2016 Annual Report
Banking the real economy
*Adjusted – please refer to page 13 of the MD&A
CONTENTS
1
6
Message from President and
Chief Executive Officer
Executive Management Team
7
8
Message from Chairman
of the Board
10 Management’s Discussion
and Analysis
Board of Directors
129 Consolidated Financial Statements
E
hare
efer to page 13 of the MD&A
ss and geography; providing sustainable and growing earnings
CEO Message
to Shareholders
Brian J.Porter
President and Chief Executive Officer
Dear Fellow Shareholders,
AGAINST THE BACKDROP OF ONGOING MARKET VOLATILITY, GLOBAL ECONOMIC AND POLITICAL UNCERTAINTY AND
HISTORICALLY LOW INTEREST RATES, SCOTIABANK ENDED THE YEAR IN A STRONG POSITION. WE BANK — WHAT WE
CALL THE REAL ECONOMY, THAT IS, FAMILIES, COMMUNITIES AND BUSINESSES SEEKING TO BECOME FINANCIALLY
BETTER OFF. WE ARE PROUD OF OUR RESULTS DESPITE A RAPIDLY CHANGING OPERATING ENVIRONMENT.
In 2017, we will increase our focus on the areas that will
create long-term shareholder value. This includes investing
in businesses that need additional scale, and strengthening
our existing operations in Canada and our key Pacific
Alliance markets.
We have made good progress and are generating significant
momentum towards becoming one of the world’s most
customer-focused banks. We are committed to delivering a
superior experience for our customers and strong results for
our shareholders.
Economic Update from our Major Markets
As 2016 comes to a close, the narrative around Canada’s
economic outlook is more positive. Despite some ongoing
challenges related to commodity prices in certain regions,
the Bank is forecasting improved growth in 2017.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 1
We are confident in our global footprint, which includes the
Caribbean and Central America as well as the countries of
the Pacific Alliance trading bloc – Mexico, Peru, Chile
and Colombia.
In particular, the Pacific Alliance presents attractive growth
opportunities for the Bank. Together, the four countries
represent the world’s sixth largest economy – when
measured by purchasing power – and its seventh largest
exporter. The countries have stable governments and policy
makers focused on growing the middle class, making critical
structural reforms and attracting investment. The Pacific
Alliance economies are expected to have relatively strong
GDP growth in the range of 3% during 2017-20, compared
with about 1.6% on average in the G7.
To properly showcase our Pacific Alliance operations, we
hosted an investor day in Mexico City earlier this year. Our
conference included visits by the Central Bank governors
from each of the four Pacific Alliance countries who
reiterated what we have been saying for some time: The
trading bloc is an excellent place to invest, and run a
business. Global asset managers and equity analysts who
attended the conference left Mexico with greater confidence
in our operations, our local and global leadership teams, and
– most importantly – our strategy in the Pacific Alliance.
We are very comfortable with our footprint in this region,
and continue to expect it will generate strong results for
our shareholders.
Financial Results
I would like to draw your attention to a few of our
financial highlights.
Overall, Scotiabank delivered strong operating and financial
results for our shareholders. The Bank earned $7.4 billion in
2016. Our earnings growth was driven by steady
performances in our personal and commercial banking
businesses – both in Canada and internationally – which
generated approximately 80% of our earnings.
Canadian Banking contributed more than half of the
Bank’s earnings in 2016, with net income of $3.7 billion, up
12% compared to 2015. The Bank selectively grew assets in
a prudent manner and made good progress in gathering
core deposits. As a result, Canadian Banking improved its
risk-adjusted margin by 10 basis points. We also did a good
job in managing expenses, achieving positive operating
leverage of 3.2%; meaning that we grew our revenue faster
than expenses. Looking forward, Canadian Banking will
remain focused on delivering a superior customer experience
(which will help us to grow primary relationships with our
customers), improving our business mix and growing our
risk-adjusted margin.
International Banking gained very good momentum over
the year and delivered a strong performance in 2016. The
business earned $2 billion, which represents growth of 12%
year-over-year. These results reflect continued strong loan,
deposit and fee income growth – particularly in the Pacific
Alliance region – improved credit trends, and well-managed
expenses. These efforts supported International Banking’s
ability to deliver positive operating leverage of 2.9% in 2016.
Global Banking and Markets had a slower start to the
year – in part, due to elevated energy loan losses.
However, performance in the second half of the year
improved, with net income growing to $1.6 billion. Stronger
results were driven by the fixed income, corporate lending
and commodities businesses, as well as the positive impact
of foreign currency translation. Credit quality also improved
during the second half of the year.
In summary, your Bank’s 2016 results reflect strong
momentum in our business lines, each of which contributed to
our overall financial success. Looking ahead to 2017, I am
confident that our continuing focus on our customers and our
efforts to strengthen the Bank will guide our future success.
Progress Against Our Strategic Agenda
We are focused on delivering a superior customer
experience, and creating shareholder value. While driving
consistent and predictable financial performance in the near
term, the ultimate objective is to position Scotiabank for
success over the longer term. The foundation of this effort is
what we call our Strategic Agenda.
2 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Scotiabank’s Strategic Agenda was shaped over the past
two years and includes five, highly-integrated components.
Customer Focus
Our unwavering commitment to being a customer-focused
organization is reflected in our new “Why We
Bank” platform, which we launched across the Bank early in
2016. “Why We Bank” is an expression of our renewed
purpose: “We believe every customer has the right to
become better off.” To enable our commitment to customer-
focus, we recently rolled out a new customer experience
management system across our retail banking operations in
Canada, Mexico, Peru, Chile and Colombia. This capability
will allow us to actively listen to our customers in real time,
and dynamically shape a better customer experience.
Leadership and Employee Engagement
We have enhanced the depth, diversity and deployment of
our leadership teams. Our leaders are now more reflective
of our customer and employee populations, and highly
motivated by our customer focus objectives. As an example,
we have had very good success in attracting leading talent
– particularly digital talent. What’s more, 30% of our senior
leaders across the Bank are now women – a new high-
water mark for your Bank, which we expect will continue
to rise.
Scotiabank has a strong culture of operating ethically,
acting with integrity and effectively managing our risk. To
achieve our longer-term goal of building an even better
Bank, however, we are taking important steps to shift
elements of the Bank’s culture. Specifically, the Bank is now
more intensely focused on our customers and more
performance-oriented. Our evolving culture has been
embraced by our leadership teams, and is resonating
strongly across the Bank.
We firmly believe that one of the best investments the Bank
can make is in our people. We are providing employees
with more tools and training opportunities so they can
reach their full potential. We are also supporting
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 3
individualized development of Bank employees through
on-the-job training and coaching, targeted development
planning and greater alignment of career planning with
business needs and career aspirations.
Structural Cost Transformation
A critical goal of the Bank’s Strategic Agenda is to become
more efficient while continuing to improve our customers’
experience. To do so, we have adopted a continuous
improvement mindset. In other words, our ability to
consistently embrace change is a strategic advantage for
the Bank, especially in today’s competitive environment.
We have made good progress in this regard. For example:
(cid:129) As digital trends and changing customer preferences
re-shape the role and utility of our branch network, we
are introducing more digital options so that customers
can bank how, when and where they want. The approach
is a win for our customers and shareholders. Customers
benefit from a superior experience in branches that are
better tailored to their needs and shareholders benefit
from lower operating costs (online and mobile channels
are significantly more efficient than in-branch
transactions).
(cid:129) In Q2, we announced a restructuring charge to invest in
strengthening our businesses through a series of
important initiatives that will enhance our operating
model and respond to changing customer preferences.
The charge also came with the commitment to deliver a
meaningful improvement in our productivity ratio of 200
to 250 basis points for 2019. We are constantly re-
evaluating how we deliver products and services across
the enterprise. This helps to ensure that we are, for
example, fully leveraging our global scale to drive value
for shareholders.
AVERAGE ASSETS BY GEOGRAPHY
Driving a Digital Transformation
We made excellent progress this past year in advancing our
Digital Strategy. We now have a deep, experienced and
dynamic leadership team in place for our digital efforts
across the Bank. And we are investing in our digital
capabilities to improve outcomes for our customers,
employees and – ultimately – for our shareholders.
As a tangible example of our commitment to becoming a
digital leader, we have launched “Digital Factories” in our
priority markets of Canada, Mexico, Peru, Chile and
Colombia. At the Factories, employees from our business
lines and corporate functions work together to re-invent
the way our customers bank with us. Our five Digital
Factories are virtually connected to each other, and they are
continuously sharing innovative customer solutions – an
approach that allows us to benefit from our global
footprint. Our Digital Factories are designed to build
solutions that will benefit our customers – we chose to
name them factories to emphasize this key point.
The Bank’s heightened efforts in digital and mobile banking
are already delivering results. For example, in June of 2016,
Forrester Research awarded Scotiabank the highest overall
score among our Canadian peers for mobile banking
functionality. And in November, Forrester ranked our online
account opening process number one among the five largest
banks in Canada – up from fifth place last year.
80
126
165
529
$ BILLIONS
CANADA............. 59%
U.S. .....................
14%
OTHER
INTERNATIONAL .. 18%
PACIFIC
ALLIANCE ............ 9%
4 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
We will continue to develop our digital capabilities across
the Bank, and we aspire to become a digital leader in all of
our major markets.
Business Mix Alignment
We have undertaken a comprehensive series of efforts to
enhance profitability, and ensure that financial resources
are well-deployed and well-aligned with our Strategic
Agenda. Among other things, this includes enhancing our
already strong approach to capital allocation, managing our
capital more efficiently and prudently growing both sides of
our balance sheet. Our focus on growing deposits and
strategic capital allocation will continue to enhance the
Bank’s risk adjusted margin.
The banking industry continues to face a multitude of
shifting regulatory, competitive and economic factors. To
manage these factors – and to ensure we deploy our
valuable financial resources and optimize our business mix –
we have several important efforts underway to further
strengthen our capabilities.
children in Latin America and the Caribbean. Last summer,
the Bank made an investment of US$2 million to implement
their “Road to Success” program. The three-year initiative
aims to benefit more than 50,000 youth across 17 countries
in Latin America and the Caribbean.
Finally, we are also supporting our communities and the
Canadian economy more generally through some
innovative approaches with several leading academic
partners. Recently, the Bank entered into digital
partnerships through investments with the Smith School of
Business at Queen’s University, the Sobey School of Business
at Saint Mary’s University, the Ivey Business School at
Western University and the Rotman School of Management
at the University of Toronto. These win-win partnerships are
helping the next generation of business leaders succeed in
the digital economy by providing opportunities for hands-on
learning experience. They are also providing the Bank with
excellent access to leading digital talent and research. We
expect to launch more of these partnerships across our
footprint in 2017.
Employees and Community
Our Shared Vision for an Even Better Bank
Scotiabankers believe we have a responsibility to give back
and make a positive difference in the communities in which
we live and work. We do this by supporting organizations
that are building strong and resilient communities.
In 2016, Scotiabank contributed in excess of $70 million in
donations, sponsorships and other forms of assistance
globally. In addition, Scotiabank employees dedicated more
than 400,000 hours of volunteering and fundraising time to
local causes.
As an example, after the Fort McMurray wildfires, the Bank
was there to help. Scotiabankers came back early to our
three Fort McMurray branches to ensure that they were
open for business when evacuees returned home. What’s
more, the Scotiabank MacDonald Island Summer Camps
hosted 1,800 local children, with a number of employees
volunteering at the camps. We are proud of the way that
Scotiabankers helped to make a real and lasting difference
for our customers and for families in the community.
The Bank is also a strong supporter of Junior Achievement
Americas, which delivers financial literacy education to
Next year marks Scotiabank’s 185th Anniversary. What
started as a small bank in Halifax, Nova Scotia, is now
Canada’s International Bank, with more than 80,000
employees, serving 23 million customers in more than
50 countries. We are among the largest 25 banks in
the world. We have an excellent brand and a reputation
that is a source of tremendous pride to all Scotiabankers.
Looking forward, we will continue to build on our
momentum, become even more relevant to our customers,
implement our Strategic Agenda, and build an even better
Bank.
I’m very proud of the Scotiabank team, and I’m especially
grateful to our shareholders for the trust you have shown in us.
I am very confident that the Bank’s best days are ahead as
we continue to build on our momentum.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 5
EXECUTIVE
MANAGEMENT
TEAM
Brian J. Porter
President and
Chief Executive Officer
Ignacio “Nacho”
Deschamps
Group Head,
International Banking
and Digital Transformation
Stephen P. Hart
Chief Risk Officer
Dieter W. Jentsch
Group Head, Global Banking
and Markets
Barbara Mason
Group Head and Chief
Human Resources Officer
Sean D. McGuckin
Group Head and
Chief Financial Officer
James O’Sullivan
Group Head,
Canadian Banking
EXECUTIVE
VICE
PRESIDENTS
Deborah M. Alexander
Executive Vice President
and General Counsel
Andrew Branion
Executive Vice President
and Group Treasurer
John W. Doig
Executive Vice President and
Chief Marketing Officer
Terry Fryett
Executive Vice President
and Chief Credit Officer
Marianne Hasold-Schilter
Executive Vice President and
Chief Administrative Officer,
International Banking
Mike Henry
Executive Vice President,
Retail Payments, Deposits
and Unsecured Lending
Marian Lawson
Executive Vice President,
Global Financial Institutions
and Transaction Banking
Kyle McNamara
Executive Vice President
and Co-Head Information
Technology, Business Systems
James McPhedran
Executive Vice President,
Canadian Banking
Daniel Moore*
Executive Vice President and
Chief Market Risk Officer
James Neate
Executive Vice President,
International Corporate and
Commercial Banking
Dan Rees
Executive Vice President,
Operations
Gillian Riley
Executive Vice President,
Canadian Commercial
Banking
Shawn Rose
Executive Vice President,
Digital Banking
Maria Theofilaktidis
Executive Vice President,
Retail Distribution,
Canadian Banking
Michael Zerbs
Executive Vice President
and Co-Head
Information Technology,
Enterprise Technology
* As at November 29, 2016
1,118
1,995
BRANCHES
& OFFICES
OUR GLOBAL
FOOTPRINT
EMPLOYEES
INTERNATIONAL CANADA
35,000
35,000
40%
40%
35,350
53,500
53,500
60%
60%
53,551
6 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Chairman’s Message
to Shareholders
Thomas C. O’Neill
Chairman of the Board, Scotiabank
Dear Fellow Shareholders,
HAVING OVERSEEN THE BANK’S TRANSFORMATIONAL JOURNEY OVER THE PAST FEW YEARS, YOUR BOARD IS PLEASED
WITH THE TREMENDOUS PROGRESS THE MANAGEMENT TEAM HAS MADE IN 2016 IN DELIVERING ON THE PILLARS OF THE
STRATEGIC AGENDA. THIS MOMENTUM HAS CONTRIBUTED TO CONSISTENT EARNINGS GROWTH AND POSITIONS YOUR
BANK FOR SUSTAINED GROWTH OVER THE LONG TERM.
Scotiabank’s employees around the globe have been
working toward delivering on the strategic priorities of
being more customer-focused; enhancing leadership depth,
diversity and deployment; being better organized to serve
customers while reducing structural costs; driving a digital
transformation and aligning our business mix with deeper
customer relationships. Your Board fully supports these as
key drivers of growth that will have a lasting impact on
shareholder value.
While the current financial landscape is certainly not without
its challenges, the management team has demonstrated
critical focus on delivering against these priorities, and your
Board is pleased with how aggressively the team is taking on
these challenges and the advancements made to date.
Our Corporate Governance
Underpinning the success of your Bank is your Board’s
commitment to having effective corporate governance.
Ongoing, active oversight and holding the executive
management team accountable are key factors to
Scotiabank’s success. We are focused on balancing and
protecting the interests of stakeholders, including
shareholders, customers, employees and communities over
the long term.
Your directors are regional, national and international
business and community leaders who bring financial
expertise, technology acumen, risk management insight and
sound business judgement to the Board’s table.
We are extremely proud of the age, ethnic, gender and
global diversity of the Board. Additionally, one of the
hallmarks of our success is ensuring we maintain an
independent Board, and I am pleased to say 15 of our
17 members are independent of the Bank.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 7
In 2016, we welcomed the appointment of three
new members:
> Scott B. Bonham brings extensive experience and critical
insights into technological developments with a depth of
experience in Silicon Valley and Canada.
> Una M. Power brings deep financial and risk management
expertise, as well as extensive international
business knowledge.
> L. Scott Thomson brings diverse international business
experience across a multitude of Canadian industries.
Building on our momentum
Your Bank is building for the future, and this excitement is
shared by the Board. As Scotiabank reaches its 185th year,
BOARD OF
DIRECTORS
Thomas C. O’Neill
Chairman of the Board.
Scotiabank director since
May 26, 2008.
COMMITTEE CHAIRS
Ronald A. Brenneman
Corporate director. Risk
Committee Chair. Scotiabank
director since March 28, 2000.
Aaron W. Regent
Founding Partner of Magris
Resources Inc. Human
Resources Committee Chair.
Scotiabank director since
April 9, 2013.
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.
Paul D. Sobey
Corporate director. Audit and
Conduct Review Committee
Chair. Scotiabank director
since August 31, 1999.
BOARD OF DIRECTORS
Nora A. Aufreiter
Corporate director.
Scotiabank director since
August 25, 2014.
Guillermo E. Babatz
Managing Partner of
Atik Capital, S.C.
Scotiabank director since
January 28, 2014.
we have great confidence in the future of the Bank and we
look forward to building on the nearly two centuries of
continuous and limitless success.
I would like to thank Brian Porter – your Bank’s President
and CEO – his leadership team and the thousands of
Scotiabankers around the world who are collectively guided
by their core belief that the Bank’s 23 million customers
have the right to become better off. And finally, my sincere
thanks to you, our shareholders for your steadfast
confidence, patronage and trust.
Scott B. Bonham
Corporate director and
co-founder of Intentional
Capital. Scotiabank director
since January 25, 2016.
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.
William R. Fatt
Corporate director. Scotiabank
director since January 27, 2015.
Tiff Macklem, Ph.D.
Dean of the Rotman
School of Management at
the University of Toronto.
Scotiabank director since
June 22, 2015.
Eduardo Pacheco
Chief Executive Officer and
a director of Mercantil
Colpatria S.A. Scotiabank
director since
September 25, 2015.
Brian J. Porter
President and Chief Executive
Officer of Scotiabank.
Scotiabank director since
April 9, 2013.
Una M. Power
Corporate director. Scotiabank
director since April 12, 2016.
Indira V. Samarasekera,
O.C., Ph.D.
Senior advisor at Bennett
Jones LLP and a corporate
director. Scotiabank director
since May 26, 2008.
Barbara S. Thomas
Corporate director.
Scotiabank director since
September 28, 2004.
L. Scott Thomson
President and Chief
Executive Officer of Finning
International Inc. Scotiabank
director since April 12, 2016.
8 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Highlights of Management’s Discussion and Analysis
MEDIUM-TERM FINANCIAL OBJECTIVES
Objective
Achieved
TOTAL ASSETS
NET INCOME
Return on Equity*
14+%
Earnings Per Share
Growth
5 - 10 %
Achieve Positive
Operating Leverage
Maintain Strong
Capital Ratios
*Adjusted - please refer to page 13 of the MD&A
$ 896
BILLION
$ 7.4
BILLION
REVENUE
$ 26
BILLION
DEPOSITS
$ 612
BILLION
LOANS
$ 480
BILLION
TOTAL TAXES
PAID
$ 3.1
BILLION
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
250
200
150
100
50
06
07
08
09
10
11
12
13
14
15
16
EARNINGS BY
BUSINESS LINE %
COMMON EQUITY TIER 1
CAPITAL RATIO %
% INCOME
BY GEOGRAPHY
12
10.8
10.3
11.0
51
21
28
8
4
14
15
16
Canadian Banking
International Banking
Global Banking and Markets
For more information, please see page 32
18
6
18
58
Canada
Other International
U.S.
Pacific Alliance
TOTAL TAXES PAID $26 $612 $ 3.1 BILLION BILLION BILLION *Adjusted - please refer to page 13 of the MD&A 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 EARNINGS BY BUSINESS LINE % Canadian Banking International Banking Global Banking and Markets COMMON EQUITY TIER 1 CAPITAL RATIO % For more information, please see page 32 % INCOME BY GEOGRAPHY Canada Other International U.S. Pacific Alliance 2016 SCOTIA BANK ANNUAL REPORT 2016 Annual Report Banking the real economy Scotiabank
ement’s Discussion and Analysis MEDIUM-TERM FINANCIAL OBJECTIVES Objective Achieved Return on Equity* 14+% Earnings Per Share Growth 5 - 10 % Achieve Positive Operating Leverage Maintain Strong Capital Ratios TOTAL ASSETS NET INCOME LOANS $896 $7.4 $480 BILLION BILLION BILLION
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 9
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 9
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/investorrelations.
Reference Table for EDTF
Type of risk
Number Disclosure
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.
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.
(1) In the Supplementary Financial Information Package
Pages
Financial
Statements
Supplementary
Regulatory
Capital
Disclosures
185
163, 202-206,
209-210
163, 202-206
205-206
1-2
4, 5, 7
6
7
10-12
10-19, 23-26
16-19, 24-25
9
207-210
207-210
209-210
MD&A
66, 70, 80
63, 65
46, 68-69, 76-79
32, 89-90, 106-107
60-63
63-65
66-67
64
31-32
33
34-35
31-32
38-42, 67, 115-116
38-42
38-42
38, 42
40-41
87-91
89-90
93-95
91-93
86
81-87
81-87
81-87
75-77, 109-116 170-171, 204-205
11-19, 15-21(1)
144-145, 171
74, 110, 113, 114
171
16-19(1)
161, 163
72-73
72, 75
42, 96-97
46
10 | 2 0 1 6 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:2) Overview
15
15
16
17
Financial results
Economic outlook
Shareholder returns
Impact of foreign currency translation
(cid:2) Group Financial Performance
Provision for credit losses
18 Net income
18 Net interest income
20 Non-interest income
21
24 Non-interest expenses
24
25
27
29
Income taxes
Financial results review: 2015 vs 2014
Fourth quarter review
Trending analysis
(cid:2) Group Financial Condition
Statement of financial position
30
31 Capital management
42 Off-balance sheet arrangements
45
46
Financial instruments
Selected credit instruments – publically known
risk items
(cid:2) Business Lines
47
49
52
55
58
Overview
Canadian Banking
International Banking
Global Banking and Markets
Other
(cid:2) Risk Management
Credit risk
70
80 Market Risk
Liquidity risk
87
Other risks
96
Operational risk
96
Reputational risk
97
Environmental risk
97
Insurance risk
98
Strategic risk
98
(cid:2) Controls and Accounting Policies
99
99
103
106
107
Controls and procedures
Critical accounting estimates
Future accounting developments
Regulatory developments
Related party transactions
(cid:2) Supplementary Data
109 Geographic information
112 Credit risk
117
119
120
Revenues and expenses
Selected quarterly information
Eleven-year statistical review
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 11
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 document, the
Management’s Discussion and Analysis in the Bank’s 2016 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 as described in the Bank’s annual financial statements (See “Controls and Accounting
Policies – Critical accounting estimates” in the Bank’s 2016 Annual Report) and updated by this document; 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 or other criminal behavior 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; anti-money laundering; consolidation in the financial services sector in Canada
and globally; competition, both from new entrants and established competitors including through internet and mobile banking; 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 Bank’s 2016 Annual
Report.
Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2016 Annual Report
under the heading “Overview-Outlook,” as updated by this document; and for each business segment “Outlook”. The “Outlook” sections 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.
November 29, 2016
12 | 2 0 1 6 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
|
O
V
E
R
V
I
E
W
MANAGEMENT’S DISCUSSION & ANALYSIS
The Management’s Discussion and Analysis (MD&A) is provided to enable readers to assess the Bank’s financial condition and results of operations as
at and for the year ended October 31, 2016. The MD&A should be read in conjunction with the Bank’s 2016 Consolidated Financial Statements and
Notes. This MD&A is dated November 29, 2016.
Additional information relating to the Bank, including the Bank’s 2016 Annual Report, are available on the Bank’s website at www.scotiabank.com.
As well, the Bank’s 2016 Annual Report and Annual Information Form are available on SEDAR at www.sedar.com and on the EDGAR section of the
SEC’s website at www.sec.gov.
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 among companies using these measures. The Bank believes that certain
non-GAAP measures are useful in assessing underlying ongoing business performance and provide readers with a better understanding of how
management assesses performance. These non-GAAP measures are used throughout this report and defined below.
T1 Impact of the 2016 restructuring charge
The table below reflects the impact of the 2016 restructuring charge of $378 million pre-tax ($278 million after tax)(1).
For the year ended October 31, 2016 ($ millions)
Net income ($ millions)
Diluted earnings per share
Return on equity
Productivity ratio
Operating leverage
(1) Calculated using the statutory tax rates of the various jurisdictions.
T2 Adjusted diluted earnings per share
The adjusted diluted earnings per share (EPS) is calculated as follows:
Reported
Impact of the
restructuring charge
Adjusting for the
restructuring charge
$ 7,368
5.77
$
13.8%
55.2%
(1.9)%
$ 278
$ 0.23
0.5%
(1.5)%
2.9%
$ 7,646
6.00
$
14.3%
53.7%
1.0%
For the year ended October 31 ($ millions)
Net income attributable to common shareholders (diluted) (refer to Note 33)
Restructuring charge
Net income attributable to common shareholders (diluted) adjusting for
restructuring charge
Other 2014 notable items(2)
Net income attributable to common shareholders (diluted) adjusting for
restructuring charge and other notable items
Amortization of intangible assets, excluding software
2016
2015
2014
Diluted
EPS(1)
$ 7,070
278
$ 5.77
0.23
$ 6,983
–
7,348
–
7,348
76
6.00
–
6.00
0.05
6,983
–
6,983
65
Diluted
EPS(1)
$ 5.67
–
5.67
–
5.67
0.05
$ 6,924
110
7,034
(400)
6,634
62
Diluted
EPS(1)
$ 5.66
0.09
5.75
(0.32)
5.43
0.06
Adjusted net income attributable to common shareholders (diluted)
$ 7,424
$ 6.05
$ 7,048
$ 5.72
$ 6,696
$ 5.49
Weighted average number of diluted common shares outstanding (millions)
1,226
1,232
1,222
(1) Adjusted diluted earnings per share calculations are based on full dollar and share amounts.
(2) Refer to T15 Notable items.
