral/Security
Credit Quality
Allowance for credit losses
Impaired loans
Acquisition-related purchased loans
Risk diversification
Risk mitigation
Overview of loan portfolio
Oil and gas
Puerto Rico
Residential mortgages
Loans to Canadian condominium developers
European exposures
Financial instruments
Page
Tables and charts
Page
74
74
75
75
75
75
75
75
76
76
76
76
76
77
22
24
25
25
25
25
26
26
26
26
28
28
52
T2 Financial highlights
T11 Provision for credit losses as a percentage of average loans and acceptances
T12 Net charge-offs as a percentage of average loans and acceptances
T63 Gross impaired loans by geographic segment
T64 Provision against impaired loans by geographic segment
T65 Cross-border exposure to select countries
T66 Loans and acceptances by type of borrower
T67 Off balance-sheet credit instruments
T68 Changes in net impaired loans
T69 Provision for credit losses
T70 Provision for credit losses against impaired loans by type of borrower
T71 Impaired loans by type of borrower
T72 Total credit risk exposures by geography
T73 AIRB credit risk exposures by maturity
T74 Total credit risk exposures and risk-weighted assets
Analysis of the aggregate credit risk exposure including market risk exposure, assets of the
Bank’s insurance subsidiaries and other assets that fully reconciles to the balance sheet
(refer Note 36 – Financial instruments – risk management in the consolidated financial
statements)
C10 Well diversified in Canada and internationally – loans and acceptances
C11 and in household and business lending – loans and acceptances
T62 Loans and acceptances by geography
T17 European exposure
T18 Funded exposures
T19 Bank’s exposure distribution by country
T20 Indirect exposures
T38 Mortgage-backed securities
T39 Collateralized debt obligations (CDOs)
14
23
23
109
109
109
110
110
111
112
112
113
113
113
114
199
27
27
108
28
29
29
30
53
53
73 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit risk summary
(cid:129) Loans and acceptances (Retail and Non-Retail) remained diversified by region, industry and customer. Regional exposure is spread across our key
markets (Canada 66.6%, United States 6.4%, Mexico 3.9%, Peru 3.6%, Chile 3.5%, Colombia 1.9%, and Other 14.1%). Financial Services,
constitutes 4.5% of overall gross exposures (before consideration of collateral) and was $21 billion, a decrease of $1 billion from October 31, 2014.
These exposures are predominately to highly rated counterparties and are generally collateralized.
(cid:129) The Bank’s overall loan book as of October 31, 2015 increased to $473 billion versus $438 billion as of October 31, 2014, with growth in the
portfolio mainly driven by Personal, and Business and Government Lending. Residential mortgages were $217 billion as at October 31, 2015, with
88% in Canada. The corporate loan book, which accounts for 35% of the total loan book, is composed of 55% of loans with an investment grade
rating as of October 31, 2015, unchanged from October 31, 2014.
The effective management of credit risk requires the establishment of an appropriate credit risk culture. Key credit risk policies and appetite
statements are important elements used to create this culture.
The Board of Directors, either directly or through the Risk Committee (the Board), reviews and approves the Bank’s Credit Risk Appetite annually and
Credit Risk Policy biennially.
(cid:129) The objectives of the Credit Risk Appetite are to ensure that:
– target markets and product offerings are well defined at both the enterprise-wide and business line levels;
– the risk parameters for new underwritings and for the portfolios as a whole are clearly specified; and
– transactions, including origination, syndication, loan sales and hedging, are managed in a manner that is consistent with the Bank’s risk appetite.
(cid:129) The Credit Risk Policy articulates the credit risk management framework, including:
– key credit risk management principles;
– delegation of authority;
– the credit risk management program;
– counterparty credit risk management for trading and investment activities;
– aggregate limits, beyond which credit applications must be escalated to the Board for approval; and
– single name/aggregation exposures, beyond which a summary of exposures must be reported to the Board.
Global Risk Management develops the credit risk management framework and policies that detail, among other things, the credit risk rating systems
and associated parameter estimates; the delegation of authority for granting credit; the calculation of the allowance for credit losses; and the
authorization of write-offs.
Corporate and commercial credit exposures are segmented by country and by major industry group. Aggregate credit risk limits for each of these
segments are also reviewed and approved annually by the Board. Portfolio management objectives and risk diversification are key factors in setting
these limits.
Consistent with the Board-approved limits, borrower limits are set within the context of established lending criteria and guidelines for individual
borrowers, particular industries, countries and certain types of lending, to ensure the Bank does not have excessive concentration in any single
borrower, or related group of borrowers, particular industry sector or geographic region. Through the portfolio management process, loans may be
syndicated to reduce overall exposure to a single name. For certain segments of the portfolio, credit derivative contracts are also used to mitigate the
risk of loss due to borrower default. Risk is also mitigated through the selective sale of loans.
Banking units and Global Risk Management regularly review the various segments of the credit portfolio on an enterprise-wide basis to assess the
impact of economic trends or specific events on the performance of the portfolio, and to determine whether corrective action is required. These
reviews include the examination of the risk factors for particular products, industries and countries. The results of these reviews are reported to the
Risk Policy Committee and, when significant, to the Board.
Risk measures
The credit risk rating systems support the determination of key credit risk parameter estimates which measure credit and transaction risk. These risk
parameters – probability of default, loss given default and exposure at default are transparent and may be replicated in order to provide consistency of
credit adjudication, as well as minimum lending standards for each of the risk rating categories. The parameters are an integral part of enterprise-wide
policies and procedures encompassing governance, risk management, and control structure, and are used in various internal and regulatory credit risk
quantification calculations.
The Bank’s credit risk rating system is subject to a rigorous validation, governance and oversight framework. The objectives of this framework are to
ensure that:
(cid:129) Credit risk rating methodologies and parameters are appropriately designed and developed, independently validated, and regularly reviewed; and
(cid:129) The review and validation processes represent an effective challenge to the design and development process.
Non-retail credit risk rating methodologies and parameters are reviewed and validated at least annually. Units within Global Risk Management are
responsible for design and development, validation and review, and are functionally independent from the business units responsible for originating
transactions. Within Global Risk Management, they are also independent from the units involved in risk rating approval and credit adjudication.
Internal credit risk ratings and associated risk parameters affect loan pricing, computation of the collective allowance for credit losses, and return on
economic capital.
74 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
Corporate and commercial
Corporate and commercial credit exposure arises in Canadian Banking, International Banking and Global Banking and Markets business lines.
Risk ratings
The Bank’s risk rating system utilizes internal grade (IG) codes – an 18 point scale used to differentiate the risk of default of borrowers, and the risk of
loss on facilities. The general relationship between the Bank’s internal borrower IG codes and external agency ratings is shown in Table 30 on
page 46.
IG codes are also used to define credit adjudication authority levels appropriate to the size and risk of each credit application. Lower-rated credits
require increasingly more senior management involvement depending upon the aggregate exposure. Where the decision is beyond their authority
levels, credit units will refer the request – with its recommendation – to a senior credit committee for adjudication. Senior credit committees also have
defined authority levels and, accordingly, forward certain requests to the Risk Policy Committee. In certain cases, these must be referred to the Risk
Committee of the Board of Directors.
Adjudication
Credit adjudication units within Global Risk Management analyze and evaluate all significant credit requests for corporate and commercial credit
exposures, to ensure that risks are adequately assessed, properly approved, continually monitored and actively managed. The decision-making process
begins with an assessment of the credit risk of the individual borrower or counterparty. Key factors considered in the assessment include:
(cid:129) The borrower’s management;
(cid:129) The borrower’s current and projected financial results and credit statistics;
(cid:129) The industry in which the borrower operates;
(cid:129) Economic trends; and
(cid:129) Geopolitical risk.
Based on this assessment, a risk rating is assigned to the individual borrower or counterparty, using the Bank’s risk rating systems.
A separate risk rating is also assigned at the facility level, taking into consideration additional factors, such as security, seniority of claim, structure,
term and any other forms of credit risk mitigation that affect the amount of potential loss in the event of a default of the facility. Security typically
takes the form of charges over inventory, receivables, real estate, and operating assets when lending to corporate and commercial borrowers; and
cash or treasuries for trading lines such as securities lending, repurchase transactions, and derivatives. The types of acceptable collateral, and related
valuation processes are documented in risk management policies and manuals.
Other forms of credit risk mitigation include third party guarantees and, in the case of derivatives facilities, master netting agreements.
Internal borrower and facility risk ratings are assigned when a facility is first authorized, and are promptly re-evaluated and adjusted, if necessary, as a
result of changes to the customer’s financial condition or business prospects. Re-evaluation is an ongoing process, and is done in the context of
general economic changes, specific industry prospects, and event risks, such as revised financial projections, interim financial results and extraordinary
announcements. Global Risk Management is the final arbiter of internal risk ratings.
The internal credit risk ratings are also considered as part of the Bank’s adjudication limits, as guidelines for hold levels are tied to different risk ratings.
Single borrower limits are much lower for higher risk borrowers than low risk borrowers.
The credit adjudication process also uses a risk-adjusted return on equity profitability model to ensure that the client and transaction structure offers
an appropriate return for a given level of risk. For the corporate portfolio, and the large borrowers in International, the Loan Portfolio Management
Group reviews the profitability model results, together with external benchmarks, and provides an opinion on the relative return and pricing of each
transaction above a minimum threshold.
Individual credit exposures are regularly monitored by both the business line units and Global Risk Management for any signs of deterioration. In
addition, a review and risk analysis of each borrower is conducted annually, or more frequently for higher-risk borrowers. If, in the judgement of
management, an account requires the expertise of specialists in workouts and restructurings, it will be transferred to a special accounts group for
monitoring and resolution.
Credit Risk Mitigation – Collateral/Security
Traditional Non-Retail Products (e.g. Operating lines of Credit, Term Loans)
Collateral values are accurately identified at the outset and throughout the tenure of a transaction by using standard evaluation methodologies.
Collateral valuation estimates are conducted at a frequency that is appropriate to the frequency by which the market value fluctuates, using the
collateral type and the Borrower risk profile.
In addition, when it is not cost effective to monitor highly volatile collateral (e.g. accounts receivable, inventory), appropriate lending margins are
applied to compensate (e.g. accounts receivable are capped at 80% of value, inventory at 50%). The frequency of collateral valuations is also
increased when early warning signals of a Borrower’s deteriorating financial condition are identified.
Borrowers are required to confirm adherence to covenants including confirmation of collateral values on a periodic basis, which are used by the Bank
to provide early warning signals of collateral value deterioration. Periodic inspections of physical collateral are performed where appropriate and
where reasonable means of doing so are available.
Bank procedures require verification including certification by Banking officers during initial, annual, and periodic reviews, that collateral values/
margins/etc. have been assessed and, where necessary, steps have been taken to mitigate any decreased collateral values.
The Bank does not use automated valuation models (AVMs) for valuation purposes. Global Risk Management (GRM) performs its own valuations of
companies based on various factors such as book value, discounted book value, enterprise value etc.
Commercial/Corporate Real Estate
New or updated appraisals are generally obtained at inception of a new facility, as well as during Loan Modifications, Loan Workouts and Troubled
Debt Restructure. The primary reason for requiring a new appraisal is if, in the reasonable opinion of the Banking Execution Unit, or GRM Real Estate,
75 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
there has been a material change in value. Additionally, none of the appraisal guidelines contained within the policies should dissuade the Bank from
requesting an appraisal more frequently if an adverse change in market conditions, sponsorship, credit worthiness, of other underwriting assumptions
is realized or expected.
Appraisals must be in writing and must contain sufficient information and analysis to support the Bank’s decision to make the loan. Moreover, in
rendering an opinion of the property’s market value, third party appraisers are responsible for establishing the scope of work necessary to develop
credible assignment results. The appraisal must meet the regulatory and industry requirements which, depending on the type of property being
appraised, contain any or all of the following three approaches to value:
comparable sales approach
replacement cost approach
i.
ii.
iii. income approach
The appraiser should disclose the rationale for the omission of any valuation approach. Furthermore, the appraiser must disclose whether the subject
property was physically inspected and whether anyone provided significant assistance to the person signing the appraisal report. The report should
contain a presentation and explanation of the assumptions used in determining value under each of the above mentioned approaches.
Review of every appraisal is conducted by the banking units and GRM Real Estate to confirm that the appraisal identifies all of the relevant issues for
the specific asset class, location and economic environment and incorporates all appropriate valuation methodologies and assumptions. In most cases,
the banking units also include comparable properties in addition to what is included in the appraisal to further justify value.
When third party assessors are used, they must be accredited and satisfactory to the Bank. In addition, GRM validates any third party valuations via
internal desktop estimates either based on comparables or discounted income valuations.
Traded products
Traded products are transactions such as derivatives, foreign exchange, commodities, repurchase/reverse repurchase agreements, and securities
lending/borrowing. Credit risks arising from traded products cannot be determined with certainty at the outset, because during the tenure of a
transaction the dollar value of the counterparty’s obligation to the Bank will be affected by changes in the capital markets (such as changes in stock
prices, interest rates, and exchange rates). The Bank adjudicates credit exposures arising from transacting in traded products by considering their
current fair value plus an additional component to reflect potential future changes in their mark-to-market value. The credit adjudication process also
includes an evaluation of potential wrong way risk, which arises when the exposure to a counterparty is positively correlated to the probability of
default of that counterparty.
Credit risk associated with traded products is managed within the same credit adjudication process as the lending business. The Bank considers the
credit risk arising from lending activities, as well as the potential credit risk arising from transacting in traded products with that counterparty.
Credit risk mitigation – collateral/security
Derivatives are generally transacted under industry standard International Swaps and Derivatives Association (ISDA) master netting agreements, which
allow for a single net settlement of all transactions covered by that agreement in the event of a default or early termination of the transactions. ISDA
agreements are frequently accompanied by an ISDA Credit Support Annex (CSA), the terms of which may vary according to each party’s view of the
other party’s creditworthiness. CSAs can require one party to post initial margin at the onset of each transaction. CSAs also allow for variation margin
to be called if total uncollateralized mark-to-market exposure exceeds an agreed upon threshold. Such variation margin provisions can be one-way
(only one party will ever post collateral) or bilateral (either party may post depending upon which party is in-the-money). The CSA will also detail the
types of collateral that are acceptable to each party, and the haircuts that will be applied against each collateral type. The terms of the ISDA master
netting agreements and CSAs are taken into consideration in the calculation of counterparty credit risk exposure.
For derivative transactions, investment grade counterparties account for approximately 90% of the credit risk. Approximately 40% of the Bank’s
derivative counterparty exposures are to bank counterparties. After taking into consideration, where applicable, netting and collateral arrangements,
no net credit risk amount arising from traded products transactions with any single counterparty was considered material to the financial position of
the Bank as at October 31, 2015. No individual exposure to an investment grade bilateral counterparty exceeded $1,200 million and no individual
exposure to a corporate counterparty exceeded $610 million.
Retail
Retail credit exposures arise in the Canadian Banking and International Banking business lines.
Adjudication
The decision-making process for retail loans ensures that credit risks are adequately assessed, properly approved, continually monitored and actively
managed. Generally, credit decisions on consumer loans are processed by proprietary adjudication software and are based on risk ratings, which are
generated using predictive credit scoring models.
The Bank’s credit adjudication and portfolio management methodologies are designed to ensure consistent underwriting and early identification of
problem loans. The Bank’s rigorous credit underwriting methodology and risk modeling in Canada is more customer focused than product focused.
The Bank’s view is that a customer-centric approach provides better risk assessment than product-based approaches, and should result in lower loan
losses over time. International Banking uses a similar approach to risk modeling, adjudication and portfolio management.
All credit scoring and policy changes are initiated by units within Global Risk Management that are functionally independent from the business units
responsible for retail portfolios. Risk models and parameters are also subject to independent validation and review from the units involved in the
design and development of models. The review process includes referral to the appropriate Senior Credit Committee for approval, where required.
Consumer credit portfolios are reviewed monthly to identify emerging trends in loan quality and to assess whether corrective action is required.
Risk ratings
The Bank’s consumer risk rating systems are oriented to borrower or transaction risk. Each retail exposure is assigned a risk grade based on the
customer’s credit history and/or internal credit score. The Bank’s automated risk rating systems assess the ongoing credit-worthiness of individual
customers on a monthly basis. This process provides for meaningful and timely identification and management of problem loans.
76 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
The overall risk ratings system under AIRB approach is subject to regular review with ongoing performance monitoring of key components. Risk model
validations are conducted independently from the areas responsible for rating system development and implementation, to ensure effective
independence.
Customer behavior characteristics which are used as inputs within the Bank’s Basel III AIRB models are consistent with those used by the Bank’s
Canadian consumer risk rating systems. The International portfolios are subject to the Standardized approach at this time.
Credit risk mitigation – collateral/security
The property values for residential real estate secured exposures are confirmed at origination through a variety of validation methodologies, including
AVM and full appraisal’s (in-person inspection). The appraisal is completed by a third party, Bank approved appraiser. For monitoring of material
portfolios, property values are indexed quarterly to house prices. For loan impairment within the material portfolios, residential property values are re-
confirmed using third party AVM’s.
Where AVM values are used, these AVM values are subject to routine validation through a continuous random sampling process that back-tests AVM
values against available property appraisals (primarily third party AVMs). Where third party appraisals are obtained, the Bank relies on the professional
industry accreditation of the appraiser. Samples of approved appraisal reports are reviewed by the Bank’s senior appraisers to ensure consistent
appraisal quality and satisfactory appraisal values. The third party appraisers are selected from a pre-approved list of Bank-vetted appraisers.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
77 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Market Risk
Market risk is the risk of loss from changes in market prices and rates (including interest rates, credit spreads, equity prices, foreign
exchange rates and commodity prices), the correlations between them, and their levels of volatility. Below is an index of market risk
disclosures:
Index of all market risk disclosures
Index
Market risk factors
Interest rate risk
Credit spread risk
Foreign currency risk
Equity risk
Commodity risk
Market risk governance
Risk measurement summary
Value at risk
Incremental risk charge and comprehensive risk
measure
Stress testing
Sensitivity analysis
Gap analysis
Validation of market risk models
Non-trading market risk
Interest rate risk
Foreign currency risk
Investment portfolio risks
Trading market risk
Market risk linkage to balance sheet
Derivative instruments and structured transactions
Derivatives
Structured transactions
European exposures
Market risk
Financial instruments
Page
Tables and charts
Page
79
79
79
79
79
79
79
79
79
80
80
80
80
80
80-81
82
82
C30 Interest rate gap
T47 Interest rate gap
T48 Structural interest rate sensitivity
82-83 T49 Total one-day VaR by risk factor
C31 Trading revenue distribution
C32 Daily trading revenue vs. VaR
84 T50 Market risk linkage to balance sheet of the Bank
84
84
84
28-30 T17 European exposure
T18 Funded exposures
T19 Bank’s exposure distribution by country
48 T35 Total market risk capital
52-53 T38 Mortgage-backed securities
T39 Collateralized debt obligations (CDOs)
81
81
82
82
83
83
84
28
29
29
49
53
53
78 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Market risk factors
Interest rate risk
The risk of loss due to changes in the level and/or the volatility of interest rates. This risk affects instruments such as, but not limited to, debt securities,
loans, mortgages, deposits and derivatives.
Interest rate risks are managed through sensitivity, gap, stress testing, annual income and VaR limits and mitigated through portfolio diversification
and hedges using interest rate derivatives and debt securities.
Credit spread risk
The risk of loss due to changes in the market price and volatility of credit, or the creditworthiness of issuers. This risk is mainly concentrated in loan
and debt securities portfolios. Risk is managed through sensitivity, jump-to-default, stress testing and VaR limits and mitigated through hedges using
credit derivatives.
Foreign currency risk
The risk of loss resulting from changes in currency exchange rates and exchange rate volatility. Foreign currency denominated debt and other
securities as well as future cash flows in foreign currencies are exposed to this type of risk. Risk is managed through maximum net trading position,
sensitivity, stress testing and VaR limits and mitigated through hedges using foreign exchange positions or derivatives.
Equity risk
The risk of loss due to changes in prices, volatility or any other equity related risk factor of individual equity or equity linked securities. This risk affects
instruments such as, but not limited to, equities, exchange traded funds, mutual funds, derivatives and other equity linked products. Risk is managed
through sensitivity, stress testing and VaR limits and mitigated through hedges using physical equity and derivatives instruments.
Commodity risk
The risk of loss due to changes in prices or volatility of precious metal, base metal, energy and agriculture products. Both commodity physical and
derivatives positions are exposed to this risk. Risk is managed through aggregate and net trading position, sensitivity, stress testing and VaR limits and
mitigated through hedges using physical commodity and derivative positions.
The following maps risk factors to trading and non-trading activities:
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
Non-trading Funding
Interest rate risk
Foreign currency risk
Market Risk Governance
Overview
Investments
Interest rate risk
Credit spread risk
Foreign currency risk
Equity risk
Trading
Interest rate risk
Credit spread risk
Foreign Currency risk
Equity risk
Commodity risk
The Board of Directors reviews and approves market risk policies and limits annually. The Bank’s Asset-Liability Committee (ALCO) and Market Risk
Management and Policy Committee (MRMPC) oversee the application of the framework set by the Board, and monitor the Bank’s market risk
exposures and the activities that give rise to these exposures. The MRMPC establishes specific operating policies and sets limits at the product,
portfolio, business unit and business line levels, and for the Bank in total. Limits are reviewed at least annually.
Global Risk Management provides independent oversight of all significant market risks, supporting the MRMPC and ALCO with analysis, risk
measurement, monitoring, reporting, proposals for standards and support for new product development. To ensure compliance with policies and
limits, market risk exposures are independently monitored on a continuing basis, either by Global Risk Management, the back offices, or Finance. They
provide senior management, business units, the ALCO, and the MRMPC with a series of daily, weekly and monthly reports of market risk exposures by
business line and risk type.
The Bank uses a variety of metrics and models to measure and control market risk exposures. These measurements are selected based on an
assessment of the nature of risks in a particular activity. The principal measurement techniques are Value at Risk (VaR), Incremental Risk Charge,
Comprehensive Risk Measure, stress testing, sensitivity analysis and gap analysis. The use and attributes of each of these techniques are noted in the
Risk Measurement Summary.
Risk Measurement Summary
Value at risk (VaR)
VaR is a statistical method of measuring potential loss due to market risk based upon a common confidence interval and time horizon. The Bank
calculates VaR daily using a 99% confidence level, and a one-day holding period for its trading portfolios. This means that once in every 100 days, the
trading positions are expected to lose more than the VaR estimate. VaR has two components: general market risk and debt specific risk. The Bank
calculates general market risk VaR using historical simulation based on 300 days of market data. Obligor specific risk on debt instruments and credit
derivatives not captured in general market risk VaR is calculated through the debt specific risk VaR, which uses a Monte Carlo simulation. In addition,
the Bank calculates a Stressed VaR measure which follows the same basic methodology as VaR but is calibrated to a one year stressed period. The
stressed period is determined based on analysis of the trading book’s risk profile against historical market data. Stressed VaR complements VaR in that
it evaluates the impact of market volatility that is outside the VaR’s historical set.
79 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
All material risk factors are captured in VaR. Where historical data is not available, proxies are used to establish the relevant volatility for VaR and
Stressed VaR until sufficient data is available. Changes in VaR between reporting periods are generally due to changes in positions, volatilities and/or
correlations between asset classes. VaR is also used to evaluate risks arising in certain funding and investment portfolios. Backtesting is also an
important and necessary part of the VaR process. The Bank backtests the actual trading profit and loss against the VaR result to validate the quality
and accuracy of the Bank’s VaR model. The Board reviews VaR and backtesting results quarterly.
Incremental Risk Charge (IRC) and Comprehensive Risk Measure (CRM)
Basel market risk capital requirements include the Incremental Risk Charge (IRC) and the Comprehensive Risk Measure (CRM) which capture the
following:
Default risk: This is the potential for direct losses due to an obligor’s (equity/bond issuer or counterparty) default.
Credit migration risk: This is the potential for direct losses due to a credit rating downgrade or upgrade.
A Monte Carlo model is used to perform default and migration simulations for the obligors underlying credit derivative and bond portfolios. In
addition, for CRM in correlation trading there is a market simulation model to capture historical price movements. Both IRC and CRM are calculated at
the 99.9th percentile with a one year liquidity horizon. The Board reviews IRC and CRM results quarterly.
Stress testing
A limitation of VaR and Stressed VaR is that they only reflect the recent history of market volatility and a specific one year stressed period, respectively.
To complement these measures, stress testing examines the impact that abnormally large changes in market factors and periods of prolonged
inactivity might have on trading portfolios. Stress testing scenarios are designed to include large shifts in risk factors as well as historical and
theoretical multi risk market events. Historical scenarios capture severe movements over periods that are significantly longer than the one-day holding
period captured in VaR, such as the 2008 Credit Crisis or the 1998 Russian Financial Crisis. Similar to Stressed VaR, stress testing provides
management with information on potential losses due to tail events. In addition, the results from the stress testing program are used to verify that the
Bank’s market risk capital is sufficient to absorb these potential losses.
The Bank subjects its trading portfolios to a series of daily, weekly and monthly stress tests. The Bank also evaluates risk in its investment portfolios
monthly, using stress tests based on risk factor sensitivities and specific market events. The stress testing program is an essential component of the
Bank’s comprehensive risk management framework which complements the VaR methodology and other risk measures and controls employed by the
Bank. The Board reviews stress testing results quarterly.
Sensitivity analysis
In trading portfolios, sensitivity analysis is used to measure the effect of changes in risk factors, including prices and volatility, on financial products
and portfolios. These measures apply across product types and geographies and are used for limit monitoring and management reporting.
In non-trading portfolios, sensitivity analysis assesses the effect of changes in interest rates on current earnings and on the economic value of
shareholders’ equity. It is applied globally to each of the major currencies within the Bank’s operations. The Bank’s sensitivity analysis for limit and
disclosure purposes is measured through positive and negative parallel shifts in the underlying interest rate curves. The Bank also performs sensitivity
analysis using various non-parallel interest rate curve shifts, for example: curve steepeners, curve flatteners and curve twists. The Board reviews
sensitivity results quarterly.
Gap analysis
Gap analysis is used to assess the interest rate sensitivity of re-pricing mismatches in the Bank’s non-trading operations. Under gap analysis, interest
rate sensitive assets, liabilities and off-balance sheet instruments are assigned to defined time periods based on expected re-pricing dates. Products
with a contractual maturity are assigned an interest rate gap term based on the shorter of the contractual maturity date and the next re-pricing date.
Products with no contractual maturity are assigned an interest rate gap based on observed historical consumer behaviour. The Board reviews gap
results quarterly.
Validation of market risk models
Prior to the implementation of new market risk models, rigorous validation and testing is conducted. Validation is conducted when the model is
initially developed and when any significant changes are made to the model. The models are also subject to ongoing validation, the frequency of
which is determined by model risk ratings. Models may also be triggered for earlier revalidation when there have been significant structural changes in
the market or changes to the composition of the portfolio. Model validation includes backtesting, and additional analysis such as:
(cid:129) Theoretical review or tests to demonstrate whether assumptions made within the internal model are appropriate;
(cid:129) Impact tests including stress testing that would occur under historical and hypothetical market conditions
(cid:129) The use of hypothetical portfolios to ensure that the model is able to capture concentration risk that may arise in an undiversified portfolio.
The validation process is governed by the Bank’s Model Risk Management Policy.
Non-trading market risk
Funding and investment activities
Market risk arising from the Bank’s funding and investment activities is identified, managed and controlled through the Bank’s asset-liability
management processes. The Asset-Liability Committee meets biweekly to review risks and opportunities, and evaluate performance including the
effectiveness of hedging strategies.
80 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Interest rate risk
Interest rate risks in the non-trading portfolios are predominately driven by the interest rate mismatch (i.e. repricing frequency) in the asset and liability
exposures. The largest exposures in the non-trading book arise from retail banking operations in Canada. The largest component of this risk is from
positions related to the retail mortgage book. Table 47 shows a summary of the interest rate gaps for the Bank’s non-trading positions.
Interest rate risk arising from the Bank’s lending, funding and investment activities is managed in accordance with Board-approved policies and global
limits, which are designed to control the risk to net interest income and economic value of shareholders’ equity. The annual income limit measures the
effect of a specified change in interest rates on the Bank’s annual net interest income over the next twelve months, while the economic value limit
measures the impact of a specified change in interest rates on the present value of the Bank’s net assets. These limits are set according to the
documented risk appetite of the Bank. Board-level limit utilization is reported to both the Asset-Liability Committee and the Board on a regular basis.
Any limit exceptions are reported according to the Limit Monitoring and Compliance Policy of the Bank.
Net interest income and the economic value of equity result from the differences between yields earned on the Bank’s non-trading assets and interest
rate paid on its liabilities. The difference in yields partly reflects mismatch between the maturity and re-pricing characteristics of the assets and
liabilities. This mismatch is inherent in the non-trading operations of the Bank and exposes it to adverse changes in the level of interest rates. The
Asset-Liability Committee provides strategic direction for the management of structural interest rate risk within the risk appetite framework authorized
by the Board of Directors. The asset/liability management strategy is executed by Group Treasury with the objective of enhancing net interest income
within established risk tolerances.
Gap analysis, simulation modeling, sensitivity analysis and VaR are used to assess exposures and for limit monitoring and planning purposes. The
Bank’s interest rate risk exposure calculations are generally based on the earlier of contractual re-pricing or maturity of on-balance sheet and off-
balance sheet assets and liabilities, although certain assets and liabilities such as credit cards and deposits without a fixed maturity are assigned a
maturity profile based on the longevity of the exposure. Expected prepayments from loans and cashable investment products are also incorporated
into the exposure calculations.
Table 48 shows the after-tax impact of an immediate and sustained 100 basis point shock over a one year period on annual income and economic
value of shareholder’s equity. The interest rate sensitivities tabulated are based on a static balance sheet. There are no assumptions made for
management actions that may mitigate risk. Based on the Bank’s interest rate positions at year-end 2015, an immediate and sustained 100 basis point
rise in interest rates across all currencies and maturities would increase after-tax net income by approximately $242 million over the next 12 months.
During fiscal 2015, this measure ranged between $84 million and $242 million.
This same increase in interest rates would result in an after-tax decrease in the present value of the Bank’s net assets of approximately $489 million.
During fiscal 2015, this measure ranged between $314 million and $603 million. The directional sensitivity of these two key metrics is largely
determined by the difference in time horizons (annual income captures the impact over the next twelve months only, whereas economic value
considers the potential impact of interest rate changes on the present value of all future cash flows). The annual income and economic value results
are compared to the authorized Board limits. There were no limit breaches in the reporting period.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
C30 Interest rate gap
$ billions, one-year interest rate gap
20
10
0
-10
-20
11
12
13
14
15
Canadian dollar gap
Foreign currencies gap
T47 Interest rate gap
Interest rate sensitivity position(1)
As at October 31, 2015
($ billions)
Canadian dollars
Assets
Liabilities
Gap
Foreign currencies
Assets
Liabilities
Gap
Total
Gap
As at October 31, 2014
Gap
Within
3 months
3 to 12
months
$
$
$
$
$
$
$
$
209.9
209.4
0.5
313.7
289.8
23.9
$
$
39.4
55.3
$ (15.9)
$
$
25.4
38.6
$ (13.2)
24.4
$ (29.1)
30.6
$ (20.8)
Over
1 year
132.2
109.3
22.9
50.3
35.5
14.8
37.7
18.0
$
$
$
$
$
$
$
$
Non-
interest
rate
sensitive
$
$
$
$
$
$
$
$
5.0
12.5
(7.5)
80.6
106.1
(25.5)
(33.0)
(27.8)
Total
386.5
386.5
–
470.0
470.0
–
–
–
$
$
$
$
$
$
$
$
(1) The above figures reflect the inclusion of off-balance sheet instruments, as well as an estimate of prepayments on consumer and mortgage loans and cashable GICs. The off-balance sheet gap is included in liabilities.
81 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T48 Structural interest sensitivity(1)
As at October 31 ($ millions)
After-Tax Impact of
100bp increase in rates
Non-trading risk
100bp decrease in rates
Non-trading risk
2015
2014
Economic
Value of
Shareholders’
Equity
Annual
Income
Economic
Value of
Shareholders’
Equity
$ (489)
$
242
$ (498)
$
419
$ (73)
$ 474
Annual
Income
$
$
179
(52)
(1) Corresponding with the current low interest rate environment, the annual income sensitivity for CAD, U.S., EUR and GBP exposures is measured using a 25 basis point decline. Prior period amounts have been restated to reflect this
change.
Foreign currency risk
Foreign currency risk in the Bank’s unhedged funding and investment activities arises primarily from the Bank’s net investments in foreign operations
as well as foreign currency earnings in its domestic and remitting foreign branch operations.
The Bank’s foreign currency exposure to its net investments in foreign operations is controlled by a Board-approved limit. This limit considers factors
such as potential volatility to shareholders’ equity as well as the potential impact on capital ratios from foreign exchange fluctuations. On a quarterly
basis, the Asset-Liability Committee reviews the Bank’s foreign currency net investment exposures and determines the appropriate hedging strategies.
These may include funding the investments in the same currency or using other financial instruments, including derivatives.
Foreign currency translation gains and losses from net investments in foreign operations, net of related hedging activities and tax effects, are recorded
in accumulated other comprehensive income within shareholders’ equity. However, the Bank’s regulatory capital ratios are not materially affected by
these foreign exchange fluctuations because the risk-weighted assets of the foreign operations tend to move in a similar direction.
The Bank is also subject to foreign currency translation risk on the earnings of its domestic and remitting foreign branch operations. The Bank
forecasts foreign currency revenues and expenses, which are primarily denominated in U.S. dollars, over a number of future fiscal quarters. The Asset-
Liability Committee also assesses economic data trends and forecasts to determine if some or all of the estimated future foreign currency revenues
and expenses should be hedged. Hedging instruments normally include foreign currency spot and forward contracts, as well as foreign currency
options and swaps. Certain of these economic hedges may not qualify for hedge accounting resulting in a potential for a mismatch in the timing of
the recognition of economic hedge gains/losses and the underlying foreign earnings translation gains/losses. In accordance with IFRS, foreign currency
translation gains and losses relating to monetary and non-monetary items are recorded directly in earnings.
As at October 31, 2015, a one per cent increase (decrease) in the Canadian dollar against all currencies in which the Bank operates decreases
(increases) the Bank’s before-tax annual earnings by approximately $60 million (October 31, 2014 – $49 million) in the absence of hedging activity,
primarily from the exposure to U.S. dollars.
Investment portfolio risks
The Bank holds investment portfolios to meet liquidity and statutory reserve requirements and for investment purposes. These portfolios expose the
Bank to interest rate, foreign currency, credit spread and equity risks. Debt investments primarily consist of government, agency, and corporate bonds.
Equity investments include common and preferred shares, as well as a diversified portfolio of third-party managed funds. The majority of these
securities are valued using prices obtained from external sources. These portfolios are controlled by a Board-approved policy and limits.
Trading market risk
The Bank’s policies, processes and controls for trading activities are designed to achieve a balance between pursuing profitable trading opportunities
and managing earnings volatility within a framework of sound and prudent practices. Trading activities are primarily customer focused.
Market risk arising from the Bank’s trading activities is managed in accordance with Board-approved policies, and aggregate VaR and stress testing
limits. The quality of the Bank’s VaR is validated by regular backtesting analysis, in which the VaR is compared to both theoretical profit and loss
results based on fixed end of day positions and actual reported profit and loss. A VaR at the 99% confidence interval is an indication of a 1%
probability that losses will exceed the VaR if positions remain unchanged during the next business day. Trading positions are however managed
dynamically and, as a result, actual profit/loss backtesting exceptions are uncommon. During fiscal 2015, there were two theoretical profit/loss
exceptions due to declines in North American interest rates, and widening credit spreads. There were no actual profit/loss exceptions.
In fiscal 2015, the total one-day VaR for trading activities averaged $11.3 million, compared to $20.8 million in 2014. The decrease was due
substantially to a model enhancement to the treatment of credit spreads in VaR.
T49 Total one-day VaR by risk factor
($ millions)
Credit Spread plus Interest Rate
Credit Spread
Interest Rate
Equities
Foreign Exchange
Commodities
Debt Specific
Diversification Effect
All-Bank VaR
All-Bank Stressed VaR
2015
Year end
Avg
High
Low Year end
$
$
10.6
8.1
4.3
4.1
0.8
2.0
7.4
(12.9)
$
9.0
7.8
4.4
2.5
1.1
4.0
5.5
(10.8)
15.2
10.1
7.9
10.7
3.2
5.6
20.7
N/A
$
6.3
5.8
2.7
1.1
0.4
1.9
3.9
N/A
$
$
8.6
8.1
4.2
2.2
0.9
3.2
20.4
(12.8)
2014
$
Avg
13.1
9.6
9.3
2.6
0.9
2.8
15.8
(14.5)
$
$
11.9
22.3
$
$
11.3
24.4
$
$
23.0
$
8.2
36.9
$ 17.4
$
$
22.5
38.7
$
$
20.8
32.9
$
$
High
22.1
12.4
18.1
5.9
1.9
5.5
22.2
N/A
27.3
40.3
Low
8.2
7.6
4.2
1.5
0.4
1.6
11.1
N/A
16.0
25.3
$
$
$
82 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
The Bank also calculates a Stressed VaR which uses the same basic methodology as the VaR. However, Stressed VaR is calculated using market
volatility from a one-year time period identified as stressful, given the risk profile of the trading portfolio. The current period is the 2008/2009 credit
crisis surrounding the collapse of Lehman Brothers. In fiscal 2015, the total one-day Stressed VaR for trading activities averaged $24.4 million
compared to $32.9 million in 2014. The decrease was primarily due to a model enhancement to the treatment of credit spreads in VaR.
Basel market risk capital requirements include the Incremental Risk Charge (IRC) and the Comprehensive Risk Measure (CRM) which capture obligor
default and migration risk. On October 31, 2015 the market risk capital requirements for IRC and CRM were $488 million and $201 million
respectively.
Description of Trading Revenue Components and graphical comparison of VaR to daily P&L
Chart 31 shows the distribution of daily trading revenue for fiscal 2015 and Chart 32 compares that distribution to daily VaR results. Trading revenue
includes changes in portfolio value as well as the impact of new trades, commissions, fees and reserves. Some components of revenue which are
calculated less frequently are pro-rated. Trading revenue averaged $6.1 million per day, compared to $6.0 million for 2014. Revenue was positive on
95% of trading days during the year, unchanged from 2014. During the year, the largest single day trading loss was $12.0 million which occurred on
September 30, 2015, and was lower than the total VaR of $14.1 million on the same day.
C31 Trading revenue distribution
Year ended October 31, 2015
C32 Daily trading revenue vs. VaR
$ millions, November 1, 2014 to October 31, 2015
45
40
35
30
25
20
15
10
5
0
# of days
Gain
Neutral
Loss
-8
-4
-2 -1 0 1 2 3 4
5
9876
$ millions
10 11 12 13 14 15 16 18 20 21 >21
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
Trading revenue
VaR, 99%, 1 day holding period
Q1
Q2
Q3
Q4
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
83 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Market risk linkage to Consolidated Statement of Financial Position
Trading assets and liabilities are marked to market daily and included in trading risk measures such as VaR. Derivatives risk related to Global
Banking and Markets’ activities is captured under trading risk measures while derivatives used in asset/liability management are in the non-trading risk
category. A comparison of Consolidated Statement of Financial Position items which are covered under the trading and non-trading risk measures is
provided in Table 50 below.
T50 Market risk linkage to Consolidated Statement of Financial Position of the Bank
As at Oct 31, 2015
($ millions)
Precious metals
Trading assets
Financial instruments designated at fair value through profit or loss
Derivative financial instruments
Investment securities
Loans
Assets not subject to market risk(1)
Total assets
Deposits
Financial instruments designated at fair value through profit or loss
Obligations related to securities sold short
Derivative financial instruments
Trading liabilities(2)
Retirement and other benefit liabilities
Liabilities not subject to market risk(3)
Market Risk Measure
Consolidated
Statement of
Financial
Position
Trading Risk
Non-trading
risk
Not subject to
market risk
Primary risk sensitivity of
non-trading risk
$
10,550 $
99,140
320
41,003
43,216
458,628
203,640
10,550 $
99,140
–
36,131
–
–
–
– $
–
320
4,872
43,216
458,628
–
–
–
–
–
–
–
203,640
$ 856,497 $ 145,821 $ 507,036 $ 203,640
n/a
n/a
Interest rate
Interest rate, FX, equity
Interest rate, equity
Interest rate, FX
n/a
$ 600,919 $
1,486
20,212
45,270
7,812
2,054
125,265
– $ 572,766 $
–
20,212
41,988
7,812
–
–
1,486
–
3,282
–
2,054
–
28,153
–
–
–
–
–
125,265
Interest rate, FX, equity
Interest rate, equity
n/a
Interest rate, FX, equity
n/a
Interest rate, credit spread
n/a
Total liabilities
$ 803,018 $
70,012 $ 579,588 $ 153,418
(1) Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.
(2) Gold and silver certificates and bullion included in other liabilities.
(3) Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities.
As at Oct 31, 2014
($ millions)
Precious metals
Trading assets
Financial instruments designated at fair value through profit or loss
Derivative financial instruments
Investment securities
Loans
Assets not subject to market risk(1)
Total assets
Deposits
Financial instruments designated at fair value through profit or loss
Obligations related to securities sold short
Derivative financial instruments
Trading liabilities(2)
Retirement and other benefit liabilities
Liabilities not subject to market risk(3)
Total liabilities
Market Risk Measure
Consolidated
Statement of
Financial
Position Trading Risk
Non-trading
risk
Not subject to
market risk
Primary risk sensitivity of
non-trading risk
$
7,286 $
7,286 $
113,248
111
33,439
38,662
424,309
188,611
113,248
–
31,401
–
–
–
– $
–
111
2,038
38,662
424,309
–
–
–
–
–
–
–
188,611
$ 805,666 $ 151,935 $ 465,120 $ 188,611
$ 554,017 $
465
27,050
36,438
4,571
2,095
131,819
– $ 526,929 $
–
27,050
34,992
4,571
–
–
465
–
1,446
–
2,095
–
27,088
–
–
–
–
–
131,819
$ 756,455 $
66,613 $ 530,935 $ 158,907
n/a
n/a
Interest rate
Interest rate, FX, equity
Interest rate, equity
Interest rate, FX
n/a
Interest rate, FX, equity
Interest rate, equity
n/a
Interest rate, FX, equity
n/a
Interest rate, credit spread
n/a
(1) Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.
(2) Gold and silver certificates and bullion included in other liabilities.
(3) Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities.
Derivative instruments and structured transactions
Derivatives
The Bank uses derivatives to meet customer needs, generate revenues from trading activities, manage market and credit risks arising from its lending,
funding and investment activities, and to lower its cost of capital. The Bank uses several types of derivative products, including interest rate swaps,
futures and options, to hedge interest rate risk exposure. Forward contracts, swaps and options are used to manage foreign currency risk exposures.
Credit exposures in its lending and investment books are managed using credit default swaps. As a dealer, the Bank markets a range of derivatives to
its customers, including interest rate, foreign exchange, equity, commodity and credit derivatives.
Market risk arising from derivatives transactions is subject to the control, reporting and analytical techniques noted above. Additional controls and
analytical techniques are applied to address certain market-related risks that are unique to derivative products.
Structured transactions
Structured transactions are specialized transactions that may involve combinations of cash, other financial assets and derivatives designed to meet the
specific risk management or financial requirements of customers. These transactions are carefully evaluated by the Bank to identify and address the
84 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
credit, market, legal, tax, reputational and other risks, and are subject to a cross-functional review and sign-off by trading management, Global Risk
Management, Taxation, Finance and Legal departments. Large structured transactions are also subject to review by senior risk management
committees and evaluated in accordance with the procedures described below in Reputational Risk.
The market risk in these transactions is usually minimal, and returns are earned by providing structuring expertise and by taking credit risk. Once
executed, structured transactions are subject to the same ongoing credit reviews and market risk analysis as other types of derivatives transactions.
This review and analysis includes careful monitoring of the quality of the reference assets, and ongoing valuation of the derivatives and reference
assets.
Liquidity Risk
Liquidity risk is the risk that the Bank is unable to meet its financial obligations in a timely manner at reasonable prices. Financial
obligations include liabilities to depositors, payments due under derivative contracts, settlement of securities borrowing and repurchase
transactions, and lending and investment commitments.
Effective liquidity risk management is essential to maintain the confidence of depositors and counterparties, manage the Bank’s cost of funds and to
support core business activities, even under adverse circumstances.
Liquidity risk is managed within the framework of policies and limits that are approved by the Board of Directors. The Board receives reports on risk
exposures and performance against approved limits. The Asset-Liability Committee (ALCO) provides senior management oversight of liquidity risk.
The key elements of the liquidity risk framework are:
(cid:129) Measurement and modeling – the Bank’s liquidity model measures and forecasts cash inflows and outflows, including off-balance sheet cash flows
on a daily basis. Risk is managed by a set of key limits over the maximum net cash outflow by currency over specified short-term horizons (cash
gaps), a minimum level of core liquidity, and liquidity stress tests.
(cid:129) Reporting – Global Risk Management provides independent oversight of all significant liquidity risks, supporting the ALCO with analysis, risk
measurement, stress testing, monitoring and reporting.
(cid:129) Stress testing – the Bank performs liquidity stress testing on a regular basis, to evaluate the effect of both industry-wide and Bank-specific
disruptions on the Bank’s liquidity position. Liquidity stress testing has many purposes including:
– Helping the Bank to understand the potential behavior of various on-balance sheet and off-balance sheet positions in circumstances of stress; and
– Based on this knowledge, facilitating the development of risk mitigation and contingency plans.
The Bank’s liquidity stress tests consider the effect of changes in funding assumptions, depositor behavior and the market value of liquid assets. The
Bank performs industry standard stress tests, the results of which are reviewed at senior levels of the organization and are considered in making
liquidity management decisions.
(cid:129) Contingency planning – the Bank maintains a liquidity contingency plan that specifies an approach for analyzing and responding to actual and
potential liquidity events. The plan outlines an appropriate governance structure for the management and monitoring of liquidity events, processes
for effective internal and external communication, and identifies potential counter measures to be considered at various stages of an event. A
contingency plan is maintained both at the parent-level as well as for major subsidiaries.
(cid:129) Funding diversification – the Bank actively manages the diversification of its deposit liabilities by source, type of depositor, instrument, term and
geography.
(cid:129) Core liquidity – the Bank maintains a pool of highly liquid, unencumbered assets that can be readily sold or pledged to secure borrowings under
stressed market conditions or due to Bank-specific events. The Bank also maintains liquid assets to support its intra-day settlement obligations in
payment, depository and clearing systems.
Liquid assets
Liquid assets are a key component of liquidity management and the Bank holds these types of assets in sufficient quantity to meet potential needs for
liquidity management.
Liquid assets can be used to generate cash either through sale, repurchase transactions or other transactions where these assets can be used as
collateral to generate cash, or by allowing the asset to mature. Liquid assets include deposits at central banks, deposits with financial institutions, call
and other short-term loans, marketable securities, precious metals and securities received as collateral from securities financing and derivative
transactions. Liquid assets do not include borrowing capacity from central bank facilities.
Marketable securities are securities traded in active markets, which can be converted to cash within a timeframe that is in accordance with the Bank’s
liquidity management framework. Assets are assessed considering a number of factors, including the expected time it would take to convert them to
cash.
Marketable securities included in liquid assets are comprised of securities specifically held as a liquidity buffer or for asset liability management
purposes; trading securities, which are primarily held by Global Banking and Markets; and collateral received for securities financing and derivative
transactions.
The Bank maintains large holdings of unencumbered liquid assets to support its operations. These assets generally can be sold or pledged to meet the
Bank’s obligations. As at October 31, 2015, unencumbered liquid assets were $198 billion (October 31, 2014 – $183 billion). Securities including NHA
mortgage-backed securities, comprised 63% of liquid assets (October 31, 2014 – 68%). Other unencumbered liquid assets, comprising cash and
deposits with central banks, deposits with financial institutions, precious metals and call and short loans, was 37% (October 31, 2014 – 32%). The
increase in liquid assets was mainly attributable to an increase in cash and deposits with central banks, precious metals, deposits with financial
institutions, and government debt securities.
85 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
The carrying values outlined in the liquid asset table are consistent with the carrying values in the Bank’s Statement of Financial Position as at
October 31, 2015. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the stress scenarios.
The Bank’s liquid asset pool is summarized in the following table:
T51 Liquid asset pool
As at October 31, 2015
($ millions)
Cash and deposits with central banks
Deposits with financial institutions
Precious metals
Securities
Canadian government obligations
Foreign government obligations
Other securities
Loans
NHA mortgage-backed securities(2)
Call and short loans
Encumbered
liquid assets
Unencumbered
liquid assets
Bank-owned
liquid assets
Securities received as
collateral from securities
financing and derivative
transactions
$
63,228
10,699
10,550
24,198
39,525
52,396
36,409
1,352
$
–
–
–
21,206
29,989
55,752
–
–
Total liquid
assets
Pledged as
collateral Other(1)
Available as
collateral
Other
$
$
63,228
10,699
10,550
$
–
–
–
$
8,700
3,255
117
45,404
69,514
108,148
36,409
1,352
22,242
44,547
65,405
2,847
–
–
–
–
–
–
54,528
7,444
10,433
23,162
24,967
42,743
33,562
1,352
$ –
–
–
–
–
–
–
–
Total
$ 238,357
$ 106,947
$ 345,304
$ 135,041
$ 12,072
$ 198,191
$ –
As at October 31, 2014
($ millions)
Cash and deposits with central banks
Deposits with financial institutions
Precious metals
Securities
Canadian government obligations
Foreign government obligations
Other securities
Loans
NHA mortgage-backed securities(2)
Call and short loans
Encumbered
liquid assets
Unencumbered
liquid assets
Bank-owned
liquid assets
Securities received as
collateral from securities
financing and derivative
transactions
$
49,507
7,223
7,286
31,551
36,959
55,868
42,286
976
$
–
–
–
17,595
41,405
44,195
–
–
Total liquid
assets
Pledged as
collateral Other(1)
Available as
collateral
Other
$
$
49,507
7,223
7,286
$
–
–
–
$
5,262
1,441
43
49,146
78,364
100,063
42,286
976
27,059
61,380
52,586
3,686
–
–
–
–
–
–
44,245
5,782
7,243
22,087
16,984
47,477
38,600
976
$ –
–
–
–
–
–
–
–
Total
$ 231,656
$ 103,195
$ 334,851
$ 144,711
$
6,746
$ 183,394
$ –
(1) Assets which are restricted from being used to secure funding for legal or other reasons.
(2) These mortgage-backed securities, which are available for sale, are reported as residential mortgage loans on the balance sheet.
86 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
A summary of total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries, is presented below:
T52 Total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries
As at October 31
($ millions)
Bank of Nova Scotia (Parent)
Bank domestic subsidiaries
Bank foreign subsidiaries
Total
2015
2014
$ 151,868
20,374
25,949
$ 141,999
23,583
17,812
$ 198,191
$ 183,394
The Bank’s liquidity pool is held across major currencies, mostly comprised of Canadian and U.S. dollar holdings. As shown above, the vast majority
(87%) of liquid assets are held by the Bank’s corporate office, branches of the Bank, and Canadian subsidiaries of the Bank. To the extent a liquidity
reserve held in a foreign subsidiary of the Bank is required for regulatory purposes, it is assumed to be unavailable to the rest of the Group. Other
liquid assets held by a foreign subsidiary are assumed to be available only in limited circumstances. The Bank monitors and ensures compliance in
relation to minimum levels of liquidity required and assets held within each entity, and/or jurisdiction.
Encumbered assets
In the course of the Bank’s day-to-day activities, securities and other assets are pledged to secure an obligation, participate in clearing or settlement
systems, or operate in a foreign jurisdiction. Securities may also be pledged under repurchase agreements. A summary of encumbered and
unencumbered assets is presented below:
T53 Asset Encumbrance
As at October 31, 2015
($ millions)
Cash and deposits with central banks
Deposits with financial institutions
Precious metals
Liquid securities:
Canadian government obligations
Foreign government obligations
Other liquid securities
Other securities
Loans classified as liquid assets:
NHA mortgage-backed securities
Call and short loans
Other loans
Other financial assets(4)
Non-financial assets
Total
As at October 31, 2014
($ millions)
Cash and deposits with central banks
Deposits with financial institutions
Precious metals
Liquid securities:
Canadian government obligations
Foreign government obligations
Other liquid securities
Other securities
Loans classified as liquid assets:
NHA mortgage-backed securities
Call and short loans
Other loans
Other financial assets(4)
Non-financial assets
Total
Bank-owned
assets
Securities received as
collateral from securities
financing and derivative
transactions
$
63,228
10,699
10,550
24,198
39,525
52,396
5,797
36,409
1,352
439,207
145,063
28,073
$
–
–
–
21,206
29,989
55,752
3,313
–
–
–
(80,907)
–
Encumbered assets
Unencumbered assets
Total assets
$
63,228
10,699
10,550
$
45,404
69,514
108,148
9,110
36,409
1,352
439,207
64,156
28,073
Pledged as
collateral
–
–
–
22,242
44,547
65,405
2,806
2,847
–
10,904
5,299
–
$
Other(1)
8,700
3,255
117
–
–
–
–
–
–
41,492
–
–
Available as
collateral(2)
Other(3)
$
54,528
7,444
10,433
23,162
24,967
42,743
–
33,562
1,352
9,134
–
–
$
–
–
–
–
–
–
6,304
–
–
377,677
58,857
28,073
$ 856,497
$ 29,353
$ 885,850
$ 154,050
$ 53,564
$ 207,325
$ 470,911
Bank-owned
assets
Securities received as
collateral from securities
financing and derivative
transactions
$
49,507
7,223
7,286
31,551
36,959
55,868
9,759
42,286
976
395,554
144,019
24,678
$
–
–
–
17,595
41,405
44,195
4,840
–
–
–
(86,166)
–
Encumbered assets
Unencumbered assets
Total assets
$
49,507
7,223
7,286
$
49,146
78,364
100,063
14,599
42,286
976
395,554
57,853
24,678
Pledged as
collateral
–
–
–
27,059
61,380
52,586
3,291
3,686
–
11,625
2,748
–
$
Other(1)
5,262
1,441
43
–
–
–
–
–
–
38,435
–
–
Available as
collateral(2)
Other(3)
$
44,245
5,782
7,243
22,087
16,984
47,477
–
38,600
976
10,358
–
–
$
–
–
–
–
–
–
11,308
–
–
335,136
55,105
24,678
$ 805,666
$ 21,869
$ 827,535
$ 162,375
$ 45,181
$ 193,752
$ 426,227
(1) Assets which are restricted from being used to secure funding for legal or other reasons.
(2) Assets that are readily available in the normal course of business to secure funding or meet collateral needs including central bank borrowing immediately available.
(3) Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but the Bank would not consider them to be readily available. These include loans, a portion of which may be used to
access central bank facilities outside of the normal course or to raise secured funding through the Bank’s secured funding programs.
(4) Securities received as collateral against other financial assets are included within liquid securities and other securities.
87 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
As of October 31, 2015 total encumbered assets of the Bank were $208 billion (October 31, 2014 – $208 billion). Of the remaining $678 billion
(October 31, 2014 – $620 billion) of unencumbered assets, $207 billion (October 31, 2014 – $194 billion) are considered readily available in the
normal course of business to secure funding or meet collateral needs as detailed above.
In some over-the-counter derivative contracts, the Bank would be required to post additional collateral in the event its credit rating was downgraded.
The Bank maintains access to sufficient collateral to meet these obligations in the event of a downgrade of its ratings by one or more of the rating
agencies. In the event of a one-notch or two-notch downgrade of the Bank’s rating by rating agencies, the Bank has to provide an additional
$647 million or $803 million of collateral, respectively, to meet contractual derivative funding or margin requirements.
Encumbered liquid assets are not considered to be available for liquidity management purposes. Liquid assets which are used to hedge derivative
positions in trading books or for hedging purposes are considered to be available for liquidity management provided they meet the criteria discussed
in liquid assets above.
Regulatory developments relating to liquidity
The OSFI Liquidity Adequacy Requirements (LAR) issued in May 2014 became effective in January 2015. The LAR guidelines are aligned with the Basel
Committee’s international framework for liquidity risk management. LAR includes the Liquidity Coverage Ratio (LCR) and Net Cumulative Cash Flow
(NCCF), along with other liquidity monitoring metrics prescribed by OSFI. Disclosure of the three-month average LCR commenced in the second
quarter of 2015.
In October 2014, BCBS released its final document on the Net Stable Funding Ratio (NSFR), which was followed in June 2015 by the Net Stable
Funding Ratio Disclosure Standards. The NSFR will become a minimum standard by January 1, 2018, and its public disclosure will commence in the
first reporting period thereafter. The Bank continues to monitor developments related to liquidity requirements.
Liquidity coverage ratio
The Liquidity Coverage Ratio measure (LCR) is based on a 30 day liquidity stress scenario, with assumptions defined in the OSFI Liquidity Adequacy
Requirements (LAR) Guideline. The LCR is calculated as the ratio of high quality liquid assets (HQLA) to net cash outflows. The Bank is subject to a
regulatory minimum LCR of 100%.
OSFI’s LAR stipulates that banks must maintain an adequate level of unencumbered, high-quality liquid assets (HQLA) that can be converted into cash
to meet liquidity needs over a 30 calendar day horizon under a pre-defined significantly severe liquidity stress scenario. The LCR-prescribed liquidity
stress scenario includes assumptions for asset haircuts, deposit run-off, wholesale rollover rates, and outflow rates for commitments.
The HQLA are grouped into three categories: Level 1, Level 2A and Level 2B, based on guidelines from the LAR. Level 1 HQLA receive no haircuts, and
includes cash, deposits with central banks, central bank reserves available to the Bank in times of stress, and securities with a 0% risk weight. Level 2A
and 2B include HQLA of lesser quality and attracts haircuts ranging from 15%-50%.
The total weighted values for net cash outflows for the next 30 days are derived by applying the assumptions specified in the LAR Guideline to specific
items, including loans, deposits, maturing debt, derivative transactions and commitments to extend credit.
The following table presents the Bank’s average LCR for the quarter ended October 31, 2015, based on month-end LCR calculations for August,
September and October.
88 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T54 Bank’s average LCR
For the quarter ended October 31, 2015 ($ millions)
High-quality liquid assets
Total high-quality liquid assets (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 debt products
Credit and liquidity facilities
Other contractual funding obligations
Other contingent funding obligations(3)
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 (%)
For the quarter ended July 31, 2015 ($ millions)
Total HQLA
Total net cash outflows
Liquidity coverage ratio (%)
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
Total
unweighted
value
(Average)(1)
Total
weighted
value
(Average)(2)
*
$ 145,859
$151,335
71,437
79,898
148,617
34,505
89,711
24,401
*
173,663
28,819
4,348
140,496
4,190
457,402
10,274
2,284
7,990
82,722
8,336
49,985
24,401
33,592
42,133
16,912
4,348
20,873
2,435
7,598
*
$ 178,754
$101,924
22,683
19,948
$
26,966
14,366
19,948
$144,555
$
61,280
Total
adjusted
value(4)
$ 145,859
$ 117,474
124%
Total
adjusted
value(4)
$ 140,147
$ 110,316
127%
*
*
*
*
*
*
* Disclosure is not required under regulatory guideline.
(1) Unweighted values represent outstanding balances maturing or callable within the next 30 days.
(2) Weighted values represent balances calculated after the application of HQLA haircuts or inflow and outflow rates, as prescribed by the OSFI LAR guidelines.
(3) Total unweighted value includes uncommitted credit and liquidity facilities, guarantees and letters of credit, outstanding debt securities with remaining maturity greater than 30 days, and other contractual cash outflows.
(4) Total adjusted value represents balances calculated after the application of both haircuts and inflow and outflow rates and any applicable caps.
HQLA continues to be substantially comprised of Level 1 assets (as defined in the LAR guideline). The decline in the Bank’s average LCR for the quarter
ended October 31, 2015 versus the average for the previous quarter was attributable to normal business activity.
The Bank’s significant operating currencies are Canadian and U.S. dollars. The Bank monitors its significant currency exposures in accordance with its
liquidity risk management framework and risk appetite.
Funding
The Bank ensures that its funding sources are well diversified. Funding concentrations are regularly monitored and analyzed by type. The sources of
funding are capital, deposits from retail and commercial clients sourced through the Canadian and international branch network, deposits from
financial institutions as well as wholesale debt issuance.
Capital and personal deposits are key components of the Bank’s core funding and these amounted to $251 billion as at October 31, 2015
(October 31, 2014 – $231 billion). The increase since October 31, 2014, was due primarily to personal deposits and internal capital generation. A
portion of commercial deposits, particularly those of an operating or relationship nature, would be considered part of the Bank’s core funding.
Furthermore, core funding is augmented by longer term wholesale debt issuances (original maturity over 1 year) of $137 billion (October 31, 2014 –
$123 billion). Longer term wholesale debt issuances include medium-term notes, deposit notes, mortgage securitizations, asset-backed securities and
covered bonds. The increase since October 31, 2014, was primarily due to foreign exchange movement.
The Bank operates in many different currencies and countries. From a funding perspective, the most significant currencies are Canadian and U.S.
dollars. With respect to the Bank’s operations outside Canada, there are different funding strategies depending on the nature of the activities in a
country. For those countries where the Bank operates a branch banking subsidiary, the strategy is for the subsidiary to be substantially self-funding in
its local market. For other subsidiaries or branches outside Canada where local deposit gathering capability is not sufficient, funding is provided
through the wholesale funding activities of the Bank.
89 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
From an overall funding perspective the Bank’s objective is to achieve an appropriate balance between the cost and the stability of funding.
Diversification of funding sources is a key element of the funding strategy.
The Bank’s wholesale debt diversification strategy is primarily executed via the Bank’s main wholesale funding centres, located in Toronto, New York,
London and Singapore. The majority of these funds are sourced in Canadian and U.S. dollars. Where required, these funds are swapped to fund assets
in different currencies. The funding strategy deployed by wholesale funding centres and the management of associated risks, such as geographic and
currency risk, are managed centrally within the framework of policies and limits that are approved by the Board of Directors.
In the normal course, the Bank uses a mix of unsecured and secured wholesale funding instruments across a variety of markets. The choice of
instruments and market is based on a number of factors, including relative cost and market capacity as well as an objective of maintaining a diversified
mix of sources of funding. Market conditions can change over time, impacting cost and capacity in particular markets or instruments. Changing
market conditions can include periods of stress where the availability of funding in particular markets or instruments is constrained. In these
circumstances the Bank would increase its focus on sources of funding in functioning markets and secured funding instruments. Should a period of
extreme stress exist such that all wholesale funding sources are constrained, the Bank maintains a pool of liquid assets to mitigate its liquidity risk. This
pool includes cash, deposits with central banks and securities.
In Canada, the Bank raises short- and longer-term wholesale debt through the issuance of senior unsecured deposit notes. Additional longer-term
wholesale debt is generated through the Bank’s Canadian Debt and Equity Shelf and the securitization of Canadian insured residential mortgages
through CMHC securitization programs (such as Canada Mortgage Bonds and Canadian NHA MBS), and of unsecured personal lines of credit through
the Hollis Receivables Term Trust II Shelf. While the Bank includes CMHC securitization programs in its view of wholesale debt issuance, this source of
funding does not entail the same type of run-off risk that can be experienced in funding raised from capital markets.
Outside of Canada, short-term wholesale debt is raised through the issuance of negotiable certificates of deposit in the United States, Hong Kong and
Australia and the issuance of commercial paper in the United States. The Bank operates longer-term wholesale debt issuance registered programs in
the United States, such as its SEC Registered Debt and Equity Shelf and SEC Registered Covered Bond Shelf. As well, the Bank’s Covered Bond
Program is listed with the U.K. Listing Authority. The Bank also raises longer-term funding across a variety of currencies through its Australian Medium
Term Note Programme, European Medium Term Note Programme and Singapore Medium Term Note Programme.
90 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
The table below provides the remaining contractual maturities of funding raised through wholesale funding. In the Statement of Financial Position,
these liabilities are primarily included in Business & Government Deposits.
T55 Wholesale funding(1)
As at October 31, 2015
($millions)
Deposits from banks(2)
Bearer deposit notes,
commercial paper and
certificate of deposits
Asset-backed commercial
paper(3)
Medium term notes and
deposit notes
Asset-backed securities
Covered bonds
Mortgage securitization(4)
Subordinated debentures(5)
Total wholesale funding
sources
Of Which:
Less
than 1
month
1-3
months
3-6
months
6-9
months
9-12
months
Sub-Total
< 1 Year
1-2
years
2-5
years
>5
years
Total
$
3,553
$
904
$
343
$
211
$
122
$
5,133
$
88
$
80
$
–
$
5,301
13,255
18,281
41,886
12,611
3,113
89,146
4,023
1,720
390
–
–
–
19
3,920
2,365
1
–
1,208
59
1,648
7,565
–
–
794
64
–
–
7,288
–
6,149
1
–
997
3
1,837
500
2,615
829
6
18,306
502
2,615
3,828
151
16,926
661
5,909
4,100
–
962
–
33,674
1,042
11,359
6,214
20
36
–
9,929
440
2,473
5,632
6,626
94,167
7,288
78,835
2,645
22,356
19,774
6,797
$ 18,937
$ 26,738
$ 52,300
$ 19,972
$ 9,022
$ 126,969
$ 31,707
$ 53,351
$ 25,136
$ 237,163
Unsecured funding
Secured funding
$ 17,217
1,720
$ 21,610
5,128
$ 49,858
2,442
$ 18,974
998
$ 5,078
3,944
$ 112,737
14,232
$ 21,037
10,670
$ 34,735
18,616
$ 16,591
8,545
$ 185,100
52,063
As at October 31, 2014
($millions)
Deposits from banks(2)
Bearer deposit notes,
commercial paper and
certificate of deposits
Asset-backed commercial
paper(3)
Medium term notes and
deposit notes
Asset-backed securities
Covered bonds
Mortgage securitization(4)
Subordinated debentures(5)
Total wholesale funding
sources
Of Which:
Less
than 1
month
1-3
months
3-6
months
6-9
months
9-12
months
Sub-Total
< 1 Year
1-2
years
2-5
years
>5
years
Total
$
5,417
$
755
$
514
$
104
$
153
$
6,943
$
96
$
117
$
–
$
7,156
9,111
24,400
33,152
15,192
3,913
85,768
8,567
1,103
3,691
3,127
–
2,254
–
16
2,609
6,266
1
–
616
16
32
2,953
279
1,408
779
53
–
–
6,332
–
–
2,294
–
–
696
45
5,499
1
2,817
392
29
20,139
281
6,479
2,483
159
12,026
507
2,254
3,869
–
30,448
794
8,205
8,526
–
121
–
7,317
523
2,158
5,356
5,288
95,559
6,332
69,930
2,105
19,096
20,234
5,447
$ 23,616
$ 34,663
$ 39,170
$ 18,331
$12,804
$ 128,584
$ 27,319
$ 49,193
$ 20,763
$ 225,859
Unsecured funding
Secured funding
$ 17,671
5,945
$ 31,437
3,226
$ 36,672
2,498
$ 17,635
696
$ 9,594
3,210
$ 113,009
15,575
$ 20,689
6,630
$ 31,668
17,525
$ 12,726
8,037
$ 178,092
47,767
(1) Wholesale funding sources exclude repo transactions and bankers acceptances, which are disclosed in T56 Contractual maturities. Amounts are based on remaining term to maturity.