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
This ratio represents net interest income divided by average core banking assets.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 13
MANAGEMENT’S DISCUSSION AND ANALYSIS
T3 Financial highlights
As at and for the years ended October 31
Operating results ($ millions)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income tax expense
Net income
Net income attributable to common shareholders
Operating performance
Basic earnings per share ($)
Diluted earnings per share ($)
Adjusted diluted earnings per share ($)(1)(2)
Return on equity (%)
Productivity ratio (%)(3)
Operating leverage (%)(3)
Core banking margin (%)(1)(3)
Financial position information ($ millions)
Cash and deposits with financial institutions
Trading assets
Loans
Total assets
Deposits
Common equity
Preferred shares
Assets under administration
Assets under management
Capital and liquidity measures
Common Equity Tier 1 (CET1) capital ratio (%)
Tier 1 capital ratio (%)
Total capital ratio (%)
Leverage ratio (%)
CET1 risk-weighted assets ($ millions)(4)
Liquidity coverage ratio (LCR) (%)
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
Common share information
Closing share price ($)(TSX)
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends per share ($)
Dividend yield (%)(6)
Market capitalization ($ millions)(TSX)
Book value per common share ($)
Market value to book value multiple
Price to earnings multiple (trailing 4 quarters)
Other information
Employees
Branches and offices
2016
2015
2014
14,292
12,058
26,350
2,412
14,540
2,030
7,368
6,987
5.80
5.77
6.05
13.8
55.2
(1.9)
2.38
46,344
108,561
480,164
896,266
611,877
52,657
3,594
472,817
192,702
11.0
12.4
14.6
4.5
364,048
127
2,446
4,626
0.49
0.50
13,092
10,957
24,049
1,942
13,041
1,853
7,213
6,897
5.70
5.67
5.72
14.6
54.2
(1.6)
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
12,305
11,299
23,604
1,703
12,601
2,002
7,298
6,916
5.69
5.66
5.49
16.1
53.4
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
72.08
61.49
69.02
1,204
1,226
1,208
2.88
4.7
87,065
43.59
1.7
12.4
88,901
3,113
1,210
1,232
1,203
2.72
4.4
73,969
40.80
1.5
10.8
89,214
3,177
1,214
1,222
1,217
2.56
3.8
83,969
36.96
1.9
12.1
86,932
3,288
(1) Refer to page 13 for a discussion of Non-GAAP measures.
(2) Refer to T2 Adjusted diluted earnings per share.
(3) Effective 2016, the taxable equivalent adjustment is no longer included in the calculation. Prior period amounts have been restated.
(4) As at October 31, 2016, 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.
(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 year.
14 | 2 0 1 6 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
|
O
V
E
R
V
I
E
W
Overview
Financial Results
The Bank’s net income for the year was $7,368 million, up 2% from $7,213 million last year and diluted earnings per share (EPS) were $5.77
compared to $5.67 last year. Return on equity was 13.8% in 2016 compared to 14.6% last year.
The Bank recorded a restructuring charge of $378 million pre-tax, or $278 million after tax, in 2016 (refer T1). Adjusting for the restructuring charge,
net income was $7,646 million, up 6% and diluted earnings per share rose 6% to $6.00 compared to last year. Return on equity was 14.3%
compared to 14.6% last year.
Current year net income was positively impacted by increases in net interest income and non-interest income, as well as acquisitions and the
favourable impact of foreign currency translation. Partially offsetting were higher provision for credit losses, non-interest expenses and income taxes.
Net interest income increased $1,200 million or 9% to $14,292 million, driven by growth in core banking assets across all business lines and
acquisitions. The core banking margin was 2.38%, down one basis point from last year.
Non-interest income increased $1,101 million or 10% to $12,058 million from the prior year. Strong growth in banking and trading revenues,
acquisitions and the favourable impact of foreign currency translation contributed to the increase. Also contributing to the increase was a gain on sale
of a non-core lease financing business in Canada, while gains on sale of real estate this year were largely offset by lower net gains on investment
securities.
The total provision for credit losses was $2,412 million, up $470 million from last year. Contributing to this increase were higher provisions related to
energy exposures in Global Banking and Markets, higher commercial provisions in International Banking, and higher retail provisions in Canadian
Banking, primarily in credit cards and automotive loans, generally in line with volume growth. Partially offsetting were higher acquisition-related
benefits this year.
Non-interest expenses were $14,540 million this year, an increase of $1,499 million or 11% over last year. Adjusting for the restructuring charge
(refer T1), expenses increased 9%. The increase reflects the impact of acquisitions, higher performance-based compensation, as well as higher
business initiative and volume-driven costs including technology and professional fees, software amortization, and deposit insurance. As well, last year
benefited from lower pension benefit costs of $204 million related to modifications made to the Bank’s main pension plan partly offset by the costs
relating to the reorganization of Canadian shared services of $61 million. Operating leverage was negative 1.9% on a reported basis, or positive 1.0%
adjusting for the restructuring charge (refer T1).
The provision for income taxes was $2,030 million, an increase of $177 million from last year. The Bank’s overall effective tax rate for the year was
21.6% compared to 20.4% in 2015. The increase in the effective tax rate was due primarily to lower tax-exempt income and higher taxes in foreign
jurisdictions this year.
The all-in Basel III Common Equity Tier 1 ratio was 11.0% as at October 31, 2016, compared to 10.3% last year, and remained well above the
regulatory minimum.
Economic Outlook
The United States will be the reference point for economic developments in the year ahead owing to the potentially large shifts brought about by the
results of the November 2016 elections. After an initial period of uncertainty as the priorities of the new American administration are clarified, we
expect U.S. economic activity to continue picking up as additional fiscal stimulus, delivered through tax cuts and infrastructure spending, accelerates
the recovery in U.S. domestic demand that has already been buoyed by reasonably strong gains in employment, consumer spending, and residential
construction.
Canadian output growth is rebounding owing to the rebuilding of Fort McMurray after the devastating wildfires in early May, a resumption of crude
oil shipments from Alberta post-fire, and a modest pick-up in non-energy exports. Although uncertainty about the new U.S. government’s approach
to trade policy may temporarily dampen investment growth in early 2017, capital spending should pick up again as Canada’s federal stimulus package
and U.S. demand growth both take hold later in the year. Consumer demand should be reasonably well supported in the year ahead by recent
employment gains and the anticipated impact of the Canada Child Benefit. A number of downside risks to Canada’s economy remain, including
stretched valuations in the Vancouver and Toronto housing markets and high household indebtedness, but these appear well-managed.
The outlook for the Pacific Alliance countries remains closely tied to the U.S. economy. Some country-specific risks will remain salient in the year
ahead, but the medium-term outlook for the region remains strong. We are positive about Mexico’s underlying strengths, and we also anticipate
further economic rebound in Brazil.
Across the Atlantic, most economic indicators in the U.K. point to much stronger than expected growth in the aftermath of the ‘Brexit’ vote as
currency movements provide a cushion for real activity. Despite this unanticipated resilience, we continue to expect the U.K. economy to slow as the
British government moves towards negotiations on withdrawal from the E.U. The knock-on effects in Europe, alongside financial sector challenges
and local political uncertainty, are likely to provide a drag on growth across the Continent. Japan’s recovery will probably remain muted as the
authorities strive to make new monetary and fiscal measures effective. The pace of growth throughout the rest of the Pacific Rim will be favourable,
with indicators pointing to a pick-up in China’s industrial activity.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 15
MANAGEMENT’S DISCUSSION AND ANALYSIS
Shareholder Returns
In fiscal 2016, the total shareholder return on the Bank’s shares was 22.5%, which outperformed
the 12.6% total return of the S&P/TSX Composite Index.
The total compound annual shareholder return on the Bank’s shares over the past five years was
11.1%, and 8.2% over the past 10 years. This exceeded the total return of the S&P/TSX
Composite Index, which was 7.0% over the past five years and 4.8% over the last ten years, as
shown in chart C2.
Quarterly dividends were raised twice during the year – a two cent increase effective the second
quarter and a further two cent increase effective in the fourth quarter. As a result, dividends per
share totaled $2.88 for the year, up 6% from 2015. The Bank was within its target payout range
of 40-50%, with a payout ratio of 49.6% for the year.
T4 Shareholder returns
For the years ended October 31
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)(1)
Increase (decrease) in share price (%)
Total annual shareholder return (%)(2)
2016
72.08
2.88
4.7
17.2
22.5
2015
61.49
2.72
4.4
(10.9)
(7.0)
2014
69.02
2.56
3.8
8.9
13.2
(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.
C1 Closing common share price
as at October 31
$80
70
60
50
40
30
06
08
10
12
14
16
C2 Return to common shareholders
Share price appreciation plus dividends
reinvested, 2006=100
240
200
160
120
06
08
10
12
14
16
Scotiabank
S&P/TSX Banks Total Return Index
S&P/TSX Composite Total Return Index
16 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Impact of Foreign Currency Translation
The impact of foreign currency translation on net income is shown in T5.
T5 Impact of foreign currency translation
For the fiscal years
U.S. dollar/Canadian dollar
Mexican Peso/Canadian dollar
Peruvian Sol/Canadian dollar
Colombian Peso/Canadian dollar
Chilean Peso/Canadian dollar
Impact on net income(1) ($ 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)
(2)
Includes impact of all currencies
Includes the impact of foreign currency hedges.
2016
2015
2014
Average
exchange rate
% Change
Average
exchange rate
% Change
Average
exchange rate
% Change
0.754
13.666
2.539
2,307
514.549
(6.4)%
10.3%
1.3%
10.8%
0.5%
0.806
12.386
2.505
2,082
512.203
(12.2)%
2.8%
(3.0)%
16.4%
0.2%
0.918
12.049
2.582
1,789
511.261
(6.5)%
(3.7)%
(1.3)%
(1.4)%
6.8%
2016
vs. 2015
2015
vs. 2014
2014
vs. 2013
$ (51)
182
86
(34)
$ 183
$ 0.15
$
14
44
65
60
$ 232
243
(151)
(62)
$ 262
$ 0.21
$
20
84
110
48
$ 191
195
(134)
(70)
$ 182
$ 0.15
$
8
80
85
9
$ 183
$ 262
$ 182
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 17
MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL PERFORMANCE
Net Income
Net income was $7,368, up 2% compared to $7,213 last year. Included in this year’s results is a restructuring charge of $378 million pre-tax, or
$278 million after tax (refer T1). Adjusting for the restructuring charge, net income increased $433 million or 6%.
Net Interest Income
Net interest income was $14,292 million, an increase of $1,200 million or 9% from the prior year. This increase was driven by a 9% growth in core
earning assets, including acquisitions, as the core banking margin was in line with last year.
Canadian Banking’s net interest income was up $608 million or 9% driven by strong asset and deposit growth, expansion in margin, and the impact
of an acquisition. Net interest income increased $652 million or 11% in International Banking primarily due to strong asset growth and the impact of
acquisitions. Global Banking and Markets net interest income increased $222 million or 21% driven by an increase in both average earning assets and
margin. Partially offsetting these increases were lower contribution from asset/liability management activities reflected in the Other segment.
Core banking assets increased $50 billion to $598 billion. The increase was driven by strong growth in both retail and commercial loans in
International Banking, corporate loans in Global Banking and Markets, automotive and credit card loans in Canadian Banking and higher volume of
assets held for liquidity purposes in the Other segment. Also contributing to the asset increase was the positive impact of foreign currency translation.
The core banking margin of 2.38% was in line with the previous year. The margin increase in Canadian Banking was offset by lower contribution
from asset/liability management activities reflected in the Other segment.
Outlook
Net interest income is expected to increase in 2017 mainly due to growth in core banking assets across all business lines. The total margin is expected
to be in line with 2016, as improvements from business mix, both on the asset and deposit side, are generally offset by continued deposit margin
compression in an expected low interest rate environment.
T6 Net interest income and core banking margin(1)
($ billions, except percentage amounts)
Total average assets and net interest income
Less: total assets in Capital Markets(1)
Banking margin on average total assets
Less: non-earning assets and customers’ liability
under acceptances
Average
balance
$ 913.8
259.4
$ 654.4
56.6
2016
Interest
$ 14.3
–
$ 14.3
Average
rate
Average
balance
$ 860.6
258.1
2015
Interest
$ 13.1
–
Average
rate
Average
balance
$ 795.6
232.5
2.18% $ 602.5
$ 13.1
2.18% $ 563.1
2014
Interest
$ 12.3
–
$ 12.3
Average
rate
2.19%
54.4
48.0
Core banking assets and margin
$ 597.8
$ 14.3
2.38% $ 548.1
$ 13.1
2.39% $ 515.1
$ 12.3
2.39%
(1) Net interest income from Capital Markets trading assets is recorded in trading revenues in non-interest income.
18 | 2 0 1 6 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
2016
Average
balance
Interest
Average
rate
Average
balance
2015
Interest
Average
rate
Average
balance
2014
Interest
Average
rate
$
67.8
107.2
$
99.8
67.8
218.6
96.8
161.4
(4.6)
$ 472.2
$ 814.8
11.4
87.6
0.4
0.2
0.1
1.1
7.4
7.3
5.5
0.58% $
0.16%
71.1
111.2
$
0.16%
1.57%
3.37%
7.57%
3.41%
99.9
43.7
214.4
87.5
142.2
(4.0)
0.3
0.2
0.2
0.7
7.5
6.6
4.6
0.41% $
0.17%
60.1
113.3
$
0.16%
1.69%
3.51%
7.52%
3.25%
91.1
41.2
210.9
79.6
128.5
(3.6)
0.3
0.1
0.2
0.8
7.6
6.1
4.3
$ 20.2
$ 22.0
4.28% $ 440.1
2.70% $ 766.0
$ 18.7
$ 20.1
4.26% $ 415.4
2.63% $ 721.1
$ 18.0
$ 19.4
11.4
83.2
10.4
64.1
0.44%
0.12%
0.20%
1.91%
3.60%
7.61%
3.39%
4.34%
2.69%
$ 913.8
$ 22.0
2.41% $ 860.6
$ 20.1
2.34% $ 795.6
$ 19.4
2.43%
T7 Average balance sheet(1) and net interest income
For the fiscal years ($ billions)
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
$ 195.1
384.7
42.8
$ 622.6
$
$
2.4
3.9
0.4
6.7
0.2
0.2
0.6
7.7
Obligations related to securities sold
under repurchase agreements and
securities lent
Subordinated debentures
Other interest-bearing liabilities
99.1
7.5
54.9
Total interest-bearing liabilities
$ 784.1
$
Other liabilities including acceptances
Equity(2)
Total liabilities and equity
Net interest income
74.4
55.3
$ 913.8
$
7.7
$ 14.3
(1) Average of daily balances.
(2)
Includes non-controlling interests of $1.5 in 2016, $1.3 in 2015 and $1.2 in 2014.
1.22% $ 181.4
368.1
1.01%
37.3
1.03%
1.08% $ 586.8
$
$
0.19%
3.10%
1.04%
90.7
5.6
50.1
0.98% $ 733.2
$
2.3
3.4
0.3
6.0
0.2
0.2
0.6
7.0
75.9
51.5
0.84% $ 860.6
$
7.0
$ 13.1
1.27% $ 172.6
339.7
0.91%
38.4
0.85%
1.02% $ 550.7
$
$
0.26%
3.33%
1.20%
87.3
5.3
50.2
0.96% $ 693.5
$
2.4
3.5
0.3
6.2
0.3
0.2
0.4
7.1
54.4
47.7
0.81% $ 795.6
$
7.1
$ 12.3
1.42%
1.02%
0.77%
1.13%
0.32%
3.84%
0.72%
1.02%
0.89%
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 19
MANAGEMENT’S DISCUSSION AND ANALYSIS
T8 Non-interest income
For the fiscal years ($ millions)
2016
2015
2014
2016
versus
2015
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
$
1,359
$
1,089
$
933
25%
949
330
928
307
901
282
$
1,279
$
1,235
$
1,183
870
284
787
266
778
236
$
1,154
$
1,053
$
1,014
436
559
406
423
379
339
C3 Sources of non-interest income
21%
11%
10%
10%
14%
Underwriting and
other advisory fees
Non-trading foreign
exchange fees
Trading revenues
Other non-interest
income
12%
4%
5%
5%
8%
Card revenues
Deposit and
payment services
and other banking
fees
Credit fees
Mutual funds
Brokerage fees
Investment
management and
trust
Total banking revenues
$
3,669
$
3,360
$
3,170
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
Net gain on investment securities
Net income from investments in associated
corporations
Insurance underwriting income, net of claims
Other
$
1,624
1,010
$
1,619
1,006
$
1,468
942
$
$
443
205
648
3,282
594
540
1,403
534
414
603
1,019
$
$
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
2
7
4%
11
7
10%
7
32
9%
–%
–
1
–
1
–%
13%
10
18
(16)
2
8
94
Total non-interest income
$ 12,058
$ 10,957
$ 11,299
10%
Non-Interest Income
Non-interest income was $12,058 million, up $1,101 million or 10%, primarily from growth in banking and trading revenues and higher underwriting
and advisory fees. The positive impact of acquisitions, foreign currency translation and hedging activities, and gain from the sale of a non-core lease
finance business also contributed to the increase. Gains on sales of real estate were generally offset by lower net gains on investment securities.
Banking revenues, excluding related expenses, grew $445 million or 12% to $4,228 million reflecting strong growth in card revenues of 25% due to
higher fee income and the impact from acquisitions in Canadian Banking and International Banking. Credit fees were up $101 million or 10% mainly
from growth in Global Banking and Markets, as well as contributions from Canadian Banking and International Banking. Banking fee related expenses
rose $136 million or 32%, primarily due to card expenses in Canadian Banking and International Banking, reflecting higher transaction volumes as
well as acquisitions.
Underwriting and other advisory fees were up $69 million or 13%, mainly due to higher new issue activity and investment advisory fees in Global
Banking and Markets.
Non-trading foreign exchange revenues rose $48 million or 10% to $540 million, primarily in Latin America and the Caribbean.
Trading revenues of $1,403 million were higher by $218 million or 18% (refer to T9) from the prior year mainly related to fixed income. Higher
commodities and foreign exchange trading revenues were offset by lower equity trading revenues.
Insurance underwriting income was up $47 million or 8%, mostly from strong premium growth in Canada and the Caribbean.
Other income increased significantly by $493 million to $1,019 million primarily due to the gain on sale of a non-core lease financing business, the
impact of acquisitions, and gains on sale of real estate.
Outlook
Non-interest income is expected to reflect continued growth in 2017 benefiting from higher card revenues, mutual fund management fees and
brokerage revenues. Gains on investment securities, primarily recorded in the Other segment, are expected to be lower than 2016.
20 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
T9 Trading revenues
For the fiscal years ($ millions)
By trading products:
Interest rate and credit
Equities
Commodities
Foreign exchange
Other
Total trading revenues
% of total revenues
2016
2015
2014
$
613
101
376
262
51
$
400
177
345
201
62
$
415
92
359
208
40
1,403
1,185
1,114
5.3%
4.9%
4.7%
Provision for Credit Losses
The total provision for credit losses was $2,412 million, up $470 million from last year net of acquisition-related benefits of $152 million. The provision
for credit losses ratio was 50 basis points compared to 43 basis points in the prior year.
In Canadian Banking, the provision for credit losses was $832 million, an increase of $145 million. The provision for credit losses was higher due to
growth in retail portfolios, primarily in credit cards and auto loans, with additional increases from commercial provisions. The provision for credit losses
ratio was 28 basis points, up five basis points from the prior year.
The provision for credit losses in International Banking increased $153 million to $1,281 million. Retail provisions were flat compared to 2015.
Increases from acquisitions and higher provisions for credit losses in Latin America from strong retail loan growth were offset by favourable foreign
currency translation. In the commercial portfolio, provisions were higher in Colombia, primarily the energy sector, and in Puerto Rico. Overall, the
provision for credit losses ratio was 126 basis points, up two basis points from last year.
The provision for credit losses in Global Banking and Markets was $249 million, an increase of $182 million from last year due to higher provisions in
the United States and Europe, primarily in the energy sector, and also in Asia. The provision for credit losses ratio was up 20 basis points to 30 basis
points.
Outlook
The quality of the Bank’s credit portfolio is expected to remain strong given its broad global diversification. The total provision for credit losses ratio is
expected to reduce in 2017. In Canadian Banking, the retail provision for credit losses ratio is expected to increase from changes in the business mix
while the commercial ratio is expected to normalize in relation to historical experience. In International Banking, the retail provision for credit losses
ratio is expected to be in line with last year after accounting for the integration of prior acquisitions while the commercial ratio should improve. In
Global Banking and Markets, the provision for credit losses ratio is expected to decline driven by lower energy related issues. Overall, provision levels in
2017 will be within the Bank’s risk appetite and aligned with strategy.
T10 Provisions against impaired loans by business line
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
For the fiscal years ($ 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
2016
2015
2014
$
$
$
770
62
832
250
224
317
112
320
58
1,031
$
$
$
642
45
687
184
260
265
108
247
64
944
$
$
$
607
56
663
248
240
267
74
146
49
776
$ 1,281
$ 1,128
$ 1,024
$
43
113
93
$
249
$
$
42
4
21
67
$
$
3
2
11
16
$ 2,362
$ 1,882
$ 1,703
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 21
MANAGEMENT’S DISCUSSION AND ANALYSIS
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
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.
2016
2015
2014
0.29%
0.15
0.28
0.25%
0.12
0.23
0.24%
0.17
0.23
2.08
0.52
1.26
0.30
0.49
0.01
2.33
0.26
1.24
0.10
0.42
0.01
2.13
0.51
1.27
0.03
0.40
0.00
0.50%
0.43%
0.40%
2016
2015
2014
0.26%
0.16
0.24
1.90
0.31
1.06
0.21
0.26%
0.20
0.25
1.99
0.30
1.10
0.01
0.21%
0.24
0.21
1.66
0.14
0.70
0.11
0.41%
0.39%
0.33%
22 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
T13 Non-interest expenses and productivity
For the fiscal years ($ millions)
2016
2015
2014
2016
versus
2015
Salaries and employee benefits
Salaries
Performance-based compensation
Share-based payments
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
$
4,071
1,538
243
1,173
$
4,019
1,438
220
1,004
$
3,680
1,473
270
1,124
$
7,025
$
6,681
$
6,547
428
89
431
948
1,290
2,238
325
359
684
442
617
693
356
47
403
$
$
$
$
$
$
$
$
433
89
421
943
1,143
2,086
303
281
584
434
592
548
319
42
361
$
$
$
$
$
$
$
$
392
82
415
889
1,047
1,936
297
229
526
417
571
471
276
38
314
$
$
$
$
$
$
$
$
Other
$
2,438
$
1,755
$
1,819
1%
7
10
17
5%
(1)
–
2
1%
13%
7%
7
28
17%
2%
4%
27%
12
12
12%
39%
Total non-interest expenses
$ 14,540
$ 13,041
$ 12,601
11%
Productivity ratio
55.2%
54.2%
53.4%
Non-interest expenses
$ millions
C4
16000
14000
12000
10000
8000
6000
4000
2000
14
15
16
Salaries & employee benefits
Premises & technology
Depreciation and amortization
Communications & advertising
Professional & taxes
Other
Direct and indirect taxes
$ millions
14
15
16
Provision for income taxes
Total other taxes
C5
3000
2500
2000
1500
1000
500
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-Interest Expenses
Non-interest expenses were $14,540 million, an increase of $1,499 million or 11% from the prior year.
The Bank took a restructuring charge this year of $378 million (refer T1). The restructuring will enable the Bank to enhance its customer experience,
drive a digital transformation and improve its productivity. The restructuring charge, recorded in the Other segment, arises from a structural cost
reduction program that relates primarily to changes in Canadian Banking and organization-wide structural changes. These strategic efforts will better
position the Bank for long-term growth.
Adjusting for the restructuring charge, the increase was $1,121 million or 9%. The increase was driven by acquisitions, higher performance-based
compensation, as well as initiative and volume-driven growth in technology, software amortization, professional fees, and deposit insurance. There
were also higher employee pension and benefit expenses as last year benefited from lower pension benefit costs related to modifications made to the
Bank’s main pension plan. These were partly offset by net savings of $55 million realized from structural cost reduction initiatives related to this year’s
restructuring charge, as well as the reorganization cost incurred in 2015.
The productivity ratio was 55.2%, or 53.7% on an adjusted basis (refer T1), compared to 54.2% in 2015.
Operating leverage was negative 1.9%. Adjusting for the restructuring charge, it was positive 1.0% (refer T1).
Outlook
Non-interest expenses are expected to rise in 2017, after adjusting for the 2016 restructuring charge. This is driven by business growth, ongoing
strategic and technology investments as well as higher pension and benefit expenses. The growth will be partly offset by savings from structural cost
reduction initiatives.
Income Taxes
The provision for income taxes was $2,030 million, an increase from $1,853 million last year. The Bank’s overall effective tax rate for the year was
21.6% compared to 20.4% for 2015. The increase in the effective tax rate was due primarily to lower tax-exempt income and higher taxes in foreign
jurisdictions this year.
Outlook
The Bank’s consolidated effective tax rate is expected to be in the range of 22% to 25% in 2017.
24 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Financial Results Review: 2015 vs. 2014
In order to identify key business trends between 2015 and 2014, commentary and the related financial results are below.
Net income
The Bank had net income of $7,213 million in 2015, compared to $7,298 million in 2014 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% in 2014.
The 2015 net income was positively impacted by an increase in net interest income, the 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 2015 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 $204 million pre-tax ($151 million after tax; approximately 3% of the pension liability), an increase to the collective
allowance against performing loans of $60 million pre-tax ($44 million after tax) to support the growing loan portfolio, and reorganization costs
related to the consolidation of Canadian shared services operations of $61 million pre-tax ($45 million after tax). These items were recorded in the
Other segment. The 2014 net income was impacted by several notable items (refer T15) totaling a net benefit of $301 million pre-tax or
$290 million after tax, or approximately 23 cents per share.
Net interest income
Net interest income increased $787 million or 6% to $13,092 million in 2015, primarily from growth in core banking assets and the favourable
impact of foreign currency translation. The core banking margin was stable at 2.39%.
Non-interest income
Non-interest income was $10,957 million, a decrease of $342 million from $11,299 million. The 2014 non-interest income was positively impacted
by notable items of $566 million (refer T15). In 2015, increases in wealth management and banking revenues and the positive impact of foreign
currency translation were partly offset by lower underwriting and advisory fees and lower net gains on investment securities.
Provision for credit losses
The total provision for credit losses was $1,942 million in 2015, up $239 million from 2014. 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. The 2015 provision also included a $60 million increase
in the collective allowance against performing loans. The 2014 provision included a notable item of $62 million related to a change in write-off
policy on unsecured bankrupt retail accounts in Canada.
Non-interest expenses
Non-interest expenses were $13,041 million in 2015, an increase of $440 million or 3% over 2014. 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. The 2014 non-interest expenses included notable items of $203 million (refer T15). Operating leverage was negative 1.5% on a
reported basis, or negative 0.7% after adjusting for the 2014 notable items.
Provision for income taxes
The provision for income taxes was $1,853 million, a decrease of $149 million from 2014. The Bank’s overall effective tax rate for 2015 was 20.4%
compared to 21.5% in 2014. The decrease in the effective tax rate was due primarily to higher tax-exempt income and lower earnings in higher tax
jurisdictions, partially offset by a lower tax rate on the notable gain in the prior year.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
T14 Financial Results Review
For the year ended October 31, 2015 ($ millions)(1)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income tax expense
Net income
Canadian
Banking
International
Banking
Global Banking
and Markets
Other(2)
Total
$
6,415
4,832
$ 11,247
687
6,014
1,202
$ 5,706
3,137
$ 8,843
1,128
5,095
568
$ 1,071
2,953
$ 4,024
67
1,846
558
$ (100)
35
$
(65)
60
86
(475)
$ 13,092
10,957
$ 24,049
1,942
13,041
1,853
$
3,344
$ 2,052
$ 1,553
$ 264
$
7,213
Net income attributable to non-controlling interests
–
199
–
–
199
Net income attributable to equity holders of the Bank
$
3,344
$ 1,853
$ 1,553
$ 264
$
7,014
(1) Taxable equivalent basis. Refer to Glossary.
(2) Includes all other smaller operating segments, including Group Treasury, and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and
provision for income taxes for the year ended October 31, 2015 – $390 to arrive at the amounts reported in Consolidated Statement of income, and differences in the actual amount of costs incurred and charged to the
operating segments.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended October 31, 2014 ($ millions)(1)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income tax expense
Net income
Net income attributable to non-controlling interests
Canadian
Banking
$
5,996
5,263
$ 11,259
663
5,799
1,113
$
3,684
1
International
Banking
Global Banking
and Markets
$ 5,155
2,945
$ 8,100
1,024
4,690
544
$ 1,842
226
$ 1,064
3,167
$ 4,231
16
1,880
665
$ 1,670
–
Other(2)
Total
$
$
90
(76)
14
–
232
(320)
$ 12,305
11,299
$ 23,604
1,703
12,601
2,002
$ 102
$
7,298
–
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 Glossary.
(2) Includes all other smaller operating segments, including Group Treasury and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and
provision for income taxes for the year ended October 31, 2014 – $354 million to arrive at the amounts reported in Consolidated Statement of Income, and differences in the actual amount of costs incurred and charged to
the operating segments.
2014 Notable Items
There were several notable items in 2014 totaling a net benefit of $290 million ($301 million pre-tax), or approximately 23 cents per share as
outlined in the table below.
T15 2014 Notable items
For the year ended October 31
($ millions, except EPS)
Gain on sale
Sale of holdings in CI Financial Corp.
Provision for credit losses
Unsecured bankrupt retail accounts in Canada
Valuation adjustments
Funding valuation adjustment
Revaluation of monetary assets in Venezuela
Legal provisions
Sub-total
Restructuring charges
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
Q3 2014 items
(1) Sale of majority of Bank’s holding in CI Financial Corp.
2014
Notes
Pre-tax
After-tax
EPS
Impact
1
2
3
4
5
6
$ 643
$ 555
$ 0.45
(62)
(30)
(47)
(55)
449
(148)
(46)
(22)
(47)
(40)
400
(110)
(0.04)
(0.02)
(0.04)
(0.03)
0.32
(0.09)
$ 301
$ 290
$ 0.23
$ 506
(81)
(38)
(86)
$ 301
$
(30)
596
566
(62)
(203)
$ 453
(74)
(27)
(62)
$ 290
$
(22)
508
486
(46)
(150)
$ 0.23
$ 301
$ 290
$ 0.23
The Bank sold a majority of its holding in CI Financial Corp. resulting in a $643 million pre-tax gain ($555 million after tax), or 45 cents per share. This included an unrealized gain of $174 million pre-tax, or
$152 million after tax, on the reclassification of the Bank’s remaining investment to available-for-sale securities.
Q4 2014 items
(2) 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.
(3) 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.
(4) 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 remeasured its net investment and monetary assets at the SICAD II rate (1 USD to 50 VEF). As a result, the Bank 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.
(5) Legal provision
The Bank recorded a legal provision of approximately $55 million ($40 million after tax) related to certain ongoing legal claims.
(6) Restructuring charges
The Bank recorded a restructuring charge of $148 million ($110 million after tax), the majority relating to employee severance charges. These charges will drive greater operational efficiencies. In Canada,
the charges relate to recent initiatives to centralize and automate several mid-office branch functions, as well as reductions in required wealth management operational support. In International Banking,
the charges are primarily for closing or downsizing approximately 120 branches, which will allow us to focus on high-growth markets, minimize branch overlap, and realize synergies resulting from recent
acquisitions. The Bank also made a series of changes to simplify its leadership structure and operating model, recorded in the Other segment.
26 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
Fourth Quarter Review
T16 Fourth Quarter Financial Results
($ millions)
Net Interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income tax expense
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Preferred shareholders
Common shareholders
Q4 2016 vs. Q4 2015
For the three months ended
October 31
2016
July 31
2016
October 31
2015
$ 3,653
3,098
$ 3,602
3,038
$ 3,371
2,754
6,751
550
3,650
540
6,640
571
3,505
605
6,125
551
3,286
445
$ 2,011
$ 1,959
$ 1,843
$
72
$
62
$
60
$ 1,939
31
$ 1,908
$ 1,897
37
$ 1,860
$ 1,783
29
$ 1,754
Net income
Net income was $2,011 million, an increase of $168 million or 9%. Strong asset growth and higher capital markets revenues were partly offset by
higher non-interest expenses and income taxes.
Net interest income
Net interest income was $3,653 million, an increase of $282 million or 8%. The increase was attributable primarily to growth in retail and commercial
loans in International Banking, credit cards, automotive loans and residential mortgages in Canadian Banking, and corporate loans in Global Banking
and Markets.
The core banking margin was 2.40%, up five basis points driven by higher margins across all business lines, partially offset by lower contribution from
asset/liability management activities in the Other segment.
Non-interest income
Non-interest income of $3,098 million was up $344 million or 12%. This was driven by higher banking fees, wealth management and trading
revenues, underwriting and other advisory fees and net income from investments in associated corporations. Gains on sale of real estate were largely
offset by lower net gains on investment securities.
Provision for credit losses
The provision for credit losses was $550 million, down $1 million. Last year’s increase in collective allowance against performing loans of $60 million
was mostly offset by higher provisions in Canadian Banking and International Banking.
Non-interest expenses
Non-interest expenses increased by $364 million or 11% to $3,650 million. Last year benefited from lower pension benefit costs, partly offset by the
reorganization costs relating to Canadian shared services. The increase was primarily due to higher performance and stock-based compensation,
acquisitions and continued investments in the business, including technology and professional expenses. This was partly offset by the favourable
impact of foreign currency translation and savings from structural cost reduction initiatives.
The productivity ratio was 54.1%, compared to 53.6%.
Income taxes
The tax rate was 21.2% compared to 19.4%, due primarily to lower tax-exempt income.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Q4 2016 vs. Q3 2016
Net income
Net income was $2,011 million, an increase of $52 million or 3% over the prior quarter. Higher revenues, lower provision for credit losses and lower
income taxes, were partly offset by higher non-interest expenses.
Net interest income
Net interest income was $3,653 million, an increase of $51 million or 1%. The increase was attributable to asset growth primarily in residential
mortgages and automotive loans in Canadian Banking, and retail loans in International Banking.
The core-banking margin was 2.40%, up two basis points, mostly from higher margins in Canadian Banking and Global Banking and Markets.
Non-interest income
Non-interest income was $3,098 million, up $60 million or 2%. Higher banking and wealth management revenues and contributions from associated
corporations were partly offset by lower underwriting and advisory fees. Gains on sale of real estate were offset by lower net gains on investment
securities.
Provision for credit losses
The provision for credit losses was $550 million, a decline from $571 million, due primarily to lower provisions in International Banking.
Non-interest expenses and productivity
Non-interest expenses were up $145 million or 4%. This was mainly due to continued investments in the business, including technology and
professional fees, and higher seasonal marketing expenses.
The productivity ratio was 54.1% compared to 52.8%.
Income taxes
The effective tax rate was 21.2% compared to 23.6%, due primarily to higher taxes in certain foreign jurisdictions in the previous quarter.
28 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
Trending Analysis
T17 Quarterly financial highlights
($ millions)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income tax expense
Net income
Basic earnings per share ($)
Diluted earnings per share ($)
Net income
For the three months ended
October 31
2016
July 31
2016
April 30
2016
January 31
2016
October 31
2015
July 31
2015
April 30
2015
January 31
2015
$ 3,653
3,098
$ 6,751
550
3,650
540
$ 3,602
3,038
$ 6,640
571
3,505
605
$ 3,518
3,076
$ 6,594
752
3,817
441
$ 3,519
2,846
$ 6,365
539
3,568
444
$ 3,371
2,754
$ 6,125
551
3,286
445
$ 3,354
2,770
$ 6,124
480
3,334
463
$ 3,198
2,739
$ 5,937
448
3,224
468
$ 3,169
2,694
$ 5,863
463
3,197
477
$ 2,011
$ 1,959
$ 1,584
$ 1,814
$ 1,843
$ 1,847
$ 1,797
$ 1,726
1.58
1.57
1.55
1.54
1.24
1.23
1.44
1.43
1.46
1.45
1.46
1.45
1.43
1.42
1.36
1.35
The Bank recorded strong net income over the past eight quarters. The second quarter of 2016 was impacted by a restructuring charge of
$378 million pre-tax, or $278 million after tax.
Net interest income
Net interest income rose throughout the year. Core banking assets increased steadily during 2016 from continuing growth in Latin America, and retail
loan growth in Canadian Banking, corporate loan growth in Global Banking and Markets, as well as the benefit from the impact of foreign currency
translation. The average balance of low-spread deposits with banks has declined since the fourth quarter of last year.
The core banking margin for the year was 2.38%, a one basis point decrease from last year. The margin was stable for the first three quarters, and
increased by five basis points in the fourth quarter.
Canadian Banking’s margin improved during the year mainly from growth in higher spread products, including credit cards and consumer automotive.
International Banking’s margin increased in each of the first three quarters, but declined slightly in the fourth quarter due to lower spreads in Chile,
Peru and the Caribbean. The banking margin in Global Banking and Markets increased each quarter during the year mainly due to higher deposit
interest and loan amortization fees, partly offset by lower spreads in the U.S. and Asia corporate loan portfolios. Lower contributions from asset/
liability management activities and higher funding costs in the Other segment had a dampening effect on the margin.
Non-interest income
Non-interest revenues grew during the first two quarters, declined in the third and rebounded in the fourth quarter. Banking revenues trended
upward during the year with strong growth in card fees in Canadian and International Banking. Mutual fund fees and retail brokerage fees were
strong in the first quarter, but dropped back in the second before climbing steadily through the second half of the year. Trading revenues recovered in
the last three quarters of the year, from the low levels experienced at the end of last year and the first quarter of the current year. The level of net
gains on investment securities reflected market opportunities.
Provision for credit losses
Provision for credit losses peaked in the second quarter, primarily in the energy sector, with declines in the third and fourth quarters. Loan loss ratios
in Canadian Banking increased slightly in the first three quarters, and declined by one basis point in the last quarter of the year. Overall provisions
were up slightly from last year due mainly to an increased mix of consumer loan and credit card volumes. International Banking provisions peaked in
the second quarter, and then declined in both the third and fourth quarters. The provision for credit losses in Global Banking and Markets was
impacted by softness in the energy sector, with increases in both the first and second quarters, before returning to more normalized levels in the
second half of the year.
Non-interest expenses
Non-interest expenses increased during the year. This was in part due to the impact of acquisitions, continued investment in growth initiatives, and
volume-related technology expenses. The restructuring charge taken in the second quarter and timing-related expenses, such as share and
performance-based compensation as well as advertising and business development costs, contributed to the quarterly fluctuations.
Income taxes
The effective tax rate ranged between 19.4% and 23.6% reflecting different levels of income earned in lower tax jurisdictions, as well as the
fluctuation of tax-exempt dividend income.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL CONDITION
T18 Condensed statement of financial position
As at October 31 ($ billions)
2016
2015
2014
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
$
54.8
108.6
$
84.5
99.1
$
64.0
113.2
92.1
72.9
480.2
87.7
87.3
43.2
458.6
83.8
93.9
38.7
424.3
71.6
$ 896.3
$ 856.5
$ 805.7
$ 611.9
$ 600.9
$ 554.0
97.1
121.8
7.6
77.0
118.9
6.2
89.0
108.6
4.9
$ 838.4
$ 803.0
$ 756.5
52.7
3.6
1.6
49.1
2.9
1.5
45.0
2.9
1.3
$
57.9
$
53.5
$
49.2
Total liabilities and shareholders’ equity
$ 896.3
$ 856.5
$ 805.7
Statement of Financial Position
Assets
C6 Loan portfolio
loans & acceptances, $ billions, as at
October 31
480
400
320
240
160
80
14
15
16
Business & government
Personal & credit cards
Residential mortgages
C7 Deposits
$ billions, as at October 31
600
500
400
300
200
100
14
15
16
Banks
Business & government
Personal
The Bank’s total assets as at October 31, 2016 were $896 billion, up $40 billion or 5% from October 31, 2015. This growth was primarily in loans and
trading assets, while higher investment securities were offset by lower deposits with financial institutions.
Cash and deposits with financial institutions decreased $28 billion due primarily to lower balances with the U.S. Federal Reserve. Securities purchased
under resale agreements and securities borrowed increased $5 billion.
Trading assets increased $9 billion or 10% from October 31, 2015, due primarily to an increase in trading securities from higher holdings of Canadian
and U.S. government debt and common equities.
Investment securities increased $30 billion or 69% from October 31, 2015, due primarily to an increase in held-to-maturity securities. As of October
31, 2016, the unrealized gain on available-for-sale securities, after the impact of qualifying hedges, decreased $241 million to $26 million due mainly
to realized gains on disposals.
Loans increased $22 billion or 5% from October 31, 2015. Residential mortgages increased $5 billion, mainly in Canada and Latin America. Personal
and credit card loans rose $8 billion, due mainly to organic growth in Canada and Latin America and the acquisition of the Canadian credit card
portfolio from JPMorgan Chase Bank. Business and government loans were up $9 billion across all business lines.
30 | 2 0 1 6 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
Liabilities
Total liabilities were $838 billion as at October 31, 2016, up $35 billion or 4% from October 31, 2015.
Total deposits increased $11 billion. Personal deposits grew by $9 billion mainly in Canada and Latin America.
Obligations related to securities sold under repurchase agreements and securities lent increased by $20 billion, mostly in line with higher trading
securities and securities purchased under resale agreements.
Equity
Total shareholders’ equity increased $4,342 million from October 31, 2015. This increase was driven by current year earnings of $7,368 million, the
issuance of common shares of $391 million mainly through the Dividend Reinvestment Plan and the exercise of options, and a net increase in
preferred shares of $660 million. This was partially offset by dividends paid of $3,598 million, distributions to non-controlling interests of $116 million,
other comprehensive loss of $229 million due primarily to an increase in the net pension obligation from a lower rate environment, as well as, the
repurchase and cancellation of approximately 1.5 million common shares for $80 million under the Normal Course Issuer Bid program.
Outlook
Assets and deposits are expected to continue to grow in 2017 across all business lines. In Canada, while growth in residential mortgages is expected
to remain moderate, other retail and commercial lending should continue to have good growth. Internationally, lending assets and personal 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 internal capital 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”. The framework encompasses medium term targets with respect to regulatory capital thresholds, earnings 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
Effective November 1, 2012, Canadian banks are subject to the revised capital adequacy requirements as published by the Basel Committee on
Banking Supervision (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). Under Basel III, there are three primary risk-based regulatory capital ratios used to assess capital
adequacy; Common Equity Tier 1 (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 share capital instruments issued after December 31, 2012, are required to meet these NVCC requirements to qualify as regulatory capital.
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 five year phase-in of new deductions and additional components to common equity. Non-
qualifying non-common capital instruments are being phased-out over 10 years and the capital conservation buffer is being phased-in over four years.
As of January 2019, banks will be required to meet new minimum requirements related to risk-weighted assets of: CET1 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%.
The Office of the Superintendent of Financial Institutions, Canada (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 five year period, beginning January 2014. In accordance with OSFI’s requirements, during 2016, 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, 2015 – scalars of 0.64, 0.71
and 0.77, respectively). The scalars will increase to 0.72, 0.77 and 0.81, respectively, effective in the first quarter of 2017.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 minimums of 7%, 8.5% and 10.5% for CET1, Tier 1 and
Total Capital ratios, respectively. OSFI has also designated the Bank a domestic systemically important bank (D-SIB), increasing its minimum capital
ratio requirements by 1% across all tiers of capital effective January 1, 2016, in line with the requirements for global systemically important banks.
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.
In 2014, OSFI released its Basel III Leverage Ratio Requirements Guideline and Public Disclosure Requirements which outlines the application and
disclosure 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.
In April 2016, OSFI published a consultative paper proposing updates to the capital requirements for residential mortgage loans in response to
evolving risks, such as risks associated with elevated house prices in certain markets, and increasing levels of household debt. The proposed changes
include a risk sensitive floor for loss given default (LGD) that will be tied to increases in local property prices and/or to house prices that are high
relative to borrower income. This will apply to banks using the advanced internal ratings-based approach to determining risk-weighted assets for
residential real estate secured lending. The proposed changes are published as draft requirements and are expected to be implemented in the first
quarter of 2017. New mortgage originations, refinances and mortgage renewals will be subject to the new rules on a go-forward basis.
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 internal 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 regulatory capital targets to ensure the Bank’s available capital is sufficient within the context of its risk appetite.
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 60 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 subordinated debentures, net of redemptions.
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 October 31, 2016 was 11.0%. Increases in the CET1 ratio from 2015 were primarily from strong internal capital generation
and the prudent management of asset growth during the year.
The Bank’s Basel III all-in Tier 1 and Total Capital ratios were 12.4% and 14.6%, respectively, as at October 31, 2016. Tier 1 and Total Capital also
benefited from capital issuances 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.
Outlook
The Bank will continue to have a strong capital position in 2017. Capital will be prudently managed to support: organic growth initiatives; selective
acquisitions that enhance shareholder returns; and higher capital requirements from evolving accounting and regulatory changes.
32 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
T19 Regulatory capital(1)
As at October 31 ($ millions)
Common Equity Tier 1 capital
Total Common Equity
Qualifying non-controlling interest in common equity of subsidiaries
Goodwill and non-qualifying intangibles, net of deferred tax liabilities(2)
Threshold related deductions
Net deferred tax assets (excluding those arising from temporary differences)
Other Common Equity Tier 1 capital deductions(3)
Common Equity Tier 1
Preferred shares(4)
Capital instrument liabilities – trust securities(4)
Other Tier 1 capital adjustments(5)
Net Tier 1 capital
Tier 2 capital
Subordinated debentures, net of amortization(4)
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
Tier 2 capital
Total regulatory capital
Risk-weighted assets ($ billions)
Credit risk
Market risk
Operational risk
CET1 risk-weighted assets(6)
Capital ratios(7)
Common Equity Tier 1
Tier 1
Total
Leverage:
Leverage exposures(8)
Leverage ratio(8)
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
Basel III All-in
2016
2015
2014
$
52,657
597
(11,589)
$
49,085
557
(11,018)
$ 44,965
514
(10,482)
(435)
(484)
(757)
(664)
(539)
(456)
(305)
(620)
(330)
39,989
36,965
33,742
3,594
1,400
83
2,934
1,400
67
2,934
1,400
(3)
45,066
41,366
38,073
7,633
528
103
–
8,264
6,182
486
196
–
6,864
4,871
468
180
–
5,519
53,330
48,230
43,592
314.8
10.6
38.6
308.0
14.4
35.6
261.9
17.3
33.3
$
364.0
$
358.0
$
312.5
11.0%
12.4%
14.6%
10.3%
11.5%
13.4%
$ 1,010,987
$ 980,212
4.5%
4.2%
10.8%
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 31). 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) 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.
(3) Other CET1 capital deductions under Basel III all-in include gains/losses due to changes in own credit risk on fair valued liabilities, pension plan assets and other items.
(4) Non-qualifying Tier 1 and Tier 2 capital instruments are subject to a phase-out period of 10 years.
(5) Other Tier 1 capital adjustments under the all-in approach include eligible non-controlling interests in subsidiaries.
(6) As at October 31, 2016, 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 0.64, 0.71, and 0.77 in 2015).
(7) 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 was 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.
(8) Effective November 1, 2014, the leverage ratio replaced the assets-to-capital multiple.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
T20 Changes in regulatory capital(1)
For the fiscal years ($ millions)
Total capital, beginning of year
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
Change in non-controlling interest in common equity of subsidiaries
Change in goodwill and other intangible assets (net of related tax liability)(2)
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
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 instruments
Changes in Tier 2 Capital
Total capital generated (used)
Total capital, end of year
Basel III All-in
2016
2015
2014
$ 48,230
$ 43,592
$ 38,841
6,987
(3,468)
391
(80)
(2)
(472)
40
(571)
199
55
61
126
(43)
6,897
(3,289)
104
(955)
(158)
1,451
43
(535)
(335)
81
(317)
44
(143)
6,916
(3,110)
771
(320)
410
35
(710)
3,391
132
2,583
941
(265)
$
3,024
$
3,223
$
7,383
1,350
(690)
16
$
676
$
2,502
(1,035)
42
(109)
–
–
70
70
1,250
–
17
78
–
(1,150)
(74)
$ (1,224)
–
(970)
(502)
64
$
$
1,400
5,100
$
$
1,345
4,638
$ (1,408)
$
4,751
$ 53,330
$ 48,230
$ 43,592
(1) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (refer to page 31). 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 capital.
(2) 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.
34 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
CET1 capital
%, as at October 31
C8
14
12
10
8
6
4
2
14
15
16
C9
Dividend growth
dollars per share
3
2
1
06
08
10
12
14
16
C10 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
14
15
16
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
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 $40.0 billion as at October 31, 2016, an increase
of $3.0 billion from the prior year primarily from:
(cid:129) $3.5 billion growth from internal capital generation;
(cid:129) $0.3 billion from net common share issuances under the Bank’s dividend reinvestment,
employee share purchase, and stock option plans; and,
(cid:129) $0.2 billion from decreases in other regulatory capital adjustments, including capital
deductions.
Partly offset by:
(cid:129) $0.6 billion increases in goodwill and intangibles (net of related tax liability) including the
impacts from the acquisition of JP Morgan Canadian Credit Card Business, Citibank Costa Rica
and Panama Retail Banking Operations.
(cid:129) $0.5 billion decrease from movements in Accumulated Other Comprehensive Income,
excluding cash flow hedges, primarily from employee benefits and available-for-sale securities
partly offset by impacts from foreign currency translation.
The Bank’s Tier 1 and Total capital ratios were also impacted by the above changes and the
issuances of $1.35 billion of NVCC preferred shares, partly offset by the redemption of
$690 million of non-NVCC preferred shares during the year. In addition, Total capital increased
mainly due to the issuance of approximately $2.5 billion of NVCC subordinated debentures,
partly offset by the $1.0 billion redemption of non-NVCC subordinated debentures during the
year.
Dividends
The strong earnings and capital position allowed the Bank to increase its dividends twice in 2016.
The annual dividend in 2016 was $2.88, compared to $2.72 in 2015, an increase of 6%. The
dividend payout ratio was 49.6% in line with the Bank’s Board approved target dividend payout
ratio of 40-50%.
T21 Selected capital management activity
For the fiscal years ($ millions)
2016
2015
2014
Dividends
Common
Preferred
Common shares issued(1)(2)
Common shares repurchased for cancellation under the Normal
Course Issuer Bid(2)
Preferred shares issued
Preferred shares redeemed
Subordinated debentures issued
Maturity, redemption and repurchase of subordinated debentures
$ 3,468
130
391
$ 3,289
117
104
$ 3,110
155
771
80
1,350
690
2,502
1,035
955
–
–
1,250
20
320
–
1,150
–
1,000
(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.
Normal Course Issuer Bid
During the year ended October 31, 2016, under normal course issuer bids, the Bank repurchased and cancelled approximately 1.5 million common shares
(2015 –15.5 million) at an average price of $52.34 per share (2015 – $61.64) for a total amount of approximately $80 million (2015 – $955 million).
On May 31, 2016, 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, which represented approximately 1% of the Bank’s common shares
issued and outstanding as of May 26, 2016. Purchases under the new bid commenced on June 2, 2016, and will end on the earlier of June 1, 2017,
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 not repurchased any common shares.
On May 29, 2015, the Bank announced that OSFI and the TSX approved its normal course issuer bid pursuant to which it may repurchase for
cancellation up to 24 million of the Bank’s common shares, which represented approximately 2% of the Bank’s common shares issued and
outstanding as of May 25, 2015. The bid ended on June 1, 2016. Under this bid, the Bank repurchased and cancelled approximately 9.5 million
common shares at an average price of $58.94 per share.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
Share data and other capital instruments
The Bank’s common and preferred share data, as well as other capital instruments, are shown in T22. Further details, including exchangeability
features, are discussed in Note 20 and Note 23 of the Consolidated Financial Statements.