(2) Only includes commercial bank deposits raised by Group Treasury.
(3) Wholesale funding sources also exclude asset-backed commercial paper issued by certain ABCP conduits that are not consolidated for financial reporting purposes.
(4) Represents residential mortgages funded through Canadian Federal Government agency sponsored programs. Funding accessed through such programs does not impact the funding capacity of the Bank in its own name.
(5) Although subordinated debentures are a component of regulatory capital, they are included in this table in accordance with EDTF recommended disclosures.
91 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Wholesale funding generally bears a higher risk of run-off in a stressed environment than other sources of funding. The Bank mitigates this risk
through funding diversification, ongoing engagement with investors and by maintaining a large holding of unencumbered liquid assets.
Unencumbered liquid assets of $198 billion as at October 31, 2015 (October 31, 2014 – $183 billion) were well in excess of wholesale funding
sources that mature in the next twelve months.
Contractual maturities and obligations
The table below provides the maturity of assets and liabilities as well as the off-balance sheet commitments as at October 31, 2015, based on the
contractual maturity date.
From a liquidity risk perspective the Bank considers factors other than contractual maturity in the assessment of liquid assets or in determining
expected future cash flows. In particular, for securities with a fixed maturity date, the ability and time horizon to raise cash from these securities is
more relevant to liquidity management than contractual maturity. For other assets and deposits the Bank uses assumptions about rollover rates to
assess liquidity risk for normal course and stress scenarios. Similarly, the Bank uses assumptions to assess the potential drawdown of credit
commitments in various scenarios.
The Bank’s contractual obligations include contracts and purchase obligations, including agreements to purchase goods and services that are
enforceable, legally binding on the Bank and affect the Bank’s liquidity and capital resource needs.
The Bank leases a large number of its branches, offices and other locations. The majority of these leases are for a term of five years, with options to
renew. The total cost of these leases, net of rental income from subleases, was $433 million in 2015 (2014 – $392 million). The increase primarily
reflects higher contractual rents, business growth, the impact of foreign exchange and operational restructuring.
Two major outsourcing contracts have been entered into by the Bank. Both are cancellable with notice.
The largest is a contract with IBM Canada entered into in 2001 to manage the Bank’s domestic computer operations, including data centres,
branches, Automated Banking Machines, and desktop computing environment. The contract was expanded in 2005 to also include the computer
operations for the Caribbean & Central America, and Mexico. The contract for the Canadian operations, Mexico and Caribbean & Central America
was renewed earlier in 2013, for a further 5 year period.
The second is a five-year contract with options for renewal with Symcor Inc. to manage the Bank’s cheque and bill payment processing, including
associated statement and report printing activities and cheque services across Canada.
92 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
T56 Contractual maturities
($ millions)
Assets
Cash and deposits with financial institutions
and precious metals
Trading assets
Financial instruments designated at fair
value through profit or loss
Securities purchased under resale
agreement and securities borrowed
Derivative financial instruments
Investment securities
Loans
Residential mortgages
Personal and credit cards
Business and government
Allowance for credit losses
Customers’ liabilities under acceptances
Other assets
Liabilities and equity
Deposits
Personal
Non-personal
Less
than one
month
One to
three
months
Three
to six
months
Six to
nine
months
Nine to
twelve
months
One to
two years
Two
to five
years
Over five
years
No specific
maturity
Total
As at October 31, 2015
$ 65,315
6,595
$
1,367
6,148
$
477
4,580
$
593
3,467
$
567
1,177
$
593
6,599
$
892
12,665
$
7
19,759
$
14,666
38,150
$
84,477
99,140
–
–
66
–
–
–
16
–
238
320
65,182
2,789
1,292
25,763
3,120
2,456
20,187
–
7,987
–
11,121
2,412
2,215
24,120
5,695
1,732
16,693
–
2,120
–
5,738
1,580
4,006
27,190
11,584
2,577
13,029
–
146
–
2,003
1,168
2,059
23,976
11,690
2,607
9,679
–
37
–
3,268
1,479
2,140
24,561
11,570
2,500
10,491
–
6
–
–
3,761
7,534
71,989
43,088
10,146
18,755
–
–
–
–
9,541
16,648
181,600
108,597
19,563
53,440
–
–
–
–
18,273
4,299
32,772
20,366
5,719
6,687
–
–
–
–
–
3,023
46,657
1,788(1)
44,177
4,889(2)
(4,197)
–
32,105
87,312
41,003
43,216
458,628
217,498
91,477
153,850
(4,197)
10,296
32,105
$ 54,015
6,506
47,509
$ 50,230
7,960
42,270
$ 67,936
8,938
58,998
$ 33,177
8,303
24,874
$ 19,993
7,186
12,807
$ 50,181
15,762
34,419
$ 68,116
16,646
51,470
$ 17,118
326
16,792
$ 240,153
118,417
121,736
$ 600,919
190,044
410,875
Financial instruments designated at fair
value through profit or loss
Acceptances
Obligations related to securities sold short
Derivative financial instruments
Obligations related to securities sold under
repurchase agreements and securities lent
Subordinated debentures
Other liabilities
Total equity
Off-Balance sheet commitments
Operating leases
Credit commitments(3)
Financial guarantees(4)
Outsourcing obligations
–
7,987
52
3,767
60,814
–
867
–
$
$
27
6,633
–
19
18
2,120
50
2,196
8,232
–
1,535
–
57
6,588
–
36
–
146
208
1,912
4,483
–
358
–
–
37
162
1,182
332
–
533
–
7
6
223
1,241
3,154
–
307
–
9
–
2,530
3,786
–
–
878
–
648
–
5,425
11,109
–
–
2,444
–
$
83
16,985
–
51
$
81
16,264
–
50
$
80
18,052
–
50
$
285
20,335
–
183
$
595
76,660
–
225
$
804
–
7,851
20,077
–
6,182
3,803
–
546
4,878
–
4
–
–
3,711
-
–
–
30,913
53,479
1,486
10,296
20,212
45,270
77,015
6,182
41,638
53,479
$
–
5
31,865
1
$
1,754
166,400
31,865
619
(1) Includes primarily impaired mortgages.
(2) Includes primarily overdrafts and impaired loans.
(3) Includes the undrawn component of committed credit and liquidity facilities.
(4) Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.
93 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
($ millions)
Assets
Cash and deposits with financial institutions and
precious metals
Trading assets
Financial instruments designated at fair value through
Less
than one
month
One to
three
months
Three
to six
months
Six to
nine
months
Nine to
twelve
months
One to
two
years
Two
to five
years
Over
five
years
No
specific
maturity
Total
As at October 31, 2014
$49,912
5,038
$ 1,312
6,068
$
398
2,921
$
125
2,628
$
715
3,051
$
125
8,707
$
394
16,124
$
2
25,143
$ 11,033
43,568
$ 64,016
113,248
profit or loss
–
–
–
12
–
60
–
–
39
111
Securities purchased under resale agreement and
securities borrowed
Derivative financial instruments
Investment securities
Loans
Residential mortgages
Personal and credit cards
Business and government
Allowance for credit losses
Customers’ liabilities under acceptances
Other assets
Liabilities and equity
Deposits
Personal
Non-personal
Financial instruments designated at fair value through
profit or loss
Acceptances
Obligations related to securities sold short
Derivative financial instruments
Obligations related to securities sold under repurchase
agreements and securities lent
Subordinated debentures
Other liabilities
Total equity
Off-Balance sheet commitments
Operating leases
Credit commitments(3)
Financial guarantees(4)
Outsourcing obligations
71,611
2,216
1,846
25,495
2,589
2,719
20,187
–
7,778
–
14,251
2,582
1,674
21,343
3,983
1,530
15,830
–
2,032
–
3,604
1,430
2,951
25,828
12,441
2,239
11,148
–
65
–
2,134
1,059
1,740
27,558
15,686
2,797
9,075
–
1
–
1,148
1,011
1,577
23,305
12,309
2,450
8,546
–
–
–
1,118
3,559
10,071
71,750
47,999
7,735
16,016
–
–
–
–
6,922
9,805
155,459
97,540
17,448
40,471
–
–
–
–
14,660
4,697
28,112
18,395
5,003
4,714
–
–
–
–
–
4,301
45,459
93,866
33,439
38,662
424,309
1,706(1) 212,648
84,204
5,111(2) 131,098
(3,641)
(3,641)
9,876
–
28,139
28,139
42,283
$53,612
7,261
46,351
$58,296
7,401
50,895
$52,802
8,334
44,468
$29,330
8,319
21,011
$22,930
7,850
15,080
$45,523
16,763
28,760
$ 65,793
17,292
48,501
$14,755
257
14,498
$210,976
101,686
109,290
$554,017
175,163
378,854
3
7,778
34
2,156
73,074
–
372
–
23
2,032
159
2,629
8,929
–
489
–
17
65
990
1,266
2,280
–
398
–
–
1
269
1,386
1,586
–
184
–
–
–
183
945
3,084
–
92
–
–
–
3,912
4,232
–
–
1,948
–
187
–
7,645
8,656
–
–
2,999
–
235
–
10,924
15,168
–
4,871
3,387
–
–
–
2,934
–
–
–
24,916
49,211
465
9,876
27,050
36,438
88,953
4,871
34,785
49,211
$
25
5,062
–
19
$
53
4,165
–
38
$
78
9,950
–
57
$
78
13,315
–
57
$
76
14,475
–
57
$
261
13,821
–
161
$
550
73,224
–
286
$
577
3,424
–
1
$
–
5
27,137
1
$
1,698
137,441
27,137
677
(1) Includes primarily impaired mortgages.
(2) Includes primarily overdrafts and impaired loans.
(3) Includes the undrawn component of committed credit and liquidity facilities.
(4) Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.
94 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
Other Risks
Operational risk
Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to inadequate or failed internal processes
or systems, human error, or external events. Operational risk includes legal and regulatory risk, business process and change risk, fiduciary
or disclosure breaches, technology failure, financial crime and environmental risk. It exists in some form in every Bank business and
function. Operational risk can not only result in financial loss, but also regulatory sanctions and damage to the Bank’s reputation. The
Bank is very successful at managing operational risk with a view to safeguarding client assets and preserving shareholder value.
In fiscal 2015, operational risk losses continue to be within the Bank’s risk appetite.
Governance and Organization
The Bank has developed policies, processes and assessment methodologies to ensure that operational risk is appropriately identified and managed
with effective controls. The governing principles of the Bank’s Operational Risk Management Framework include:
(cid:129) The three lines of defence model helps to ensure proper accountability and clearly defines the roles and responsibilities for operational risk
management. The first line of defence is the business units, who own the risks in their businesses and operations. The second line of defence is led
by a central risk management unit within Global Risk Management, with support from control and stewardship functions across the Bank. The third
line of defence is Internal Audit.
(cid:129) The individual business lines are accountable for management and control of the significant operational risks to which they are exposed.
The Bank has a governance and organizational structure through which there is effective oversight and in which operational risk is managed to an
established risk appetite, including:
– The Board of Directors is responsible for sound corporate governance and approves biennially the Bank’s Operational Risk Management Policy;
– A senior level Operational Risk Committee comprised of Heads of business lines and key control functions, and chaired by the Chief Risk Officer.
This Committee provides consistent, Bank-wide oversight of operational risk management;
– Business-line level operational risk committees are in place to ensure issues are known, discussed, managed and escalated, as needed and in a
timely manner;
– Executive management with clearly defined areas of responsibility;
– A central unit in Global Risk Management responsible for: developing and applying methods to identify, assess, manage and monitor operational
risks; and reporting on risks as well as actual loss events and to play a challenge role to the business units in their assessment and management of
operational risk;
– Independent specialist units responsible for developing methods to mitigate specific components of operational risk, including codifying policies and
processes required to control those specific risks;
– Separation of duties between key functions; and
– An independent internal audit department responsible for verifying that significant risks are identified and assessed, and for testing controls to
ensure that overall risk is at an acceptable level. The Internal Audit department is also responsible for auditing and assessing the Bank’s Operational
Risk Management Framework and its design and effectiveness.
Operational Risk Management Framework
The Bank’s Operational Risk Management Framework sets out an integrated approach to identify, assess, control, mitigate and report operational risks
across the Bank. The following are key components of the Bank’s Operational Risk Management Framework:
(cid:129) The Bank’s risk and control assessment program, which is managed by Global Risk Management’s central operational risk unit, includes formal
reviews of significant units, operations and processes to identify and assess operational risks. This program provides a basis for management to
ensure that key risks have been identified and that controls are functioning effectively. Business line management attests to the accuracy of each
assessment and develops action plans to mitigate risks if controls are not identified as effective. Results of these reviews are summarized and
reported to executive management and the Board of Directors.
(cid:129) The Bank has a standard inventory of operational risks which are discussed and considered in each risk assessment.
(cid:129) The Bank’s scenario analysis program provides a forward looking view of key risks and provides management with insights into how plausible but
high impact, remote operational risk events might occur. Scenario analysis will also assist in the selection of severity distributions in the Bank’s
Advanced Measurement Approach (AMA) capital model (discussed below).
(cid:129) The Bank’s Key Risk Indicator (KRI) program provides management with an early warning system of changes in risk exposure that may indicate that
an operational risk appetite or tolerance may be breached. KRIs exist at the business line and all-Bank level.
(cid:129) The Business Environment and Internal Control Factors (BEICF) program incorporates the impact of key business environment and internal control
factors into the regulatory capital allocated to divisions by utilizing a BEICF scorecard. The scorecard will be used to adjust capital calculations
produced using the Bank’s AMA capital model and due to its forward-looking nature, it also assists with identifying new trends and emerging risks.
(cid:129) The Bank’s centralized operational loss event database, which is managed and maintained by the central operational risk unit within Global Risk
Management, captures key information on operational losses. This data is analyzed, benchmarked against industry loss data and significant metrics,
then reported to executive management and the Board of Directors to provide insight into operational risk exposures, appetites and trends.
(cid:129) Operational risk is difficult to quantify in a fulsome and accurate manner, due to the nature of operational risk itself. Operational risk is often
included with or is a by-product of another form of risk and is not taken on intentionally. Tools for operational risk management and measurement
continue to evolve across the global financial services industry. There are two methods for the calculation of operational risk regulatory capital
available to the Bank under Basel framework – The Standardized Approach and the Advanced Measurement Approach (AMA). The Bank continues
to use the Standardized Approach and will implement AMA, when approved by OSFI.
95 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
(cid:129) Operational risk reporting is provided to the Bank’s senior executive management and the Board of Directors. In addition to details and trends from
operational risk loss events, reporting also includes information on risk and control assessments and scenarios completed, industry trends and
significant events, key risk indicators and Business Environment and Internal Control Factor (BEICF) survey results. The combination of these
information sources provides both a backward and forward-looking view of operational risk at the Bank.
(cid:129) The Bank is a member of the Operational Riskdata Exchange Association (ORX), an international consortium of banks that share anonymized loss
data. This industry data is used to support risk identification, assessment and will be used as an input to the Bank’s AMA capital model. Discussion
forums within ORX also help to ensure that the Bank is current of all industry best practices and developments.
(cid:129) The Bank’s Fraud Management Office, which identifies threats of financial crime, implements systems and processes to mitigate loss and reports on
fraud loss activity to senior management.
(cid:129) The Bank’s monitoring of industry events, identifies significant losses incurred at other financial institutions and provides a reference for reviewing
and assessing the Bank’s own risk exposure.
(cid:129) The compliance risk management program led by Global Compliance through an established network and associated processes that include:
monitoring regulatory changes; conducting compliance risk assessments; implementing policies and procedures; training; monitoring and resolving
issues; and reporting on the status of compliance and compliance controls to executive management, the Board of Directors, and regulators as
required.
(cid:129) The Bank’s New Products and Services Risk Management Policy which describes the general principles applicable to the review, approval and
implementation of new products and services within Scotiabank and is intended to provide overarching guidance. Processes are in place at the all-
Bank level and in each business line for evaluation of risk in new businesses, services and products.
(cid:129) The Bank’s Business Continuity Management Department is responsible for governance and oversight of the Bank’s business continuity, and
monitors units to ensure compliance with these policies. The Bank’s business continuity management policy requires that all business units develop
business continuity capabilities for their respective functions.
(cid:129) The Bank is exposed to ever increasing cyber risks, which may include theft of assets, unauthorized access to sensitive information, or operational
disruption such as breaches of cyber security. With this in mind, the Bank has implemented a robust and continuously evolving cyber security
program to keep pace with the evolving threats. While the Bank’s computer systems continue to be subject to cyber-attack attempts, the
countermeasures in place remain effective. Scotiabank has not experienced material breaches of cyber security. The Bank continues to actively
monitor this risk, leveraging external threat intelligence, internal monitoring, reviewing best practices and implementing additional controls as
required, to mitigate these risks.
(cid:129) The Bank’s Model Risk Management Policy, which provides the framework for model review and approval under the oversight of the Operational
Risk Committee.
(cid:129) The Bank’s training programs, including the mandatory Anti-Money Laundering, Operational Risk and Information Security courses and
examinations which ensure employees are aware and equipped to safeguard our customers’ and the Bank’s assets.
(cid:129) Risk mitigation programs, which use insurance policies to transfer the risk of high severity losses, where feasible and appropriate.
Reputational risk
Reputational risk is the risk that negative publicity regarding Scotiabank’s conduct, business practices or associations, whether true or
not, will adversely affect its revenues, operations or customer base, or require costly litigation or other defensive measures.
Negative publicity about an institution’s business practices may involve any aspect of its operations, but usually relates to questions of business ethics
and integrity, or quality of products and services. Negative publicity and attendant reputational risk frequently arise as a by-product of some other
kind of risk management control failure.
Reputational risk is managed and controlled throughout the Bank by codes of conduct, governance practices and risk management programs, policies,
procedures and training. Many relevant checks and balances are outlined in greater detail under other risk management sections, particularly
Operational risk, where reference is made to the Bank’s well-established compliance program. All directors, officers and employees have a
responsibility to conduct their activities in accordance with the Scotiabank Guidelines for Business Conduct, and in a manner that minimizes
reputational risk. While all employees, officers and directors are expected to protect the reputation of Scotiabank by complying with the Bank’s
Guidelines for Business Conduct, the activities of the Legal, Corporate Secretary, Public, Corporate and Government Affairs and Compliance
departments, and the Reputational Risk Committee, are particularly oriented to the management of reputational risk.
In providing credit, advice, or products to customers, or entering into associations, the Bank considers whether the transaction, relationship or
association might give rise to reputational risk. The Bank has an established, Board-approved reputational risk policy, as well as policy and procedures
for managing reputational and legal risk related to structured finance transactions. Global Risk Management plays a significant role in the
identification and management of reputational risk related to credit underwriting. In addition, the Reputational Risk Committee is available to support
Global Risk Management, as well as other risk management committees and business units, with their assessment of reputational risk associated with
transactions, business initiatives, and new products and services.
The Reputational Risk Committee considers a broad array of factors when assessing transactions, so that the Bank meets, and will be seen to meet,
high ethical standards. These factors include the extent, and outcome, of legal and regulatory due diligence pertinent to the transaction; the economic
intent of the transaction; the effect of the transaction on the transparency of a customer’s financial reporting; the need for customer or public
disclosure; conflicts of interest; fairness issues; and public perception.
The Committee may impose conditions on customer transactions, including customer disclosure requirements to promote transparency in financial
reporting, so that transactions meet Bank standards. In the event the Committee recommends not proceeding with a transaction and the sponsor of
the transaction wishes to proceed, the transaction is referred to the Risk Policy Committee.
96 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
Environmental risk
Environmental risk refers to the possibility that environmental concerns involving Scotiabank or its customers could affect the Bank’s
financial performance.
To safeguard the Bank and the interests of its stakeholders, Scotiabank has an environmental policy, which is approved by the Bank’s Board of
Directors. The policy guides day-to-day operations, lending practices, supplier agreements, the management of real estate holdings and external
reporting practices. It is supplemented by specific policies and practices relating to individual business lines.
Environmental risks associated with the business operations of each borrower and any real property offered as security are considered in the Bank’s
credit evaluation procedures. This includes an environmental assessment where applicable, and commentary on climate change where it could have a
material impact (including regulatory, physical or reputational impacts) on the borrower. Global Risk Management has primary responsibility for
establishing the related policies, processes and standards associated with mitigating environmental risk in the Bank’s lending activities. Decisions are
taken in the context of the risk management framework discussed on page 66.
In the area of project finance, the Equator Principles have been integrated into the Bank’s internal processes and procedures since 2006. The Equator
Principles help financial institutions determine, assess and manage environmental and social risk. The principles apply to project finance loans and
advisory assignments where total capital costs exceed US$10 million, and to certain project-related corporate loans. The Equator Principles provide
safeguards for sensitive projects to ensure protection of natural habitats and the rights of indigenous peoples, as well as safeguards against the use of
child and forced labour.
Environmental concerns also play a prominent role in shaping the Bank’s real estate practices and purchasing decisions. The Real Estate Department
adheres to an Environmental Compliance Policy to ensure responsible management of the Bank’s real estate holdings from an environmental
perspective. In addition, recycling and resource management programs are in place in the Bank’s corporate offices and branch networks. Internal
tracking systems are in place with respect to energy use, greenhouse gas emissions (GHG) and paper consumption. Since 2012, GHG emissions data
for the branch network and corporate offices has been externally verified. A variety of reduction measures are in place for energy, paper and waste. In
order to further reduce the Bank’s environmental footprint, it is guided by an Environmental Paper Policy.
To ensure it continues to operate in an environmentally responsible manner, the Bank monitors policy and legislative requirements through ongoing
dialogue with government, industry and stakeholders in countries where it operates. Scotiabank has been meeting with environmental organizations,
industry associations and socially responsible investment organizations with respect to the role that banks can play to help address issues such as
climate change, protection of biodiversity, promotion of sustainable forestry practices, and other environmental issues important to its customers and
communities where it operates. The Bank has an ongoing process of reviewing its practices in these areas.
Scotiabank has a number of environmentally related products and services to meet demand and promote the “green” economy. These include: an
EcoEnergy Financing program designed to support personal and small business customers who wish to install small-scale renewable energy projects;
an auto loan product for hybrid, electric and clean diesel vehicles; an Energy and Agriculture Commodities group, which assists corporate clients by
providing liquidity and hedge solutions in the carbon market; and an eco-home renovation program.
Environmental Reporting
Scotiabank is also a signatory to, and participant in the Carbon Disclosure Project, which provides corporate disclosure to the investment community
on greenhouse gas emissions and climate change management. For further information, you may access the Bank’s annual Corporate Social
Responsibility report at http://www.scotiabank.com/ca/common/csr/pdf/Scotiabank_2014_Corporate_Social_Responsibility_Report.pdf.
Insurance risk
The Bank is both a distributor of third party insurance products and underwriter of insurance risk. As a distributor of third party
insurance products, the Bank earns fees but bears no insurance risk. The Bank bears insurance risk in its role as an underwriter, either
through direct underwriting or via reinsurance.
Insurance risk is the risk of potential financial loss due to actual experience being different from that assumed in the pricing process of
the insurance products.
Insurance by nature involves the distribution of products that transfer individual risks to the issuer with the expectation of a return built into the
insurance premiums earned. The Bank is exposed to insurance risk primarily through its creditor, life and select property and casualty insurance and
reinsurance products.
The insurance governance and risk management frameworks are calibrated within each insurance subsidiary commensurate with the nature and
materiality of risk assumed. Senior management within the insurance business subsidiaries has primary responsibility for managing insurance risk, with
oversight by Global Risk Management through the Insurance Risk Committee. The insurance subsidiaries have their own boards of directors, as well as
independent appointed actuaries who provide additional risk management oversight.
The insurance subsidiaries maintain a number of policies and practices to manage insurance risk. Sound product design is an essential element. The
vast majority of risks insured are short-term in nature, that is, they do not involve long-term pricing guarantees. Geographic diversification and
product-line diversification are important elements as well. Reinsurance is commonly used as an effective tool to manage the insurance risk exposures.
Insurance risk is also managed through effective underwriting and claim adjudication practices, ongoing monitoring of experience, and stress-testing
scenario analysis.
97 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Strategic risk
Strategic risk is the risk that the Bank’s business strategies are ineffective, being poorly executed, or insufficiently resilient to changes in the
business environment.
The Board of Directors is ultimately responsible for oversight of strategic risk, by adopting a strategic planning process and approving, on an annual
basis, a strategic plan for the Bank.
The Bank manages its strategic planning process through a series of coordinated efforts between the Executive Management Team, the Business Lines
and the Corporate Functions. These efforts address a wide range of relevant considerations including capital and resource allocation, business
initiatives, strategic transactions and investments, stress testing and alignment with the Bank’s Risk Appetite Framework. These considerations are
reviewed in a consistent and disciplined manner. The process involves input from the entire Executive Management Team and from the Board of
Directors.
On an annual basis, a comprehensive Strategy Report is prepared that summarizes the Bank’s key strategic considerations, and is presented by the
President and Chief Executive Officer to the Board of Directors for their review and approval.
The execution and evaluation of strategic plans within the Bank is critically important to the Bank’s enterprise-wide risk management framework. The
Bank makes continuous efforts to ensure that all employees are aware of the Bank’s overall strategic direction, and that employees are also aware of
the strategies and objectives for their respective business line or corporate function. On an ongoing basis, the business lines and corporate functions
identify, manage and assess the internal and external considerations – including risk factors – that could affect the achievement of their strategic
objectives. These matters are considered on an enterprise-wide basis by the Bank’s Executive Management Team, which makes adjustments, as
required.
98 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
C
O
N
T
R
O
L
S
A
N
D
A
C
C
O
U
N
T
I
N
G
P
O
L
I
C
I
E
S
CONTROLS AND ACCOUNTING POLICIES
Controls and procedures
Management’s responsibility for financial information contained in this annual report is described on page 127.
Disclosure controls and procedures
The Bank’s disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and communicated to
the Bank’s management, including the President and Chief Executive Officer and Chief Financial Officer (CFO), as appropriate, to allow timely
decisions regarding required disclosure.
As of October 31, 2015, the Bank’s management, with the participation of the President and Chief Executive Officer and CFO, evaluated the
effectiveness of its disclosure controls and procedures, as defined under the rules adopted by the U.S. Securities and Exchange Commission (SEC) and
the Canadian securities regulatory authorities, and have concluded that the Bank’s disclosure controls and procedures are effective.
Internal control over financial reporting
Management of the Bank is responsible for establishing and maintaining adequate internal control over financial reporting. These controls include
policies and procedures that:
(cid:129) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Bank;
(cid:129) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and that receipts and
expenditures are being made only in accordance with authorizations of management and directors of the Bank; and
(cid:129) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Bank’s assets that
could have a material effect on the financial statements.
All control systems contain inherent limitations, no matter how well designed. As a result, the Bank’s management acknowledges that its internal
control over financial reporting will not prevent or detect all misstatements due to error or fraud. In addition, management’s evaluation of controls
can provide only reasonable, not absolute, assurance that all control issues that may result in material misstatements, if any, have been detected.
Management assessed the effectiveness of internal control over financial reporting, using the Internal Control-Integrated Framework 2013 issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and based on that assessment concluded that internal control over
financial reporting was effective as at October 31, 2015.
Changes in internal control over financial reporting
There have been no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially
affect, the Bank’s internal control over financial reporting during the year ended October 31, 2015.
Critical accounting estimates
The Bank’s accounting policies are integral to understanding and interpreting the financial results reported in this annual report. Note 3 on pages 137
to 149 summarizes the significant accounting policies used in preparing the Bank’s consolidated financial statements. Certain of these policies require
management to make estimates, assumptions and subjective judgements that are difficult, complex, and often relate to matters that are inherently
uncertain. The policies discussed below are considered to be particularly important to the presentation of the Bank’s financial position and results of
operations, because changes in the estimates, assumptions and judgements could have a material impact on the Bank’s consolidated financial
statements. These estimates, assumptions and judgements are adjusted in the normal course of business to reflect changing underlying circumstances.
Allowance for credit losses
The allowance for credit losses represents management’s best estimate of the probable credit losses in the portfolio of deposits with other institutions,
loans to borrowers and acceptances. Management undertakes regular reviews of credit quality to assess the adequacy of the allowance for credit
losses. This process requires the use of estimates, assumptions and subjective judgements at many levels. These subjective judgements include
identifying credits that are impaired, and considering factors specific to individual credits, as well as portfolio characteristics and risks. Changes to
these estimates or use of other reasonable judgements and estimates could directly affect the provision for credit losses.
The allowance for credit losses is comprised of collective and individually assessed allowances.
Allowances in respect of individually significant credit exposures are an estimate of probable incurred losses related to existing impaired loans. In
establishing these allowances applicable to individual credit exposures, management individually assesses each loan for objective indicators of
impairment and forms a judgement as to whether the loan is impaired. Loan impairment is recognized when, in management’s opinion, there is no
longer reasonable assurance that interest and principal payments will be collected based on original contractual terms. Once a loan is determined to
be impaired, management estimates its net realizable value by making judgements relating to the timing of future cash flow amounts, the fair value
of any underlying security pledged as collateral, costs of realization, observable market prices, and expectations about the future prospects of the
borrower and any guarantors.
Individual provisions were higher in 2015 than in 2014, driven primarily by higher provisions in international banking.
Management estimates allowances on a collective basis for exposures in certain homogenous portfolios, including residential mortgages, credit card
loans and most personal loans. This collective assessment for these positions involves estimating the probable losses inherent in the portfolio by using
a formulaic method that considers recent loss experience.
An allowance is also determined in respect of probable incurred losses that are inherent in the portfolio, of performing loans, but have not yet been
specifically identified on an individual basis. Management establishes this allowance on a collective basis through an assessment of quantitative and
qualitative factors. Using an internally developed methodology, management arrives at an initial quantitative estimate of the collective allowance for
the performing portfolio based on numerous factors, including historical average default probabilities, loss given default rates and exposure at default
99 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
factors. Material changes in any of these parameters or assumptions would affect the range of expected credit losses and, consequently, could affect
the collective allowance level. For example, if either the probability of default or the loss given default rates for the non-retail portfolio were
independently increased or decreased by 10%, the methodology would indicate an increase or decrease to the quantitative estimate of approximately
$73 million (2014 – $74 million).
A qualitative assessment of the collective allowance is made based on observable data, such as: economic trends and business conditions, portfolio
concentrations, risk migrations and recent trends in volumes and severity of delinquencies, and a component for the imprecision inherent in the
methodology and parameters. Management reviews the collective allowance quarterly to assess whether the allowance is at the appropriate level in
relation to the size of the portfolio, inherent credit risks and trends in portfolio quality.
The total collective allowance for credit losses as at October 31, 2015, was $3,260 million, an increase of $404 million from a year earlier. The
increase was primarily due to changes in credit quality and an increase in collective allowance against performing loans of $60 million to support the
growing loan portfolio. Of the collective allowance amount, $644 million is attributable to business and government performing loans, with the
remainder allocated to personal lending and credit cards ($1,941 million) and residential mortgages ($675 million). These amounts for personal
lending and credit cards, and for residential mortgages include allowances for both performing and impaired loans.
As noted above, the individual allowance for credit losses for personal loans, credit cards and mortgages is formula-based and also reflects incurred
but not yet identified losses.
Fair value of financial instruments
All financial instruments are measured at fair value on initial recognition. Subsequent measurement of a financial instrument depends on its
classification. Non-trading loans and receivables, certain securities and most financial liabilities are carried at amortized cost unless classified or
designated as fair value through profit and loss or available-for-sale at inception. All other financial instruments, including those designated as fair
value through profit and loss at inception, are carried at fair value.
Fair value of a financial asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants in the principal, or in its absence, the most advantageous market to which the Bank has access at the measurement date.
The best evidence of fair value for a financial instrument is the quoted price in an active market. Quoted market prices represent a Level 1 valuation.
Quoted prices are not always available for over-the-counter transactions, as well as transactions in inactive or illiquid markets. In these instances,
internal models that maximize the use of observable inputs are used to estimate fair value. The chosen valuation technique incorporates all the factors
that market participants would take into account in pricing a transaction. When all significant inputs are observable, the valuation is classified as
Level 2. Financial instruments traded in a less active market have been valued using indicative market prices, present value of cash-flows or other
valuation techniques. Fair value estimates normally do not consider forced or liquidation sales. Where financial instruments trade in inactive markets or
when using models where observable parameters do not exist, greater management judgement is required for valuation purposes. Valuations that
require the significant use of unobservable inputs are considered Level 3. The calculation of estimated fair value is based on market conditions at a
specific point in time and therefore may not be reflective of future fair values.
The Bank has controls and processes in place to ensure that the valuation of financial instruments is appropriately determined. Global Risk
Management (GRM) is responsible for the design and application of the Bank’s risk management framework. GRM is independent from the Bank’s
business units and is overseen by Executive Management and the Board of Directors. Senior management committees within GRM oversee and
establish standards for risk management processes that are critical in ensuring that appropriate valuation methodologies and policies are in place for
determining fair value.
Where possible, valuations are based on quoted prices or observable inputs obtained from active markets. GRM oversees a monthly Independent Price
Verification (IPV) process in order to assess the reliability and accuracy of prices and inputs used in the determination of fair value. The IPV process is
performed by price verification groups that are independent from the business. The Bank maintains an approved list of pricing sources that are used in
the IPV process. These sources include, but are not limited to, brokers, dealers and consensus pricing services. The valuation policies relating to the IPV
process require that all pricing or rate sources used be external to the Bank. On a periodic basis, an independent assessment of pricing or rate sources
is also performed by GRM to determine market presence or market representative levels.
Where quoted prices are not readily available, such as for transactions in inactive or illiquid markets, internal models that maximize the use of
observable inputs are used to estimate fair value. An independent senior management committee within GRM oversees the vetting, approval and
ongoing validation of valuation models used in determining fair value. Risk policies associated with model development are approved by Executive
Management and/or key risk committees.
In determining fair value for certain instruments or portfolios of instruments, valuation adjustments or reserves may be required to arrive at a more
accurate representation of fair value. The Bank’s policy of applying valuation reserves to a portfolio of instruments is approved by a senior
management committee. These reserves include adjustments for credit risk, bid-offer spreads, unobservable parameters, constraints on prices in
inactive or illiquid markets and when applicable funding costs. The methodology for the calculation of valuation reserves are reviewed at least annually
by senior management.
Valuation adjustments recorded against the fair value of financial assets and financial liabilities totaled $27 million as at October 31, 2015, (2014 –
$113 million), net of any write-offs. These valuation adjustments are due mainly to credit risk considerations and bid-offer spreads on derivative
transactions.
As at October 31, 2015, a funding valuation adjustment (FVA) of $42 million pre-tax (2014 – $30 million) was recorded relating to uncollateralized
derivative instruments.
The Bank discloses the classification of all financial instruments carried at fair value in a hierarchy based on the determination of fair value. The
valuation hierarchy is as follows:
(cid:129) Level 1 – fair value is based on unadjusted quoted prices in active markets for identical instruments,
(cid:129) Level 2 – fair value is based on models using significant market-observable inputs other than quoted prices for the instruments, or
(cid:129) Level 3 – fair value is based on models using significant inputs that are not based on observable market data.
100 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
C
O
N
T
R
O
L
S
A
N
D
A
C
C
O
U
N
T
I
N
G
P
O
L
I
C
I
E
S
The Bank’s assets and liabilities which are carried at fair value as classified by the valuation hierarchy are reflected in Note 7 on page 154. The
percentage of each asset and liability category by fair value hierarchy level are outlined as follows:
T57 Fair value hierarchy of financial instruments carried at fair value
Fair value hierarchy
As at October 31, 2015
Level 1
Level 2
Level 3
Trading
assets
(incl. precious
metals)
52%
47%
1%
100%
Assets
Available-
for-sale
securities
59%
37%
4%
100%
Liabilities
Obligations
related to
securities
sold short
84%
16%
–%
100%
Derivatives
3%
96%
1%
100%
Derivatives
5%
95%
–%
100%
Impairment of investment securities
Investment securities are evaluated for impairment at the end of each reporting date, or more frequently, if events or changes in circumstances
indicate the existence of objective evidence of impairment.
In the case of equity instruments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its original cost
is considered in determining whether impairment exists. In the case of debt instruments classified as available-for-sale and held-to-maturity investment
securities, impairment is assessed based on the same criteria as impairment of loans.
When a decline in value of available-for-sale debt or equity instrument is due to impairment, the value of the security is written down to fair value.
The losses arising from impairment are reclassified from accumulated other comprehensive income and included in net gain on investment securities
within other operating income in the Consolidated Statement of Income.
The losses arising from impairment of held-to-maturity investment securities are recognized in net gain on investment securities within other operating
income in the Consolidated Statement of Income.
Reversals of impairment losses on available-for-sale debt instruments resulting from increases in fair value related to events occurring after the date of
impairment are included in net gain on investment securities within other operating income in the Consolidated Statement of Income, to a maximum
of the original impairment charge. Reversals of impairment on available-for-sale equity instruments are not recognized in the Consolidated Statement
of Income; increases in fair value of such instruments after impairment are recognized in equity.
Reversals of impairment losses on held-to-maturity investment securities are included in net gain on investment securities within other operating
income in the Consolidated Statement of Income, to a maximum of the amortized cost of the investment before the original impairment charge.
As at October 31, 2015, the gross unrealized gains on available-for-sale securities recorded in accumulated other comprehensive income were
$1,058 million (2014 – $1,259 million), and the gross unrealized losses were $291 million (2014 – $123 million). Net unrealized gains were therefore
$767 million (2014 – $1,136 million) before hedge amounts. The net unrealized gains after hedge amounts were $267 million (2014 – $847 million).
At October 31, 2015, the unrealized loss recorded in accumulated other comprehensive income relating to securities in an unrealized loss position for
more than 12 months was $191 million (2014 – $90 million). This unrealized loss was comprised of $24 million (2014 – $23 million) in debt securities,
$164 million (2014 – $59 million) related to preferred shares and $3 million (2014 – $8 million) related to common shares. The unrealized losses on
the debt securities arose primarily from changes in interest rates and credit spreads. For debt securities, based on a number of considerations,
including underlying credit of the issuers, the Bank expects that future interest and principal payments will continue to be received on a timely basis in
accordance with the contractual terms of the security.
Employee benefits
The Bank sponsors various pension and other benefit plans for eligible employees in Canada, the U.S., and other international operations. The pension
benefits are generally based on years of service and average earnings at retirement. Other benefits generally include post-retirement health care,
dental care and life insurance, along with other long-term employee benefits such as long-term disability.
Employee benefit expense and the related benefit obligation are calculated using actuarial methods and certain actuarial assumptions. These
assumptions are based on management’s best estimate and are reviewed and approved annually. The management assumption with the greatest
potential impact is the discount rate. This rate is used for measuring the benefit obligation and is generally prescribed to be equal to the current yield
on long term, high-quality corporate bonds with durations similar to the benefit obligation. This discount rate must also be used to determine the
annual benefit expense. If the assumed discount rate was 1% lower, the benefit expense for 2015 would have been $208 million higher. Other key
assumptions include future compensation, health care costs, employee turnover, retirement age and mortality. When making these estimates,
management considers expectations of future economic trends and business conditions, including inflation rates as well as other factors, such as plan
specific experience and best practices.
During the year the Bank made changes to its current Canadian pension arrangements (discussed in note 28 of the 2015 consolidated financial
statements on page 189) which resulted in a decrease of $204 million (pre-tax) to the benefit expense and pension liability of the Bank’s main pension
plan.
The Bank uses a measurement date of October 31, and based on this measurement date, the Bank reported a deficit of $498 million in its principal
pension plans as disclosed in Note 28 to the consolidated financial statements on pages 187 to 191.
Actual experience that differs from assumptions made by management will result in a net actuarial gain or loss recognized immediately in other
comprehensive income.
Note 28 on pages 187 to 191 of the 2015 consolidated financial statements contains details of the Bank’s employee benefit plans, such as the
disclosure of pension and other benefit amounts, management’s key assumptions, and a sensitivity analysis of changes in these assumptions on the
employee benefit obligation and expense.
Corporate income taxes
Management exercises judgment in determining the provision for income taxes and deferred income tax assets and liabilities. The provision is based
on management’s expectations regarding the income tax consequences of transactions and events during the period. Management interprets the tax
101 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
legislation for each jurisdiction in which the Bank operates and makes assumptions about the expected timing of the reversal of deferred income tax
assets and liabilities. If management’s interpretations of the legislation differ from those of the tax authorities or if the actual timing of the reversals of
the deferred income tax assets and liabilities is not as anticipated, the provision for income taxes could increase or decrease in future periods.
Total deferred tax assets related to the Bank’s unused income tax losses from operations arising in prior years were $539 million as at October 31,
2015 (October 31, 2014 – $620 million). The tax related to temporary differences, unused tax losses and unused tax credits for which no deferred tax
asset is recognized in the Consolidated Statement of Financial Position amounted to $166 million (2014 – $338 million). The amount related to
unrecognized tax losses was $24 million, which will expire as follows: $20 million in 2018 and beyond and $4 million have no fixed expiry date.
The Bank maintains provisions for uncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit, dispute,
or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the Bank’s best estimate of
the amount expected to be paid based on an assessment of all relevant factors, which are reviewed at the end of each reporting period.
Note 27 on pages 185 to 187 of the 2015 consolidated financial statements contains further details with respect to the Bank’s provisions for income
taxes.
Structured entities
In the normal course of business, the Bank enters into arrangements with structured entities on behalf of its customers and for its own purposes.
These structured entities can be generally categorized as multi-seller commercial paper conduits, Bank funding vehicles and structured finance entities.
Further details are provided on pages 49 and 50 in the off-balance sheet arrangements section.
Management is required to exercise judgement to determine whether a structured entity should be consolidated. This evaluation involves
understanding the arrangements, determining whether decisions about the relevant activities are made by means of voting rights or other contractual
arrangements and determining whether the Bank controls the structured entity.
The Bank controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee. The three elements of control are:
(cid:129) power over the investee;
(cid:129) exposure, or rights, to variable returns from involvement with the investee; and
(cid:129) the ability to use power over the investee to affect the amount of the investor’s returns.
This definition of control applies to circumstances:
(cid:129) when voting rights or similar rights give the Bank power, including situations where the Bank holds less than a majority of voting rights or involving
potential voting rights;
(cid:129) when an investee is designed so that voting rights are not the dominant factor in deciding who controls the investee (i.e., relevant activities are
directed by contractual arrangements);
(cid:129) involving agency relationships; and
(cid:129) when the Bank has control over specified assets of an investee.
The Bank does not control an investee when it is acting in an agent’s capacity. The Bank assesses whether it is an agent by determining whether it is
primarily engaged to act on behalf and for the benefit of another party or parties. Factors that the Bank considers in this assessment include the scope
of its decision-making authority over the investee, the rights held by other parties, the remuneration to which it is entitled, and the Bank’s exposure to
variability of returns from other interests that it holds in the investee.
The analysis uses both qualitative and quantitative analytical techniques and involves the use of a number of assumptions about the business
environment in which the structured entity operates and the amount and timing of future cash flows.
The Bank reassesses whether it controls an investee if facts and circumstances indicate that one or more of the three elements of control change.
Management is required to exercise judgement to determine if a change in control event has occurred.
During 2015, there were no change in control events that caused the Bank to change its control conclusion of its multi-seller conduits or other
structured entities.
As described in Note 15 to the consolidated financial statements (on pages 171 to 173) and in the discussion of off-balance sheet arrangements (on
pages 49 and 50), the Bank does not control the two Canadian-based multi-seller conduits that it sponsors and they are not required to be
consolidated on the Bank’s Consolidated Statement of Financial Position. The Bank controls its U.S.-based multi-seller conduit and consolidates it on
the Bank’s Consolidated Statement of Financial Position.
Equity investment in hyper-inflationary country
Venezuela has been designated as hyper-inflationary and measures of foreign exchange controls have been imposed by the Venezuelan government.
These restrictions have limited the Bank’s ability to repatriate cash and dividends out of Venezuela.
As at October 31, 2015, the Bank’s total net investment in Banco del Caribe of $30 million, along with monetary assets, comprising of cash and
dividend receivable was translated at the SIMADI exchange rate of 1 USD to 198 VEF. These amounts were previously measured at SICAD II rate of
1 USD to 52 VEF.
As a result the Bank recorded a reduction in the carrying value of the investment in associates of $24 million with a corresponding decrease to OCI.
The Bank has also recognized foreign exchange losses of $5 million in the Consolidated Statement of Income as other operating income, in relation to
the monetary assets.
Goodwill
For the purpose of impairment testing, goodwill acquired in a business combination is, on the acquisition date, allocated to each of the Bank’s group
of cash-generating units (CGU) that are expected to benefit from the particular acquisition.
Goodwill is not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired.
102 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
C
O
N
T
R
O
L
S
A
N
D
A
C
C
O
U
N
T
I
N
G
P
O
L
I
C
I
E
S
Goodwill is reviewed at each reporting date to determine whether there is any indication of impairment. Each CGU to which goodwill is allocated for
impairment testing purposes reflects the lowest level at which goodwill is monitored for internal management purposes.
The carrying amount of the CGU is determined by management using approved internal economic capital models. These models consider various
factors including market risk, credit risk, operational risk, and other relevant business risks for each CGU. An impairment loss is recognized if the
carrying amount of a CGU exceeds its recoverable amount. The recoverable amount is the greater of fair value less costs of disposal and value in use.
If either fair value less costs of disposal or value in use exceeds the carrying amount, there is no need to determine the other. The recoverable amount
for the CGU has been determined using the fair value less costs of disposal method. In arriving at such value an appropriate valuation model is used
which considers various factors including normalized net income, price earnings multiples and control premium. These calculations are corroborated
by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. An impairment loss, in respect of
goodwill, is not reversed.
Significant judgement is applied in determining the recoverable amounts of the CGU and assessing whether certain events or circumstances constitute
objective evidence of impairment.
Goodwill was assessed for annual impairment based on the methodology as at July 31, 2015, and no impairment was determined to exist.
Indefinite life intangible assets
Intangible assets with indefinite useful lives are not amortized but tested for impairment annually and when circumstances indicate that the carrying
value may be impaired. Intangible assets are reviewed at each reporting date to determine whether there is any indication of impairment.
The recoverable amount is the greater of fair value less costs of disposal and value in use. If either fair value less costs of disposal or value in use
exceeds the carrying amount, there is no need to determine the other. Value in use method is used by the Bank to determine the recoverable amount
of the intangible asset. In determining value in use, an appropriate valuation model is used which considers factors such as management-approved
cash flow projections, discount rate and terminal growth rate. An impairment loss is recognized if the carrying amount of the intangible asset exceeds
its recoverable amount. Impairment losses recognized in prior periods are reassessed at each reporting period for any indication that the loss has
decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the intangible asset’s carrying amount does not exceed the carrying amount that would have
been determined if no impairment loss had been recognized.
The recoverable amount is significantly impacted by the discount rate and the terminal value. Significant judgement is applied in determining the
intangible asset’s recoverable amount and assessing whether certain events or circumstances constitute objective evidence of impairment.
Intangible assets were assessed for annual impairment based on the methodology as at July 31, 2015, and no impairment was determined to exist.
Provisions
According to IFRS, the Bank should recognize a provision if, as a result of a past event, the Bank has a present legal or constructive obligation that can
be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Probable in this context means
more likely than not.
Litigation and other
In the ordinary course of business, the Bank and its subsidiaries are routinely defendants in, or parties to a number of pending and threatened legal
actions and proceedings, including actions brought on behalf of various classes of claimants. In view of the inherent difficulty of predicting the
outcome of such matters, the Bank cannot state what the eventual outcome of such matters will be. However, based on current knowledge,
management does not believe that liabilities, if any, arising from pending litigation will have a material adverse effect on the Consolidated Statement
of Financial Position or results of operations of the Bank.
Off-balance sheet credit risks
The provisions for off-balance sheet credit risks relates primarily to off-balance sheet credit risks such as undrawn lending commitments, letters of
credit and letters of guarantee. These are collectively assessed in a manner consistent with the collective allowance for performing on-balance sheet
credit risks.
Recently adopted standards and future accounting developments
Changes in accounting policies during the year
The Bank has adopted the following amended accounting standards issued by the IASB effective November 1, 2014. The new accounting policies
used by the Bank have been described below:
Presentation of own credit risk (IFRS 9)
The own credit risk provisions of IFRS 9, Financial Instruments, changes the accounting for liabilities designated at fair value through profit or loss such
that changes in fair value arising from changes in the Bank’s own credit risk are recognized in other comprehensive income unless doing so creates or
increases an accounting mismatch. Cumulative fair value changes related to own credit risk recognized in other comprehensive income cannot be
subsequently reclassified to net income. This replaces the previous requirement in IAS 39, Financial Instruments: Recognition and Measurement, to
recognize such changes in net income.
In July 2014, the IASB issued the final IFRS 9 standard which permitted entities to early adopt this requirement prior to the IFRS 9 mandatory effective
date of January 1, 2018. The Bank early adopted this requirement as it relates to deposit note liabilities designated at fair value through profit or loss,
effective November 1, 2014. This change was applied retrospectively. However, in accordance with the IFRS 9 transition provisions, prior period
comparatives have not been restated. The impact of this change on opening retained earnings was an increase of $5 million and on accumulated
other comprehensive income was a decrease of $5 million.
103 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Levies (IFRIC 21)
IFRIC 21, Levies, provides guidance on when to recognize a liability to pay a levy imposed by government that is accounted for in accordance with
IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and also for a liability to pay a levy whose timing and amount is certain. The
interpretation clarifies that an obligating event, as identified by the legislation, would trigger the recognition of a liability to pay a levy. While the
interpretation discusses the timing of the recognition, it does not change the measurement of the amount to be recognized. The adoption of IFRIC 21
did not have a significant impact on the Bank.
Novation of derivatives and continuation of hedge accounting (IAS 39)
The amendment to IAS 39 adds a limited exception to allow hedge accounting to continue in a situation where a derivative, which has been
designated as a hedging instrument, is novated to effect clearing with a central counterparty as a result of laws and regulation, if specific conditions
are met. The amendment did not have a significant impact to the Bank.
Financial instruments: presentation (IAS 32)
The amendments to IAS 32, Financial Instruments: Presentation, clarifies the requirements relating to offsetting financial assets and financial liabilities.
The adoption of these amendments did not have a significant impact on the Bank.
Disclosures for non-financial assets (IAS 36)
The IASB issued narrow-scope amendments to the disclosure requirements in IAS 36, Impairment of Assets, to require additional disclosures for an
individual asset or cash-generating unit for which a material impairment loss has been recognized or reversed where its determination is based on fair
value less costs of disposal (FVLCOD). If there has been a change in the valuation technique, the Bank is also required to disclose the reason for
making the change. No additional disclosure was made as a result of this amendment since the Bank did not recognize or reverse an impairment loss
for non-financial assets where the recoverable amount was determined based on FVLCOD.
104 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
C
O
N
T
R
O
L
S
A
N
D
A
C
C
O
U
N
T
I
N
G
P
O
L
I
C
I
E
S
Future accounting developments
The Bank actively monitors developments and changes in standards from the IASB as well as regulatory requirements from the Canadian Securities
Administrators and OSFI.
Effective November 1, 2017
Financial instruments
On July 24, 2014, the IASB issued IFRS 9, Financial Instruments, which will replace IAS 39. The standard covers three broad topics: Classification and
Measurement, Impairment and Hedging. The Bank is required to adopt IFRS 9 beginning on November 1, 2017, with the exception of the own credit
risk of liabilities designated at fair value through profit or loss, which the Bank early adopted effective November 1, 2014.
(For a description of the changes in requirements please refer to Note 5 of the 2015 consolidated financial statements on page 151).
The Bank launched an enterprise wide IFRS 9 adoption project which is governed by an executive steering committee comprising of senior levels of
management from all relevant departments including risk management, finance, and the business units. Project milestones and deliverables are
monitored and reported on a regular basis. Given the size and complexity of the project appropriate resources have been assigned. The Bank
continues to assess the business impact of the new requirements.
Impairment
The adoption of IFRS 9 will have a significant impact on the Bank’s impairment methodology. The IFRS 9 expected credit loss (ECL) model is more
forward looking than the IAS 39 impairment model. The overall strategy in implementing the new requirements is to leverage existing credit models
(including those under Basel) and processes to the extent possible and develop new models and systems to meet the incremental requirements of
IFRS9. While most of the Bank’s loan portfolios use advanced credit models, for certain portfolios the Bank will develop new methodologies and
models taking into account the size and complexity of the portfolios.
The identification, evaluation and interpretation of key new concepts for impairment under IFRS 9 include the determination of significant increase in
credit risk and the need to incorporate macro-economic, forward looking information. This means that application of the standard will require
considerable judgment as to how changes in macro-economic factors will affect ECLs.
Classification and Measurement, and Hedging
The basis of measurement for the Bank’s financial assets may change.
The Bank is currently completing detailed reviews of its business models and the cash flow characteristics of its portfolio holdings to assess the scope
and magnitude of the impact.
The Bank is permitted to defer the adoption of the hedge accounting requirements of the standard to a future period and it has not yet confirmed
its decision on whether to exercise this option.
Effective November 1, 2018
Revenue from contracts with customers
On May 28, 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which provides a single principle based framework to be applied
to all contracts with customers. IFRS 15 replaces the previous revenue standard IAS 18, Revenue, and the related Interpretations on revenue
recognition. The standard scopes out contracts that are considered to be lease contracts, insurance contracts and financial instruments, and as such
will impact the businesses that earn fee and commission revenues. The new standard is a control based model as compared to the existing revenue
standard which is primarily focused on risks and rewards. Under the new standard revenue is recognized when a customer obtains control of a good
or service. Transfer of control occurs when the customer has the ability to direct the use of and obtain the benefits of the good or service. The
standard is effective for the Bank on November 1, 2018, with early adoption permitted, using either a full retrospective approach or a modified
retrospective approach. A majority of the Bank’s revenue generating instruments meet the definition of financial instruments and remain out of scope.
The areas of focus for the Bank will be fees and commission revenues from wealth management and other banking services.
Regulatory developments
The Bank continues to respond to global regulatory developments, such as capital and liquidity requirements under the Basel Committee on Banking
Supervision global standards (Basel III), over-the-counter derivatives reform, consumer protection measures and specific financial reforms, such as the
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Bank monitors these and other developments and is working
to ensure business impacts, if any, are minimized.
Taxpayer Protection and Bank Recapitalization Regime and Proposed Tax Rules
On April 21, 2015, the Federal Government confirmed its intention to implement a “bail-in” regime, “Taxpayer Protection and Bank Recapitalization
Regime”, for the largest six Canadian banks, including The Bank of Nova Scotia, designated as domestic systemically important banks (D-SIBs). The
Federal Government intends to introduce legislative amendments to enhance the resolution toolkit for D-SIBs, including implementation of the
framework for the Taxpayer Protection and Bank Recapitalization Regime, with associated regulations and guidelines to follow. This proposal,
introduced in August 2014, is aimed at ensuring that (i) taxpayers are protected from having to bail out a D-SIB in the highly unlikely event of such an
institution’s failure; and (ii) Canada’s financial system remains strong by clarifying a bank’s shareholders and creditors are responsible for bearing
losses, thereby giving them stronger incentives to monitor the bank’s risk-taking activities. The proposed regime would only apply to certain unsecured
debt and not to customer deposits, and would include a statutory conversion power which would allow for the permanent conversion of eligible
liabilities of a non-viable bank into common shares. D-SIBs would also be subject to minimum loss absorbency requirements to ensure they can
withstand significant losses and emerge from a conversion well capitalized, as well as comprehensive disclosure and reporting requirements. The
regime would apply only to eligible liabilities issued after the implementation of the proposed regime with no retroactive application to existing debt.
The proposed “bail-in” regime has not yet been finalized and these proposed changes could adversely impact the Bank’s cost of funding.
105 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Federal Budget Proposal
The 2015 Canadian Federal Budget proposed tax rules for synthetic equity arrangements which if enacted, would impact the tax deductibility of
Canadian dividends paid or payable after October 31, 2015, in certain circumstances. On July 31, 2015, the Department of Finance (Canada) issued
draft legislation which included certain modifications to the rules. While the Bank continues to assess the impact of this proposal, these proposed tax
rules are not expected to materially affect the Bank’s overall financial results.
Dodd-Frank Act
On December 10, 2013, the Federal Reserve approved a final rule implementing Section 619 of the Dodd-Frank Act, commonly known as the Volcker
Rule. The Volcker Rule impacts our global activities as its reach extends to the Bank and each of its subsidiaries and affiliates (subject to certain
exceptions and exclusions). The Volcker Rule imposes prohibitions and restrictions on banking entities and their affiliates in connection with
proprietary trading and investing in or sponsoring of hedge funds or private equity funds. The Bank has developed an enterprise wide compliance
program to meet the requirements of the Volcker Rule, which became effective on July 21, 2015. These impacts are not expected to materially affect
the Bank’s overall financial results.
On February 18, 2014 the Board of Governors of the Federal Reserve System (“Federal Reserve”) in the U.S. approved the final rule to implement the
enhanced prudential standards and early remediation requirements of sections 165 and 166 of the Dodd-Frank Act (the FBO Rule) for bank holding
companies and foreign banking organizations. Regulation YY implements certain provisions of section 165 that require the Federal Reserve Board to
establish enhanced prudential standards for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion.
With respect to foreign banking organizations, the overall intent of Section 165 and Regulation YY is to strengthen the regulation of the U.S.
operations of foreign banking organizations by requiring home country capital certification consistent with the Basel capital framework, home country
capital stress tests comparable to U.S. standards, maintenance of a liquidity buffer for U.S. branches and agencies and establishment of a U.S. risk
committee with the appointment of a U.S. Chief Risk Officer. The Bank has appointed a Chief Risk Officer for the U.S., has established a U.S. Risk
Committee and will work to help ensure compliance with the final rule by the effective date of July 2016. The Bank is not currently required to form a
U.S. intermediate holding company under the final rule.
On August 5, 2015, the US Securities and Exchange Commission (“SEC”) took several steps toward completing its regulatory framework for security-
based swap dealers and majority security-based swap participants, as required under the Dodd-Frank Act. The SEC unanimously adopted final rules
providing the registration process for security-based swap dealers and majority security-based swap participants, including the detailed forms that
registrants will be required to file. The registration date has not been set and is dependent on additional rulemaking by the SEC. The Bank, which is
currently registered as a swap dealer with the Commodity Futures Trading Commission, anticipates that it will be required to register as a security-
based swap dealer with the SEC.
The Foreign Account Tax Compliance Act (FATCA)
FATCA is U.S. legislation designed to prevent U.S. taxpayers from using accounts held outside of the U.S. to evade taxes. FATCA and, in some
countries, related local regulations now require financial institutions to report annually on specified accounts held outside of the U.S. by U.S.
taxpayers. This reporting is made available to the U.S. Internal Revenue Service either directly or through local regulatory agencies. Under an initiative
known as Global FATCA, more than 100 OECD member countries have committed to automatic exchange of information relating to accounts held by
tax residents of signatory countries, using a Common Reporting Standard (CRS). Implementation of the CRS is scheduled to commence in
January 2016 in countries that have signed on as “early adopters.” More than 40 countries where the Bank has a presence have now signed on to the
CRS, and 17 of these have signed on as early adopters. Under the guidance of an enterprise program office, dedicated project teams in each of the
Bank’s business lines are working to meet all FATCA-related obligations worldwide while minimizing negative impact on the client experience. The
Bank will meet all obligations imposed under FATCA and other tax information exchange regimes, in accordance with local law.
106 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Related party transactions
Compensation of key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank,
directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and
Chief Executive Officer, including Group Heads, and the Chief Financial Officer.
T58 Compensation of the Bank key management personnel
For the year ended October 31 ($ millions)
Salaries and cash incentives(1)
Equity-based payment(2)
Pension and other benefits(1)
Total
(1) Expensed during the year.
(2) Awarded during the year.
2015
$ 13
20
3
$ 36
2014
$ 17
25
3
$ 45
Directors can use some or all of their director fees earned to buy common shares of the Bank at market rates through the Directors’ Share Purchase
Plan. Non-officer directors may elect to receive all or a portion of their fees in the form of deferred stock units which vest immediately. Commencing
in fiscal 2004, the Bank no longer grants stock options to non-officer directors. Refer to Note 26 – Share-based payments for further details of these
plans.
Loans and deposits of key management personnel
T59 Loans and deposits of key management personnel
As at October 31 ($ millions)
Loans
Deposits
2015
$ 5
$ 3
2014
$ 4
$ 5
In Canada, loans are currently granted to key management personnel at market terms and conditions. Effective March 1, 2001, the Bank discontinued
the practice of granting loans to key management personnel in Canada at reduced rates. Any of these loans granted prior to March 1, 2001, are
grandfathered until maturity.
The Bank’s committed credit exposure to companies controlled by directors totaled $182.9 million as at October 31, 2015 (October 31, 2014 –
$9.4 million) while actual utilized accounts were $6.7 million (October 31, 2014 – $3.4 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as
related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions
and are as follows:
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
C
O
N
T
R
O
L
S
A
N
D
A
C
C
O
U
N
T
I
N
G
P
O
L
I
C
I
E
S
T60 Transactions with associates and joint ventures
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
Scotiabank principal pension plan
2015
$ (27)
747
187
84
$
2014
$
$
11
553
223
75
The Bank manages assets of $2.0 billion (October 31, 2014 – $1.8 billion) which is a portion of the Scotiabank principal pension plan assets and
earned $4 million (October 31, 2014 – $4 million) in fees.
Oversight and governance
The oversight responsibilities of the Audit and Conduct Review Committee (ACRC) with respect to related party transactions include reviewing policies
and practices for identifying transactions with related parties that may materially affect the Bank, and reviewing the procedures for ensuring
compliance with the Bank Act for related party transactions. The Bank Act requirements encompass a broader definition of related party transactions
than is set out in GAAP. The Bank has various procedures in place to ensure that related party information is identified and reported to the ACRC on a
semi-annual basis. The ACRC is provided with detailed reports that reflect the Bank’s compliance with its established procedures.
The Bank’s Internal Audit department carries out audit procedures as necessary to provide the ACRC with reasonable assurance that the Bank’s
policies and procedures to identify, authorize and report related party transactions are appropriately designed and operating effectively.
107 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
SUPPLEMENTARY DATA
Geographic information
T61 Net income by geographic segment
2015
2014
2013
Canada U.S. Mexico
Peru Chile Colombia
Other
Inter-
national
Total Canada U.S. Mexico
Peru Chile Colombia
Other
Inter-
national
Total Canada U.S. Mexico
Peru Chile Colombia
Other
Inter-
national
Total
For the fiscal years
($ millions)
Net interest
income
$6,458 $472 $1,246 $1,077 $554
$677
$2,631 $13,115 $6,219 $440 $1,180 $935 $407
$726
$2,443 $12,350 $5,706 $461 $1,048 $895 $357
$657
$2,311 $11,435
Non-interest
income
6,272
882
561
601 231
372
2,163
11,082
7,071 810
599 534 226
391
2,049
11,680
5,731 746
578 493 236
336
2,239
10,359
Provision for
credit losses
728
6
260
266 108
246
268
1,882
662
6
240 267
74
145
309
1,703
472
38
130 246 101
102
199
1,288
Non-interest
expenses
6,936
507
1,160
744 431
541
2,745
13,064
6,986 513 1,154 645 348
556
2,495
12,697
6,441 464 1,050 628 332
484
2,414
11,813
Provision for
income taxes
1,038
267
27
195
24
84
401
2,036
1,156 237
35 175
16
141
340
2,100
956 190
61 166
16
132
362
1,883
Total
$4,028 $574 $ 360 $ 473 $222
$178
$1,380 $ 7,215 $4,486 $494 $ 350 $382 $195
$275
$1,348 $ 7,530 $3,568 $515 $ 385 $348 $144
$275
$1,575 $ 6,810
Corporate
adjustments
Net income
T62 Loans and acceptances by geography(1)
(2)
$ 7,213
(232)
$ 7,298
(200)
$ 6,610
As at October 31 ($ billions)
2015
2014
2013
2012
2011
2015
2011
Percentage mix
Canada
Atlantic provinces
Quebec
Ontario
Manitoba and Saskatchewan
Alberta
British Columbia
U.S.
Mexico
Peru
Chile
Colombia
Other International
Latin America
Europe
Caribbean and Central America
Asia and Other
Total allowance for loan losses(2)
Total loans and acceptances net of
allowance for loan losses
$ 25.6
28.5
150.7
16.5
49.6
44.5
$ 25.5
27.7
145.1
15.1
46.3
43.0
$ 23.5
27.5
143.2
13.6
43.2
40.9
$ 21.5
22.3
123.7
11.5
36.7
35.2
315.4
302.7
291.9
250.9
30.2
18.6
17.0
16.4
8.7
6.7
9.3
31.8
19.0
66.8
23.5
16.0
13.3
13.9
9.1
5.3
6.3
27.7
20.0
59.3
20.0
12.9
11.4
13.1
7.7
4.6
6.4
27.0
21.1
59.1
20.7
10.7
10.1
12.6
6.7
3.6
6.0
25.9
17.2
52.7
$ 19.6
20.5
109.7
10.4
33.9
32.2
226.3
16.7
10.3
8.1
11.2
0.2
9.0
8.7
17.8
21.1
56.6
5.4%
6.0
31.8
3.5
10.5
9.4
66.6
6.4
3.9
3.6
3.5
1.9
1.4%
2.0
6.7
4.0
6.0%
6.2
33.3
3.1
10.3
9.8
68.7
5.1
3.1
2.5
3.4
0.1
2.7%
2.6
5.4
6.4
14.1
17.1
$ 473.1
$ 437.8
$ 416.1
$ 364.4
$ 329.4
100.0%
100.0%
(4.2)
(3.6)
(3.3)
(3.0)
(2.7)
$ 468.9
$ 434.2
$ 412.8
$ 361.4
$ 326.7
(1) Prior periods have been restated to reflect the current period presentation.
(2) Total allowance includes a collective allowance on performing loans of $1,404 million in 2015 and $1,272 million for previous years.
The increase reflects an overall increase in the collective allowance of $60 million and a $72 million reallocation from reserves against unfunded commitments and other off-balance-sheet items.
108 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T63 Gross impaired loans by geographic segment
As at October 31 ($ millions)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Total
2015(1)
2014(1)(2)
2013(1)
2012(1)
$ 1,189
11
271
603
405
356
1,823
$ 1,116
11
314
423
381
332
1,623
$ 1,022
184
223
326
440
179
1,327
$ 1,182
139
145
266
520
38
1,332
$ 4,658
$ 4,200
$ 3,701
$ 3,622
2011(1)
$ 1,168
8
152
230
614
–
1,229
$ 3,401
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(2) Prior period amounts have been restated to conform with current period presentation.
T64 Provision against impaired loans by geographic segment
For the fiscal years ($ millions)
2015
2014(1)
2013(1)
2012(1)
2011(1)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Total
(1) Prior period amounts have been restated to conform with current period presentation.