T22 Shares and other instruments
As at October 31, 2016
Share data
Common shares(1)
Preferred shares
Preferred shares Series 16(2)
Preferred shares Series 17(2)
Preferred shares Series 18(2)(3)(4)
Preferred shares Series 19(2)(3)(5)
Preferred shares Series 20(2)(3)(6)
Preferred shares Series 21(2)(3)(7)
Preferred shares Series 22(2)(3)(8)
Preferred shares Series 23(2)(3)(9)
Preferred shares Series 30(2)(3)(10)
Preferred shares Series 31(2)(3)(11)
Preferred shares Series 32(2)(3)(12)
Preferred shares Series 33(2)(3)(13)
Preferred shares Series 34(2)(3)(14)(15)
Preferred shares Series 36(2)(3)(14)(16)
Preferred shares Series 38(2)(3)(14)(17)
Trust securities
Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust(18a,c,d)
Scotiabank Tier 1 Securities – Series 2009-1 issued by Scotiabank Tier 1 Trust(18b,c,d)
NVCC subordinated debentures
Subordinated debentures due March 2027
Subordinated debentures due December 2025(19)
Subordinated debentures due December 2025(20)
Options
Outstanding options granted under the Stock Option Plans to purchase common shares(1)(21)
Amount
($ millions)
Dividends
declared
per share
Number
outstanding
(000s)
$
15,513
$
2.88
1,207,894
345
230
187
158
201
149
234
66
154
111
279
130
350
500
500
1.312500
1.400000
0.837500
0.628938
0.902500
0.541438
0.957500
0.586438
0.455000
0.366438
0.638235
0.334959
1.184800
0.852350
–
Amount
($ millions)
$
750
650
Distribution
Yield (%)
28.25
39.01
5.650
7.802
Amount
($ millions)
$
US$
1,250
750
1,250
13,800
9,200
7,498
6,302
8,039
5,961
9,377
2,623
6,143
4,457
11,162
5,184
14,000
20,000
20,000
Number
outstanding
(000s)
750
650
Interest
Rate (%)
2.58
3.37
4.50
Number
outstanding
(000s)
19,852
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Dividends on common shares are paid quarterly, if and when declared. As at November 18, 2016, the number of outstanding common shares and options was 1,208,151 thousand and 19,594 thousand, respectively.
These preferred shares are entitled to non-cumulative preferential cash dividends payable quarterly.
These preferred shares have conversion features (refer to Note 23 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.
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.
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.
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.
Subsequent to the initial five-year fixed rate period which ended on February 1, 2016, 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 1.34%, 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 1.34%, multiplied by $25.00, which will be reset quarterly.
These preferred shares contain Non-Viability Contingent Capital (NVCC) provisions necessary for the shares to qualify as Tier 1 regulatory capital under Basel III. Refer to Note 23 of the Consolidated Financial Statements.
(13)
(14)
(15) On December 17, 2015, the Bank issued 14,000 thousand Non-cumulative 5-Year Rate Reset Preferred Shares Series 34 (NVCC) for $350 million. Dividends, if and when declared, are for the initial five-year period ending on
April 25, 2021. 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 4.51%, multiplied by
$25.00.
(16) On March 14, 2016, the Bank issued 20,000 thousand Non-cumulative 5-Year Rate Reset Preferred Shares Series 36 (NVCC) for $500 million. Dividends, if and when declared, are for the initial five-year period ending on
July 25, 2021. 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 4.72%, multiplied by
$25.00.
(17) On September 16, 2016, the Bank issued 20,000 thousand Non-cumulative 5-Year Rate Reset Preferred Shares Series 38 (NVCC) for $500 million. The initial dividend, if and when declared, will be payable on January 27, 2017.
Dividends, if and when declared are for the initial five-year period ending on January 26, 2022. 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 4.19%, multiplied by $25.00.
(18)(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 23 – Restrictions on dividend payments]. Under the circumstances
outlined in 18(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.
(18)(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 18(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.
36 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
(18)(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.
(18)(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 23 –
Restrictions on dividend payments].
(19) On December 8, 2015, the Bank issued $750 million subordinated debentures (NVCC) due December 8, 2025.
(20) On December 16, 2015, the Bank issued US$1.25 billion subordinated debentures (NVCC) due December 16, 2025.
(21)
Included are 57,800 stock options with tandem stock appreciation rights (Tandem SAR) features.
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit ratings
Credit ratings are one of the factors that 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 credit ratings and outlook that the rating agencies assign to the
Bank are based on their own views and methodologies.
The Bank continues to have strong credit ratings and is rated AA by DBRS, Aa3 by Moody’s, AA- by Fitch and A+ by Standard and Poor’s (S&P).
On December 11, 2015, S&P affirmed the Bank’s A+ rating for deposits and senior debt, as well as the A-1 rating for short-term instruments. The
Bank’s outlook was changed to stable from negative. The outlook change was predicated on S&P’s belief that the potential negative ratings impact
from the proposed bail-in regime has subsided, with a view that the implementation timetable could be two years or more to 2018 or later.
On January 25, 2016, Moody’s downgraded the Bank’s long-term ratings by one notch to Aa3 from Aa2, while affirming the Bank’s short-term
deposit rating of P-1.
On August 22, 2016, DBRS confirmed the Bank’s long and short-term rating of AA and R-1 (high), respectively.
On October 27, 2016, Fitch affirmed the Bank’s long and short-term rating of AA- and F1+, respectively.
Fitch and S&P have a stable outlook on the Bank. Meanwhile, DBRS and Moody’s continue to maintain their negative outlook for all Canadian banks
citing the uncertainty around the federal government’s proposed new bail-in regime for senior unsecured debt, 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 $364.0, $364.5 and
$364.9 billion, respectively at year end, representing increases from 2015 of approximately $6.0 billion. The increases are due to higher credit risk
RWA of approximately $6.8 billion (including the impact of foreign currency translation of $2.7 billion) and operational risk RWA of $3.0 billion, partly
offset by lower market risk RWA of $3.8 billion.
CET1 Credit risk-weighted assets
As shown in T23, CET1 credit risk-weighted assets increased by $6.8 billion to $314.8 billion primarily due to the following components:
(cid:129) Book quality changes increased RWA by $10.5 billion.
(cid:129) The implementation of the Internal Modeling Method for the determination of counterparty credit risk and credit valuation adjustment RWA
decreased RWA by $3.2 billion.
(cid:129) Implementation of methodology and policy changes during the year decreased RWA by $2.8 billion.
(cid:129) Higher RWA from acquisitions, net of divestitures, of $1.7 billion were mainly due to the acquisitions of JP Morgan Canadian Credit Card Business,
Citibank Costa Rica and Panama Retail Banking Operations.
(cid:129) The impact of foreign exchange translation increased RWA by $2.7 billion.
T23 Flow statement for Basel III All-in credit risk-weighted assets ($ millions)
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)
2016
2015
Credit risk
$ 308,035
1,781
10,542
(3,214)
(2,849)
1,672
2,731
(3,876)
$ 314,822
456
315,278
390
$ 315,668
Of which
counterparty
credit risk
$ 22,940
(4,082)
740
(3,214)
–
–
48
–
$ 16,432
456
16,888
390
$ 17,278
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
$ 24,398
Includes counterparty credit risk.
(1)
(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, 2016, 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 0.64, 0.71, and 0.77 in 2015).
38 | 2 0 1 6 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
T24 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% – 0.0510%
0.0510% – 0.1321%
0.0618% – 0.1517%
0.0969% – 0.2429%
0.1381% – 0.3383%
0.1969% – 0.4714%
0.3059% – 0.5239%
0.4751% – 0.5822%
0.5822% – 0.7380%
0.7380% – 1.4180%
1.4180% – 2.7248%
2.7248% – 9.9903%
9.9903% – 19.0626%
19.0626% – 35.9847%
35.9847% – 59.9872%
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.
T25 Non-retail AIRB portfolio exposure by internal rating grade(1)(2)
As at October 31 ($ millions)
2016
2015
Grade
IG Code
($)(4)
Exposure
at default
PD
(%)(5)(8)
LGD
(%)(6)(8)
RW
(%)(7)(8)
Exposure
at default
($)(4)
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
RWA
($)
878
6,458
8,540
10,326
14,189
16,704
20,502
14,955
11,830
6,063
4,682
2,078
2,447
4,901
178
8,106
66,127
45,031
52,357
42,398
40,162
37,926
36,135
23,941
15,941
7,307
4,692
1,297
1,221
2,465
100
2,520
379,620
132,837
100,869
–
480,489
132,837
0.01
0.06
0.07
0.13
0.18
0.25
0.36
0.51
0.74
1.42
2.73
9.99
19.05
28.77
59.28
100
1.20
–
0.95
18
30
37
37
41
44
46
43
46
40
43
41
40
37
43
42
36
25
34
1
14
16
24
35
44
57
62
74
83
100
160
200
199
178
322
35
–
28
RWA
($)
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
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
374,542
129,520
86,832
–
461,374
129,520
PD
(%)(5)(8)
LGD
(%)(6)(8)
RW
(%)(7)(8)
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
(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 $100.9 billion ($86.8 billion in 2015).
(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. Each of the Bank’s internal borrower IG codes is mapped to a PD estimate.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
(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
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 five-year AIRB requirement for PD estimates and the minimum
seven-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 T25.
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, re-calibrated and independently validated 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, 2016,
are shown in T26.
T26 Portfolio-level comparison of estimated and actual non-retail percentages
Average PD
Average LGD
Average CCF(2)
Estimated(1)
Actual
0.85
41.26
49.94
0.69
24.63
16.08
(1) Estimated parameters are based on portfolio averages at Q3/15, 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.
40 | 2 0 1 6 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
The table below summarizes the credit quality distribution of the Bank’s AIRB retail portfolio as at October 31, 2016.
T27 Retail AIRB portfolio exposure by PD range(1)(2)
As at October 31 ($ millions)
2016
2015
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
($)(2)
44,356
59,509
52,261
20,851
6,265
1,997
2,312
677
RWA
($)
964
4,417
12,483
10,961
6,028
2,926
3,682
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
Exposure
at default
($)(2)
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
0.04
0.15
0.54
1.75
5.34
10.77
35.12
30
31
42
53
61
67
56
74
38
2
7
24
53
96
147
159
–
22
49,414
59,484
53,094
21,545
5,551
2,213
2,521
611
RWA
($)
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
28
28
41
53
65
63
52
72
36
2
7
24
54
100
147
155
–
22
–
100.00
–
100.00
188,228
41,461
1.48
194,433
41,991
1.46
(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. Comparison of estimated and actual loss parameters
for the period ended July 31, 2016 are shown in Table T28. During this period the actual experience was significantly better than the estimated risk
parameters.
T28 Estimated and actual loss parameters(1)
($ millions)
Residential real estate secured
Residential mortgages
Insured mortgages(8)
Uninsured mortgages
Secured lines of credit
Qualifying revolving retail exposures
Other retail
Average
estimated
PD
(%)(2)(7)
Actual
default
rate
(%)(2)(5)
Average
estimated
LGD
(%)(3)(7)
Actual
LGD
(%)(3)(6)
Estimated
EAD
Actual
EAD
($)(4)(7)
($)(4)(5)
1.01
0.54
0.77
2.02
1.95
0.46
0.25
0.25
1.78
1.32
–
19.37
29.53
77.74
58.88
–
11.54
20.47
65.66
49.85
–
–
89
656
6
–
–
79
573
5
(1) Estimates and Actual Values are restated to align with new models implemented during the period.
(2) Account weighted aggregation.
(3) Default weighted aggregation.
(4) EAD is estimated for revolving products only.
(5) Actual based on accounts not at default as at four quarters prior to reporting date.
(6) Actual LGD calculated based on 24 month recovery period after default and therefore excludes any recoveries received after the 24 month period.
(7) Estimates are based on the four quarters prior to the reporting date.
(8) Actual and Estimated LGD for insured mortgages are not shown. Actual LGD includes the insurance benefit, whereas estimated LGD may not.
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.
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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 41
MANAGEMENT’S DISCUSSION AND ANALYSIS
Below are the market risk requirements as at October 31, 2016 and 2015:
T29 Total market risk capital
($ millions)
All-Bank VaR
All-Bank stressed VaR
Incremental risk charge
Comprehensive risk measure
Standardized approach
Total market risk capital(1)
(1) Equates to $10,571 of market risk-weighted assets (2015 – $14,350).
T30 Risk-weighted assets movement by key drivers
($ millions)
RWA 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
2016
$ 105
209
407
77
48
$ 846
$
2015
141
246
488
201
72
$ 1,148
Market risk
2016
2015
$ 14,350
(5,018)
1,239
–
$ 17,251
2,004
(2,723)
(2,182)
$ 10,571
$ 14,350
(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 $3.8 billion to $10.6 billion as shown in T30 primarily due to 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 received approval from OSFI to use the Advanced Measurement Approach (AMA) commencing the first quarter of 2017. 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. No significant capital increase is expected under AMA.
Operational risk-weighted assets increased by $3.0 billion during the year to $38.6 billion primarily due to organic growth in gross income and
acquisitions which closed during the year.
Internal capital
The Bank utilizes economic capital methodologies and measures to calculate internal capital. Internal capital is a measure of the unexpected losses
inherent in the Bank’s business activities. The calculation of internal 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 internal capital. The major risk categories included in
internal 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 internal 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 internal 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 internal capital is attributed, such as business risk, significant investments, insurance risk and real estate
risk.
In addition, the Bank’s measure of internal 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 internal capital amount.
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.
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 44).
42 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
All structured entities are subject to a rigorous review and approval process to ensure that all significant 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, 2016, total assets of consolidated structured entities were $59 billion, compared to $47 billion at the end of 2015. 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 14(a) to the consolidated financial statements.
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 $23 million in 2016 (October 31, 2015 – $18 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 14(b) to the consolidated
financial statements.
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 $22 million in 2016, compared to $17 million in 2015.
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 $5.8 billion as at
October 31, 2016 (October 31, 2015 – $3.9 billion). The year-over-year increase was due to normal business operations. As at October 31, 2016, total
commercial paper outstanding for the Canadian-based conduits was $4.4 billion (October 31, 2015 – $2.5 billion) and the Bank held less than 0.1%
of the total commercial paper issued by these conduits. Table T31 presents a summary of assets purchased and held by the Bank’s two Canadian
multi-seller conduits as at October 31, 2016 and 2015, by underlying exposure.
All of the funded assets have at least an equivalent rating of AA– or higher based on the Bank’s internal rating program. Assets held in these conduits
were investment grade as at October 31, 2016. Approximately 75% of the funded assets have final maturities falling within four years, and the
weighted-average repayment period, based on cash flows, approximates 1.8 years.
T31 Assets held by Scotiabank-sponsored Canadian-based multi-seller conduits
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
As at October 31 ($ millions)
Auto loans/leases
Trade receivables
Canadian residential mortgages
Equipment loans/leases
Total(3)
Funded assets are reflected at original cost, which approximates estimated fair value.
(1)
(2) Exposure to the Bank is through global-style liquidity facilities.
(3) These assets are substantially sourced from Canada.
2016
2015
Funded
assets(1)
Unfunded
commitments
Total
exposure(2)
Funded
assets(1)
Unfunded
commitments
Total
exposure(2)
$ 3,168
131
1,081
21
$ 4,401
$
601
618
194
–
$ 3,769
749
1,275
21
$ 1,200
131
1,082
78
$
573
614
193
2
$ 1,773
745
1,275
80
$ 1,413
$ 5,814
$ 2,491
$ 1,382
$ 3,873
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 43
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 $2,326 million as at October 31, 2016, (October 31, 2015 –
$2,330 million).
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 $1,968 million income from its involvement with
the unconsolidated Bank-sponsored structured entities for the year ended October 31, 2016 (for the year ended October 31, 2015 – $1,977 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 $1,237 million as at
October 31, 2016, compared to $1,366 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 13 to the
consolidated financial statements on page 173.
The Bank securitizes a portion of its Canadian lines of credit and credit card receivables (receivables) through two Bank-sponsored structured entities.
The receivables are comprised of unsecured personal lines of credit, securitized through Hollis Receivables Term Trust II (Hollis), and personal and small
business credit card receivables, securitized through Trillium Credit Card Trust II (Trillium). Hollis and Trillium issue Class A notes to third-party investors
and subordinated notes to the Bank, and the proceeds of such issuances are used to purchase co-ownership interests in the respective receivables
originated by the Bank. The sale of such co-ownership interests does not qualify for derecognition and therefore the receivables continue to be
recognized on the Consolidated Statement of Financial Position. Recourse of the note holders is limited to the purchased co-ownership interests.
During the year, no receivables were securitized through Hollis (2015 – $1,145 million) and $1,242 million were securitized through Trillium. The
subordinated notes issued by Hollis of $297 million (2015 – $399 million) and Trillium of $99 million, both held by the Bank, are eliminated on
consolidation.
The Bank securitizes a portion of its Canadian auto loan receivables (receivables) through Securitized Term Auto Receivables Trust 2016-1 (START), a
Bank-sponsored structured entity. START issues multiple series of Class A notes to third-party investors and subordinated notes to the Bank, and the
proceeds of such issuances are used to purchase a discrete pool of retail indirect auto loan receivables from the Bank on a fully serviced basis. The sale
of such pool does not qualify for derecognition and therefore the receivables continue to be recognized on the Consolidated Statement of Financial
Position. Recourse of the note holders is limited to the receivables. During the year, $740 million of assets were securitized through START. The
subordinated notes issued by START of $45 million, held by the Bank, are eliminated on consolidation.
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, 2016, these amounted to $35 billion, compared to $31 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, 2016, these commitments amounted to
$174 billion, compared to $166 billion last year. The year-over-year increase primarily reflects an increase in foreign currency denominated business
activity.
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.
Fees from the Bank’s guarantees and loan commitment arrangements, recorded as credit fees in other income in the Consolidated Statement of
Income, were $574 million in 2016, compared to $489 million in the prior year. Detailed information on guarantees and loan commitments is
disclosed in Note 35 to the consolidated financial statements.
44 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
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 or 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.
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 write-downs
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. 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 60 to 98. In addition,
Note 35 to the consolidated financial statements 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 83. For trading activities, T50 discloses the average one-day
Value at Risk by risk factor. For derivatives, based on the Bank’s maturity profile of derivative instruments, only 16% (2015 – 14%) had a term to
maturity greater than five years.
Note 9 to the consolidated financial statements 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 6 to the consolidated financial statements 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 $2,148 million as at October 31, 2016
(October 31, 2015 – favourable $2,410 million). This difference relates mainly to loan assets, deposit liabilities, subordinated debentures and other
liabilities. The year-over-year change in the fair value over carrying value arose mainly from changes in interest rates since origination. Fair value
estimates are based on market conditions as at October 31, 2016, and may not be reflective of future fair values. Further information on how fair
values are estimated is contained in the section on critical accounting estimates on page 99.
Disclosures specific to certain financial instruments designated at fair value through profit or loss can be found in Note 8 to the consolidated financial
statements. These designations were made primarily to significantly reduce accounting mismatches.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 45
MANAGEMENT’S DISCUSSION AND ANALYSIS
Selected Credit Instruments – Publically Known Risk Items
Mortgage-backed securities
Total mortgage-backed securities held in the non-trading and trading portfolios are shown in T32.
T32 Mortgage-backed securities
As at October 31
Carrying value ($ millions)
Canadian NHA mortgage-backed securities(1)
Commercial mortgage-backed securities
Other residential mortgage-backed securities
Total
2016
2015
Non-trading
portfolio
Trading
portfolio
Non-trading
portfolio
Trading
portfolio
$ 1,591
–
521
$ 1,546
57
–
$ 137
2
206
$ 1,335
113
3
$ 2,112
$ 1,603
$ 345
$ 1,451
(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, 2016, the carrying value of cash-based CLOs reported as loans on the Consolidated Statement of Financial Position was $14 million
(October 31, 2015 – $34 million). The fair value was $7 million (October 31, 2015 – $28 million). The year-over-year decline was due to paydowns.
None of these cash-based CLOs are classified as impaired loans. Substantially all of the referenced assets of the Bank’s CLOs are corporate exposures,
without any U.S. mortgage-backed securities.
Trading portfolio
The Bank also holds synthetic CDOs in its trading portfolio as a result of structuring and managing transactions with clients and other financial
institutions. To hedge its trading exposure, the Bank purchases or sells CDOs to other financial institutions, along with purchasing and/or selling index
tranches or single name credit default swaps (CDSs). The main driver of the value of CDOs and CDSs is changes in credit spreads. Total CDOs
purchased and sold in the trading portfolio are shown in T33 below.
T33 Collateralized debt obligations (CDOs)
As at October 31
Outstanding ($ millions)
CDOs – sold protection
CDOs – purchased protection
2016
2015
Notional
Amount
$ 142
–
$
Positive/
(negative)
fair value
$ 4
$ –
Notional
Amount
$ 1,977
$ 1,776
Positive/
(negative)
fair value
$ 24
$ (8)
The change in the notional amount and fair value of CDOs were due mainly to trades that matured or 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, 2016, a 50 basis point widening of relevant credit spreads in this portfolio would result in a pre-tax decrease of approximately
$2.0 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, 2016, 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.
46 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
BUSINESS LINE OVERVIEW
Business line results are presented on a taxable equivalent basis, adjusting for the following:
(cid:129) The Bank analyzes revenue on a taxable equivalent basis (TEB) for business lines. 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. 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.
(cid:129) 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.
Below are the results of the Bank’s three business operating segments for 2016:
CANADIAN BANKING
Canadian Banking reported net income to equity holders of $3,736 million, up 12% from last year. Solid asset and deposit growth, along with
increasing margin driven by credit cards and deposits, gain on sale of a non-core lease financing business and higher non-interest income contributed
to this increase. This was partially offset by higher provision for credit losses and non-interest expenses. Return on equity was 22.0% compared to
21.0% last year.
INTERNATIONAL BANKING
International Banking had net income attributable to equity holders of $2,079 million, up $226 million or 12% from last year. Results benefited from
strong asset and fee growth and the positive impact of foreign currency translation. This was partly offset by higher provision for credit losses. Return
on equity was 12.8%, compared to 13.0% last year.
GLOBAL BANKING AND MARKETS
Global Banking and Markets reported net income attributable to equity holders of $1,571 million, an increase of $18 million from last year. Strong
revenue performances in the fixed income, corporate lending and commodities businesses, were mainly offset by higher provision for credit losses and
lower results in equities. Return on equity was 12.6% compared to 13.0% last year.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
B
U
S
I
N
E
S
S
L
I
N
E
S
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 47
MANAGEMENT’S DISCUSSION AND ANALYSIS
KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES
Management uses a number of key metrics to monitor business line performance:
(cid:129) Net income
(cid:129) Return on equity
(cid:129) Productivity ratio
(cid:129) Provision for credit losses ratio
(cid:129) Employee engagement
T34 2016 Financial performance
($ millions)
Net interest income(2)
Non-interest income(2)
Total revenue(2)
Provision for credit losses
Non-interest expenses
Income tax expense(2)
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Return on equity (%)(3)
Average assets ($ billions)
Average liabilities ($ billions)
Canadian
Banking
International
Banking
Global Banking
and Markets
Other(1)
Total
$
7,024
5,164
12,188
832
6,324
1,296
$
3,736
–
3,736
22.0%
309
232
$
$
$
$ 6,359
3,482
9,841
1,281
5,523
707
$ 2,330
251
$ 2,079
12.8%
143
109
$
$
$ 1,293
3,139
4,432
249
2,040
572
$ 1,571
–
$ (384)
273
(111)
50
653
(545)
$ (269)
–
$ 1,571
$ (269)
12.6%
351
270
$
$
–%
$ 111
$ 247
$
$
$
$ 14,292
12,058
26,350
2,412
14,540
2,030
$
7,368
251
7,117
13.8%
914
858
(1) 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.
(2) Taxable equivalent basis.
(3) Refer to Glossary.
48 | 2 0 1 6 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
A
N
A
D
I
A
N
B
A
N
K
I
N
G
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.
2016 Achievements
(cid:129) Delivered an industry-leading customer experience across our businesses and channels.
(cid:129)
(cid:129)
(cid:129)
Launched two new customer-focused branch formats – Scotiabank Express in Guelph and Montreal and Scotiabank Solutions in
Guelph and Kitchener. Also, launched the Network Transformation Wave Pilot to improve the customer and employee experience.
Scotiabank received a record nine awards in the 2016 Ipsos Best Banking Awards, placing 2nd among the Big Five Banks for Overall
Service Quality.
Tangerine earned the highest ranking in customer satisfaction among mid-sized banks for the fifth straight year in the 2016 J.D. Power
Canadian Retail Banking Customer Satisfaction Study.
For the eleventh year in a row, Tangerine was recognized as a customer service leader in the Ipsos Best Banking Awards.
(cid:129)
(cid:129) Contact centres for Scotiabank (Halifax) and ScotiaLife Financial both received Contact Centre World Class First Call Resolution
(FCR) Certification from the Service Quality Management (SQM) Group.
(cid:129) Delivered industry-leading solutions to enhance the customer experience, including best-in-class processes for mortgage, credit
(cid:129)
card, small business loan applications and branch onboarding.
Launched new Scotia Wealth Management brand – “Enriched Thinking” – one unified voice, one strong brand, and one
integrated approach to serving client needs.
(cid:129) HollisWealth ranking moved up from fourth place in 2015 to secure third place in the J.D. Power 2016 Canadian Full Service
Investor Satisfaction Study.
(cid:129) Further optimized our business mix by growing our higher margin assets, building sticky core deposits, and earning higher fee
income.
(cid:129)
Two popular co-brand credit cards from Scotiabank – the Scotiabank GM Visa Infinite card and the Scotiabank SCENE Visa card – were
recognized with highest honours in the 2015 MoneySense Annual Credit Cards Ranking.
Launched the Scotiabank More Rewards Visa in partnership with Western Canada based grocer Overwaitea Food Group.
Successfully completed the acquisition of the JPMorgan Chase MasterCard portfolio.
(cid:129)
(cid:129)
(cid:129) Completed the sale of Roynat’s non-core lease financing business.
(cid:129)
(cid:129)
(cid:129) Record year for life insurance revenue driven by Private Banking, Private Investment Counsel, and stronger partnership with Financial
Tangerine won the 2016 Product of the Year award for the Tangerine Money-Back Credit Card.
Scotiabank iTRADE selected by MoneySense Magazine as a Top 3 pick in best online brokerages in Canada.
Planning specialists.
(cid:129) Dynamic Funds won five Fundata FundGrade A+ Awards.
(cid:129) Made significant investments to become a digital banking leader.
(cid:129) Named the 2016 World’s Best Consumer Digital Bank in Canada by Global Finance Magazine.
(cid:129)
(cid:129)
(cid:129)
Tied for highest overall score in the 2016 Canadian Mobile Banking Functionality Benchmark by Forrester Research.
Tied for third place overall in the 2016 Global Mobile Banking Functionality Benchmark by Forrester Research.
Tangerine named the industry leader in Canadian Mobile Banking Services according to Surviscor’s 2015 Mobile Banking scorecard
Review. Scotiabank came in at #2.
Launched Apple Pay. All Scotiabank customers can now use mobile payments through Apple Pay (for iPhone) and My Mobile Wallet
(for Android and Blackberry).
(cid:129)
Business Profile
Canadian Banking provides a full suite of financial advice and banking solutions, supported by an excellent customer experience, to over 10 million
Retail, Small Business, Commercial Banking, and Wealth Management customers. It serves these customers through its network of 980 branches and
more than 3,500 automated banking machines (ABMs), as well as internet, mobile and telephone banking and specialized sales teams. Canadian
Banking also provides an alternative self-directed banking solution to over two million Tangerine Bank customers. Canadian Banking is comprised of
the following areas:
(cid:129) Retail and Small Business Banking provides financial advice and solutions and day-to-day banking products, including debit cards, chequing
accounts, credit cards, investments, mortgages, loans and related creditor insurance products, to individuals and small businesses. Tangerine Bank
provides day-to-day banking products, including chequing and saving accounts, credit cards, and investments to self-directed customers.