T65 Cross-border exposure to select countries(1)
$
727
6
260
265
108
247
269
$
662
6
240
267
74
146
308
$
473
38
130
244
100
101
202
$
517
20
91
180
82
22
240
$
621
(12)
144
80
64
–
242
$ 1,882
$ 1,703
$ 1,288
$ 1,152
$ 1,136
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
Loans
Trade
Interbank
deposits
Government
and other
securities
Investment in
subsidiaries
and affiliates
Other
As at
October 31
($ millions)
Asia
China
India
Thailand
South Korea
Hong Kong
Malaysia
Japan
Taiwan
Others(2)
Total
Latin America
Chile
Mexico
Brazil
Peru
Colombia
Others(3)
Total
Caribbean and
Central America
Panama
Costa Rica
El Salvador
Dominican Republic
Jamaica
Others(4)
$
5,225
2,416
101
1,786
1,517
1,072
252
914
1,004
$ 1,624
711
47
172
81
–
52
43
437
$
248
–
497
–
207
1
60
153
2
$
451
6
–
328
–
–
327
36
–
$
635
–
2,415
–
–
288
–
–
–
$ 14,287
$ 3,166
$ 1,167
$ 1,148
$
3,338
$
2015
Total
8,248
3,144
3,074
2,626
1,827
1,423
730
1,173
1,460
$
2014
Total
9,087
3,323
2,670
2,822
1,761
1,486
1,754
1,273
2,156
$ 23,705
$ 26,332
$
6,388
6,374
6,050
6,112
2,476
667
$
6,126
5,254
5,384
5,280
2,606
667
$
$
$
66
11
15
340
22
61
39
27
17
598
36
66
583
15
11
–
$
$
$
$
2,797
2,555
2,852
2,397
674
153
$
748
595
2,169
186
253
16
$ 11,428
$ 3,966
$
3,392
1,255
542
859
69
1,676
$
213
89
71
33
8
56
–
–
61
19
–
–
80
39
–
–
–
–
6
45
$
12
172
240
76
5
–
$
2,794
2,986
145
3,418
1,532
498
$
506
$ 11,374
$
712
$ 28,066
$ 25,316
$
$
–
–
–
–
–
69
69
$
$
–
866
597
–
669
459
$
2,591
$
3
3
–
–
–
–
6
$
3,647
2,213
1,209
892
747
2,267
$
2,653
1,877
1,016
1,014
501
1,999
$ 10,974
$
9,060
Total
$
7,793
$
469
$
As at October 31, 2015
$ 33,509
$ 7,602
$ 1,292
As at October 31, 2014
$ 28,601
$12,431
$
972
$ 1,723
$ 2,249
$ 17,304
$ 1,316
$ 62,745
$ 15,305
$ 1,151
$ 60,708
(1) Cross-border exposure represents a claim, denominated in a currency other than the local one, against a borrower in a foreign country on the basis of ultimate risk. Totals may not add due to rounding.
(2) Includes Indonesia, Macau, Singapore, Vietnam and Turkey.
(3) Includes Venezuela and Uruguay
(4) Includes other English and Spanish Caribbean countries, such as Bahamas, Barbados, British Virgin Islands, Trinidad & Tobago, Turks & Caicos.
109 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit Risk
T66 Loans and acceptances by type of borrower
As at October 31 ($ billions)
Residential mortgages
Personal loans and credit cards
Personal
Financial services
Non-bank
Bank(1)
Wholesale and retail
Real estate and construction
Oil and gas
Transportation
Automotive
Agriculture
Hospitality and leisure
Mining and primary metals
Utilities
Health care
Technology and media
Chemical
Food and beverage
Forest products
Other(2)
Sovereign(3)
Business and government
Total allowance for loan losses
Total loans and acceptances net of allowance for loan losses
(1) Deposit taking institutions and securities firms.
(2) Other related to $2.3 in financing products, $1.5 in services and $1.5 in wealth management (2014 – $6.5, $1.3, and $1.2 respectively).
(3) Includes central banks, regional and local governments, and supra-national agencies.
2015
Balance
% of total
2014
2013
$ 217.5
91.5
$ 309.0
46.0%
19.3
65.3%
$ 212.6
84.2
$ 209.9
76.0
$ 296.8
$ 285.9
$
14.3
6.7
21.5
19.5
16.5
9.1
10.4
8.1
3.6
7.3
5.8
5.0
9.1
2.0
4.9
1.7
13.6
5.0
3.0%
1.4
4.6
4.1
3.5
1.9
2.2
1.7
0.8
1.5
1.2
1.0
1.9
0.4
1.1
0.4
2.9
1.1
$
13.4
8.9
16.6
15.5
12.8
8.1
8.1
7.1
3.6
6.0
5.9
3.5
5.4
1.4
3.9
1.3
15.3
4.2
$
11.7
12.1
14.1
14.2
10.4
7.8
7.4
6.1
3.4
4.7
4.4
3.6
5.3
1.3
3.1
1.5
14.9
4.2
$ 164.1
$ 473.1
(4.2)
$ 468.9
34.7%
$ 141.0
$ 130.2
100.0%
$ 437.8
$ 416.1
(3.6)
(3.3)
$ 434.2
$ 412.8
T67 Off-balance sheet credit instruments
As at October 31 ($ billions)
Commitments to extend credit(1)
Standby letters of credit and letters of guarantee
Securities lending, securities purchase commitments and other
Total
(1) Excludes commitments which are unconditionally cancellable at the Bank’s discretion at any time.
2015
2014
2013
2012
$ 166.4
30.9
42.8
$ 137.3
26.0
38.9
$ 240.1
$ 202.2
$ 118.8
24.2
28.3
$ 171.3
$ 109.9
22.1
16.2
$ 148.2
2011
$ 104.7
21.1
14.2
$ 140.0
110 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T68 Changes in net impaired loans(1)(2)
For the fiscal years ($ millions)
Gross impaired loans
Balance at beginning of year
Net additions(3)
New additions
Declassifications
Payments
Sales
Write-offs
Residential mortgages
Personal loans
Credit cards
Business and government
Foreign exchange and other
Balance at end of year
Allowance for credit losses on impaired loans
Balance at beginning of year
Provision for credit losses
Write-offs
Recoveries
Residential mortgages
Personal loans
Credit cards
Business and government
Foreign exchange and other
Balance at end of year
Net impaired loans
Balance at beginning of year
Net change in gross impaired loans
Net change in allowance for credit losses on impaired loans
Balance at end of year
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
2015
2014
2013
2012
2011
$ 4,200
$ 3,701
$ 3,622
$ 3,401
$ 3,714
3,763
(13)
(1,254)
(11)
2,485
(109)
(1,310)
(490)
(319)
(2,228)
201
3,767
(32)
(1,295)
(141)
2,299
(69)
(1,027)
(463)
(338)
(1,897)
97
2,863
(208)
(1,218)
(9)
1,428
(91)
(728)
(449)
(201)
(1,469)
120
2,825
(194)
(1,183)
(36)
1,412
(66)
(733)
(299)
(200)
(1,298)
107
2,790
–
(1,708)
–
1,082
(130)
(374)
(628)
(192)
(1,324)
(71)
$ 4,658
$ 4,200
$ 3,701
$ 3,622
$ 3,401
$ 2,198
1,916
(2,228)
$ 1,893
1,668
(1,897)
$ 1,617
1,272
(1,469)
$ 1,406
1,135
(1,298)
$ 1,385
1,098
(1,324)
35
260
82
52
429
258
68
224
107
93
492
42
40
179
113
111
443
30
30
185
76
80
371
3
33
71
152
61
317
(70)
$ 2,573
$ 2,198
$ 1,893
$ 1,617
$ 1,406
$ 2,002
458
(375)
$ 1,808
499
(305)
$ 2,005
79
(276)
$ 1,995
221
(211)
$ 2,329
(313)
(21)
$ 2,085
$ 2,002
$ 1,808
$ 2,005
$ 1,995
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(2) Prior period amounts have been restated to conform with current period presentation.
(3) 2011 information has been presented in aggregate for declassification, payments and sales in “payments”.
111 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T69 Provision for credit losses
For the fiscal years ($ millions)
Gross provisions
Reversals
Recoveries
Net provisions for credit losses on impaired loans
Collective provision (reversals) on performing loans
Total net provisions for credit losses
T70 Provision for credit losses against impaired loans by type of borrower
For the fiscal years ($ millions)
Residential mortgages
Personal loans and credit cards
Personal
Financial services
Non-bank
Bank
Wholesale and retail
Real estate and construction
Oil and gas
Transportation
Automotive
Agriculture
Hospitality and leisure
Mining and primary metals
Utilities
Health care
Technology and media
Chemical
Food and beverage
Forest products
Other
Sovereign
Business and government
Total provisions against impaired loans
2015
2014
2013
2012
2011
$ 2,435
(68)
(485)
1,882
60
$ 2,312
(99)
(510)
1,703
–
$ 1,829
(98)
(443)
1,288
–
$ 1,637
(110)
(375)
1,152
100
$ 1,653
(168)
(349)
1,136
(60)
$ 1,942
$ 1,703
$ 1,288
$ 1,252
$ 1,076
2015
2014
2013
2012
$
118
1,526
$
–
1,414
$
117
1,004
$ 1,644
$ 1,414
$ 1,121
$
$
(1)
(1)
62
30
48
23
9
12
1
11
–
9
4
4
16
4
6
1
238
$
5
–
58
61
3
12
1
7
44
12
24
15
32
–
9
–
6
–
289
$
–
–
36
43
18
(11)
–
4
9
–
10
5
6
–
2
–
42
3
167
$
$
112
875
987
–
1
30
25
4
5
2
17
10
(1)
2
13
7
–
(1)
7
41
3
165
$ 1,882
$ 1,703
$ 1,288
$ 1,152
112 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
T71 Impaired loans by type of borrower
As at October 31 ($ millions)
Residential mortgages
Personal loans and credit cards
Personal
Financial services
Non-bank
Bank
Wholesale and retail
Real estate and construction
Oil and gas
Transportation
Automotive
Agriculture
Hospitality and leisure
Mining and primary metals
Utilities
Health care
Technology and media
Chemical
Food and beverage
Forest products
Other
Sovereign
Business and government
Total
2015(1)
Allowance
for credit
losses
$
529
1,327
$ 1,856
9
–
174
120
61
43
12
39
8
17
30
30
14
23
37
5
91
4
717
$
Net
$ 1,139
5
$ 1,144
12
–
86
146
104
109
23
56
52
10
244
16
4
–
27
14
32
6
941
$
$ 2,573
$ 2,085
Gross
$ 1,668
1,332
$ 3,000
21
–
260
266
165
152
35
95
60
27
274
46
18
23
64
19
123
10
$ 1,658
$ 4,658
Gross
$ 1,491
1,254
$ 2,745
15
1
194
270
44
88
14
82
168
62
265
51
16
2
54
4
113
12
$ 1,455
$ 4,200
2014(1)(2)
Allowance
for credit
losses
$
359
1,225
$ 1,584
5
1
127
91
51
24
4
41
80
22
20
26
9
–
18
3
88
4
614
$
Net
$ 1,132
29
$ 1,161
10
–
67
179
(7)
64
10
41
88
40
245
25
7
2
36
1
25
8
841
$
$ 2,198
$ 2,002
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(2) Prior period amounts have been restated to conform with current period presentation.
T72 Total credit risk exposures by geography(1)(2)
As at October 31 ($ millions)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Europe
Caribbean and Central America
Latin America (other)
Other
Total
As at October 31, 2014
2015
Non-Retail
$
Drawn
73,408
89,288
13,355
16,106
9,312
5,245
19,128
18,950
7,339
28,811
Undrawn
exposures(3)
Other
Retail
Total
$ 30,861
25,930
713
1,228
390
86
6,306
2,137
672
4,111
$
40,766
38,067
1,503
3,236
1,433
480
14,614
1,838
514
3,130
$ 290,918
–
8,237
6,437
8,642
4,088
–
16,906
437
–
$ 435,953
153,285
23,808
27,007
19,777
9,899
40,048
39,831
8,962
36,052
2014
Total
$ 405,718
116,969
20,775
21,391
16,940
10,507
29,271
34,567
7,111
37,270
$ 280,942
$ 232,611
$ 72,434
$ 59,388
$ 105,581
$
85,909
$ 335,665
$ 794,622
$ 700,519
$ 322,611
$ 700,519
(1) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure. Includes all credit risk portfolios and excludes available-for-sale equities and other assets.
(2) Amounts represent exposure at default.
(3) Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, derivatives, securitization and repo-style transactions after collateral.
T73 AIRB credit risk exposures by maturity(1)(2)
As at October 31 ($ millions)
Residual maturity
Non-retail
Less than 1 year
One to 5 years
Over 5 years
Total non-retail
Retail
Less than 1 year
One to 5 years
Over 5 years
Revolving credits(4)
Total retail
Total
As at October 31, 2014
2015
Drawn
Undrawn
exposures(3)
Other
$
$
$
$
$
$
133,066
84,140
8,409
225,615
32,025
160,660
20,682
36,850
250,217
475,832
430,397
$
$
$
$
$
$
20,754
44,865
1,779
67,398
13,343
–
–
17,705
31,048
98,446
84,703
$
59,780
34,956
7,749
$ 102,485
$
$
–
–
–
–
–
$ 102,485
$
83,171
Total
213,600
163,961
17,937
395,498
45,368
160,660
20,682
54,555
281,265
676,763
598,271
$
$
$
$
$
$
2014
Total
$ 179,376
128,307
14,709
$ 322,392
$
48,916
154,437
20,138
52,388
$ 275,879
$ 598,271
(1) Remaining term to maturity of the credit exposure. Includes all credit risk portfolios and excludes available-for-sale equities and other assets.
(2) Exposure at default, before credit risk mitigation.
(3) Off-balance sheet lending instruments, such as letters of credit, letters of guarantee, securitization, derivatives and repo-style transactions after collateral.
(4) Credit cards and lines of credit with unspecified maturity.
113 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T74 Total credit risk exposures and risk-weighted assets
AIRB
Standardized(1)
Total
2015
2014
Total
As at October 31 ($ millions)
Default(2)
assets(3)
Default(2)
assets(3)
Default(2)
assets(3)
Exposure at
CET1 risk-
weighted
Exposure at
CET1 risk-
weighted
Exposure at
CET1 risk-
weighted
Exposure at
Default(2)
CET1 risk-
weighted
assets(3)
Non-retail
Corporate
Drawn
Undrawn
Other(4)
Bank
Drawn
Undrawn
Other(4)
Sovereign
Drawn
Undrawn
Other(4)
Total Non-retail
Drawn
Undrawn
Other(4)
Retail(5)
Retail residential mortgages
Drawn
Secured lines of credit
Drawn
Undrawn
Qualifying retail revolving
exposures (QRRE)
Drawn
Undrawn
Other retail
Drawn
Undrawn
Total retail
Drawn
Undrawn
Securitization exposures
Trading derivatives
CVA derivatives
Subtotal
Equities
Other assets
Total credit risk, before scaling
$ 110,558
53,939
37,531
$ 67,579
24,130
12,605
$ 46,956
4,976
2,894
$ 45,257
4,905
2,871
$ 157,514
58,915
40,425
$ 112,836
29,035
15,476
$ 130,621
47,082
31,678
$ 90,240
22,314
11,496
202,028
104,314
54,826
53,033
256,854
157,347
209,381
124,050
24,298
11,330
14,748
50,376
90,759
2,129
1,016
93,904
225,615
67,398
53,295
6,362
3,689
3,136
13,187
3,398
354
36
3,788
77,339
28,173
15,777
2,867
56
158
3,081
5,504
4
–
5,508
55,327
5,036
3,052
1,982
37
117
2,136
805
1
–
806
27,165
11,386
14,906
53,457
96,263
2,133
1,016
99,412
8,344
3,726
3,253
15,323
4,203
355
36
4,594
48,044
4,943
2,988
280,942
72,434
56,347
125,383
33,116
18,765
25,883
10,954
8,195
45,032
76,107
1,352
805
78,264
232,611
59,388
40,678
7,500
3,356
1,486
12,342
4,858
140
33
5,031
102,598
25,810
13,015
$ 346,308
$ 121,289
$ 63,415
$ 55,975
$ 409,723
$ 177,264
$ 332,677
$ 141,423
$ 187,656
$ 11,509
$ 27,934
$ 13,458
$ 215,590
$ 24,967
$ 211,341
$ 19,766
187,656
11,509
27,934
13,458
215,590
24,967
211,341
19,766
18,804
12,631
31,435
16,910
17,705
34,615
26,847
712
27,559
250,217
31,048
4,197
1,133
5,330
10,031
2,241
12,272
12,701
178
12,879
38,438
3,552
–
–
–
–
–
–
–
–
–
–
–
–
26,466
–
26,466
54,400
–
19,301
–
19,301
32,759
–
18,804
12,631
31,435
16,910
17,705
34,615
53,313
712
54,025
304,617
31,048
4,197
1,133
5,330
10,031
2,241
12,272
32,002
178
32,180
71,197
3,552
19,115
12,209
31,324
16,011
16,196
32,207
47,080
659
47,739
293,547
29,064
4,487
1,282
5,769
9,356
2,105
11,461
28,848
161
29,009
62,457
3,548
$ 281,265
$ 41,990
$ 54,400
$ 32,759
$ 335,665
$ 74,749
$ 322,611
$ 66,005
20,956
28,234
–
2,713
8,232
–
44
–
–
46
–
7,183
21,000
28,234
–
2,759
8,232
7,183
19,982
25,249
–
4,621
8,041
5,632
$ 676,763
$ 174,224
$ 117,859
$ 95,963
$ 794,622
$ 270,187
$ 700,519
$ 225,722
2,985
–
2,985
–
–
50,873
–
24,265
2,985
50,873
2,985
24,265
4,269
52,288
4,269
23,065
factor
$ 679,748
$ 177,209
$ 168,732
$ 120,228
$ 848,480
$ 297,437
$ 757,076
$ 253,056
Add-on for 6% scaling factor(6)
–
10,597
–
–
–
10,597
–
8,831
Total credit risk
$ 679,748
$ 187,806
$ 168,732
$ 120,228
$ 848,480
$ 308,034
$ 757,076
$ 261,887
(1) Net of specific allowances for credit losses.
(2) Outstanding amount for on-balance sheet exposures and loan equivalent amount for off-balance sheet exposures, before credit risk mitigation.
(3) As at October 31, 2015, CVA risk-weighted assets were calculated using scalars of 0.64, 0.71, and 0.77 for the CET1, Tier 1 and Total capital ratios, respectively (scalars of 0.57, 0.65, and 0.77 in 2014).
(4) Other exposures include off-balance sheet lending instruments, such as letters of credit, letters of guarantee, non-trading derivatives and repo-style exposures, after collateral.
(5) During the year ended October 31, 2015, the Bank implemented new retail probability of default and loss given default models for mortgages and term loans.
(6) Basel Committee imposed a scaling factor (6%) on risk-weighted assets for Internal ratings-based credit risk portfolios.
114 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Revenues and Expenses
T75 Volume/rate analysis of change in net interest income
TEB(1)
($ millions)
Net interest income
Total earning assets
Total interest-bearing liabilities
Change in net interest income
Assets
Deposits with banks
Trading assets
Securities purchased under resale agreements
Investment securities
Loans:
Residential mortgages
Personal loans and credit cards
Business and government
Total loans
Total earning assets
Liabilities
Deposits:
Personal
Business and government
Banks
Total deposits
Obligations related to securities sold under repurchase
agreements
Subordinated debentures
Other interest-bearing liabilities
Total interest-bearing liabilities
(1) Refer to non-GAAP measures on page 13. Totals may not add due to rounding.
T76 Provision for income taxes
For the fiscal years ($ millions)
Income taxes
Provision for income taxes
Other taxes
Payroll taxes
Business and capital taxes
Harmonized sales tax and other
Total other taxes
Total income and other taxes(2)
Net income before income taxes
Effective income tax rate (%)
Total tax rate (%)(3)
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
Increase (decrease) due to change in:
2015 versus 2014
Increase (decrease) due to change in:
2014 versus 2013
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
$
$
$
$
$
$
$
$
1,304
428
876
48
(2)
17
46
127
597
471
1,195
$
$
$
(558)
(466)
(92)
(19)
52
(34)
(95)
(195)
(77)
(190)
(462)
$
1,304
$
(558)
$
125
290
(8)
407
11
11
(1)
$
(261)
(393)
28
(626)
(53)
(28)
241
$
428
$
(466)
$
746
(38)
784
29
50
(17)
(49)
(68)
520
281
733
746
(136)
(103)
20
(219)
(42)
(17)
240
(38)
$ 1,246
381
$
$
865
23
10
27
21
156
583
426
1,165
$
$
$
(719)
(811)
92
(39)
(5)
(38)
(121)
33
(72)
(477)
(516)
$ 1,246
$
(719)
$
85
289
18
392
36
(106)
59
$
(267)
(346)
32
(581)
(46)
(29)
(155)
$
$
$
$
$
527
(430)
957
(16)
5
(11)
(100)
189
511
(51)
649
527
(182)
(57)
50
(189)
(10)
(135)
(96)
$
381
$
(811)
$
(430)
2015
2014
2013(1)
2015
versus
2014
$ 1,853
$ 2,002
$ 1,737
(7)%
329
361
310
1,000
312
314
295
921
277
274
268
819
$ 2,853
$ 2,923
$ 2,556
$ 9,066
$ 9,300
$ 8,347
20.4
28.3
21.5
28.6
20.8
27.9
6
15
5
9
(2)%
(3)%
(1.1)
(0.3)
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014.
(2) Comprising $1,849 of Canadian taxes (2014 – $1,679; 2013 – $1,403) and $1,004 of foreign taxes (2014 – $1,244; 2013 – $1,153).
(3) Total income and other taxes as a percentage of net income before income and other taxes.
115 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T77 Assets under administration and management
($ billions)
Assets under administration
Personal
Retail brokerage
Investment management and trust
Mutual funds
Institutional
Total
Assets under management
Personal
Mutual funds
Institutional
Total
T78 Assets under administration and management
As at October 31 ($ billions)
Assets under administration
Balance at beginning of year
Net inflows (outflows)(1)
Impact of market changes, including foreign currency translation
Balance at end of year
(1) Includes impact of business acquisitions/dispositions of nil (2014 – $(0.9); 2013 – $15.5).
2015
2014
2013
2012
$
155.9
100.2
256.1
130.7
67.1
$
148.8
95.1
243.9
122.5
61.1
$
132.9
85.2
218.1
106.8
52.9
$
117.6
79.9
197.5
82.2
48.3
$
453.9
$
427.5
$
377.8
$
328.0
$
43.0
117.7
18.3
$
35.7
110.6
18.5
$
$
29.7
96.5
19.3
24.3
73.8
16.6
$
179.0
$
164.8
$
145.5
$
114.7
2015
2014
2013
$
427.5
14.3
12.1
$
377.8
22.0
27.7
$
328.0
32.6
17.2
$
453.9
$
427.5
$
377.8
As at October 31 ($ billions)
2015
2014
2013
Assets under management
Balance at beginning of year
Net inflows (outflows)(1)
Impact of market changes, including foreign currency translation
Balance at end of year
(1) Includes impact of business acquisitions/dispositions of nil (2014 – $(0.9) billion; 2013 – $15.7).
T79 Fees paid to the shareholders’ auditors
For the fiscal years ($ millions)
Audit services
Audit-related services
Tax services outside of the audit scope
Other non-audit services
Total
$
164.8
8.2
6.0
$
145.5
6.5
12.8
$
114.7
20.9
9.9
$
179.0
$
164.8
$
145.5
2015
25.5
0.9
–
0.4
26.8
$
$
2014
24.6
0.6
–
0.7
25.9
$
$
2013
24.4
1.2
0.1
0.4
26.1
$
$
2012
20.7
0.5
0.1
0.5
21.8
$
$
116 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
Selected Quarterly Information
T80 Selected quarterly information
As at and for the quarter ended
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2015
2014
Operating results ($ millions)
Net interest income
Net interest income (TEB(1))
Non-interest income
Non-interest income (TEB(1))
Total revenue
Total revenue (TEB(1))
Provision for credit losses
Non-interest expenses
Provision for income taxes
Provision for income taxes (TEB(1))
Net income
Net income attributable to common shareholders
Operating performance
Basic earnings per share ($)
Diluted earnings per share ($)
Adjusted diluted earnings per share ($)(1)
Return on equity (%)(1)
Productivity ratio (%)(TEB(1))
Core banking margin (%)(TEB(1))
Financial position information ($ billions)
Cash and deposits with financial institutions
Trading assets
Loans
Total assets
Deposits
Common equity
Preferred shares
Assets under administration(1)
Assets under management(1)
Capital and liquidity measures
Common Equity Tier 1 (CET1) capital ratio (%)
Tier 1 capital ratio (%)
Total capital ratio (%)
Leverage ratio (%)(2)
CET1 risk-weighted assets ($ billions)(3)
Liquidity coverage ratio (LCR)(%)(4)
Credit quality
Net impaired loans ($ millions)(5)
Allowance for credit losses ($ millions)
Net impaired loans as a % of loans and acceptances(5)
Provision for credit losses as a % of average net loans and acceptances
(annualized)
Common share information
Share price ($) (TSX)
High
Low
Close
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends per share ($)
Dividend yield (%)(6)
Market capitalization ($ billions) (TSX)
Book value per common share ($)
Market value to book value multiple
Price to earnings multiple (trailing 4 quarters)
3,371
3,373
2,754
2,825
6,125
6,198
551
3,286
445
518
1,843
1,754
1.46
1.45
1.46
14.2
53.0
2.35
73.9
99.1
458.6
856.5
600.9
49.1
2.9
453.9
179.0
10.3
11.5
13.4
4.2
358.0
124
2,085
4,197
0.44
3,354
3,357
2,770
2,875
6,124
6,232
480
3,334
463
571
1,847
1,767
1.46
1.45
1.47
14.7
53.5
2.40
82.8
103.7
451.0
863.1
602.8
48.7
2.9
459.8
182.9
10.4
11.6
13.5
4.1
348.0
127
2,096
4,125
0.45
3,198
3,202
2,739
2,852
5,937
6,054
448
3,224
468
585
1,797
1,727
1.43
1.42
1.43
15.1
53.3
2.41
60.7
113.1
436.0
837.2
575.3
46.7
2.9
445.8
176.8
10.6
11.9
13.9
4.1
328.7
123
2,172
3,694
0.48
3,169
3,174
2,694
2,781
5,863
5,955
463
3,197
477
569
1,726
1,649
1.36
1.35
1.36
14.2
53.7
2.41
65.9
109.6
439.9
851.9
584.6
46.9
2.9
440.8
173.8
10.3
11.5
13.2
4.1
335.2
N/A
2,266
3,788
0.50
3,099
3,105
2,648
2,743
5,747
5,848
574
3,361
374
475
1,438
1,343
1.10
1.10
1.11
11.9
57.5
2.39
56.7
113.2
424.3
805.7
554.0
45.0
2.9
427.5
164.8
10.8
12.2
13.9
N/A
312.5
N/A
2,002
3,641
0.46
3,150
3,155
3,337
3,421
6,487
6,576
398
3,140
598
687
2,351
2,267
1.86
1.85
1.86
20.6
47.8
2.41
50.0
120.4
418.9
791.5
545.1
44.2
2.9
421.9
164.8
10.9
12.3
14.1
N/A
307.8
N/A
1,877
3,406
0.43
3,051
3,054
2,674
2,755
5,725
5,809
375
2,995
555
639
1,800
1,699
1.40
1.39
1.40
16.3
51.6
2.42
59.8
117.7
418.9
791.8
551.5
43.0
3.2
419.0
158.8
9.8
11.3
13.3
N/A
300.2
N/A
1,941
3,364
0.45
3,005
3,008
2,640
2,717
5,645
5,725
356
3,105
475
555
1,709
1,607
1.33
1.32
1.34
15.4
54.2
2.35
55.3
113.0
414.8
782.8
539.4
42.4
3.8
393.1
153.3
9.4
11.2
13.5
N/A
302.1
N/A
1,833
3,361
0.43
0.47
0.42
0.41
0.42
0.53
0.37
0.36
0.34
64.15
52.58
61.49
1,205
1,227
1,203
0.70
4.8
74.0
40.80
1.5
10.8
67.29
60.52
64.19
1,210
1,231
1,208
0.68
4.3
77.5
40.30
1.6
12.0
67.73
61.30
66.53
1,210
1,231
1,210
0.68
4.2
80.5
38.61
1.7
11.6
71.18
60.75
61.06
1,215
1,220
1,210
0.66
4.0
73.9
38.75
1.6
10.7
74.39
64.05
69.02
1,217
1,223
1,217
0.66
3.8
84.0
36.96
1.9
12.1
74.93
66.18
74.01
1,217
1,225
1,217
0.64
3.6
90.1
36.34
2.0
12.6
66.72
59.92
66.60
1,215
1,222
1,217
0.64
4.0
81.0
35.33
1.9
12.3
66.75
60.56
61.10
1,209
1,217
1,215
0.62
3.9
74.2
34.87
1.8
11.7
(1) Refer to page 13 for a discussion of non-GAAP measures.
(2) Effective November 1, 2014, the Bank is subject to OSFI’s Leverage Requirements Guideline.
(3) Credit valuation adjustment (CVA) risk-weighted assets were calculated using scalars of 0.64, 0.71 and 0.77 to compute CET1, Tier1 and Total capital ratios, respectively in 2015.
(4) LCR is based on OSFI’s guideline, Liquidity Adequacy Requirement (LAR), effective commencing 2015.
(5) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(6) Based on the average of the high and low common share price for the period.
117 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Eleven-Year Statistical Review
T81 Consolidated Statement of Financial Position
As at October 31 ($ millions)
Assets
Cash and deposits with financial institutions
Precious metals
Trading assets
Securities
Loans
Other
Financial instruments designated at fair value through profit or loss
Securities purchased under resale agreements and securities borrowed
Derivative financial instruments
Investment securities
Loans
Residential mortgages
Personal and credit cards
Business and government
Allowance for credit losses
Other
Customers’ liability under acceptances
Property and equipment
Investments in associates
Goodwill and other intangible assets
Deferred tax assets
Other assets
Liabilities
Deposits
Personal
Business and government(2)
Financial institutions
Financial instruments designated at fair value through profit or loss(2)
Other
Acceptances
Obligations related to securities sold short
Derivative financial instruments
Obligations related to securities sold under repurchase agreements and securities lent
Subordinated debentures
Capital instruments
Other liabilities
Equity
Common equity
Common shares
Retained earnings
Accumulated other comprehensive income (loss)
Other reserves
Total common equity
Preferred shares
Total equity attributable to equity holders of the Bank
Non-controlling interests
Non-controlling interests in subsidiaries
Capital instrument equity holders
Total equity
IFRS
2015
2014
2013(1)
2012(1)
2011
$
73,927
10,550
$
56,730
7,286
$
53,338
8,880
$
47,337
12,387
$
38,723
9,249
78,380
18,341
2,419
99,140
320
87,312
41,003
43,216
217,498
91,477
153,850
462,825
4,197
458,628
10,296
2,286
4,033
11,449
2,034
12,303
42,401
95,363
14,508
3,377
113,248
111
93,866
33,439
38,662
212,648
84,204
131,098
427,950
3,641
424,309
9,876
2,272
3,461
10,884
1,763
9,759
38,015
84,196
11,225
1,068
96,489
106
82,533
24,503
34,319
209,865
76,008
119,615
405,488
3,273
402,215
10,556
2,214
5,326
10,704
1,938
10,523
41,261
74,639
12,857
100
87,596
197
66,189
30,338
33,376
175,630
68,277
111,648
355,555
2,977
352,578
8,932
2,218
4,791
8,692
2,273
11,321
38,227
62,192
13,607
–
75,799
375
47,181
37,322
30,176
161,685
63,317
96,743
321,745
2,689
319,056
8,172
2,504
4,434
7,639
2,214
11,579
36,542
$ 856,497
$ 805,666
$ 743,644
$ 668,225
$ 594,423
$ 190,044
375,144
35,731
600,919
1,486
$ 175,163
342,367
36,487
554,017
465
$ 171,048
313,820
33,019
517,887
174
$ 138,051
293,460
34,178
465,689
157
$ 133,025
262,833
25,376
421,234
101
10,296
20,212
45,270
77,015
6,182
–
41,638
200,613
803,018
15,141
31,316
2,455
173
49,085
2,934
52,019
1,460
–
53,479
9,876
27,050
36,438
88,953
4,871
–
34,785
201,973
756,455
15,231
28,609
949
176
44,965
2,934
47,899
1,312
–
49,211
10,556
24,977
29,267
77,508
5,841
–
32,047
180,196
698,257
14,516
25,068
388
193
40,165
4,084
44,249
1,138
–
45,387
8,932
18,622
35,323
56,968
10,143
–
32,726
162,714
628,560
13,139
21,775
(745)
166
34,335
4,384
38,719
946
–
8,172
15,450
40,236
38,216
6,923
2,003
29,848
140,848
562,183
8,336
18,421
(497)
96
26,356
4,384
30,740
626
874
39,665
32,240
$ 856,497
$ 805,666
$ 743,644
$ 668,225
$ 594,423
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014.
(2) Certain prior period amounts have been restated to conform with current period presentation.
118 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T82 Consolidated Statement of Income
IFRS
For the year ended October 31 ($ millions)
2015
2014(1)
2013(1)(2)
2012(1)(2)
2011(1)
Revenue
Interest income
Loans
Securities
Securities purchased under resale agreements and securities borrowed
Deposits with financial institutions
Interest expense
Deposits
Subordinated debentures
Capital instruments
Other
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income before taxes
Income tax expense
Net income
Net income attributable to non-controlling interests
Non-controlling interests in subsidiaries
Capital instrument equity holders
Net income attributable to equity holders of the Bank
Preferred shareholders
Common shareholders
Earnings per common share (in dollars)
Basic
Diluted
$ 18,912
922
161
292
$ 18,176
921
180
263
$ 17,359
1,000
190
279
$ 15,606
1,045
221
287
$ 14,373
986
221
275
20,287
19,540
18,828
17,159
15,855
6,070
187
–
938
7,195
13,092
10,957
24,049
1,942
13,041
9,066
1,853
7,213
199
199
–
7,014
117
6,897
5.70
5.67
$
$
$
$
$
$
6,173
204
–
858
7,235
12,305
11,299
23,604
1,703
12,601
9,300
2,002
7,298
227
227
–
7,071
155
6,916
5.69
5.66
$
$
$
$
$
$
6,397
339
–
742
7,478
11,350
9,949
21,299
1,288
11,664
8,347
1,737
6,610
231
231
–
6,379
217
6,162
5.15
5.11
$
$
$
$
$
$
6,117
381
–
691
7,189
9,970
9,676
19,646
1,252
10,436
7,958
1,568
6,390
196
196
–
6,194
220
5,974
5.27
5.18
$
$
$
$
$
$
5,589
369
138
745
6,841
9,014
8,296
17,310
1,076
9,481
6,753
1,423
5,330
149
91
58
5,181
216
4,965
4.63
4.53
$
$
$
$
$
$
(1) Certain prior period amounts have been restated to conform to the current period presentation.
(2) Certain amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
119 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T81A Consolidated Balance Sheet – CGAAP
As at October 31 ($ millions)
2010
2009
2008
2007
2006
2005
CGAAP
Assets
Cash resources
Securities
Trading
Available-for-sale
Investment
Equity accounted investments
Securities purchased under resale agreements
Loans
Residential mortgages
Personal and credit cards
Business and government
Allowance for credit losses
Other
Customers’ liability under acceptances
Derivative instruments
Land, buildings and equipment
Other assets
Liabilities and shareholders’ equity
Deposits
Personal
Business and government
Banks
Other
Acceptances
Obligations related to securities sold under repurchase
agreements
Obligations related to securities sold short
Derivative instruments
Other liabilities
Subordinated debentures
Capital instrument liabilities
Shareholders’ equity
Preferred shares
Common shareholders’ equity
Common shares and contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total common shareholders’ equity
Total equity attributable to equity holders of the Bank
Non-controlling interests
Total shareholders’ equity
$
46,027
$
43,278
$
37,318
$
29,195
$
23,376
$
20,505
64,684
47,228
–
4,651
116,563
27,920
120,482
62,548
103,981
287,011
2,787
58,067
55,699
–
3,528
117,294
17,773
101,604
61,048
106,520
269,172
2,870
48,292
38,823
–
920
88,035
19,451
115,084
50,719
125,503
291,306
2,626
59,685
28,426
–
724
88,835
22,542
102,154
41,734
85,500
229,388
2,241
62,490
–
32,870
142
95,502
25,705
89,590
39,058
76,733
50,007
–
23,285
167
73,459
20,578
75,520
34,695
62,681
205,381
172,896
2,607
2,469
284,224
266,302
288,680
227,147
202,774
170,427
7,616
26,852
2,450
15,005
51,923
9,583
25,992
2,372
13,922
51,869
11,969
44,810
2,449
14,913
74,141
11,538
21,960
2,061
8,232
43,791
9,555
12,098
2,103
7,893
31,649
7,576
12,867
1,836
6,777
29,056
$ 526,657
$ 496,516
$ 507,625
$ 411,510
$ 379,006
$ 314,025
$ 128,850
210,687
22,113
$ 123,762
203,594
23,063
$ 118,919
200,566
27,095
$ 100,823
161,229
26,406
361,650
350,419
346,580
288,458
$
93,450
141,072
29,392
263,914
$
83,953
109,389
24,103
217,445
7,616
9,583
11,969
11,538
9,555
7,576
40,286
21,519
31,990
28,947
36,568
14,688
28,806
24,682
36,506
11,700
42,811
31,063
28,137
16,039
24,689
21,138
130,358
114,327
134,049
101,541
5,939
500
5,944
500
4,352
500
1,710
500
33,470
13,396
12,869
24,799
94,089
2,271
750
26,032
11,250
13,004
18,983
76,845
2,597
750
3,975
3,710
2,860
1,635
600
600
5,775
21,932
(4,051)
23,656
27,631
579
28,210
4,946
19,916
(3,800)
21,062
24,772
554
25,326
3,829
18,549
(3,596)
18,782
21,642
502
22,144
3,566
17,460
(3,857)
17,169
18,804
497
19,301
3,425
15,843
(2,321)
16,947
17,547
435
17,982
3,317
14,126
(1,961)
15,482
16,082
306
16,388
$ 526,657
$ 496,516
$ 507,625
$ 411,510
$ 379,006
$ 314,025
120 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
T82A Consolidated Statement of Income – CGAAP
For the year ended October 31 ($ millions)
2010
2009
2008
2007
2006
2005
CGAAP
Interest income
Loans
Securities
Securities purchased under resale agreements
Deposits with banks
Interest expense
Deposits
Subordinated debentures
Capital instrument liabilities
Other
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Other income
Net interest and other income
Non-interest expenses
Salaries and employee benefits
Other
Income before income taxes
Provision for income taxes
Net income
Net income attributable to non-controlling interests
Net income attributable to equity holders of the Bank
Preferred shareholders
Common shareholders
Average number of common shares outstanding (millions)
Basic
Diluted
Earnings per common share (in dollars)(1)
Basic
Diluted
Dividends per common share (in dollars)
(1) The calculation of earnings per share is based on full dollar and share amounts.
$ 12,171
4,227
201
292
$ 13,973
4,090
390
482
$ 15,832
4,615
786
1,083
$ 13,985
4,680
1,258
1,112
$ 11,575
4,124
1,102
881
$
9,236
3,104
817
646
16,891
18,935
22,316
21,035
17,682
13,803
6,768
289
37
1,176
8,270
8,621
1,239
7,382
6,884
8,339
285
37
1,946
10,607
8,328
1,744
6,584
6,129
12,131
166
37
2,408
14,742
7,574
630
6,944
4,302
10,850
116
53
2,918
13,937
7,098
270
6,828
5,392
8,589
130
53
2,502
11,274
6,408
216
6,192
4,800
5,755
134
53
1,990
7,932
5,871
230
5,641
4,529
14,266
12,713
11,246
12,220
10,992
10,170
4,647
3,535
8,182
6,084
1,745
4,339
100
4,239
201
4,038
1,032
1,034
3.91
3.91
1.96
$
$
$
$
$
$
4,344
3,575
7,919
4,794
1,133
3,661
114
3,547
186
3,361
1,013
1,016
3.32
3.31
1.96
$
$
$
$
$
$
4,109
3,187
7,296
3,950
691
3,259
119
3,140
107
3,033
987
993
3.07
3.05
1.92
$
$
$
$
$
$
3,983
3,011
6,994
5,226
1,063
4,163
118
4,045
51
3,994
989
997
4.04
4.01
1.74
$
$
$
$
$
$
3,768
2,675
6,443
4,549
872
3,677
98
3,579
30
3,549
988
1,001
3.59
3.55
1.50
$
$
$
$
$
$
3,488
2,555
6,043
4,127
847
3,280
71
3,209
25
3,184
998
1,012
3.19
3.15
1.32
$
$
$
$
$
$
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
121 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T83 Consolidated Statement of Changes in Equity
For the year ended October 31 ($ millions)
2015
2014
2013(1)
2012(1)
IFRS
Common shares
Balance at beginning of year
Issued
Purchased for cancellation
Balance at end of year
Retained earnings
Balance at beginning of year
IFRS adjustment
Restated balances
Net income attributable to common shareholders of the Bank(4)
Dividends: Preferred(5)
Common
Purchase of shares for cancellation and premium on redemption
Other
Balance at end of year
Accumulated other comprehensive income (loss)
Balance at beginning of year
IFRS adjustment
Restated balances
Cumulative effect of adopting new accounting policies
Other comprehensive income (loss)
Balance at end of year
Other reserves(9)
Balance at beginning of year
Share-based payments
Other
Balance at end of year
Total common equity
Preferred shares
Balance at beginning of year
Net income attributable to preferred shareholders of the Bank(4)
Preferred dividends(5)
Issued
Redeemed
Balance at end of year
Non-controlling interests
Balance at beginning of year
IFRS adjustment
Restated balances
Net income attributable to non-controlling interests
Distributions to non-controlling interests
Effect of foreign exchange and others
Balance at end of year
Total equity at end of year
$ 15,231
104
(194)
$ 15,141
28,609
–
28,609
6,897
–
(3,289)
(761)
(140)(6)
$ 31,316
949
–
949
(5)(7)
1,511
2,455
$
176
14
(17)
$
173
$ 49,085
2,934
117
(117)
–
–
2,934
$
1,312
–
1,312
199
(86)
35
$
1,460
$ 53,479
$ 14,516
771
(56)
$ 15,231
25,315
(247)
25,068
6,916
–
(3,110)
(264)
(1)
$ 28,609
545
(157)
388
–
561
949
$
193
30
(47)
$
176
$ 44,965
4,084
155
(155)
–
(1,150)
2,934
$
1,155
(17)
1,138
227
(76)
23
$
1,312
$ 49,211
$ 13,139
1,377
–
$ 14,516
21,978
(203)
21,775
6,162
–
(2,858)
–
(11)
$ 25,068
(31)
(714)
(745)
–
1,133
388
$
166
36
(9)
$
193
$ 40,165
4,384
217
(217)
–
(300)
4,084
$
1,743
(797)
946
231
(80)
41
$
1,138
$ 45,387
$
8,336
4,803
–
$ 13,139
18,421
(144)
18,277
5,974
–
(2,493)
–
17
$ 21,775
(497)
32
(465)
–
(280)
(745)
$
96
38
32
$
166
$ 34,335
4,384
220
(220)
–
–
4,384
$
1,500
(891)
609
196
(44)
185
$
946
$ 39,665
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014.
(2) Relates to the adoption of new financial instruments accounting standards under CGAAP.
(3) Relates to the adoption of new stock-based compensation accounting standard under CGAAP.
(4) Under CGAAP, net income attributable to preferred shareholders was included in retained earnings.
(5) Under IFRS, preferred dividends are recorded as a reduction to preferred shareholders’ equity. Under CGAAP, dividends are a reduction to retained earnings.
(6) Includes retrospective adjustments primarily related to foreign currency translation on Allowance for Credit Losses with respect to periods prior to 2013 ($152).
(7) To reflect the adoption of the own credit risk provisions of IFRS 9 pertaining to financial liabilities designated at fair value through profit or loss.
(8) Relates to the adoption of the new accounting standard for impairment and classification of financial instruments under CGAAP.
(9) Under CGAAP, amounts represent Contributed Surplus.
T84 Consolidated Statement of Comprehensive Income
2011
5,750
2,586
–
8,336
$
$
21,932
(6,248)
15,684
4,965
–
(2,200)
–
(28)
$ 18,421
(4,051)
4,320
269
–
(766)
(497)
$
25
46
25
$
96
$ 26,356
3,975
216
(216)
409
–
4,384
$
579
936
1,515
149
(181)
17
$
1,500
$ 32,240
For the year ended October 31 ($ millions)
Net income
Other comprehensive income (loss), net of income taxes:
Items that will be reclassified subsequently to net income
Net change in unrealized foreign currency translation gains (losses)
Net change in unrealized gains (losses) on available-for-sale securities
Net change in gains (losses) on derivative instruments designated as cash
flow hedges
Other comprehensive income from investments in associates
Items that will not be reclassified subsequently to net income
Net change in remeasurement of employee benefit plan asset and liability
Net change in fair value due to change in own credit risk on financial
liabilities designated under the fair value option(2)
Other comprehensive income from investments in associates
Other comprehensive income (loss)
Comprehensive income
Comprehensive income attributable to:
Common shareholders of the Bank
Preferred shareholders of the Bank
Non-controlling interests in subsidiaries
Capital instrument equity holders
2015
$ 7,213
2014
$ 7,298
1,855
(480)
55
(9)
(1)
15
1
1,436
$ 8,649
$ 8,408
117
124
–
$ 8,649
889
(38)
(6)
60
(320)
N/A
(2)
583
$ 7,881
$ 7,477
155
249
–
$ 7,881
IFRS
2013(1)
$ 6,610
346
110
93
20
563
N/A
–
1,132
$ 7,742
$ 7,298
217
227
–
$ 7,742
2012(1)
$ 6,390
2011
$ 5,330
149
151
116
25
(747)
N/A
–
(306)
$ 6,084
$ 5,694
220
170
–
$ 6,084
(697)
(169)
105
–
–
N/A
–
(761)
$ 4,569
$ 4,199
216
96
58
$ 4,569
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 .
(2) In accordance with the transition requirements for the own credit risk provisions of IFRS 9, prior year comparatives have not been restated for the adoption of this standard in 2015.
122 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
2010
4,946
804
–
5,750
$
$
19,916
–
–
4,239
(201)
(2,023)
–
1
$ 21,932
(3,800)
–
–
–
(251)
$ (4,051)
–
25
–
$
25
$ 23,656
3,710
–
–
265
–
3,975
$
554
–
–
100
(35)
(40)
$
579
$ 28,210
2010
$ 4,339
(591)
278
62
–
–
N/A
–
(251)
$ 4,088
$ 3,787
201
100
–
$ 4,088
2009
3,829
1,117
–
4,946
$
$
18,549
–
–
3,547
(186)
(1,990)
–
(4)
$ 19,916
(3,596)
–
–
595(8)
(799)
$ (3,800)
–
–
–
$
–
$ 21,062
2,860
–
–
850
–
3,710
$
502
–
–
114
(36)
(26)
$
554
$ 25,326
2009
$ 3,661
(1,736)
894
43
–
–
N/A
–
(799)
$ 2,862
$ 2,562
186
114
–
$ 2,862
2008
3,566
266
(3)
3,829
$
$
17,460
–
–
3,140
(107)
(1,896)
(37)
(11)
$ 18,549
(3,857)
–
–
–
261
$ (3,596)
–
–
–
$
–
$ 18,782
1,635
–
–
1,225
–
2,860
$
N/A
–
–
N/A
N/A
N/A
$
502
$ 22,144
2008
$ 3,259
2,368
(1,588)
(519)
–
–
N/A
–
261
$ 3,520
$ 3,294
107
119
–
$ 3,520
CGAAP
2007
3,425
184
(43)
3,566
$
$
15,843
–
(61)(2)
4,045
(51)
(1,720)
(586)
(10)
$ 17,460
(2,321)
–
–
683
(2,219)
$ (3,857)
–
–
–
$
–
$ 17,169
600
–
–
1,035
–
1,635
$
N/A
–
–
N/A
N/A
N/A
$
497
$ 19,301
2006
3,316
135
(26)
3,425
$
$
14,126
–
(25)(3)
3,579
(30)
(1,483)
(324)
–
$ 15,843
(1,961)
–
–
–
(360)
$ (2,321)
1
(1)
–
$
–
$ 16,947
600
–
–
–
–
600
$
N/A
–
–
N/A
N/A
N/A
$
435
$ 17,982
2005
3,228
172
(84)
3,316
$
$
13,239
–
–
3,209
(25)
(1,317)
(973)
(7)
$ 14,126
(1,783)
–
–
–
(178)
$ (1,961)
1
–
–
$
1
$ 15,482
300
–
–
300
–
600
$
N/A
–
–
N/A
N/A
N/A
$
306
$ 16,388
CGAAP
2007
$ 4,163
(2,228)
(67)
76
–
–
N/A
–
(2,219)
$ 1,944
$ 1,775
51
118
–
$ 1,944
2006
$ 3,677
2005
$ 3,280
(360)
–
–
–
–
N/A
–
(360)
$ 3,317
$ 3,189
30
98
–
$ 3,317
(178)
–
–
–
–
N/A
–
(178)
$ 3,102
$ 3,006
25
71
–
$ 3,102
123 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
T85 Other statistics
For the year ended October 31
Operating performance
Basic earnings per share ($)
Diluted earnings per share ($)
Return on equity (%)(2)
Productivity ratio (%)(TEB(2))
Return on assets (%)
Core banking margin (%)(TEB(2))
Net interest margin on total average assets (%)(TEB)(2)
Capital measures(3)
Common Equity Tier 1 (CET1) capital ratio (%)
Tier 1 capital ratio (%)
Total capital ratio (%)
Leverage ratio (%)(4)
Common share information
Share price ($) – (TSX):
High
Low
Close
Number of shares outstanding (millions)
Dividends per share ($)
Dividend yield (%)(5)
Price to earnings multiple(6)
Book value per common share ($)
Other information
Average total assets ($ millions)
Number of branches and offices
Number of employees
Number of automated banking machines
2015
2014
2013(1)
2012(1)
2011
IFRS
5.70
5.67
14.6
53.4
0.84
2.39
N/A
10.3
11.5
13.4
4.2
71.18
52.58
61.49
1,203
2.72
4.4
10.8
40.80
5.69
5.66
16.1
52.6
0.92
2.39
N/A
10.8
12.2
13.9
N/A
74.93
59.92
69.02
1,217
2.56
3.8
12.1
36.96
5.15
5.11
16.6
54.0
0.88
2.31
N/A
9.1
11.1
13.5
N/A
64.10
52.30
63.39
1,209
2.39
4.1
12.3
33.23
5.27
5.18
19.9
52.4
0.97
2.31
N/A
N/A
13.6
16.7
N/A
57.18
47.54
54.25
1,184
2.19
4.2
10.3
28.99
4.63
4.53
20.3
53.9
0.91
2.32
N/A
N/A
12.2
13.9
N/A
61.28
49.00
52.53
1,089
2.05
3.7
11.3
24.20
860,607
795,641
3,177
89,214
8,191
3,288
86,932
8,732
748,901
3,330
86,690(7)
8,471
659,538
586,101
3,123
81,497
7,341
2,926
75,362
6,260
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014. Capital measures have not been restated for the new IFRS standards as they
represent the actual amounts in the period for regulatory purposes.
(2) Refer to page 13 for a discussion of non-GAAP measures.
(3) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules as an all-in basis (refer page 39). Comparative amounts for periods 2012-2007 were determined in accordance with Basel II
rules. Amounts prior to 2007 were determined in accordance with Basel I rules and have not been restated.
(4) Effective November 1, 2014, the Bank is subject to OSFI’s Leverage Requirements Guideline.
(5) Based on the average of the high and low common share price for the year.
(6) Based on the closing common share price.
(7) Restated to conform with current period presentation.
124 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
2010
2009
2008
2007
2006
2005
CGAAP
3.91
3.91
18.3
51.8
0.84
N/A
1.73
N/A
11.8
13.8
N/A
55.76
44.12
54.67
1,043
1.96
3.9
14.0
22.68
3.32
3.31
16.7
53.7
0.71
N/A
1.68
N/A
10.7
12.9
N/A
49.19
23.99
45.25
1,025
1.96
5.4
13.6
20.55
3.07
3.05
16.7
59.4
0.72
N/A
1.75
N/A
9.3
11.1
N/A
54.00
35.25
40.19
992
1.92
4.3
13.1
4.04
4.01
22.0
53.7
1.03
N/A
1.89
N/A
9.3
10.5
N/A
54.73
46.70
53.48
984
1.74
3.4
13.2
3.59
3.55
22.1
55.3
1.05
N/A
1.95
N/A
10.2
11.7
N/A
49.80
41.55
49.30
990
1.50
3.3
13.7
3.19
3.15
20.9
56.3
1.06
N/A
2.00
N/A
11.1
13.2
N/A
44.22
36.41
42.99
990
1.32
3.3
13.5
18.94
17.45
17.13
15.64
515,991
513,149
455,539
403,475
350,709
309,374
2,784
70,772
5,978
2,686
67,802
5,778
2,672
69,049
5,609
2,331
58,113
5,283
2,191
54,199
4,937
1,959
46,631
4,449
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
125 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s Report on Internal Control Over Financial Reporting
The management of The Bank of Nova Scotia (the Bank) is responsible for establishing and maintaining adequate internal control over financial
reporting, and have designed such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by
The International Accounting Standards Board.
Management has used the Internal Control – Integrated Framework (2013) to evaluate the effectiveness of internal control over financial
reporting, which is a recognized and suitable framework developed by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management has evaluated the design and operation of the Bank’s internal control over financial reporting as of October 31, 2015, and has
concluded that such internal control over financial reporting is effective. There are no material weaknesses that have been identified by management
in this regard.
KPMG LLP, the independent auditors appointed by the shareholders of the Bank, who have audited the consolidated financial statements, have
also audited internal control over financial reporting and have issued their report below.
Brian J. Porter
President and Chief Executive Officer
Sean McGuckin
Chief Financial Officer
Toronto, Canada
December 1, 2015
Report of Independent Registered Public Accounting Firm
To the Shareholders of The Bank of Nova Scotia
We have audited The Bank of Nova Scotia’s internal control over financial reporting as of October 31, 2015, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank of
Nova Scotia’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our
responsibility is to express an opinion on The Bank of Nova Scotia’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Bank of Nova Scotia maintained, in all material respects, effective internal control over financial reporting as of October 31,
2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statements of financial position of The Bank of Nova Scotia as at October 31, 2015 and October 31,
2014, the consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period
ended October 31, 2015, and notes, comprising a summary of significant accounting policies and other explanatory information, and our report dated
December 1, 2015 expressed an unmodified (unqualified) opinion on those consolidated financial statements.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 1, 2015
126 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
T A B L E O F C O N T E N T S
128 Management’s Responsibility for Financial Information
129
Independent Auditors’ Report of Registered Public Accounting Firm
130
Consolidated Statement of Financial Position
131
Consolidated Statement of Income
132
Consolidated Statement of Comprehensive Income
133
Consolidated Statement of Changes in Equity
134
Consolidated Statement of Cash Flows
135
Notes to the 2015 Consolidated Financial Statements
127 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Management’s Responsibility for Financial Information
The management of The Bank of Nova Scotia (the Bank) is responsible for the integrity and fair presentation of the financial information contained in
this Annual Report. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board. The consolidated financial statements also comply with the accounting requirements of the
Bank Act.
The consolidated financial statements, where necessary, include amounts which are based on the best estimates and judgment of management.
Financial information presented elsewhere in this Annual Report is consistent with that shown in the consolidated financial statements.
Management has always recognized the importance of the Bank maintaining and reinforcing the highest possible standards of conduct in all of its
actions, including the preparation and dissemination of statements fairly presenting the financial condition of the Bank. In this regard, management
has developed and maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are
properly authorized and recorded, assets are safeguarded against unauthorized use or disposition, and liabilities are recognized. The system is
augmented by written policies and procedures, the careful selection and training of qualified staff, the establishment of organizational structures
providing an appropriate and well-defined division of responsibilities, and the communication of policies and guidelines of business conduct
throughout the Bank.
Management, under the supervision of and the participation of the President and Chief Executive Officer and the Chief Financial Officer, have a
process in place to evaluate disclosure controls and procedures and internal control over financial reporting in line with Canadian and U.S. securities
regulations.
The system of internal controls is further supported by a professional staff of internal auditors who conduct periodic audits of all aspects of the
Bank’s operations. As well, the Bank’s Chief Auditor has full and free access to, and meets periodically with the Audit and Conduct Review Committee
of the Board of Directors. In addition, the Bank’s compliance function maintains policies, procedures and programs directed at ensuring compliance
with regulatory requirements, including conflict of interest rules.
The Office of the Superintendent of Financial Institutions Canada, which is mandated to protect the rights and interests of the depositors and
creditors of the Bank, examines and enquires into the business and affairs of the Bank, as deemed necessary, to determine whether the provisions of
the Bank Act are being complied with, and that the Bank is in a sound financial condition.
The Audit and Conduct Review Committee, composed entirely of outside directors, reviews the consolidated financial statements with both
management and the independent auditors before such statements are approved by the Board of Directors and submitted to the shareholders of
the Bank.
The Audit and Conduct Review Committee reviews and reports its findings to the Board of Directors on all related party transactions that may have
a material impact on the Bank.
KPMG LLP, the independent auditors appointed by the shareholders of the Bank, have audited the consolidated financial position of the Bank as at
October 31, 2015 and October 31, 2014 and its consolidated financial performance and its consolidated cash flows for each of the years in the three-
year period ended October 31, 2015 prepared in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board in accordance with Canadian Generally Accepted Auditing Standards and the standards of the Public Company
Accounting Oversight Board (United States) and the effectiveness of internal control over financial reporting and have expressed their opinion upon
completion of such audits in the following report to the shareholders. The Shareholders’ Auditors have full and free access to, and meet periodically
with, the Audit and Conduct Review Committee to discuss their audits, including any findings as to the integrity of the Bank’s accounting, financial
reporting and related matters.
Brian J. Porter
President and Chief Executive Officer
Sean McGuckin
Chief Financial Officer
Toronto, Canada
December 1, 2015
128 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Independent Auditors’ Report of Registered Public Accounting Firm
To the Shareholders of The Bank of Nova Scotia
We have audited the accompanying consolidated financial statements of The Bank of Nova Scotia, which comprise the consolidated statements of
financial position as at October 31, 2015 and October 31, 2014, the consolidated statements of income, comprehensive income, changes in equity
and cash flows for each of the years in the three-year period ended October 31, 2015, and notes, comprising a summary of significant accounting
policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Bank’s preparation and fair presentation
of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of The Bank of Nova
Scotia as at October 31, 2015 and October 31, 2014 and its consolidated financial performance and its consolidated cash flows for each of the years
in the three-year period ended October 31, 2015 in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
Other Matter
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Bank of Nova
Scotia’s internal control over financial reporting as of October 31, 2015, based on the criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 1, 2015
expressed an unmodified (unqualified) opinion on the effectiveness of The Bank of Nova Scotia’s internal control over financial reporting.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 1, 2015
129 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Financial Position
As at October 31 ($ millions)
Assets
Cash and deposits with financial institutions
Precious metals
Trading assets
Securities
Loans
Other
Financial instruments designated at fair value through profit or loss
Securities purchased under resale agreements and securities borrowed
Derivative financial instruments
Investment securities
Loans
Residential mortgages
Personal and credit cards
Business and government
Allowance for credit losses
Other
Customers’ liability under acceptances
Property and equipment
Investments in associates
Goodwill and other intangible assets
Deferred tax assets
Other assets
Liabilities
Deposits
Personal
Business and government
Financial institutions
Financial instruments designated at fair value through profit or loss
Other
Acceptances
Obligations related to securities sold short
Derivative financial instruments
Obligations related to securities sold under repurchase agreements and securities lent
Subordinated debentures
Other liabilities
Equity
Common equity
Common shares
Retained earnings
Accumulated other comprehensive income (loss)
Other reserves
Total common equity
Preferred shares
Total equity attributable to equity holders of the Bank
Non-controlling interests in subsidiaries
Note
2015
2014
6
8(a)
8(b)
9
10
12
13
13
13
13(d)
16
17
18
27(c)
19
20
20
20
9
10
21
22
24(a)
24(b)
31(b)
$ 73,927
10,550
$ 56,730
7,286
78,380
18,341
2,419
99,140
320
87,312
41,003
43,216
217,498
91,477
153,850
462,825
4,197
458,628
10,296
2,286
4,033
11,449
2,034
12,303
42,401
95,363
14,508
3,377
113,248
111
93,866
33,439
38,662
212,648
84,204
131,098
427,950
3,641
424,309
9,876
2,272
3,461
10,884
1,763
9,759
38,015
$ 856,497
$ 805,666
$ 190,044
375,144
35,731
600,919
1,486
$ 175,163
342,367
36,487
554,017
465
10,296
20,212
45,270
77,015
6,182
41,638
200,613
803,018
15,141
31,316
2,455
173
49,085
2,934
52,019
1,460
53,479
9,876
27,050
36,438
88,953
4,871
34,785
201,973
756,455
15,231
28,609
949
176
44,965
2,934
47,899
1,312
49,211
$ 856,497
$ 805,666
Thomas C. O’Neill
Chairman of the Board
Brian J. Porter
President and Chief Executive Officer
The accompanying notes are an integral part of these consolidated financial statements.
130 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Consolidated Statement of Income
For the year ended October 31 ($ millions)
Revenue
Interest income
Loans
Securities
Securities purchased under resale agreements and securities borrowed
Deposits with financial institutions
Interest expense
Deposits
Subordinated debentures
Other
Net interest income
Non-interest income
Banking
Wealth management
Underwriting and other advisory
Non-trading foreign exchange
Trading revenues
Net gain on sale of investment securities
Net income from investments in associated corporations
Insurance underwriting income, net of claims
Other
Total revenue
Provision for credit losses
Non-interest expenses
Salaries and employee benefits
Premises and technology
Depreciation and amortization
Communications
Advertising and business development
Professional
Business and capital taxes
Other
Income before taxes
Income tax expense
Net income
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Note
2015
2014(1)
2013(1)(2)
32
32
33
12(d)
17
37
13(d)
$ 18,912
922
161
292
20,287
$ 18,176
921
180
263
19,540
$ 17,359
1,000
190
279
18,828
6,070
187
938
7,195
6,173
204
858
7,235
6,397
339
742
7,478
13,092
12,305
11,350
3,360
3,269
525
492
1,185
639
405
556
526
10,957
24,049
1,942
22,107
6,681
2,086
584
434
592
548
361
1,755
3,170
3,023
712
420
1,114
741
428
474
1,217
11,299
23,604
1,703
21,901
6,547
1,936
526
417
571
471
314
1,819
3,000
2,665
503
404
1,300
375
681
448
573
9,949
21,299
1,288
20,011
6,239
1,815
516
409
505
432
274
1,474
13,041
12,601
11,664
9,066
1,853
9,300
2,002
8,347
1,737
$ 7,213
$ 7,298
$ 6,610
Net income attributable to non-controlling interests in subsidiaries
31(b)
$
199
$
227
$
231
Net income attributable to equity holders of the Bank
Preferred shareholders
Common shareholders
Earnings per common share (in dollars)
Basic
Diluted
$ 7,014
117
$ 6,897
$ 7,071
155
$ 6,916
$ 6,379
217
$ 6,162
34
34
$
$
5.70
5.67
$
$
5.69
5.66
$
$
5.15
5.11
(1) Certain prior period amounts have been restated to conform to the current period presentation.
(2) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS10 and IAS 19) in 2014.
The accompanying notes are an integral part of these consolidated financial statements.
131 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
For the year ended October 31 ($ millions)
Net income
Other comprehensive income (loss)
Items that will be reclassified subsequently to net income
Net change in unrealized foreign currency translation gains (losses):
Net unrealized foreign currency translation gains (losses)
Net gains (losses) on hedges of net investments in foreign operations
Income tax expense (benefit):
Net unrealized foreign currency translation gains (losses)
Net gains (losses) on hedges of net investments in foreign operations
Net change in unrealized gains (losses) on available-for-sale securities:
Net unrealized gains (losses) on available-for-sale securities
Reclassification of net (gains) losses to net income(2)
Income tax expense (benefit):
Net unrealized gains (losses) on available-for-sale securities
Reclassification of net (gains) losses to net income
Net change in gains (losses) on derivative instruments designated as cash flow hedges:
Net gains (losses) on derivative instruments designated as cash flow hedges
Reclassification of net (gains) losses to net income
Income tax expense (benefit):
Net gains (losses) on derivative instruments designated as cash flow hedges
Reclassification of net (gains) losses to net income
Other comprehensive income from investments in associates
Items that will not be reclassified subsequently to net income
Net change in remeasurement of employee benefit plan asset and liability:
Actuarial gains (losses) on employee benefit plans
Income tax expense (benefit)
Net change in fair value due to change in own credit risk on financial liabilities designated under the fair
value option:(3)
Change in fair value due to change in own credit risk on financial liabilities designated under the fair value
option
Income tax expense (benefit)
Other comprehensive income from investments in associates
Other comprehensive income (loss)
Comprehensive income
Comprehensive income attributable to non-controlling interests
Comprehensive income attributable to equity holders of the Bank
Preferred shareholders
Common shareholders
2015
2014
2013(1)
$ 7,213
$ 7,298
$ 6,610
3,145
(1,677)
46
(433)
1,855
386
(966)
161
(261)
(480)
1,519
(1,444)
450
(430)
55
(9)
(3)
(2)
(1)
20
5
15
1
1,436
1,607
(943)
25
(250)
889
801
(934)
186
(281)
(38)
441
(447)
137
(137)
(6)
60
(432)
(112)
(320)
–
–
–
(2)
583
687
(469)
(1)
(127)
346
378
(289)
79
(100)
110
280
(155)
85
(53)
93
20
774
211
563
–
–
–
–
1,132
$ 8,649
$ 7,881
$ 7,742
$
124
$
249
$
227
$ 8,525
117
$ 8,408
$ 7,632
155
$ 7,477
$ 7,515
217
$ 7,298
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS10 and IAS 19) in 2014.
(2)
(3)
Includes amounts related to qualifying hedges.
In accordance with the transition requirements for the own credit risk provisions of IFRS 9, prior period comparatives have not been restated for the adoption of this standard in
2015 (refer to Note 4).
The accompanying notes are an integral part of these consolidated financial statements.
132 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7
8
)
5
5
9
(
)
9
8
2
,
3
(
)
6
8
(
)
7
1
1
(
4
1
)
5
3
(
3
1
2
,
7
6
3
4
,
1
1
1
2
,
9
4
$
9
4
6
,
8
$
9
7
4
,
3
5
$
–
–
–
–
–
–
–
–
–
–
–
–
3
8
5
8
9
2
,
7
7
8
3
,
5
4
0
4
7
1
8
8
,
7
)
5
5
1
(
)
0
7
4
,
1
(
)
0
1
1
,
3
(
)
6
7
(
0
3
)
6
1
(
$
1
1
2
,
9
4
$
–
–
–
–
–
–
–
–
–
–
–
–
)
4
6
1
,
1
(
1
5
5
,
6
4
$
3
4
7
)
3
4
7
(
)
4
1
7
,
1
(
9
7
3
,
1
4
$
7
7
7
)
7
7
7
(
0
1
6
,
6
2
3
1
,
1
2
4
7
,
7
3
4
3
,
1
5
6
6
,
9
3
)
0
8
(
)
7
1
2
(
)
0
0
3
(
)
8
5
8
,
2
(
6
3
6
5
$
7
8
3
,
5
4
$
–
–
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
$
$
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
N
g
n
i
l
l
o
r
t
n
o
c
-
n
o
N
r
e
h
t
o
l
d
e
t
a
u
m
u
c
c
A
)
s
s
o
l
(
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
l
a
t
o
T
s
r
e
d
o
h
l
y
t
i
u
q
e
)
)
b
(
1
3
e
t
o
N
(
y
t
i
u
q
e
)
4
2
e
t
o
N
(
y
t
i
u
q
e
)
3
(
s
e
v
r
e
s
e
r
)
2
(
k
s
i
r
)
2
(
s
t
i
f
e
n
e
b
)
2
(
s
e
t
a
i
c
o
s
s
a
s
e
g
d
e
h
s
e
i
t
i
r
u
c
e
s
n
o
i
t
a
l
s
n
a
r
t
)
1
(
s
g
n
n
r
a
e
i
l
a
t
i
p
a
C
t
n
e
m
u
r
t
s
n
i
n
i
s
t
s
e
r
e
t
n
i
i
s
e
i
r
a
d
i
s
b
u
s
n
o
m
m
o
c
l
a
t
o
T
d
e
r
r
e
f
e
r
P
l
a
t
o
T
d
e
r
r
e
f
e
r
p
d
n
a
s
e
r
a
h
s
n
o
m
m
o
c
r
e
h
t
O
n
w
O
t
i
d
e
r
c
e
e
y
o
p
m
E
l
e
r
a
h
S
m
o
r
f
h
s
a
C
w
o
l
f
l
-
e
b
a
l
i
a
v
A
i
n
g
e
r
o
F
l
e
a
s
-
r
o
f
y
c
n
e
r
r
u
c
i
d
e
n
a
t
e
R
s
e
r
a
h
s
n
o
m
m
o
C
)
4
2
e
t
o
N
(
2
1
3
,
1
$
9
9
8
,
7
4
$
4
3
9
,
2
$
5
6
9
,
4
4
$
6
7
1
$
$
)
0
8
4
(
$
3
1
1
$
)
8
4
(
$
4
6
6
$
0
0
7
$
9
0
6
,
8
2
$
1
3
2
,
5
1
$
)
5
7
(
9
9
1
4
2
1
–
–
–
–
–
)
6
8
(
)
6
(
0
1
1
$
5
2
5
,
8
$
7
1
1
$
8
0
4
,
8
$
4
1
0
,
7
1
1
5
,
1
–
7
1
1
7
9
8
,
6
1
1
5
,
1
7
8
)
5
5
9
(
)
7
1
1
(
)
9
8
2
,
3
(
–
4
1
)
5
4
1
(
–
–
–
)
7
1
1
(
–
–
–
7
8
)
5
5
9
(
)
9
8
2
,
3
(
–
–
4
1
)
5
4
1
(
–
–
–
)
7
1
(
–
–
–
–
–
4
1
–
–
–
–
–
–
–
–
–
)
5
(
)
5
(
–
–
–
–
–
–
–
5
1
)
4
1
(
$
5
1
$
)
4
1
(
$
–
)
8
(
)
8
(
–
–
–
–
–
–
–
$
–
5
5
5
5
–
–
–
–
–
–
–
7
–
)
0
7
4
(
3
3
9
,
1
–
–
7
9
8
,
6
$
)
0
7
4
(
$
3
3
9
,
1
$
7
9
8
,
6
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
)
4
(
)
0
4
1
(
–
)
1
6
7
(
)
9
8
2
,
3
(
–
–
–
4
0
1
)
4
9
1
(
–
–
–
–
–
$
y
t
i
u
q
E
n
i
s
e
g
n
a
h
C
f
o
t
n
e
m
e
t
a
t
S
d
e
t
a
d
i
l
o
s
n
o
C
4
1
0
2
,
1
r
e
b
m
e
v
o
N
t
a
s
a
e
c
n
a
a
B
l
e
m
o
c
n
i
t
e
N
)
s
s
o
l
(
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
l
a
t
o
T
d
e
m
e
e
d
e
r
/
d
e
s
a
h
c
r
u
p
e
r
d
e
u
s
s
i
s
e
r
a
h
S
s
e
r
a
h
S
i
d
a
p
s
d
n
e
d
i
v
i
d
n
o
m
m
o
C
i
d
a
p
s
d
n
e
d
i
v
i
d
d
e
r
r
e
f
e
r
P
)
s
n
o
i
l
l
i
m
$
(
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
o
t
s
n
o
i
t
u
b
i
r
t
s
i
D
s
t
n
e
m
y
a
p
d
e
s
a
b
-
e
r
a
h
S
r
e
h
t
O
0
6
4
,
1
$
9
1
0
,
2
5
$
4
3
9
,
2
$
5
8
0
,
9
4
$
3
7
1
$
0
1
$
)
4
9
4
(
$
5
0
1
$
$
4
9
1
$
3
3
6
,
2
$
6
1
3
,
1
3
$
1
4
1
,
5
1
$
5
1
0
2
,
1
3
r
e
b
o
t
c
O
t
a
s
a
e
c
n
a
a
B
l
–
–
–
–
)
6
(
1
–
)
6
7
(
)
7
1
(
8
3
1
,
1
2
2
7
2
2
9
4
2
$
)
4
0
4
(
1
6
5
1
7
0
,
7
9
4
2
,
4
4
0
4
7
2
3
6
,
7
)
5
5
1
(
)
0
7
4
,
1
(
)
0
1
1
,
3
(
–
0
3
)
7
1
(
–
–
5
5
1
4
8
0
,
4
)
4
0
4
(
1
6
5
6
1
9
,
6
5
6
1
,
0
4
$
5
5
1
$
7
7
4
,
7
$
–
–
–
–
–
)
5
5
1
(
)
0
5
1
,
1
(
–
–
0
3
)
7
1
(
0
4
7
)
0
2
3
(
)
0
1
1
,
3
(
–
3
9
1
–
–
–
)
4
3
(
–
–
–
–
$
)
8
(
)
3
1
(
0
3
5
5
1
,
1
$
3
5
6
,
4
4
$
4
8
0
,
4
$
9
6
5
,
0
4
$
3
9
1
$
2
1
3
,
1
$
9
9
8
,
7
4
$
4
3
9
,
2
$
5
6
9
,
4
4
$
6
7
1
$
$
–
$
)
7
5
1
(
)
7
5
1
(
–
)
3
2
3
(
$
)
3
2
3
(
$
–
–
–
–
–
–
–
–
5
5
5
5
–
8
5
8
5
–
–
–
–
–
–
–
$
)
2
4
(
$
5
0
7
$
)
3
7
1
(
$
5
1
3
,
5
2
$
6
1
5
,
4
1
$
3
1
0
2
,
1
r
e
b
m
e
v
o
N
d
e
t
r
o
p
e
r
s
a
e
c
n
a
a
B
l
$
–
)
2
4
(
–
)
6
(
)
6
(
–
–
)
1
4
(
5
0
7
$
)
1
4
(
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
)
3
7
1
(
–
3
7
8
3
7
8
–
–
–
–
–
–
–
)
7
4
2
(
–
–
6
1
9
,
6
8
6
0
,
5
2
$
6
1
9
,
6
$
–
–
–
)
4
(
3
)
4
6
2
(
)
0
1
1
,
3
(
–
–
–
)
6
5
(
1
7
7
–
–
–
–
–
6
1
5
,
4
1
$
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
o
t
s
n
o
i
t
u
b
i
r
t
s
i
D
)
s
s
o
l
(
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
l
a
t
o
T
d
e
m
e
e
d
e
r
/
d
e
s
a
h
c
r
u
p
e
r
e
r
a
h
S
i
d
a
p
s
d
n
e
d
i
v
i
d
n
o
m
m
o
C
i
d
a
p
s
d
n
e
d
i
v
i
d
d
e
r
r
e
f
e
r
P
d
e
u
s
s
i
s
e
r
a
h
S
s
t
n
e
m
y
a
p
d
e
s
a
b
-
e
r
a
h
S
r
e
h
t
O
)
7
(
t
n
e
m
t
s
u
d
a
j
i
g
n
n
e
p
O
s
e
c
n
a
a
b
l
d
e
t
a
t
s
e
R
e
m
o
c
n
i
t
e
N
$
)
0
8
4
(
$
3
1
1
$
)
8
4
(
$
4
6
6
$
0
0
7
$
9
0
6
,
8
2
$
1
3
2
,
5
1
$
4
1
0
2
,
1
3
r
e
b
o
t
c
O
t
a
s
a
e
c
n
a
a
B
l
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
.
s
e
r
a
h
s
r
o
f
n
o
i
t
p
o
g
n
d
n
o
p
s
e
r
r
o
c
i
.
)
4
e
t
o
N
o
t
r
e
f
e
r
(
s
s
o
l
r
o
t
i
f
o
r
p
h
g
u
o
r
h
t
e
u
a
v
l
r
i
a
f
t
a
d
e
t
a
n
g
i
s
e
d
s
e
i
t
i
l
i
b
a
i
l
l
i
a
c
n
a
n
i
f
o
t
g
n
n
a
t
r
e
p
9
i
i
S
R
F
I
f
o
s
n
o
i
s
i
v
o
r
p
k
s
i
r
t
i
d
e
r
c
n
w
o
e
h
t
f
o
n
o
i
t
p
o
d
a
e
h
t
t
c
e
l
f
e
r
o
t
s
t
n
e
m
t
s
u
d
a
j
e
v
i
t
c
e
p
s
o
r
t
e
r
s
t
n
e
s
e
r
p
e
R
.
s
n
o
i
t
a
n
b
m
o
c
i
s
s
e
n
i
s
u
b
m
o
r
f
g
n
i
s
i
r
a
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
o
t
s
e
g
n
a
h
c
s
e
d
u
l
c
n
I
.
4
1
0
2
n
i
)
9
1
S
A
I
d
n
a
0
1
S
R
F
I
(
s
d
r
a
d
n
a
t
s
S
R
F
I
d
e
d
n
e
m
a
d
n
a
w
e
n
f
o
n
o
i
t
p
o
d
a
e
h
t
t
c
e
l
f
e
r
o
t
d
e
t
s
u
d
a
j
y
l
e
v
i
t
c
e
p
s
o
r
t
e
r
e
r
a
s
t
n
u
o
m
a
d
o
i
r
e
p
r
o
i
r
p
n
a
t
r
e
C
i
.
e
m
o
c
n
i
t
e
n
o
t
y
l
t
n
e
u
q
e
s
b
u
s
d
e
i
f
i
s
s
a
c
e
r
l
e
b
t
o
n
l
l
i
w
)
l
i
n
-
3
1
0
2
;
)
2
(
$
-
4
1
0
2
(
1
$
i
s
e
t
a
c
o
s
s
a
m
o
r
f
e
r
a
h
S
.
e
m
o
c
n
i
t
e
n
o
t
y
l
t
n
e
u
q
e
s
b
u
s
d
e
i
f
i
s
s
a
l
c
e
r
e
b
t
o
n
l
l
i
w
t
a
h
t
s
t
n
u
o
m
a
s
t
n
e
s
e
r
p
e
R
.
)
6
2
e
t
o
N
o
t
r
e
f
e
r
(
s
t
n
e
m
y
a
p
d
e
s
a
b
-
e
r
a
h
s
f
o
t
n
u
o
c
c
a
n
o
s
t
n
u
o
m
a
s
t
n
e
s
e
r
p
e
R
.
)
2
5
1
$
(
3
1
0
2
o
t
r
o
i
r
p
s
d
o
i
r
e
p
o
t
t
c
e
p
s
e
r
h
t
i
w
s
e
s
s
o
L
t
i
d
e
r
C
r
o
f
e
c
n
a
w
o
l
l
A
n
o
n
o
i
t
a
l
s
n
a
r
t
i
y
c
n
e
r
r
u
c
n
g
e
r
o
f
o
t
d
e
t
a
e
r
l
y
l
i
r
a
m
i
r
p
s
t
n
e
m
t
s
u
d
a
j
e
v
i
t
c
e
p
s
o
r
t
e
r
s
e
d
u
l
c
n
I
.
n
o
i
t
c
i
r
t
s
e
r
y
r
o
t
a
u
g
e
r
l
l
a
c
o
l
o
t
j
t
c
e
b
u
s
s
i
i
h
c
h
w
,
n
o
i
t
a
r
o
p
r
o
c
i
d
e
t
a
c
o
s
s
a
n
g
e
r
o
f
i
a
o
t
d
e
t
a
e
r
l
)
3
4
$
–
3
1
0
2
;
2
5
$
–
4
1
0
2
(
i
1
6
$
f
o
s
g
n
n
r
a
e
d
e
n
a
t
e
r
d
e
t
u
b
i
r
t
s
i
d
n
u
i
s
e
d
u
l
c
n
I
)
1
(
)
2
(
)
3
(
)
4
(
)
5
(
)
6
(
)
7
(
)
8
(
r
i
e
h
t
g
n
n
a
t
e
r
i
i
e
l
i
l
h
w
s
e
e
y
o
p
m
e
n
a
t
r
e
c
i
y
b
d
e
c
n
u
o
n
e
r
y
l
i
r
a
t
n
u
o
v
l
s
R
A
S
m
e
d
n
a
T
f
o
t
c
a
p
m
i
s
e
d
u
l
c
n
I
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
i
f
d
e
t
a
d
i
l
o
s
n
o
c
e
s
e
h
t
f
o
t
r
a
p
l
a
r
g
e
t
n
i
n
a
e
r
a
s
e
t
o
n
g
n
i
y
n
a
p
m
o
c
c
a
e
h
T
)
0
2
(
6
6
9
6
4
9
1
3
2
)
4
(
$
7
2
2
$
–
–
–
–
)
6
(
5
4
–
)
0
8
(
)
7
1
9
(
9
7
3
,
6
6
3
1
,
1
5
1
5
,
7
3
4
3
,
1
9
1
7
,
8
3
)
7
1
2
(
)
0
0
3
(
)
8
5
8
,
2
(
–
6
3
1
1
–
–
7
1
2
4
8
3
,
4
$
7
1
2
$
–
)
0
0
3
(
–
)
7
1
2
(
–
–
–
)
7
1
9
(
–
5
3
3
,
4
3
6
6
1
–
2
6
1
,
6
6
3
1
,
1
8
9
2
,
7
3
4
3
,
1
)
8
5
8
,
2
(
–
–
6
3
1
1
$
–
–
–
)
5
3
(
$
–
–
–
–
)
8
(
6
2
6
3
$
–
$
$
)
4
1
7
(
)
4
1
7
(
–
7
5
5
7
5
5
$
–
–
–
–
–
–
–
–
5
3
5
3
–
0
2
0
2
–
–
–
–
–
–
–
$
–
)
5
3
1
(
–
3
9
3
9
–
–
7
9
5
8
0
1
$
8
0
1
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
)
8
2
5
(
–
8
5
3
8
5
3
–
–
–
–
–
–
–
2
6
1
,
6
5
7
7
,
1
2
$
2
6
1
,
6
$
–
–
–
1
–
)
8
5
8
,
2
(
)
3
(
)
2
1
(
)
3
0
2
(
–
–
–
–
–
–
–
–
–
–
7
7
3
,
1
9
3
1
,
3
1
$
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
o
t
s
n
o
i
t
u
b
i
r
t
s
i
D
)
s
s
o
l
(
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
l
a
t
o
T
d
e
m
e
e
d
e
r
s
e
r
a
h
s
d
e
r
r
e
f
e
r
P
i
d
a
p
s
d
n
e
d
i
v
i
d
n
o
m
m
o
C
i
d
a
p
s
d
n
e
d
i
v
i
d
d
e
r
r
e
f
e
r
P
d
e
u
s
s
i
s
e
r
a
h
S
s
t
n
e
m
y
a
p
d
e
s
a
b
-
e
r
a
h
S
r
e
h
t
O
)
7
(
t
n
e
m
t
s
u
d
a
j
i
g
n
n
e
p
O
s
e
c
n
a
a
b
l
d
e
t
a
t
s
e
R
e
m
o
c
n
i
t
e
N
$
6
3
6
,
9
3
$
4
8
3
,
4
$
2
5
2
,
5
3
$
6
6
1
$
$
)
5
3
1
(
$
7
9
5
$
)
8
2
5
(
$
8
7
9
,
1
2
$
9
3
1
,
3
1
$
2
1
0
2
,
1
r
e
b
m
e
v
o
N
d
e
t
r
o
p
e
r
s
a
e
c
n
a
a
B
l
$
8
3
1
,
1
$
9
4
2
,
4
4
$
4
8
0
,
4
$
5
6
1
,
0
4
$
3
9
1
$
$
)
7
5
1
(
$
5
5
$
)
2
4
(
$
5
0
7
$
)
3
7
1
(
$
8
6
0
,
5
2
$
6
1
5
,
4
1
$
)
7
(
3
1
0
2
,
1
3
r
e
b
o
t
c
O
t
a
s
a
e
c
n
a
a
B
l
133 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Cash Flows
Sources (uses) of cash flows for the year ended October 31 ($ millions)
Cash flows from operating activities
Net income
Adjustment for:
Net interest income
Depreciation and amortization
Provisions for credit losses
Equity-settled share-based payment expense
Net gain on sale of investment securities
Realized gain on sale of an investment in an associate
Unrealized gain on reclassification of an investment in an associate
Net income from investments in associated corporations
Provision for income taxes
Changes in operating assets and liabilities:
Trading assets
Securities purchased under resale agreements and securities borrowed
Loans
Deposits
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and securities lent
Net derivative financial instruments
Other, net
Dividends received
Interest received
Interest paid
Income tax paid
Net cash from/(used in) operating activities
Cash flows from investing activities
Interest-bearing deposits with financial institutions
Purchase of investment securities
Proceeds from sale and maturity of investment securities
Acquisition/sale of subsidiaries, associated corporations or business units, net of cash acquired
Property and equipment, net of disposals
Other, net
Net cash from/(used in) investing activities
Cash flows from financing activities
Proceeds from issue of subordinated debentures
Redemption/repayment of subordinated debentures
Redemption of preferred shares
Proceeds from common shares issued
Common shares purchased for cancellation
Cash dividends paid
Distributions to non-controlling interests
Other, net
Net cash from/(used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year(2)
Cash and cash equivalents at end of year(2)
2015
2014
2013(1)
$ 7,213
$ 7,298
$ 6,610
(13,092)
584
1,942
14
(639)
–
–
(405)
1,853
20,302
13,991
(22,942)
13,915
(8,101)
(18,982)
2,442
4,707
1,147
19,145
(7,262)
(1,985)
13,847
(8,448)
(44,684)
41,649
(701)
(282)
(1,053)
(13,519)
1,248
(18)
–
101
(955)
(3,406)
(86)
3,379
263
305
896
5,828
(12,305)
526
1,703
30
(741)
(469)
(174)
(428)
2,002
(13,848)
(7,526)
(16,785)
20,224
1,506
7,306
(1,147)
7,181
1,063
18,438
(7,509)
(1,401)
4,944
213
(47,328)
44,876
2,045
(277)
(115)
(586)
–
(1,000)
(1,150)
753
(320)
(3,265)
(76)
872
(4,186)
207
379
5,449
(11,350)
516
1,288
36
(375)
–
–
(681)
1,737
(6,793)
(9,866)
(16,006)
6,028
5,458
17,455
282
4,708
1,139
18,011
(7,688)
(1,555)
8,954
(4,079)
(47,894)
52,652
(3,439)
(180)
(324)
(3,264)
–
(4,210)
(300)
1,256
–
(3,075)
(80)
30
(6,379)
102
(587)
6,036
$ 6,724
$ 5,828
$ 5,449
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS10 and IAS 19) in 2014.
(2) Represents cash and non-interest bearing deposits with financial institutions (refer to Note 6).
The accompanying notes are an integral part of these consolidated financial statements.
134 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
N O T E S T O T H E 2 0 1 5 C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
T A B L E O F C O N T E N T S
Page Note
136
136
137
149
150
151
151
157
158
159
163
164
167
170
171
173
174
174
176
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Reporting entity
Basis of preparation
Page Note
176 20
Deposits
177 21
Subordinated debentures
Significant accounting policies
177 22
Other liabilities
Recently adopted accounting standards
177 23
Provisions
Future accounting developments
178 24
Common and preferred shares
Cash and deposits with financial institutions
181 25
Capital management
Fair value of financial instruments
182 26
Share-based payments
Trading assets
185 27
Corporate income taxes
Financial instruments designated at fair value
through profit or loss
Derivative financial instruments
Offsetting financial assets and financial
liabilities
Investment securities
Loans, impaired loans and allowance for
credit losses
Derecognition of financial assets
Structured entities
Property and equipment
Investments in associates
Goodwill and other intangible assets
Other assets
187 28
Employee benefits
192 29
Operating segments
194 30
Related party transactions
195 31
Principal subsidiaries and non-controlling
interests in subsidiaries
196 32
Non-interest income
197 33
Trading revenues
197 34
Earnings per share
197 35
Guarantees, commitments and pledged assets
199 36
Financial instruments – risk management
208 37
Business combinations, other acquisitions and
divestitures
135 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
1
Reporting entity
The Bank of Nova Scotia (the Bank) is a chartered bank under the Bank Act (Canada) (the Bank Act). The Bank is a Schedule I Bank under the Bank Act and is
regulated by the Office of the Superintendent of Financial Institutions (OSFI). The Bank is a global financial services provider offering a diverse range of
products and services, including personal, commercial, corporate and investment banking. The head office of the Bank is located at 1709 Hollis Street,
Halifax, Nova Scotia, Canada and its executive offices are at Scotia Plaza, 44 King Street West, Toronto, Canada. The common shares of the Bank are listed
on the Toronto Stock Exchange and the New York Stock Exchange.
2
Basis of preparation
Statement of compliance
These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by International
Accounting Standards Board (IASB) and accounting requirements of OSFI in accordance with Section 308 of the Bank Act. Section 308 states that,
except as otherwise specified by OSFI, the financial statements are to be prepared in accordance with IFRS.
The consolidated financial statements for the year ended October 31, 2015 have been approved by the Board of Directors for issue on December 1,
2015.
Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for the following material items that are measured at fair
value in the Consolidated Statement of Financial Position:
Š Financial assets and liabilities held-for-trading
Š Financial assets and liabilities designated at fair value through profit or loss
Š Derivative financial instruments
Š Available-for-sale investment securities
Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Bank’s functional currency. All financial information presented
in Canadian dollars has been rounded to the nearest million unless otherwise stated.
Management’s use of estimates, assumptions and judgments
The Bank’s accounting policies require estimates, assumptions and judgments that relate to matters that are inherently uncertain. The Bank has
established procedures to ensure that accounting policies are applied consistently and that the processes for changing methodologies for determining
estimates are controlled and occur in a timely and systematic manner. Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.
Use of estimates and assumptions
The preparation of these consolidated financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities at the date of the consolidated financial statements, and income and expenses during the reporting period.
Estimates made by management are based on historical experience and other assumptions that are believed to be reasonable. Key areas of estimation
uncertainty include those relating to the allowance for credit losses, the fair value of financial instruments (including derivatives), corporate income taxes,
employee benefits, the fair value of all identifiable assets and liabilities as a result of business combinations, impairment of investment securities, impairment
of non-financial assets and derecognition of financial assets and liabilities. While management makes its best estimates and assumptions, actual results could
differ from these and other estimates. Refer to the relevant accounting policies in Note 3 for details on the Bank’s use of estimates and assumptions.
Significant judgments
In the preparation of these consolidated financial statements, management is required to make significant judgments in the classification and
presentation of transactions and instruments and accounting for involvement with other entities.
136 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Significant estimates, assumptions and judgments have been made in the following areas and are discussed as noted in the consolidated financial
statements:
Allowance for credit losses
Fair value of financial instruments
Corporate income taxes
Employee benefits
Goodwill and intangible assets
Fair value of all identifiable assets and liabilities as a result of business combinations
Impairment of investment securities
Impairment of non-financial assets
Structured entities
De facto control of other entities
Derecognition of financial assets and liabilities
Provisions
3
Significant accounting policies
Note 3
Note 13(d)
Note 3
Note 7
Note 3
Note 27
Note 3
Note 28
Note 3
Note 18
Note 3
Note 37
Note 3
Note 12
Note 3
Note 16
Note 3
Note 15
Note 3
Note 31
Note 3
Note 14
Note 3
Note 23
The significant accounting policies used in the preparation of these consolidated financial statements, including any additional accounting
requirements of OSFI, as set out below, have been applied consistently to all periods presented in these consolidated financial statements, unless
otherwise stated.
Basis of consolidation
The consolidated financial statements include the assets, liabilities, financial performance and cash flows of the Bank and all of its subsidiaries, after
elimination of intercompany transactions and balances. Subsidiaries are defined as entities controlled by the Bank and exclude associates and joint
arrangements. The Bank’s subsidiaries can be classified as entities controlled through voting interests or structured entities. The Bank consolidates a
subsidiary from the date it obtains control. The Bank controls an investee when it is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the investee. For the Bank to control an entity, all of the three
elements of control should be in existence:
Š power over the investee;
Š exposure, or rights, to variable returns from involvement with the investee; and
Š the ability to use power over the investee to affect the amount of the Bank’s returns.
The Bank does not control an investee when it is acting as an agent. The Bank assesses whether it is an agent by determining whether it is primarily
engaged to act on behalf of and for the benefit of another party or parties. The Bank reassesses whether it controls an investee if facts and circumstances
indicate that one or more of the elements of control has changed. Non-controlling interests are presented within equity in the Consolidated Statement of
Financial Position separate from equity attributable to common and preferred shareholders of the Bank. Partial sales and incremental purchases of
interests in subsidiaries that do not result in a change of control are accounted for as equity transactions with non-controlling interest holders. Any
difference between the carrying amount of the interest and the transaction amount is recorded as an adjustment to retained earnings.
Voting-interest subsidiaries
Control is presumed with an ownership interest of more than 50% of the voting rights in an entity unless there are other factors that indicate that the
Bank does not control the entity despite having more than 50% of voting rights.
The Bank may consolidate an entity when it owns less than 50% of the voting rights when it has one or more other attributes of power:
Š by virtue of an agreement, over more than half of the voting rights;
Š to govern the financial and operating policies of the entity under a statute or an agreement;
Š to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board
or body; or
Š to govern the financial and operating policies of the entity through the size of its holding of voting rights relative to the size and dispersion of
holding of the other vote holders and voting patterns at shareholder meetings (i.e., de facto control).
Structured entities
Structured entities are designed to accomplish certain well-defined objectives and for which voting or similar rights are not the dominant factor in
deciding who controls the entity. The Bank may become involved with structured entities either at the formation stage or at a later date. The Bank
controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those
returns through its power over the investee.
137 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
The Bank consolidates all structured entities that it controls.
Investments in associates
An associate is an entity in which the Bank has significant influence, but not control, over the operating and financial policies of the entity. Significant
influence is ordinarily presumed to exist when the Bank holds between 20% and 50% of the voting rights. The Bank may also be able to exercise
significant influence through board representation. The effects of potential voting rights that are currently exercisable or convertible are considered in
assessing whether the Bank has significant influence.
Investments in associates are recognized initially at cost, which includes the purchase price and other costs directly attributable to the purchase.
Associates are accounted for using the equity method which reflects the Bank’s share of the increase or decrease of the post-acquisition earnings and
other movements in the associate’s equity.
If there is a loss of significant influence and the investment ceases to be an associate, equity accounting is discontinued from the date of loss of
significant influence. If the retained interest on the date of loss of significant influence is a financial asset, it is measured at fair value and the
difference between the fair value and the carrying value is recorded as an unrealized gain or loss in the Consolidated Statement of Income.
Investments in associates are evaluated for impairment at the end of each financial reporting period, or more frequently if events or changes in
circumstances indicate the existence of objective evidence of impairment.
For purposes of applying the equity method for an investment that has a different reporting period from the Bank, adjustments are made for the
effects of any significant events or transactions that occur between the reporting date of the investment and the reporting date of the Bank.
Joint arrangements
A joint arrangement is an arrangement over which two or more parties have joint control. Joint control exists only when decisions about the relevant
activities (i.e., those that significantly affect the returns of the arrangement) require the unanimous consent of the parties sharing the control of the
arrangement. Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and
obligations of each investor, rather than the legal structure of the joint arrangement.
For joint operations, the Bank recognizes its share of the joint operation represented by:
Š its assets and liabilities held/incurred jointly
Š its revenue and expenses incurred jointly arising from the joint operation
Similar to accounting for investment in associates, for joint ventures, investments are recognized initially at cost and accounted for using the equity
method which reflects the Bank’s share of the increase or decrease of the post-acquisition earnings and other movements in the joint venture’s equity.
Investments in joint ventures are evaluated for impairment at the end of each financial reporting period, or more frequently if events or changes in
circumstances indicate the existence of objective evidence of impairment.
If there is a loss of joint control and it does not result in the Bank having significant influence over the entity, equity accounting is discontinued from the
date of loss of joint control. If the retained interest in the former joint venture on the date of loss of joint control is a financial asset, it is measured at fair
value and the difference between the fair value and the carrying value is recorded as an unrealized gain or loss in the Consolidated Statement of Income.
Translation of foreign currencies
The financial statements of each of the Bank’s foreign operations are measured using its functional currency, being the currency of the primary
economic environment of the foreign operation.
Translation gains and losses related to the Bank’s monetary items are recognized in non-interest income in the Consolidated Statement of Income.
Revenues and expenses denominated in foreign currencies are translated using average exchange rates, except for depreciation and amortization of
buildings purchased in foreign currency, equipment and leasehold improvements of the Bank, which are translated using historical rates. Foreign
currency non-monetary items that are measured at historical cost are translated into the functional currency at historical rates. Foreign currency non-
monetary items measured at fair value are translated into functional currency using the rate of exchange at the date the fair value was determined.
Foreign currency gains and losses on non-monetary items are recognized in the Consolidated Statement of Income or Consolidated Statement of
Comprehensive Income consistent with the gain or loss on the non-monetary item.
Unrealized gains and losses arising upon translation of foreign operations, together with any gains or losses arising from hedges of those net
investment positions to the extent effective, are credited or charged to net change in unrealized foreign currency translation gains/losses in the
Consolidated Statement of Comprehensive Income. On disposal or partial disposal of a foreign operation, resulting in a loss of control, an appropriate
portion of the translation differences previously recognized in other comprehensive income are recognized in the Consolidated Statement of Income.
Financial assets and liabilities
Date of recognition
The Bank initially recognizes loans, deposits, subordinated debentures and debt securities issued on the date at which they are originated or
purchased. Regular-way purchases and sales of financial assets are recognized on the settlement date. All other financial assets and liabilities,
including derivatives, are initially recognized on the trade date at which the Bank becomes a party to the contractual provisions of the instrument.
Initial classification and measurement
The classification of financial assets and liabilities at initial recognition depends on the purpose and intention for which the financial assets are
acquired and liabilities issued and their characteristics. The initial measurement of a financial asset or liability is at fair value.
Determination of fair value
Fair value of a financial asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants in the principal, or in its absence, the most advantageous market to which the Bank has access at the measurement date.
The Bank values instruments carried at fair value using quoted market prices, where available. Quoted market prices represent a Level 1 valuation.
When quoted market prices are not available, the Bank maximizes the use of observable inputs within valuation models. When all significant inputs
are observable, the valuation is classified as Level 2. Valuations that require the significant use of unobservable inputs are considered Level 3.
138 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Inception gains and losses are only recognized where the valuation is dependent on observable market data, otherwise, they are deferred and
amortized over the life of the related contract or until the valuation inputs become observable.
IFRS 13 permits a measurement exception that allows an entity to determine the fair value of a group of financial assets and liabilities with offsetting
risks based on the sale or transfer of its net exposure to a particular risk (or risks). The Bank has adopted this exception through an accounting policy
choice. Consequently, the fair values of certain portfolios of financial instruments are determined based on the net exposure of those instruments to
particular market, credit or funding risk.
In determining fair value for certain instruments or portfolios of instruments, valuation adjustments or reserves may be required to arrive at a more
accurate representation of fair value. These adjustments include those made for credit risk, bid-offer spreads, unobservable parameters, constraints on
prices in inactive or illiquid markets and when applicable funding costs.
Derecognition of financial assets and liabilities
Derecognition of financial assets
The derecognition criteria are applied to the transfer of part of an asset, rather than the asset as a whole, only if such part comprises specifically
identified cash flows from the asset, a fully proportionate share of the cash flows from the asset, or a fully proportionate share of specifically identified
cash flows from the asset.
A financial asset is derecognized when the contractual rights to the cash flows from the asset has expired; or the Bank transfers the contractual rights
to receive the cash flows from the financial asset; or has assumed an obligation to pay those cash flows to an independent third-party; and the Bank
has transferred substantially all the risks and rewards of ownership of that asset to an independent third-party. Management determines whether
substantially all the risk and rewards of ownership have been transferred by quantitatively comparing the variability in cash flows before and after the
transfer. If the variability in cash flows remains significantly similar subsequent to the transfer, the Bank has retained substantially all of the risks and
rewards of ownership.
Where substantially all the risks and rewards of ownership of the financial asset are neither retained nor transferred, the Bank derecognizes the
transferred asset only if it has lost control over that asset. Control over the asset is represented by the practical ability to sell the transferred asset. If
the Bank retains control over the asset, it will continue to recognize the asset to the extent of its continuing involvement. At times such continuing
involvement may be in the form of investment in senior or subordinated tranches of notes issued by non-consolidated structured entities.
On derecognition of a financial asset, the difference between the carrying amount and the sum of (i) the consideration received (including any new
asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in other comprehensive income is
recognized in the Consolidated Statement of Income.
Transfers of financial assets that do not qualify for derecognition are reported as secured financings in the Consolidated Statement of Financial Position.
Derecognition of financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged, canceled or expires. If an existing financial liability is replaced
by another from the same counterparty on substantially different terms, or the terms of the existing liability are substantially modified, such an
exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective
carrying amount of the existing liability and the new liability is recognized as a gain/loss in the Consolidated Statement of Income.
Offsetting of financial instruments
Financial assets and financial liabilities with the same counterparty are offset, with the net amount reported in the Consolidated Statement of Financial
Position, only if there is currently a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to
realize the assets and settle the liabilities simultaneously. When financial assets and financial liabilities are offset in the Consolidated Statement of
Financial Position, the related income and expense items will also be offset in the Consolidated Statement of Income, unless specifically prohibited by
an applicable accounting standard.
Cash and deposits with financial institutions
Cash and deposits with financial institutions comprises cash, cash equivalents, demand deposits with banks and other financial institutions, highly
liquid investments that are readily convertible to cash, subject to insignificant risk of changes in value and may carry restrictions in certain
circumstances. These investments are those with less than three months’ maturity from the date of acquisition.
Precious metals
Precious metals are carried at fair value less costs to sell, and any changes in fair value less costs to sell are credited or charged to non-interest
income – trading revenues in the Consolidated Statement of Income.
Trading assets and liabilities
Trading assets and liabilities are measured at fair value in the Consolidated Statement of Financial Position, with transaction costs recognized
immediately in the Consolidated Statement of Income. Gains and losses realized on disposal and unrealized gains and losses due to fair value changes
on trading assets and liabilities, other than certain derivatives, are recognized as part of non-interest income – trading revenues in the Consolidated
Statement of Income. Trading assets and liabilities are not reclassified subsequent to their initial recognition.
Financial assets and liabilities designated at fair value through profit or loss
Financial assets and financial liabilities classified in this category are those that have been designated by the Bank on initial recognition or on transition
to IFRS. The Bank may only designate an instrument at fair value through profit or loss when one of the following criteria is met, and designation is
determined on an instrument by instrument basis:
Š The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or
recognizing gains or losses on them on a different basis; or
139 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Š The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed together and their performance
evaluated on a fair value basis, in accordance with a documented risk management or investment strategy and the information about the group is
provided to key management personnel and it can be demonstrated that significant financial risks are eliminated or significantly reduced; or
Š The financial instrument contains one or more embedded derivatives which significantly modify the cash flows otherwise required.
Financial assets and financial liabilities designated at fair value through profit or loss are recorded in the Consolidated Statement of Financial Position
at fair value. For assets designated at fair value through profit or loss, changes in fair value are recognized in the Consolidated Statement of Income.
For liabilities designated at fair value through profit or loss, changes in fair value arising from changes in the Bank’s own credit risk are recognized in
the Consolidated Statement of Comprehensive Income (OCI), without subsequent reclassification to the Consolidated Statement of Income, unless
doing so would create or increase an accounting mismatch. All other changes in fair value are recognized in the Consolidated Statement of Income.
Securities purchased and sold under resale agreements
Securities purchased under resale agreements (reverse repurchase agreements) and securities sold under agreements to repurchase (repurchase
agreements) are treated as collateralized financing arrangements and are recorded at amortized cost. The party disbursing the cash takes possession
of the securities serving as collateral for the financing and having a market value equal to, or in excess of, the principal amount loaned. The securities
received under reverse repurchase agreements and securities delivered under repurchase agreements are not recognized on, or derecognized from,
the Consolidated Statement of Financial Position, unless the risks and rewards of ownership are obtained or relinquished. The related income and
interest expense are recorded on an accrual basis in the Consolidated Statement of Income.
Obligations related to securities sold short
Obligations related to securities sold short arise in dealing and market-making activities where debt securities and equity shares are sold without
possessing such securities.
Similarly, if securities purchased under an agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded
as a short sale within obligations related to securities sold short in the Consolidated Statement of Financial Position. These trading liabilities are
measured at fair value with any gains or losses included in non-interest income – trading revenues in the Consolidated Statement of Income. Interest
expense accruing on debt securities sold short is recorded in interest expense – other.
Securities lending and borrowing
Securities lending and borrowing transactions are usually collateralized by securities or cash. The transfer of the securities to counterparties is only
reflected on the Consolidated Statement of Financial Position if the risks and rewards of ownership are also transferred. Cash advanced or received as
collateral is recorded as an asset or liability. Fees received and paid are reported as fee and commission revenues and expenses in the Consolidated
Statement of Income, respectively.
Securities borrowed are not recognized on the Consolidated Statement of Financial Position, unless they are then sold to third parties, in which case
the obligation to return the securities is recorded as a trading liability and measured at fair value with any gains or losses included in non-interest
income – trading revenues, in the Consolidated Statement of Income.
Derivative financial instruments
Derivative financial instruments are contracts whose value is derived from interest rates, foreign exchange rates, commodities, equity prices or other
financial variables. Most derivative financial instruments can be characterized as interest rate contracts, foreign exchange and gold contracts,
commodity contracts, equity contracts or credit contracts. Derivative financial instruments are either exchange-traded contracts or negotiated over-
the-counter contracts. Negotiated over-the-counter contracts include swaps, forwards and options.
The Bank enters into these derivative contracts for trading purposes, as well as to manage its risk exposures (i.e., to manage the Bank’s non-trading
interest rate, foreign currency and other exposures). Trading activities are undertaken to meet the needs of the Bank’s customers, as well as for the
Bank’s own account to generate income from trading operations.
Derivatives embedded in other financial instruments or host contracts are treated as separate derivatives when the following conditions are met:
Š their economic characteristics and risks are not closely related to those of the host contract;
Š a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and
Š the combined contract is not held for trading or designated at fair value through profit or loss.
Where an embedded derivative is separable from the host contract but the fair value, as at the acquisition or reporting date, cannot be reliably
measured separately, the entire combined contract is measured at fair value. All embedded derivatives are presented on a combined basis with the
host contracts although they are separated for measurement purposes when conditions requiring separation are met. Subsequent changes in fair
value of embedded derivatives are recognized in non-interest income – other in the Consolidated Statement of Income.
All derivatives, including embedded derivatives that must be separately accounted for, are recorded at fair value in the Consolidated Statement of
Financial Position. The determination of the fair value of derivatives includes consideration of credit risk, estimated funding costs and ongoing direct
costs over the life of the instruments. Inception gains or losses on derivatives are only recognized where the valuation is dependent on observable
market data, otherwise, they are deferred and amortized over the life of the related contract, or until the valuation inputs become observable.
The gains and losses resulting from changes in fair values of trading derivatives are included in non-interest income – trading revenues in the
Consolidated Statement of Income.
Changes in the fair value of non-trading derivatives that do not qualify for hedge accounting are recorded in the Consolidated Statement of Income in
non-interest income – other. Where derivative instruments are used to manage the volatility of share-based payment expense, these derivatives are
carried at fair value with changes in the fair value in relation to units hedged included in non-interest expenses – salaries and employee benefits in the
Consolidated Statement of Income.
140 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Changes in the fair value of derivatives that qualify for hedge accounting are recorded as non-interest income – other in the Consolidated Statement
of Income for fair value hedges and other comprehensive income in the Consolidated Statement of Comprehensive Income for cash flow hedges and
net investment hedges.
Investment securities
Investment securities are comprised of available-for-sale and held-to-maturity securities.
Available-for-sale investment securities
Available-for-sale investment securities include equity and debt securities. Equity investments classified as available-for-sale are those which are neither
classified as held-for-trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held
for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. Available-
for-sale investment securities are recorded at fair value with unrealized gains and losses recorded in other comprehensive income. When realized,
these gains and losses are reclassified from the Consolidated Statement of Comprehensive Income and recorded in the Consolidated Statement of
Income on an average cost basis. For non-monetary investment securities designated as available-for-sale, the gain or loss recognized in other
comprehensive income includes any related foreign exchange gains or losses. Foreign exchange gains and losses that relate to the amortized cost of
an available-for-sale debt security are recognized in the Consolidated Statement of Income.
Premiums, discounts and related transaction costs on available-for-sale debt securities are amortized over the expected life of the instrument to
interest income – securities in the Consolidated Statement of Income using the effective interest method.
Transaction costs on available-for-sale equity securities are initially capitalized and then recognized as part of the net realized gain/loss on subsequent
sale of the instrument in the Consolidated Statement of Income.
Held-to-maturity investment securities
Held-to-maturity investment securities are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive
intent and ability to hold to maturity, and which do not meet the definition of a loan, are not held-for-trading, and are not designated at fair value
through profit or loss or as available-for-sale. After initial measurement, held-to-maturity investment securities are carried at amortized cost using the
effective interest method, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition, transaction
costs and fees that are an integral part of the effective interest rate. The amortization is included in interest income – securities in the Consolidated
Statement of Income.
A sale or reclassification of a more than an insignificant amount of held-to-maturity investments would result in the reclassification of all held-to-
maturity investments as available-for-sale, and would prevent the Bank from classifying investment securities as held-to-maturity for the current and
the following two financial years. However, sales and reclassifications in any of the following circumstances would not trigger a reclassification:
Š Sales or reclassifications that are so close to maturity that changes in the market rate of interest would not have a significant effect on the financial
asset’s fair value;
Š Sales or reclassifications after the Bank has collected substantially all of the asset’s original principal; or
Š Sales or reclassifications attributable to non-recurring isolated events beyond the Bank’s control that could not have been reasonably anticipated.
Impairment of investment securities
Investment securities are evaluated for impairment at the end of each reporting period, or more frequently if events or changes in circumstances
indicate the existence of objective evidence of impairment.
In the case of equity instruments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its original cost
is objective evidence of impairment. In the case of debt instruments classified as available-for-sale and held-to-maturity investment securities,
impairment is assessed based on the same criteria as impairment of loans.
When a decline in value of available-for-sale debt or equity instrument is due to impairment, the carrying value of the security continues to reflect fair
value. Losses arising from impairment are reclassified from accumulated other comprehensive income and included in net gain on investment
securities within non-interest income in the Consolidated Statement of Income.
The losses arising from impairment of held-to-maturity investment securities are recognized in net gain on investment securities within non-interest
income in the Consolidated Statement of Income.
Reversals of impairment losses on available-for-sale debt instruments resulting from disposals or increases in fair value related to events occurring after
the date of impairment are included in net gain on investment securities within non-interest income in the Consolidated Statement of Income, to a
maximum of the original impairment charge. Reversals of impairment on available-for-sale equity instruments are not recognized in the Consolidated
Statement of Income; increases in fair value of such instruments after impairment are recognized in equity.
Reversals of impairment losses on held-to-maturity investment securities are included in net gain on investment securities within non-interest income
in the Consolidated Statement of Income, to a maximum of the amortized cost of the investment before the original impairment charge.
Loans
Loans include loans and advances originated or purchased by the Bank which are not classified as held-for-trading, held-to-maturity or designated at
fair value. Debt securities, which are not trading securities or have not been designated as available-for-sale securities and that are not quoted in an
active market, are also classified as loans.
Loans originated by the Bank are recognized when cash is advanced to a borrower. Loans purchased are recognized when cash consideration is paid
by the Bank. Loans are measured at amortized cost using the effective interest method, less any impairment losses. Loans are stated net of allowance
for credit losses.
Purchased loans
All purchased loans are initially measured at fair value on the date of acquisition. In arriving at the fair value, the Bank considers interest rate mark
adjustments and credit mark adjustments. As a result of recording all purchased loans at fair value, no allowances for credit losses are recorded in the
141 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Financial Position on the date of acquisition. Consequently none of the purchased loans are considered to be impaired on
the date of acquisition.
The interest rate mark on the date of acquisition is principally set up for fixed interest rate loans and captures the impact of the interest rate
differential between the contractual rate of interest on the loan and the prevailing interest rate on the loan on the date of acquisition for the
remaining term. The interest rate mark is fully amortized into interest income in the Consolidated Statement of Income over the expected life of the
loan using the effective interest method.
An aggregate credit mark adjustment is established to capture management’s best estimate of cash flow shortfalls on the loans over their life time as
determined at the date of acquisition. The credit mark adjustment comprises of both an incurred loss mark and a future expected loss mark.
For individually assessed loans, the credit mark established at the date of acquisition is tracked over the life of the loan. Changes to the expected cash
flows of these loans from those expected at the date of acquisition are recorded as a charge/recovery in the provision for credit losses in the
Consolidated Statement of Income.
Where loans are not individually assessed for determining losses, a portfolio approach is taken to determine expected losses at the date of acquisition.
The portfolio approach will result in both an incurred loss mark and a future expected loss mark. The incurred loss mark is assessed at the end of each
reporting period against the performance of the loan portfolio and an increase in expected cash flows will result in recovery in provision for credit
losses in the Consolidated Statement of Income while any cash flows lower than expected will result in an additional provision for credit losses. The
future expected loss mark is amortized into income as losses are recognized or as the portfolio of loans winds down over its expected life. An
assessment is required at the end of each reporting period to determine the reasonableness of the unamortized balance in relation to the loan
portfolio. An overall benefit is only recognized to the extent that the amortized amount is greater than the actual losses incurred. A net charge is
recorded if the actual losses exceed the amortized amounts.
Loan impairment and allowance for credit losses
The Bank considers a loan to be impaired when there is objective evidence of impairment as a result of one or more loss events that occurred after the
date of initial recognition of the loan and the loss event has an impact on the estimated future cash flows of the loan that can be reliably estimated.
Objective evidence is represented by observable data that comes to the attention of the Bank and includes events that indicate:
Š significant financial difficulty of the borrower;
Š a default or delinquency in interest or principal payments;
Š a high probability of the borrower entering a phase of bankruptcy or a financial reorganization;
Š a measurable decrease in the estimated future cash flows from loan or the underlying assets that back the loan.
If a payment on a loan is contractually 90 days in arrears, the loan will be classified as impaired, if not already classified as such, unless the loan is fully
secured, the collection of the debt is in process, and the collection efforts are reasonably expected to result in repayment of the loan or in restoring it
to a current status within 180 days from the date a payment has become contractually in arrears. Finally, a loan that is contractually 180 days in
arrears is classified as impaired in all situations, except when it is guaranteed or insured by the Canadian government, the provinces or a Canadian
government agency; such loans are classified as impaired if the loan is contractually in arrears for 365 days. Any credit card loan that has a payment
that is contractually 180 days in arrears is written off. Losses expected as a result of future events, are not recognized.
The Bank considers evidence of impairment for loans and advances at both an individual and collective level.
Individual impairment allowance
For all loans that are considered individually significant, the Bank assesses on a case-by-case basis at each reporting period whether an individual
allowance for loan losses is required.
For those loans where objective evidence of impairment exists and the Bank has determined the loan to be impaired, impairment losses are
determined based on the Bank’s aggregate exposure to the customer considering the following factors:
Š the customer’s ability to generate sufficient cash flow to service debt obligations;
Š the extent of other creditors’ commitments ranking ahead of, or pari passu with, the Bank and the likelihood of other creditors continuing to
support the company;
Š the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties
are evident; and
Š the realizable value of security (or other credit mitigants) and likelihood of successful repossession.
Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the
resultant present value with the loan’s current carrying amount. This results in interest income being recognized using the original effective interest
rate.
Collective impairment allowance
For loans that have not been individually assessed as being impaired, the Bank pools them into groups to assess them on a collective basis. Collective
allowances are calculated for impaired loans and performing loans. Allowances related to performing loans estimate probable incurred losses that are
inherent in the portfolio but have not yet been specifically identified as impaired.
Internal risk rating parameters are used in the calculation of the collective impairment allowance. For non-retail loan portfolios, internal risk rating
parameters form the basis for calculating the quantitative portion of the collective allowance for performing loans:
Š Probability of Default rates (PD) which are based upon the internal risk rating for each borrower;
Š Loss Given Default rates (LGD); and
Š Exposure at Default factors (EAD).
Funded exposures are multiplied by the borrower’s PD and by the relevant LGD parameter.
142 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Committed but undrawn exposures are multiplied by the borrower’s PD, by the relevant LGD parameter, and by the relevant EAD parameter. A model
stress component is also applied to recognize uncertainty in the credit risk parameters and the fact that current actual loss rates may differ from the
long term averages included in the model.
Retail loans
Retail loans represented by residential mortgages, credit cards and other personal loans are considered by the Bank to be homogeneous groups of
loans that are not considered individually significant. All homogeneous groups of loans are assessed for impairment on a collective basis.
Mortgages are collectively assessed for impairment, taking into account number of days past due, historical loss experience and incorporating both
quantitative and qualitative factors including the current business and economic environment and the realizable value of collateral to determine the
appropriate level of the collective impairment allowance.
A roll rate methodology is used to determine impairment losses on a collective basis for credit cards and other personal loans because individual loan
assessment is impracticable. Under this methodology, loans with similar credit characteristics are grouped into ranges according to the number of days
past due and statistical analysis is used to estimate the likelihood that loans in each range will progress through the various stages of delinquency and
ultimately prove irrecoverable. This methodology employs statistical analyses of historical data and experience of delinquency and default to estimate
the amount of loans that will eventually be written off as a result of the events not identifiable on an individual loan basis. When the portfolio size is
small or when information is insufficient or not reliable enough to adopt a roll rate methodology, the Bank adopts a basic formulaic approach based
on historical loss rate experience.
Performing loans
Over and above the individually assessed and retail roll rate allowances, loans that were subject to individual assessment for which no evidence of
impairment existed, are grouped together according to their credit risk characteristics for the purpose of reassessing them on a collective basis. This
reflects impairment losses that the Bank has incurred as a result of events that have occurred but where the individual loss has not been identified.
The collective impairment allowance for such loans is determined after taking into account:
Š historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product);
Š the estimated period between impairment occurring and the loss being identified and evidenced by the establishment of an appropriate allowance
against the individual loan; and
Š management’s experienced judgment as to whether current economic and credit conditions are such that the actual level of inherent losses at the
reporting date is likely to be greater or less than that suggested by historical experience. As soon as information becomes available which identifies
losses on individual loans within the group, those loans are removed from the group and assessed on an individual basis for impairment.
Provision for credit losses on off-balance sheet positions
A provision is set up for the Bank’s off-balance sheet positions and recorded in other liabilities on the Consolidated Statement of Financial Position.
The process to determine the provision for off-balance sheet positions is similar to the methodology used for loans. Any change in the provision is
recorded in the Consolidated Statement of Income as provision for credit losses.
Write-off of loans
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, write-off is generally after receipt of any proceeds from the realization of security. In circumstances where the net
realizable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss related to loans decreases in a subsequent period, and the decrease can be related objectively to an event
occurring after the impairment was recognized, the excess is written back by reducing the loan impairment allowance account accordingly. The write-
back is recognized in the provision for credit losses in the Consolidated Statement of Income.
Restructured loans
Restructured loans include loans where the Bank has renegotiated the original terms of a loan by granting a concession to the borrower (concessions).
These concessions include interest rate adjustments, deferral or extension of principal or interest payments and forgiveness of a portion of principal or
interest. Once the terms of the loan have been renegotiated and agreed upon with the borrower the loan is considered a restructured loan. The
investment in the loan is reduced as of the date of the restructuring to the amount of the net expected cash flows receivable under the modified
terms, discounted at the original effective interest rate inherent in the loan. The loan is no longer considered past due and the reduction in the
carrying value of the loan is recognized as a charge for loan impairment in the Consolidated Statement of Income in the period in which the loan
is restructured. In other cases, restructuring may be considered substantial enough to result in recognition of a new loan.
Customer’s liability under acceptances
The Bank’s potential liability under acceptances is reported as a liability in the Consolidated Statement of Financial Position. The Bank has equivalent
claims against its customers in the event of a call on these commitments, which are reported as an asset. Fees earned are reported in fee and
commission revenues – banking fees in the Consolidated Statement of Income.
Hedge accounting
The Bank formally documents all hedging relationships and its risk management objective and strategy for undertaking these hedge transactions at
inception. The hedge documentation includes identification of the asset, liability, firm commitment or highly probable forecasted transaction being
hedged, the nature of the risk being hedged, the hedging instrument used and the method used to assess the effectiveness of the hedge. The Bank
also formally assesses, both at each hedge’s inception and on an ongoing basis, whether the hedging instruments are highly effective in offsetting
changes in fair value or cash flows of hedged items. Hedge ineffectiveness is measured and recorded in non-interest income – other in the
Consolidated Statement of Income.
143 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
There are three types of hedges: (i) fair value hedges, (ii) cash flow hedges and (iii) net investment hedges.
Fair value hedges
For fair value hedges, the change in fair value of the hedging instrument is offset in the Consolidated Statement of Income by the change in fair value of
the hedged item attributable to the hedged risk. The Bank utilizes fair value hedges primarily to convert fixed rate financial instruments to floating rate
financial instruments. Hedged items include available-for-sale debt and equity securities, loans, deposit liabilities and subordinated debentures. Hedging
instruments include single-currency interest rate swaps, cross-currency interest rate swaps, foreign currency forwards and foreign currency liabilities.
Cash flow hedges
For cash flow hedges, the change in fair value of the hedging instrument, to the extent effective, is recorded in other comprehensive income until the
corresponding gains and losses on the hedged item is recognized in income. The Bank utilizes cash flow hedges primarily to hedge the variability in
cash flows relating to floating rate financial instruments and highly probable forecasted revenues. Hedged items include available-for-sale debt
securities, loans, deposit liabilities and highly probable forecasted transactions. Hedging instruments include single-currency interest rate swaps, cross-
currency interest rate swaps, total return swaps and foreign currency forwards.
Net investment hedges
For net investment hedges, the change in fair value of the hedging instrument, to the extent effective, is recorded in other comprehensive income
until the corresponding cumulative translation adjustments on the hedged net investment are recognized in income. The Bank designates foreign
currency liabilities and foreign currency forwards as hedging instruments to manage the foreign currency exposure and impact on capital ratios arising
from foreign operations.
Property and equipment
Land, buildings and equipment
Land is carried at cost. Buildings (including building fittings), equipment, and leasehold improvements are carried at cost less accumulated depreciation
and accumulated impairment losses, if any. Cost includes expenditures that are directly attributable to the acquisition of the asset. Depreciation is
calculated using the straight-line method over the estimated useful life of the related asset less any residual value as follows: buildings – 40 years,
building fittings – 15 years, equipment 3 to 10 years, and leasehold improvements – term of lease plus one renewal period up to a maximum of
15 years. Depreciation expense is included in the Consolidated Statement of Income under operating expenses – depreciation and amortization.
Depreciation methods, useful lives and residual values are reassessed at each financial year-end and adjusted as appropriate.
When major components of building and equipment have different useful lives, they are accounted for separately and depreciated over each
component’s estimated useful life.
Net gains and losses on disposal are included in non-interest income – other in the Consolidated Statement of Income in the year of disposal.
Investment property
Investment property is property held either for rental income or for capital appreciation or for both. The Bank holds certain investment properties
which are presented in property and equipment on the Consolidated Statement of Financial Position.
Investment property is carried at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated using the
straight-line method over the estimated useful life of 40 years. Depreciation methods, useful lives and residual values are reassessed at each financial
year-end and adjusted as appropriate.
Assets held-for-sale
Non-current non-financial assets (and disposal groups) are classified as held-for-sale if their carrying amount will be recovered principally through a
sale transaction rather than through continuing use. These assets meet the criteria for classification as held-for-sale if they are available for immediate
sale in their present condition and their sale is considered highly probable to occur within one year.
Non-current non-financial assets classified as held-for-sale are measured at the lower of their carrying amount and fair value (less costs to sell) and are
presented within other assets in the Consolidated Statement of Financial Position. Any subsequent write-down to fair value less costs to sell is
recognized in the Consolidated Statement of Income, in non-interest income. Any subsequent increase in the fair value less costs to sell, to the extent
this does not exceed the cumulative write-down, is also recognized in non-interest income, together with any realized gains or losses on disposal.
Non-financial assets acquired in exchange for loans as part of an orderly realization are recorded as assets held-for-sale or assets held-for-use. If the
acquired asset does not meet the requirement to be considered held-for-sale, the asset is considered held-for-use, measured initially at cost which
equals the carrying value of the loan and accounted for in the same manner as a similar asset acquired in the normal course of business.
Business combinations and goodwill
The Bank follows the acquisition method of accounting for the acquisition of subsidiaries. The Bank considers the date on which control is obtained and
it legally transfers the consideration for the acquired assets and assumed liabilities of the subsidiary to be the date of acquisition. The cost of an
acquisition is measured at the fair value of the consideration paid. The fair value of the consideration transferred by the Bank in a business combination
is calculated as the sum of the acquisition date fair value of the assets transferred by the Bank, the liabilities incurred by the Bank to former owners of
the acquiree, and the equity interests, including any options, issued by the Bank. The Bank recognizes the acquisition date fair values of any previously
held investment in the subsidiary and contingent consideration as part of the consideration transferred in exchange for the acquisition. A gain or loss on
any previously held investments of an acquiree is recognized in non-interest income – other in the Consolidated Statement of Income.
In general, all identifiable assets acquired (including intangible assets) and liabilities assumed (including any contingent liabilities) are measured at the
acquisition date fair value. The Bank records identifiable intangible assets irrespective of whether the assets have been recognized by the acquiree
before the business combination. Non-controlling interests, if any, are recognized at their proportionate share of the fair value of identifiable assets
and liabilities, unless otherwise indicated. Where the Bank has an obligation to purchase a non-controlling interest for cash or another financial asset,
144 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
a portion of the non-controlling interest is recognized as a financial liability based on management’s best estimate of the present value of the
redemption amount. Where the Bank has a corresponding option to settle the purchase of a non-controlling interest by issuing its own common
shares, no financial liability is recorded.
Any excess of the cost of acquisition over the Bank’s share of the net fair value of the identifiable assets acquired and liabilities assumed is recorded as
goodwill. If the cost of acquisition is less than the fair value of the Bank’s share of the identifiable assets acquired and liabilities assumed, the resulting
gain is recognized immediately in non-interest income – other in the Consolidated Statement of Income.
During the measurement period (which is within one year from the acquisition date), the Bank may, on a retrospective basis, adjust the amounts
recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date.
The Bank accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received.
Subsequent to acquisition, the Bank accounts for the following assets and liabilities recognized in a business combination as described below:
Š Contingent liabilities, until resolved, are measured at the higher of the amount that would be recognized as a provision or the amount initially
recognized, with any change recognized in the Consolidated Statement of Income.
Š Indemnification assets are measured on the same basis as the item to which the indemnification relates.
Š Contingent consideration classified as a liability is measured at fair value, with any change recognized in the Consolidated Statement of Income.
Š Liabilities to non-controlling interest holders when remeasured at the end of each reporting period, a corresponding change is recorded in equity.
After initial recognition of goodwill in a business combination, goodwill in aggregate is measured at cost less any accumulated impairment losses.
Goodwill is not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired.
Goodwill is reviewed at each reporting date to determine whether there is any indication of impairment. For the purpose of impairment testing,
goodwill acquired in a business combination is, on the acquisition date, allocated to each of the Bank’s group of cash-generating units (CGUs) that is
expected to benefit from the combination. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested
reflects the lowest level at which goodwill is monitored for internal management purposes. Goodwill impairment, at a standalone subsidiary level, may
not in itself result in an impairment at the consolidated Bank level.
The carrying amount of the CGU is determined by management using approved internal economic capital models. These models consider various factors
including credit risk, market risk, operational risk and other relevant business risks for each CGU. The recoverable amount is the greater of fair value less
costs of disposal and value in use. If either fair value less costs of disposal or value in use exceeds the carrying amount, there is no need to determine the
other. The recoverable amount of the CGU has been determined using the fair value less costs of disposal method. The estimation of fair value less costs
of disposal involves significant judgment in the determination of inputs. In determining fair value less costs of disposal, an appropriate valuation model is
used which considers various factors including normalized net income, control premiums and price earnings multiples. These calculations are
corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. An impairment loss is
recognized if the carrying amount of the CGU exceeds the recoverable amount. An impairment loss, in respect of goodwill, is not reversed.
Intangible assets
Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business combination or generated
internally. The Bank’s intangible assets are mainly comprised of computer software, customer relationships, contract intangibles, core deposit
intangibles and fund management contracts.
The cost of a separately acquired intangible asset includes its purchase price and directly attributable costs of preparing the asset for its intended use.
Intangibles acquired as part of a business combination are initially recognized at fair value.
In respect of internally generated intangible assets, cost includes all directly attributable costs necessary to create, produce, and prepare the asset to
be capable of operating in the manner intended by management.
After initial recognition, an intangible asset is carried at its cost less any accumulated amortization and accumulated impairment losses.
Intangible assets that have finite useful lives are initially measured at cost and are amortized on a straight-line basis over their useful lives as follows:
computer software – 5 to 10 years; and other intangible assets – 5 to 20 years. Amortization expense is included in the Consolidated Statement of
Income under operating expenses – depreciation and amortization. As intangible assets are considered to be non-financial assets, the impairment
model for non-financial assets is applied. Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually and
when circumstances indicate that the carrying value may be impaired.
Impairment of non-financial assets
The carrying amount of the Bank’s non-financial assets, other than goodwill and indefinite life intangible assets and deferred tax assets which are
separately addressed, is reviewed at each reporting date to determine whether there is any indication of impairment. For the purpose of impairment
testing, non-financial assets that cannot be tested individually are grouped together into the smallest group of assets that generate cash inflows from
continuing use that are largely independent from the cash inflows of other assets or groups of assets.
If any indication of impairment exists then the asset’s recoverable amount is estimated. The recoverable amount of an asset or CGU is the greater of
its value in use and its fair value less costs of disposal. The Bank’s corporate assets do not generate separate cash inflows. If there is an indication that
a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.
An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses of continuing
operations are recognized in the Consolidated Statement of Income in those expense categories consistent with the nature of the impaired asset.
Impairment losses recognized in prior periods are reassessed at each reporting date for any indication that the loss had decreased or no longer exists.
An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed
only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized. Such reversal is recognized in the Consolidated Statement of Income.
145 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Significant judgment is applied in determining the non-financial asset’s recoverable amount and assessing whether certain events or circumstances
constitute objective evidence of impairment.
Corporate income taxes
The Bank follows the balance sheet liability method for corporate income taxes. Under this method, deferred tax assets and liabilities represent the
cumulative amount of tax applicable to temporary differences which are the differences between the carrying amount of the assets and liabilities, and
their values for tax purposes. Deferred tax assets are recognized only to the extent it is probable that sufficient taxable profits will be available against
which the benefit of these deferred tax assets can be utilized.
Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where the Bank has both the legal
right and the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.
The Bank maintains provisions for uncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit, dispute,
or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the Bank’s best estimate of
the amount expected to be paid based on an assessment of all relevant factors, which are reviewed at the end of each reporting period.
Income tax is recognized in the Consolidated Statement of Income except where it relates to items recognized in other comprehensive income or
directly in equity, in which case income tax is recognized in the same line as the related item.
Leases
Bank as a lessor
Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title,
are classified as finance leases and presented within loans in the Consolidated Statement of Financial Position. When assets held are subject to a
finance lease, the leased assets are derecognized and a receivable is recognized which is equal to the present value of the minimum lease payments,
discounted at the interest rate implicit in the lease. Initial direct costs incurred in negotiating and arranging a finance lease are incorporated into the
receivable through the discount rate applied to the lease. Finance lease income is recognized over the lease term based on a pattern reflecting a
constant periodic rate of return on the net investment in the finance lease. Finance lease income is included in the Consolidated Statement of Income
under interest income from loans.
Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating
leases. The leased assets are included within property and equipment on the Bank’s Consolidated Statement of Financial Position. Rental income is
recognized on a straight-line basis over the period of the lease in non-interest income – other in the Consolidated Statement of Income. Initial direct
costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized as an expense on
a straight-line basis over the lease term.
Bank as a lessee
Assets held under finance leases are initially recognized as property and equipment in the Consolidated Statement of Financial Position at an amount
equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments. The corresponding finance lease obligation is
included in other liabilities in the Consolidated Statement of Financial Position. The discount rate used in calculating the present value of the minimum
lease payments is the interest rate implicit in the lease. Contingent rentals are recognized as expense in the periods in which they are incurred.
Operating lease rentals payable are recognized as an expense on a straight-line basis over the lease term, which commences when the lessee controls
the physical use of the asset. Lease incentives are treated as a reduction of rental expense and are also recognized over the lease term on a straight-
line basis. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.
Sale and lease-back
Where the Bank enters into a sale leaseback transaction for a non-financial asset at fair market value that results in the Bank retaining an operating
lease (where the buyer/lessor retains substantially all risks and rewards of ownership), any gains and losses are recognized immediately in net income.
Where the sale leaseback transaction results in a finance lease, any gain on sale is deferred and recognized in net income over the remaining term of
the lease.
Leasehold improvements
Leasehold improvements are investments made to customize buildings and offices occupied under operating lease contracts to make them suitable for
their intended purpose. The present value of estimated reinstatement costs to bring a leased property into its original condition at the end of the
lease, if required, is capitalized as part of the total leasehold improvements costs. At the same time, a corresponding liability is recognized to reflect
the obligation incurred. Reinstatement costs are recognized in net income through depreciation of the capitalized leasehold improvements over their
estimated useful life.