(cid:129) Commercial Banking delivers advice and a full suite of 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.
(cid:129) Wealth Management provides a suite of investment and wealth management advice, services, products and solutions to customers, as well as
advisors. The asset management business is focused on developing investment solutions for both retail and institutional investors. The customer-
facing wealth businesses, including private customer, online brokerage, full-service brokerage, pensions, institutional customer services and an
independent advisor channel, are focused on providing a full suite of wealth management solutions to our customers.
Strategy
Canadian Banking continues to execute on a long term strategy to deliver a best-in-class customer experience, grow its primary banking relationships,
and outperform competitors in earnings growth through customer experience, business mix, operational improvements and digital transformation.
2017 Priorities
(cid:129) Customer experience: Deliver an excellent customer experience across our businesses and channels.
(cid:129) Business mix: Optimize our business mix by growing higher margin assets, building core deposits, and earning higher fee income.
(cid:129) Operational improvement: Reduce structural costs to build the capacity to invest in our businesses and technology.
(cid:129) Digital transformation: Enhance our digital offering and e-commerce capabilities to drive digital sales and engagement.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 49
MANAGEMENT’S DISCUSSION AND ANALYSIS
T35 Canadian Banking financial performance
($ millions)
Net interest income(1)
Non-interest income(1)(2)
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 equity(3)
Productivity(1)
Net interest margin(4)
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
Other ($ billions) as at October 31
Assets under administration
Assets under management
(1) Taxable equivalent basis.
(2) Includes net income from investments in associated corporations of $78 (2015 – $66; 2014 – $157).
(3) Refer to Glossary.
(4) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
2016
7,024
5,164
12,188
832
6,324
1,296
3,736
–
3,736
$
$
$
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
$
$
$
22.0%
51.9%
2.38%
0.28%
21.0%
53.5%
2.23%
0.23%
22.8%
51.5%
2.14%
0.23%
$ 302,648
309,232
224,006
232,498
$ 293,460
299,929
210,241
217,753
$ 284,966
291,549
202,088
208,354
$
$
318
145
$
$
310
135
$
$
296
124
50 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Financial Performance
Canadian Banking’s net income attributable to equity holders was $3,736 million in 2016, an increase
of $392 million or 12%. The gain on the sale of a non-core lease financing business (“the gain on
sale”) of $116 million pre-tax or $100 million after tax contributed 3% growth to net income. Strong
performance from retail and small business banking, commercial banking and wealth management,
as well as the impact of the credit card portfolio acquired from JPMorgan Chase Bank (“the
acquisition”) contributed to the growth.
Assets and liabilities
Average assets rose $9 billion or 3% to $309 billion. 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 8% in personal loans primarily in consumer automotive
lending and credit cards, $5 billion or 3% in residential mortgages, as well as $3 billion or 9% in
business loans and acceptances.
Average liabilities rose $14 billion or 7% to $232 billion. Retail banking experienced solid growth
in chequing accounts of $2 billion or 9% and savings deposits of $8 billion or 14%. There was
also growth of $2 billion or 4% in small business and commercial banking business operating
accounts and $4 billion or 25% in wealth management deposits. Partially offsetting was a decline
in lower spread GICs of $2 billion or 2%.
Assets under management (AUM) and assets under administration (AUA)
AUM of $145 billion increased $10 billion or 7% driven by market appreciation and net sales.
AUA increased $8 billion or 3% to $318 billion driven by market appreciation.
Revenues
Canadian Banking reported total revenues of $12,188 million in 2016, up $941 million from last
year, including the gain on sale.
Net interest income increased $609 million or 9% to $7,024 million. The increase was driven by a 15
basis point increase in the margin to 2.38%, strong growth in assets and deposits, and the impact of
the acquisition. The increase in margin was primarily driven by growth in higher margin credit cards,
margin expansion in deposits, the run-off of lower spread Tangerine mortgages, and the acquisition.
Non-interest income increased $332 million or 7% to $5,164 million. The increase was driven by
strong growth in credit cards, retail and commercial banking, insurance and wealth management
businesses and includes gains on sale of real estate and the non-core lease financing business.
Retail & Small Business Banking
Total retail and small business banking revenues were $6,843 million, up $607 million or 10%.
Net interest income grew $428 million or 9%, primarily driven by a 16 basis point improvement
in the margin and solid growth in credit card products and deposits. Non-interest income
increased $179 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 $274 million or 15% to $2,133 million, including
the gain on sale. Net interest income rose $135 million or 9% due mainly to growth in loans and
business operating accounts and a margin expansion of six basis points. Non-interest income
increased $139 million or 33% mainly driven by the gain on sale and higher acceptance fees.
Wealth Management
Total wealth management revenues were $3,212 million, an increase of $60 million or 2%. Net
interest income rose $46 million or 15% mainly due to growth in deposits and loans. Non-
interest revenues increased $13 million from higher investment management fees and growth in
mutual funds revenues as a result of net sales and market appreciation. Partly offsetting these
increases was lower transaction based brokerage fees.
Non-interest expenses
Non-interest expenses were $6,324 million, an increase of $310 million or 5%, primarily
reflecting the impact of the acquisition, technology and project spending, partially offset by
benefits realized from cost reduction initiatives. Operating leverage was positive 3.2%, or 2.2%
adjusting for the gain on sale.
Provision for credit losses
The provision for credit losses in Canadian Banking was $832 million, an increase of $145 million.
The provision for credit losses was higher due to growth in retail portfolios, primarily in credit
cards and auto loans, with additional increases from commercial provisions, partly offset by
acquisition-related benefits. The provision for credit losses ratio was 28 basis points, compared to
23 basis points in the prior year due to growth in higher margin products.
Provision for income taxes
The effective tax rate decreased to 25.8%, compared to 26.4% in the previous year.
Outlook
Canadian Banking’s growth in 2017 will be driven in part by an improving economic outlook for
Canada. Assets are projected to grow across retail mortgages, automotive, commercial loans and
credit cards. Deposits are also expected to grow across retail chequing and savings, small business
and commercial deposits. Margins are expected to be stable to slightly increasing during 2017.
Provisions for credit losses will rise reflecting primarily a changing asset mix. Wealth management
is expected to see continued growth in 2017. Expense management continues to be a focus that
will lead to further improvements in productivity.
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
C11 Total revenue
$ millions
26%
18%
56%
Retail & Small Business Banking
Commercial Banking
Wealth Management
C12 Total revenue by sub-segment
$ millions
12000
10000
8000
6000
4000
2000
14
15
16
Wealth Management
Commercial Banking
Retail & Small Business Banking
C13 Average loans and acceptances
$ billions
300
250
200
150
100
50
14
15
16
Commercial loans/acceptances
Retail loans (except mortgages)
Residential mortgages
C14 Canadian wealth management assets
$ billions, as at October 31
350
300
250
200
150
100
50
175
150
125
100
75
50
25
14
15
16
Assets under administration (left scale)
Assets under management (right scale)
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 51
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
2016 Achievements
(cid:129) Improved customer experience across our businesses and channels.
(cid:129) Developed 4 new retail branch prototypes in Mexico City to focus on improving customer experience.
(cid:129)
(cid:129) Named Scotiabank “World’s Best Emerging Market Bank 2016” in the Bahamas, Barbados, Costa Rica, Trinidad & Tobago, Turks & Caicos and
Launched the Net Promoter System (NPS) to build customer advocacy across the Pacific Alliance and Canada.
The U.S. Virgin Islands by Global Finance Magazine.
(cid:129) Achieved Service Quality Measurement World Class Certification and recognition at the 2015 SQM Conference Awards for our contact centres
in Mexico, Jamaica and the Dominican Republic.
(cid:129) Further optimized our business mix by growing high-yielding assets, building sticky core deposits, and earning higher fee income.
Introduced new Premium Banking Model in eight branches in Peru.
(cid:129)
(cid:129) Achieved leading bookrunner by volume in Latin America (Thomson Reuters).
(cid:129) Renewed partnership with Cencosud in Colombia to target new credit card customers.
(cid:129)
Extended ATM alliance to Mifel and Actiniver (regional financial services providers) in Mexico to provide customers with access to a broader self-
service network.
(cid:129) Made significant investments to become a digital banking leader.
(cid:129)
(cid:129)
Launched the Global Digital Banking Organization including stand-alone Digital Banking Units in Mexico, Peru, Chile and Colombia.
Launched significant enhancements to Online and Mobile Banking platforms in Mexico.
(cid:129) Redeployed new Online and Mobile Banking platforms in the Caribbean.
(cid:129) Recognized as the #1 Global Bank with the Best Digital Strategy for 2016 by Retail Banker International.
(cid:129) Named the “World’s Best Consumer Digital Bank 2016” in Latin America, the Caribbean and Canada for 2016 by Global Finance magazine.
(cid:129)
Launched fintech partnership with Kabbage in Mexico and Canada to provide customers with real-time credit adjudication.
Business Profile
International Banking (IB) has a well-established, diversified franchise that serves more than 14 million Retail, Corporate, and Commercial customers
across our footprint. These customers are supported by over 50,000 employees, 1,800+ branches, and a network of contact and business support
centres. IB is focused on Latin America, including the Pacific Alliance countries of Mexico, Peru, Chile and Colombia, and the Caribbean and Central
America.
We believe the Pacific Alliance countries offer excellent opportunities for growth with young demographics, low banking penetration, growing
economies, low consumer indebtedness and stable banking systems. The Caribbean and Central American markets are more mature and have lower
growth, but are still very profitable.
Strategy
International Banking continues to pursue: (i) a growth strategy in the Pacific Alliance countries and (ii) an optimization strategy in the Caribbean and
Central American countries.
Our strategy is organized around five key areas:
(cid:129) Customer focus – Increase the number of primary customers in target segments by creating a simpler and more compelling digital customer
experience, and a systematic approach to gathering and acting upon customer feedback.
(cid:129) Digital transformation – Drive digital adoption and sales for customers through digital customer-facing and internal processes and increase our
operational efficiency.
(cid:129) Business mix alignment – Optimize the business mix by growing core deposits, targeting more profitable products, balancing portfolio growth,
and closely managing our usage of wholesale funding.
(cid:129) Structural costs transformation – Optimize the operating model and footprint to lower structural costs, reduce complexity, digitize processes,
leverage scale and ultimately improve productivity.
(cid:129) Leadership – Make leadership a competitive advantage by actively acquiring, developing and engaging a diverse pool of leaders to deepen bench
strength and reflect our growth markets.
2017 Priorities
Aligned to our strategy and in addition to the growth in our core business, our primary focus is on the following key growth initiatives over the next
3-5 years:
1. Customer focus: Launch Net Promoter System (NPS) across Peru, Chile, Colombia and Mexico to provide our employees and leadership with
timely and specific customer feedback.
2. Digital transformation: Establish digital banking organizations within our Pacific Alliance operations to drive greater digital adoption and sales.
3. Business mix: Enhance business mix by growing core deposits to reduce funding costs along with growing in targeted profitable segments/
products.
4.
Structural costs transformation: Continue cost reduction programs to lower expenses and use the savings to fund strategic initiatives, make
investments in technology, and improve productivity.
52 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
T36 International Banking financial performance
($ millions)
Net interest income(1)
Non-interest income(1)(2)
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 equity(3)
Productivity(1)
Net interest margin(4)
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
Other ($ millions as at October 31)
Assets under administration
Assets under management
Includes net income from investments in associated corporations of $473 (2015 – $476; 2014 – $411).
(1) Taxable equivalent basis.
(2)
(3) Refer to Glossary.
(4) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
2016
6,359
3,482
9,841
1,281
5,523
707
2,330
251
2,079
$
$
$
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
1,616
$
$
$
12.8%
56.1%
4.71%
1.26%
13.0%
57.6%
4.71%
1.24%
11.7%
57.9%
4.75%
1.27%
$ 135,167
142,582
87,508
109,302
$ 121,130
128,248
73,946
94,340
$ 108,717
114,996
65,025
84,969
$
$
85,888
47,287
$
$
80,606
43,560
$
$
71,587
41,125
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 53
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Performance
Net income attributable to equity holders was $2,079 million, an increase of $226 million or
12%. Earnings from strong asset and fee growth, including the positive impact of foreign
currency translation, were partly offset by higher provision for credit losses. Strong underlying
asset and fee growth in Latin America and a solid contribution from Caribbean & Central
America, were complemented by earnings in Asia.
Assets and Liabilities
Average assets of $143 billion increased $14 billion or 11%, driven by strong retail and commercial
loan growth of 11% and 12% respectively. Latin America primarily drove the growth in lending
assets with retail and commercial assets increasing 11% and 14%, respectively. Caribbean and
Central America saw retail assets increase by 12% with commercial assets up 6%. Average liabilities
increased $15 billion or 16% to $109 billion largely due to 18% growth in deposits, including
demand and savings deposits up 16%, partly offset by lower securities sold under repurchase
agreements down 20%.
Revenues
Total revenues of $9,841 million increased $998 million or 11%. Net interest income increased 11%
driven by strong loan growth and recent acquisitions. The net interest margin was stable at 4.71%.
Non-interest income increased $345 million or 11%. This increase was largely driven by higher net fee
and commission revenues which increased 10% to $2,579 million with higher banking and wealth
management fees across Latin America and the Caribbean. Other operating income rose by
$104 million or 14% due mainly to foreign exchange hedge related gains, higher acquisition benefits,
and insurance revenues, partly offset by lower net gains on investment securities.
Latin America
Total revenues of $6,455 million increased 10% from last year, or 16% adjusting for the negative
impact of foreign currency translation. Non-interest income was up $191 million or 10%. Net
interest income increased $418 million or 11%, reflecting the impact of strong asset growth and
a stable net interest margin. Net fee and commission revenues increased by $174 million or 10%
largely driven by higher transaction, credit card fees, wealth management fees, and foreign
exchange fees. Other non-interest income increased by $17 million, due mainly to foreign
exchange hedge related gains, higher acquisition-related benefits, and trading revenues, partly
offset lower net gains on investment securities.
Caribbean and Central America
Total revenues were $2,967 million, up 14% versus last year or 7% adjusting for the positive
impact of foreign currency translation. Net interest income increased $234 million or 13%, driven
by positive foreign currency translation and acquisitions of Citi Central America. Non-interest
income including net fees and commissions was up 16%, or 7% adjusting for foreign currency
translation, as a result of strong growth in banking, credit card and foreign exchange fees, and
higher insurance revenues, and hedge gains vs losses last year.
Asia
Total revenues were $419 million, up 6% versus last year, or down 3% adjusting for the positive
impact of foreign currency translation. This was primarily driven by a lower contribution from
Thanachart Bank, partly offset by a higher contribution from Bank of Xi’an.
Non-interest expenses
Non-interest expenses of $5,523 million increased $428 million or 8% from last year. The increase
reflected the impact of acquisitions, business volume growth and inflationary increases, partly offset
by the positive impact of foreign currency translation. Operating leverage was a positive 2.9%.
Provision for credit losses
The provision for credit losses increased $153 million or 14% to $1,281 million. Retail provisions
were flat compared to 2015. Increases from acquisitions and higher provisions for credit losses in
Latin America from strong retail growth were offset by favourable foreign currency translation.
Commercial provisions for credit losses increased mainly in Colombia, primarily the energy sector,
and Puerto Rico. Overall, the provision for credit losses ratio was stable, up two basis points to
1.26% relative to last year.
Provision for income taxes
The effective tax rate was 23.3% compared to 21.7% last year due primarily to lower tax
benefits in Mexico and the Caribbean.
Outlook
International Banking’s growth in 2017 will be achieved through leveraging its diversified
footprint, with particular focus on the Pacific Alliance countries. Despite moderation of economic
growth in the Pacific Alliance countries, we expect to continue to deliver low double digit loan
growth in this region. Margins and credit quality are expected to remain stable. Expense
management and delivering positive operating leverage remains a key business priority, with
strategic investments in optimizing the business structure and delivering a stronger customer
experience being funded through internal structural cost reduction programs. While the primary
business focus is on organic growth, acquisition opportunities will continue to be considered that
are strategically aligned and complement current operations within the existing footprint.
54 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
C15 Total revenue
4.3%
30.2%
65.5%
Caribbean and Central America
Latin America
Asia
C16 Total revenue by region
$ millions
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
14
15
16
Asia
Caribbean and Central America
Latin America
C17 Average loans and acceptances
$ billions
100
80
60
40
20
14
15
16
Residential mortgages
Retail loans (except mortgages)
Business loans/acceptances
C18 Average earning assets(1) by region
$ billions
140
120
100
80
60
40
14
15
16
Asia
Caribbean and Central America
Latin America
(1) Average earning assets excluding bankers acceptances
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
Global Banking and Markets
Global Banking and Markets (GBM) provides clients with corporate banking, investment banking, capital markets and transaction banking 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.
2016 Achievements
(cid:129) Enhanced customer focus and leveraged our global footprint and our core sector expertise to deliver value-added solutions and superior service to
clients. Examples include:
(cid:129) US$11.8 billion acquisition by Fortis Inc. of ITC Holdings Corp. Scotiabank acted as financial advisor and provided financing to Fortis. This
transaction made Fortis one of the top 15 North American public utilities by enterprise value. Scotiabank was also exclusive financial advisor
to Fortis on its US$1.2 billion sale of a 19.9% equity interest in ITC to GIC Private Limited, Singapore’s sovereign wealth fund.
(cid:129) $3.2 billion sale of RONA Inc. to Lowe’s Companies Inc. Scotiabank acted as exclusive financial advisor to RONA. Together, RONA and
Lowe’s Canada stores created Canada’s leading home improvement retailer.
(cid:129) Mandated lead arranger, underwriter, book-runner and swaps provider on the three largest debt transactions in Australia over the past
year: A$12.8 billion debt facility for the acquisition of the Ausgrid electricity network; A$5.9 billion debt facility for the acquisition of the
TransGrid electricity network; and A$4.2 billion debt facility for the acquisition of the Port of Melbourne. The Ausgrid financing was the
largest ever AUD corporate loan transaction.
(cid:129) US$900 million sale by Glencore plc of silver production from the Antamina mine in Peru to Silver Wheaton Corp., and US$500 million sale
of gold and silver production from its Antapaccay mine in Peru to Franco-Nevada Corp. Scotiabank was sole financial advisor to Glencore,
one of the world’s largest diversified natural resource companies. Joint book-runner on a US$920 million bought deal by Franco-Nevada,
largely aimed for the acquisition from Glencore. Franco-Nevada is the leading precious metals royalty and streaming company by both gold
revenue and number of precious metal assets.
(cid:129) US$525 million acquisition by Gran Tierra Energy Inc. of PetroLatina Energy Ltd. Scotiabank acted as lead financial advisor, sole lead
arranger for a US$130 million bridge credit facility and top left book-runner in two equity offerings for a total of US$303 million. Gran
Tierra is an oil and gas exploration and production company based in Canada with operations in South America, mainly Colombia.
(cid:129) $1.9 billion inaugural Scotiabank lead bond underwriting for the Province of Alberta on its September 2021 offering, the largest Canadian
bond underwriting for a province in history.
(cid:129) JPY 6 billion 30-year bond deal for the Province of Manitoba, Scotiabank’s inaugural JPY transaction for a Canadian province. Scotiabank
was joint lead underwriter and sole hedge provider on this deal, named as the 2016 Deal of the Year for Asia-Pacific from mtn-i awards.
(cid:129) Scotiabank’s Equity Research team earned eleven #1 industry rankings and 17 top-tier sector rankings in the 2016 Canadian Equity
Investors Study by Greenwich Associates. Additionally, the team ranked joint second overall in the 2016 Thomson Reuters Analyst Awards
for Canada, recognizing analysts’ performance based on their stock picking ability and accuracy of their earnings estimates.
(cid:129) Implemented a new client segmentation and coverage model to improve customer experience and better align our resources and
capabilities to meet our clients’ needs.
(cid:129) First Canadian bank to offer Bulk Interac e-Transfer, making it easier for businesses to send refunds or payments to customers online.
(cid:129) Further optimized our business mix, including growing our Latin America business and repositioning our business in Asia and Australia.
(cid:129) Obtained all licenses required to operate as a branch of The Bank of Nova Scotia in Australia. This allows Scotiabank to extend our offerings
to Australian-based customers and better serve Canadian and international customers with business interests in Australia.
(cid:129) Named Best Foreign Exchange Provider in Canada, Peru and Costa Rica, Global Finance (2016).
(cid:129) Hired new staff to support our Investment Banking coverage in the Pacific Alliance.
(cid:129) Strengthened our customer data and analytics capabilities by enhancing our customer relationship management system and data quality and
by introducing new client planning tools.
(cid:129) Following the creation of the GBM Diversity & Inclusion (D&I) Office in late 2015, we have made good progress towards making GBM a more
diverse and inclusive workplace, including creating steering committees in each region in which we operate to advance our D&I initiatives globally.
Business Profile
Global Banking and Markets (GBM) conducts the Bank’s wholesale banking and capital markets business with corporate, government and institutional
investor clients. GBM is a full-service wholesale bank and investment dealer in Canada and Mexico, and offers a range of products and services in the
U.S., Latin America (excluding Mexico), and in select markets in Europe, Asia and Australia.
More specifically, GBM provides clients 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 services
(prime brokerage and stock lending); foreign exchange sales and trading; commodity derivatives; precious and base metals sales, trading, financing
and physical services; and collateral management.
Scotiabank took steps to refocus its Asia business this year. This included the establishment of a fully-licensed branch in Australia, the closing of our
representative offices in Vietnam and Thailand, and the closing of our branches in Taiwan and Dubai.
Strategy
GBM aims to be a leading wholesale bank in Canada and the Pacific Alliance and maintain a focused presence in other regions to support multi-
regional customers and leverage GBM’s strengths in its core markets and sectors.
We will achieve this objective by:
(cid:129) Enhancing our customer focus to strengthen customer relationships;
(cid:129) Making the required investments in our platform and technology;
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 55
MANAGEMENT’S DISCUSSION AND ANALYSIS
(cid:129) Executing on cost control strategies; and
(cid:129) Directing capital and resources to businesses which optimize profitability and align with our customer-focused strategies.
2017 Priorities
(cid:129) Improve customer focus – Improve our customer coverage and deepen relationships with our most important customers. Increase our emphasis
on investment banking and other fee-based activities that strengthen customer relationships. Leverage our global platforms to serve the strategic
and financial objectives of our customers.
(cid:129) Align business mix – Shift our business mix to more closely align with our customer-focused strategy and other priorities by: (i) increasing fee-
based revenue as a percentage of total revenue; (ii) improving sector diversification; and (iii) shifting more focus and resources to our Pacific Alliance
operations.
(cid:129) Improve resource productivity – Improve productivity and achieve cost efficiencies through: (i) structural cost management and the re-purposing
of our cost base; (ii) further reduction in costs and risks through enhanced client on-boarding processes; and (iii) re-alignment of global wholesale
operations.
(cid:129) Further digital transformation – Improve automation and embrace disruptive technologies to improve the customer experience and reduce costs.
Invest in advanced analytics to drive revenues and optimize the use of capital and funding.
T37 Global Banking and Markets 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 in subsidiaries
Net income attributable to equity holders of the Bank
Key ratios
Return on equity(2)
Productivity(1)
Net interest margin(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
(1) Taxable equivalent basis.
(2) Refer to Glossary.
(3) Net interest income (TEB) as % of average earning assets excluding bankers’ acceptances.
2016
1,293
3,139
4,432
249
2,040
572
1,571
–
1,571
$
$
$
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
$
$
$
12.6%
46.0%
1.67%
0.30%
13.0%
45.9%
1.65%
0.10%
15.2%
44.4%
1.69%
0.03%
$ 103,316
81,662
298,664
350,627
77,261
269,755
$ 108,137
70,103
290,482
342,389
63,308
239,628
$ 110,869
63,818
274,386
311,021
59,273
217,408
56 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Financial Performance
Global Banking and Markets reported net income attributable to equity holders of $1,571 million
in 2016, an increase of $18 million or 1% from last year. Stronger results in the fixed income,
corporate lending and commodities businesses, as well as the positive impact of foreign currency
translation, were mainly offset by higher provision for credit losses and lower results in equities.
Average assets
Average assets increased by $9 billion or 3% to $351 billion this year. Adjusting for the positive
impact of foreign currency translation, average assets decreased by $4 billion or 1%, due
primarily to a decrease of $7 billion in trading assets and $3 billion in securities purchased under
resale agreements. This was partly offset by growth of $6 billion in corporate loans and
acceptances.
Average liabilities
Average liabilities increased by $30 billion or 13% to $270 billion this year. Adjusting for the
impact of foreign currency translation, the increase was $19 billion or 8%, mainly due to growth
of $12 billion in deposits and $6 billion in securities sold under repurchase agreements.
Net interest income
Net interest income increased by 21% to $1,293 million, mainly due to higher lending volumes
and loan origination fees in Canada, U.S. and Europe, and the positive impact of foreign currency
translation. The net interest margin was 1.67%, which was two basis points higher than 2015.
Non-interest income
Non-interest income of $3,139 million increased by $186 million or 6%. Stronger fixed income
and commodities trading revenues, higher underwriting and advisory fees and higher banking
fees all contributed to the growth. This was partly offset by lower revenues in equities.
Non-interest expenses
Non-interest expenses increased by $194 million or 11% to $2,040 million in 2016. This was due
to higher performance-related and share-based compensation, higher technology, compliance
and regulatory costs, volume-driven securities expenses, and the negative impact of foreign
currency translation. Operating leverage was negative 0.4%.
Provision for credit losses
The provision for credit losses was $249 million, up $182 million from last year, due to higher
provisions in the U.S., Europe and Asia, primarily in the energy sector. The provision for credit
losses ratio was up 20 basis points to 30 basis points.
Provision for income taxes
The effective tax rate of 26.7% was 0.3% higher than the prior year.
Outlook
Global Banking and Markets expects business conditions and financial results to continue to
moderately improve in 2017, as volatility driven by political (US election, Brexit) and monetary
(Fed policy) events influence investor and business confidence. Improved focus client revenues,
growth in deposits, improved Corporate Banking results and strong performance from
Investment Banking will be partly offset by lower other capital markets’ activities. Expense
management is expected to provide benefits in 2017 with expenses down from 2016 from
benefits from the recent structural cost initiatives, partly offset by higher technology costs.