Provisions
A provision, including for restructuring, is recognized if, as a result of a past event, the Bank has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
The amount recognized as a provision is the Bank’s best estimate of the consideration required to settle the present obligation, taking into account
the risks and uncertainties surrounding the obligation. If the effect of the time value of money is considered material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where
appropriate, the risks specific to the liability. The increase in the provision due to the passage of time is recorded as interest expense – other in the
Consolidated Statement of Income.
146 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Insurance contracts
Gross premiums for life insurance contracts are recognized as income when due. Gross premiums for non-life insurance business primarily property and
casualty are recognized as income over the term of the insurance contracts. Unearned premiums represent the portion of premiums written in the current
year that relate to the period of risk after the reporting date. Insurance claims recoveries are accounted as income in the same period as the related claims.
Gross insurance claims for life insurance contracts reflect the cost of all claims arising during the year. Gross insurance claims for property and casualty
insurance contracts include paid claims and movements in outstanding claim liabilities. Insurance premiums ceded to reinsurers are accounted as an
expense in the same period as the premiums for the direct insurance contracts to which they relate.
Guarantees
A guarantee is a contract that contingently requires the Bank to make specified payments to reimburse the holder for a loss it incurs because a
specified debtor failed to make payment when due in accordance with the original or modified terms of a debt instrument. Guarantees include
standby letters of credit, letters of guarantee, indemnifications, credit enhancements and other similar contracts. Guarantees that qualify as a
derivative are accounted for in accordance with the policy for derivative instruments. For guarantees that do not qualify as a derivative, a liability is
recorded for the fair value of the obligation assumed at inception. The fair value of the obligation at inception is generally based on the discounted
cash flow of the premium to be received for the guarantee, resulting in a corresponding asset. Subsequent to initial recognition, such guarantees are
measured at the higher of the initial amount, less amortization to recognize any fee income earned over the period, and the best estimate of the
amount required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability is reported in the Consolidated
Statement of Income.
Employee benefits
The Bank provides pension and other benefit plans for eligible employees in Canada, the United States and other international operations. Pension
benefits are predominantly offered in the form of defined benefit pension plans (generally based on an employee’s length of service and the final five
years’ average salary), with some pension benefits offered in the form of defined contribution pension plans (where the Bank’s contribution is fixed
and there is no legal or constructive obligation to pay further amounts). Other benefits provided include post-retirement health care, dental care and
life insurance, along with other long-term employee benefits such as long-term disability benefits.
Defined benefit pension plans and other post-retirement benefit plans
The cost of these employee benefits is actuarially determined each year using the projected unit credit method. The calculation uses management’s
best estimate of a number of assumptions – including the discount rate, future compensation, health care costs, mortality, as well as the retirement
age of employees. The discount rate is based on the yield at the reporting date on high quality corporate bonds that have durations approximating the
terms of the Bank’s obligations. This discount rate must also be used to determine the annual benefit expense.
The Bank’s net asset or liability in respect of employee benefit plans is calculated separately for each plan as the difference between the present value
of future benefits earned in respect of service for prior periods and the fair value of plan assets. The net asset or liability is included in other assets and
other liabilities, as appropriate, in the Consolidated Statement of Financial Position. When the net amount in the Consolidated Statement of Financial
Position is an asset, the recognized asset is limited to the present value of any economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.
The current service cost, net interest expense (income), past service cost, and administrative expense are recognized in net income. Net interest income
or expense is calculated by applying the discount rate used to measure the obligation at the beginning of the annual period to the net defined benefit
asset or liability. When the benefits of a plan are improved (reduced), a past service cost (credit) is recognized immediately in net income.
Remeasurements comprising of actuarial gains and losses, the effect of the asset ceiling and the change in the return on plan assets are recognized
immediately in the Consolidated Statement of Financial Position with a charge or credit to the Statement of Comprehensive Income (OCI) in the
period in which they occur. Amounts recorded in OCI are not recycled to the Consolidated Statement of Income.
Other long-term employee benefits
Other long-term employee benefits are accounted for similar to defined benefit pension plans and other post-retirement benefit plans described above
except that remeasurements are recognized in the Consolidated Statement of Income in the period in which they arise.
Defined contribution plans
The cost of such plans are equal to contributions payable by the Bank to employees’ accounts for service rendered during the period and expensed.
Short-term employee benefits
Short-term employee benefits are expensed as the related service is provided and a liability is measured on an undiscounted basis net of payments made.
Recognition of income and expenses
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The
following specific criteria must also be met before revenue is recognized:
Interest and similar income and expenses
For all non-trading interest-bearing financial instruments, interest income or expense is recorded in net interest income using the effective interest
rate. This is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a
shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all the
contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly
attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses.
For trading financial instruments, mark-to-market changes including related interest income or expense is recorded in trading revenues.
147 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
The carrying amount of interest-bearing financial instruments, measured at amortized cost or classified as available-for-sale, is adjusted if the Bank
revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in
carrying amount is recorded as non-interest income in the Consolidated Statement of Income.
Once the carrying value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income
continues to be recognized based on net effective interest rate inherent in the investment.
Loan origination costs are deferred and amortized into interest income using the effective interest method over the expected term of the loan. Loan
fees are recognized in interest income over the appropriate lending or commitment period. Mortgage prepayment fees are recognized in interest
income when received, unless they relate to a minor modification to the terms of the mortgage, in which case the fees are deferred and amortized
using the effective interest method over the remaining period of the original mortgage.
Loan syndication fees are recognized when no other services are required of the Bank and the fees are non-refundable unless the yield we retain is
less than that of comparable lenders in the syndicate. In such cases, an appropriate portion will be deferred and amortized in interest income over the
term of the loan.
Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and
recognized as part of the effective interest on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognized
over the commitment period on a straight-line basis.
Interest income and interest expense from trading operations are presented in trading revenues, in the Consolidated Statement of Income.
Fee and commission revenues
The Bank earns fee and commission revenues from a diverse range of services it provides to its customers. Fee income can be divided into the
following two categories:
Fees earned for the provision of services over a period of time are accrued over that period the services are provided. These fees include commission
income, investment management, custody and other management and advisory fees. Investment management fees and custodial fees are mainly
calculated as a percentage of daily or period-end market value of the assets under management (AUM) or assets under administration (AUA) and are
received monthly, quarterly, semi-annually, or annually based on the underlying investment management contracts. Performance-based fees related to
AUM are earned based on exceeding certain benchmarks or other performance targets, are recognized at the end of the performance period in which
the target is met.
Fees arising from negotiating or participating in the negotiation of a transaction for a third-party, such as the arrangement of the acquisition of shares
or other securities or the purchase or sale of businesses, are recognized on completion of the underlying transaction. Fees or components of fees that
are linked to a certain performance are recognized after fulfilling the corresponding criteria.
Fee and commission expenses
Fee and commission expenses relate to transaction and service fees which are expensed as the services are received.
Dividend income
Dividend income on equity securities is recognized in interest income when the Bank’s right to receive payment is established.
Share-based payments
Share-based payments awarded to employees are recognized as compensation expense in the Consolidated Statement of Income over the vesting
period based on the number of awards expected to vest including the impact of expected forfeitures. For awards that are delivered in tranches, each
tranche is considered a separate award and accounted for separately.
Stock appreciation rights and other awards that must be settled for cash are classified as liabilities. Liability-classified awards are re-measured to fair value at
each reporting date while they remain outstanding, with any changes in fair value recognized in compensation expense in the period. The liability is
expensed over the vesting period which incorporates the re-measurement of the fair value and a revised forfeiture rate that anticipates units expected to vest.
Employee stock options with tandem stock appreciation rights give the employee the right to exercise for shares or settle in cash. These options are
classified as liabilities and are re-measured to fair value at each reporting date while they remain outstanding. If an option is exercised, thereby
cancelling the tandem stock appreciation right, both the exercise price proceeds together with the accrued liability and associated taxes are credited to
equity – common shares in the Consolidated Statement of Financial Position.
Plain vanilla options and other awards that must be settled for shares are classified as equity awards. Equity-classified awards are expensed based on
the grant date fair value with a corresponding increase to equity – other reserves in the Consolidated Statement of Financial Position. If an option is
exercised, both the exercise price proceeds together with the amount recorded in other reserves is credited to equity – common shares in the
Consolidated Statement of Financial Position.
For tandem stock appreciation rights, stock appreciation rights and plain vanilla options, the Bank estimates fair value using an option pricing model.
The option pricing model requires inputs such as the exercise price of the option, the current share price, the risk free interest rate, expected
dividends, expected volatility (calculated using an equal weighting of implied and historical volatility) and specific employee exercise behaviour
patterns based on statistical data. For other awards, fair value is the quoted market price of the Bank’s common shares at the reporting date.
Where derivatives are used to economically hedge share-based payment expense, related mark-to-market gains and losses are included in non-interest
expenses – salaries and employee benefits in the Consolidated Statement of Income.
A voluntary renouncement of a tandem stock appreciation right where an employee retains the corresponding option for shares with no change in
the overall fair value of the award, results in a reclassification of the accrued liability and associated tax to equity – other reserves in the Consolidated
Statement of Financial Position. This reclassification is measured at the fair value of the renounced awards as of the renouncement date. Subsequent
to the voluntary renouncement, these awards are accounted for as plain vanilla options, based on the fair value as of the renouncement date.
Customer loyalty programs
The Bank operates loyalty points programs, which allow customers to accumulate points when they use the Bank’s products and services. The points
can then be redeemed for free or discounted products or services, subject to certain conditions.
148 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Consideration received is allocated between the products sold or services rendered and points issued, with the consideration allocated to points equal
to their fair value. The fair value of points is generally based on equivalent retail prices for the mix of awards expected to be redeemed. The fair value
of the points issued is deferred in other liabilities and recognized as banking revenues when the points are redeemed or lapsed. Management
judgment is involved in determining the redemption rate to be used in the estimate of points to be redeemed.
Dividends on shares
Dividends on common and preferred shares are recognized as a liability and deducted from equity when they are approved by the Bank’s Board.
Dividends are deducted from equity when they are declared and no longer at the discretion of the Bank.
Segment reporting
Management’s internal view is the basis for the determination of operating segments. The operating segments are those whose operating results are
regularly reviewed by the Bank’s chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its
performance. The Bank has three operating segments: Canadian Banking, International Banking, and Global Banking and Markets. The other category
represents smaller operating segments, including Group Treasury and other corporate items, which are not allocated to an operating segment. These
segments offer different products and services and are managed separately based on the Bank’s management and internal reporting structure.
The results of these business segments are based upon the internal financial reporting systems of the Bank. The accounting policies used in these
segments are generally consistent with those followed in the preparation of the consolidated financial statements by the Bank. The only notable
accounting measurement difference is the grossing up of revenues which are tax-exempt and income from associate corporations to an equivalent
before-tax basis for those affected segments. This change in measurement enables comparison of income arising from taxable and tax-exempt sources.
Because of the complexity of the Bank, various estimates and allocation methodologies are used in the preparation of the business segment financial
information. The funding value of assets and liabilities is transfer-priced at wholesale market rates, and corporate expenses are allocated to each
segment on an equitable basis using various parameters. As well, capital is apportioned to the business segments on a risk-based methodology.
Transactions between segments are recorded within segment results as if conducted with a third-party and are eliminated on consolidation.
Earnings per share (EPS)
Basic EPS is computed by dividing net income for the period attributable to the Bank’s common shareholders by the weighted-average number of
common shares outstanding during the period.
Diluted EPS is calculated by dividing adjusted net income for the period attributable to common shareholders by the weighted-average number of
diluted common shares outstanding for the period. In the calculation of diluted earnings per share, earnings are adjusted for changes in income or
expenses that would result from the issuance of dilutive shares. The weighted-average number of diluted common shares outstanding for the period
reflects the potential dilution that would occur if options, securities or other contracts that entitle their holders to obtain common shares had been
outstanding from the beginning of the period (or a later date) to the end of the period (or an earlier date). Instruments determined to have an
antidilutive impact for the period are excluded from the calculation of diluted EPS.
Earnings are adjusted by the after-tax amount of distributions related to dilutive capital instruments recognized in the period. For tandem stock
appreciation rights that are carried as liabilities, the after-tax re-measurement included in salaries and employee benefits expense, net of related
hedges, is adjusted to reflect the expense had these rights been equity-classified.
The number of additional shares for inclusion in diluted EPS for share-based payment options is determined using the treasury share method. Under
this method, the net number of incremental common shares is determined by assuming that in-the-money stock options are exercised and the
proceeds are used to purchase common shares at the average market price during the period.
The number of additional shares associated with capital instruments that potentially result in the issuance of common shares is based on the terms of
the contract.
4
Recently adopted accounting standards
Changes in accounting policies during the year
The Bank has adopted the following new accounting standards issued by the IASB effective November 1, 2014. The new accounting policies used by
the Bank have been described below:
Presentation of own credit risk (IFRS 9)
The own credit risk provisions of IFRS 9, Financial Instruments, changes the accounting for liabilities designated at fair value through profit or loss such
that changes in fair value arising from changes in the Bank’s own credit risk are recognized in other comprehensive income unless doing so creates or
increases an accounting mismatch. Cumulative fair value changes related to own credit risk recognized in other comprehensive income cannot be
subsequently reclassified to net income. This replaces the previous requirement in IAS 39, Financial Instruments: Recognition and Measurement, to
recognize such changes in net income.
In July 2014, the IASB issued the final IFRS 9 standard which permitted entities to early adopt this requirement prior to the IFRS 9 mandatory effective
date of January 1, 2018. The Bank early adopted this requirement as it relates to deposit note liabilities designated at fair value through profit or loss,
effective November 1, 2014. This change was applied retrospectively. However, in accordance with the IFRS 9 transition provisions, prior period
comparatives have not been restated. The impact of this change on opening retained earnings was an increase of $5 million and on accumulated
other comprehensive income was a decrease of $5 million.
Levies (IFRIC 21)
IFRIC 21, Levies, provides guidance on when to recognize a liability to pay a levy imposed by government that is accounted for in accordance with
IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and also for a liability to pay a levy whose timing and amount is certain. The
interpretation clarifies that an obligating event, as identified by the legislation would trigger the recognition of a liability to pay a levy. While the
interpretation discusses the timing of the recognition, it does not change the measurement of the amount to be recognized. The adoption of IFRIC 21
did not have a significant impact on the Bank.
149 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Novation of derivatives and contribution of hedge accounting (IAS 39)
The amendment to IAS 39, Financial Instruments: Recognition and Measurement, adds a limited exception to IAS 39 to allow hedge accounting to
continue in a situation where a derivative, which has been designated as a hedging instrument, is novated to effect clearing with a central
counterparty as a result of laws and regulation, if specific conditions are met. The amendment did not have a significant impact to the Bank.
Financial instruments: presentation (IAS 32)
The amendments to IAS 32, Financial Instruments: Presentation, clarifies the requirements relating to offsetting financial assets and financial liabilities.
The adoption of these amendments did not have a significant impact on the Bank.
Disclosures of non-financial assets (IAS 36)
The IASB issued narrow-scope amendments to the disclosure requirements in IAS 36, Impairment of Assets, to require additional disclosures for an
individual asset or cash-generating unit for which a material impairment loss has been recognized or reversed where its determination is based on fair
value less costs of disposal (FVLCOD). If there has been a change in the valuation technique, the Bank is also required to disclose the reason for
making the change. No additional disclosure was made as a result of this amendment since the Bank did not recognize or reverse an impairment loss
for non-financial assets where the recoverable amount was determined based on FVLCOD.
5
Future accounting developments
The Bank actively monitors developments and changes in standards from the IASB as well as regulatory requirements from the Canadian Securities
Administrators and OSFI. The Bank is currently assessing the impact of adoption of IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts
with Customers, on its consolidated financials.
Effective November 1, 2017
Financial instruments
On July 24, 2014, the IASB issued IFRS 9, Financial Instruments, which will replace IAS 39. The standard covers three broad topics: Classification and
Measurement, Impairment and Hedging.
On January 9, 2015, the Office of the Superintendent of Financial Institutions (OSFI) issued an advisory on the early adoption of IFRS 9 for Domestic
Systematically Important Banks (D-SIBs) for annual reporting periods beginning on November 1, 2017. The Bank has been identified as a D-SIB and is
required to adopt IFRS 9 beginning on November 1, 2017, with the exception of the own credit risk of liabilities designated at fair value through profit
or loss, which the Bank early adopted effective November 1, 2014.
Classification and measurement
The standard requires the Bank to consider two criteria when determining the measurement basis for debt instruments held as financial assets, i) its
business model for managing those financial assets and ii) the cash flows characteristics of the asset. Equity investments are measured at FVTPL;
however, at initial recognition of, and date of transition of, a non-trading equity investment, the Bank may irrevocably elect to designate the
investment as FVOCI with no subsequent recycling to profit and loss. IFRS 9 requirements related to financial liabilities have been carried forward
unchanged from IAS39. In addition, the Bank may, at initial recognition, irrevocably elect to designate a financial asset as FVTPL, if doing so eliminates
or significantly reduces an accounting mismatch which would otherwise arise.
Impairment
The standard introduces a new single model for the measurement of impairment losses on all financial instruments including loans and debt securities
measured at amortized cost or at fair value through OCI. The IFRS 9 expected credit loss (ECL) model replaces the current “incurred loss” model of IAS 39.
The ECL model contains a three stage approach which is based on the change in credit quality of loans since initial recognition. Under the first stage,
where there has not been a significant increase in credit risk since initial recognition, an amount equal to 12 months ECL will be recorded. Under the
second stage, where there has been a significant increase in credit risk since initial recognition; however, the financial instruments are not considered
credit impaired, an amount equal to the lifetime ECL will be recorded.
Under the third stage, where there is an objective evidence of impairment at the reporting date these financial assets will be classified as credit
impaired and an amount equal to the lifetime expected credit losses will be recorded for the financial assets.
The ECL model is forward looking and requires the use of reasonable and supportable forecasts of future economic conditions in the determination of
significant increases in credit risk and measurement of expected credit losses.
Hedging
The standard expands the scope of hedged items and hedging items to which hedge accounting can be applied and aims to better align the
accounting with the risk management activities of the Bank.
Financial instruments: disclosures (IFRS 7)
IFRS 7, Financial Instruments: Disclosures, has been amended to include more extensive qualitative and quantitative disclosure relating to IFRS 9 such
as new classification categories, three stage impairment model, new hedge accounting requirements and transition provisions.
IFRS 9 must be adopted retrospectively. Restatement of comparatives is not required; however it is permitted. The Bank is currently assessing the
impact of adopting this new standard.
Transition elections
The Bank is permitted to defer the adoption of the hedge accounting requirements of IFRS 9 to a future period and continue to apply the hedge
accounting requirements of IAS 39. However, the hedging disclosure requirements of IFRS 9 will apply to the Bank regardless of the choice made.
At the date of transition, the Bank is permitted to make a one-time irrevocable reassessment of its fair value option designations for its financial assets
and liabilities.
150 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Effective November 1, 2018
Revenue from contracts with customers
On May 28, 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which provides a single principle based framework to be applied
to all contracts with customers. IFRS 15 replaces the previous revenue standard IAS 18, Revenue, and the related Interpretations on revenue
recognition. The standard scopes out contracts that are considered to be lease contracts, insurance contracts and financial instruments, and as such
will impact the businesses that earn fee and commission revenues. The new standard is a control-based model as compared to the existing revenue
standard which is primarily focused on risks and rewards. Under the new standard revenue is recognized when a customer obtains control of a good
or service. Transfer of control occurs when the customer has the ability to direct the use of and obtain the benefits of the good or service. The
standard is effective for the Bank on November 1, 2018, with early adoption permitted, using either a full retrospective approach or a modified
retrospective approach. A majority of the Bank’s revenue generating instruments meets the definition of financial instruments and remains out of
scope. The areas of focus for the Bank’s assessment will be fees and commission revenues from wealth management and other banking services.
6
Cash and deposits with financial institutions
As at October 31 ($ millions)
Cash and non-interest-bearing deposits with financial institutions
Interest-bearing deposits with financial institutions
Total
2015
2014
$ 6,724
$ 5,828
67,203
50,902
$ 73,927
$ 56,730
The Bank is required to maintain balances with central banks, other regulatory authorities and certain counterparties and these amount to
$6,219 million (2014 – $4,628 million).
7
Fair value of financial instruments
Determination of fair value
The calculation of fair value is based on market conditions at a specific point in time and therefore may not be reflective of future fair values. The Bank
has controls and processes in place to ensure that the valuation of financial instruments is appropriately determined.
The best evidence of fair value for a financial instrument is the quoted price in an active market. Quoted market prices represent a Level 1 valuation.
Where possible, valuations are based on quoted prices or observable inputs obtained from active markets. Independent Price Verification (IPV) is
undertaken to assess the reliability and accuracy of prices and inputs used in the determination of fair value. The IPV process is performed by price
verification groups that are independent from the business. The Bank maintains a list of pricing sources that are used in the IPV process. These sources
include, but are not limited to, brokers, dealers and consensus pricing services. The valuation policies relating to the IPV process require that all pricing
or rate sources used be external to the Bank. On a periodic basis, an independent assessment of pricing or rate sources is performed to determine
market presence or market representative levels.
Quoted prices are not always available for over-the-counter transactions, as well as transactions in inactive or illiquid markets. In these instances,
internal models that maximize the use of observable inputs are used to estimate fair value. The chosen valuation technique incorporates all the factors
that market participants would take into account in pricing a transaction. When all significant inputs to models are observable, the valuation is
classified as Level 2. Financial instruments traded in a less active market are valued using indicative market prices, present value of cash-flows or other
valuation techniques. Fair value estimates normally do not consider forced or liquidation sales.
Where financial instruments trade in inactive markets or when using models where observable parameters do not exist, greater management
judgment is required for valuation purposes. Valuations that require the significant use of unobservable inputs are considered Level 3.
The specific inputs and valuation techniques used in determining the fair value of financial instruments are noted below. For Level 3 instruments,
additional information is disclosed in the Level 3 sensitivity analysis on page 156.
The fair values of cash and deposits with banks, securities purchased under resale agreements and securities borrowed, customers’ liability under
acceptances, obligations related to securities sold under repurchase agreements and securities lent, acceptances, and obligations related to securities
sold short are assumed to approximate their carrying values, either due to their short-term nature or because they are frequently repriced to current
market rates.
Trading loans
Trading loans as they relate to precious metals (primarily gold and silver) are valued using a discounted cash flow model incorporating market-
observable inputs, including precious metals spot and forward prices and interest rate curves (Level 2). Other trading loans that serve as hedges to
loan-based credit total return swaps are valued using consensus prices from Bank approved independent pricing services (Level 2).
Government issued or guaranteed securities
The fair values of government issued or guaranteed debt securities are primarily based on quoted prices in active markets, where available. Where
quoted prices are not available, the fair value is determined by utilizing recent transaction prices, broker quotes, or pricing services (Level 2).
For securities that are not actively traded, the Bank uses a discounted cash flow method, using the effective yield of a similar instrument adjusted for
instrument-specific risk factors such as credit spread and contracted features (Level 2).
Corporate and other debt
Corporate and other debt securities are valued using prices from independent market data providers or third-party broker quotes. Where prices are not
available consistently, the last available data is used and verified with a yield-based valuation approach (Level 2). In some instances, interpolated yields of
151 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
similar bonds are used to price securities (Level 2). The Bank uses pricing models with observable inputs from market sources such as credit spread,
interest rate curves, and recovery rates (Level 2). These inputs are verified through an Independent Pricing Valuation process on a monthly basis.
For certain securities where there is no active market, no consensus market pricing and no indicative or executable independent third-party quotes, the
Bank uses pricing by third-party providers or internal pricing models and cannot readily observe the market inputs used to price such instruments (Level 3).
Mortgage-backed securities
The fair value of residential mortgage-backed securities is primarily determined using third-party broker quotes and independent market data
providers, where the market is more active (Level 2). Where the market is inactive, an internal price-based model is used (Level 3).
Equity securities
The fair value of equity securities is based on quoted prices in active markets, where available. Where equity securities are less frequently traded, the
most recent exchange-quoted pricing is used to determine fair value. Where there is a wide bid-offer spread, fair value is determined based on quoted
market prices for similar securities (Level 2).
Where quoted prices in active markets are not readily available, such as for private equity securities, the fair value is determined as a multiple of the
underlying earnings or percentage of underlying assets obtained from third-party general partner statements (Level 3).
Income funds and hedge funds
The fair value of income funds and hedge funds is based on observable quoted prices where available. Where quoted or active market prices are
unavailable, the last available Net Asset Value, fund statements and other financial information available from third-party fund managers at the fund
level are used in arriving at the fair value. These inputs are not considered observable because we cannot redeem these funds at Net Asset Value
(Level 3).
Derivatives
Fair values of exchange-traded derivatives are based on quoted market prices. Fair values of over-the-counter (OTC) derivatives or inactive exchange-
traded derivatives are determined using pricing models, which take into account input factors such as current market and contractual prices of the
underlying instruments, as well as time value and yield curve or volatility factors underlying the positions (Level 2). The determination of the fair value
of derivatives includes consideration of credit risk, estimated funding costs and ongoing direct costs over the life of the instruments.
Derivative products valued using a valuation technique with market-observable inputs mainly include interest rate swaps and options, currency swaps
and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present
value calculations. The models incorporate various inputs including foreign exchange spot and forward rates and interest rate curves (Level 2).
Derivative products valued using a valuation technique with significant unobservable inputs are long dated contracts (interest rate swaps, currency
swaps, forward foreign exchange contracts, option contracts and certain credit default swaps) and other derivative products that reference a basket of
assets, commodities or currencies. These models incorporate certain significant non-observable inputs such as volatility and correlation (Level 3).
Loans
The estimated fair value of loans carried at amortized cost reflects changes in the general level of interest rates and credit worthiness of borrowers
that have occurred since the loans were originated or purchased. The particular valuation methods used are as follows:
Š Canadian fixed rate residential mortgages are fair valued by discounting the expected future contractual cash flows, taking into account expected
prepayments and using management’s best estimate of average market interest rates currently offered for mortgages with similar remaining terms
(Level 3).
Š For fixed rate business and government loans, fair value is determined by discounting the expected future contractual cash flows of these loans at
interest rates estimated by using the appropriate currency swap curves for the remaining term, adjusted for a credit mark of the expected losses in
the portfolio (Level 3).
Š For all other fixed rate loans, fair value is determined by discounting the expected future contractual cash flows of these loans at interest rates
estimated by using the appropriate currency swap curves for the remaining term (Level 3).
Š For all floating rate loans fair value is assumed to equal book value.
The fair value of loans is not adjusted for the value of any credit protection the Bank has purchased to mitigate credit risk.
Deposits
The fair values of deposits payable on demand or after notice or floating rate deposits payable on a fixed date is assumed to equal book value.
The estimated fair values of Canadian personal fixed rate deposits payable on a fixed date are fair valued by discounting the expected future contractual
cash outflows, using management’s best estimate of average market interest rates currently offered for deposits with similar remaining terms (Level 2).
Deposits under the Canada Mortgage Bond (CMB) program are fair valued by discounting expected future contractual cash flows using market
observable inputs (Level 2).
For all other fixed rate deposits, fair value is determined by discounting the expected future contractual cash flows of these deposits at interest rates
estimated by using the appropriate currency swap curves for the remaining term (Level 2).
For structured deposit notes containing embedded features that are bifurcated from the deposit notes, the fair value of the embedded derivatives is
determined using option pricing models with inputs similar to other interest rate or equity derivative contracts (Level 2). The fair value of certain
embedded derivatives is determined using net asset values (Level 3).
Subordinated debentures and other liabilities
The fair values of subordinated debentures, including debentures issued by subsidiaries which are included in other liabilities, are determined by
reference to quoted market prices where available or market prices for debt with similar terms and risks (Level 2). The fair values of other liabilities is
determined by the discounted contractual cash flow method with appropriate currency swap curves for the remaining term (Level 2).
152 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Fair value of financial instruments
The following table sets out the fair values of financial instruments of the Bank using the valuation methods and assumptions described above. The
fair values disclosed do not include non-financial assets, such as property and equipment, investments in associates, precious metals, goodwill and
other intangible assets.
As at October 31 ($ millions)
Assets:
Cash and deposits with financial institutions
Trading assets
Financial instruments designated at fair value through profit or
loss
Securities purchased under resale agreements and securities
borrowed
Derivative financial instruments
Investment securities
Loans
Customers’ liability under acceptances
Other financial assets
Liabilities:
Deposits
Financial instruments designated at fair value through profit or
loss
Acceptances
Obligations related to securities sold short
Derivative financial instruments
Obligations related to securities sold under repurchase
agreements and securities lent
Subordinated debentures
Other financial liabilities
Total
fair
value
2015
Total
carrying
value
Favourable/
(Unfavourable)
Total
fair
value
2014
Total
carrying
value
Favourable/
(Unfavourable)
$ 73,927
99,140
$ 73,927
99,140
$
320
320
87,312
41,003
43,281
463,047
10,296
9,024
87,312
41,003
43,216
458,628
10,296
9,024
–
–
–
–
–
65
4,419
–
–
$ 56,730
113,248
$ 56,730
113,248
$
111
111
93,866
33,439
38,662
428,616
9,876
7,029
93,866
33,439
38,662
424,309
9,876
7,029
–
–
–
–
–
–
4,307
–
–
602,606
600,919
(1,687)
555,754
554,017
(1,737)
1,486
10,296
20,212
45,270
77,015
6,234
25,778
1,486
10,296
20,212
45,270
77,015
6,182
25,443
–
–
–
–
–
(52)
(335)
465
9,876
27,050
36,438
88,953
5,073
21,668
465
9,876
27,050
36,438
88,953
4,871
21,218
–
–
–
–
–
(202)
(450)
Changes in interest rates, credit spreads and liquidity costs are the main cause of changes in the fair value of the Bank’s financial instruments resulting
in a favourable or unfavourable variance compared to carrying value. For the Bank’s financial instruments carried at cost or amortized cost, the
carrying value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes. For
available-for-sale investment securities, derivatives and financial instruments held for trading purposes or designated as fair value through profit and
loss, the carrying value is adjusted regularly to reflect the fair value.
153 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Fair value hierarchy
The following table outlines the fair value hierarchy of instruments carried at fair value on a recurring basis and of instruments not carried at fair value.
As at October 31, ($ millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
2015
2014
Instruments carried at fair value on a
recurring basis:
Assets:
Precious metals(1)
Trading assets
Loans
Canadian federal government and
government guaranteed debt
Canadian provincial and municipal debt
US treasury and other US agencies’ debt
Other foreign governments’ debt
Corporate and other debt
Income funds and hedge funds
Equity securities
Other(2)
Financial instruments designated at
fair value through profit or loss
Investment securities(3)
Canadian federal government and
government guaranteed debt
Canadian provincial government and
municipal debt
US treasury and other US agencies’ debt
Other foreign governments’ debt
Bonds of designated emerging markets
Corporate and other debt
Mortgage-backed securities
Equity securities
Derivative financial instruments
Interest rate contracts
Foreign exchange and gold contracts
Equity contracts
Credit contracts
Commodity contracts
Liabilities:
Deposits(4)
Financial instruments designated at
fair value through profit or loss
Obligations related to securities sold
short
Derivative financial instruments
Interest rate contracts
Foreign exchange and gold contracts
Equity contracts
Credit contracts
Commodity contracts
$
10,550
$
$
–
–
7,295
–
5,313
9,512
163
93
32,553
2,419
$ 57,348
$
16
$
$
18,341
–
5,281
368
1,515
13,162
1,728
107
–
51,052
279
$
$
–
–
–
–
–
–
67
1,218
5
–
$
10,550
$
18,341
7,295
5,281
5,681
11,027
13,392
3,039
32,665
2,419
–
–
13,848
–
9,212
8,004
85
144
35,564
3,377
$
7,286
$
14,508
–
7,531
1,764
2,230
12,453
2,946
217
–
–
–
–
–
–
–
32
1,282
51
–
$
7,286
14,508
13,848
7,531
10,976
10,234
12,570
4,372
35,832
3,377
1,290
$ 109,690
$ 70,234
$ 48,935
25
$
320
$
–
$
90
$
$
1,365
$ 120,534
21
$
111
$
5,752
$
1,997
$
–
$
7,749
$ 5,520
$
1,331
$
–
$
6,851
1,085
9,678
6,003
–
921
97
1,665
$ 25,201
$
$
$
$
–
1
173
–
1,656
1,830
–
–
$ 17,073
$
–
3
233
–
1,201
2,621
150
6,233
–
4,212
187
224
15,624
14,584
19,741
2,032
850
1,828
39,035
43
1,486
3,139
13,443
21,470
2,172
2,542
3,943
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,437
$
43,570
$
–
–
447
–
137
23
1,133
1,740
36
–
102
–
–
138
1,192
–
–
81
–
170
12
–
263
3,706
9,828
12,683
–
5,270
307
3,022
803
6,096
5,793
–
889
–
3,087
2,500
130
4,779
45
5,260
99
208
42,565
$ 22,188
$ 14,352
$
14,620
19,742
2,307
850
3,484
–
2
237
–
875
$ 12,668
14,996
1,547
970
1,380
41,003
$ 1,114
$ 31,561
1,235
1,486
$
$
–
–
20,212
$ 24,025
$
$
$
136
465
3,025
$
13,524
21,473
2,575
2,554
5,144
–
3
463
–
579
$ 13,003
13,927
1,711
3,947
2,295
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
45,270
$ 1,045
$ 34,883
$
–
–
411
–
500
39
1,006
3,303
6,226
10,983
45
6,649
138
4,301
1,956
$ 38,496
146
–
573
4
41
764
1,011
–
–
52
–
456
2
–
510
$ 12,814
14,998
2,357
974
2,296
$ 33,439
$
$
1,147
465
$ 27,050
$ 13,055
13,930
2,630
3,949
2,874
$ 36,438
Instruments not carried at fair value(5):
Assets:
Investment securities – Held to maturity
Loans(6)
$
$
131
–
585
–
$
–
260,583
$
716
260,583
$
Liabilities:
Deposits(6)(7)
Subordinated debt
Other liabilities
–
–
–
252,382
6,234
11,041
–
–
–
252,382
6,234
11,041
–
–
–
–
–
$
166
–
$
–
248,177
$
166
248,177
267,343
5,073
10,318
–
–
–
267,343
5,073
10,318
(1) The fair value of precious metals is determined based on quoted market prices and forward spot prices.
(2) Consists primarily of base metal positions. The fair value of these positions is determined based on quoted prices in active markets.
(3) Excludes investments which are held-to-maturity of $716 (2014 – $166).
(4) These amounts represent embedded derivatives bifurcated from structured deposit notes.
(5) Represents the fair value of financial assets and liabilities where the carrying amount is not a reasonable approximation of fair value.
(6) Excludes floating rate instruments as carrying value approximates fair value.
(7) Excludes embedded derivatives bifurcated from structured deposit notes.
154 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Non-recurring fair value measurements
There were no non-recurring fair value measurements at October 31, 2015 and October 31, 2014.
Level 3 instrument fair value changes
Financial instruments categorized as Level 3 in the fair value hierarchy comprise certain illiquid government bonds, highly-structured corporate bonds,
mortgage-backed securities, illiquid investments in funds, private equity securities, income funds, hedge funds, complex derivatives, and embedded
derivatives in structured deposit notes.
The following tables summarize changes in Level 3 instruments carried at fair value for the year ended October 31, 2015.
All positive balances represent assets and negative balances represent liabilities. Consequently, positive amounts indicate purchases of assets or
settlement of liabilities and negative amounts indicate sales of assets or issuances of liabilities.
As at October 31, 2015
($ millions)
Trading assets(4)
Fair value
November 1
2014
Gains/(losses)
recorded in
income(1)
Gains/(losses)
recorded in
OCI(2)
Purchases/
Issuances
Sales/
Settlements
Transfers
into/out of
Level 3
Fair value
October 31
2015
Corporate and other debt
Income funds and hedge funds
Equity securities
$
Investment securities
Other foreign governments’ debt
Corporate and other debt
Mortgage-backed securities
Equity securities
Derivative financial instruments-assets
Interest rate contracts
Equity contracts
Credit contracts
Commodity contracts
Derivative financial instruments – liabilities
Interest rate contracts
Equity contracts
Credit contracts
Commodity and other contracts
Deposits(7)
Total
32
1,303
51
1,386
411
500
39
1,006
1,956
146
573
4
41
(52)
(456)
(2)
–
254
(1,011)
2,585
$
(3)
193
6
196
5
39
–
101
145
1
71
(4)
4
–
(56)
(4)
–
12
(181)
172
$
$
–
–
–
–
25
(17)
–
82
90
–
–
–
–
–
–
–
–
–
–
90
38
16
–
54
678
3
–
157
838
15
19
–
–
(38)
(16)
(6)
–
(26)
–
866
$
–
(269)
(52)
(321)
(672)
(388)
(16)
(213)
(1,289)
(26)
(99)
–
(12)
9
168
–
258
298
–
(1,312)
$
–
–
–
–
–
–
–
–
–
(100)
(462)
–
(33)
–
190
–
(258)
(663)
–
(663)
$
67
1,243
5
1,315
447
137
23
1,133
1,740
36
102
–
–
(81)
(170)
(12)
–
(125)
(1,192)
1,738
Change in
unrealized
gains/(losses)
recorded in
income for
instruments
still held(3)
$
(3)
185(5)
2
184
–
–
–
–
–
1
67(6)
(4)
–
(6)
(67)(6)
(4)
–
(13)
(181)(5)
(10)
(1) Gains and losses on trading assets and all derivative financial instruments are included in trading revenues in the Consolidated Statement of Income. Gains and losses on disposal of
investment securities are included in net gain on sale of investment securities in the Consolidated Statement of Income.
(2) Gains and losses from fair value changes of investment securities are presented in the net change in unrealized gains (losses) on available-for-sale securities in the Consolidated
Statement of Comprehensive Income.
(3) These amounts represent the gains and losses from fair value changes of Level 3 instruments still held at the end of the period that are recorded in the Consolidated Statement of
Income.
(4) Trading assets include an insignificant amount of financial assets designated at fair value through profit or loss.
(5) The unrealized gain on income fund and hedge fund units is mostly offset by the mark-to-market changes in an equity-linked note and certain other derivative instruments in
structured transactions. Both gains and offsetting losses are included in trading revenues in the Consolidated Statement of Income.
(6) Certain unrealized gains and losses on derivative assets and liabilities are largely offset by mark-to-market changes on other instruments included in trading revenues in the
Consolidated Statement of Income, since these instruments act as an economic hedge to certain derivative assets and liabilities.
(7) These amounts represent embedded derivatives bifurcated from structured deposit notes.
The following table summarizes the changes in Level 3 instruments carried at fair value for the year ended October 31, 2014.
($ millions)
Trading assets(2)
Investment securities
Derivative financial instruments
Deposits(3)
As at October 31, 2014
Fair value
November 1
2013
Gains/(losses)
recorded in
income(1)
Gains/(losses)
recorded
in OCI
Purchases/
Issuances
Sales/
Settlements
$ 1,400
2,014
(337)
(937)
$ 107
460
(41)
(74)
$
–
(164)
–
–
$ 121
990
303
–
$ (242)
(1,344)
449
–
Transfers
into/out of
Level 3
$
–
–
(120)
–
Fair value
October 31
2014
$ 1,386
1,956
254
(1,011)
(1) Gains and losses for items in Level 3 may be offset with losses and gains on related hedges in Level 1 or Level 2.
(2) Trading assets include an insignificant amount of financial assets designated at fair value through profit or loss.
(3) These amounts represent embedded derivatives bifurcated from structured deposit notes.
155 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Investment securities(2)
Other foreign governments’ debt
Corporate and other debt
Mortgage-backed securities
Derivative financial instruments
Interest rate contracts
Equity contracts
CONSOLIDATED FINANCIAL STATEMENTS
Significant transfers
Significant transfers can occur between the fair value hierarchy levels due to additional or new information becoming available on valuation inputs
and their observability. The Bank recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period during which the
change has occurred. The following significant transfers were made among Levels 1, 2 and 3 for the year ended October 31, 2015:
A net amount of derivative assets of $595 million was transferred out of Level 3 into Level 2 primarily for equity derivatives. A net amount of
derivative liabilities of $68 million was transferred into Level 3. $67 million was transferred out of Level 2 and $1 million was transferred out of
Level 1.
The following significant transfers were made among Levels 1, 2 and 3 for the year ended October 31, 2014:
A net amount of derivative assets of $30 million was transferred out of Level 3 to Level 2, and a net amount of derivative liabilities of $90 million was
transferred into Level 3 from Level 2.
All transfers were as a result of new information being obtained regarding the observability of inputs used in the valuation.
Level 3 sensitivity analysis
The fair value of Level 3 instruments is determined using management’s judgments about the appropriate value of unobservable inputs. Due to the
unobservable nature of the inputs used, there may be uncertainty about the valuation of Level 3 instruments. Management has used reasonably
possible alternative assumptions to determine the sensitivity of these inputs and the resulting potential impact on fair value of these Level 3
instruments as set out in the table below:
Trading assets(2)
Corporate and other debt
Model based
Default correlation
56% - 84%
Valuation technique
Significant
unobservable inputs
Range of estimates (weighted
average) for unobservable inputs(1)
Price based
Price based
Model based
Price based
Price
Price
Default correlation
Price
100%
95%
56% - 84%
95%
Changes in fair value
from reasonably
possible alternatives
($ millions)
–
(2)/–
(1)/1
(1)/1
Option pricing
model
Option pricing
model
Interest rate
volatility
Equity volatility
Single stock correlation
7% - 157%
(19)/19
4% - 98%
(77)% - 98%
43% - 84%
(5)/5
(1)/1
Credit contracts
Model based
Default correlation
(1) The range of estimates represents the actual lowest and highest level inputs used to fair value financial instruments within each financial statement category.
(2) The valuation of private equity, hedge fund investments and embedded derivatives, bifurcated from structured notes, utilize net asset values as reported by fund managers. Net
asset values are not considered observable as the Bank cannot redeem these instruments at such values. The range for net asset values per unit or price per share has not been
disclosed for these instruments since the valuations are not model based.
The Bank applies judgment in determining unobservable inputs used to calculate the fair value of Level 3 instruments.
The following section discusses the significant unobservable inputs for Level 3 instruments.
Correlation
Correlation in a credit derivative or debt instrument refers to the likelihood of a single default causing a succession of defaults. It affects the
distribution of the defaults throughout the portfolio and therefore affects the valuation of instruments such as collateralized debt obligation tranches.
A higher correlation may increase or decrease fair value depending on the seniority of the instrument.
Correlation becomes an input into equity derivative pricing when the relationship between price movements of two or more of the underlying assets is
relevant.
Volatility
Volatility is a measure of security price fluctuation. Historic volatility is often calculated as the annualized standard deviation of daily price variation for
a given time period. Implied volatility is volatility, when input into an option pricing model, that returns a value equal to the current market value of
the option.
156 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
8
Trading assets
(a) Trading securities
An analysis of the carrying value of trading securities is as follows:
As at October 31, 2015 ($ millions)
Remaining term to maturity
Within three
months
Three to
twelve
months
One to
five years
Five to ten
years
Over ten
years
No specific
maturity
Carrying
value
Trading securities:
Canadian federal government and government
guaranteed debt
Canadian provincial and municipal debt
U.S. treasury and other U.S. agencies’ debt
Other foreign governments’ debt
Common shares
Other
Total
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
Total trading securities
$
338
420
728
1,902
–
1,294
$ 4,682
$ 1,429
1,289
389
1,575
$ 4,682
$ 1,054
594
455
2,501
–
2,212
$ 6,816
$ 1,971
2,348
689
1,808
$ 6,816
$
3,154
1,422
1,314
3,142
–
6,137
$ 15,169
$
5,457
6,312
959
2,441
$ 15,169
$
$
$
$
991
1,169
1,555
1,631
–
1,963
7,309
2,633
2,995
28
1,653
7,309
$
$
$
$
1,758
1,676
1,629
1,851
–
1,751
8,665
3,937
2,906
84
1,738
8,665
$
–
–
–
–
35,704
35
$ 35,739
$ 18,992
5,918
680
10,149
$ 35,739
$ 7,295
5,281
5,681
11,027
35,704
13,392
$ 78,380
$ 34,419
21,768
2,829
19,364
$ 78,380
As at October 31, 2014 ($ millions)
Remaining term to maturity
Within three
months
Three to
twelve
months
One to
five years
Five to ten
years
Over ten
years
No specific
maturity
Carrying
value
Trading securities:
Canadian federal government and government
guaranteed debt
Canadian provincial and municipal debt
U.S. treasury and other U.S. agencies’ debt
Other foreign governments’ debt
Common shares
Other
Total
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
Total trading securities
$ 1,222
1,323
54
1,809
–
723
$ 5,131
$ 3,012
743
218
1,158
$ 5,131
$ 1,115
1,530
365
1,363
–
1,605
$ 5,978
$ 2,877
1,575
216
1,310
$ 5,978
$
5,778
2,161
4,525
3,773
–
6,604
$ 22,841
$ 10,542
7,710
573
4,016
$ 22,841
$
3,895
869
2,699
1,483
–
1,903
$ 10,849
$
5,481
3,930
80
1,358
$ 10,849
$
1,838
1,648
3,333
1,806
–
1,735
$ 10,360
$
5,265
3,356
60
1,679
$ 10,360
$
–
–
–
–
40,204
–
$ 40,204
$ 30,435
3,013
475
6,281
$ 40,204
$ 13,848
7,531
10,976
10,234
40,204
12,570
$ 95,363
$ 57,612
20,327
1,622
15,802
$ 95,363
157 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
(b) Trading loans
The following table provides the geographic breakdown of trading loans:
As at October 31 ($ millions)
Trading loans(1)(2)
U.S.(3)
Europe(4)
Asia Pacific(4)
Canada(4)
Other(4)
Total
2015
2014
$ 9,990
3,525
3,657
394
775
$ 18,341
$ 8,266
2,408
2,957
123
754
$ 14,508
(1) Geographic segmentation of trading loans is based upon the location of the ultimate risk of the underlying asset.
(2) Loans denominated in U.S. dollars.
(3)
Includes trading loans that serve as a hedge to loan-based credit total return swaps of $7,094 (2014 – $5,437), while the remaining relates to short-term precious metals trading
and lending activities.
(4) These loans are primarily related to short-term precious metals trading and lending activities.
9
Financial instruments designated at fair value through profit or loss
In accordance with its risk management strategy, the Bank has elected to designate certain financial instruments at fair value through profit or loss.
These include:
Š certain investments, in order to significantly reduce an accounting mismatch between fair value changes in these assets and fair value changes in
related derivatives.
Š certain deposit note liabilities containing extension and equity linked features, in order to significantly reduce an accounting mismatch between fair
value changes in these liabilities and fair value changes in related derivatives.
For assets designated at fair value through profit or loss, changes in fair value are recognized in net income. For liabilities designated at fair value
through profit or loss, changes in fair value arising from changes in the Bank’s own credit risk are recognized in other comprehensive income, without
subsequent reclassification to net income, unless doing so would create or increase an accounting mismatch. All other changes in fair value are
recognized in net income.
For deposit note liabilities designated at fair value through profit or loss, presenting changes in fair value due to changes in the Bank’s own credit risk
in other comprehensive income would not create or increase an accounting mismatch in net income since the Bank does not currently hedge its own
credit risk.
The cumulative fair value adjustment due to own credit risk is determined at a point in time by comparing the present value of expected future cash
flows over the term of these liabilities discounted at the Bank’s effective funding rate, and the present value of expected future cash flows discounted
under a benchmark rate. The change in fair value attributable to change in credit risk is determined by the change in the cumulative fair value
adjustment due to own credit risk.
The following table presents the fair value of financial assets and liabilities designated at fair value through profit or loss and their changes in fair
value.
October 31 ($ millions)
Investment securities(2)
Loans(2)
Deposit note liabilities(3)
Fair value
Change in fair value
Cumulative change in FV(1)
As at
For the year ended
2015
2014
$
107
213
1,486
$ 111
–
465
2015
$(1)
18
106
2014
2015
2014
$
–
–
16
$ 12
18
124
$ 13
–
18
(1) The cumulative change in fair value is measured from the instruments’ date of initial recognition.
(2) Changes in fair value are recorded in non-interest income – other.
(3) Changes in fair value attributable to changes in the Bank’s own credit risk are recorded in other comprehensive income. Other changes in fair value are recorded in non-interest
income – other.
The following tables present the changes in fair value attributable to changes in the Bank’s own credit risk for financial liabilities designated at fair
value through profit or loss as well as their contractual maturity and carrying amounts.
Term deposits
Difference
between
carrying value
and
contractual
maturity
amount
$124
$ 18
Changes in fair value
for the period
attributable to
changes in own
credit risk
recorded in other
comprehensive
income
$ 20
$n/a
Cumulative changes
in fair value
attributable to
changes in own
credit risk(1)
$15
$ (5)
Contractual
maturity
amount(1)
$1,610
$ 483
Carrying Value
$1,486
$ 465
As at October 31, 2015
As at October 31, 2014
(1) The cumulative change in fair value is measured from the instruments’ date of initial recognition.
158 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
10 Derivative financial instruments
(a) Notional amounts
The following table provides the aggregate notional amounts of derivative financial instruments outstanding by type and segregated between those
used by the Bank in its dealer capacity (Trading) and those derivatives designated in hedging relationships. The notional amounts of these contracts
represent the derivatives volume outstanding and do not represent the potential gain or loss associated with the market risk or credit risk of such
instruments. The notional amounts represent the amount to which a rate or price is applied to determine the amount of cash flows to be exchanged.
Credit derivatives within other derivative contracts are comprised primarily of purchased and sold credit default swap transactions. To a lesser extent,
this category also includes total return swaps referenced to loans and debt securities. Other derivative contracts – other includes precious metals other
than gold, and other commodities including energy and base metal derivatives.
2015
2014
Trading
Hedging
Total
Trading
Hedging
Total
As at October 31 ($ millions)
Interest rate contracts
Exchange-traded:
Futures
Options purchased
Options written
Over-the-counter:
Forward rate agreements
Swaps
Options purchased
Options written
Over-the-counter (settled through central
counterparties):
Forward rate agreements
Swaps
Options purchased
Options written
Total
Foreign exchange and gold contracts
Exchange-traded:
Futures
Options purchased
Options written
Over-the-counter:
Spot and forwards
Swaps
Options purchased
Options written
Over-the-counter (settled through central
counterparties):
Spot and forwards
Swaps
Options purchased
Options written
Total
Other derivative contracts
Exchange-traded:
Equity: over-the-counter
Credit: over-the-counter
Commodity and other contracts
Over-the-counter:
Equity: over-the-counter
Credit: over-the-counter
Commodity and other contracts
Over-the-counter (settled through central
counterparties):
Equity: over-the-counter
Credit: over-the-counter
Commodity and other contracts
Total
Total notional amounts outstanding
$
$
$
$
$
$
140,240
29,670
28,755
198,665
4,613
582,414
31,734
32,900
651,661
852,416
2,136,724
–
–
2,989,140
$ 3,839,466
$
$
$
6,626
251
–
6,877
431,211
296,670
5,382
4,884
738,147
–
–
–
–
–
745,024
13,594
–
106,181
119,775
47,152
54,020
43,524
144,696
–
31,280
–
–
31,280
–
64,994
–
–
64,994
96,274
–
–
–
–
20,419
41,658
–
–
62,077
–
–
–
–
–
62,077
–
–
–
–
605
–
–
605
$
–
–
–
–
140,240
29,670
28,755
198,665
4,613
613,694
31,734
32,900
682,941
$
206,138
31,294
31,953
269,385
32,582
605,342
16,622
18,757
673,303
$
–
–
–
–
$
$
$
$
$
–
47,291
–
–
47,291
–
46,129
–
–
46,129
93,420
–
–
–
–
13,422
30,705
–
–
44,127
–
–
–
–
–
44,127
–
–
–
–
–
–
–
–
206,138
31,294
31,953
269,385
32,582
652,633
16,622
18,757
720,594
567,049
2,440,465
–
–
3,007,514
$ 3,997,493
$
$
$
4,666
64
–
4,730
444,300
265,986
3,083
2,308
715,677
11
–
–
334
345
720,752
15,986
–
82,512
98,498
49,887
54,647
44,017
148,551
852,416
2,201,718
–
–
3,054,134
$ 3,935,740
567,049
2,394,336
–
–
2,961,385
$ 3,904,073
$
$
$
6,626
251
–
6,877
451,630
338,328
5,382
4,884
800,224
–
–
–
–
–
807,101
13,594
–
106,181
119,775
47,757
54,020
43,524
145,301
$
$
$
4,666
64
–
4,730
430,878
235,281
3,083
2,308
671,550
11
–
–
334
345
676,625
15,986
–
82,512
98,498
49,887
54,647
44,017
148,551
1,198
9,913
101
11,212
$
275,683
$ 4,860,173
–
–
–
–
$
605
$ 158,956
1,198
9,913
101
11,212
$
276,288
$ 5,019,129
735
3,276
512
4,523
$
251,572
$ 4,832,270
–
–
–
–
$
–
$ 137,547
735
3,276
512
4,523
$
251,572
$ 4,969,817
159 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
(b) Remaining term to maturity
The following table summarizes the remaining term to maturity of the notional amounts of the Bank’s derivative financial instruments by type:
As at October 31, 2015 ($ millions)
Interest rate contracts
Futures
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange and gold contracts
Futures
Spot and forwards
Swaps
Options purchased
Options written
Other derivative contracts
Equity
Credit
Commodity and other contracts
Within one year
One to five years
Over five years
Total
$
140,106
735,756
945,149
32,246
31,630
1,884,887
$
133
121,273
1,264,240
22,636
23,269
1,431,551
$
1
–
606,023
6,522
6,756
619,302
$
140,240
857,029
2,815,412
61,404
61,655
3,935,740
1,535
420,551
69,370
3,657
3,638
498,751
34,689
22,747
89,482
146,918
5,091
30,622
187,566
1,926
1,198
226,403
26,792
37,526
60,324
124,642
–
457
81,392
50
48
81,947
1,068
3,660
–
4,728
6,626
451,630
338,328
5,633
4,884
807,101
62,549
63,933
149,806
276,288
Total
$ 2,530,556
$ 1,782,596
$ 705,977
$ 5,019,129
As at October 31, 2014 ($ millions)
Interest rate contracts
Futures
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange and gold contracts
Futures
Spot and forwards
Swaps
Options purchased
Options written
Other derivative contracts
Equity
Credit
Commodity and other contracts
Within one year
One to five years
Over five years
Total
$
205,986
423,781
1,189,834
43,987
46,033
1,909,621
$
71
175,099
1,378,480
–
–
1,553,650
$
81
751
524,784
3,929
4,677
534,222
$
206,138
599,631
3,093,098
47,916
50,710
3,997,493
4,421
397,044
46,395
2,420
2,317
452,597
40,211
17,729
81,465
139,405
245
46,484
148,764
727
325
196,545
25,595
37,676
45,099
108,370
–
783
70,827
–
–
71,610
802
2,518
477
3,797
4,666
444,311
265,986
3,147
2,642
720,752
66,608
57,923
127,041
251,572
Total
$ 2,501,623
$ 1,858,565
$ 609,629
$ 4,969,817
(c) Credit risk
As with other financial assets, derivative instruments are subject to credit risk. Credit risk arises from the possibility that counterparties may default on
their obligations to the Bank. However, whereas the credit risk of other financial assets is represented by the principal amount net of any applicable
allowance for credit losses, the credit risk associated with derivatives is normally a small fraction of the notional amount of the derivative instrument.
Derivative contracts generally expose the Bank to credit loss if changes in market rates affect a counterparty’s position unfavourably and the
counterparty defaults on payment. Accordingly, exposure to credit risk of derivatives is represented by the positive fair value of the instrument.
Negotiated over-the-counter derivatives often present greater credit exposure than exchange-traded contracts. The net change in the exchange-traded
contracts is normally settled daily in cash with the exchange. Holders of these contracts look to the exchange for performance under the contract.
The Bank strives to limit credit risk by dealing with counterparties that it believes are creditworthy, and investment grade counterparties account for a
significant portion of the credit risk exposure arising from the Bank’s derivative transactions as at October 31, 2015. To control credit risk associated
with derivatives, the Bank uses the same credit risk management activities and procedures that are used in the lending business in assessing and
adjudicating potential credit exposure. The Bank applies limits to each counterparty, measures exposure as the current positive fair value plus potential
future exposure, and uses credit mitigation techniques, such as netting and collateralization.
160 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
The Bank obtains the benefit of netting by entering into master netting arrangements with counterparties (typically industry standard International
Swaps and Derivatives Association (ISDA) agreements), which allow for a single net settlement of all transactions covered by that agreement in the
event of a default or early termination of the transactions. In this manner, the credit risk associated with favourable contracts is eliminated by the
master netting arrangement to the extent that unfavourable contracts with the same counterparty are not settled before favourable contracts.
Collateralization is typically documented by way of an ISDA Credit Support Annex (CSA), the terms of which may vary according to each party’s view
of the other party’s creditworthiness. CSAs can require one party to post initial margin at the onset of each transaction. CSAs also allow for variation
margin to be called if total uncollateralized mark-to-market exposure exceeds an agreed upon threshold. Such variation margin provisions can be one
way (only one party will ever post collateral) or bi-lateral (either party may post collateral depending upon which party is in-the-money). The CSA will
also detail the types of collateral that are acceptable to each party, and the adjustments that will be applied against each collateral type. The terms of
the ISDA master netting agreements and CSAs are taken into consideration in the calculation of counterparty credit risk exposure (see also page 76 of
the 2015 Annual Report).
Derivatives instruments used by the Bank include credit derivatives in its investment and loan portfolios: credit protection is sold as an alternative to
acquiring exposure to bond or loan assets, while credit protection is bought to manage or mitigate credit exposures.
The following table summarizes the credit exposure of the Bank’s derivative financial instruments. The credit risk amount (CRA) represents the
estimated replacement cost, or positive fair value, for all contracts taking into account master netting or collateral arrangements that have been made.
The CRA does not reflect actual or expected losses.
The credit equivalent amount (CEA) is the CRA plus an add-on for potential future exposure. The add-on amount is based on a formula prescribed in
the Capital Adequacy Requirements (CAR) Guideline of the Superintendent. The risk-weighted balance is calculated by multiplying the CEA by the
capital requirement (K) times 12.5, where K is a function of the probability of default (PD), loss given default (LGD), maturity and prescribed
correlation factors. Other derivative contracts – other includes precious metals other than gold, and other commodities, including energy and base
metal derivatives.
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
As at October 31 ($ millions)
Notional amount
(CRA)(1)
(CEA)(1)
Assets(2)
Notional amount
(CRA)(1)
(CEA)(1)
Assets(1)
2015
2014
Credit risk
amount
Credit
equivalent
amount
CET1
Risk
Weighted
Credit risk
amount
Credit
equivalent
amount
Risk
Weighted
Interest rate contracts
Futures
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange and gold contracts
Futures
Spot and forwards
Swaps
Options purchased
Options written
Other derivative contracts
Equity
Credit
Commodity and other contracts
Credit Valuation Adjustment(2)
$
$
140,240
857,029
2,815,412
61,404
61,655
3,935,740
6,626
451,630
338,328
5,633
4,884
807,101
62,549
63,933
149,806
276,288
–
–
250
2,222
–
–
2,472
–
2,328
1,759
199
–
4,286
1,228
261
2,288
3,777
–
$
3
525
10,416
149
–
11,093
249
6,742
8,592
328
–
15,911
6,534
2,643
11,347
20,524
–
$
–
45
1,871
138
–
2,054
5
1,860
2,214
98
–
4,177
2,049
608
1,945
4,602
7,183
$
$
206,138
599,631
3,093,098
47,916
50,710
3,997,493
4,666
444,311
265,986
3,147
2,642
720,752
66,608
57,923
127,041
251,572
–
–
106
1,858
18
–
1,982
–
2,451
1,495
19
–
3,965
860
548
1,582
2,990
–
$
1,030
459
9,053
106
–
10,648
232
6,303
6,190
69
–
12,794
5,726
1,405
11,863
18,994
–
$
21
23
1,475
125
–
1,644
5
1,565
1,426
19
–
3,015
2,260
374
1,702
4,336
5,632
Total derivatives
$ 5,019,129
$ 10,535
$ 47,528
$ 18,016
$ 4,969,817
$ 8,937
$ 42,436
$ 14,627
Amount settled through central
counterparties(3)
Exchange-traded
Over-the-counter
325,317
3,065,346
$ 3,390,663
$
–
–
–
8,172
6,331
$ 14,503
$
163
127
290
372,613
3,012,382
$ 3,384,995
$
–
–
–
9,247
6,072
$ 15,319
$
185
121
306
(1) The amounts presented are net of collateral and master netting agreements at the product level. The total amounts relating to netting and collateral were $30,467 (2014 –
$24,502) for CRA, and $50,078 (2014 – $39,276) for CEA.
(2) As per OSFI guideline, effective 2014, Credit Valuation Adjustment (CVA) to CET1 RWA for derivatives was phased-in at 0.57. In 2015, the CVA was 0.64.
(3) Amounts are included under total derivatives above. Amounts include exposures settled directly through central counterparties and exposures settled through clearing members of
central counterparties.
161 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
(d) Fair value
The following table summarizes the fair value of derivatives segregated by type and segregated between trading and those derivatives designated in
hedging relationships.
As at October 31 ($ millions)
2015
2015
2014
Average fair value
Year-end fair value
Year-end fair value(1)
Favourable
Unfavourable
Favourable
Unfavourable
Favourable
Unfavourable
Trading
Interest rate contracts
Forward rate agreements
Swaps
Options
Foreign exchange and gold contracts
Forwards
Swaps
Options
Other derivative contracts
Equity
Credit
Commodity and other contracts
Trading derivatives’ market valuation
Hedging
Interest rate contracts
Swaps
Foreign exchange and gold contracts
Forwards
Swaps
Other derivative contracts
Equity
Hedging derivatives’ market valuation
Total derivative financial instruments as per Statement of
Financial Position
Less: impact of master netting and collateral(2)
Net derivative financial instruments(2)
$
166
14,008
135
14,309
$
3
13,406
159
13,568
$
250
12,871
107
13,228
$
3
12,770
104
12,877
$
113
11,908
119
12,140
$
4
12,374
152
12,530
7,891
9,679
185
17,755
2,716
654
3,516
6,886
$ 38,950
6,696
11,772
122
18,590
2,379
3,350
5,132
10,861
$ 43,019
5,358
10,694
227
16,279
2,276
841
3,507
6,624
$ 36,131
5,192
13,517
131
18,840
2,574
2,554
5,143
10,271
$ 41,988
7,573
6,055
50
13,678
2,346
910
2,327
5,583
$ 31,401
6,423
6,534
53
13,010
2,631
3,948
2,873
9,452
$ 34,992
$
1,316
$
679
$
696
$
494
301
3,223
3,524
32
4,872
$
$
$
578
2,025
2,603
–
3,282
$
$
$
77
1,265
1,342
–
2,038
$
$
$
273
679
952
–
1,446
$
$
$
$ 41,003
$ 45,270
$ 33,439
$ 36,438
30,468
$ 10,535
30,468
$ 14,802
24,502
8,937
$
24,502
$ 11,936
(1) The average fair value of trading derivatives’ market valuation for the year ended October 31, 2014 was: favourable $25,829 and unfavourable $29,502. Average fair value
amounts are based on the latest 13 month-end balances.
(2) Master netting agreement amounts are based on the capital adequacy criteria of the Basel Committee on Banking Supervision (BCBS) and OSFI. These criteria allow netting where
there are legally enforceable contracts which enable net settlement in the event of a default, bankruptcy, liquidation or similar circumstances.
(e) Hedging activities
The Bank’s hedging activities that qualify for hedge accounting consist of fair value hedges, cash flow hedges, and net investment hedges.
Ineffectiveness of hedge relationships
Due to the ineffective portion of designated hedges, the Bank recorded the following amounts in non-interest income – other:
For the year ended October 31 ($ millions)
Fair value hedges
Gain (loss) recorded on hedged items
Gain (loss) recorded on hedging instruments
Ineffectiveness
Cash flow hedges
Ineffectiveness
Hedging instruments
Market valuation is disclosed by the type of relationship:
As at October 31 ($ millions)
Derivatives designated in fair value hedging relationships(1)
Derivatives designated in cash flow hedging relationships
Derivatives designated in net investment hedging relationships(1)
Total derivatives designated in hedging relationships
2015
2014
$ (220)
198
(22)
$
$ 55
(74)
$ (19)
$
(27)
$
(2)
2015
2014
Favourable
Unfavourable
Favourable
Unfavourable
$ 1,557
3,205
110
$ 4,872
$
715
2,055
512
$ 3,282
$
791
1,183
64
$ 2,038
$
566
632
248
$ 1,446
(1) As at October 31, 2015, the fair value of non-derivative instruments designated as net investment hedges and fair value hedges was $7,428 (2014 – $6,666). These non-derivative
hedging instruments are presented as deposits – financial institutions on the Consolidated Statement of Financial Position.
162 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Cash flow hedges
The period when cash flows of designated hedged items are expected to occur and impact the Consolidated Statement of Income are as follows:
As at October 31, 2015 ($ millions)
Cash inflows from assets
Cash outflows from liabilities
Net cash flows
As at October 31, 2014 ($ millions)
Cash inflows from assets
Cash outflows from liabilities
Net cash flows
Within one year
Within one
to five years
More than
five years
$
1,431
(14,803)
$
9,543
(18,172)
$ 3,801
(3,296)
$ (13,372)
$ (8,629)
$
505
Within one year
$
$
619
(5,992)
(5,373)
Within one
to five years
More than
five years
$
665
(11,515)
$ 2,363
(2,287)
$ (10,850)
$
76
Income related to interest cash flows is recognized using the effective interest method over the life of the underlying instrument. Foreign currency
gains and losses related to future cash flows of on-balance sheet monetary items are recognized as incurred. Forecasted revenue is recognized over
the period to which it relates.
11 Offsetting financial assets and financial liabilities
The Bank is eligible to present certain financial assets and financial liabilities as listed in the table below on a net basis on the Consolidated Statement
of Financial Position pursuant to criteria described in Note 3 – Significant accounting policies.
The following tables provide information on the impact of offsetting on the Bank’s Consolidated Statement of Financial Position, as well as the
financial impact of netting for instruments that are subject to enforceable master netting arrangements or similar agreements, but do not qualify for
offsetting in the Consolidated Statement of Financial Position, as well as available cash and financial instrument collateral.
As at October 31, 2015 ($ millions)
Gross amounts of
recognized financial
liabilities offset in
the consolidated
statement of
financial position
Net amounts of
financial assets
presented in the
consolidated
statement of
financial position
Gross amounts
of recognized
financial assets
Related amounts not offset
in the consolidated statement
of financial position
Impact of
master netting
arrangements
or similar
agreements(1)
Collateral(2)
Net amount(3)
$
65,026
$ (24,023)
$
41,003
$ (22,357)
$
(8,451)
$ 10,195
Types of financial assets
Derivative financial instruments(4)
Securities purchased under resale agreements
and securities borrowed
95,757
(8,445)
87,312
(8,107)
(74,308)
4,897
Total
$ 160,783
$ (32,468)
$ 128,315
$ (30,464)
$ (82,759)
$ 15,092
As at October 31, 2015 ($ millions)
Related amounts not offset in the
consolidated statement
of financial position
Types of financial liabilities
Derivative financial instruments(4)
Obligations related to securities sold under
repurchase agreements and securities lent
Total
Gross amounts of
recognized financial
assets offset in
the consolidated
statement of
financial position
Net amounts of
financial liabilities
presented in the
consolidated
statement of
financial position
Impact of
master
netting
arrangements
or similar
agreements(1)
Gross amounts
of recognized
financial liabilities
Collateral(2)
Net amount(3)
$
69,293
$ (24,023)
$
45,270
$ (22,357)
$
(8,560)
$ 14,353
85,460
$ 154,753
(8,445)
$ (32,468)
77,015
$ 122,285
(8,107)
$ (30,464)
(58,090)
$ (66,650)
10,818
$ 25,171
(1) Amounts that are subject to master netting arrangements or similar agreements but were not offset in the Consolidated Statement of Financial Position because they did not meet
the net settlement/simultaneous settlement criteria; or because the rights of set off are conditional upon the default of the counterparty only.
(2) Cash and financial instrument collateral amounts received or pledged in relation to the total amounts of financial assets and financial liabilities, including those that were not offset
in the Consolidated Statement of Financial Position. These amounts are disclosed at fair value and the rights of set off are conditional upon the default of the counterparty.
(3) Not intended to represent the Bank’s actual exposure to credit risk, as a variety of credit mitigation strategies are employed in addition to offsetting and collateral arrangements.
(4) For fiscal 2015, the cash collateral received against the positive market values of derivative financial instruments of $1,173 and the cash collateral pledged towards the negative
mark to market of derivative financial instruments of $675 are recorded within other liabilities and other assets respectively.
163 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2014 ($ millions)
Types of financial assets
Derivative financial instruments(4)
Securities purchased under resale agreements
and securities borrowed
Total
As at October 31, 2014 ($ millions)
Gross amounts of
recognized financial
liabilities offset in
the consolidated
statement of
financial position
Net amounts of
financial assets
presented in the
consolidated
statement of
financial position
Related amounts not offset
in the consolidated statement
of financial position
Impact of
master netting
arrangements
or similar
agreements(1)
Collateral(2)
Net amount(3)
$ (13,597)
$
33,439
$ (19,878)
$
(4,849)
$
8,712
(8,703)
$ (22,300)
93,866
$ 127,305
(13,183)
$ (33,061)
(75,697)
$ (80,546)
4,986
$ 13,698
Gross amounts
of recognized
financial assets
$
47,036
102,569
$ 149,605
Types of financial liabilities
Derivative financial instruments(4)
Obligations related to securities sold under
repurchase agreements and securities lent
Total
Gross amounts
of recognized
financial liabilities
$
50,035
97,656
$ 147,691
Gross amounts of
recognized financial
assets offset in
the consolidated
statement of
financial position
Net amounts of
financial liabilities
presented in the
consolidated
statement of
financial position
Related amounts not offset
in the consolidated statement
of financial position
Impact of
master netting
arrangements
or similar
agreements(1)
Collateral(2)
Net amount(3)
$ (13,597)
$
36,438
$ (19,878)
$
(3,557)
$ 13,003
(8,703)
$ (22,300)
88,953
$ 125,391
(13,183)
$ (33,061)
(68,168)
$ (71,725)
7,602
$ 20,605
(1) Amounts that are subject to master netting arrangements or similar agreements but were not offset in the Consolidated Statement of Financial Position because they did not meet
the net settlement/simultaneous settlement criteria; or because the rights of set off are conditional upon the default of the counterparty only.
(2) Cash and financial instrument collateral amounts received or pledged in relation to the total amounts of financial assets and financial liabilities, including those that were not offset
in the Consolidated Statement of Financial Position. These amounts are disclosed at fair value and the rights of set off are conditional upon the default of the counterparty.
(3) Not intended to represent the Bank’s actual exposure to credit risk, as a variety of credit mitigation strategies are employed in addition to offsetting and collateral arrangements.
For fiscal 2014, the cash collateral received against the positive market values of derivative financial instruments of $1,268 and the cash collateral pledged towards the negative
(4)
mark to market of derivative financial instruments of $493 are recorded within other liabilities and other assets, respectively.
12 Investment securities
Investment securities includes held-to-maturity securities and available-for-sale securities.
(a) An analysis of the carrying value of investment securities is as follows:
As at October 31, 2015 ($ millions)
Available-for-sale
Canadian federal government issued or guaranteed
debt
Yield(1) %
Canadian provincial and municipal debt
Yield(1) %
U.S. treasury and other U.S. agency debt
Yield(1) %
Other foreign government debt
Yield(1) %
Bonds of designated emerging markets
Yield(1) %
Other debt
Yield(1) %
Preferred shares
Common shares
Total available-for-sale securities
Held-to-maturity
Canadian provincial and municipal debt
Other foreign government debt
Other debt
Total held-to-maturity assets
Total investment securities
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
Total investment securities
Remaining term to maturity
$
Within
three
months
2
0.6
12
0.1
373
0.2
2,274
2.4
–
–
846
1.2
–
–
3,507
–
–
–
–
$ 3,507
$
5
674
161
2,667
$ 3,507
$
Three to
twelve
months
199
1.0
1,034
1.3
1,118
0.3
4,838
2.0
–
–
947
0.7
–
–
8,136
–
69
–
69
$ 8,205
$
761
2,033
997
4,414
$ 8,205
$
One to
five
years
5,105
1.3
2,482
1.3
8,197
1.1
4,323
3.3
–
–
3,503
1.5
–
–
23,610
74
268
232
574
$ 24,184
$
5,899
13,796
1,259
3,230
$ 24,184
Five to
ten years
Over ten
years
$ 1,279
2.2
166
2.3
140
1.6
1,053
4.3
–
–
67
1.7
–
–
2,705
–
8
–
8
$ 2,713
$ 1,359
498
120
736
$ 2,713
$ 1,164
3.1
12
2.9
–
–
195
5.4
–
–
214
2.3
–
–
1,585
–
–
–
–
$ 1,585
$ 1,207
193
83
102
$ 1,585
$
No
specific
maturity
–
–
–
–
–
–
–
–
–
–
–
–
255
2,767
3,022
–
–
–
–
$ 3,022
$
956
1,536
40
490
$ 3,022
$
Carrying
value
7,749
1.7
3,706
1.3
9,828
1.0
12,683
2.8
–
–
5,577
1.4
255
2,767
42,565
74
345
232
651
$ 43,216
$ 10,187
18,730
2,660
11,639
$ 43,216
(1) Represents the weighted-average yield of fixed income securities.
164 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
As at October 31, 2014 ($ millions)
Available-for-sale
Canadian federal government issued or
guaranteed debt
Yield(1) %
Canadian provincial and municipal debt
Yield(1) %
U.S. treasury and other U.S. agency debt
Yield(1) %
Other foreign government debt
Yield(1) %
Bonds of designated emerging markets
Yield(1) %
Other debt
Yield(1) %
Preferred shares
Common shares
Total available-for-sale securities
Held-to-maturity
Other foreign government debt
Total investment securities
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
Total investment securities
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Remaining term to maturity
Within
three
months
Three to
twelve
months
One to
five
years
Five to
ten years
Over ten
years
$
11
1.0
–
–
321
–
2,179
2.0
7
10.7
1,003
3.0
–
–
3,521
$
237
2.8
202
1.7
637
–
3,784
2.2
–
–
1,406
1.9
–
–
6,266
$
4,205
1.7
2,614
1.5
5,261
0.6
3,905
3.5
11
12.4
3,734
1.5
–
–
19,730
$ 1,310
2.5
480
1.8
–
–
661
6.1
27
4.4
497
1.2
–
–
2,975
$ 1,088
1.5
7
3.2
7
0.3
454
6.3
–
–
147
2.5
–
–
1,703
$
No
specific
maturity
–
–
–
–
–
–
–
–
–
–
–
–
368
3,933
4,301
$
Carrying
value
6,851
1.8
3,303
1.5
6,226
0.5
10,983
3.0
45
7.8
6,787
1.8
368
3,933
38,496
–
–
146
20
–
–
166
$ 3,521
$ 6,266
$ 19,876
$ 2,995
$ 1,703
$ 4,301
$ 38,662
$
13
549
332
2,627
$
263
1,681
92
4,230
$
6,249
7,781
2,170
3,676
$ 3,521
$ 6,266
$ 19,876
$ 1,352
267
126
1,250
$ 2,995
$ 1,110
150
85
358
$ 1,703
$ 1,938
1,736
44
583
$ 4,301
$ 10,925
12,164
2,849
12,724
$ 38,662
(1) Represents the weighted-average yield of fixed income securities.
(b) An analysis of unrealized gains and losses on available-for-sale securities is as follows:
As at October 31, 2015 ($ millions)
Canadian federal government issued or guaranteed debt
Canadian provincial and municipal debt
U.S. treasury and other U.S. agency debt
Other foreign government debt
Bonds of designated emerging markets
Other debt
Preferred shares
Common shares
Total available-for-sale securities
As at October 31, 2014 ($ millions)
Canadian federal government issued or guaranteed debt
Canadian provincial and municipal debt
U.S. treasury and other U.S. agency debt
Other foreign government debt
Bonds of designated emerging markets
Other debt
Preferred shares
Common shares
Total available-for-sale securities
$
Cost
7,558
3,685
9,806
12,701
–
5,531
413
2,104
Gross
unrealized
gains
Gross
unrealized
losses
$
202
25
29
32
–
58
6
706
$
11
4
7
50
–
12
164
43
$
Fair value
7,749
3,706
9,828
12,683
–
5,577
255
2,767
$ 41,798
$ 1,058
$ 291
$ 42,565
$
Cost
6,704
3,284
6,218
10,940
39
6,666
412
3,097
Gross
unrealized
gains
Gross
unrealized
losses
$
147
20
11
60
7
128
15
871
$
–
1
3
17
1
7
59
35
$
Fair value
6,851
3,303
6,226
10,983
45
6,787
368
3,933
$ 37,360
$ 1,259
$ 123
$ 38,496
The net unrealized gain on available-for-sale securities of $767 million (2014 – gain of $1,136 million) decreases to a net unrealized gain of
$267 million (2014 – gain of $847 million) after the impact of qualifying hedges is taken into account. The net unrealized gain on available-for-sale
securities is recorded in Accumulated Other Comprehensive Income.
165 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
(c) An analysis of available-for-sale securities with continuous unrealized losses:
As at October 31, 2015 ($ millions)
Canadian federal government issued or
guaranteed debt
$
Canadian provincial and municipal debt
U.S. treasury and other U.S. agency debt
Other foreign government debt
Other debt
Preferred shares
Common shares
Less than twelve months
Twelve months or greater
Total
Cost
Fair value
Unrealized
losses
Cost
Fair value
Unrealized
losses
Cost
Fair value
Unrealized
losses
2,362 $
1,302
977
3,532
1,625
1
419
2,351
1,298
973
3,499
1,617
1
379
$
11
4
4
33
8
–
40
$
– $
–
10
1,140
132
383
39
–
–
7
1,123
128
219
36
$
–
–
3
17
4
164
3
$
2,362 $
1,302
987
4,672
1,757
384
458
2,351
1,298
980
4,622
1,745
220
415
$
11
4
7
50
12
164
43
Total available-for-sale securities
$ 10,218 $ 10,118
$ 100
$ 1,704 $ 1,513
$ 191
$ 11,922 $ 11,631
$ 291
As at October 31, 2014 ($ millions)
Canadian federal government issued or
guaranteed debt
Canadian provincial and municipal debt
U.S. treasury and other U.S. agency debt
Other foreign government debt
Bond of designated emerging markets
Other debt
Preferred shares
Common shares
Total available-for-sale securities
Less than twelve months
Twelve months or greater
Total
Cost
Fair value
Unrealized
losses
Cost
Fair value
Unrealized
losses
Cost
Fair value
Unrealized
losses
$
$
359 $
100
293
2,033
7
1,161
1
779
4,733 $
359
100
293
2,028
7
1,160
1
752
4,700
$
$
–
–
–
5
–
1
–
27
33
$
80 $
80
108
7
326
10
178
333
85
$ 1,217 $ 1,127
109
10
338
11
184
392
93
$
$
–
1
3
12
1
6
59
8
90
$
$
439 $
209
303
2,371
18
1,345
393
872
5,950 $
439
208
300
2,354
17
1,338
334
837
5,827
$
–
1
3
17
1
7
59
35
$ 123
As at October 31, 2015, the cost of 610 (2014 – 409) available-for-sale securities exceeded their fair value by $291 million (2014 – $123 million). This
unrealized loss is recorded in accumulated other comprehensive income as part of unrealized gains (losses) on available-for-sale securities. Of the 610
(2014 – 409) investment securities, 110 (2014 – 113) have been in an unrealized loss position continuously for more than a year, amounting to an
unrealized loss of $191 million (2014 – $90 million).
Investment securities are considered to be impaired only if objective evidence indicates one or more loss events have occurred and have affected the
estimated future cash flows after considering available collateral.
Collateral is not generally obtained directly from the issuers of debt securities. However, certain debt securities may be collateralized by specifically
identified assets that would be obtainable in the event of default.
Investment securities are evaluated for impairment at the end of each reporting date, or more frequently, if events or changes in circumstances
indicate the existence of objective evidence of impairment.
(d) Net gain on sale of investment securities
An analysis of net gain on sale of investment securities is as follows:
For the year ended October 31 ($ millions)
Net realized gains or losses
Impairment losses(1)
Net gain on sale of investment securities
2015
2014
2013
$ 646
7
$ 639
$ 755
14
$ 741
$ 433
58
$ 375
(1)
Impairment losses (gains) are comprised of $8 from equity securities (2014 – $14; 2013 – $63) and $(1) from other debt securities (2014 – nil; 2013 – $(5)).
166 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
13 Loans, impaired loans and allowance for credit losses
(a)
Loans and acceptances outstanding by geography(1)
As at October 31 ($ millions)
Canada:
Residential mortgages
Personal and credit cards
Business and government
United States:
Personal and credit cards
Business and government
Mexico:
Residential mortgages
Personal and credit cards
Business and government
Peru:
Residential mortgages
Personal and credit cards
Business and government
Chile:
Residential mortgages
Personal and credit cards
Business and government
Colombia:
Residential mortgages
Personal and credit cards
Business and government
Other International:
Residential mortgages
Personal and credit cards
Business and government
Total loans
Acceptances(2)
Total loans and acceptances(3)
Allowance for credit losses
Total loans and acceptances net of allowances for loan losses
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
2015
2014
$ 190,123
70,263
44,808
$ 188,842
65,542
38,561
305,194
292,945
1,558
28,593
30,151
6,043
3,076
9,473
18,592
2,367
4,317
10,287
16,971
5,068
3,681
7,710
16,459
1,286
2,956
4,441
8,683
12,611
5,626
48,538
66,775
462,825
10,296
473,121
1,109
22,389
23,498
5,409
3,360
7,196
15,965
1,896
3,596
7,794
13,286
4,561
2,434
6,908
13,903
1,240
3,354
4,498
9,092
10,700
4,809
43,752
59,261
427,950
9,876
437,826
(4,197)
(3,641)
$ 468,924
$ 434,185
(1) Geographic segmentation is based on the location of the property for residential mortgages; otherwise, the residence of the borrower.
(2) 1% of borrowers reside outside Canada.
(3) Loans and acceptances denominated in U.S. dollars were $95,581 (2014 – $80,597), in Mexican pesos $14,054 (2014 – $12,972), Chilean pesos $12,566 (2014 – $10,256), and in
other foreign currencies $42,570 (2014 – $35,721).
167 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
(b)
Loan maturities
As at October 31, 2015
($ millions)
Residential mortgages
Personal and credit cards
Business and government
Remaining term to maturity
Rate sensitivity
Within
one year
One to
five years
Five to
ten years
Over
ten years
No specific
maturity
Total
Floating
Fixed rate
Non-rate
sensitive
Total
$ 43,659 $ 151,685 $ 9,438 $ 10,928 $ 1,788 $ 217,498 $ 61,553 $ 153,896 $ 2,049 $ 217,498
91,477
153,850
91,477
153,850
39,137
100,492
44,177
4,889
29,709
72,195
11,872
70,079
51,465
50,803
4,595
6,186
1,124
501
875
2,555
Total
$ 125,610 $ 253,589 $ 20,219 $ 12,553 $ 50,854 $ 462,825 $ 201,182 $ 256,164 $ 5,479 $ 462,825
Allowance for credit losses
–
–
–
–
(4,197)
(4,197)
–
–
(4,197)
(4,197)
Total loans net of allowance
for credit losses
$ 125,610 $ 253,589 $ 20,219 $ 12,553 $ 46,657 $ 458,628 $ 201,182 $ 256,164 $ 1,282 $ 458,628
As at October 31, 2014
Remaining term to maturity
Rate sensitivity
($ millions)
Residential mortgages
Personal and credit cards
Business and government
Total loans
Allowance for credit losses
Total loans net of allowance
Within
one year
One to
five years
Five to
ten years
Over
ten years
No specific
maturity
Total
Floating
Fixed rate
Non-rate
sensitive
Total
$ 47,008 $ 145,539 $ 10,308 $ 8,087 $ 1,706 $ 212,648 $ 53,747 $ 156,985 $ 1,916 $ 212,648
84,204
131,098
84,204
131,098
42,283
5,111
25,183
56,487
11,735
64,786
45,091
41,794
38,046
87,162
4,144
4,351
1,067
2,142
859
363
$ 123,529 $ 227,209 $ 18,803 $ 9,309 $ 49,100 $ 427,950 $ 178,955 $ 243,870 $ 5,125 $ 427,950
(3,641)
(3,641)
(3,641)
(3,641)
–
–
–
–
–
–
for credit losses
$ 123,529 $ 227,209 $ 18,803 $ 9,309 $ 45,459 $ 424,309 $ 178,955 $ 243,870 $ 1,484 $ 424,309
(c)
Impaired loans(1)(2)
As at October 31 ($ millions)
Residential mortgages
Personal and credit cards
Business and government
Total
By geography:
Canada
United States
Mexico
Peru
Chile
Colombia
Other International
Total
Gross
impaired
loans(1)
$ 1,668
1,332
1,658
$ 4,658
2015
Allowance
for credit
losses
$
529(3)
1,327(3)
717(4)
$ 2,573
Net
$ 1,139
5
941
$ 2,085
$
450
5
85
181
230
121
1,013
$ 2,085
Gross
impaired
loans(1)
$ 1,491
1,254
1,455
$ 4,200
2014
Allowance
for credit
losses
$
359(3)
1,225(3)
614(4)
$ 2,198
Net
$ 1,132
29
841
$ 2,002
$
378
11
122
119
249
129
994
$ 2,002
Interest income recognized on impaired loans during the year ended October 31, 2015 was $13 (2014 – $18).
(1)
(2) Excludes loans acquired under FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico. For loans where the guarantee has expired, the total amount of loans
considered impaired is $150.
(3) Allowance for credit losses for residential mortgages and personal and credit card loans is assessed on a collective basis.
(4) Allowance for credit losses for business and government loans is individually assessed.
For the years ended October 31, 2015 and 2014, the Bank would have recorded additional interest income of $337 million and $287 million,
respectively, on impaired loans, if these impaired loans were classified as performing loans.
168 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
(d) Allowance for credit losses
As at October 31 ($ millions)
Individual
Collective
Total before loans acquired under FDIC guarantee
Loans acquired under FDIC guarantee(3)
As at October 31 ($ millions)
Individual
Collective
Total before loans acquired under FDIC guarantee
Loans acquired under FDIC guarantee(3)
Balance at
beginning
of year
$
614
2,856
3,470
171
$ 3,641
Balance at
beginning
of year
$
561
2,604
3,165
108
$ 3,273
Write-offs(1)
Recoveries
$
(320)
(1,908)
(2,228)
(2)
$ (2,230)
$
52
377
429
56
$ 485
Write-offs(1)
Recoveries
$
(338)
(1,559)
(1,897)
–
$ (1,897)
$
93
399
492
18
$ 510
2015
Provision
for credit
losses
$
255
1,721
1,976
(34)
$ 1,942
2014
Provision
for credit
losses
$
265
1,403
1,668
35
$ 1,703
Represented by:
Allowance against impaired loans
Allowance against performing loans and loans past due but not impaired(4)
Total before loans acquired under FDIC guarantee
Loans acquired under FDIC guarantee(3)
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Other, including
foreign currency
adjustment(2)
$ 116
214
330
29
$ 359
Other, including
foreign currency
adjustment
$
$
33
9
42
10
52
Balance at
end of
year
$
717
3,260
3,977
220
$ 4,197
Balance at
end of
year
$
614
2,856
3,470
171
$ 3,641
2015
2014
$ 2,573
1,404
3,977
220
$ 4,197
$ 2,198
1,272
3,470
171
$ 3,641
(1) For the wholesale portfolios, impaired loans restructured during the year amounted to $81 (2014 – $373). Write-offs of impaired loans restructured during the year were nil (2014 –
(2)
$27). Non-impaired loans restructured during the year amounted to $93 (2014 – $113).
Includes rebalancing of reserves between off-balance sheet and on-balance sheet credit exposures; and retrospective adjustments primarily relating to foreign currency translation of
prior years.
(3) This represents the gross amount of allowance for credit losses as the receivable from FDIC is separately recorded in other assets.
(4) The allowance for performing loans is attributable to business and government loans $644 (2014 –$584) with the remainder allocated to personal and credit card loans
$614 (2014 – $527) and residential mortgages $146 (2014 – $161).
(e)
Loans acquired under FDIC guarantee
As at October 31, 2015 ($ millions)
R-G Premier Bank
Unpaid principal balance
Fair value adjustments
Net carrying value
Allowance for credit losses
As at October 31, 2014 ($ millions)
R-G Premier Bank
Unpaid principal balance
Fair value adjustments
Net carrying value
Allowance for credit losses
Non-single
family home
loans
Single
family home
loans
$ 417
136
553
(160)
$ 393
$ 2,136
(291)
1,845
(60)
$ 1,785
Non-single
family home
loans
Single
family home
loans
$ 645
(43)
602
(111)
$ 491
$ 2,043
(314)
1,729
(60)
$ 1,669
Total
$ 2,553
(155)
2,398
(220)
$ 2,178
Total
$ 2,688
(357)
2,331
(171)
$ 2,160
(1) A net receivable of $38 has been recorded for claims of losses under the FDIC guarantee that expired during the year.
Loans purchased as part of the acquisition of R-G Premier Bank of Puerto Rico are subject to loss share agreements with the FDIC. Under this
agreement, the FDIC guarantees 80% of loan losses. The provision for credit losses in the Consolidated Statement of Income related to these loans is
reflected net of the amount expected to be reimbursed by the FDIC. Allowance for credit losses in the Consolidated Statement of Financial Position is
reflected on a gross basis. During the year, the FDIC guarantee on non-single family loans expired. The guarantee for single family home loans will
expire in April 2020.
As at October 31, 2015, the carrying value of loans acquired under the FDIC guarantee was $2.2 billion (2014 – $2.2 billion) and the carrying value of
loans for which claims for losses under the guarantee expired during the year was $393 million. A net receivable of $218 million (2014 – $275 million)
from the FDIC is included in Other assets in the Consolidated Statement of Financial Position.
169 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Loans past due but not impaired(1)
(f)
A loan is considered past due when a counterparty has not made a payment by the contractual due date. The following table presents the carrying
value of loans that are contractually past due but not classified as impaired because they are either less than 90 days past due or fully secured and
collection efforts are reasonably expected to result in repayment, or restoring it to a current status in accordance with the Bank’s policy.
As at October 31 ($ millions)
Residential mortgages
Personal and credit cards
Business and government
Total
2015(2)(3)
2014(2)(3)
31 - 60
days
$ 1,256
677
172
$ 2,105
61 - 90
days
$ 453
360
73
$ 886
91 days
and
greater
$ 127
56
338
$ 521
Total
$ 1,836
1,093
583
$ 3,512
31 - 60
days
$ 1,253
591
140
$ 1,984
61 - 90
days
$ 483
298
57
$ 838
91 days
and
greater
$ 153
48
233
$ 434
Total
$ 1,889
937
430
$ 3,256
(1) Loans past due 30 days or less are not presented in this analysis as they are not administratively considered past due.
(2) Excludes loans acquired under the FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(3) These loans would be considered in the determination of an appropriate level of collective allowances despite not being individually classified as impaired.
14 Derecognition of financial assets
Securitization of residential mortgage loans
The Bank securitizes fully insured residential mortgage loans, Bank originated and others, through the creation of mortgage backed securities (MBS)
under the National Housing Act (NHA) MBS program, sponsored by Canada Mortgage Housing Corporation (CMHC). MBS created under the program
are sold to Canada Housing Trust (the Trust), a government sponsored entity, under the Canada Mortgage Bond (CMB) program and/or third-party
investors. The Trust issues securities to third-party investors.
The sale of mortgages under the above programs does not meet the derecognition requirements, as the Bank retains the pre-payment and interest
rate risk associated with the mortgages, which represents substantially all the risk and rewards associated with the transferred assets.
The transferred mortgages continue to be recognized on the Consolidated Statement of Financial Position as residential mortgage loans. Cash proceeds from
the transfer are treated as secured borrowings and included in Deposits – Business and government on the Consolidated Statement of Financial Position.
The following table provides the carrying amount of transferred assets that do not qualify for derecognition and the associated liabilities:
As at October 31 ($ millions)
Assets
Carrying value of residential mortgage loans
Other related assets(2)
Liabilities
Carrying value of associated liabilities
2015(1)
2014(1)
$ 18,313
3,296
$ 17,969
2,425
20,816
20,414
(1) The fair value of the transferred assets is $21,728 (2014 – $20,430) and the fair value of the associated liabilities is $21,416 (2014 – $20,791), for a net position of $312
(2014 – $(361)).
(2) These include cash held in trust and trust permitted investment assets acquired as part of principal reinvestment account that the Bank is required to maintain in order to participate
in the programs.
Securitization of personal loans
The Bank securitizes a portion of its unsecured personal line of credit receivables on a revolving basis through a consolidated structured entity. The
receivables continue to be recognized on the Consolidated Statement of Financial Position as personal loans. For further details, see Note 15.
Securities sold under repurchase agreements and securities lent
The Bank enters into transactions, such as repurchase agreements and securities lending agreements, where the Bank transfers assets under
agreements to repurchase them on a future date and retains all the substantial risks and rewards associated with the assets. The transferred assets
remain on the Consolidated Statement of Financial Position.
The following table provides the carrying amount of the transferred assets and the associated liabilities:
As at October 31 ($ millions)
Carrying value of assets associated with:
Repurchase agreements(2)
Securities lending agreements
Total
Carrying value of associated liabilities(3)
2015(1)
2014(1)
$ 67,052
41,190
108,242
$ 80,335
37,110
117,445
$ 77,015
$ 88,953
(1) The fair value of transferred assets is $108,242 (2014 – $117,445) and the fair value of the associated liabilities is $77,015 (2014 – $88,953), for a net position of $31,227 (2014 –
$28,492).
(2) Does not include over-collateralization of assets pledged.
(3) Liabilities for securities lending arrangements only include amounts related to cash collateral received. In most cases, securities are received as collateral.
170 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
15 Structured entities
(a) Consolidated structured entities
U.S. multi-seller conduit
The Bank-sponsored U.S. multi-seller conduit purchases high-quality financial assets from independent third parties (the sellers) funded by the issuance
of highly rated asset-backed commercial paper. The sellers continue to service the financial assets and provide credit enhancements through
overcollateralization protection and cash reserves.
Each asset purchased by the conduit has a deal-specific liquidity facility provided by the Bank in the form of a liquidity asset purchase agreement
(LAPA). The primary purpose of the backstop liquidity facility is to provide an alternative source of financing in the event the conduit is unable to
access the asset-backed commercial paper market. The administration agent can require the Bank in its capacity as liquidity provider to perform under
its asset-specific LAPA agreements, in which case the Bank is obliged to purchase an interest in the related assets owned by the conduit. The Bank is
not obligated to perform under the LAPA agreements in the event the conduit itself is insolvent.
The Bank’s liquidity agreements with the conduit call for the Bank to fund full par value of the assets, including defaulted assets, if any, of the conduit. This
facility is available to absorb the losses on defaulted assets, if any, in excess of losses absorbed by deal-specific seller credit enhancements. Further, the Bank
provides a program-wide credit enhancement (PWCE) to the conduit and holds the subordinated note issued by the conduit.
The Bank’s exposure from the U.S. conduit through the LAPA, including the obligation to purchase defaulted assets, the Bank’s PWCE and investment
in the conduit’s subordinated note, give the Bank the obligation to absorb losses that could potentially be significant to the conduit, which in
conjunction with power to direct the conduit’s activities, result in the Bank consolidating the U.S. multi-seller conduit.
The conduit’s assets are primarily included in business and government loans on the Bank’s Consolidated Statement of Financial Position.
There are contractual restrictions on the ability of the Bank’s consolidated U.S. multi-seller conduit to transfer funds to the Bank. The Bank is restricted
from accessing the conduit’s assets under the relevant arrangements. The Bank has no rights to the assets owned by the conduit. In the normal course
of business, the assets of the conduit can only be used to settle the obligations of the conduit.
Bank funding vehicles
The Bank uses funding vehicles to facilitate cost-efficient financing of its own operations, including the issuance of covered bonds and notes. These
vehicles include Scotia Covered Bond Trust, Scotiabank Covered Bond Guarantor Limited Partnership and Hollis Receivables Term Trust II.
Activities of these structured entities are generally limited to holding a pool of assets or receivables generated by the Bank.
These structured entities are consolidated due to the Bank’s decision-making power and ability to use the power to affect the Bank’s returns.
Covered bond programs
Scotia Covered Bond Trust
Under the Bank’s global covered bond program, the Bank issues debt to investors that is guaranteed by Scotia Covered Bond Trust (the “Trust”).
Under the program, the Trust purchases CMHC insured residential mortgages from the Bank, which it acquires with funding provided by the Bank.
As at October 31, 2015, $8.5 billion (2014 – $12.2 billion) covered bonds were outstanding and included in Deposits – Business and government on
the Consolidated Statement of Financial Position. The Bank’s outstanding covered bonds are denominated in U.S. dollars. As at October 31, 2015,
assets pledged in relation to these covered bonds were residential mortgages denominated in Canadian dollars of $6.8 billion (2014 – $12.9 billion).
Scotiabank Covered Bond Guarantor Limited Partnership
The Bank has a registered covered bond program in which it issues debt that is guaranteed by Scotiabank Covered Bond Guarantor Limited Partnership (the
“LP”). Under this program, the LP purchases uninsured residential mortgages from the Bank, which it acquires with funding provided by the Bank.
As at October 31, 2015, $13.7 billion (2014 – $5.3 billion) covered bonds were outstanding and included in Deposits – Business and government on
the Consolidated Statement of Financial Position. The Bank’s outstanding covered bonds are denominated in U.S. dollars, Australian dollars, British
pounds and Euros. As at October 31, 2015, assets pledged in relation to these covered bonds were residential mortgages denominated in Canadian
dollars of $14.5 billion (2014 – $5.8 billion).
Personal line of credit securitization trust
The Bank securitizes a portion of its unsecured personal line of credit receivables (receivables) on a revolving basis through Hollis Receivables Term
Trust II (Hollis), a Bank-sponsored structured entity. Hollis issues notes to third-party investors and the Bank, proceeds of which are used to purchase a
co-ownership interest in the receivables originated by the Bank. Recourse of the note holders is limited to the purchased interest.
The Bank is responsible for servicing the transferred receivables as well as performing administrative functions for Hollis. The subordinated notes
issued by Hollis are held by the Bank.
As at October 31, 2015, $2.0 billion notes (2014 – $1.0 billion) were outstanding and included in Deposits – Business and government on the
Consolidated Statement of Financial Position. As at October 31, 2015, assets pledged in relation to these notes were $2.5 billion (2014 – $1.2 billion).
Other
Assets of other consolidated structured entities are comprised of securities, deposits with banks and other assets to meet the Bank’s and customer needs.
171 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
(b) Unconsolidated structured entities
The following table provides information about other structured entities in which the Bank has a significant interest but does not control and
therefore does not consolidate. A significant interest is generally considered to exist where the Bank is exposed to 10% or more of the unconsolidated
structured entities maximum exposure to loss.
As at October 31 ($ millions)
2015
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles
Other
Total
Total assets (on structured entity’s financial statements)
$
2,491
$
7,813
$ 1,520
$ 950
$ 12,774
Assets recognized on the Bank’s financial statements
Trading assets
Investment securities
Loans(1)
Liabilities recognized on the Bank’s financial statements
Deposits – Business and government
Bank’s maximum exposure to loss
As at October 31 ($ millions)
Total assets (on structured entity’s financial statements)
Assets recognized on the Bank’s financial statements
Trading assets
Investment securities
Loans(1)
Liabilities recognized on the Bank’s financial statements
Deposits – Business and government
3
–
–
3
–
–
470
1,144
716
2,330
–
15
47
62
–
–
1,488
1,488
57
86
35
178
–
–
530
1,245
798
2,573
1,488
1,488
2,491
$
2,330
$
62
$ 178
$
5,061
2014
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles
Other
Total
2,707
$ 12,165
$ 1,520
$ 945
$ 17,337
$
$
13
–
–
13
–
–
422
1,487
924
2,833
–
15
52
67
–
–
1,488
1,488
52
79
56
187
–
–
487
1,581
1,032
3,100
1,488
1,488
Bank’s maximum exposure to loss
$
2,707
$
2,833
$
67
$ 187
$
5,794
(1) Loan balances are presented net of allowance for credit losses.
The Bank’s maximum exposure to loss represents the notional amounts of guarantees, liquidity facilities, and other credit support relationships with the
structured entities, the credit risk amount for certain derivative contracts with the entities and the amount invested where the Bank holds an ownership
interest in the structured entities. Of the aggregate amount of maximum exposure to loss as at October 31, 2015, the Bank has recorded $2.6 billion (2014 –
$3.1 billion), primarily its interest in the structured entities, on its Consolidated Statement of Financial Position.
Canadian multi-seller conduits that the Bank administers
The Bank sponsors two Canadian multi-seller conduits. The conduits purchase assets from independent third parties (the sellers) funded by the
issuance of asset-backed commercial paper. The sellers continue to service the assets and provide credit enhancements through overcollateralization
protection and cash reserves. The Bank has no rights to these assets as they are available to support the obligations of the respective programs, but
manages for a fee the commercial paper selling programs. To ensure timely repayment of the commercial paper, each asset pool financed by the
multi-seller conduits has a deal-specific liquidity asset purchase agreement (LAPA) with the Bank. Pursuant to the terms of the LAPA, the Bank as the
liquidity provider is obligated to purchase non-defaulted assets, transferred by the conduit at the conduit’s original cost as reflected in the table above.
In most cases, the liquidity agreements do not require the Bank to purchase defaulted assets. Additionally, the Bank has not provided any program-
wide credit enhancement to these conduits. The Bank provides additional liquidity facilities to these multi-seller conduits to a maximum amount of
$1.4 billion (2014 – $1.4 billion) based on future asset purchases by these conduits.
Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns, which results in the Bank not
consolidating the two Canadian conduits.
Structured finance entities
The Bank has interests in structured entities used to assist corporate clients in accessing cost-efficient financing through their securitization structures. The
Bank may act as an administrator, an investor or a combination of both in these types of structures.
Capital funding vehicles
These entities are designed to pass the Bank’s credit risk to the holders of the securities. Therefore the Bank does not have exposure or rights to variable
returns from these entities.
172 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Other
Other includes investments in managed funds, collateralized debt obligation entities, and other structured entities. The Bank’s maximum exposure to
loss is limited to its net investment in these funds.
c) Other unconsolidated Bank-sponsored entities
The Bank sponsors unconsolidated structured entities in which it has insignificant or no interest at the reporting date. The Bank is a sponsor when it is
significantly involved in the design and formation at inception of the structured entities, and the Bank’s name is used by the structured entities to
create an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also considers other factors, such as its
continuing involvement and obligations to determine if, in substance, the Bank is a sponsor. The Bank considered mutual funds and managed
companies as sponsored entities at October 31, 2015.
The following table provides information on revenue from unconsolidated Bank-sponsored entities.
As at October 31 ($ millions)
Revenue
(1)
Includes mutual funds, other funds and trusts.
2015
Scotia
Managed
Companies
Funds(1)
2014
Scotia
Managed
Companies
Total
Total
Funds(1)
$ 1,964
$ 13
$ 1,977
$ 1,804
$ 18
$ 1,822
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
The Bank earned revenue of $1,977 million (2014 – $1,822 million) from its involvement with the unconsolidated Bank sponsored structured entities
for the year ended October 31, 2015, which was comprised of interest income of $3 million (2014 – $4 million), non-interest income – banking of
$133 million (2014 – $141 million) and non-interest income – wealth management of $1,841 million (2014 – $1,677 million), including mutual fund,
brokerage and investment management and trust fees.
16 Property and equipment
($ millions)
Cost
Balance as at October 31, 2013
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2014
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2015
Accumulated depreciation
Balance as at October 31, 2013
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2014
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2015
Net book value
Balance as at October 31, 2014
Balance as at October 31, 2015
(1)
Includes $27 (2014 – $41) of investment property.
Land
Buildings
Equipment
$ 284
11
(40)
11
$ 266
19
(11)
60
$ 334
$
$
$
–
–
–
–
–
–
–
–
–
$ 266
$ 335
$ 1,649
168
(155)
25
$ 1,687
135
(243)
70
$ 1,649
$
$
$
$
$
691
36
(23)
11
715
47
(17)
9
754
972
910
$ 3,323
177
(148)
26
$ 3,378
262
(118)
17
$ 3,539
$ 2,772
184
(152)
11
$ 2,815
178
(46)
31
$ 2,978
$
$
563
560
Leasehold
improvements
$ 1,146
94
(41)
25
$ 1,224
100
(57)
38
$ 1,305
$
$
$
$
$
725
77
(57)
8
753
78
(27)
5
809
471
481
Total
$ 6,402
450
(384)
87
$ 6,555
516
(429)
185
$ 6,827
$ 4,188
297
(232)
30
$ 4,283
303
(90)
45
$ 4,541
$ 2,272(1)
$ 2,286(1)
173 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
17 Investments in associates
The Bank had significant investments in the following associates:
As at October 31 ($ millions)
Thanachart Bank Public Company
Limited
Canadian Tire’s Financial Services
business (CTFS)(2)
Bank of Xi’an Co. Ltd.
Maduro & Curiel’s Bank N.V.(3)
Banco del Caribe(4)
Country of
incorporation
Nature of business
Ownership
percentage
Date of financial
statements(1)
Carrying
value
2015
2014
Carrying
value
Thailand
Banking
49.0%
September 30, 2015
$ 2,415
$ 2,134
Canada
China
Curacao
Venezuela
Financial Services
Banking
Banking
Banking
20.0%
19.9%
48.1%
26.6%
September 30, 2015
September 30, 2015
September 30, 2015
September 30, 2015
538
610
264
30
509
359
221
54
(1) Represents the date of the most recent published financial statements. Where available, financial statements prepared by the associates’ management or other published
information is used to estimate the change in the Bank’s interest since the most recent published financial statements.
(2) On October 1, 2014, the Bank acquired a 20% equity interest in Canadian Tire’s Financial Services business (CTFS). Under the agreement Canadian Tire has an option to sell to the
Bank up to an additional 29% equity interest within the next 10 years at the then fair value, that can be settled, at the Bank’s discretion, by issuance of common shares or cash.
After 10 years, for a period of six months, the Bank has the option to sell its equity interest back to Canadian Tire at the then fair value. As at October 1, 2014 CTFS had total assets
of $5,351 and total liabilities of $4,387.
(3) The local regulator requires financial institutions to set aside reserves for general banking risks. These reserves are not required under IFRS, and represent undistributed retained
earnings related to a foreign associated corporation, which are subject to local regulatory restrictions. As of October 31, 2015 these reserves amounted to $61 (2014 – $52).
(4) As at October 31, 2015, the Bank’s total net investment in Banco del Caribe, along with monetary assets, comprising of cash and dividend receivable was translated at the
SIMADI exchange rate of 1 USD to 198 VEF replacing the SICAD II exchange rate (2014 – 1 USD to 50 VEF).
Summarized financial information of the Bank’s significant associates are as follows.
($ millions)
Thanachart Bank Public Company Limited
Canadian Tire’s Financial Services business (CTFS)
Bank of Xi’an Co. Ltd.
Maduro & Curiel’s Bank N.V.
Banco del Caribe
($ millions)
Thanachart Bank Public Company Limited
Bank of Xi’an Co. Ltd.
Maduro & Curiel’s Bank N.V.
Banco del Caribe
(1) Based on the most recent available financial statements.
18 Goodwill and other intangible assets
Goodwill
The changes in the carrying amounts of goodwill by cash-generating unit (CGU) are as follows:
For the twelve months ended and as at September 30, 2015(1)
Revenue
$ 1,601
1,003
942
327
111
Net
income
$ 389
310
378
92
(9)
Total assets
Total liabilities
$ 35,483
5,829
29,525
4,954
1,131
$ 31,399
4,782
26,688
4,391
1,016
For the twelve months ended and as at September 30, 2014(1)
Revenue
$ 1,488
695
291
1,160
Net
income
$ 336
299
86
107
Total assets
Total liabilities
$ 34,124
25,259
4,117
16,728
$ 30,571
23,558
3,642
15,106
($ millions)
Balance as at October 31, 2013
Foreign currency adjustments and
other
Balance as at October 31, 2014
Transfers November 1, 2014
Acquisitions
Foreign currency adjustments and
other
Canadian
Banking
Global Wealth
& Insurance
$ 1,633
$ 2,283
9
2,292
(2,292)
–
–
1,633
1,728
–
–
Global
Capital
Markets
$ 92
8
100
(100)
–
Global
Corporate &
Investment
Banking
Global
Banking and
Markets
Latin
America
Caribbean
and
Central
America
$ 114
$
9
123
(123)
–
–
–
–
223
–
35
$ 2,078
$
667
(37)
2,041
413
116
(179)
53
720
151
–
134
Asia
Pacific
$ –
Total
$ 6,867
–
–
–
–
–
42
6,909
–
116
(10)
Balance as at October 31, 2015
$ 3,361
$
$ 258
$ 2,391
$ 1,005
$ –
$ 7,015
–
–
–
–
$
–
–
$
Effective November 1, 2014, the Canadian and International businesses previously reported in Global Wealth & Insurance are included in Canadian
Banking and International Banking’s results, respectively. In addition, there was a reallocation of the results of the Global Capital Markets CGU and
Global Corporate & Investment Banking CGU into Global Banking and Markets CGU. As well, certain business activity previously reported in the Asia
Pacific CGU is now included in Global Banking and Markets CGU. Consequently, the aggregate number of CGUs for the purposes of goodwill
impairment assessment as of November 1, 2014 is reduced to 5 (October 31, 2014 – 7 CGUs). Goodwill was assessed for impairment following the
reallocation and no impairment was determined to exist.
174 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Impairment testing of goodwill
Goodwill acquired in business combinations is allocated to each of the Bank’s group of CGUs that are expected to benefit from the synergies of the
particular acquisition. Goodwill is assessed for impairment annually or more frequently if events or circumstances occur that may result in the
recoverable amount of the CGU falling below its carrying value.
The carrying amount of the CGU is determined by management using approved internal economic capital models. These models consider various
factors including credit risk, market risk, operational risk and other relevant business risks for each CGU. The recoverable amount is the higher of fair
value less costs of disposal and value in use. The recoverable amount for the CGU has been determined using the fair value less costs of disposal
method. In arriving at such value for the CGU, the Bank has used price earnings (P/E) multiples applied to normalized net income for the last four
quarters as of the test date, a control premium is added based on a five year weighted average acquisition premium paid for comparable companies,
and costs of disposal are deducted from the fair value of the CGU. The resulting recoverable amount determined is then compared to its respective
carrying amount to identify any impairment. P/E multiples ranging from 10 to 12.5 times (2014 – 10 to 18 times) have been used.
The fair value less costs of disposal of the CGU is sensitive to changes in net income, P/E multiples and control premiums.
Management believes that reasonable negative changes in any one key assumption used to determine the recoverable amount of the CGU would not
result in an impairment.
Goodwill was assessed for annual impairment as at July 31, 2015 and July 31, 2014 and no impairment was determined to exist.
Intangible assets
Intangible assets consist of assets with indefinite and finite useful lives. Indefinite life intangible assets consist substantially of fund management
contracts. The fund management contracts are for the management of open-ended funds. Finite life intangible assets include assets such as computer
software, customer relationships and core deposit intangibles.
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
($ millions)
Cost
Balance as at October 31, 2013
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2014
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2015
Accumulated amortization
Balance as at October 31, 2013
Amortization Expense
Foreign currency adjustments and other
Balance as at October 31, 2014
Amortization Expense
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2015
Net book value
As at October 31, 2014
As at October 31, 2015
Finite life
Indefinite life
Computer
software
Other
intangibles
Fund management
contracts(1)
Other
intangibles
Total
$ 1,400
$ 1,218
$ 2,325
$
67
$ 5,010
372
–
(1)
$ 1,771
5
474
–
(57)
1
–
12
$ 1,231
296
–
–
(17)
$ 2,193
$ 1,510
$
$
$
479
143
7
629
191
–
(42)
778
$ 1,142(2)
$ 1,415(2)
$
$
$
$
$
694
86
10
790
90
–
4
884
441
626
–
–
–
$ 2,325
–
–
–
–
$ 2,325
$
$
$
–
–
–
–
–
–
–
–
$ 2,325
$ 2,325
–
(1)
1
67
–
–
–
1
68
–
–
–
–
–
–
–
–
67
68
$
$
$
$
$
$
$
373
(1)
12
$ 5,394
301
474
(14)
(59)
$ 6,096
$ 1,173
229
17
$ 1,419
281
(14)
(24)
$ 1,662
$ 3,975
$ 4,434
(1) Fund management contracts are attributable to HollisWealth Inc. (formerly DundeeWealth Inc.).
(2) Computer software comprises of purchased software of $256 (2014 – $251), internally generated software of $619 (2014 – $481), and in process software not subject to
amortization of $540 (2014 – $410).
Impairment testing of intangible assets
Indefinite life intangible assets are not amortized and are assessed for impairment annually or more frequently if events or changes in circumstances
indicate that the asset may be impaired. Impairment is assessed by comparing the carrying value of the indefinite life intangible asset to its recoverable
amount. The recoverable amount of the fund management contracts is based on a value in use approach using the multi-period excess earnings
method. This approach uses cash flow projections from management-approved financial budgets which include key assumptions related to market
appreciation, net sales of funds, and operating margins taking into consideration past experience and market expectations. The forecast cash flows
cover a 5-year period, with a terminal growth rate of 4.5% (2014 – 4.5%) applied thereafter. These cash flows have been discounted at a rate of
10% (2014 – 10%). Management believes that reasonable negative changes in any one key assumption used to determine the recoverable amount
would not result in an impairment.
Indefinite life intangible assets were assessed for annual impairment as at July 31, 2015 and July 31, 2014 and no impairment was determined to exist.
175 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
19 Other assets
As at October 31 ($ millions)
Accrued interest
Accounts receivable
Current tax assets
Pension assets (Note 28)
Receivable from brokers, dealers and clients
Receivable from the Federal Deposit Insurance Corporation (Note 13)
Other
$
2015
1,742
1,683
649
183
504
218
7,324
$ 12,303
2014
$ 1,690
1,172
565
117
945
275
4,995
$ 9,759
Total
20 Deposits
As at October 31 ($ millions)
Personal
Business and government
Financial institutions
Total
Recorded in:
Canada
United States
United Kingdom
Mexico
Peru
Chile
Colombia
Other International
Total(5)
2015
2014
Payable on demand(1)
Interest-
bearing
$ 10,364
63,444
2,386
$ 76,194
$ 66,379
3,558
–
–
2,321
52
101
3,783
$ 76,194
Non-interest
bearing
$
5,233
20,855
1,945
$ 28,033
$ 15,499
393
5
3,326
447
1,360
702
6,301
Payable after
Payable on a
notice(2)
fixed date(3)
Total
$ 102,820
31,060
2,046
$ 135,926(4)
$ 71,627
259,785
29,354
$ 360,766
$ 103,447
4,408
421
4,870
4,446
67
5,630
12,637
$ 224,090
70,656
14,121
7,598
7,513
6,461
392
29,935
$ 190,044
375,144
35,731
$ 600,919
$ 409,415
79,015
14,547
15,794
14,727
7,940
6,825
52,656
$ 175,163
342,367
36,487
$ 554,017
$ 373,491
84,710
13,296
13,668
11,701
5,785
7,450
43,916
$ 28,033
$ 135,926
$ 360,766
$ 600,919
$ 554,017
(1) Deposits payable on demand include all deposits for which we do not have the right to notice of withdrawal, generally chequing accounts.
(2) Deposits payable after notice include all deposits for which we require notice of withdrawal, generally savings accounts.
(3) All deposits that mature on a specified date, generally term deposits, guaranteed investments certificates and similar instruments.
(4)
(5) Deposits denominated in U.S. dollars amount to $227,320 (2014 – $201,891) deposits denominated in Mexican pesos amount to $14,034 (2014 – $12,444) and deposits
Includes $120 (2014 – $104) of non-interest bearing deposits.
denominated in other foreign currencies amount to $66,860 (2014 – $49,836).
The following table presents the maturity schedule for term deposits in Canada greater than $100,000(1).
($ millions)
As at October 31, 2015
As at October 31, 2014
(1) The majority of foreign term deposits are in excess of $100,000.
Within three
months
Three to six
months
Six to
twelve months
One to
five years
Over
five years
Total
$ 24,170
$ 18,890
$ 27,219
$ 90,927
$ 17,231
$ 178,437
$ 42,801
$ 13,907
$ 23,338
$ 75,987
$ 14,110
$ 170,143
176 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
21 Subordinated debentures
These debentures are direct, unsecured obligations of the Bank and are subordinate to the claims of the Bank’s depositors and other creditors. The
Bank, where appropriate, enters into interest rate and cross-currency swaps to hedge the related risks.
As at October 31 ($ millions)
Maturity date
Interest
rate (%)
Terms(1)
January 2021
6.65
August 2022
2.898
October 2024
3.036
June 2025
March 2027
8.90
2.58
November 2037 3.015
April 2038
August 2085
3.37
Floating
Redeemable at any time. After January 22, 2016, interest will be payable
at an annual rate equal to the 90-day bankers’ acceptance rate plus
5.85%.
Redeemable on or after August 3, 2017. After August 3, 2017, interest
will be payable at an annual rate equal to the 90-day bankers’ acceptance
rate plus 1.255%.
Redeemable on or after October 18, 2017. After October 18, 2019,
interest will be payable at an annual rate equal to the 90-day bankers’
acceptance rate plus 1.14%.
Redeemable at any time.
Redeemable on or after March 30, 2022. After March 30, 2022, interest
will be payable at an annual rate equal to the 90-day bankers’ acceptance
rate plus 1.19%(3).
JPY ¥10 billion. Redeemable on November 20, 2017.
JPY ¥10 billion. Redeemable on April 9, 2018.
US$126 million bearing interest at a floating rate of the offered rate for
six-month Eurodollar deposits plus 0.125%. Redeemable on any interest
payment date.
2015
Carrying
value(2)
2014
Carrying
value(2)
Par value
$ 1,000
$ 1,000
$ 1,000
1,500
1,501
1,501
1,750
250
1,250
108
108
1,806
263
1,247
100
100
1,748
264
–
99
99
165
$ 6,131
165
$ 6,182
160
$ 4,871
(1)
In accordance with the provisions of the Capital Adequacy Guideline of the Superintendent, all redemptions are subject to regulatory approval and subject to the terms in the
relevant prospectus.
(2) The carrying value of subordinated debentures may differ from par value due to adjustments related to hedge accounting.
(3) The debentures contain non-viability contingent capital (NVCC) provisions. Under such NVCC provisions, the debentures are convertible into a variable number of common shares if
OSFI announces that the Bank has ceased, or is about to cease, to be viable, or if a federal or provincial government in Canada publicly announces that the Bank has accepted or
agreed to accept a capital injection, or equivalent support, from the federal government or any provincial government or political subdivision or agent thereof without which the
Bank would have been determined by OSFI to be non-viable. If such a conversion were to occur, the debentures would be converted into common shares pursuant to an automatic
conversion formula defined as 150% of the par value plus accrued and unpaid interest divided by the conversion price. The conversion price is based on the greater of: (i) a floor
price of $5.00 (subject to adjustments in certain events as set out in the prospectus supplement March 23, 2015), and (ii) the current market price of the Bank’s common shares at
the time of the trigger event (10-day weighted average). Based on the floor price of $5.00 and excluding the impact of accrued and unpaid interest (if any) and declared but unpaid
dividends (if any), the maximum number of common shares issuable on conversion of the debentures would be 375 million shares, which would represent an increase to common
shares outstanding of 31% based on the common shares outstanding as at October 31, 2015.
22 Other liabilities
As at October 31 ($ millions)
Accrued interest
Accounts payable and accrued expenses
Current tax liabilities
Deferred tax liabilities (Note 27)
Gold and silver certificates and bullion
Margin and collateral accounts
Payables to brokers, dealers and clients
Provisions (Note 23)
Pension liabilities (Note 28)
Other liabilities of subsidiaries and structured entities
Other
Total
23 Provisions
($ millions)
As at November 1, 2013
Provisions made during the year
Provisions used or no longer required during the year
Balance as at October 31, 2014
Provisions made during the year
Provisions used or no longer required during the year
Balance as at October 31, 2015
2015
2014
$
1,888
5,225
584
599
7,812
8,848
226
315
722
10,835
4,584
$ 41,638
$
1,920
5,265
1,009
454
4,571
5,078
293
518
817
10,020
4,840
$ 34,785
Off-balance sheet
credit risks
Restructuring
Other
Total
$ 184
–
–
$ 184
–
(72)
$ 112
$
22
148
(34)
$ 136
–
(87)
49
$
$ 141
116
(59)
$ 198
66
(110)
$ 154
$ 347
264
(93)
$ 518
66
(269)
$ 315
177 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Off-balance sheet credit risks
The provision for off-balance sheet credit risks relates primarily to off-balance sheet credit risks such as undrawn lending commitments, letters of credit and
letters of guarantee. These are collectively assessed in a manner consistent with the collective allowance for performing on-balance sheet credit risks.
Restructuring
During fiscal 2014, the Bank initiated certain restructuring initiatives in order to improve the Bank’s customers’ experience, reduce costs in a
sustainable manner, and to achieve greater operational efficiencies. As a result, in order to implement these initiatives, in the fourth quarter of 2014, a
charge of $148 million was recorded in non-interest expenses, primarily relating to employee severance costs. As at October 31, 2015, $49 million of
the restructuring provision remains and is expected to be utilized in fiscal 2016.
Other
Other primarily includes provisions related to litigation reserves. In the ordinary course of business, the Bank and its subsidiaries are routinely
defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes
of claimants. In view of the inherent difficulty of predicting the outcome of such matters, the Bank cannot state what the eventual outcome of such
matters will be. However, based on current knowledge, management does not believe that liabilities, if any arising from pending litigation will have a
material adverse effect on the Consolidated Statement of Financial Position or results of operations of the Bank.
24 Common and preferred shares
a) Common shares
Authorized:
An unlimited number of common shares without nominal or par value.
Issued and fully paid:
2015
2014
As at October 31 ($ millions)
Number of shares
Amount
Number of shares
Amount
Outstanding at beginning of year
Issued under Shareholder Dividend and Share Purchase Plan(1)
Issued in relation to share-based payments, net (Note 26)
Issued in relation to the acquisition of a subsidiary or associated corporation
Repurchased for cancellation under the Normal Course Issuer Bid
Outstanding at end of year
1,216,582,245
27,220
1,827,730
–
(15,499,990)
1,202,937,205(2)
$ 15,231
2
102
–
(194)
$ 15,141
1,208,588,989
8,849,647
3,493,491
150,118
(4,500,000)
1,216,582,245(2)
$ 14,516
574
187
10
(56)
$ 15,231
(1) For fiscal 2015, the Bank discontinued issuing shares from Treasury for the Dividend Reinvestment and Stock Dividend options of the Plan and purchased these shares on the
market. Effective March 31, 2015, the Bank also discontinued issuing shares from Treasury for the Share Purchase option of the Plan and purchased these shares on the market. As
at October 31, 2015, there were 10,020,821 common shares held in reserve for issuance under the Plan.
In the normal course of business, the Bank’s regulated Dealer subsidiary purchases and sells the Bank’s common shares to facilitate trading/institutional client activity. During fiscal
2015, the number of such shares bought and sold was 12,466,541 (2014 – 13,033,821).
(2)
Dividend
The dividends paid on common shares in 2015 and 2014 were $3,289 million ($2.72 per share) and $3,110 million ($2.56 per share), respectively. The
Board of Directors approved a quarterly dividend of 70 cents per common share at its meeting on November 30, 2015. This quarterly dividend applies
to shareholders of record as of January 5, 2016, and is payable January 27, 2016.
Normal Course Issuer Bid
On May 27, 2014, the Bank announced that OSFI and the Toronto Stock Exchange (TSX) approved a normal course issuer bid pursuant to which it
may repurchase for cancellation up to 12 million of the Bank’s common shares. On March 3, 2015, the Bank announced that OSFI and the TSX
approved an increase in the bid up to 16 million shares. Under this bid, the Bank repurchased and cancelled approximately 7.5 million common shares
during the year at an average price of $63.18 per share for a total amount of approximately $474 million. The bid ended on May 29, 2015.
On May 29, 2015, the Bank announced that OSFI and the TSX approved a normal course issuer bid pursuant to which it may repurchase for
cancellation up to 24 million of the Bank’s common shares. The bid will end on the earlier of June 1, 2016, or the date on which the Bank completes
its purchases. Under this bid, as at October 31, 2015, the Bank has repurchased and cancelled 8.0 million common shares at an average price of
$60.20 per share, for a total amount of approximately $481 million.
During the year ended October 31, 2015, under these two bids the Bank repurchased and cancelled approximately 15.5 million common shares (2014
– 4.5 million) at an average price of $61.64 per share (2014 - $71.04) for a total amount of approximately $955 million (2014 - $320 million).
178 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
b)
Preferred shares
Authorized:
An unlimited number of preferred shares without nominal or par value.
Issued and fully paid:
As at October 31 ($ millions)
Preferred shares:
Series 14(a)(b)
Series 15(a)(c)
Series 16(a)(d)
Series 17(a)(e)
Series 18(a)(f)(g)
Series 19(a)(f)(g)
Series 20(a)(f)(h)
Series 21(a)(f)(h)
Series 22(a)(f)(i)
Series 23(a)(f)(i)
Series 30(a)(f)(j)
Series 31(a)(f)(j)
Series 32(a)(f)(k)
Total preferred shares
Terms of preferred shares
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
2015
2014
Number of shares
Amount
Number of shares
Amount
13,800,000
13,800,000
13,800,000
9,200,000
7,497,663
6,302,337
8,039,268
5,960,732
9,376,944
2,623,056
6,142,738
4,457,262
16,345,767
$
345
345
345
230
187
158
201
149
234
66
154
111
409
13,800,000
13,800,000
13,800,000
9,200,000
7,497,663
6,302,337
8,039,268
5,960,732
9,376,944
2,623,056
10,600,000
–
16,345,767
$
345
345
345
230
187
158
201
149
234
66
265
–
409
117,345,767
$ 2,934
117,345,767
$ 2,934
Dividends
per share
Issue date
Issue
price
Initial
dividend
Initial dividend
payment date
Rate reset
spread
Redemption date
Redemption
price
Preferred shares:
Series 14(b)
0.281250
January 24, 2007
25.00
0.283560
April 26, 2007
Series 15(c)
0.281250
Series 16(d)
0.328125
April 5, 2007
April 17, 2007
October 12, 2007
25.00
0.348290
July 27, 2007
25.00
0.391950
January 29, 2008
Series 17(e)
0.350000
January 31, 2008
25.00
0.337530
April 28, 2008
–
–
–
–
Series 18(g)
0.209375
Series 19(g)
0.153938
March 25, 2008
March 27, 2008
April 26, 2013
25.00
0.431500
July 29, 2008
2.05%
25.00
0.189250
July 29, 2013
Series 20(h)
Series 21(h)
Series 22(i)
Series 23(i)
Series 30(j)
Series 31(j)
0.225625
0.132063
June 10, 2008
October 26, 2013
25.00
25.00
0.167800
0.167875
July 29, 2008
January 29, 2014
0.239375
0.143313
September 9, 2008
January 26, 2014
25.00
25.00
0.482900
0.173875
January 28, 2009
April 28, 2014
0.113750
0.088313
April 12, 2010
April 26, 2015
25.00
25.00
0.282200
0.095500
July 28, 2010
July 29, 2015
Series 32(k)
0.231250
February 1, 2011
February 28, 2011
25.00
0.215410
April 27, 2011
April 28, 2015 to
April 26, 2016
July 29, 2015 to
July 26, 2016
January 28, 2015 to
January 26, 2016
April 28, 2015 to
April 26, 2016
April 26, 2018
2.05%
April 26, 2013 to
April 26, 2018
1.70%
October 26, 2018
1.70% October 26, 2013 to
October 26, 2018
January 26, 2019
1.88%
1.88% January 26, 2014 to
January 26, 2019
April 26, 2020
April 26, 2015 to
April 26, 2020
February 2, 2016
1.00%
1.00%
1.34%
25.25
25.25
25.50
25.50
25.00
25.50
25.00
25.50
25.00
25.50
25.00
25.50
25.00
(a) Non-cumulative preferential cash dividends on Series 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 30, 31 and 32 are payable quarterly, as and when
declared by the Board. Dividends on the Non-cumulative 5-Year Rate Reset Preferred Shares (Series 18, 20, 22, 30 and 32) are payable at the
applicable rate for the initial five-year fixed rate period ending one day prior to the redemption date. Subsequent to the initial five-year fixed rate
period, and resetting every five years thereafter, the dividend on all Rate Reset Preferred Shares will be determined by the sum of the 5-year
Government of Canada Yield plus the indicated rate reset spread, multiplied by $25.00. If outstanding, non-cumulative preferential cash
dividends on the Series 19, 21, 23, 31 and 33 are payable quarterly, as and when declared by the Board. Dividends on the Non-cumulative 5-year
Rate Reset Preferred Shares (Series 19, 21, 23, 31 and 33) are payable, in an amount per share equal to the sum of the T-Bill Rate plus the rate
reset spread of the converted preferred shares, multiplied by $25.00. For each of the years presented, the Bank paid all of the non-cumulative
preferred share dividends.
(b) With regulatory approval, the Series 14 Non-cumulative Preferred Shares may be redeemed by the Bank during the period commencing April 28,
2015 and ending April 26, 2016, at $25.25 per share, together with declared and unpaid dividends to the date then fixed for redemption and
$25.00 per share commencing April 27, 2016.
179 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
(c) With regulatory approval, the Series 15 Non-cumulative Preferred Shares may be redeemed by the Bank during the period commencing July 29,
2015 and ending July 26, 2016, at $25.25 per share, together with declared and unpaid dividends to the date then fixed for redemption and
$25.00 per share commencing July 27, 2016.
(d) With regulatory approval, the Series 16 Non-cumulative Preferred Shares may be redeemed by the Bank during the period commencing
January 28, 2015 and ending January 26, 2016 at $25.50 per share, together with declared and unpaid dividends to the date then fixed for
redemption, at $25.25 per share if redeemed during the period commencing January 27, 2016 and ending January 26, 2017, and $25.00 per
share commencing January 27, 2017.
(e) With regulatory approval, the Series 17 Non-cumulative Preferred Shares may be redeemed by the Bank during the period commencing April 28,
2015 and ending April 26, 2016 at $25.50 per share, together with declared and unpaid dividends to the date then fixed for redemption, at
$25.25 per share if redeemed during the period commencing April 27, 2016 and ending April 25, 2017, and $25.00 per share commencing April
26, 2017.
(f) Holders of Fixed Rate Reset Preferred Shares will have the option to convert shares into an equal number of the relevant series of Floating Rate
Preferred Shares on the applicable Rate Reset Series conversion date and every five years thereafter. Holders of Floating Rate Reset Preferred
Shares have reciprocal conversion options into the relevant series of Fixed Rate Reset Preferred Shares. With respect to Series 18 and 19, 20 and
21, 22 and 23, 30 and 31, and 32 and 33, if the Bank determines that, after giving effect to any Election Notices received, there would be less
than 1,000,000 Fixed Rate or Floating Rate Preferred Shares of such Series issued and outstanding on an applicable conversion date, then all of
the issued and outstanding preferred shares of such Series will automatically be converted into an equal number of the preferred shares of the
other relevant Series.
(g) Holders of Series 18 Non-cumulative 5-Year Rate Reset Preferred Shares will have the option to convert shares into an equal number of Series 19
non-cumulative floating rate preferred shares on April 26, 2018 and on April 26 every five years thereafter. With regulatory approval, the
Series 18 preferred shares may be redeemed by the Bank on April 26, 2018 and every five years thereafter, respectively, at $25.00 per share,
together with declared and unpaid dividends. With regulatory approval, the Series 19 Non-cumulative Preferred Shares may be redeemed by the
Bank at (i) $25.00 together with all declared and unpaid dividends to the date fixed for redemption in the case of redemptions on April 26, 2018
and on April 26 every five years thereafter, or (ii) $25.50 together with all declared and unpaid dividends to the date on any other date fixed for
redemption on any other date on or after April 26, 2013.
(h) Holders of Series 20 Non-cumulative 5-Year Rate Reset Preferred Shares will have the option to convert shares into an equal number of Series 21
non-cumulative floating rate preferred shares on October 26, 2018, and on October 26 every five years thereafter. With regulatory approval, the
Series 20 preferred shares may be redeemed by the Bank on October 26, 2018, and every five years thereafter, respectively, at $25.00 per share,
together with declared and unpaid dividends. With regulatory approval, the Series 21 Non-cumulative Preferred Shares may be redeemed by the
Bank at (i) $25.00 together with all declared and unpaid dividends to the date fixed for redemption in the case of redemptions on October 26,
2018 and on October 26 every five years thereafter, or (ii) $25.50 together with all declared and unpaid dividends to the date on any other date
fixed for redemption on any other date on or after October 26, 2013.
(i) Holders of Series 22 Non-cumulative 5-Year Rate Reset Preferred Shares will have the option to convert shares into an equal number of Series 23
non-cumulative floating rate preferred shares on January 26, 2019, and on January 26 every five years thereafter. With regulatory approval, the
Series 22 preferred shares may be redeemed by the Bank on January 26, 2019, and every five years thereafter, respectively, at $25.00 per share,
together with declared and unpaid dividends. With regulatory approval, the Series 23 Non-cumulative Preferred Shares may be redeemed by the
Bank at (i) $25.00 together with all declared and unpaid dividends to the date fixed for redemption in the case of redemptions on January 26,
2019 and on January 26 every five years thereafter, or (ii) $25.50 together with all declared and unpaid dividends to the date on any other date
fixed for redemption on any other date after January 26, 2014.