Provisions for credit losses are expected to moderate to longer term average levels. The U.S. and
Canada are expected to drive the bulk of growth in 2017 as Europe suffers from Brexit
uncertainty and high regulatory costs, and Asia begins to grow from a lower asset base after
recent repositioning.
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
C19 Total revenue
53%
47%
Business Banking
Capital Markets
C20 Business banking revenue
$ millions
2500
2000
1500
1000
500
14
15
16
Metals
Lending
C21 Capital markets revenue
by business line
$ millions
2500
2000
1500
1000
500
14
15
16
Global Investment Banking
Global Equities
Fixed Income & Commodities
C22 Composition of average
earning assets
$ billions
400
350
300
250
200
150
100
50
14
15
16
Other
Securities purchased under resale agreement
Trading assets
Corporate loans and acceptances
C23 Trading loss days
14
12
10
8
6
4
2
14
15
16
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 57
MANAGEMENT’S DISCUSSION AND ANALYSIS
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, non-interest income, and 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 $299 million in 2016, compared to
$390 million in 2015.
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 loss attributable to equity holders of $269 million in 2016. Adjusting for the restructuring charge of $378 million
($278 million after tax; refer T1), net income was $9 million this year.
The prior year 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 $204 million pre-tax ($151 million after tax), an increase to the collective allowance for credit losses against performing
loans due to the increase in the loan portfolio of $60 million pre-tax ($44 million after tax), and reorganization costs related to Canadian Banking’s
shared services operations of $61 million pre-tax ($45 million after tax).
Revenues
Revenues declined by $46 million mainly due to lower contributions from asset/liability management activities. Partly offsetting were lower taxable
equivalent basis offsets and the positive impact of foreign currency translation. Gains on sale of real estate were largely offset by lower net gains on
investment securities.
Provision for credit losses
The increase in collective allowance for credit losses on performing loans was $50 million this year compared to $60 million last year.
Non-interest expenses
Non-interest expenses increased by $567 million to $653 million. The increase was largely due to the restructuring charge of $378 million and
increased costs relating to strategic and technology initiatives. There were also higher employee pension and benefit expenses in 2016 as last year
included lower pension expenses from a reduction in pension benefit accrual, partially offset by reorganization costs related to Canadian Banking’s
shared service operations in the prior year.
T38 Other financial performance
($ millions)
Net interest income(1)
Non-interest income(1)(2)
Total revenue(1)
Provision for credit losses
Non-interest expenses
Income tax expense(1)
Net income
Net income attributable to equity holders of the bank
2016
2015
2014
$ (384)
273
$ (100)
35
$
(111)
50
653
(545)
(65)
60
86
(475)
90
(76)
14
–
232
(320)
$ (269)
$ 264
$ 102
$ (269)
$ 264
$ 102
(1)
(2)
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.
Includes net income from investments in associated corporations of $(137) in 2016; (2015 – $(137); 2014 – $(140)).
58 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Financial Performance of Business Lines: 2015 vs. 2014
Canadian Banking
Canadian Banking’s net income attributable to equity holders was $3,344 million in 2015, a decrease of $339 million or 9% primarily from
changes in the Canadian tax legislation and the gain on sale of the Bank’s investment in CI Financial Corp. in 2014 (refer T15). Retail and small
business banking and wealth management generated strong performances. This year’s results were positively impacted by good asset and
deposit growth and an eight basis point increase in the margin to 2.23%. Also contributing was the full year impact of the Bank’s investment in
Canadian Tire Financial Services. Return on equity was 21.0% versus 22.8% in 2014.
International Banking
Net income attributable to equity holders was $1,853 million in 2015, an increase of $237 million or 15% resulting from the favourable impact
of foreign currency translation, strong asset and fee growth, and acquisitions partly offset by lower securities gains and higher provisions for
credit losses. The 2014 results were negatively impacted by the revaluation of monetary assets in Venezuela and the restructuring charge,
totaling $74 million (refer T15), which also contributed to the year-over-year increase. Return on equity was 13.0%, up from 11.7% in 2014.
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 2014.
Lower results in investment banking, Asia lending and precious metals, as well as lower securities gains in U.S. were only partly offset by growth
in other businesses. The 2014 results were also impacted primarily by the restructuring charge (refer T15).
Return on equity decreased to 13.0% from 15.2% in 2014.
Other
The Other segment had net income attributable to equity holders of $264 million in 2015, up $162 million from last year. The 2015 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 $204 million pre-tax ($151 million after tax), an increase to the collective allowance against performing loans due to
the relative increase in the loan portfolio of $60 million pre-tax ($44 million after tax), and reorganization costs related to the consolidation of
Canadian shared services of $61 million pre-tax ($45 million after tax). Included in the 2014 results were additional legal provisions and a
restructuring charge (refer T15), totaling $62 million.
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 59
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.
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 value. Scotiabank’s Enterprise-
Wide Risk Management Framework (the Framework) articulates 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.
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 Strategic Insurance Environmental
Strong Risk Culture
The Bank’s risk management framework is applied on an enterprise-
wide basis and consists of five key elements:
1. Risk Governance,
2. Risk Appetite,
3. Risk Management Tools,
4. Risk Identification and Assessment, and
5. Risk Culture.
The Types of Risk
The Bank ensures that risk-taking activities are consistent with the Bank’s strategies and risk appetite by favouring businesses that generate
sustainable, consistent and predictable earnings over the business cycle. In order to mitigate risk, the Bank seeks to avoid excessive risk concentrations
through a diversified mix of businesses, products, geographies, currencies and customers. The Framework provides an overview of each principal risk
type that can materially impact the Bank and how each principal risk type is managed. Scotiabank’s principal risk types include: Credit, Market,
Liquidity, Operational, Reputational, Strategic, Insurance and Environmental.
Risk Management Principles
Risk-taking and risk management activities across the enterprise are guided by the following principles:
Risk and reward – business decisions are consistent with strategies and risk appetite, and there is an appropriate balance between risk and reward in
order to maximize shareholder value.
Understand the risks – the Bank limits its risk taking activities to those that are well understood, and where there is sufficient expertise, resources and
infrastructure to effectively measure and manage the risks – all material risks are identified, measured and managed.
Forward thinking – forward thinking and the use of stress testing are utilized to proactively identify emerging risks and potential vulnerabilities.
Everyone is a risk manager – within the Bank’s risk governance structure, it is the shared responsibility of every employee to manage risk.
Protect our brand – all risk taking activities must be in line with the Bank’s risk appetite, Scotiabank’s Code of Conduct, Values and policy principles
which are established to guide risk taking behaviors and protect the Bank’s brand.
Compensation – compensation plan design and decisions are aligned with the Bank’s strategy and risk culture and support appropriate risk behaviors.
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 executive
management team. Decision-making is highly centralized through a number of senior and executive risk management committees.
The Bank’s risk management framework is predicated on the three-lines-of-defence model. Within this model, the First Line of Defence (typically
comprised of the business lines and most corporate functions) incur and own the risks, while the Second Line of Defence (typically comprised of
control functions such as Global Risk Management, Compliance, and Finance) 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 of Defence) provides enterprise-wide independent
assurance over the design and operation of the Bank’s internal control, risk management and governance processes throughout the first and second
lines of defence. In this risk governance structure, employees in every area of the organization are responsible for risk management.
60 | 2 0 1 6 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
BOARD OF DIRECTORS
Board of Directors
Committees
President and Chief Executive Officer
Executive Management Team and
Executive & Senior Management Committees
THREE LINES OF DEFENCE
1A
Risk Owners
1B
Risk Owners’ Support
2
Risk Owner’s Oversight
3
Independent Assurance
(cid:129) Own the risks generated by their
activities, which may be financial
(e.g. credit, market) or
nonfinancial (e.g. operational,
reputational)
(cid:129) Design and execute internal
controls
(cid:129) Ensure the risks generated are
identified, assessed, managed and
monitored, are within risk
appetite, and are in compliance
with relevant policies, guidelines
and limits
(cid:129) Assist Risk Owners in
identifying, assessing,
monitoring, reporting, and
responding to risks
(cid:129) Assist Risk Owners in
implementing risk
management initiatives,
and establishing risk
governance, internal
controls, and reporting
frameworks
(cid:129) Establish risk appetite, risk limits,
policies and frameworks, in
accordance with best practice
and regulatory requirements
(cid:129) Measure, monitor and report on
risks taken in relation to limits
and risk appetite, and on
emerging risks
(cid:129) Must be independent of the first
line to be able to perform its
function in an objective manner
(cid:129) Provide reasonable assurance to
senior management and the
Board that the first and second
lines of defence are effectively
managing and controlling risks
(cid:129) Focus on governance framework
and control systems
Important
Note:
All employees are, for some of their activities, Risk Owners (1A), as all employees are capable of generating reputational
and operational risks in their day to day activities, and must be held accountable for owning and managing these risks.
The Board of Directors: as the top of the Bank’s risk management governance structure, provides oversight, either directly or through its committees,
to satisfy itself that decision making is aligned with the Bank’s strategies and risk appetite. The Board receives regular updates on the key risks of the
Bank – including a quarterly comprehensive summary of the Bank’s risk profile and performance of the portfolio against defined limits – and approves
key risk policies, limits, the Risk Appetite Framework and the Credit Risk Appetite.
The Risk Committee of the Board: assists the Board by providing oversight to the risk management function at the Bank. This includes periodically
reviewing and approving the Bank’s key risk management policies, frameworks and limits and satisfying itself that management is operating within
the Bank’s Risk Appetite Framework. The Committee also oversees the risk management function’s independence from the Business Lines and
oversees the effectiveness of the Chief Risk Officer and risk management function.
The Audit and Conduct Review Committee of the Board: assists the Board by providing oversight on the effectiveness of the Bank’s system of internal
controls. The Committee oversees the integrity of the Bank’s consolidated financial statements and related quarterly results. The Committee oversees
the Bank’s compliance with legal and regulatory requirements and oversees the Compliance, Finance, Audit, and Anti-Money Laundering/Anti-
Terrorist Financing functions at the Bank.
Human Resources Committee of the Board: in conjunction with the Risk Committee of the Board, satisfies itself that adequate procedures are in place
to identify, assess and manage the risks associated with the Bank’s material compensation programs and that such procedures are consistent with the
Bank’s risk management programs. The Committee has further responsibilities relating to leadership, succession planning and total rewards.
Corporate Governance Committee of the Board: acts in an advisory capacity to the Board to enhance the Bank’s corporate governance through a
continuing assessment of the Bank’s approach to corporate governance and makes policy recommendations.
President and Chief Executive Officer (CEO): reports directly to the Board and is responsible for defining, communicating and implementing the
strategic direction, goals and core values for Scotiabank that maximize long term shareholder value. The CEO oversees the establishment of the Bank’s
risk appetite, in collaboration with the CRO and CFO, which is consistent with the Bank’s short and long term strategy, business and capital plans, as
well as compensation programs.
Chief Risk Officer (CRO): is responsible for the overall management of Global Risk Management. The CRO has unfettered access to the Risk
Committee of the Board to ensure independence of GRM. As a senior member of the Bank’s executive management team, the CRO participates in
strategic decisions related to where and how the Bank will deploy its various resources sources of capital to meet the performance targets of the
business lines and the Bank’s Balanced Scorecard. The CRO reports directly to the CEO and the Risk Committee of the Board.
Executive Committees:
Operating Committee: serves as a forum for the President and Chief Executive Officer (the “CEO”) to discuss key strategic issues and the long-term
direction of the Bank with senior executives. Through the Operating Committee, the CEO may solicit views and advice and counsel from senior
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 61
MANAGEMENT’S DISCUSSION AND ANALYSIS
executives on issues pertinent to the CEO and the direction of the Bank. Meetings of the Operating Committee also consider “tone from the top”
matters, enabling its members to shape, reinforce and role-model the Bank’s desired operating style and organizational culture. The Operating
Committee may discuss topics including: setting the Bank’s key strategies and, upon approval by the Board, directing the execution of those strategies
and the execution of the Bank’s overall risk strategy; and monitoring and evaluating how risks are managed across the Bank.
Asset-Liability Committee (ALCO): is chaired by the CEO and consists of the executive and senior management of the Bank, including members from
Group Treasury, Finance, Global Banking & Markets, Canadian Banking, International Banking and GRM. The purpose of the committee is to provide
high level oversight and strategic direction for the management of funding, foreign exchange risk, hedging stock based compensation, and economic
forecasts. This committee also reviews monthly economic updates and the performance of the key topics discussed.
Additionally, the Committee reviews balance sheet management topics, such as: deposits, liquidity, net interest margin, and capital management
topics. The committee’s focus is on business line activity (i.e. mortgages and deposits) as well as funding aspects. The committee reviews high level
strategies, monitors progress and discusses various trends and key issues. As well, the committee reviews quarterly capital plans, capital allocation and
capital risk indicators.
Strategic Transaction Investment Committee (STIC): is chaired by the CEO and provides advice, counsel and decisions on effective allocation and
prioritization of resources with respect to the Bank’s portfolio of businesses, strategic investments including mergers and acquisitions (M&A), and
divestitures. The committee’s objectives include review and approval of the Bank’s business mix guidelines, review of the Bank’s portfolio of businesses
and post-acquisition assessments at 12 and 24-36 month benchmarks.
Risk Policy Committee (RPC): is chaired by the CEO and includes the CRO and the heads of the business lines, Group Treasury and GRM. It is
responsible for policies, limits, proposals, and other issues covering credit, market, reputational, legal and operational risk, as well as adjudicating on
issues referred by the senior management committees. The committee’s accountabilities include reviewing and adjudicating on the mandates of its
subcommittees.
Human Capital Committee (HCC): is chaired by the Group Head & Chief Human Resources Officer and includes the President and CEO, the CRO, and
the heads of the business lines, among others. The committee reviews and approves all major new and changing Bank-wide Human Resources
objectives, strategies, policies and programs including all compensation matters. As well, the committee reviews and approves all senior management
appointments and the staffing of key positions.
Systems Planning and Policy Committee (SPPC): is chaired by the CEO and consists of the executive and senior management of the Bank, including
Canadian Banking, Global Banking & Markets, International Banking, and GRM. This committee reviews and approves major business initiatives
involving human and computing facilities, and reviews and adjudicates on submissions in excess of designated executive approval limits.
Senior Management Committees:
Stress Testing Committee (STC): is chaired by the Senior Vice President & Chief Market Risk Officer. It consists of senior management from GRM,
Executive Offices (E.O.) Audit, E.O. Finance, Group Treasury, Economics, Enterprise Strategy, and the Group Head and Chief Financial Officers (CFO) of
the business lines. The purpose of the committee is to provide high level oversight of stress testing; serve as the most senior point of management that
establishes and enhances policies to develop, review, challenge and communicate stress testing results; and promote consistent, collaborative
application of the stress testing program Bank-wide.
Senior Credit Committees (SCCs): consist of three non-retail Senior Credit Committees (Corporate, Commercial, and International) which are chaired
by the Executive Vice President & Chief Credit Officer (with the Chief Risk Officer as alternate chair), and two Senior Credit Committees (Canadian
Banking and International) for Retail, Small Business and Wealth Management which is chaired by the Chief Risk Officer (with the Executive Vice
President & Chief Credit Officer as the alternate chair). The Senior Vice President & Chief Market Risk Officer is also an alternate for Corporate SCC.
Other voting members of each committee include the Senior Vice Presidents of the relevant credit units, and the Managing Director and Heads of the
relevant business lines. A quorum must include the chair or alternate chair, and a member from the relevant business line.
Market Risk Management and Policy Committee (MRMPC): is chaired by the Senior Vice President & Chief Market Risk Officer. It consists of executive
and senior management of the Bank including representatives from GRM (Chief Risk Officer and Executive Vice President & Chief Credit Officer),
Group Treasury, International Banking and Global Banking & Markets. The MRMPC is responsible for overseeing and establishing standards for
market, liquidity and insurance risk management processes within the Bank. For subsidiaries, the MRMPC provides advice and counsel to ensure that
their limits are consistent with the overall objectives and strategic direction of the Bank. The MRMPC may delegate in writing the authority to approve
specified types of transactions and changes to approved limits to staff in GRM and other departments (Delegated Authorities).
Reputational Risk Committee (RRC): is chaired by the Executive Vice President, General Counsel. It consists of senior management from Audit,
Finance, GRM, Group Treasury, Global Compliance, Legal and Public Corporate & Government Affairs as well as senior management from Canadian
Banking, International Banking and Global Banking & Markets. The mandate of the RRC is to promote conduct consistent with high ethical standards
and protect the reputation of the Bank, by recommending reputational risk policies and procedures as may be necessary to the Board; overseeing the
implementation of Board-approved reputational risk policies and procedures; approving additions or exceptions to policies and procedures as may be
reserved to the RRC; and upon referral to the RRC from the various business line divisions, risk committees or sub-committees, reviewing business
activities, initiatives, products, services, transactions or processes which the sponsor believes may embody a degree of reputational risk, and
recommending either for or against proceeding or proceeding subject to conditions, based on an assessment of the reputational risk involved.
Operational Risk Committee (ORC): is chaired by the Chief Risk Officer. It consists of executive and senior management, including the CFO, and the
heads of the business lines and key functional areas. The committee provides high level oversight of operational risk, and promotes an enterprise-wide
operational risk framework to ensure risks are understood, communicated, and appropriate actions are taken to mitigate related losses. In particular,
the committee reviews the Bank’s top operational risks, including those arising in new products and initiatives and in existing products and programs
where the risk profile may be changing due to internal or external factors.
Risk Rating Governance Committee (RRGC): provides oversight of the Bank’s Non-retail credit risk rating system, including policies governing the
development, validation, approval and ongoing maintenance of the Bank’s Non-retail credit risk rating models and parameter estimates. RRGC also
acts as a forum that provides an opportunity for executive/senior management discussion on various aspects of the Non-retail credit risk rating system,
62 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
including potential refinements and enhancements. As part of its mandate, RRGC is responsible for reviewing, updating and approving the Bank’s
Non-retail credit risk rating system. RRGC membership includes the Bank’s Chief Risk Officer, the Executive Vice-President and Chief Credit Officer, the
Senior Vice-President and Chief Market Risk Officer, as well as other executive/senior management representatives from risk management, banking
and internal audit.
Business Line and Corporate Functions: as the first line of defence in the Three Lines of Defence model, are accountable for effective management of
the risks within their business lines and functions through identifying, assessing, mitigating and monitoring the risks. Business lines and corporate
functions actively implement effective internal controls to manage risk and maintain activities within risk appetite and policies. Further, business lines
have processes to be able to effectively identify, monitor and report against allocated risk appetite limits.
Global Risk Management (GRM): supports the Bank’s objectives and is mandated to maintain an ongoing and effective enterprise-wide risk
management framework that resonates through all levels of the Bank. GRM is responsible for providing reasonable assurance to executive
management, the Board of Directors and shareholders that risks are actively identified, managed and communicated to all key stakeholders – this is
achieved through timely and relevant reporting. GRM’s mission is 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 value.
Global Compliance: on an enterprise-wide basis, promotes ethical conduct and compliance generally throughout Scotiabank; and supports directors,
officers and employees of the Bank and its subsidiaries in managing compliance risk. Compliance is ultimately the responsibility of line management,
supported by compliance officers. Together, they comprise the compliance network by which compliance activities are managed throughout
Scotiabank. Global Compliance acts as a consultant and educator on regulatory and internal policies and procedures and in this role may establish, or
assist with the establishment of, various compliance risk management related programs, sources of written policy, procedures or guidance, training
programs or systems as may be necessary or appropriate.
Global Finance: leads enterprise-wide financial strategies which support the Bank’s ability to maximize sustainable shareholder value, and actively
manages the reliable and timely reporting of financial information to management, the Board of Directors and shareholders, as well as other
stakeholders. This reporting includes the Bank’s consolidated financial statements and related quarterly and annual results. Global Finance executes
the Bank’s financial and capital management strategies with appropriate governance and control, while ensuring its processes are efficient and
effective.
Internal Audit: reports independently to the Board through the Audit and Conduct Review Committee on the design and operating effectiveness of
the Bank’s risk governance and risk management framework. The mission of the audit department 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.
Risk Appetite
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 the identification of 1) risk capacity, the maximum level of risk the Bank can assume before breaching
key constraints, 2) risk appetite, the level and types of risk the Bank is willing to assume within its risk capacity to achieve its strategic objectives, and
3) key risk appetite measures, quantitative metrics that capture the Bank’s risk appetite. Together, the application of these components helps to
ensure the Bank stays within appropriate risk boundaries. Scotiabank’s risk appetite is integrated into the strategic and capital planning process and is
reviewed annually by senior management who recommend it to the Board for approval. Business lines and control functions develop their own Risk
Appetite Frameworks, which are in alignment with the risk appetite and strategies articulated in the Bank’s Risk Appetite Framework. Scotiabank
actively communicates the Bank’s risk appetite, and how it relates to Scotiabankers, to further promote a sound risk culture.
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
(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.
Risk
Appetite
Statement
Risk
Capacity
Risk
Appetite
Key Risk
Appetite
Measures
The Bank’s risk appetite is aligned with its enterprise strategy, where the most notable strategic choice is to have highly diversified, well-balanced and
sustainable operations within a clearly defined, global footprint.
Key risk appetite measures provide clear 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. Other
components of Scotiabank’s key risk appetite measures include measures that:
(cid:129) Set risk capacity and appetite in relation to regulatory constraints
(cid:129) Use stress testing to provide forward-looking metrics
(cid:129) Ensure Scotiabank’s credit rating remains strong
(cid:129) Minimize earnings volatility
(cid:129) Limit exposure to operational events that can have an impact on earnings, including regulatory fines
(cid:129) Ensure reputational risk is top of mind and strategy is being executed within operating parameters
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Scotiabank’s risk management framework is supported by a variety of risk management tools that are used together to manage bank-wide risks. 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.
Policies & limits
The Bank develops and implements its key risk policies in consultation with the Board. Such policies (which include appetites and frameworks) are also
subject to the requirements and guidelines of the Office of the Superintendent of Financial Institutions (OSFI), the Bank Act, and the Canada Deposit
Insurance Corporation (CDIC). Policy development and implementation reflect best governance practices which the Bank strives to adhere to at all
times. The Bank also provides advice and counsel to its subsidiaries in respect of their risk policies to ensure alignment with the Bank’s policies, subject
to the local regulatory requirements of each subsidiary.
Policies 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.
Limits control risk-taking activities within the appetite and tolerances established by the Board and 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.
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 documented in a series of policies, manuals and handbooks.
Measurement, monitoring, and reporting
Risk measurement tools include the use of models. The Bank uses models for a range of purposes including:
(cid:129) valuing transactions,
(cid:129) measuring risk exposures,
(cid:129) determining credit risk ratings and parameters, and
(cid:129) calculating economic and regulatory capital.
The use of quantitative risk methodologies and models is balanced by a strong governance framework and includes the application of sound and
experienced judgment. The development, independent review, and approval of models is subject to formalized policies such as the Model Risk
Management Policy and oversight of senior management committees such as the Model Review Committee (for market risk, counterparty credit risk,
and liquidity risk models). Key models used in the calculation of credit and market risk regulatory capital on an enterprise basis are OSFI approved.
These models are incorporated into the Bank’s framework for governance and control of model risk to ensure that they continue to perform in line
with regulatory requirements.
The Bank continuously monitors its risk exposures to ensure business activities are operating within approved limits or guidelines, and the Bank’s
strategies and risk appetite. Breaches, if any, of these limits or guidelines are reported to senior management 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 risk policies, limits, and guidelines.
They also provide a clear statement of the amounts, types, and sensitivities of the various risks in the portfolio. Senior management and the Board use
this information to understand the Bank’s risk profile and the performance of the portfolios. A comprehensive summary of the Bank’s risk profile and
performance of the portfolio is presented quarterly to the Risk Committee of the Board.
Stress testing
Stress testing programs at both the enterprise-wide level and individual risk level allow the Bank to estimate the potential impact on the Bank’s
income and capital as a result 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 policy, and 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.
64 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Risk Culture
Effective risk management requires a strong, robust, and pervasive risk management culture where every Bank employee is a risk
manager and is responsible for managing risks.
The Bank’s risk governance structure, risk appetite, and risk management tools influence – and are in turn influenced by – the Bank’s risk culture. This
symbiotic inter-relationship ensures a strong alignment exists between strategy, risk culture, and the key components of the Bank’s risk management
framework.
The following are the foundational support on which the Bank’s risk culture is built upon:
(cid:129) Tone from the top – Clear and consistent communication from leaders on risk behavior expectations and the importance of Scotiabank’s values.
(cid:129) Accountability – All Scotiabankers in every business function are held accountable for risk ownership and their actions in accordance with the Three
Lines of Defence model.
(cid:129) Incentives – Motivate and reward key risk takers for identifying, managing and promoting a sound risk culture within their environment.
(cid:129) Effective challenge – Effective challenge, alternative views and open dialogue are promoted when identifying risks – Scotiabankers are encouraged
and expected to “Raise a hand”.
Other elements of Scotiabank’s strong risk culture:
(cid:129) Compensation: programs are structured to discourage behaviours that are not aligned with the Bank’s values or Scotiabank’s Code of Conduct,
and ensure that such behaviors will not be rewarded. Higher risk behaviors are also discouraged and there are reduced opportunities for significant
one-time rewards. The Bank’s material 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.
(cid:129) Risk appetite: the Bank uses a variety of communication channels to build and sustain employee awareness of the qualitative and quantitative
constraints (i.e. the “boundaries”) that apply to each and every employee’s activities.
(cid:129) Reporting: reputational & operational risk dashboards and other key metrics are monitored and reported. The Bank also seeks out employee
feedback through a variety of surveys.
(cid:129) Training: risk education programs are available to employees in the business lines and control functions. Scotiabank continually reinforces risk
culture by providing effective and informative mandatory and non-mandatory training modules for all employees, as well as presentations, videos,
and other training media on a variety of risk management topics.
(cid:129) 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 (whether global or local) includes business line heads and senior risk officers
from GRM. 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.
Risk culture is a component of the Bank’s organizational culture. Key elements that support the Bank’s organizational culture are as follows:
(cid:129) Scotiabank’s Code of Conduct: stringent guidelines to which all staff must attest on an annual basis
(cid:129) Values: Integrity – Act With Honour; Respect – Value Every Voice; Accountability – Make It Happen; Passion – Be Your Best
(cid:129) Organizational fit: cultural behaviours are considered in hiring and promotional processes. Assessment of organizational fit is increasingly
considered when evaluating new business opportunities and hiring practices
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 65
MANAGEMENT’S DISCUSSION AND ANALYSIS
Principal Risk Types
Risk Type
Credit Risk
Governing Documentation
Application to Risk Appetite
Credit Risk Policy
Credit Risk Appetite
Industry Concentration Framework
Collective Allowance Policy for
Performing Loans
Residential Mortgage Underwriting
Policy
Quantitative limits:
(cid:129) Exposure to a single counterparty or group of related parties (limits
differentiated by counterparty type, 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
Quantitative limits, such as various value at risk (VaR), stress test results, equity
and debt investment exposures, and structural interest rate and foreign
exchange exposures.