(j) Holders of Series 30 Non-cumulative 5-Year Rate Reset Preferred Shares will have the option to convert shares into an equal number of Series 31
non-cumulative floating rate preferred shares on April 26, 2020 and on April 26 every five years thereafter. With regulatory approval, the
Series 30 preferred shares may be redeemed by the Bank on April 26, 2020, and every five years thereafter, respectively, at $25.00 per share,
together with declared and unpaid dividends. With regulatory approval, the Series 31 Non-cumulative Preferred Shares may be redeemed by the
Bank at (i) $25.00 together with all declared and unpaid dividends to the date fixed for redemption in the case of redemptions on April 26, 2020
and on April 26 every five years thereafter, or (ii) $25.50 together with all declared and unpaid dividends to the date fixed for redemption on any
other date after April 26, 2015.
(k) Holders of Series 32 Non-cumulative 5-Year Rate Reset Preferred Shares will have the option to convert shares into an equal number of Series 33
non-cumulative floating rate preferred shares on February 2, 2016, and on February 2 every five years thereafter. With regulatory approval, Series
32 preferred shares may be redeemed by the Bank on February 2, 2016, and for Series 33 preferred shares, if applicable, on February 2, 2021 and
every five years thereafter, respectively, at $25.00 per share, together with declared and unpaid dividends.
(c) Restrictions on dividend payments
Under the Bank Act, the Bank is prohibited from declaring any dividends on its common or preferred shares when the Bank is, or would be placed by
such a declaration, in contravention of the capital adequacy, liquidity or any other regulatory directives issued under the Bank Act. In addition,
common share dividends cannot be paid unless all dividends to which preferred shareholders are then entitled have been paid or sufficient funds have
been set aside to do so.
In the event that applicable cash distributions on any of the Scotiabank Trust Securities are not paid on a regular distribution date, the Bank has
undertaken not to declare dividends of any kind on its preferred or common shares. Similarly, should the Bank fail to declare regular dividends on any
of its directly issued outstanding preferred or common shares, cash distributions will also not be made on any of the Scotiabank Trust Securities.
Currently, these limitations do not restrict the payment of dividends on preferred or common shares.
180 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
25 Capital management
The Bank has a capital management process in place to measure, deploy and monitor its available capital and assess its adequacy. This capital
management process aims to achieve four major objectives: exceed regulatory thresholds and meet longer-term internal capital targets, maintain
strong credit ratings, manage capital levels commensurate with the risk profile of the Bank and provide the Bank’s shareholders with acceptable
returns.
Capital is managed in accordance with the Board-approved Capital Management Policy. Senior executive management develop the capital strategy
and oversee the capital management processes of the Bank. The Bank’s Finance, Group Treasury and Global Risk Management (GRM) groups are key
in implementing the Bank’s capital strategy and managing capital. Capital is managed using both regulatory capital measures and internal metrics.
Although the Bank is subject to several capital regulations in the different business lines and countries in which the Bank operates, capital adequacy is
managed on a consolidated Bank basis. The Bank also takes measures to ensure its subsidiaries meet or exceed local regulatory capital requirements.
The primary regulator of its consolidated capital adequacy is the Office of the Superintendent of Financial Institutions Canada (OSFI). The capital
adequacy regulations in Canada are largely consistent with international standards set by the Basel Committee on Banking Supervision (BCBS).
Effective November 1, 2012, Canadian banks are subject to the revised capital adequacy requirements as published by the BCBS and commonly
referred to as Basel III. Basel III builds on the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework”
(Basel II). OSFI has issued guidelines, reporting requirements and disclosure guidance which are consistent with the Basel III reforms, except for its
deferral of the Basel III credit valuation adjustment (CVA) related capital charges, requiring they be phased-in over a 5 year period, beginning January
2014.
Under Basel III, there are three primary risk-based regulatory capital ratios used to assess capital adequacy, CET1, Tier 1 and Total Capital ratios, which
are determined by dividing those capital components by risk-weighted assets. Basel III also provides guidance on non-viability contingent capital
(NVCC). The guidance stipulates that in order to qualify as regulatory capital, non-common share capital instruments must be convertible into
common equity upon a trigger event as defined within the guidance. All non-common instruments issued after December 31, 2012, were required to
meet these NVCC requirements to qualify as regulatory capital.
To enable banks to meet the new standards, Basel III contains transitional arrangements commencing January 1, 2013, through January 1, 2019.
Transitional requirements result in a 5 year phase-in of new deductions and additional capital components to common equity. Non-qualifying capital
instruments will be phased out over 10 years and the capital conservation buffer will be phased in over 4 years.
OSFI requires Canadian deposit-taking institutions to fully implement the 2019 Basel III reforms, without the transitional phase-in provisions for capital
deductions (referred to as ‘all-in’), and achieve minimums of 7%, 8.5% and 10.5% for CET1, Tier 1 and Total Capital, respectively. OSFI has also
designated the bank as a domestic systemically important bank (D-SIB), increasing its minimum capital ratio requirements by 1% effective January 1,
2016, in line with the requirements for global systemically important banks.
Risk-weighted assets represent the Bank’s exposure to credit, market and operational risk and are computed by applying a combination of the Bank’s
internal credit risk parameters and OSFI prescribed risk weights to on-and off-balance sheet exposures. Under the Basel framework there are two main
methods for computing credit risk: the standardized approach, which uses prescribed risk weights; and internal ratings-based approaches, which allow
the use of a bank’s internal models to calculate some, or all, of the key inputs into the regulatory capital calculation. Users of the Advanced Internal
Ratings Based Approach (AIRB) are required to have sophisticated risk management systems for the calculations of credit risk regulatory capital. Once
banks demonstrate full compliance with the AIRB requirements, and OSFI has approved its use, they may proceed to apply the AIRB approach in
computing capital requirements. The Bank uses the AIRB to compute credit risk for material Canadian, U.S., European portfolios and for a significant
portion of international corporate and commercial portfolios. The Bank continues to assess the remaining portfolios for the application of AIRB in the
future. In 2012, the Bank implemented the Basel Committee’s revised market risk framework. The Bank uses the Standardized Approach to calculate
the operational risk capital requirements.
In addition to risk-based capital requirements, the Basel III reforms introduced a simpler, non risk-based Leverage ratio requirement to act as a
supplementary measure to its risk-based capital requirements. The Leverage ratio is defined as a ratio of Basel III Tier 1 capital to a leverage exposure
measure which includes on-balance sheet assets and off-balance sheet commitments, derivatives and securities financing transactions, as defined
within the requirements.
In January 2014, the BCBS issued revisions to the Basel III Leverage Ratio framework. Revisions to the framework related primarily to the exposure
measure, i.e. the denominator of the ratio, and consist mainly of: lower credit conversion factors for certain off-balance sheet commitments; further
clarification on the treatment for derivatives, related collateral, and securities financing transactions; additional requirements for written credit
derivatives; and, minimum public disclosure requirements commencing January 2015. The final calibration will be completed by 2017, with a view to
migrating to a Pillar 1 (minimum capital requirement) treatment by January 2018.
In October 2014, OSFI released its Leverage Requirements Guideline which outlines the application of the Basel III Leverage ratio in Canada and the
replacement of the former Assets-to-Capital Multiple (ACM), effective the first quarter of 2015. Institutions are expected to maintain a material
operating buffer above the 3% minimum. Leverage ratio disclosures are in accordance with OSFI’s September 2014 Public disclosure Requirements.
The Bank meets OSFI’s authorized Leverage ratio.
181 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
The Bank’s regulatory capital and leverage position were as follows:
As at October 31 ($ millions)
Capital
Common Equity Tier 1 Capital(1)
Net Tier 1 Capital(2)
Total regulatory capital(2)(3)
Risk-weighted assets used in calculation of capital ratios(4)
CET1 risk-weighted assets(4)
Tier 1 risk-weighted assets(4)
Total risk-weighted assets(4)
Capital ratios
Common Equity Tier 1 Capital ratio
Tier 1 capital ratio
Total capital ratio
Leverage:
Leverage exposures(5)
Leverage ratio(5)
2015
2014
All-in
Transitional
All-in
Transitional
$
$
$
36,965
41,366
48,230
$
$
$
44,811
44,811
51,501
$
$
$
33,742
38,073
43,592
$
$
$
41,712
41,712
47,100
$ 357,995
$ 358,780
$ 359,453
$ 364,824
$ 364,824
$ 364,824
$ 312,473
$ 313,263
$ 314,449
$ 319,936
$ 319,936
$ 319,936
10.3%
11.5%
13.4%
12.3%
12.3%
14.1%
$ 980,212
$ 983,318
4.2%
4.6%
10.8%
12.2%
13.9%
N/A
N/A
13.0%
13.0%
14.7%
N/A
N/A
(1) Other Common Equity Tier 1 capital adjustments under the all-in approach include defined pension plan assets and other items. For the transitional approach, deductions include:
Common Equity Tier 1 all-in deductions multiplied by an annual transitional factor (40% in 2015; 20% in 2014) and an adjustment for Additional Tier 1 deductions for which there
is insufficient Additional Tier 1 capital.
(2) Non-qualifying Tier 1 and Tier 2 capital instruments are subject to a phase-out period of 10 years. Amounts reported for regulatory capital may be less than as reported on the
Consolidated Statement of Financial Position.
(3) Other Tier 1/Tier 2 capital adjustments under the all-in approach include eligible non-controlling interests in subsidiaries; in addition, Tier 2 includes eligible collective allowance and
excess allowance. For the transitional approach, other Tier 1/Tier 2 capital adjustments include the amount of the Common Equity Tier 1 regulatory adjustment not deducted that
were Tier 1/Tier 2 deductions under Basel II (such as 50% of significant investments in financial institutions).
In accordance with OSFI’s requirements, scalars for CVA risk-weighted assets of 0.64, 0.71 and 0.77 (0.57, 0.65 and 0.77 in 2014) were used to compute the CET1 capital ratio,
Tier 1 capital ratio and Total capital ratio, respectively.
(4)
(5) Effective 2015, the leverage ratio replaced the Assets-to-capital multiple.
The Bank substantially exceeded the OSFI capital targets as at October 31, 2015. OSFI has also prescribed an authorized leverage ratio and the Bank
was above the regulatory minimum as at October 31, 2015.
26 Share-based payments
(a) Stock option plans
The Bank grants stock options and stand-alone stock appreciation rights (SARs) as part of the Employee Stock Option Plan. Options to purchase
common shares and/or to receive an equivalent cash payment, as applicable, may be granted to selected employees at an exercise price of the higher
of the closing price of the Bank’s common shares on the Toronto Stock Exchange (TSX) on the trading day prior to the grant date or the volume
weighted average trading price for the five trading days immediately preceding the grant date.
Stock Options granted since December 2014 vest 50% at the end of the third year and 50% at the end of the fourth year. This change is prospective
and does not impact prior period grants. Stock Options are exercisable no later than 10 years after the grant date. In the event that the expiry date
falls within an insider trading blackout period, the expiry date will be extended for 10 business days after the end of the blackout period. As approved
by the shareholders, a total of 129 million common shares have been reserved for issuance under the Bank’s Employee Stock Option Plan of which
95.2 million common shares have been issued as a result of the exercise of options and 22.7 million common shares are committed under outstanding
options, leaving 11.1 million common shares available for issuance as options. Outstanding options expire on dates ranging from December 2, 2015
to December 8, 2024.
The cost of these options is recognized on a graded vesting basis except where the employee is eligible to retire prior to a tranche’s vesting date, in
which case the cost is recognized between the grant date and the date the employee is eligible to retire.
The stock option plans include:
▪ Tandem stock appreciation rights
Employee stock options granted between December 2, 2005 to November 1, 2009 have Tandem SARs, which provide the employee the choice to
either exercise the stock option for shares, or to exercise the Tandem SARs and thereby receive the intrinsic value of the stock option in cash. As at
October 31, 2015, 175,876 Tandem SARs were outstanding (2014 – 363,775).
The share-based payment liability recognized for vested Tandem SARs as at October 31, 2015 was $3 million (2014 – $7 million). The corresponding
intrinsic value of this liability as at October 31, 2015 was $3 million (2014 – $8 million).
In 2015, a benefit of $0.3 million (2014 – $1 million) was recorded in salaries and employee benefits in the Consolidated Statement of Income. This
benefit included losses arising from derivatives used to manage the volatility of share-based payments of $1 million (2014 – $5 million gains).
182 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
▪ Stock options
Employee stock options granted beginning December 2009, are equity-classified stock options which call for settlement in shares and do not have
Tandem SARs features.
The amount recorded in equity – other reserves for vested stock options as at October 31, 2015 was $182 million (2014 – $184 million).
In 2015, an expense of $13 million (2014 – $30 million) was recorded in salaries and employee benefits in the Consolidated Statement of Income.
As at October 31, 2015, future unrecognized compensation cost for non-vested stock options was $5 million (2014 – $8 million) which is to be
recognized over a weighted-average period of 1.90 years (2014 – 1.71 years).
▪ Stock appreciation rights
Stand-alone SARs are granted instead of stock options to selected employees in countries where local laws may restrict the Bank from issuing
shares. When a SAR is exercised, the Bank pays the appreciation amount in cash equal to the rise in the market price of the Bank’s common shares
since the grant date.
During fiscal 2015, 88,768 SARs were granted (2014 – 233,120) and as at October 31, 2015, 1,791,458 SARs were outstanding (2014 –
1,852,484), of which 1,726,644 SARs were vested (2014 – 1,744,867).
The share-based payment liability recognized for vested SARs as at October 31, 2015 was $17 million (2014 – $27 million). The corresponding
intrinsic value of this liability as at October 31, 2015 was $17 million (2014 – $31 million).
In 2015, a benefit of $3 million (2014 – benefit of $1 million) was recorded in salaries and employee benefits in the Consolidated Statement of
Income. This benefit included losses arising from derivatives used to manage the volatility of share-based payment of $6 million (2014 – $14 million
gains).
Determination of fair values
The share-based payment liability and corresponding expense for SARs and options with Tandem SAR features were quantified using the Black-Scholes
option pricing model with the following assumptions and resulting fair value per award:
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
As at October 31
Assumptions
Risk-free interest rate%
Expected dividend yield
Expected price volatility
Expected life of option
Fair value
Weighted-average fair value
2015
2014
0.57% – 0.82%
4.33%
16.34% – 28.12%
0.05 – 4.43 years
0.98% – 1.40%
3.70%
15.12% – 22.82%
0.05 – 4.35 years
$
10.23
$
16.45
The share-based payment expense for stock options, i.e., without Tandem SAR features, was quantified using the Black-Scholes option pricing model
on the date of grant. The fiscal 2015 and 2014 stock option grants were fair valued using the following weighted-average assumptions and resulting
fair value per award:
Assumptions
Risk-free interest rate %
Expected dividend yield
Expected price volatility
Expected life of option
Fair value
Weighted-average fair value
2015 Grant
2014 Grant
1.60%
3.86%
21.90%
6.69 years
2.02%
3.65%
21.45%
6.07 years
$
7.63
$
8.85
The risk-free rate is based on Canadian treasury bond rates interpolated for the maturity equal to the expected life until exercise of the options.
Expected dividend yield is based on historical dividend payout. Expected price volatility is determined based on the historical volatility for
compensation. For accounting purposes, an average of the market consensus implied volatility for traded options on our common shares and the
historical volatility is used.
Details of the Bank’s Employee Stock Option Plan are as follows(1):
As at October 31
Outstanding at beginning of year
Granted
Exercised as options
Exercised as Tandem SARs
Forfeited
Expired
Outstanding at end of year(2)
Exercisable at end of year(3)
Available for grant
2015
2014
Number of stock
options (000’s)
Weighted average
exercise price
Number of stock
options (000’s)
Weighted average
exercise price
23,355
1,514
(1,811)
(2)
(99)
–
22,957
16,192
11,317
$ 51.68
68.32
46.10
47.92
58.06
–
$ 53.19
$ 50.09
23,609
3,242
(3,342)
(50)
(104)
–
23,355
14,344
12,731
$ 49.09
63.98
45.31
44.35
54.78
–
$ 51.68
$ 48.08
183 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2015
Range of exercise prices
$33.89 to $46.02
$47.39 to $52.00
$52.57 to $55.63
$63.98 to $68.32
Options Outstanding
Options Exercisable
Number of stock
options (000’s)
Weighted average
remaining
contractual life (years)
Weighted average
exercise price
Number of stock
options (000’s)
Weighted average
exercise price
2,676
7,186
8,413
4,682
22,957
2.54
4.59
5.48
8.42
5.46
$ 36.13
$ 49.39
$ 55.09
$ 65.37
$ 53.19
2,676
6,266
6,458
792
16,192
$ 36.13
$ 49.31
$ 54.93
$ 63.98
$ 50.09
(1) Excludes SARs.
(2)
(3)
Includes outstanding options of 175,876 Tandem SARs (2014 – 363,775) and 301,950 options originally issued under HollisWealth plans (2014 – 578,672).
Includes exercisable options of 175,876 Tandem SARs (2014 – 363,775) and 301,950 options originally issued under HollisWealth plans (2014 – 416,517).
(b) Employee share ownership plans
Eligible employees can contribute up to a specified percentage of salary towards the purchase of common shares of the Bank. In general, the Bank
matches 50% of eligible contributions, up to a maximum dollar amount, which is expensed in salaries and employee benefits. During 2015, the
Bank’s contributions totalled $31 million (2014 – $30 million). Contributions, which are used to purchase common shares in the open market, do not
result in a subsequent expense to the Bank from share price appreciation.
As at October 31, 2015, an aggregate of 19 million common shares were held under the employee share ownership plans (2014 – 19 million). The
shares in the employee share ownerships plans are considered outstanding for computing the Bank’s basic and diluted earnings per share.
(c) Other share-based payment plans
Other share-based payment plans use notional units that are valued based on the Bank’s common share price on the TSX. These units accumulate
dividend equivalents in the form of additional units based on the dividends paid on the Bank’s common shares. These plans are settled in cash and, as
a result, are liability-classified. Fluctuations in the Bank’s share price change the value of the units, which affects the Bank’s share-based payment
expense. As described below, the value of a portion of the Performance Share Unit notional units also varies based on Bank performance. Upon
exercise or redemption, payments are made to the employees with a corresponding reduction in the accrued liability.
In 2015, an aggregate expense of $209 million (2014 – $242 million) was recorded in salaries and employee benefits in the Consolidated Statement
of Income for these plans. This expense includes losses from derivatives used to manage the volatility of share-based payment of $72 million (2014 –
$92 million gains).
As at October 31, 2015, the share-based payment liability recognized for vested awards under these plans was $754 million (2014 – $901 million).
Details of these other share-based payment plans are as follows:
Deferred Stock Unit Plan (DSU)
Under the DSU Plan, senior executives may elect to receive all or a portion of their cash bonus under the Annual Incentive Plan (which is expensed for
the year awarded in salaries and employee benefits in the Consolidated Statement of Income) in the form of deferred stock units which vest
immediately. In addition the DSU plan allows for eligible executives of the Bank to participate in grants that are not allocated from the Annual
Incentive Plan election. These grants are subject to specific vesting schedules. Units are redeemable in cash only when an executive ceases to be a
Bank employee, and must be redeemed by December 31 of the year following that event. As at October 31, 2015, there were 1,325,679 units (2014
– 1,600,374) awarded and outstanding of which 1,325,679 units were vested (2014 – 1,600,374).
Directors’ Deferred Stock Unit Plan (DDSU)
Under the DDSU Plan, non-officer directors of the Bank may elect to receive all or a portion of their fee for that fiscal year (which is expensed by the
Bank in other expenses in the Consolidated Statement of Income) in the form of deferred stock units which vest immediately. Units are redeemable in
cash, only following resignation or retirement, and must be redeemed by December 31 of the year following that event. As at October 31, 2015,
there were 337,413 units outstanding (2014 – 333,315).
Restricted Share Unit Plan (RSU)
Under the RSU Plan, selected employees receive an award of restricted share units which, for the majority of grants, vest at the end of three years.
There are certain grants that provide for a graduated vesting schedule. Upon vesting all RSU units are paid in cash to the employee. The share-based
payment expense is recognized evenly over the vesting period except where the employee is eligible to retire prior to the vesting date in which case,
the expense is recognized between the grant date and the date the employee is eligible to retire. As at October 31, 2015, there were 2,147,971 units
(2014 – 2,346,330) awarded and outstanding of which 1,566,333 were vested (2014 – 1,659,401).
Performance Share Unit Plan (PSU)
Eligible executives receive an award of performance share units that vest at the end of three years. One grant provides for a graduated vesting
schedule which includes a specific performance factor calculation. A portion of the PSU awards are subject to performance criteria measured over a
three-year period whereby a multiplier factor is applied which impacts the incremental number of outstanding shares due to employees. The three-
year performance measures include return on equity compared to target and total shareholder return relative to a comparator group selected prior to
the granting of the award. The Bank uses a probability-weighted-average of potential outcomes to estimate the multiplier impact. The share-based
payment expense is recognized over the vesting period except where the employee is eligible to retire prior to the vesting date; in which case, the
expense is recognized between the grant date and the date the employee is eligible to retire. This expense varies based on changes in the Bank’s share
price and the Bank’s performance compared to the performance measures. Upon vesting, the units are paid in cash to the employee. As at
October 31, 2015, there were 9,025,306 units (2014 – 9,409,639) outstanding subject to performance criteria, of which 7,686,580 units were vested
(2014 – 8,011,356).
184 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Deferred Performance Plan
Under the Deferred Performance Plan, a portion of the bonus received by Global Banking and Markets employees (which is accrued and expensed in
the year to which it relates) is allocated to qualifying employees in the form of units. These units are subsequently paid in cash to the employees over
each of the following three years. Changes in the value of the units, which arise from fluctuations in the market price of the Bank’s common shares,
are expensed in the same manner as the Bank’s other liability-classified share-based payment plans in the salaries and employee benefits expense in
the Consolidated Statement of Income. As at October 31, 2015, there were 1,940,375 units outstanding (2014 – 1,943,917).
(d) Share Bonus Plans
Prior to the acquisition of HollisWealth and related entities (formerly DundeeWealth) on February 1, 2011, HollisWealth had established share bonus
plans for eligible participants. The share bonus plans permitted common shares of HollisWealth to be issued from treasury or purchased in the market.
At the time of the acquisition of HollisWealth, the share bonus awards that were granted but not yet vested were converted into 377,516 Bank of
Nova Scotia common shares to be issued from treasury. As at October 31, 2015, there were 3,766 (2014 – 21,739) share bonus awards outstanding
from the HollisWealth share bonus plans. During 2015, 16,961 common shares were issued from treasury for these plans (2014 – 17,615) and
1,012 awards were forfeited (2014 – 1,596). Share bonus awards have not been granted under these plans since February 1, 2011.
The share bonus plans are considered to be equity-classified awards. As at October 31, 2015, the amount recorded in equity-other reserves for vested
awards for these plans was $5 million (2014 – $5 million).
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
27 Corporate income taxes
Corporate income taxes recorded in the Bank’s consolidated financial statements for the years ended October 31 are as follows:
(a) Components of income tax provision
For the year ended October 31 ($ millions)
Provision for income taxes in the Consolidated Statement of Income:
Current income taxes:
Domestic:
Federal
Provincial
Adjustments related to prior periods
Foreign
Adjustments related to prior periods
Deferred income taxes:
Domestic:
Federal
Provincial
Foreign
2015
2014
2013(1)
$
528
459
23
897
2
$
565
423
(70)
865
(3)
$
460
376
(8)
856
(13)
1,909
1,780
1,671
(16)
(20)
(20)
(56)
141
66
15
222
38
27
1
66
Total provision for income taxes in the Consolidated Statement of Income
$ 1,853
$ 2,002
$ 1,737
Provision for income taxes in the Consolidated Statement of Changes in Equity:
Current income taxes
Deferred income taxes
Reported in:
Other Comprehensive Income
Retained earnings
Common shares
Other reserves
Total provision for income taxes in the Consolidated Statement of Changes in Equity
Total provision for income taxes
Provision for income taxes in the Consolidated Statement of Income includes:
Deferred tax expense (benefit) relating to origination/reversal of temporary differences
Deferred tax expense (benefit) of tax rate changes
Deferred tax benefit of previously unrecognized tax losses, tax credits and temporary differences
$ (496)
(8)
(504)
(464)
(43)
1
2
(504)
$ 1,349
$
$
118
(2)
(172)
(56)
$ (248)
(174)
(422)
$
(99)
207
108
(432)
4
1
5
(422)
$ 1,580
$
$
163
–
59
222
94
(3)
5
12
108
$ 1,845
$
$
118
(5)
(47)
66
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014.
185 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
(b) Reconciliation to statutory rate
Income taxes in the Consolidated Statement of Income vary from the amounts that would be computed by applying the composite federal and
provincial statutory income tax rate for the following reasons:
For the year ended October 31 ($ millions)
Income taxes at statutory rate
Increase (decrease) in income taxes resulting from:
Lower average tax rate applicable to subsidiaries and foreign
branches
Tax-exempt income from securities
Deferred income tax effect of substantively enacted tax rate changes
Other, net
Total income taxes and effective tax rate
2015
2014
2013
Percent
of pre-tax
income
Percent
of pre-tax
income
Amount
Percent
of pre-tax
income
Amount
Amount
$ 2,386
26.3% $ 2,439
26.2% $ 2,185
26.2%
(233)
(281)
(2)
(17)
$ 1,853
(177)
(2.6)
(212)
(3.1)
–
–
(0.2)
(48)
20.4% $ 2,002
(250)
(1.9)
(214)
(2.3)
(5)
–
(0.5)
21
21.5% $ 1,737
(3.0)
(2.6)
(0.1)
0.3
20.8%
The change in the statutory tax rate between 2015 and 2014 was primarily due to an increase in a provincial tax rate.
(c) Deferred taxes
Significant components of the Bank’s deferred tax assets and liabilities are as follows:
October 31 ($ millions)
Deferred tax assets:
Loss carryforwards
Allowance for credit losses
Deferred compensation
Deferred income
Property and equipment
Pension and other post-retirement benefits
Securities
Other
Total deferred tax assets
Deferred tax liabilities:
Deferred income
Property and equipment
Pension and other post-retirement benefits
Securities
Intangible assets
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)(1)
Statement of Income
Statement of Financial Position
For the year ended
As at
2015
2014
2015
2014
$ 80
(93)
50
46
(72)
54
8
(10)
$ 63
$ 39
1
22
(26)
38
45
$119
$ (56)
$ 138
(63)
(45)
(6)
92
(2)
144
46
$ 304
$
6
13
38
9
33
(17)
$ 82
$ 222
$ 539
812
215
301
186
676
138
408
$3,275
$ 114
65
153
68
914
526
$1,840
$1,435
$
620
669
254
282
91
683
145
290
$ 3,034
$
75
64
132
60
881
513
$ 1,725
$ 1,309
(1) For Consolidated Statement of Financial Position presentation, deferred tax assets and liabilities are assessed by legal entity. As a result, the net deferred tax assets of $1,435
(2014 – $1,309) are represented by deferred tax assets of $2,034 (2014 – $1,763), and deferred tax liabilities of $599 (2014 – $454) on the Consolidated Statement of Financial
Position.
The major changes to net deferred taxes were as follows:
For the year ended October 31 ($ millions)
Balance at beginning of year
Deferred tax benefit (expense) for the year recorded in income
Deferred tax benefit (expense) for the year recorded in equity
Acquired in business combinations
Other
Balance at end of year
2015
2014
$1,309
56
8
27
35
$1,435
$ 1,347
(222)
174
–
10
$ 1,309
The tax related to temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognized in the Consolidated
Statement of Financial Position amounts to $166 million (2014 – $338 million). The amount related to unrecognized tax losses is $24, which will
expire as follows: $20 million in 2018 and beyond and $4 million have no fixed expiry date.
Included in the net deferred tax asset are tax benefits of $41 million (2014 – $1 million) that have been recognized in certain Canadian and foreign
subsidiaries that have incurred losses in either the current or the preceding year. In determining if it is appropriate to recognize these tax benefits, the
Bank relied on projections of future taxable profits.
Deferred tax liabilities are not required to be recognized for taxable temporary differences arising on investments in subsidiaries, associates and
interests in joint ventures if the Bank controls the timing of the reversal of the temporary difference and it is probable that the temporary difference
186 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
will not reverse in the foreseeable future. At the end of the year taxable temporary differences of $46.0 billion (2014 – $38.7 billion) related to the
Bank’s investment in subsidiaries were not recognized as deferred tax liabilities in line with these requirements.
28 Employee benefits
The Bank sponsors a number of employee benefit plans, including pensions (defined benefit and defined contribution) and other benefit plans
(post-retirement benefits and other long-term employee benefits) for most of its employees globally. The information presented below relates to the
Bank’s principal plans; other plans operated by certain subsidiaries of the Bank are not considered material and are not included in these disclosures.
Global pension plans
The principal pension plans include plans in Canada, the US, Mexico, the UK, Ireland, Jamaica, Trinidad & Tobago and other countries in the
Caribbean in which the Bank operates. The Bank has a strong and well defined governance structure to manage these global obligations. The
investment policy for each principal plan is reviewed periodically and all plans are in good standing with respect to legislation and local regulations.
Actuarial valuations for funding purposes for the Bank’s funded pension plans are conducted as required by applicable legislation. The purpose of the
actuarial valuation is to determine the funded status of the plans on a going-concern and statutory basis and to determine the required contributions.
The plans are funded in accordance with applicable pension legislation and the Bank’s funding policies such that future benefit promises based on
plan provisions are well secured. The assumptions used for the funding valuations are set by independent plan actuaries on the basis of the
requirements of the local actuarial standards of practice and statute.
Scotiabank Pension Plan (Canada)
The most significant pension plan is the Scotiabank Pension Plan (SPP) in Canada, a defined benefit pension plan, which was recently amended to
include an optional defined contribution (DC) component for employees in Canada hired on or after January 1, 2016. As the administrator of the SPP,
the Bank has established a well-defined governance structure and policies to ensure compliance with legislative and regulatory requirements under
OSFI and the Canada Revenue Agency. The Bank appoints a number of committees to oversee and make decisions related to the administration of the
SPP. Certain committees are also responsible for the investment of the assets of the SPP Fund and for monitoring the investment managers and
performance.
Š The Human Resources Committee (HRC) of the Board approves the charter of the Pension Administration and Investment Committee (PAIC),
reviews reports, and approves the investment policy. The HRC also reviews and recommends any amendments to the SPP to the Board of Directors.
Š PAIC is responsible for recommending the investment policy to the HRC, for appointing and monitoring investment managers, and for reviewing
auditor and actuary reports. PAIC also monitors the administration of member pension benefits.
Š The Scotiabank Master Trust Committee (MTC) invests assets in accordance with the investment policy and all applicable legislation. The MTC
assigns specific mandates to investment management firms. PAIC and the MTC both have representation from independent members on the
committees.
Š The Capital Accumulation Plans (CAP) Committee is responsible for the administration and investment of the DC component of the SPP including
the selection and monitoring of investment options available to DC participants.
Actuarial valuations for funding purposes for the SPP are conducted on an annual basis. The most recent funding valuation was conducted as of
November 1, 2014. Contributions are being made to the SPP in accordance with this valuation and are shown in the table in b) below. The
assumptions used for the funding valuation are set by independent plan actuaries on the basis of the requirements of the Canadian Institute of
Actuaries and applicable regulation.
Pension Plan Changes
As communicated to employees in the fourth quarter of 2015, the current Canadian pension arrangements will be closed to new employees hired on
or after January 1, 2016. In addition, effective November 1, 2018, additional retirement optional forms of pension will be introduced while the
commuted value at retirement option will be removed. Benefits earned for service after November 1, 2018, will no longer be eligible for early
retirement subsidies. New hires on or after January 1, 2016, will be enrolled in a new hybrid (non-contributory defined benefit with an optional
defined contribution) pension arrangement, within the SPP.
The past service cost outlined in the table d) below includes the impact of various plan changes including the removal of the commuted value at
retirement option from the Canadian plans and the impact of settling liabilities in the US Scotiabank Pension Plan through a one-time optional lump
sum window for former employees who have not yet retired.
Other benefit plans
The principal other benefit plans include plans in Canada, the US, Mexico, Uruguay, the UK, Jamaica, Trinidad & Tobago and other countries in the
Caribbean in which the Bank operates. The most significant other benefit plans provided by the Bank are in Canada.
Key assumptions
The financial information reported below in respect of pension and other benefit plans are based on a number of assumptions. The most significant
assumption is the discount rate, which is set by reference to the yields on high quality corporate bonds with durations that match the defined benefit
obligations. This discount rate must also be used to determine the annual benefit expense. Other assumptions set by management are determined in
reference to market conditions, plan-level experience, best practices and future expectations. The key weighted-average assumptions used by the
Bank for the measurement of the benefit obligation and benefit expense for all of the Bank’s principal plans are summarized in the table in f) below.
187 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Risk management
The Bank’s defined benefit pension plans and other benefit plans expose the Bank to a number of risks. Some of the more significant risks include
interest rate risk, investment risk, longevity risk and health care cost increases, among others. These risks could result in higher defined benefit
expense and a higher defined benefit obligation to the extent that:
Š there is a decline in discount rates; and/or
Š plan assets returns are less than expected; and/or
Š plan members live longer than expected; and/or
Š health care costs are higher than assumed.
In addition to the governance structure and policies in place, the Bank manages risks by regularly monitoring market developments and asset
investment performance. The Bank also monitors regulatory and legislative changes along with demographic trends and revisits the investment
strategy and/or plan design as warranted.
a) Relative size of plan obligations and assets
For the year ended October 31, 2015
Percentage of total benefit obligations
Percentage of total plan assets
Percentage of total benefit expense
For the year ended October 31, 2014
Percentage of total benefit obligations
Percentage of total plan assets
Percentage of total benefit expense
Pension plans
Other benefit plans
Canada
SPP
Other
International
Canada
International
72% 11%
76%
6%
64% 18%
17%
18%
18%
62%
20%
62%
38%
80%
38%
Pension plans
Other benefit plans
Canada
SPP
Other
International
Canada
International
73%
77%
78%
10%
5%
18%
17%
18%
4%
64%
21%
60%
36%
79%
40%
b) Cash contributions and payments
The table below shows the cash contributions and payments made by the Bank to its principal plans in 2015, and the two prior years.
Contributions to the principal plans for the year ended October 31 ($ millions)
2015
2014
2013
Defined benefit pension plans (cash contributions to fund the plans, including paying beneficiaries under the
unfunded pension arrangements)
SPP
All other plans
Other benefit plans (cash contributions mainly in the form of benefit payments to beneficiaries)
Defined contribution pension plans (cash contributions)
Total contributions(1)
$236
60
42
29
$367
$ 268
75
46
21
$ 410
$ 331
72
59
19
$ 481
(1) Based on preliminary estimates, the Bank expects to make contributions of $237 to the SPP, $62 to all other defined benefit pension plans, $49 to other benefit plans and $31 to all
other defined contribution plans for the year ending October 31, 2016.
c) Funded and unfunded plans
The excess (deficit) of the fair value of assets over the benefit obligation at the end of the year includes the following amounts for plans that are
wholly unfunded and plans that are wholly or partly funded.
As at October 31 ($ millions)
2015
2014
2013
2015
2014
2013
Benefit obligation
Benefit obligation of plans that are wholly unfunded
Benefit obligation of plans that are wholly or partly funded
$
373
7,740
$
376
7,571
$
342
6,598
$ 1,231
408
$ 1,201
418
$ 1,121
389
Pension plans
Other benefit plans
Funded Status
Benefit obligation of plans that are wholly or partly funded
Fair value of assets
$ 7,740
7,615
$ 7,571
7,323
$ 6,598
6,647
$
408
307
$
418
341
$
389
332
Excess (deficit) of fair value of assets over benefit obligation of
wholly or partly funded plans
Benefit obligation of plans that are wholly unfunded
Excess (deficit) of fair value of assets over total benefit obligation
Effect of asset limitation and minimum funding requirement
$ (125)
373
$
$ (498)
(41)
$ (248)
376
$
$ (624)
(76)
$
$
49
342
$ (293)
(77)
$ (101)
$ 1,231
$ (1,332)
–
(77)
$
$ 1,201
$ (1,278)
–
(57)
$
$ 1,121
$ (1,178)
–
Net asset (liability) at end of year
$ (539)
$ (700)
$ (370)
$ (1,332)
$ (1,278)
$ (1,178)
188 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
$ 1,501
45
75
–
(61)
(68)
3
–
15
$ 1,510
$
$
311
21
(8)
59
–
(61)
–
–
10
332
d) Financial information
The following tables present financial information related to the Bank’s principal plans.
For the year ended October 31 ($ millions)
Change in benefit obligation
Benefit obligation at beginning of year
Current service cost
Interest cost on benefit obligation
Employee contributions
Benefits paid
Actuarial loss (gain)
Past service cost
Settlements
Foreign exchange
Benefit obligation at end of year
Pension plans
Other benefit plans
2015
2014
2013
2015
2014
2013
$ 7,947
304
350
23
(498)
152
(241)
(48)
124
$ 8,113
$ 6,940
262
342
21
(393)
731
(19)
–
63
$ 7,947
$ 6,678
247
314
18
(397)
62
–
–
18
$ 6,940
$ 1,619
43
84
–
(73)
(52)
3
(2)
17
$ 1,639
$ 1,510
41
84
–
(66)
35
7
(23)
31
$ 1,619
Change in fair value of assets
Fair value of assets at beginning of year
Interest income on fair value of assets
Return on plan assets in excess of interest income on fair value of
$ 7,323
343
$ 6,647
343
$ 5,607
285
$
assets
Employer contributions
Employee contributions
Benefits paid
Administrative expenses
Settlements
Foreign exchange
Fair value of assets at end of year
Funded status
Excess (deficit) of fair value of assets over benefit obligation at end of
year
Effect of asset limitation and minimum funding requirement(1)
Net asset (liability) at end of year
Recorded in:
Other assets in the Bank’s Consolidated Statement of Financial Position
Other liabilities in the Bank’s Consolidated Statement of Financial
Position
Net asset (liability) at end of year
Annual benefit expense
Current service cost
Net interest expense (income)
Administrative expenses
Past service costs
Amount of settlement (gain) loss recognized
Remeasurement of other long-term benefits
Benefit expense (income) recorded in the Consolidated Statement of
Income
Defined contribution benefit expense
Remeasurements
(Return) on plan assets in excess of interest income on fair value of
assets
Actuarial loss (gain) on benefit obligation
Change in the asset limitation
Remeasurements recorded in OCI
Total benefit cost
Additional details on actual return on assets and actuarial (gains) and
losses
Actual return on assets (net of administrative expenses)
Actuarial (gains) and losses from changes in demographic assumptions
Actuarial (gains) and losses from changes in financial assumptions
Actuarial (gains) and losses from changes in experience
Additional details on fair value of pension plan assets invested
In Scotiabank securities (stock, bonds)
In property occupied by Scotiabank
Change in asset ceiling/onerous liability
Asset ceiling /onerous liability at end of prior year
Interest expense
Remeasurements
Foreign exchange
Asset ceiling /onerous liability at end of year
55
296
23
(498)
(12)
(39)
124
$ 7,615
$ (498)
(41)
$ (539)
183
(722)
$ (539)
$
$
$
$
$
$
$
$
$
304
15
10
(241)
(9)
–
79
29
(55)
152
(49)
48
156
386
91
22
39
404
5
77
8
(49)
5
41
310
343
21
(393)
(9)
–
61
$ 7,323
747
403
18
(397)
(9)
–
(7)
$ 6,647
$
341
23
(12)
42
–
(73)
–
–
(14)
307
$
$
332
25
11
46
–
(66)
–
(18)
11
341
$
$
$
$
$
$
$
$
$
$
$
$
$
(624)
(76)
(700)
117
(817)
(700)
262
6
9
(19)
–
–
258
21
(310)
731
(8)
413
692
644
54
645
32
556
4
77
7
(8)
–
76
$
$
$
$
$
$
$
$
$
$
247
41
9
–
–
–
297
19
(747)
62
(53)
(738)
(422)
$ 1,023
174
(201)
89
$
$
509
4
130
12
(53)
(12)
77
(293)
(77)
(370)
$ (1,332)
–
$ (1,332)
$ (1,278)
–
$ (1,278)
$ (1,178)
–
$ (1,178)
132
$
–
$
–
$
–
(502)
(370)
(1,332)
$ (1,332)
(1,278)
$ (1,278)
(1,178)
$ (1,178)
$
$
$
$
$
$
$
$
$
43
60
–
4
(2)
4
109
–
13
(58)
–
(45)
64
11
(22)
(28)
(2)
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
41
59
–
7
(5)
5
107
–
(8)
27
–
19
126
36
(26)
102
(41)
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
45
54
–
3
–
(24)
78
–
10
(46)
–
(36)
42
13
32
(87)
(13)
–
–
–
–
–
–
–
(1) The recognized asset is limited by the present value of economic benefits available from a reduction in future contributions to a plan and from the ability to pay plan expenses from
the fund.
189 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
e) Maturity profile of the defined benefit obligation
The weighted average duration of the total benefit obligation at October 31, 2015 is 15.3 years (2014 – 14.7 years, 2013 – 14.5 years).
For the year ended October 31
Disaggregation of the benefit obligation (%)
Canada
Active members
Inactive and retired members
Total
Mexico
Active members
Inactive and retired members
Total
United States
Active members
Inactive and retired members
Total
Pension plans
Other benefit plans
2015
2014
2013
2015
2014
2013
58%
42%
40%
60%
100% 100% 100% 100% 100% 100%
35%
65%
58%
42%
36%
64%
57%
43%
30%
70%
59%
41%
100% 100% 100% 100% 100% 100%
58%
42%
38%
62%
59%
41%
35%
65%
39%
61%
41%
59%
100% 100% 100% 100% 100% 100%
37%
63%
40%
60%
43%
57%
36%
64%
f) Key assumptions (%)
The key weighted-average assumptions used by the Bank for the measurement of the benefit obligation and benefit expense for all of the Bank’s
principal plans are summarized as follows:
For the year ended October 31
2015
2014
2013
2015
2014
2013
Pension plans
Other benefit plans
Benefit obligation at end of year
Discount rate – all plans
Discount rate – Canadian plans only
Rate of increase in future compensation(1)
Benefit expense (income) for the year
Discount rate – all plans
Discount rate – Canadian plans only
Rate of increase in future compensation(1)
Health care cost trend rates at end of year
Initial rate
Ultimate rate
Year ultimate rate reached
Assumed life expectancy in Canada (years)
Life expectancy at 65 for current pensioners – male
Life expectancy at 65 for current pensioners – female
Life expectancy at 65, for future pensioners currently aged 45 – male
Life expectancy at 65, for future pensioners currently aged 45 – female
Assumed life expectancy in Mexico (years)
Life expectancy at 65 for current pensioners – male
Life expectancy at 65 for current pensioners – female
Life expectancy at 65, for future pensioners currently aged 45 – male
Life expectancy at 65, for future pensioners currently aged 45 – female
Assumed life expectancy in United States (years)
Life expectancy at 65 for current pensioners – male
Life expectancy at 65 for current pensioners – female
Life expectancy at 65, for future pensioners currently aged 45 – male
Life expectancy at 65, for future pensioners currently aged 45 – female
4.64% 4.46% 5.04% 5.33%
4.40% 4.20% 4.80% 4.27%
2.75% 2.77% 2.84% 4.41%
5.24% 5.56%
4.12% 4.80%
4.51% 4.49%
4.46% 5.04% 4.80% 5.24%
4.20% 4.80% 4.60% 4.12%
2.77% 2.84% 2.80% 4.51%
5.56% 5.00%
4.80% 4.50%
4.49% 4.40%
n/a
n/a
n/a
23.1
24.3
24.1
25.2
21.3
23.8
21.7
24.0
22.3
23.5
23.0
25.4
n/a
n/a
n/a
23.0
24.2
24.0
25.1
21.3
23.8
21.7
24.0
20.5
22.6
19.9
22.0
n/a
n/a
n/a
22.4
23.8
23.3
24.6
21.3
23.8
21.7
24.0
19.5
21.4
19.1
20.9
6.29%
4.97%
2030
6.37% 6.51%
5.02% 4.98%
2029
2029
23.1
24.3
24.1
25.2
21.3
23.8
21.7
24.0
22.3
23.5
23.0
25.4
23.0
24.2
24.0
25.1
21.3
23.8
21.7
24.0
20.5
22.6
19.9
22.0
22.4
23.8
23.3
24.6
21.3
23.8
21.7
24.0
19.5
21.4
19.1
20.9
(1) The weighted-average rates of increase in future compensation shown for other benefit plans do not include Canadian flexible post-retirement benefits plans established in fiscal
2005, as they are not impacted by future compensation increases.
190 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
g) Sensitivity analysis
The sensitivity analysis presented below may not represent the actual change in obligation as changes in assumptions may be somewhat correlated.
For purposes of the sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method
at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation recognized in the statement of
financial position.
For the year ended October 31, 2015 ($ millions)
Impact of the following changes:
1% decrease in discount rate
0.25% increase in rate of increase in future compensation
1% increase in health care cost trend rate
1% decrease in health care cost trend rate
1 year increase in Canadian life expectancy
1 year increase in Mexican life expectancy
1 year increase in the United States life expectancy
Pension plans
Other benefit plans
Benefit
obligation
Benefit
expense
Benefit
obligation
Benefit
expense
$
1,364
86
n/a
n/a
133
1
8
$
189
4
n/a
n/a
21
–
–
$
268
1
148
(127)
22
4
5
$
19
–
17
(14)
1
–
–
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
h) Assets
The Bank’s principal pension plans’ assets are generally invested with the long-term objective of maximizing overall expected returns, at an acceptable
level of risk relative to the benefit obligation. A key factor in managing long-term investment risk is asset mix. Investing the pension assets in different
asset classes and geographic regions helps to mitigate risk and to minimize the impact of declines in any single asset class, particular region or type of
investment. Investment management firms – including related-party managers – are typically hired and assigned specific mandates within each asset
class.
Pension plan asset mix guidelines are set for the long term, and are documented in each plan’s investment policy. Asset mix policy typically also
reflects the nature of the plan’s benefit obligations. Legislation places certain restrictions on asset mix – for example, there are usually limits on
concentration in any one investment. Other concentration and quality limits are also set forth in the investment policies. The use of derivatives is
generally prohibited without specific authorization; currently, the main use of derivatives is for currency hedging. Asset mix guidelines are reviewed at
least once each year, and adjusted, where appropriate, based on market conditions and opportunities. However, large asset class shifts are rare, and
typically reflect a change in the pension plan’s situation (e.g. a plan termination). Actual asset mix is reviewed regularly, and rebalancing back to target
asset mix is considered – as needed – generally on a semi-annual basis. The Bank’s other benefit plans are generally not funded; the assets reflected
for these other benefit plans are related to programs in Canada and Mexico.
The tables below shows the weighted-average actual and target asset allocations for the Bank’s principal plans at October 31, by asset category.
Asset category %
Cash and cash equivalents
Equity investments
Quoted in an active market
Non quoted
Fixed income investments
Quoted in an active market
Non quoted
Other – Non quoted
Total
Target asset allocation at October 31, 2015
Asset category %
Cash and cash equivalents
Equity investments
Fixed income investments
Other
Total
Pension plans
Other benefit plans
Actual
2015
Actual
2014
Actual
2013
Actual
2015
Actual
2014
Actual
2013
2%
4%
1%
2%
2%
2%
44%
19%
63%
5%
25%
30%
42%
22%
64%
6%
23%
29%
48%
20%
68%
4%
24%
28%
45%
–%
45%
28%
25%
53%
46%
–%
46%
28%
24%
52%
44%
–%
44%
29%
25%
54%
5%
–%
100% 100% 100% 100% 100% 100%
3%
3%
–%
–%
Pension plans
Other benefit plans
–%
62%
32%
6%
100%
2%
46%
52%
–%
100%
191 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
29 Operating segments
Scotiabank is a diversified financial services institution that provides a wide range of financial products and services to retail, commercial and corporate
customers around the world. The Bank’s businesses are grouped into three business lines: Canadian Banking, International Banking and Global
Banking and Markets. Other smaller business segments are included in the Other segment. The results of these business segments are based upon the
internal financial reporting systems of the Bank. The accounting policies used in these segments are generally consistent with those followed in the
preparation of the consolidated financial statements as disclosed in Note 3 of the consolidated financial statements. Notable accounting measurement
differences are:
–
–
tax normalization adjustments related to the gross-up of income from associated corporations. This adjustment normalizes the effective tax rate
in the divisions to better present the contribution of the associated companies to the divisional results.
the grossing up of tax-exempt net interest income and non-interest income to an equivalent before-tax basis for those affected segments.
These differences in measurement enable comparison of net interest income and non-interest income arising from taxable and tax-exempt sources.
Changes to operating segments effective November 1, 2014
Effective November 1, 2014, the Canadian and International businesses previously reported in Global Wealth & Insurance are included in Canadian
Banking and International Banking’s results, respectively. As well, certain Asia business activity previously reported in International Banking is now
included in Global Banking and Markets. Prior period comparative results have been restated.
Scotiabank’s results, and average assets and liabilities, allocated by these operating segments, are as follows:
For the year ended October 31, 2015
Taxable equivalent basis ($ millions)
Net interest income(2)
Non-interest income(3)
Total revenues
Provision for credit losses
Depreciation and amortization
Non-interest expenses
Provision for income taxes
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Average assets ($ billions)
Average liabilities ($ billions)
$
Canadian
Banking
6,415
4,832
11,247
687
272
5,742
1,202
International
Banking
Global Banking
and Markets
$ 5,706
3,137
$ 1,071
2,953
8,843
1,128
242
4,853
568
4,024
67
57
1,789
558
Other(1)
$ (100)
35
Total
$ 13,092
10,957
(65)
60
13
73
(475)
24,049
1,942
584
12,457
1,853
$
3,344
$ 2,052
$ 1,553
$ 264
$
7,213
–
3,344
300
218
199
1,853
128
94
–
1,553
342
240
–
264
91
257
199
7,014
861
809
(1)
(2)
(3)
Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income and non-
interest income and provision for income taxes for the year ended October 31, 2015 ($390) to arrive at the amounts reported in the Consolidated Statement of Income, differences
in the actual amount of costs incurred and charged to the operating segments.
Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure.
Includes net income from investments in associated corporations for Canadian Banking - $66; International Banking – $476 and Other – $(137).
For the year ended October 31, 2014
Taxable equivalent basis ($ millions)
Net interest income(2)
Non-interest income(3)
Total revenues
Provision for credit losses
Depreciation and amortization(4)
Non-interest expenses(4)
Provision for income taxes
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Average assets ($ billions)
Average liabilities ($ billions)
Canadian
Banking
$ 5,996
5,263
11,259
663
235
5,564
1,113
International
Banking
Global Banking
and Markets
$ 5,155
2,945
$ 1,064
3,167
8,100
1,024
224
4,466
544
4,231
16
56
1,824
665
Other(1)
$ 90
(76)
14
–
11
221
(320)
Total
$ 12,305
11,299
23,604
1,703
526
12,075
2,002
$ 3,684
$ 1,842
$ 1,670
$ 102
$ 7,298
1
3,683
292
208
226
1,616
115
85
–
1,670
311
217
–
102
78
238
227
7,071
796
748
(1)
Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income and non-
interest income and provision for income taxes for the year ended October 31, 2014 ($354), to arrive at the amounts reported in the Consolidated Statement of Income, differences
in the actual amount of costs incurred and charged to the operating segments.
Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure.
Includes net income from investments in associated corporations for Canadian Banking – $157; International Banking – $411 and Other – $(140).
(2)
(3)
(4) Prior period amounts were restated to conform with current period presentation.
192 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
For the year ended October 31, 2013
Taxable equivalent basis ($ millions)
Net interest income(2)
Non-interest income(3)
Total revenues
Provision for credit losses
Depreciation and amortization
Non-interest expenses
Provision for income taxes
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Average assets ($ billions)
Average liabilities ($ billions)
Canadian
Banking
$ 5,691
4,230
9,921
480
242
5,120
1,015
International
Banking
$ 4,756
3,140
Global Banking
and Markets
$ 1,090
2,882
7,896
774
215
4,233
621
3,972
34
56
1,675
554
Other(1)
$ (187)
(303)
Total
$ 11,350
9,949
(490)
–
7
116
(453)
21,299
1,288
520
11,144
1,737
$ 3,064
$ 2,053
$ 1,653
$ (160)
$ 6,610
2
3,062
284
200
229
1,824
100
74
–
1,653
274
197
–
(160)
91
235
231
6,379
749
706
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
(1)
(2)
(3)
Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income and non-
interest income and provision for income taxes for the year ended October 31, 2013 ($312), to arrive at the amounts reported in the Consolidated Statement of Income, differences
in the actual amount of costs incurred and charged to the operating segments.
Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure.
Includes net income from investments in associated corporations for Canadian Banking – $239; International Banking – $668 and Other – $(226).
Geographical segmentation(1)
The following table summarizes the Bank’s financial results by geographic region. Revenues and expenses which have not been allocated back to
specific operating business lines are reflected in corporate adjustments.
For the year ended October 31, 2015 ($ millions)
Net interest income
Non-interest income(1)
Total revenues(2)
Provision for credit losses
Non-interest expenses
Provision for income taxes
Corporate adjustments
Net income
Net income attributable to non-controlling
interests in subsidiaries
Net income attributable to equity holders of
the Bank
Total average assets ($ billions)
Corporate adjustments
Total average assets, including corporate
adjustments
Canada
$ 6,458
6,272
12,730
728
6,936
1,038
United
States
$ 472
882
1,354
6
507
267
Mexico
Peru
Chile
Colombia
$1,246
561
1,807
260
1,160
27
$1,077
601
1,678
266
744
195
$ 554
231
785
108
431
24
$ 677
372
1,049
246
541
84
Other
International
$ 2,631
2,163
4,794
268
2,745
401
$ 4,028
$ 574
$ 360
$ 473
$ 222
$ 178
$ 1,380
Total
$13,115
11,082
24,197
1,882
13,064
2,036
$ 7,215
(2)
$ 7,213
199
$ 7,014
$
502
$ 125
$
26
$
21
$ 17
$
10
$
148
$
849
12
Includes net income from investments in associated corporations for Canada - $66; Peru - $4 and Other International - $472.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
For the year ended October 31, 2014 ($ millions)
Net interest income
Non-interest income(1)
Total revenues(2)
Provision for credit losses
Non-interest expenses
Provision for income taxes
Corporate adjustments
Net income
Net income attributable to non-controlling
interests in subsidiaries
Net income attributable to equity holders of
the Bank
Total average assets ($ billions)
Corporate adjustments
Total average assets, including corporate
adjustments
Canada
$ 6,219
7,071
13,290
662
6,986
1,156
$ 4,486
United
States
$ 440
810
1,250
6
513
237
$ 494
Mexico
$1,180
599
1,779
240
1,154
35
$ 350
Peru
Chile
Colombia
$ 935
534
1,469
267
645
175
$ 382
$ 407
226
633
74
348
16
$ 195
$ 726
391
1,117
145
556
141
$ 275
Other
International
$ 2,443
2,049
4,492
309
2,495
340
$ 1,348
$
470
$ 117
$
24
$
17
$ 15
$
10
$
130
Includes net income from investments in associated corporations for Canada – $156; Peru – $6 and Other International – $405.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
193 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
$
861
Total
$12,350
11,680
24,030
1,703
12,697
2,100
$ 7,530
(232)
$ 7,298
227
$ 7,071
783
$
13
$
796
CONSOLIDATED FINANCIAL STATEMENTS
For the year ended October 31, 2013 ($ millions)
Net interest income
Non-interest income(1)
Total revenues(2)
Provision for credit losses
Non-interest expenses
Provision for income taxes
Corporate adjustments
Net income
Net income attributable to non-controlling
interests in subsidiaries
Net income attributable to equity holders of
the Bank
Canada
$ 5,706
5,731
11,437
472
6,441
956
United
States
$ 461
746
1,207
38
464
190
Mexico
$1,048
578
1,626
130
1,050
61
Peru
Chile
Colombia
$ 895
493
1,388
246
628
166
$ 357
236
$ 657
336
593
101
332
16
993
102
484
132
Other
International
$ 2,311
2,239
4,550
199
2,414
362
$ 3,568
$ 515
$ 385
$ 348
$ 144
$ 275
$ 1,575
Total average assets ($ billions)
$
434
$ 110
$
21
$
15
$ 15
$
9
$
119
Corporate adjustments
Total average assets, including corporate
adjustments
Total
$11,435
10,359
21,794
1,288
11,813
1,883
$ 6,810
(200)
$ 6,610
231
$ 6,379
$
723
26
$
749
Includes net income from investments in associated corporations for Canada - $239; Mexico - $4; Peru - $5 and Other International - $659.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
30 Related party transactions
Compensation of key management personnel of the Bank
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank,
directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and
Chief Executive Officer, including Group Heads, and the Chief Financial Officer.
For the year ended October 31 ($ millions)
Salaries and cash incentives(1)
Equity-based payment(2)
Pension and other benefits(1)
Total
(1) Expensed during the year.
(2) Awarded during the year.
2015
2014
$ 13
20
3
$ 36
$ 17
25
3
$ 45
Directors can use some or all of their director fees earned to buy common shares of the Bank at market rates through the Directors’ Share Purchase
Plan. Non-officer directors may elect to receive all or a portion of their fees in the form of deferred stock units which vest immediately. Refer to
Note 26 for further details of these plans.
Loans and deposits of key management personnel
As at October 31 ($ millions)
Loans
Deposits
2015
$ 5
$ 3
2014
$ 4
$ 5
In Canada, loans are currently granted to key management personnel at market terms and conditions. Effective March 1, 2001, the Bank discontinued
the practice of granting loans to key management personnel in Canada at reduced rates. Any of these loans granted prior to March 1, 2001, are
grandfathered until maturity.
The Bank’s committed credit exposure to companies controlled by directors totaled $182.9 million as at October 31, 2015 (2014 – $9.4 million), while
actual utilized amounts were $6.7 million (2014 – $3.4 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as
related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions
and were recorded as follows:
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
2015
$ (27)
747
187
84
$
2014
11
553
223
75
$
2013
20
511
287
58
The Bank manages assets of $2.0 billion (2014 – $1.8 billion) which is a portion of the Scotiabank principal pension plan assets and earned $4 million
(2014 – $4 million) in fees.
194 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
31 Principal subsidiaries and non-controlling interests in subsidiaries
(a) Principal subsidiaries(1)
The following table presents the principal subsidiaries the Bank owns, directly or indirectly. All of these subsidiaries are included in the Bank’s
consolidated financial statements.
As at October 31 ($ millions)
Canadian
1832 Asset Management L.P.
BNS Investments Inc.
Montreal Trust Company of Canada
Hollis Canadian Bank
HollisWealth Inc.
National Trustco Inc.
The Bank of Nova Scotia Trust Company
National Trust Company
RoyNat Inc.
Scotia Capital Inc.
Scotia Dealer Advantage Inc.
Scotia Life Insurance Company
Scotia Mortgage Corporation
Scotia Securities Inc.
Tangerine Bank
International
Banco Colpatria Multibanca Colpatria S.A. (51%)
The Bank of Nova Scotia Berhad
The Bank of Nova Scotia International Limited
The Bank of Nova Scotia Asia Limited
The Bank of Nova Scotia Trust Company (Bahamas) Limited
Grupo BNS de Costa Rica, S.A.
Scotiabank & Trust (Cayman) Ltd.
Scotiabank (Bahamas) Limited
Scotiabank (British Virgin Islands) Limited
Scotiabank (Hong Kong) Limited
Scotiabank (Ireland) Limited
Scotiabank (Turks and Caicos) Ltd.
Grupo Financiero Scotiabank Inverlat, S.A. de C.V. (97.4%)
Nova Scotia Inversiones Limitada
Scotiabank Chile (99.6%)
Scotia Capital (USA) Inc.(2)
Scotia Holdings (US) Inc.(3)
Scotiabanc Inc.
Scotia International Limited
Scotiabank Anguilla Limited
Scotiabank Brasil S.A. Banco Multiplo
Scotiabank Caribbean Holdings Ltd.
Scotia Group Jamaica Limited (71.8%)
The Bank of Nova Scotia Jamaica Limited
Scotia Investments Jamaica Limited (77.0%)
Scotiabank (Belize) Ltd.
Scotiabank Trinidad and Tobago Limited (50.9%)
Scotiabank de Puerto Rico
Scotiabank El Salvador, S.A. (99.4%)
Scotiabank Europe plc
Scotiabank Peru S.A.A. (97.8%)
Principal office
Toronto, Ontario
Toronto, Ontario
Montreal, Quebec
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Stratford, Ontario
Toronto, Ontario
Toronto, Ontario
Burnaby, British Columbia
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Bogota, Colombia
Kuala Lumpur, Malaysia
Nassau, Bahamas
Singapore
Nassau, Bahamas
San Jose, Costa Rica
Grand Cayman, Cayman Islands
Nassau, Bahamas
Road Town, Tortola, B.V.I.
Hong Kong, China
Dublin, Ireland
Providenciales, Turks and Caicos Islands
Mexico, D.F., Mexico
Santiago, Chile
Santiago, Chile
New York, New York
Houston, Texas
Houston, Texas
Nassau, Bahamas
The Valley, Anguilla
Sao Paulo, Brazil
Bridgetown, Barbados
Kingston, Jamaica
Kingston, Jamaica
Kingston, Jamaica
Belize City, Belize
Port of Spain, Trinidad and Tobago
San Juan, Puerto Rico
San Salvador, El Salvador
London, United Kingdom
Lima, Peru
Carrying value of shares
2015
2014
$
1,241
12,746
$
810
11,824
392
3,632
608
58
1,598
445
206
797
53
3,443
858
3,728
538
49
1,327
357
174
695
16
3,329
1,259
288
16,310
1,271
306
12,731
2,986
2,585
3,022
2,491
899
145
1,311
1,316
597
2,472
3,418
820
181
884
1,069
488
2,110
2,784
(1) The Bank (or immediate parent of an entity) owns 100% of the outstanding voting shares of each subsidiary unless otherwise noted. The listing includes major operating
subsidiaries only.
(2) The carrying value of this subsidiary is included with that of its parent, Scotia Capital Inc.
(3) The carrying value of this subsidiary is included with that of its parent, BNS Investments Inc.
195 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Subsidiaries may have a different reporting date from that of the Bank of October 31. Dates may differ for a variety of reasons including local
reporting requirements or tax laws. In accordance with our accounting policies, for the purpose of inclusion in the consolidated financial statements
of the Bank, adjustments are made where significant for subsidiaries with different reporting dates.
(b) Non-controlling interests in subsidiaries
The Bank’s significant non-controlling interests in subsidiaries are comprised of the following entities:
October 31 ($ millions)
Banco Colpatria Multibanca Colpatria S.A.(1)
Scotia Group Jamaica Limited
Scotiabank Trinidad and Tobago Limited
Cencosud Administradora de Tarjetas S.A.
Other
As at
For the year ended
2015
2014
2015
2014
Non-controlling
interest %
Non-controlling
interests in
subsidiaries
Non-controlling
interests in
subsidiaries
Net income
attributable to
non-controlling
interests in
subsidiaries
Dividends
paid to
non-controlling
interest
Net income
attributable to
non-controlling
interests in
subsidiaries
Dividends
paid to
non-controlling
interest
49.0%
28.2%
49.1%
49.0%
0.1% -
49.0%(2)
$
417
307
353
111
272
$
518
245
294
–
255
$ 75
37
54
–
33
$ 27
17
33
–
9
$ 86
$ 125
31
45
–
26
$ 227
$ 21
16
30
–
9
$ 76
Total
$ 1,460
$ 1,312
$ 199
(1) Non-controlling interest holders for Banco Colpatria Multibanca Colpatria S.A. have a right to sell their holding to the Bank after the end of 7th anniversary (January 17, 2019) and
at subsequent pre-agreed intervals, into the future, at fair market value that can be settled at the Bank’s discretion, by issuance of common shares or cash.
(2) Range of non-controlling interest % for other subsidiaries.
Summarized financial information of the Bank’s subsidiaries with significant non-controlling interests are as follows:
($ millions)
Banco Colpatria Multibanca Colpatria S.A.
Scotia Group Jamaica Limited
Scotiabank Trinidad and Tobago Limited
Cencosud Administradora de Tarjetas S.A.
($ millions)
Banco Colpatria Multibanca Colpatria S.A.
Scotia Group Jamaica Limited
Scotiabank Trinidad and Tobago Limited
32 Non-interest income
As at and for the year ended October 31, 2015
Total
comprehensive
income
$ (165)
263
214
(1)
Revenue
$ 942
383
283
125
Total assets
$ 10,969
4,877
4,670
1,772
Total
liabilities
$ 10,207
3,667
3,731
1,265
As at and for the year ended October 31, 2014
Total
comprehensive
income
$ 237
119
146
Revenue
$ 1,009
340
228
Total assets
$ 11,259
4,157
3,756
Total
liabilities
$ 10,203
3,215
3,015
The following table presents details of banking revenues and wealth management revenues in non-interest income.
For the year ended October 31 ($ millions)
Banking
Card revenues
Deposit and payment services
Credit fees
Other
Banking fee related expenses
Total banking revenues
Wealth Management
Mutual funds
Brokerage fees
Investment management and trust
Total wealth management revenues
2015
2014(1)
2013(1)
$ 1,089
1,235
1,053
406
3,783
423
$
933
1,183
1,014
379
3,509
339
$
816
1,122
943
416
3,297
297
$ 3,360
$ 3,170
$ 3,000
$ 1,619
1,006
644
$ 3,269
$ 1,468
942
613
$ 3,023
$ 1,280
847
538
$ 2,665
(1) Certain prior period amounts have been restated to conform with current period presentation.
196 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
33 Trading revenues
The following table presents details of trading revenues.
For the year ended October 31 ($ millions)
Interest rate and credit
Equities
Commodities
Foreign exchange
Other
Total
34 Earnings per share
For the year ended October 31 ($ millions)
Basic earnings per common share
Net income attributable to common shareholders
Weighted average number of common shares outstanding (millions)
Basic earnings per common share(2) (in dollars)
Diluted earnings per common share
Net income attributable to common shareholders
Adjustments to net income due to:(3)
Capital instruments
Share-based payment options and others
Adjusted income attributable to common shareholders
Weighted average number of common shares outstanding (millions)
Adjustments to average shares due to:(3) (millions)
Capital instruments
Share-based payment options and others
Weighted average number of diluted common shares outstanding (millions)
Diluted earnings per common share(2) (in dollars)
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
$
2015
400
177
345
201
62
$
2014
415
92
359
208
40
$
2013
596
120
338
198
48
$ 1,185
$ 1,114
$ 1,300
2015
2014
2013(1)
$ 6,897
1,210
$ 6,916
1,214
$ 6,162
1,195
$
5.70
$
5.69
$
5.15
$ 6,897
$ 6,916
$ 6,162
–
86
–
8
18
3
$ 6,983
$ 6,924
$ 6,183
1,210
1,214
1,195
–
22
–
8
8
6
1,232
1,222
1,209
$
5.67
$
5.66
$
5.11
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014.