Liquidity Risk
Liquidity Risk and Collateral
Management Policy
Quantitative limits:
(cid:129) Minimum Liquidity Coverage Ratio (LCR);
(cid:129) Appropriate 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 event limit, a single event loss
limit, and a variety of limits for individual categories of operational risk.
Low appetite for reputational, legal, or taxation risk arising in business activities,
initiatives, products, services, transactions or processes, or from a lack of
suitability of products for clients.
Consistent with the Equator Principles, to which the Bank is a signatory, the
Bank provides project finance loans and project-related corporate loans only to
those projects whose borrowers can demonstrate their ability and willingness to
comply with comprehensive processes aimed at ensuring that the 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.
The Bank will limit its insurance risk-taking activities to those that are well
understood and where there is sufficient expertise, resources and infrastructure
to effectively measure and manage the risks and to earn commensurate returns.
Where insurance risks are taken, it is on a selective basis to achieve stable and
sustainable earnings; and the risk assumed is diversified geographically and by
product.
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
Global Fraud Policy
Third Party Risk Management Policy
Reputational Risk
Reputational Risk Policy
Scotiabank’s Code of Conduct
Compliance Policy
KYC Policy
Environmental Risk
Environmental Policy
Strategic Risk
Annual Strategy Report to the
Board of Directors
Insurance Risk
Insurance Risk Policy
Insurance Risk Management
Framework
66 | 2 0 1 6 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
T39 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
Business
activities
Balance
Sheet
Attributed
Capital(2)
(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) Account 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 $309bn
(cid:129) Average assets $143bn
(cid:129) Average assets $351bn
(cid:129) Average assets(1) $111bn
(cid:129) Attributed Capital $16.8bn
(cid:129) Proportion of Bank
36%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other
46%
–%
9%
45%
Risk-
Weighted
Assets(3)
(cid:129) RWA
$109.0bn
(cid:129) Proportion of Bank 30%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
84%
–%
16%
(cid:129) Attributed Capital $15.9bn
(cid:129) Proportion of Bank
34%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other
56%
1%
7%
36%
(cid:129) RWA
$131.9bn
(cid:129) Proportion of Bank 36%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
87%
2%
11%
(cid:129) Attributed Capital $12.2bn
(cid:129) Proportion of Bank
26%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other
73%
7%
5%
15%
(cid:129) RWA
(cid:129) Proportion of Bank
$113.4bn
31%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
87%
6%
7%
(cid:129) Attributed Capital $2.1bn
(cid:129) Proportion of Bank
4%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other
52%
2%
-2%
48%
(cid:129) RWA
(cid:129) Proportion of Bank
$9.7bn
3%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
94%
6%
–%
Credit, market, liquidity, operational, reputational, environmental, strategic and insurance risk.
(1) Average assets for the Other segment include certain non-earning assets related to the business lines.
(2) Attributed Capital is a combination of regulatory: (i) Risk-based capital and (ii) Leverage capital. Attributed Capital is reported on an average basis.
(3) Risk-weighted assets (RWA) are as at October 31, 2016 as measured for regulatory purposes in accordance with the Basel III all-in approach.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 67
MANAGEMENT’S DISCUSSION AND ANALYSIS
Top and emerging risks
The Bank is exposed to a variety of top and emerging risks. These risks can potentially adversely affect the Bank’s business, financial performance,
reputation and business strategies. As part of our risk management approach, we proactively identify, assess, review, monitor and manage a broad
range of top and emerging risks so that appropriate risk mitigation strategies can be taken. Every quarter, a listing and a brief discussion of selected
top and emerging risks is presented to Senior Management and the Board of Directors.
The Bank’s top and emerging risks are as follows:
Geopolitical risk
Geopolitical risks could affect volatility in foreign exchange and capital markets globally. This affects all participants in these markets. In the short run,
a market shock could potentially impact the Bank’s trading and non-trading market activities and revenues. Over a longer period of time, the more
broadly based macroeconomic effects could potentially impact the Bank’s exposures to customers and market segments impacted by those shocks.
Although it is difficult to predict where new geopolitical disruption will occur, the Bank’s stress testing program assists in evaluating the potential
impact of severe conditions, whether caused by geopolitical or other circumstances. Management’s strong understanding of the local political
landscapes and macroeconomic environments in which the Bank operates, combined with the Bank’s business model and diversified geographic
footprint, serve as ongoing mitigants to this risk.
Legal and regulatory compliance risk
The Bank is subject to extensive regulation in the jurisdictions in which it operates. Although the Bank continually monitors and evaluates the potential
impact of regulatory developments to assess the impact on our businesses and to implement any necessary changes, regulators and private parties
may challenge our compliance. Failure to comply with legal and regulatory requirements may result in fines, penalties, litigation, regulatory sanctions,
enforcement actions and limitations or prohibitions from engaging in business activities, all of which may negatively impact the Bank’s financial
performance and its reputation. In addition, day-to-day compliance with existing laws and regulations, has involved and will continue to involve
significant resources, including requiring the Bank to take actions or incur greater costs than anticipated, which may negatively impact the Bank’s
financial performance. Such changes could also adversely impact the Bank’s business strategies or limit its product or service offerings, or enhance the
ability of the Bank’s competitors to offer their own products and services that rival the Bank’s.
Anti-money laundering
Money laundering and terrorist financing are receiving significant attention as nations attempt to deal with the harmful legal, economic, and social
consequences of illegal activities. Governments, law enforcement agencies, and regulators around the world employ a variety of means, including
establishing regulatory requirements on financial institutions, to curtail the ability of criminal and terrorist elements to profit from, or finance, their
activities. It is widely recognized that financial institutions are uniquely positioned and possess the necessary infrastructure to assist in the fight against
money laundering, terrorist financing, and criminal activity through prevention, detection, and the exchange of information.
Money laundering, terrorist financing and economic sanctions violations represent regulatory, legal, financial and reputational risk to the Bank.
Scotiabank is subject to a number of expanding and constantly evolving anti-money laundering/anti-terrorist financing (AML/ATF) and economic
sanctions laws and regulations internationally given the Bank’s global footprint.
The Bank is committed to sustaining secure financial systems in the countries around the world in which it maintains operations by taking the
necessary action, using a risk-based approach. The Bank’s AML program includes policies and internal controls with respect to client identification and
due diligence, transaction monitoring, investigating and reporting of suspicious activity, and evaluation of new products and services to prevent and/or
detect activities that may pose AML risk to the Bank. The AML program also facilitates an annual enterprise-wide AML/ATF risk assessment process
and ensures that all employees, including the Board of Directors, undergo initial and ongoing AML/ATF training.
Technology and Information Security Risk
Technology and information security risks have become increasingly prevalent in business in general and for financial institutions in particular. Globally
these risks have increased as a result of the sophistication and constant evolution of new technologies and attack methodologies. The Bank’s
technologies, systems and networks, and those of our customers and the third parties providing services to us, may be subject to attacks, breaches or
other compromises. With any such attack, breach, compromise, or weakness of technology or information systems, hardware or related processes, the
Bank may experience, among other things: financial loss; a loss of customers or business opportunities; disruption to operations; misappropriation or
unauthorized release of confidential, financial or personal information; damage to computers or systems of the Bank and those of its customers and
counterparties; violations of applicable privacy and other laws; litigation; regulatory penalties or intervention, remediation, investigation or restoration
cost; increased costs to maintain and update our operational and security systems and infrastructure; and reputational damage. The Bank actively
monitors and manages these technology and information security risks. Through enterprise-wide programs, industry best practices, and robust threat
and vulnerability assessments and responses, the Bank dynamically adapts its information technology operations, protocols, and governance standards
against these proliferating risks and their potential impacts.
Technology disruption
Technology continues to impact the banking industry and its customers. Non-traditional new participants are entering certain segments of the
financial industry which, in some cases, reduced regulatory requirements or other oversight. New entrants may use new technologies, advanced data
and analytical tools, lower cost to market and/or faster processes to challenge traditional financial institutions. The scope and breadth of technology
disruption is difficult to anticipate and has the potential to impact revenues and costs in certain of the Bank’s businesses. To mitigate this risk, the
Bank continues to adapt and employs a number of strategies to ensure its continuing competitiveness against disruptive technologies, including using
data and analytical tools to understand and respond swiftly to customer needs, and investing in technology and innovation. The Bank also considers
the use of partnerships to appropriately meet the pace of innovation in financial services products and delivery channels. Failure to properly implement
and deploy key technological innovations could adversely affect the Bank’s operating results or financial position.
68 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Low commodity prices / energy exposure
Oil prices have continued their weakness well into 2016. The protracted low oil price has challenged many businesses, and with forecasts calling for
modest price increases into 2017, continued stress can be expected on vulnerable companies in this sector. Weak performance in the energy sector is
also having a negative impact on Canadian tax revenues and has contributed to softness in Alberta’s housing market. The Bank has taken a number of
actions to prudently manage loan exposures in this sector and in related consumer loan segments, and according to the Bank’s stress test scenarios,
losses are expected to be manageable.
Canadian consumer indebtedness
Canadian household indebtedness continues to outpace growth in disposable income fueled by persistently low interest rates and stable national
employment levels. In such an environment, higher consumer indebtedness contributed to an upward trend in mortgage credit growth and strong
home sales. In light of these trends, multiple levels of government implemented new legislation to introduce additional safeguards to the housing
market. These include the foreign buyer tax in British Columbia and changes on a national basis to tighten origination criteria for insured mortgages.
While interest rates are expected to remain at relatively low in the mid to long term, the risks of an external shock, such as higher unemployment
rates, could impact Canadians’ ability to repay their loans and consequently drive a correction in the housing market.
We actively manage our lending portfolios and stress test them against various scenarios. For further discussion relating to our retail portfolio, refer to
the Credit Risk Summary section.
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 69
MANAGEMENT’S DISCUSSION AND ANALYSIS
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
Portfolio review
Risk diversification
Risk mitigation
Overview of loan portfolio
Energy
Real estate secured lending
Loans to Canadian condominium developers
European exposures
Financial instruments
70 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Page
Tables and charts
Page
71
71
71
71
72
72
72
72
73
73
73
73
73
73
74
74
74
75
75
75
75
75
75
76
77
77
45
T3 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
T65 Gross impaired loans by geographic segment
T66 Provision against impaired loans by geographic segment
T67 Cross-border exposure to select countries
T68 Loans and acceptances by type of borrower
T69 Off balance-sheet credit instruments
T70 Changes in net impaired loans
T71 Provision for credit losses
T72 Provision for credit losses against impaired loans by type of borrower
T73 Impaired loans by type of borrower
T74 Total credit risk exposures by geography
T75 AIRB credit risk exposures by maturity
T76 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 35 – Financial instruments – risk management in the
consolidated financial statements)
C24 Well diversified in Canada and internationally – loans and acceptances
C25 and in household and business lending – loans and acceptances
T64 Loans and acceptances by geography
T44 European exposure
T45 Funded exposures
T46 Bank’s exposure distribution by country
T47 Indirect exposures
T32 Mortgage-backed securities
T33 Collateralized debt obligations (CDOs)
14
22
22
110
110
111
112
112
113
113
114
114
115
115
116
202
76
76
110
77
78
78
79
46
46
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 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 66.1%, United States 7.7%, Mexico 4.2% and Other 22%). Financial Services, constitutes 3.9% of overall gross exposures (before
consideration of collateral) and was $20 billion, a decrease of $1 billion from October 31, 2015. These exposures are predominately to highly rated
counterparties and are generally collateralized.
(cid:129) The Bank’s overall loan book as of October 31, 2016 increased to $497 billion versus $473 billion as of October 31, 2015, with growth reflected in
Personal, and Business and Government lending. Residential mortgages were $223 billion as of October 31, 2016, with 87% in Canada. The
corporate loan book, which accounts for 35% of the total loan book, is composed of 53% of loans with an investment grade rating as of
October 31, 2016, down from 55% as of October 31, 2015.
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; and
– aggregate limits, beyond which credit applications must be escalated to the Board for approval.
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
equity.
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 T24.
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 71
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
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,
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.
72 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
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 86% of the credit risk. Approximately 30% 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, 2016. No individual exposure to an investment grade bilateral counterparty exceeded $1,002 million and no individual
exposure to a corporate counterparty exceeded $293 million.
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
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 retail risk modeling 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.
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.
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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 73
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit quality
T40 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
2016
Gross
impaired
loans
Allowance
for credit
losses
Net
impaired
loans
Gross
impaired
loans
2015
Allowance
for credit
losses
Net
impaired
loans
$ 1,003
228
$ 1,231
$ 1,540
301
764
499
381
143
$
$
$
(656)
(160)
(816)
(648)
(215)
(501)
(237)
(239)
(136)
2,088
(1,328)
$
$
$
347
68
415
$
843
208
$ 1,051
892
$ 1,588
$
$
$
86
263
262
142
7
760
271
603
405
356
117
(543)
(157)
(700)
(647)
(186)
(422)
(175)
(235)
(117)
$
$
$
300
51
351
941
85
181
230
121
–
617
1,752
(1,135)
$ 3,628
$ (1,976)
$ 1,652
$ 3,340
$ (1,782)
$ 1,558
$
27
210
298
$
535
$ 5,394
$
(7)
(47)
(102)
$
20
163
196
$
138
11
118
$
(156)
$
379
$
267
$
$
(39)
(6)
(46)
(91)
$
99
5
72
$
176
$ (2,948)
$ 2,446
$ 4,658
$ (2,573)
$ 2,085
Allowance for credit losses against performing loans
$ (1,444)
$ (1,404)
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
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
Net impaired loans
2016(1)
2015(1)
0.49%
55%
0.44%
55%
Allowance for credit losses
The total allowance for credit losses was up $415 million to $4,392 million as at October 31, 2016 (excluding $234 million related to loans acquired
under FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico), from $3,977 million (excluding $220 million related to R-G
Premier Bank) last year.
Allowances in Canadian Banking increased by $116 million to $816 million, in line with the increases in gross impaired loans.
In International Banking, allowances increased by $194 million to $1,976 million mainly in Peru, Chile, and Mexico.
Global Banking and Markets allowances increased by $65 million to $156 million, reflecting the increase in gross impaired loans.
The collective allowance against performing loans increased by $40 million to $1,444 million due to a $50 million increase in the collective allowance
against performing loans and partially offset by a $10 million re-allocation to the reserves against unfunded commitments and other off-balance sheet
items.
Impaired loans
Gross impaired loans increased to $5,394 million as at October 31, 2016 (excluding $100 million related to loans purchased under FDIC guarantee
related to the acquisition of R-G Premier Bank of Puerto Rico), from $4,658 million (excluding $157 million related to R-G Premier Bank of Puerto Rico)
last year.
Impaired loans in Canadian Banking increased by $180 million, primarily in the retail portfolio.
In International Banking, impaired loans increased by $288 million due to increases in Latin America region, primarily in Peru and Chile.
Impaired loans in Global Banking and Markets increased by $268 million, primarily in the United States and Asia.
Net impaired loans, after deducting the allowance for credit losses, were $2,446 million as at October 31, 2016, an increase of $361 million from a
year ago. Net impaired loans as a percentage of loans and acceptances were 0.49% as at October 31, 2016, an increase of five basis points from a
year ago.
74 | 2 0 1 6 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
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.
The total credit mark remaining on all acquired loans in Canadian Banking and International Banking as at October 31, 2016 was $259 million
(October 31, 2015 – $148 million).
Adjusting for the impact of foreign currency translation, the utilization of incurred and expected losses in the credit mark during the year was
$244 million (for the year ended October 31, 2015 – $68 million). The net benefit to net income attributable to common shareholders from the credit
mark on acquired loans this year was $123 million (for the year ended October 31, 2015 – $23 million).
Portfolio review
Canadian Banking
Gross impaired loans in the retail portfolio increased by $160 million to $1,003 million. Provision for credit losses in the retail portfolio were $770
million, up $128 million from last year driven by growth in relatively higher spread loans. In the commercial loan portfolio, gross impaired loans
increased by $20 million to $228 million and the provision for credit losses was $62 million, up $17 million from last year.
International Banking
In retail, gross impaired loans increased by $70 million to $2,227 million during the year, with an increase attributable mainly to Peru. Retail provisions
were flat compared to 2015. Increases from acquisitions and higher provisions for credit losses in Latin America from strong retail loan growth were
offset by favourable foreign currency translation. In commercial banking, gross impaired loans were $1,401 million, an increase of $218 million over
the prior year. The provision for credit losses in the commercial portfolio was $274 million in 2016, versus $126 million in 2015. The increase was
attributable to higher provisions in the energy sector, primarily in Colombia, and in Puerto Rico.
Global Banking and Markets
Gross impaired loans in Global Banking and Markets increased by $268 million in 2016 to $535 million primarily in the energy sector. The provision
for credit losses was $249 million in 2016, versus $67 million in 2015. The provisions this year were primarily in the energy sector.
Risk diversification
The Bank’s exposures to various countries and types of borrowers are well diversified (see T64 on page 110 and T68 on page 112). Chart C24 shows
loans and acceptances by geography. Ontario represents the largest Canadian exposure at 31.5% of the total. Latin America was 10.7% of the total
exposure and the U.S. was 7.7%.
C25 shows loans and acceptances by type of borrower (see T68 on page 112). Excluding loans to households, the largest industry exposures were
wholesale and retail (4.5%), real estate and construction (4.5%), financial services (3.9% including banks and non-banks), and energy (3.1%).
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 2016, loan sales totaled $42 million, compared to $143 million in 2015. The largest volume of loan sales in 2016
related to loans in the energy industry. As at October 31, 2016, credit derivatives used to mitigate exposures in the portfolios totaled $24 million
(notional amount), compared to $39 million as at October 31, 2015.
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. Energy, mining, and shipping portfolios are being closely managed.
Overview of loan portfolio
The Bank has a well-diversified portfolio by product, business and geography. Details of certain portfolios of current focus are highlighted below.
Energy
The Bank’s outstanding loan exposure to commercial and corporate companies in the energy sector was $15.6 billion as at October 31, 2016
(October 31, 2015 – $16.5 billion), reflecting approximately 3.1% (October 31, 2015 – 3.5%) of the Bank’s total loan portfolio. In addition, the Bank
has related undrawn energy loan commitments amounting to $11.1 billion as at October 31, 2016 (October 31, 2015 – $14.3 billion). The decline in
undrawn loan commitments is primarily driven by the upstream and midstream sub-sectors. Exposure in the upstream sub-sector declined by
$2.2 billion since October 31, 2015. Approximately 59% of the Bank’s outstanding energy loan exposure and associated undrawn commitments are
investment grade, after taking into account the benefit of collateral and guarantees.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 75
MANAGEMENT’S DISCUSSION AND ANALYSIS
As expected, retail delinquencies are tracking higher in Alberta. The outstanding loan exposures
are primarily secured. The Bank continues to consider the impact of lower energy prices in its
ongoing stress testing program. Results continue to be within our risk tolerance.
Real estate secured lending
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, 2016, these loans
accounted for $322 billion or 65% of the Bank’s total loans and acceptances outstanding
(October 31, 2015 – $309 billion or 65%). Of these, $242 billion or 75% are real estate secured
loans (October 31, 2015 – $236 billion or 76%). The tables below provide more details by
portfolios.
Insured and uninsured residential mortgages and home equity lines of credit
The following table presents amounts of insured and uninsured residential mortgages and home
equity lines of credit (HELOCs), by geographic area.
T41 Insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic
areas
Residential mortgages
Home equity lines of credit
2016
45%
As at October 31
Insured(1)
Uninsured
Total
Insured(1)
Uninsured
Total
($ millions)
Amount % Amount % Amount % Amount % Amount % Amount %
C24 Well diversified in Canada and
internationally…
loans and acceptances, October 2016
6%
3%
2%
11%
4%
8%
Canada
United States
Mexico
Latin America
Europe
66%
Caribbean and
Central America
Other
C25 … and in household and business
lending
loans & acceptances, October 2016
30%
5%
20%
Corporate
Financial and government
Personal
Residential mortgages
Canada:(2)
Atlantic provinces $
Quebec
Ontario
Manitoba &
Saskatchewan
Alberta
British Columbia
& Territories
7,034
8,346
3.7
4.3
52,230 27.0
$
4,901
7,150
2.5
3.7
41,935 21.7
6.2
$ 11,935
15,496
8.0
94,165 48.7
$ 1
–
2
–
–
–
$ 1,259
999
6.6
5.2
9,646 50.6
$ 1,260
999
9,648
5,857
3.0
19,551 10.1
3,236
10,828
16,929
8.8
15,306
1.7
5.6
7.9
9,093
4.7
30,379 15.7
32,235 16.7
2
3
–
–
0.1
840
4.4
3,027 15.8
842
3,030
–
3,294 17.3
3,294
17.3
6.6
5.2
50.6
4.4
15.9
Canada(3)
$109,947 56.9% $ 83,356 43.1% $193,303
100% $ 8
0.1% $19,065 99.9% $19,073
100%
International
–
–
29,585
100
29,585
100
–
–
–
–
–
–
Total
$109,947 49.3% $112,941 50.7% $222,888
100% $ 8
0.1% $19,065 99.9% $19,073
100%
2015
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
–
–
–
–
–
–
Total
$ 92,802 42.7% $124,696
57.3% $217,498
100% $ 9
0.1% $18,627 99.9% $18,636
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 $2,376 (October 31, 2015 – $2,104) of which $1,392 are insured (October 31, 2015 – $1,005).
Amortization period ranges for residential mortgages
The following table presents the distribution of residential mortgages by amortization periods,
and by geographic areas.
T42 Distribution of residential mortgages by amortization periods, and by geographic areas
2016
Residential mortgages by amortization
Less than
20 years
20-24
years
25-29
years
30-34
years
35 years
and
greater
Total
residential
mortgages
35.2% 36.3% 26.7%
67.7% 19.0% 11.5%
35.6% 35.6% 25.7%
66.4% 20.4% 11.4%
1.7%
1.7%
2015
3.0%
1.6%
0.1%
0.1%
0.1%
0.2%
100%
100%
100%
100%
As at October 31
Canada
International
Canada
International
Loan to value ratios
The Canadian residential mortgage portfolio is 43% uninsured (October 31, 2015 – 51%). The
average loan-to-value (LTV) ratio of the uninsured portfolio is 50% (October 31, 2015 – 53%).
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.
76 | 2 0 1 6 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
T43 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, 2016
Residential mortgages
LTV%
Home equity lines of credit(2)
LTV%
68.1%
63.0
62.4
67.6
66.7
60.7
62.9%
69.1%
For the year end October 31, 2015
62.5%
68.3%
59.4%
68.8
64.6
64.4
69.3
61.7
64.5%
N/A
65.7%
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 $956 million as at October 31, 2016 (October 31,
2015 – $927 million). This is a high quality portfolio with well-known developers who have long-term relationships with the Bank.
European exposures
As a result of the Bank’s broad international operations, the Bank has sovereign credit risk exposure to a number of countries. The Bank actively
manages this sovereign risk, including the use of risk limits calibrated to the credit worthiness of the sovereign exposure.
The Bank believes that its European exposures are manageable, are sized appropriately relative to the credit worthiness of the counterparties (83% of
the exposures are to investment grade counterparties based on a combination of internal and external ratings), and are modest relative to the capital
levels of the Bank. The Bank’s European exposures are carried at amortized cost or fair value using observable inputs, with negligible amounts valued
using models with unobservable inputs (Level 3). There were no significant events in the quarter that have materially impacted the Bank’s exposures.
The current European exposure is provided in T44 below.
T44 European exposure
As at October 31
($ millions)
Gross exposures
Less: Undrawn commitments
Net funded exposure
2016
2015
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
$ 11,858
$ 2,890
$ 12,472
$ 10,823
$ 3,554
$ 41,597
$ 39,231
–
–
12,472
–
–
12,472
12,409
$ 11,858
$ 2,890
$
–
$ 10,823
$ 3,554
$ 29,125
$ 26,822
Individual allowances for credit loss are $37.7.
Letters of credit and guarantees are included as funded exposure as they have been issued.
(1)
(2)
(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 $2,547 and collateral held against SFT was $7,714.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 77
MANAGEMENT’S DISCUSSION AND ANALYSIS
Below are the funded exposures related to all European countries:
T45 Funded exposures
As at October 31
($ 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, 2015
Includes $1,959 (October 31, 2015 – $667) in exposures to supra-national agencies.
(1)
(2) Corporate includes financial institutions that are not banks.
The Bank’s exposure are distributed as follows:
T46 Bank’s exposure distribution by country
As at October 31
($ millions)
Greece
Ireland
Italy
Portugal
Spain
Total GIIPS
U.K.
Germany
France
Netherlands
Switzerland
Other
Total Non-GIIPS
Total Europe
As at October 31, 2015
Sovereign(1)
Bank
Corporate(2)
Total
2016
$
$
$
$
$
$
311
286
11
–
307
915
7,561
1,975
599
1,255
1,051
3,275
15,716
16,631
15,128
$
$
$
$
$
$
–
27
(1)
–
111
137
1,163
1,799
1,947
452
239
1,599
7,199
7,336
6,214
$
$
$
$
$
$
–
37
181
–
181
399
2,304
306
1,196
398
309
246
4,759
5,158
5,480
2016
Loans and
loan
equivalents
Deposits
with
financial
institutions
Securities
SFT and
derivatives
$
$
$
$
$
$
311
99
213
–
486
1,109
6,090
1,371
754
1,090
1,102
3,232
13,639
14,748
14,547
$
$
$
$
$
$
–
27
–
–
–
27
1,620
204
517
85
23
43
2,492
2,519
2,709
$
$
$
$
$
$
–
55
(22)
–
103
136
1,279
2,389
2,251
600
158
1,491
8,168
8,304
6,669
$
$
$
$
$
$
–
169
–
–
10
179
2,039
116
220
330
316
354
3,375
3,554
2,897
$
$
$
$
$
$
$
$
$
$
$
$
311
350
191
–
599
1,451
11,028
4,080
3,742
2,105
1,599
5,120
27,674
29,125
26,822
Total
311
350
191
–
599
1,451
11,028
4,080
3,742
2,105
1,599
5,120
27,674
29,125
26,822
2015
Total
339
428
509
(2)
505
1,779
12,895
2,847
2,569
974
1,042
4,716
25,043
26,822
2015
Total
339
428
509
(2)
505
1,779
12,895
2,847
2,569
974
1,042
4,716
25,043
26,822
$
$
$
$
$
$
$
$
$
$
The Bank’s exposure to certain European countries of focus – Greece, Ireland, Italy, Portugal and Spain (GIIPS) – is not significant. As of October 31,
2016, the Bank’s current funded exposure to the GIIPS sovereign entities, as well as banks and non-bank financial institutions and corporations
domiciled in these countries, totaled approximately $1.5 billion, down from $1.8 billion last year. Of the $1.5 billion, $1.1 billion was related to loans
and loan equivalents.