(2) Earnings per share calculations are based on full dollar and share amounts.
(3) Certain grants of tandem stock appreciation rights or options that the Bank may settle at its own discretion by issuing common shares in relation to non-controlling interest and
additional interest in an associated company are not included in the calculation of diluted earnings per share as they were anti-dilutive.
35 Guarantees, commitments and pledged assets
(a) Guarantees
The Bank enters into various types of guarantees and indemnifications in the normal course of business. Guarantees represent an undertaking to
another party to make a payment to that party when certain specified events occur. The various guarantees and indemnifications that the Bank
provides with respect to its customers and other third parties are presented below:
As at October 31 ($ millions)
Standby letters of credit and letters of guarantee
Liquidity facilities
Derivative instruments
Indemnifications
2015
2014
Maximum potential
amount of future
Maximum potential
amount of future
payments(1)
payments(1)
$ 30,944
3,874
5,206
568
$ 26,024
4,125
6,303
578
(1) The maximum potential amount of future payments represents those guarantees that can be quantified and excludes other guarantees that cannot be quantified. As many of these
guarantees will not be drawn upon and the maximum potential amount of future payments listed above does not consider the possibility of recovery under recourse or collateral
provisions, the above amounts are not indicative of future cash requirements, credit risk, or the Bank’s expected losses from these arrangements.
Standby letters of credit and letters of guarantee
(i)
Standby letters of credit and letters of guarantee are irrevocable undertakings by the Bank on behalf of a customer, to make payments to a third party
in the event that the customer is unable to meet its obligations to the third party. Generally, the term of these guarantees does not exceed four years.
The types and amounts of collateral security held by the Bank for these guarantees is generally the same as for loans. As at October 31, 2015,
$4 million (2014 – $4 million) was included in other liabilities in the Consolidated Statement of Financial Position with respect to these guarantees.
197 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Liquidity facilities
(ii)
The Bank provides backstop liquidity facilities to asset-backed commercial paper conduits, administered by the Bank. These facilities generally provide
an alternative source of financing in the event market disruption prevents the conduit from issuing commercial paper or, in some cases, when certain
specified conditions or performance measures are not met. These facilities generally have a term of up to three years. Of the $3,874 million (2014 –
$4,125 million) in backstop liquidity facilities provided to asset-backed commercial paper conduits, 100% (2014 – 100%) is committed liquidity for
the Bank’s sponsored conduits.
(iii) Derivative instruments
The Bank enters into written credit derivative contracts under which a counterparty is compensated for losses on a specified referenced asset, typically
a loan or bond, if certain events occur. The Bank also enters into written option contracts under which a counterparty is granted the right, but not the
obligation, to sell a specified quantity of a financial instrument at a pre-determined price on or before a set date. These written option contracts are
normally referenced to interest rates, foreign exchange rates, commodity prices or equity prices. Typically, a corporate or government entity is the
counterparty to the written credit derivative and option contracts that meet the characteristics of guarantees described above. The maximum potential
amount of future payments disclosed in the table above relates to written credit derivatives, puts and floors. However, these amounts exclude certain
derivatives contracts, such as written caps, as the nature of these contracts prevents quantification of the maximum potential amount of future
payments. As at October 31, 2015, $891 million (2014 – $515 million) was included in derivative instrument liabilities in the Consolidated Statement
of Financial Position with respect to these derivative instruments.
Indemnifications
(iv)
In the ordinary course of business, the Bank enters into many contracts which contain indemnification provisions, such as purchase contracts, service
agreements, trademark licensing agreements, director/officer contracts, escrow arrangements, sales of assets or businesses, outsourcing agreements,
leasing arrangements, clearing system arrangements, securities lending agency agreements and structured transactions. The Bank cannot estimate the
maximum potential future amount that may be payable. The Bank has not made any significant payments under such indemnifications. Historically,
the Bank has not made any significant payments under these indemnities. As at October 31, 2015, $3 million (2014 – $3 million) was included in
other liabilities in the Consolidated Statement of Financial Position with respect to indemnifications.
(b) Other indirect commitments
In the normal course of business, various other indirect commitments are outstanding which are not reflected on the Consolidated Statement of
Financial Position. These may include:
Š Commercial letters of credit which require the Bank to honour drafts presented by a third-party when specific activities are completed;
Š Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financings for specific amounts
and maturities, subject to specific conditions;
Š Securities lending transactions under which the Bank, acting as principal or agent, agrees to lend securities to a borrower. The borrower must fully
collateralize the security loan at all times. The market value of the collateral is monitored relative to the amounts due under the agreements, and
where necessary, additional collateral is obtained; and
Š Security purchase commitments which require the Bank to fund future investments.
These financial instruments are subject to normal credit standards, financial controls and monitoring procedures.
The table below provides a detailed breakdown of the Bank’s other indirect commitments expressed in terms of the contractual amounts of the
related commitment or contract which are not reflected on the Consolidated Statement of Financial Position.
As at October 31 ($ millions)
Commercial letters of credit
Commitments to extend credit(1)
Original term to maturity of one year or less
Original term to maturity of more than one year
Securities lending
Securities purchase and other commitments
Total
(1)
Includes liquidity facilities.
2015
2014
$
921
$
1,113
64,522
101,874
41,190
682
53,236
83,981
37,110
720
$ 209,189
$ 176,160
198 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
(c)
Lease commitments
Operating lease commitments
The Bank leases various offices, branches and other premises under non-cancellable operating lease arrangements. The leases have various terms,
escalation and renewal rights. There are no contingent rents payable. The Bank also leases equipment under non-cancellable lease arrangements.
Where the Bank is the lessee, the future minimum lease payment under non-cancellable operating leases are as follows:
As at October 31 ($ millions)
Within one year
After one year but not more than five years
More than five years
Total
$
2015
328
880
546
$
2014
310
811
577
$ 1,754
$ 1,698
Building rent expense, included in premises and technology expense in the Consolidated Statement of Income, was $433 million (2014 – $392 million).
(d) Assets pledged and repurchase agreements
In the ordinary course of business, securities and other assets are pledged against liabilities. As well, securities are sold under repurchase agreements.
The carrying value of pledged assets and details of related activities are shown below.
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
As at October 31 ($ millions)
Assets pledged to:
Bank of Canada(1)
Foreign governments and central banks(1)
Clearing systems, payment systems and depositories(1)
Assets pledged in relation to exchange-traded derivative transactions
Assets pledged as collateral related to securities borrowed, and securities lent
Assets pledged in relation to over-the-counter derivative transactions
Assets pledged in relation to covered bond program (Note 15)
Assets pledged under CMHC programs (Note 14)
Other
Total assets pledged
Obligations related to securities sold under repurchase agreements
Total(2)
2015
2014
$
25
2,933
1,557
1,512
88,839
12,447
21,293
21,609
3,036
$
25
1,340
1,207
1,925
82,888
6,895
18,764
20,394
4,029
$ 153,251
67,052
$ 220,303
$ 137,467
80,335
$ 217,802
(1)
(2)
Includes assets pledged in order to participate in clearing and payment systems and depositories, or pledged to have access to the facilities of central banks in foreign jurisdictions.
Includes assets that have been received from counterparties through normal course of business in securities financing and derivative transactions.
(e) Other executory contracts
The Bank and its subsidiaries have entered into certain long-term executory contracts, relating to outsourced services. The significant outsourcing
arrangements have variable pricing based on utilization and are cancellable with notice.
36 Financial instruments – risk management
The Bank’s principal business activities result in a balance sheet that consists primarily of financial instruments. In addition, the Bank uses derivative
financial instruments for both trading and hedging purposes. The principal financial risks that arise from transacting financial instruments include
credit risk, liquidity risk and market risk. The Bank’s framework to monitor, evaluate and manage these risks is consistent with that in place as at
October 31, 2014:
(cid:129)
extensive risk management policies define the Bank’s risk appetite, set the limits and controls within which the Bank and its subsidiaries can
operate, and reflect the requirements of regulatory authorities. These policies are approved by the Bank’s Board of Directors, either directly
or through the Risk Committee of the Board, (the Board);
(cid:129) guidelines are developed to clarify risk limits and conditions under which the Bank’s risk policies are implemented;
(cid:129) processes are implemented to identify, evaluate, document, report and control risk. Standards define the breadth and quality of information
required to make a decision; and
compliance with risk policies, limits and guidelines is measured, monitored and reported to ensure consistency against defined goals.
(cid:129)
Further details on the fair value of financial instruments and how these amounts were determined are provided in Note 7. Note 10 provides details on
the terms and conditions of the Bank’s derivative financial instruments including notional amounts, remaining term to maturity, credit risk, and fair
values of derivatives used in trading and hedging activities.
(a) Credit risk
Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Bank. The
Bank’s credit risk appetite and credit risk policy are developed by its Global Risk Management (GRM) department and are reviewed and approved by the
Board on an annual and biennial basis, respectively. The credit risk appetite defines target markets and risk tolerances that are developed at an all-Bank
level, and then further refined at the business line level. The objectives of the credit risk appetite are to ensure that, for the Bank, including the individual
business lines:
(cid:129)
(cid:129)
(cid:129)
target markets and product offerings are well defined;
the risk parameters for new underwritings and for the portfolios as a whole are clearly specified; and
transactions, including origination, syndication, loan sales and hedging, are managed in a manner to ensure the goals for the overall
portfolio are met.
199 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
The credit risk policy sets out, among other things, the credit risk rating systems and associated parameter estimates, the delegation of authority for
granting credit, the provisions for credit losses and the collective allowance on performing loans. It forms an integral part of enterprise-wide policies
and procedures that encompass governance, risk management and control structure.
The Bank’s credit risk rating systems are designed to support the determination of key credit risk parameter estimates which measure credit and
transaction risk. For non-retail exposures, parameters are associated with each credit facility through the assignment of borrower and transaction
ratings. Borrower risk is evaluated using methodologies that are specific to particular industry sectors and/or business lines. The risk associated with
facilities of a given borrower is assessed by considering the facilities’ structural and collateral-related elements. For retail portfolios, each exposure has
been assigned to a particular pool (real estate secured, other retail – term lending, unsecured revolving) and within each pool to a risk grade. This
process provides for a meaningful differentiation of risk, and allows for appropriate and consistent estimation of loss characteristics at the pool and
risk grade level. Further details on credit risk relating to derivatives are provided in Note 10(c).
(i) Credit risk exposures
Credit risk exposures disclosed below are presented based on the Basel framework utilized by the Bank i.e. exposures subject to credit risk capital. The
Bank uses the Advanced Internal Ratings Based approach (AIRB) for all material Canadian, U.S., European portfolios, and effective 2011 for a
significant portion of all international corporate and commercial portfolios. The remaining portfolios, including other individual portfolios, are treated
under the standardized approach. Under the AIRB approach, the Bank uses internal risk parameter estimates, based on historical experience, for
probability of default (PD), loss given default (LGD) and exposure at default (EAD), as defined below:
(cid:129)
(cid:129)
(cid:129)
EAD: Generally represents the expected gross exposure – outstanding amount for on-balance sheet exposure and loan equivalent amount for
off-balance sheet exposure.
PD: Measures the likelihood that a borrower will default within a 1-year time horizon, expressed as a percentage.
LGD: Measures the severity of loss on a facility in the event of a borrower’s default, expressed as a percentage of exposure at default.
Under the standardized approach, credit risk is estimated using the risk weights as prescribed by the Basel framework either based on credit
assessments by external rating agencies or based on the counterparty type for non-retail exposures and product type for retail exposures. Standardized
risk weights also takes into account other factors such as specific provisions for defaulted exposures, eligible collateral, and loan-to-value for real
estate secured retail exposures.
As at October 31 ($ millions)
Category
By counterparty type
Non-retail
AIRB portfolio
Corporate
Bank
Sovereign
Standardized portfolio
Corporate
Bank
Sovereign
Total non-retail
Retail(4)
AIRB portfolio
Real estate secured
Qualifying revolving
Other retail
Standardized portfolio
Real estate secured
Other retail
Total retail
Total
By geography(5)
Canada
United States
Mexico
Peru
Chile
Columbia
Other International
Europe
Caribbean
Latin America (other)
All other
Total
2015
Exposure at default(1)
2014
Drawn(2)
Undrawn
commitments
Other
exposures(3)
Total
Total
$ 110,558
24,298
177,591
312,447
46,956
2,867
5,504
55,327
$ 367,774
$ 119,628
16,910
26,847
163,385
27,934
26,466
54,400
$ 217,785
$ 585,559
$ 333,278
89,288
21,592
22,543
17,954
9,333
19,128
35,856
7,776
28,811
$ 585,559
$
$
$
53,939
11,330
2,129
67,398
4,976
56
4
5,036
72,434
12,631
17,705
712
31,048
–
–
–
$
31,048
$ 103,482
$
61,909
25,930
713
1,228
390
86
$
68,466
19,294
14,725
102,485
2,938
158
–
3,096
$ 105,581
$
–
–
–
–
–
–
–
$
–
$ 105,581
$
40,766
38,067
1,503
3,236
1,433
480
6,306
2,137
672
4,111
$ 103,482
14,614
1,838
514
3,130
$ 105,581
$ 232,963
54,922
194,445
482,330
54,870
3,081
5,508
63,459
$ 545,789
$ 132,259
34,615
27,559
194,433
27,934
26,466
54,400
$ 248,833
$ 794,622
$ 435,953
153,285
23,808
27,007
19,777
9,899
40,048
39,831
8,962
36,052
$ 794,622
$ 191,450
53,853
160,535
405,838
47,660
2,681
5,175
55,516
$ 461,354
$ 135,242
32,207
24,984
192,433
23,977
22,755
46,732
$ 239,165
$ 700,519
$ 405,718
116,969
20,775
21,391
16,940
10,507
29,271
34,567
7,111
37,270
$ 700,519
(1) Exposure at default is presented after credit risk mitigation. Exposures exclude available-for-sale equity securities and other assets.
(2) Non-retail drawn includes loans, acceptances, deposits with financial institutions and available-for-sale debt securities. Retail drawn includes residential mortgages, credit cards, lines
of credit, and other personal loans.
(3) Non-retail other exposures include off-balance sheet lending instruments such as letters of credit, letters of guarantees, securitizations including first loss protection of $48 (2014 -
$154), derivatives and repo-style transactions (reverse repurchase agreements, repurchase agreements, securities lending and securities borrowing), net of related collateral. Not
applicable for retail exposures.
(4) During the year, the Bank implemented new retail probability of default (PD), exposure at default (EAD) and loss given default (LGD) models for mortgages and term loans.
(5) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure.
200 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Consolidated Statement of Financial Position asset categories cross-referenced to credit risk exposures
The table below provides mapping of on-balance sheet asset categories that are included in the various Basel III exposure categories as presented in
the credit risk exposure summary table on page 200 of these consolidated financial statements. In addition, it also provides other exposures which are
subject to market risk and/or other assets which are not subject to market and credit risk with a reconciliation to the balance sheet. The credit risk
exposures on certain assets such as cash, precious metals, investment securities (equities) and other assets are not included on the credit risk exposure
summary table. Also excluded from the credit risk exposures are certain trading assets and all assets of the Bank’s insurance subsidiaries.
Credit Risk Exposures
Other Exposures
Drawn(1)
Other Exposures
Market Risk Exposures
As at October 31, 2015 ($ millions)
Non-retail
Retail
Securitization
Cash and deposits with financial
Repo-style
Transactions
OTC
Derivatives
Equity
Also
subject to
Credit Risk
All Other(1)
Total
institutions
Precious metals
Trading assets
Securities
Loans
Other
Financial assets designated at fair value
through profit or loss
Securities purchased under resale
agreements and securities borrowed
Derivative financial instruments
Investment securities
Loans:
Residential mortgages(2)
Personal and credit cards
Business & government
Allowances for credit losses(3)
Customers’ liability under acceptances
Property and equipment
Investment in associates
Goodwill and other intangibles assets
Other (including Deferred tax assets)
$
71,631 $
–
–
11,213
–
295
–
–
39,187
88,945
–
147,210
(1,045)
10,296
–
–
–
41
–
–
–
–
–
–
–
–
–
$
$
–
–
–
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
87,312
–
–
–
41,003
–
$
–
–
–
–
–
25
–
–
2,960
128,398
89,220
–
–
–
–
–
–
168
–
2,240
6,599
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
$
–
10,550
$
2,296 $
–
73,927
10,550
–
11,213
–
–
–
35,862
–
–
–
–
–
–
–
–
–
–
78,380
7,128
2,419
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,069
155
17
41
(3,152)
–
2,286
4,033
11,449
14,128
78,380
18,341
2,419
320
87,312
41,003
43,216
217,498
91,477
153,850
(4,197)
10,296
2,286
4,033
11,449
14,337
Total
$ 367,773 $ 217,786
$ 8,839
$ 87,312
$ 41,003
$ 2,985
$ 47,075
$ 98,477
$ 32,322 $ 856,497
Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks.
Includes $86.8 billion in mortgages guaranteed by Canada Mortgage Housing Corporation including 90% of privately insured mortgages.
(1)
(2)
(3) Gross of allowances against impaired loans for AIRB exposures and net of allowances against impaired loans for standardized exposures.
Credit Risk Exposures
Other Exposures
Drawn(1)
Other Exposures
Market Risk Exposures
As at October 31, 2014 ($ millions)
Non-retail
Retail
Securitization
Cash and deposits with financial
Repo-style
Transactions
OTC
Derivatives
Equity
Also
subject to
Credit Risk
All Other(1)
Total
institutions
Precious metals
Trading assets
Securities
Loans
Other
Financial assets designated at fair value
through profit or loss
Securities purchased under resale
agreements and securities borrowed
Derivative financial instruments
Investment securities
Loans:
Residential mortgages(2)
Personal and credit cards
Business & government
Allowances for credit losses(3)
Customers’ liability under acceptances
Property and equipment
Investment in associates
Goodwill and other intangibles assets
Other (including Deferred tax assets)
$ 54,774 $
–
–
8,465
–
72
–
–
33,417
84,973
–
124,800
(861)
9,876
–
–
–
539
–
–
–
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
$
$
–
–
–
–
–
–
–
–
–
–
–
–
93,866
–
–
–
33,439
–
127,543
82,417
–
–
–
–
–
–
142
–
1,776
6,277
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
–
–
–
39
–
–
4,230
–
–
–
–
–
–
–
–
–
$
–
–
$
–
7,286
$ 1,956 $ 56,730
7,286
–
–
8,465
–
–
–
31,405
–
–
–
–
–
–
–
–
–
–
95,363
6,043
3,377
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,015
132
11
21
(2,780)
–
2,272
3,461
10,884
10,841
95,363
14,508
3,377
111
93,866
33,439
38,662
212,648
84,204
131,098
(3,641)
9,876
2,272
3,461
10,884
11,522
Total
$316,055 $210,102
$8,053
$93,866
$33,439
$4,269
$39,870
$112,069
$27,813 $805,666
Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks.
Includes $83.4 billion in mortgages guaranteed by Canada Mortgage Housing Corporation including 90% of privately insured mortgages.
(1)
(2)
(3) Gross of allowances against impaired loans for AIRB exposures and net of allowances against impaired loans for standardized exposures.
201 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
(ii) Credit quality of non-retail exposures
Credit decisions are made based upon an assessment of the credit risk of the individual borrower or counterparty. Key factors considered in the
assessment include: the borrower’s management; the borrower’s current and projected financial results and credit statistics; the industry in which the
borrower operates; economic trends; and geopolitical risk. Banking units and Global Risk Management also review the credit quality of the credit
portfolio across the organization on a regular basis to assess whether economic trends or specific events may affect the performance of the portfolio.
The Bank’s non-retail portfolio is well diversified by industry. As at October 31, 2015, and October 31, 2014, a significant portion of the authorized
corporate and commercial lending portfolio was internally assessed at a grade that would generally equate to an investment grade rating by external
rating agencies. There has not been a significant change in concentrations of credit risk since October 31, 2014.
Internal grades (IG) are used to differentiate the risk of default of a borrower. The following table cross references the Bank’s internal borrower grades
with equivalent ratings categories utilized by external rating agencies:
Cross referencing of internal ratings to external ratings(1)
Equivalent External Rating
S&P
AAA to AA+
AA to A+
A to A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B to B-
CCC+
CCC
CCC- to CC
–
Default
Moody’s
Aaa to Aa1
Aa2 to A1
A2 to A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2 to B3
Caa1
Caa2
Caa3 to Ca
–
DBRS
Internal Grade
AAA to AA (high)
AA to A (high)
A to A (low)
BBB (high)
BBB
BBB (low)
BB (high)
BB
BB (low)
B (high)
B to B (low)
–
–
–
–
Investment grade
Non-Investment grade
Watch list
Default
Internal Grade
Code
99 – 98
95
90
87
85
83
80
77
75
73
70
65
60
40
30
27 – 21
PD Range(2)
0.0000% – 0.0578%
0.0578% – 0.1488%
0.0648% – 0.1657%
0.0997% – 0.2593%
0.1448% – 0.3643%
0.2103% – 0.5116%
0.3277% – 0.5674%
0.5108% – 0.6293%
0.6293% – 0.7962%
0.7962% – 1.5389%
1.5389% – 2.9747%
2.9747% – 10.5529%
10.5529% – 19.5817%
19.5817% – 36.1350%
36.1350% – 60.1124%
100%
(1) Applies to non-retail portfolio.
(2) PD ranges overlap across IG codes as the Bank utilizes two risk rating systems for its AIRB portfolios, and each risk rating system has its own separate IG to PD mapping.
Non-retail AIRB portfolio
The credit quality of the non-retail AIRB portfolio, expressed in terms of risk categories of borrower internal grades is shown in the table below:
As at October 31 ($ millions)
Category of internal grades
Investment grade
Non-Investment grade
Watch list
Default
2015
Exposure at Default(1)
Undrawn
commitments
Other
exposures(2)
$
1,774
8,221
13,187
10,754
9,618
9,484
7,133
2,897
2,259
944
691
132
185
59
–
60
$
14,472
22,370
22,850
11,649
8,019
8,754
3,827
1,682
6,587
1,537
272
122
119
147
–
29
$
Total
89,664
47,214
52,276
43,056
33,445
38,646
33,036
20,340
19,589
8,737
4,804
991
1,101
1,454
3
1,093
2014
Total
69,922
39,970
44,094
33,212
30,571
31,433
27,175
16,318
16,578
5,223
4,556
815
500
816
37
1,018
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
IG Code
99 – 98
95
90
87
85
83
80
77
75
73
70
65
60
40
30
27 –21
$
Drawn
73,418
16,623
16,239
20,653
15,808
20,408
22,076
15,761
10,743
6,256
3,841
737
797
1,248
3
1,004
Total, excluding residential mortgages
Government guaranteed residential mortgages(3)
Total
$ 225,615
86,832
$ 312,447
$ 67,398
–
$ 67,398
$ 102,436
–
$ 102,436
$ 395,449
86,832
$ 482,281
$ 322,238
$
83,446
$ 405,684
(1) After credit risk mitigation.
(2)
Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, securitizations, excluding first loss protection of $48 (2014 – $154), derivatives and
repo-style transactions (reverse repurchase agreements, repurchase agreements and securities lending and borrowing), net of related collateral.
(3) These exposures are classified as sovereign exposures and are included in the non-retail category.
202 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Non-retail standardized portfolio
Non-retail standardized portfolio as at October 31, 2015 comprised of drawn, undrawn and other exposures to corporate, bank and sovereign
counterparties amounted to $63 billion (October 31, 2014 – $56 billion). Exposures to most Corporate/Commercial counterparties mainly in the
Caribbean and Latin American region, are to non-investment grade counterparties based on the Bank’s internal grading systems.
(iii) Credit quality of retail exposures
The Bank’s retail portfolios consist of a number of relatively small loans to a large number of borrowers. The portfolios are distributed across Canada
and a wide range of countries. As such, the portfolios inherently have a high degree of diversification. In addition, as of October 31, 2015, 49% of
the Canadian banking residential mortgage portfolio is insured and the average loan-to-value ratio of the uninsured portion of the portfolio is 53%.
Retail AIRB portfolio
The data in the table below provides a distribution of the retail AIRB exposure within each PD range by asset class:
As at October 31 ($ millions)
Category of (PD) grades
Exceptionally Low
Very Low
Low
Medium Low
Medium
High
Extremely High
Default
Total
(1) After credit risk mitigation.
2015
Exposure at default(1)
Real estate secured
PD range
Mortgages
HELOC
0.0000% – 0.0499% $
0.0500% – 0.1999%
0.2000% – 0.9999%
1.0000% – 2.9999%
3.0000% – 9.9999%
10.0000% – 19.9999%
20.0000% – 99.9999%
100%
42,022
33,034
18,926
4,502
1,067
510
561
202
$
$
–
14,197
11,070
5,546
–
290
274
58
Qualifying
revolving
6,982
6,231
9,563
7,108
2,338
1,384
827
182
$
Other
retail
410
6,022
13,535
4,389
2,146
29
859
169
$
Total
49,414
59,484
53,094
21,545
5,551
2,213
2,521
611
$
2014
Total
26,232
70,129
66,984
16,215
7,953
2,307
1,969
644
$ 100,824
$ 31,435
$ 34,615
$ 27,559
$ 194,433
$ 192,433
Retail standardized portfolio
The retail standardized portfolio of $54 billion as at October 31, 2015 (2014 – $47 billion) was comprised of residential mortgages, personal loans, credit
cards and lines of credit to individuals, mainly in the Caribbean and Latin American region. Of the total retail standardized exposures, $28 billion (2014 –$24
billion) was represented by mortgages and loans secured by residential real estate, mostly with a loan-to-value ratio of below 80%.
(iv) Collateral
Collateral held
In the normal course of business, to reduce its exposure to counterparty credit risk, the Bank receives collateral on derivative, securities lending, and
other transactions related to the capital markets. The following are examples of the terms and conditions customary to collateral for these types of
transactions:
The risks and rewards of the pledged assets reside with the pledgor.
(cid:129)
(cid:129) Additional collateral is required when the market value of the transaction exceeds thresholds agreed upon with the pledgor.
(cid:129)
The Bank is normally permitted to sell or repledge the collateral it receives, although this right is specific to each agreement under which the
collateral is pledged.
(cid:129) Upon satisfaction of the obligation, the Bank must return the pledged assets, unless the Bank has the right to sell or repledge the collateral it
receives, in which case the Bank must return comparable collateral to the pledgor.
As at October 31, 2015, the approximate market value of collateral accepted that may be sold or repledged by the Bank was $117 billion (2014 –
$114 billion). This collateral is held primarily in connection with reverse repurchase agreements, securities lending and derivative transactions.
Collateral pledged
In the normal course of business, securities and other assets are pledged to secure an obligation, participate in clearing or settlement systems, or
operate in a foreign jurisdiction. Note 35(d) details the nature and extent of the Bank’s asset pledging activities. Asset pledging transactions are
conducted under terms that are common and customary to standard derivative, securities financing, and other borrowing activities. Standard risk
management controls are applied with respect to asset pledging.
Assets acquired in exchange for loans
The carrying value of non-financial assets acquired in exchange for loans as at October 31, 2015 was $310 million (2014 – $353 million) mainly
comprised of real estate and were classified as either held for sale or held for use as appropriate.
203 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Liquidity risk
(b)
Liquidity risk is the risk that the Bank is unable to meet its financial obligations in a timely manner at reasonable prices. The Bank’s liquidity risk is
subject to extensive risk management controls and is managed within the framework of policies and limits approved by the Board. The Board receives
reports on risk exposures and performance against approved limits. The Asset-Liability Committee (ALCO) provides senior management oversight of
liquidity risk.
The key elements of the Bank’s liquidity risk management framework include:
(cid:129)
liquidity risk measurement and management limits, including limits on maximum net cash outflow by currency over specified short-term
horizons;
(cid:129) prudent diversification of its wholesale funding activities by using a number of different funding programs to access the global financial
markets and manage its maturity profile, as appropriate;
large holdings of liquid assets to support its operations, which can generally be sold or pledged to meet the Bank’s obligations;
liquidity stress testing, including Bank-specific, global-systemic, and combination systemic/specific scenarios; and
liquidity contingency planning.
(cid:129)
(cid:129)
(cid:129)
The Bank’s foreign operations have liquidity management frameworks that are similar to the Bank’s framework. Local deposits are managed from a
liquidity risk perspective based on the local management frameworks and regulatory requirements.
(i) Commitments to extend credit
In the normal course of business, the Bank enters into commitments to extend credit in the form of loans or other financings for specific amounts and
maturities, subject to specific conditions. These commitments, which are not reflected on the Consolidated Statement of Financial Position, are subject
to normal credit standards, financial controls and monitoring procedures.
(ii) Derivative instruments
The Bank is subject to liquidity risk relating to its use of derivatives to meet customer needs, generate revenues from trading activities, manage market
and credit risks arising from its lending, funding and investment activities, and lower its cost of capital. The maturity profile of the notional amounts of
the Bank’s derivative instruments is summarized in Note10(b).
(c) Market risk
Market risk arises from changes in market prices and rates (including interest rates, credit spreads, equity prices, foreign exchange rates and
commodity prices), the correlations between them, and their levels of volatility. Market risk is subject to extensive risk management controls, and is
managed within the framework of market risk policies and limits approved by the Board. The ALCO and Market Risk Management and Policy
Committee oversee the application of the framework set by the Board, and monitor the Bank’s market risk exposures and the activities that give rise
to these exposures.
The Bank uses a variety of metrics and models to measure and control market risk exposures. The measurements used are selected based on an
assessment of the nature of risks in a particular activity. The principal measurement techniques are Value at Risk (VaR), stress testing, sensitivity
analysis and simulation modeling, and gap analysis. The Board reviews results from these metrics quarterly. Models are independently validated
internally prior to implementation and are subject to formal periodic review.
VaR is a statistical measure that estimates the potential loss in value of the Bank’s trading positions due to adverse market movements over a defined
time horizon with a specified confidence level. The quality of the Bank’s VaR is validated by regular back testing analysis, in which the VaR is
compared to theoretical and actual profit and loss results. To complement VaR, the Bank also uses stress testing to examine the impact that
abnormally large swings in market factors and periods of prolonged inactivity might have on trading portfolios. The stress testing program is designed
to identify key risks and ensure that the Bank’s capital can absorb potential losses from abnormal events. The Bank subjects its trading portfolios to a
series of stress tests on a daily, weekly and monthly basis.
In trading portfolios, sensitivity analysis is used to measure the effect of changes in risk factors, including prices and volatility, on financial products
and portfolios. In non-trading portfolios, sensitivity analysis assesses the effect of changes in interest rates on current earnings and on the economic
value of shareholders’ equity. Simulation modeling under various scenarios is particularly important for managing risk in the deposit, lending and
investment products the Bank offers to its retail customers. Gap analysis is used to assess the interest rate sensitivity of the Bank’s retail, wholesale
banking and international operations. Under gap analysis, interest rate-sensitive assets, liabilities and derivative instruments are assigned to defined
time periods, on the earlier of contractual repricing or maturity dates on the basis of expected repricing dates.
(i) Non-trading interest rate risk
Interest rate risk, inclusive of credit spread risk, is the risk of loss due to the following: changes in the level, slope and curvature of the yield curve; the
volatility of interest rates; mortgage prepayment rates; changes in the market price of credit; and the creditworthiness of a particular issuer. The Bank
actively manages its interest rate exposures with the objective of enhancing net interest income within established risk tolerances. Interest rate risk
arising from the Bank’s funding and investment activities is managed in accordance with Board-approved policies and global limits, which are
designed to control the risk to net interest income and economic value of shareholders’ equity. The income limit measures the effect of a specified
shift in interest rates on the Bank’s annual net income over the next twelve months, while the economic value limit measures the impact of a specified
change in interest rates on the present value of the Bank’s net assets. Interest rate exposures in individual currencies are also controlled by gap limits.
204 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Interest rate sensitivity gap
The following table summarizes carrying amounts of assets, liabilities and equity, and derivative instrument notional amounts in order to arrive at the
Bank’s interest rate gap based on the earlier of contractual repricing or maturity dates. To arrive at the Bank’s view of its effective interest rate gap,
adjustments are made to factor in expected mortgage and loan repayments based on historical patterns and reclassify the Bank’s trading instruments
to the immediately rate sensitive and within 3 months categories. Consumer behaviour assumptions are used to reclassify certain non-maturity assets
and liabilities.
As at October 31, 2015 ($ millions)
Cash and deposits with financial institutions $
Precious metals
Trading assets
Financial instruments designated at fair
Immediately
rate sensitive
50,051
–
–
$
Within
3 months
16,417
–
21,897
Three to
12 months
One to 5 years
Over 5 years
$
967
–
9,469
$
344
–
14,609
$
–
–
15,300
$
Non-rate
sensitive
6,148
10,550
37,865
$
Total
73,927
10,550
99,140
–
–
66
16
–
238
320
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
value through profit or loss
Securities purchased under resale
agreements and securities borrowed
Investment securities
Loans
Other assets
Total assets
Deposits
Financial instruments designated at fair
value through profit or loss
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements and securities
lent
Subordinated debentures
Other liabilities
Equity
14,352
–
21,989
–
86,392
37,539
12,412
217,419
–
$ 305,684
97,822
$ 296,112
$
$
–
17
1,349
306
32,956
–
904
–
28,728
1,000
2,850
484
11,008
6,337
44,036
–
71,883
–
18,460
156,272
–
$ 189,701
69,012
$
93,797
96
513
7,798
165
1,162
1,099
41
7,820
–
3,507
2,650
1,351
79,845
$ 109,166
$
$
$
$
–
3,455
17,630
–
36,385
24,413
2,552(1)
1,282(2)
83,404
87,312
43,216
458,628
83,404
$ 166,452
$ 856,497
14,894
$
29,282
$ 600,919
–
7,845
–
1,510
3,220
–
–
3,711
1,486
20,212
7,533
–
86,418
50,545
77,015
6,182
97,204
53,479
27,469
$ 177,489
$ 856,497
$
$
$
$
$
$
–
–
–
–
–
–
Total liabilities and equity
$ 131,699
$ 330,829
On-balance sheet gap
Off-balance sheet gap
$ (45,307)
–
$ (25,145)
(4,533)
(7,962)
(13,034)
Interest rate sensitivity gap based on
contractual repricing
Adjustment to expected repricing
$ (45,307)
107,042
$ (29,678)
(7,667)
$ (20,996)
(8,095)
Total interest rate sensitivity gap
$
61,735
$ (37,345)
$ (29,091)
$
$
$
80,535
7,327
87,862
(57,155)
30,707
8,916
9,278
$ (11,037)
962
18,194
(11,182)
$ (10,075)
(22,943)
7,012
$ (33,018)
$
$
$
As at October 31, 2014 ($ millions)
Total interest rate sensitivity gap
$
46,206
$ (15,571)
$ (20,885)
$
9,338
$
8,709
$ (27,797)
$
(1) Represents common shares, preferred shares, and equity accounted investments.
Includes net impaired loans, less the collective allowance on performing loans.
(2)
205 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
Average effective yields by the earlier of the contractual repricing or maturity dates
The following tables summarize average effective yields, by the earlier of the contractual repricing or maturity dates, for the following interest rate-
sensitive financial instruments:
As at October 31, 2015 (%)
Cash and deposits with financial institutions
Precious metals
Trading assets
Financial instruments designated at fair value through profit or loss
Securities purchased under resale agreements and securities
borrowed
Investment securities(1)
Loans(2)
Deposits(3)
Financial instruments designated at fair value through profit or loss
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
and securities lent(3)
Subordinated debentures(3)
Other liabilities
As at October 31, 2014 (%)
Cash and deposits with financial institutions
Precious metals
Trading assets
Financial instruments designated at fair value through profit or loss
Securities purchased under resale agreements and securities
borrowed
Investment securities(1)
Loans(2)
Deposits(3)
Financial instruments designated at fair value through profit or loss
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
and securities lent(3)
Subordinated debentures(3)
Other liabilities
Immediately
rate sensitive
Within
3 months
Three to
12 months
One to
5 years
Over
5 years
Non-rate
sensitive
Total
0.3%
–
–
–
0.8%
–
2.7
–
0.3%
–
2.8
8.4
0.2%
–
3.9
8.9
–%
–
3.9
–
–% 0.4%
–
–
–
–
3.3
8.5
0.5
–
4.5
0.6
–
1.2
0.2
–
2.7
0.6
2.2
3.6
0.7
1.0
1.5
1.2
6.7
3.4
0.7
1.8
4.6
1.6
2.7
1.9
0.3
0.7
4.6
–
2.0
4.0
2.0
–
1.8
–
3.0
6.2
–
3.1
5.9
2.7
–
3.0
–
3.7
5.0
–
–
–
–
–
–
–
–
–
0.6
2.1
4.0
1.1
1.0
2.4
0.6
3.7(4)
4.6
Immediately
rate sensitive
Within
3 months
Three to
12 months
One to
5 years
Over
5 years
Non-rate
sensitive
Total
0.3%
–
–
–
1.0%
–
1.9
–
1.0%
–
2.1
5.6
–%
–
2.8
8.4
–%
–
3.1
–
–% 0.4%
–
–
–
–
2.6
7.9
0.4
–
4.8
0.9
–
0.2
0.3
–
2.5
0.7
3.0
3.9
0.9
1.7
1.3
1.1
–
4.1
0.6
2.2
4.3
1.5
3.3
0.4
0.3
0.5
3.0
0.8
1.9
4.3
2.3
–
1.6
–
3.8
4.3
–
3.4
5.9
2.9
1.1
2.9
–
8.9
4.4
–
–
–
–
–
–
–
–
–
0.6
2.5
4.2
1.3
1.5
2.1
0.6
4.0(4)
4.1
(1) Yields are based on cost or amortized cost and contractual interest or stated dividend rates adjusted for amortization of premiums and discounts. Yields on tax-exempt securities
have not been computed on a taxable equivalent basis.
(2) Yields are based on book values, net of allowance for credit losses, and contractual interest rates, adjusted for the amortization of any unearned income.
(3) Yields are based on book values and contractual rates.
(4) After adjusting for the impact of related derivatives, the yield was 3.3% (2014 – 3.7%).
Interest rate sensitivity
Based on the Bank’s interest rate positions, the following table shows the pro-forma after-tax impact on the Bank’s net income over the next twelve
months and economic value of shareholders’ equity of an immediate and sustained 100 and 200 basis point increase and decrease in interest rates
across major currencies as defined by the Bank.
As at October 31 ($ millions)
2015
2014
100 bp increase
100 bp decrease(1)
200 bp increase
200 bp decrease(1)
Canadian
dollar
$
68
$ (17)
$ 137
$ (17)
Net income
Other
currencies
$ 174
$ (56)
$ 351
$ (72)
Economic value of equity
Total
$ 242
$ (73)
$ 488
$ (89)
Canadian
dollar
$ (287)
$ 135
$ (652)
$ (255)
Other
currencies
$ (201)
$ 283
$ (383)
$ 667
Total
(488)
$
$
418
$ (1,035)
412
$
Net
income
$ 179
$ (52)
$ 360
$ (62)
Economic value
of equity
(498)
$
$
474
$ (1,059)
908
$
(1) Corresponding with the current low interest rate environment, the annual income sensitivity for CAD, U.S., EUR and GBP exposures is measured using a 25 bp decline. Prior period
amounts have been restated to reflect this change.
(ii) Non-trading foreign currency risk
Foreign currency risk is the risk of loss due to changes in spot and forward rates, and the volatility of currency exchange rates. Non-trading foreign
currency risk, also referred to as structural foreign exchange risk, arises primarily from Bank’s net investments in self-sustaining foreign operations and is
controlled by a Board-approved limit. This limit considers potential volatility to shareholders’ equity as well as the potential impact on capital ratios from
foreign exchange fluctuations. On a quarterly basis, the Asset-Liability Committee (ALCO) reviews the Bank’s exposures to these net investments. The
Bank may fully or partially hedge this exposure by funding the investments in the same currency, or by using other financial instruments, including
derivatives.
206 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
The Bank is subject to foreign currency risk on the earnings of its foreign operations. To manage this risk, foreign currency revenues and expenses,
which are primarily denominated in U.S. dollars, are projected over a number of future fiscal quarters. The ALCO assesses economic data and forecasts
to decide on the portion of the estimated future foreign currency revenues and expenses to hedge. Hedging instruments normally include foreign
currency spot and forward contracts, as well as foreign currency options and swaps.
As at October 31, 2015, a one percent increase (decrease) in the Canadian dollar against all currencies in which the Bank operates decreases (increases) the
Bank’s before-tax annual earnings by approximately $60 million (2014 – $49 million) in the absence of hedging activity, primarily from exposure to U.S.
dollars. A similar change in the Canadian dollar as at October 31, 2015 would increase (decrease) the unrealized foreign currency translation losses in the
accumulated other comprehensive income section of equity by approximately $315 million (2014 – $260 million), net of hedging.
(iii) Non-trading equity risk
Equity risk is the risk of loss due to adverse movements in equity prices. Equity price risk is often classified into two categories: general equity risk,
which refers to the sensitivity of an instrument or portfolio’s value to changes in the overall level of equity prices, and specific equity risk, which refers
to that portion of an individual equity instrument’s price volatility that is determined by entity-specific characteristics.
The Bank is exposed to equity risk through its equity investment portfolios, which are controlled by Board-approved portfolio, VaR, and stress-test
limits. Equity investments include common and preferred shares, as well as a diversified portfolio of third-party managed funds.
The majority of the Bank’s equity investment portfolios are managed by Group Treasury under the strategic direction of the ALCO. Group Treasury
delegates the management of a portion of equity and equity-related portfolios to other external fund managers to take advantage of these fund
managers’ expertise in particular market niches and products.
The fair value of available-for-sale equity securities is shown in Note 12.
(iv) Trading portfolio risk management
The Bank’s policies, processes and controls for trading activities are designed to achieve a balance between pursuing profitable trading opportunities
and managing earnings volatility within a framework of sound and prudent practices. Trading activities are primarily customer focused.
Market risk arising from the Bank’s trading activities is managed in accordance with Board-approved policies and limits, including aggregate VaR and
stress testing limits.
Trading portfolios are marked-to-market in accordance with the Bank’s valuation policies. Positions are marked-to-market daily and valuations are
independently reviewed by back office, GRM or finance units on a regular basis. These units also provide profit and loss reporting, as well as VaR and
limit compliance reporting to business unit management and executive management for evaluation and action as appropriate. VaR is calculated daily
using a 99% confidence level, and a one-day holding period. This means that, once in every 100 days, the trading positions are expected to lose more
than the VaR estimate. The Bank calculates general market risk VaR using historical simulation based on 300 days of market data. For debt specific risk
VaR, the Bank uses a Monte Carlo simulation. The table below shows the Bank’s VaR by risk factor:
($ millions)
As at October 31, 2015
Average
High
Low
As at October 31, 2014
For the year ended October 31, 2015
Credit spread plus interest rate
Credit spread
Interest rate
Equities
Foreign exchange
Commodities
Debt specific
Diversification effect
All-Bank VaR
All-Bank stressed VaR
$ 10.6
8.1
4.3
4.1
0.8
2.0
7.4
(12.9)
$ 11.9
$ 22.3
$
9.0
7.8
4.4
2.5
1.1
4.0
5.5
(10.8)
$ 11.3
$ 24.4
$ 15.2
10.1
7.9
10.7
3.2
5.6
20.7
N/A
$ 23.0
$ 36.9
$
6.3
5.8
2.7
1.1
0.4
1.9
3.9
N/A
$
8.2
$ 17.4
Below are the market risk capital requirements as at October 31, 2015.
($ millions)
All-Bank VaR
All-Bank stressed VaR
Incremental risk charge
Comprehensive risk measure (CRM)
CRM surcharge
Standardized approach
Total market risk capital
(1) Equates to $14,350 of risk-weighted assets (2014 – $17,251).
207 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
$ 8.6
8.1
4.2
2.2
0.9
3.2
20.4
(12.8)
$ 22.5
$ 38.7
$
141
246
488
201
–
72
$ 1,148(1)
CONSOLIDATED FINANCIAL STATEMENTS
(d) Operational risk
Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to inadequate or failed internal processes or systems,
human error, or external events. Operational risk includes legal and regulatory risk, business process and change risk, fiduciary or disclosure breaches,
technology failure, financial crime and environmental risk. Operational risk, in some form, exists in each of the Bank’s business and support activities,
and can result in financial loss, regulatory sanctions and damage to the Bank’s reputation. The Bank has developed policies, processes and assessment
methodologies to ensure that operational risk is appropriately identified and managed with effective controls with a view to safeguarding client assets
and preserving shareholder value.
37 Business combinations, other acquisitions and divestitures
Current Year:
Cencosud Administradora de Tarjetas S.A., Chile
On May 1, 2015, the Bank acquired a 51% controlling interest in Cencosud Administradora de Tarjetas S.A. and certain other smaller entities
(collectively, CAT) from Cencosud S.A. (Cencosud), for a consideration of US $280 million. Simultaneously, the Bank entered into a 15 year exclusivity
contract with Cencosud to manage the business.
The acquisition was accounted for as a business combination resulting in consolidation of 100% of its assets and liabilities with the recording of
non-controlling interest for the 49% held by another shareholder. Assets recognized mainly include credit card and consumer loans. The non-
controlling interest was measured as the proportionate share of CAT’s identifiable net assets. A finite life intangible of $296 million relating to the
exclusivity contract was recorded.
Citibank Peru Operations
On May 1, 2015, the Bank’s subsidiary in Peru acquired 100% of the retail and commercial banking operations of Citibank in Peru for cash
consideration of $380 million. The acquisition was accounted for as a business combination and resulted in the recognition of mainly personal and
credit card loans of $480 million and personal deposits of $210 million.
Announced in 2015:
Citibank Panama and Costa Rica Operations
On July 14, 2015, the Bank announced an agreement to acquire Citigroup’s retail and commercial banking businesses in Panama and Costa Rica,
subject to regulatory approval, and will be accounted for as a business combination.
Acquisition of JPMorgan Canadian Credit Card Portfolio
On October 15, 2015, the Bank announced that it has reached an agreement to acquire a MasterCard and private label credit card portfolio of
approximately $1.7 billion in receivables and the related Canadian credit card operations from JPMorgan Chase Bank N.A. The transaction closed on
November 16, 2015.
Prior year:
Canadian Tire Financial Services
On October 1, 2014, the Bank acquired a 20% equity interest in Canadian Tire’s Financial Services business (CTFS), for $500 million in cash.
Acquisition-related expenses of $5 million were capitalized as part of the carrying value of the investment. Under the agreement Canadian Tire has an
option to sell to the Bank up to an additional 29% equity interest within the next 10 years at the then fair value, that can be settled, at the Bank’s
discretion, by issuance of common shares or cash. After 10 years, for a period of six months, the Bank has the option to sell its equity interest back to
Canadian Tire at the then fair value. The Bank has also provided a funding commitment to CTFS of $2.25 billion for financing credit card receivables.
This investment was accounted for under the equity method of accounting.
Sale of investment in CI Financial Corp.
On June 17, 2014 the Bank sold 82.8 million shares of its investment in CI Financial Corp. (representing 29.1% ownership) at a price of $31.60 per
share. On that date, the remaining holdings of 21.8 million shares, representing 7.7% ownership, were reclassified to available-for-sale securities at
market value. The total pre-tax gain of $643 million, was included in non-interest income – other.
208 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Shareholder Information
Annual meeting
Shareholders are invited to attend the 184th Annual Meeting of Holders
of Common Shares, to be held on April 12, 2016, at the Calgary TELUS
Convention Centre, 120 9th Avenue SE, Calgary, Alberta, Canada,
beginning at 9:30 a.m. (local time). The record date for determining
shareholders entitled to receive notice of and to vote at the meeting
will be the close of business on February 16, 2016.
Shareholdings and dividends
Information regarding your shareholdings and dividends may be
obtained by contacting the transfer agent.
Direct deposit service
Shareholders may have dividends deposited directly into accounts held
at financial institutions which are members of the Canadian Payments
Association. To arrange direct deposit service, please write to the
transfer agent.
Dividend and Share Purchase Plan
Scotiabank’s dividend reinvestment and share purchase plan allows
common and preferred shareholders to purchase additional common
shares by reinvesting their cash dividend without incurring brokerage or
administrative fees. As well, eligible shareholders may invest up to
$20,000 each fiscal year to purchase additional common shares of the
Bank. All administrative costs of the plan are paid by the Bank. For
more information on participation in the plan, please contact the
transfer agent.
Listing of shares
Common shares of the Bank are listed for trading on the Toronto and
New York stock exchanges.
Series 14, Series 15, Series 16, Series 17, Series 18, Series 19, Series 20,
Series 21, Series 22, Series 23, Series 30, Series 31 and Series 32
preferred shares of the Bank are listed on the Toronto Stock Exchange.
Stock Symbols
STOCK
Common shares
Series 14, Preferred
Series 15, Preferred
Series 16, Preferred
Series 17, Preferred
Series 18, Preferred
Series 19, Preferred
Series 20, Preferred
Series 21, Preferred
Series 22, Preferred
Series 23, Preferred
Series 30, Preferred
Series 31, Preferred
Series 32, Preferred
TICKER
SYMBOL
BNS
BNS.PR.L
BNS.PR.M
BNS.PR.N
BNS.PR.O
BNS.PR.P
BNS.PR.A
BNS.PR.Q
BNS.PR.B
BNS.PR.R
BNS.PR.C
BNS.PR.Y
BNS.PR.D
BNS.PR.Z
CUSIP
NO.
064149 10 7
064149 78 4
064149 77 6
064149 76 8
064149 75 0
064149 74 3
064149 73 5
064149 72 7
064149 71 9
064149 69 3
064149 68 5
064149 63 6
064149 62 8
064149 61 0
Dividend Dates for 2016
Record and payment dates for common and preferred shares, subject
to approval by the Board of Directors.
RECORD DATE
January 5
PAYMENT DATE
January 27
April 5
July 5
April 27
July 27
October 4
October 27
Valuation day price
For Canadian income tax purposes, The Bank of Nova Scotia’s common
stock was quoted at $31.13 per share on Valuation Day, December 22,
1971. This is equivalent to $2.594 after adjusting for the two-for-one
stock split in 1976, the three-for-one stock split in 1984, and the two-
for-one stock split in 1998. The stock dividend in 2004 did not affect
the Valuation Day amount. The stock received as part of the 2004
stock dividend is not included in the pre-1972 pool.
Duplicated communication
Some registered holders of The Bank of Nova Scotia shares might
receive more than one copy of shareholder mailings, such as this
Annual Report. Every effort is made to avoid duplication; however, if
you are registered with different names and/or addresses, multiple
mailings may result. If you receive, but do not require, more than one
mailing for the same ownership, please contact the transfer agent to
combine the accounts.
Credit ratings
SENIOR LONG-TERM DEBT/DEPOSITS
AA
DBRS
AA -
Fitch
Aa2
Moody’s(1)
Standard & Poor’s A+
SHORT TERM DEPOSITS/COMMERCIAL PAPER
R-1(high)
DBRS
F1+
Fitch
Moody’s
P-1
Standard & Poor’s A-1
SUBORDINATED DEBT
AA(low)
DBRS
A+
Fitch
A2
Moody’s(1)
Standard & Poor’s A -
NON-CUMULATIVE PREFERRED SHARES
DBRS
Pfd-2(high)
Baa1(hyb)
Moody’s(1)
Standard & Poor’s BBB/P-2*
(1) On November 2, 2015, Moody’s placed the Bank’s long-term ratings on review for
downgrade.
*Canadian scale
Credit ratings affect the Bank’s access to capital markets and
borrowing costs, as well as the terms on which the Bank can conduct
derivatives and hedging transactions and obtain related borrowings.
The Bank continues to have strong credit ratings. The current ratings
are Aa2 by Moody’s, A+ by Standard and Poor’s (S&P), AA by DBRS
and AA- by Fitch.
On November 2, 2015, Moody’s placed the Bank’s long-term ratings of
Aa2 on review for downgrade, while affirming the Bank’s short-term
deposit rating of P-1. Moody’s will conclude its review over a 90-day
period. On October 14, 2015, S&P confirmed the Bank’s A+ rating for
Deposits and Senior Debt, as well as the A-1 rating for short-term
instruments. The outlook remains unchanged at negative. And
similarly, on July 28, 2015, DBRS also confirmed its rating of the Bank
including a negative outlook. The rating agencies cite the uncertainty
around the federal government’s proposed new “bail-in” regime for
senior unsecured debt as the principal reason for the recent system-
wide changes in outlook in order to reflect the greater likelihood that
such debt may incur losses in the unlikely event of a distress scenario.
209 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Glossary
Allowance for Credit Losses: An allowance set aside which, in
management’s opinion, is adequate to absorb all incurred credit-related
losses in the Bank’s portfolio of loans. It includes individual and
collective allowances.
Assets Under Administration and Management: Assets owned by
customers, for which the Bank provides management and custodial
services. These assets are not reported on the Bank’s Consolidated
Statement of Financial Position.
Bankers’ Acceptances (BAs): Negotiable, short-term debt securities,
guaranteed for a fee by the issuer’s bank.
Basis Point: A unit of measure defined as one-hundredth of one
per cent.
Capital: Consists of common shareholders’ equity, non-cumulative
preferred shares, capital instruments and subordinated debentures. It can
support asset growth, provide against loan losses and protect depositors.
Common Equity Tier 1 (CET1), Tier 1 and Total Capital Ratios:
Under Basel III, there are three primary regulatory capital ratios used to
assess capital adequacy, CET1, Tier 1 and Total capital ratios, which are
determined by dividing those capital components by their respective
risk-weighted assets.
Basel III introduced a new category of capital, CET1, which consists
primarily of common shareholders’ equity net of regulatory
adjustments. These regulatory adjustments include goodwill, intangible
assets net of deferred tax liabilities, deferred tax assets that rely on
future probability, defined-benefit pension fund net assets, shortfall of
credit provision to expected losses and significant investments in
common equity of other financial institution.
Tier 1 includes CET1 and additional Tier 1 capital which consists
primarily of qualifying non-cumulative preferred shares and non-
qualifying instruments subject to phase-out. Tier 2 capital consists
mainly of qualifying subordinated or non-qualifying debentures subject
to phase-out and the eligible allowances for credit losses.
Total capital is comprised of CET1 capital, Tier 1 capital and Tier 2 capital.
Covered Bonds: Debt obligations of the Bank for which the payment
of all amounts of interest and principal are unconditionally and
irrevocably guaranteed by a limited partnership or trust and secured by
a pledge of the covered bond portfolio. The assets in the covered bond
portfolio held by the limited partnership or trust consist of first lien
Canadian uninsured residential mortgages or first lien Canadian
residential mortgages insured under CMHC Mortgage Insurance,
respectively, and their related security interest.
Derivative Products: Financial contracts whose value is derived from
an underlying price, interest rate, exchange rate or price index.
Forwards, options and swaps are all derivative instruments.
Fair Value: The price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
in the principal, or in its absence, the most advantageous market to
which the Bank has access at the measurement date.
Foreign Exchange Contracts: Commitments to buy or sell a specified
amount of foreign currency on a set date and at a predetermined rate
of exchange.
Forward Rate Agreement (FRA): A contract between two parties,
whereby a designated interest rate, applied to a notional principal
amount, is locked in for a specified period of time. The difference
between the contracted rate and prevailing market rate is paid in cash
on the settlement date. These agreements are used to protect against,
or take advantage of, future interest rate movements.
Futures: Commitments to buy or sell designated amounts of
commodities, securities or currencies on a specified date at a
predetermined price. Futures are traded on recognized exchanges.
Gains and losses on these contracts are settled daily, based on closing
market prices.
Hedging: Protecting against price, interest rate or foreign exchange
exposures by taking positions that are expected to react to market
conditions in an offsetting manner.
Impaired Loans: Loans on which the Bank no longer has reasonable
assurance as to the timely collection of interest and principal, or where
a contractual payment is past due for a prescribed period or the
customer is declared to be bankrupt. Excludes Federal Deposit
Insurance Corporation (FDIC) guaranteed loans.
Leverage Ratio: The ratio of Basel III Tier 1 capital to a leverage
exposure measure which includes on-balance sheet assets and off-
balance sheet commitments, derivatives and securities financing
transactions, as defined within the OSFI Leverage Requirements
Guideline.
Marked-To-Market: The valuation of certain financial instruments at
fair value as of the Consolidated Statement of Financial Position date.
Core Banking Margin: This ratio represents net interest income (on a
taxable equivalent basis) on average earning assets excluding bankers
acceptances and total average assets relating to the Global Capital
markets business within Global Banking and Markets. This is consistent
with the fact that net interest from trading operations is recorded in
trading revenues included in non-interest income.
Notional Principal Amounts: The contract or principal amounts used
to determine payments for certain off-balance sheet instruments and
derivatives, such as FRAs, interest rate swaps and cross-currency swaps.
The amounts are termed “notional” because they are not usually
exchanged themselves, serving only as the basis for calculating
amounts that do change hands.
Off-Balance Sheet Instruments: These are indirect credit
commitments, including undrawn commitments to extend credit and
derivative instruments.
Operating leverage: This financial metric measures the rate of growth
in total revenue (on a taxable equivalent basis) less the rate of growth
in operating expenses.
Options: Contracts between buyer and seller giving the buyer of the
option the right, but not the obligation, to buy (call) or sell (put) a
specified commodity, financial instrument or currency at a set price or
rate on or before a specified future date.
OSFI: The Office of the Superintendent of Financial Institutions
Canada, the regulator of Canadian banks.
Productivity Ratio: Management uses the productivity ratio as a
measure of the Bank’s efficiency. This ratio represents operating
expenses as a percentage of total revenue (TEB). A lower ratio indicates
improved productivity.
Repos: Repos is short for “obligations related to securities sold under
repurchase agreements” – a short-term transaction where the Bank
sells assets, normally government bonds, to a client and simultaneously
agrees to repurchase them on a specified date and at a specified price.
It is a form of short-term funding.
Return on Equity (ROE): Net income attributable to common
shareholders, expressed as a percentage of average common
shareholders’ equity.
Reverse Repos: Reverse repos is short for “securities purchased under
resale agreements” – a short-term transaction where the Bank
purchases assets, normally government bonds, from a client and
simultaneously agrees to resell them on a specified date and at a
specified price. It is a form of short-term collateralized lending.
210 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Risk-Weighted Assets: Comprised of three broad categories including
credit risk, market risk and operational risk, which are computed under
the Basel III Framework. Risk-weighted assets for credit risk are
calculated using formulas specified by the Basel III Framework. The
formulas are based on the degree of credit risk for each class of
counterparty. Off-balance sheet instruments are converted to on
balance sheet equivalents, using specified conversion factors, before
the appropriate risk measurements are applied. The Bank uses both
internal models and standardized approaches to calculate market risk
capital and standardized approach to calculate operational risk capital.
These capital requirements are converted to risk weighted assets
equivalent by multiplying by a 12.5 factor.
Securitization: The process by which financial assets (typically loans) are
transferred to a trust, which normally issues a series of different classes
of asset-backed securities to investors to fund the purchase of loans.
Structured Entities: A structured entity is defined as an entity created
to accomplish a narrow and well-defined objective. A structured entity
may take the form of a corporation, trust, partnership or
unincorporated entity. Structured entities are often created with legal
arrangements that impose strict and sometimes permanent limits on
the decision-making powers of their governing board, trustee or
management over the operations of the entity.
Standby Letters of Credit and Letters of Guarantee: Written
undertakings by the Bank, at the request of the customer, to provide
assurance of payment to a third-party regarding the customer’s
obligations and liabilities to that third-party.
Obligations, Structured Investment Vehicles, and Asset-Backed
Securities. These instruments represent investments in pools of credit-
related assets, whose values are primarily dependent on the
performance of the underlying pools.
Swaps: Interest rate swaps are agreements to exchange streams of
interest payments, typically one at a floating rate, the other at a fixed
rate, over a specified period of time, based on notional principal
amounts. Cross-currency swaps are agreements to exchange payments
in different currencies over predetermined periods of time.
Taxable Equivalent Basis (TEB): The Bank analyzes net interest
income, non-interest income, and total revenue on a taxable equivalent
basis (TEB). This methodology grosses up tax-exempt income earned on
certain securities reported in either net interest income or non-interest
income to an equivalent before tax basis. A corresponding increase is
made to the provision for income taxes; hence, there is no impact on net
income. Management believes that this basis for measurement provides
a uniform comparability of net interest income and non-interest income
arising from both taxable and non-taxable sources and facilitates a
consistent basis of measurement. While other banks also use TEB, their
methodology may not be comparable to the Bank’s methodology. For
purposes of segmented reporting, a segment’s revenue and provision
for income taxes are grossed up by the taxable equivalent amount. The
elimination of the TEB gross up is recorded in the Other segment.
Value At Risk (VaR): An estimate of the potential loss that might
result from holding a position for a specified period of time, with a
given level of statistical confidence.
Structured Credit Instruments: A wide range of financial products
which includes Collateralized Debt Obligations, Collateralized Loan
Yield Curve: A graph showing the term structure of interest rates,
plotting the yields of similar quality bonds by term to maturity.
Basel III Glossary
Credit Risk Parameters
Exposure at Default (EAD): Generally represents the expected gross
exposure – outstanding amount for on-balance sheet exposure and
loan equivalent amount for off-balance sheet exposure at default.
Probability of Default (PD): Measures the likelihood that a borrower
will default within a one-year time horizon, expressed as a percentage.
Loss Given Default (LGD): Measures the severity of loss on a facility
in the event of a borrower’s default, expressed as a percentage of
exposure at default.
Exposure Types
Non-retail
Corporate: Defined as a debt obligation of a corporation, partnership,
or proprietorship.
Bank: Defined as a debt obligation of a bank or bank equivalent
(including certain public sector entities (PSEs) treated as bank
equivalent exposures).
Sovereign: Defined as a debt obligation of a sovereign, central bank,
certain multi development banks and certain PSEs treated as sovereign.
Securitization: On-balance sheet investments in asset-backed securities,
mortgage backed securities, collateralized loan obligations and
collateralized debt obligations, off-balance sheet liquidity lines to Bank’s
own sponsored and third-party conduits and credit enhancements.
Retail
Residential Mortgage: Loans to individuals against residential
property (four units or less).
Secured Lines Of Credit: Revolving personal lines of credit secured by
residential real estate.
Qualifying Revolving Retail Exposures (QRRE): Credit cards and
unsecured line of credit for individuals.
Other Retail: All other personal loans.
Exposure Sub-types
Drawn: Outstanding amounts for loans, leases, acceptances, deposits
with banks and available-for-sale debt securities.
Undrawn: Unutilized portion of an authorized committed credit lines.
Other Exposures
Repo-Style Transactions: Reverse repurchase agreements (reverse
repos) and repurchase agreements (repos), securities lending and
borrowing.
OTC Derivatives: Over-the-counter derivatives contracts refers to
financial instruments which are traded through a dealer network rather
than through an exchange.
Other Off-balance Sheet: Direct credit substitutes, such as standby
letters of credit and guarantees, trade letters of credit, and
performance letters of credit and guarantees.
Exchange-Traded Derivative Contracts: Exchange-traded derivative
contracts are derivative contracts (e.g., futures contracts and options)
that are transacted on an organized futures exchange. These include
futures contracts (both long and short positions), purchased options
and written options.
Qualifying Central Counterparty (QCCP): A licensed central
counterparty is considered “qualifying” when it is compliant with the
International Organization of Securities Commissions (IOSCO) standards
and is able to assist clearing member banks in properly capitalizing for
CCP exposures.
Asset Value Correlation Multiplier (AVC): Basel III has increased the
risk-weights on exposures to certain Financial Institutions (FIs) relative to
the non-financial corporate sector by introducing an AVC. The correlation
factor in the risk-weight formula is multiplied by this AVC factor of 1.25
for all exposures to regulated FIs whose total assets are greater than or
equal to US $100 billion and all exposures to unregulated FIs.
Specific Wrong-Way Risk (WWR): Specific Wrong-Way Risk arises
when the exposure to a particular counterparty is positively correlated
with the probability of default of the counterparty due to the nature of
the transactions with the counterparty.
211 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Additional information
CORPORATE HEADQUARTERS
FOR FURTHER INFORMATION
Scotiabank
Scotia Plaza
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 866-6161
E-mail: email@scotiabank.com
Customer Service Centre
1-800-4-SCOTIA
Finance Department
Scotiabank
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 866-4790
Fax: (416) 866-4048
E-mail: corporate.secretary@scotiabank.com
Financial Analysts, Portfolio Managers and other Institutional Investors
Tel: (416) 775-0798
Fax: (416) 866-7867
E-mail: investor.relations@scotiabank.com
Online
For product, corporate, financial and shareholder information: scotiabank.com
Public, Corporate and Government Affairs
Scotiabank
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 933-2927
Fax: (416) 866-4988
E-mail: corporate.communications@scotiabank.com
Shareholder Services
Transfer Agent and Registrar Main Agent
Computershare Trust Company of Canada
100 University Avenue, 8th Floor, Toronto, Ontario
Canada M5J 2Y1
Tel: 1-877-982-8767
Fax: 1-888-453-0330
E-mail: service@computershare.com
Co-transfer Agent (U.S.A.)
Computershare Trust Company N.A.
250 Royall Street, Canton, MA 02021, U.S.A.
Tel: 1-800-962-4284
212 (cid:2) 2 0 1 5 S C O T I A B A N K A N N U A L R E P O R T
Building stronger communities
through young people
Investing in our communities has been a focus at
Scotiabank for over 180 years. We believe investing
in young people is the path to prosperity, and
supporting young people in the community helps
develop self-confidence, teamwork and leadership
skills. We proudly support organizations that make
sports accessible to young people, helping to build
strong communities around the world.
Bringing the game of futbol to
young people globally
In Mexico City, eight youth soccer teams
competed in the inaugural Scotiabank
CONCACAF Champions League
Under-13 tournament. Participating teams
came together from Canada, Costa Rica,
El Salvador, Jamaica, Mexico, Panama and
the United States to play at the Cruz Azul
futbol training facility. Team Toluca, Mexico,
took home the winning cup after several
days of competition.
Sharing our passion for community hockey with Nunavik and Nunavut youth
During the hockey season, Scotiabank teamed up with the National Hockey League (NHL®) and
Project North, a non-profit organization dedicated to enriching the lives of youth in Canada’s
Arctic, to bring the Stanley Cup® and NHL alumni to kids in Kuujjuaq, Nunavik and Iqaluit, Nunavut.
Scotiabank also donated 25 hockey bags of new hockey equipment to Project North that went
towards youth in Nunavik.
Serving customers for more than 180 years
The coat of arms, or crest, was designed by
A. Scott Carter, R.C.A., M.R.A.I.C., of Toronto, and
approved by the College of Heralds on May 30, 1951.
The words “Strength, Integrity, Service” form the Motto.
The various elements illustrate the Scottish tradition
of Nova Scotia, where the bank was founded
(thistle, unicorn, St. Andrew’s cross) combined with
emblems representing Canada and its various areas
(maple leaf, stag, ship, codfish, plough, sheaf of grain).
9464710
® Registered trademark of The Bank of Nova Scotia.