Specific to sovereign exposures to GIIPS, the Bank’s exposure to Ireland included central bank deposits of $26 million and $1 million in trading book
securities. The Bank was net long securities in sovereign exposures to Spain ($111 million) and net short to Italy (-$1 million). The Bank had no
sovereign securities holdings of Greece and Portugal.
The Bank had exposures to Italian banks of $181 million, as at October 31, 2016 (October 31, 2015 – $187 million), primarily related to short-term
precious metals trading. Greek exposure of $311 million (October 31, 2015 – $339 million) related primarily to secured loans to shipping companies.
Securities exposures to European sovereigns and banks (excluding GIIPS) were $6.0 billion as at October 31, 2016 (October 31, 2015 – $5.3 billion),
predominantly related to issuers in France, Germany, Luxembourg, the Netherlands and the United Kingdom. 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, 2016, credit exposure to banks in the form of issued letters of credit amounted to $1.4 billion (October 31, 2015 –
$1.2 billion).
78 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Undrawn commitments of $12.5 billion (October 31, 2015 – $12.4 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 $9.1 billion as at October 31, 2016 (October 31, 2015 – $8.6 billion). As at October 31, 2016, commitments related to letters
of credit with banks amounted to $2.7 billion (October 31, 2015 – $3.3 billion). Unfunded commitments are detailed further by country in T47.
The Bank’s indirect exposure is also detailed in the table below and is defined as:
(cid:129) Securities where the exposures are to non-European entities whose parent company is domiciled in Europe, and;
(cid:129) Letters of credit or guarantees (included as loan equivalents in the above table).
Included in the indirect exposure was securities exposure of $485 million related to GIIPS, $75 million to Germany and $25 million to the United
Kingdom. Indirect exposure by way of letters of credit totaled $2,890 million at October 31, 2016 (October 31, 2015 – $2,593 million), of which
$184 million (October 31, 2015 – $62 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
$295 million (October 31, 2015 – $555 million).
The Bank may on occasion use credit default swaps (CDS) to partially offset its banking book exposure. As part of the trading portfolio, the Bank may
purchase or sell CDS. Specific to GIIPS as at October 31, 2016, the Bank had no CDS protection on funded loan exposures. All exposures, including
CDS, are subject to risk limits and ongoing monitoring by the Bank’s independent risk management department.
Like other banks, the Bank also provides settlement and clearing facilities for a variety of clients in these countries and actively monitors and manages
these intra-day exposures. However, the Bank has no funded exposure in these countries to retail customers or small businesses.
T47 Undrawn commitments and indirect exposure
As at October 31
($ 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)
2016
2015
2016
2015
$
$
$
–
421
49
–
172
642
4,958
798
1,583
1,364
701
2,426
$
$
$
–
256
53
–
180
489
5,526
607
1,599
1,188
740
2,260
$
–
35
73
–
561
$
–
(1)
6
–
420
$
669
$
425
$ 1,270
154
459
291
146
463
$ 1,365
161
338
210
144
554
$ 11,830
$ 11,920
$ 2,783
$ 2,772
$ 12,472
$ 12,409
$ 3,452
$ 3,197
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 79
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:
Page
Tables and charts
Page
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
81
81
81
81
81
81
81
81-82
81
82
82
82
82
82
82-84 C26 Interest rate gap
T48 Interest rate gap
T49 Structural interest rate sensitivity
84
84
84
T50 Total one-day VaR by risk factor
C27 Trading revenue distribution
C28 Daily trading revenue vs. VaR
Market risk linkage to balance sheet
86
T51 Market risk linkage to balance sheet of the Bank
Derivative instruments and structured transactions
Derivatives
Structured transactions
European exposures
86
86
86-87
77-79
T44 European exposure
T45 Funded exposures
T46 Bank’s exposure distribution by country
Market risk
Financial instruments
41-42
T29 Total market risk capital
45-46
T32 Mortgage-backed securities
T33 Collateralized debt obligations (CDOs)
80 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
83
83
83
84
85
85
86
77
78
78
42
46
46
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 derivative instruments.
Commodity risk
The risk of loss due to changes in prices or volatility of precious metal, base metal, energy and agriculture products. Both physical commodity and
derivative 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 historical resampling. 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.
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 or 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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 81
MANAGEMENT’S DISCUSSION AND ANALYSIS
Incremental Risk Charge (IRC) and Comprehensive Risk Measure (CRM)
Basel market risk capital requirements include IRC and 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.
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.
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. T48 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.
82 | 2 0 1 6 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
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.
T49 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
shareholders’ 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 2016, an immediate and sustained 100 basis point rise in
interest rates across all currencies and maturities would decrease after-tax net income by approximately $32 million over the next 12 months. The
Bank is relatively balanced from an earnings perspective, with positive near-term earnings sensitivity to rising rates in the US and most other Foreign
currencies, and positive medium-term earnings sensitivity to rising rates in Canada. During fiscal 2016, this measure ranged between $(55) million and
$160 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 $785 million.
During fiscal 2016, this measure ranged between $(263) million and $(805) 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.
C26 Interest rate gap
$ billions, one-year interest rate gap
20
10
0
-10
-20
-30
12
13
14
15
16
Foreign currencies gap
Canadian dollar gap
T48 Interest rate gap
Interest rate sensitivity position(1)
As at October 31, 2016 ($ billions)
Canadian dollars
Assets
Liabilities
Gap
Foreign currencies
Assets
Liabilities
Gap
Total
Gap
As at October 31, 2015
Gap
Within
3 months
3 to 12
months
Over
1 year
Non-interest
rate
sensitive
Total
$ 208.7
$ 231.5
$ 46.8
$ 49.0
$ (22.8)
$
(2.2)
$ 146.0
$ 113.0
$
33.0
$
6.8
$ 14.8
$ 408.3
$ 408.3
$
(8.0)
$
–
$ 311.7
$ 296.8
$
14.9
$ 28.0
$ 38.8
$ (10.8)
$
$
(7.9)
$ (13.0)
24.4
$ (29.1)
$
$
$
$
$
68.4
43.3
25.1
58.1
37.7
$ 79.9
$ 109.1
$ (29.2)
$ (37.2)
$ (33.0)
$ 488.0
$ 488.0
$
$
$
–
–
–
(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.
T49 Structural interest sensitivity
As at October 31 ($ millions)
After-Tax Impact of
100bp increase in rates
Non-trading risk
100bp decrease in rates(1)
Non-trading risk
2016
2015
Economic
Value of
Shareholders’
Equity
Annual
Income
Economic
Value of
Shareholders’
Equity
Annual
Income
$ (785)
$ (32)
$ (488)
$ 242
$ 650
$ 32
$ 418
$ (240)
(1) The annual income sensitivity for CAD, USD, EUR, and GBP exposures is now measured using a 100 basis point decline. Prior period items have been restated to reflect this change.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 83
MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2016, 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, 2015 – $60 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 or loss results
based on fixed end of day positions and actual reported profit or 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.
In fiscal 2016, the total one-day VaR for trading activities averaged $12.6 million, compared to $11.3 million in 2015.
T50 Total one-day VaR by risk factor
($ 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
2016
2015
Year end
Avg
High
Low Year end
Avg
$
$
$
10.6
8.0
8.5
2.0
2.1
2.0
4.2
(7.6)
13.2
21.2
$
$
10.6
8.3
6.4
2.7
1.3
2.4
6.3
(10.7)
$
$
12.6
27.6
$
$
16.4
13.6
10.0
6.4
2.9
3.9
12.6
N/A
20.3
37.4
$
$
$
7.5
4.5
3.0
0.8
0.6
1.3
3.7
N/A
8.7
18.0
$
$
$
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)
11.9 $
11.3 $
23.0
22.3 $
24.4 $
36.9
High
15.2
10.1
7.9
10.7
3.2
5.6
20.7
N/A
Low
6.3
5.8
2.7
1.1
0.4
1.9
3.9
N/A
8.2
17.4
$
$
$
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 2016, the total one-day Stressed VaR for trading activities averaged $27.6 million
compared to $24.4 million in 2015.
Basel market risk capital requirements include IRC and CRM which capture obligor default and migration risk. On October 31, 2016 the market risk
capital requirements for IRC and CRM were $407 million and $77 million, respectively.
84 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Description of trading revenue components and graphical comparison of VaR to daily P&L
Chart C27 shows the distribution of daily trading revenue for fiscal 2016 and Chart C28 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 $6.5 million per day, compared to $6.1 million for 2015. Revenue was positive
on 98% of trading days during the year, an increase from 95% in 2015. During the year, the largest single day trading loss was $8.0 million which
occurred on May 2, 2016, and was smaller than the total VaR of $9.7 million on the same day.
C27 Trading revenue distribution
Year ended October 31, 2016
C28 Daily trading revenue vs. VaR
$ millions, November 1, 2015 to October 31, 2016
40
35
30
25
20
15
10
5
0
# of days
Gain
Loss
-7 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 20 25 30>30
$ millions
40
30
20
10
0
-10
-20
-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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 85
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 the table below.
T51 Market risk linkage to Consolidated Statement of Financial Position of the Bank
As at October 31, 2016
($ 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
$
8,442 $
8,442 $
108,561
221
41,657
72,919
480,164
184,302
–
–
221
5,256
72,919
480,164
–
$ 896,266 $ 153,404 $ 558,560
108,561
–
36,401
–
–
–
$
–
–
–
–
–
–
184,302
$ 184,302
n/a
n/a
Interest rate
Interest rate, FX, equity
Interest rate, equity
Interest rate, FX
n/a
$ 611,877 $
1,459
23,312
42,387
8,430
3,011
147,969
– $ 580,814
1,459
–
–
23,312
4,174
38,213
–
8,430
3,011
–
–
–
$
Interest rate, FX, equity
31,063
Interest rate, equity
–
n/a
–
Interest rate, FX, equity
–
–
n/a
– Interest rate, credit spread
n/a
147,969
$ 838,445 $
69,955 $ 589,458
$ 179,032
Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.
(1)
(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 October 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)
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
$
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
1,486
–
–
20,212
3,282
41,988
–
7,812
2,054
–
–
–
$
28,153
–
–
–
–
–
125,265
$ 803,018 $
70,012 $ 579,588
$ 153,418
Interest rate, FX, equity
Interest rate, equity
n/a
Interest rate, FX, equity
n/a
Interest rate, credit spread
n/a
Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.
(1)
(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
86 | 2 0 1 6 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, 2016, unencumbered liquid assets were $183 billion (October 31, 2015 – $201 billion). Securities including NHA
mortgage-backed securities, comprised 74% of liquid assets (October 31, 2015 – 62%). Other unencumbered liquid assets, comprising cash and
deposits with central banks, deposits with financial institutions, precious metals and call and short loans, was 26% (October 31, 2015 – 38%). The
decrease in liquid assets was mainly attributable to a decrease in cash and deposits with central banks, partly offset by an increase in unencumbered
government securities.
The carrying values outlined in the liquid asset table are consistent with the carrying values in the Bank’s Statement of Financial Position as at
October 31, 2016. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the stress scenarios.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 87
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank’s liquid asset pool is summarized in the following table:
T52 Liquid asset pool
As at October 31, 2016
($ 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
Total liquid
assets
Pledged as
collateral Other(1)
Available as
collateral
Other
$
35,396
10,948
8,442
45,825
50,761
58,833
33,072
1,673
$
–
–
–
12,482
36,822
60,745
–
–
$
$
35,396
10,948
8,442
$
–
–
–
$ 7,917
196
115
58,307
87,583
119,578
33,072
1,673
27,187
58,680
76,394
1,993
–
–
–
–
–
–
27,479
10,752
8,327
31,120
28,903
43,184
31,079
1,673
$ –
–
–
–
–
–
–
–
Total
$ 244,950
$ 110,049
$ 354,999
$ 164,254
$ 8,228
$ 182,517
$ –
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
Total liquid
assets
Pledged as
collateral Other(1)
Available as
collateral
Other
$
63,228
10,699
10,550
24,198
39,525
52,396
36,409
1,352
$
–
–
–
21,206
29,989
55,752
–
–
$
$
63,228
10,699
10,550
$
–
–
–
$ 8,700
293
117
45,404
69,514
108,148
36,409
1,352
22,242
44,547
65,405
2,847
–
–
–
–
–
–
54,528
10,406
10,433
23,162
24,967
42,743
33,562
1,352
$ –
–
–
–
–
–
–
–
Total
$ 238,357
$ 106,947
$ 345,304
$ 135,041
$ 9,110
$ 201,153
$ –
(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.
A summary of total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries, is presented below:
T53 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
2016
2015
$ 135,335
13,871
33,311
$ 154,830
20,374
25,949
$ 182,517
$ 201,153
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
(82%) 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.
88 | 2 0 1 6 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
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:
T54 Asset Encumbrance
As at October 31, 2016
($ 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, 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
Bank-owned
assets
Securities received as
collateral from securities
financing and derivative
transactions
$
35,396
10,948
8,442
45,825
50,761
58,833
5,007
33,072
1,673
464,840
151,916
29,553
$
–
–
–
12,482
36,822
60,745
4,149
–
–
–
(84,399)
–
Encumbered assets
Unencumbered assets
Total assets
$
35,396
10,948
8,442
$
58,307
87,583
119,578
9,156
33,072
1,673
464,840
67,517
29,553
Pledged as
collateral
–
–
–
27,187
58,680
76,394
3,615
1,993
–
5,934
5,316
–
$
Other(1)
7,917
196
115
–
–
–
–
–
–
60,311
–
–
Available as
collateral(2)
Other(3)
$
27,479
10,752
8,327
31,120
28,903
43,184
–
31,079
1,673
11,596
–
–
$
–
–
–
–
–
–
5,541
–
–
386,999
62,201
29,553
$ 896,266
$ 29,799
$ 926,065
$ 179,119
$ 68,539
$ 194,113
$ 484,294
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
–
2,915
5,299
–
$
Other(1)
8,700
293
117
–
–
–
–
–
–
49,481
–
–
Available as
collateral(2)
Other(3)
$
54,528
10,406
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
$ 146,061
$ 58,591
$ 210,287
$ 470,911
(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.
As of October 31, 2016 total encumbered assets of the Bank were $248 billion (October 31, 2015 – $205 billion). Of the remaining $678 billion
(October 31, 2015 – $681 billion) of unencumbered assets, $194 billion (October 31, 2015 – $210 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 below its lowest current rating, the Bank has to provide an
additional $98 million or $218 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 Net Stable Funding Ratio (NSFR) is expected to become a minimum standard in OSFI’s liquidity framework by November 1, 2017, following a
consultation process with banks and the public. The NSFR is aimed at reducing structural funding risk by requiring banks to fund their activities with
sufficiently stable sources of funding.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 89
MANAGEMENT’S DISCUSSION AND ANALYSIS
Liquidity coverage ratio
The Liquidity Coverage Ratio (LCR) measure 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 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, 2016, based on month-end LCR calculations for August,
September and October.
T55 Bank’s average LCR
For the quarter ended October 31, 2016 ($ 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 October 31, 2015 ($ millions)
Total HQLA
Total net cash outflows
Liquidity coverage ratio (%)
Total
unweighted
value
(Average)(1)
Total
weighted
value
(Average)(2)
*
$ 136,401
160,438
73,193
87,245
155,616
37,039
96,196
22,381
169,782
17,134
5,681
146,967
3,002
426,203
*
11,070
2,346
8,724
82,996
8,957
51,658
22,381
37,940
42,806
17,097
5,681
20,028
1,292
7,182
*
$ 183,286
$
105,477
21,534
28,028
$
34,145
13,291
28,028
$
155,039
$
75,464
Total
adjusted
value(4)
*
*
*
$ 136,401
$ 107,822
127%
Total
adjusted
value(4)
*
*
*
$ 145,859
$ 117,474
124%
* 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 increase in the Bank’s average LCR for the
quarter ended October 31, 2016 versus the average for the quarter ended October 31, 2015 was attributable to normal business activity.
90 | 2 0 1 6 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 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 $266 billion as at October 31, 2016
(October 31, 2015 – $251 billion). The increase since October 31, 2015, was due primarily to personal deposits, internal capital generation and the
issuance of NVCC subordinated debentures and preferred shares, net of redemptions. 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 $141 billion (October 31, 2015 – $137 billion). Longer term wholesale debt issuances
include medium-term notes, deposit notes, mortgage securitization, asset-backed securities and covered bonds. The increase since October 31, 2015,
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.
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 markets 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), uninsured residential mortgages through the Bank’s Covered Bond
Program, unsecured personal lines of credit through the Hollis Receivables Term Trust II Shelf and retail credit card receivables through the Trillium
Credit Card 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 non-registered programs, such as the securitization of retail indirect auto loan
receivables through Securitized Term Auto Receivables Trust 2016-1. The Bank’s Covered Bond Program is listed with the U.K. Listing Authority, and
the Bank may issue under the program in Europe, the United States, Australia and Switzerland. 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. The Bank’s European Medium Term Note Programme is listed with the U.K. Listing Authority, Swiss Stock Exchange and the Tokyo
Pro-Bond Market. The Bank’s Singapore Medium Term Note Programme is listed with the Singapore Exchange and the Taiwan Exchange.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 91
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
T56 Wholesale funding(1)
As at October 31, 2016
($ 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
$ 2,958
$
571
$
187
$
148
$
31
$
3,895
$
103
$
149
$
11,434
16,838
25,324
8,181
7,357
69,134
3,151
2,625
1,573
–
–
–
22
3,978
5,700
451
3,353
1,376
30
1,906
4,576
25
2,707
663
62
–
3,681
26
–
950
1
–
8,509
–
3,962
189
–
1,063
3
19,492
691
6,060
4,052
118
21,935
1,218
3,413
2,102
–
333
–
31,195
1,555
19,160
7,834
109
–
–
–
7,576
417
1,381
3,782
8,767
$
4,147
72,618
8,509
80,198
3,881
30,014
17,770
8,994
$ 18,612
$ 32,297
$ 35,450
$ 12,987
$ 12,605
$ 111,951
$ 31,922
$ 60,335
$ 21,923
$ 226,131
Unsecured funding
Secured funding
$ 15,987
2,625
$ 23,139
9,158
$ 30,149
5,301
$ 12,011
976
$ 11,353
1,252
$
92,639
19,312
$ 25,189
6,733
$ 31,786
28,549
$ 16,343
5,580
$ 165,957
60,174
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
15,006
20,128
42,633
13,417
3,671
94,855
4,195
1,720
390
–
–
–
19
3,920
2,365
1
–
1,208
59
1,648
7,565
–
–
794
64
–
6,149
–
–
997
3
–
7,288
–
1,837
500
2,615
829
6
18,306
501
2,615
3,828
151
16,926
661
5,909
4,100
–
964
–
33,674
1,042
11,359
6,214
20
36
–
9,929
440
2,473
5,632
6,626
100,050
7,288
78,835
2,644
22,356
19,774
6,797
$ 20,688
$ 28,585
$ 53,047
$ 20,777
$
9,580
$ 132,677
$ 31,879
$ 53,353
$ 25,136
$ 243,045
Unsecured funding
Secured funding
$ 18,968
1,720
$ 23,456
5,129
$ 50,605
2,442
$ 19,780
997
$
5,636
3,944
$ 118,445
14,232
$ 21,209
10,670
$ 34,738
18,615
$ 16,591
8,545
$ 190,983
52,062
(1) Wholesale funding sources exclude repo transactions and bankers acceptances, which are disclosed in T57 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.
92 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
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 $183 billion as at October 31, 2016 (October 31, 2015 – $201 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, 2016, 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 $428 million in 2016 (2015 – $433 million). The decrease reflects cost reductions resulting from structural cost
transformation initiatives, partially offset by unfavourable forex impact.
Two major outsourcing contracts have been entered into by the Bank. Both are cancellable with notice.
The largest is a contract with IBM Canada entered into in 2001 to manage the Bank’s domestic computer operations, including data centres,
branches, Automated Banking Machines, and desktop computing environment. The contract was expanded in 2005 to also include the computer
operations for the Caribbean & Central America, and Mexico. The contract for the Canadian operations, Mexico and Caribbean & Central America
was renewed earlier in 2013, for a further five year period.
The second is with Symcor Inc. consisting of two contracts (a 2 year term and a 5 year term with a renewal option) to manage the Bank’s cheque and
bill payment processing, including associated statement and report printing activities and cheque services across Canada.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
R
I
S
K
M
A
N
A
G
E
M
E
N
T
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 93
MANAGEMENT’S DISCUSSION AND ANALYSIS
T57 Contractual maturities
($ millions)
Assets
Cash and deposits with financial institutions and
precious metals
Trading assets
Financial instruments designated at fair value
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, 2016
$ 37,703 $
8,579
1,071 $
7,984
320 $
237 $
2,485
2,754
1,198 $
2,762
932 $
537 $
38 $
4,683
17,149
20,109
12,750 $
42,056
54,786
108,561
through profit or loss
–
–
–
–
205
–
16
–
–
221
Securities purchased under resale agreement and
securities borrowed
Derivative financial instruments
Investment securities – available-for-sale
Investment securities – held-to-maturity
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
70,343
2,311
1,933
207
23,431
3,382
2,790
17,259
–
9,899
–
13,250
3,041
4,088
439
24,057
5,485
2,484
16,088
–
1,816
–
6,156
1,210
3,265
1,162
26,091
8,771
2,902
14,418
–
248
–
1,541
1,218
2,641
522
25,375
12,693
3,154
9,528
–
9
–
839
900
1,301
1,003
26,331
10,796
2,777
12,758
–
6
–
–
3,694
5,666
4,347
81,473
48,038
10,277
23,158
–
–
–
–
9,986
23,587
14,434
190,391
112,675
20,914
56,802
–
–
–
–
19,297
5,945
296
31,851
19,265
5,813
6,773
–
–
–
–
–
2,083
–
51,164
1,783(1)
48,391
5,616(2)
(4,626)
–
33,851
92,129
41,657
50,509
22,410
480,164
222,888
99,502
162,400
(4,626)
11,978
33,851
$ 55,066 $ 59,091 $ 55,977 $ 24,792 $ 22,794 $ 50,504 $
6,944
48,122
8,892
50,199
9,131
46,846
7,392
17,400
6,501
16,293
15,206
35,298
75,096 $ 13,125 $ 255,432 $ 611,877
199,302
16,317
412,575
58,779
128,370
127,062
549
12,576
–
9,899
80
1,711
87,130
–
568
–
4
1,816
200
2,237
7,050
–
819
–
–
248
388
1,399
215
–
591
–
–
9
897
1,399
335
–
316
–
3
6
22
1,035
2,352
–
550
–
110
–
2,755
4,267
1
–
1,434
–
1,038
–
4,544
10,473
–
–
2,432
–
304
–
9,039
19,866
–
7,633
4,094
–
–
–
5,387
–
–
–
31,912
57,821
1,459
11,978
23,312
42,387
97,083
7,633
42,716
57,821
$
28 $
60 $
88 $
85 $
83 $
291 $
631 $
536 $
5,081
–
17
5,170
–
35
12,498
–
50
15,381
–
49
20,870
–
49
15,723
–
197
93,842
–
114
5,680
–
–
– $
–
35,297
1
1,802
174,245
35,297
512
(1)
(2)
(3)
(4)
Includes primarily impaired mortgages.
Includes primarily overdrafts and impaired loans.
Includes the undrawn component of committed credit and liquidity facilities.
Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.
94 | 2 0 1 6 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
($ 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 – available-for-sale
Investment securities – held-to-maturity
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
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
3,941
65
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
2,136
4
24,561
11,570
2,500
10,491
–
6
–
–
3,761
7,423
111
71,989
43,088
10,146
18,755
–
–
–
–
9,541
16,185
463
181,600
108,597
19,563
53,440
–
–
–
–
18,273
4,291
8
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
42,565
651
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
–
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
648
–
5,425
11,109
804
–
7,851
20,077
–
–
878
–
–
–
2,444
–
$
83
16,985
–
51
$
81
16,264
–
50
$
80
18,052
–
50
$
285
20,335
–
183
$
595
76,660
–
225
$
–
–
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
–
6,182
3,803
–
546
4,878
–
4
(1)
(2)
(3)
(4)
Includes primarily impaired mortgages.
Includes primarily overdrafts and impaired loans.
Includes the undrawn component of committed credit and liquidity facilities.
Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 95
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 2016, 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 the identification, 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:
(cid:129) The Board of Directors is responsible for sound corporate governance and approves biennially the Bank’s Operational Risk Management Policy;
(cid:129) A senior level Operational & Compliance 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 and compliance risk management;
(cid:129) Business-line level committees are in place to ensure operational risk issues are known, discussed, managed and escalated, as needed and in a
timely manner;
(cid:129) Executive management with clearly defined areas of responsibility;
(cid:129) A central unit in Global Risk Management responsible for: developing 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;
(cid:129) 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;
(cid:129) Separation of duties between key functions; and
(cid:129) 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, including 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 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 residual risk exposure, as
appropriate. 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
highly unlikely 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 information on the level of exposure to a given operational risk to a particular point in time
and can help to monitor potential shifts in risk conditions or new emerging risk and/or measure residual risk exposure and effectiveness of controls.
KRIs exist within the business lines and at the enterprise 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 potentially 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 was
approved by OSFI in August 2016 to use AMA; implementation is planned for FY2017.
(cid:129) Operational risk reporting is provided to the Bank’s senior executive management and the Board of Directors, and includes information relating to
key events, results, trends and themes across the operational risk tools. The combination of these information sources provides both a backward
and forward-looking view of operational risk at the Bank.
96 | 2 0 1 6 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
(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 or denials of service attacks, and has implemented a robust and continuously evolving cyber security program in
response. 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 Scotiabank’s Code of 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 Scotiabank’s Code of 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.
Environmental Risk
Environmental risk refers to the possibility that environmental concerns involving Scotiabank or its customers could affect the Bank’s
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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 97
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 the impact of climate (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.
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, manage and report 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. Further information is available in the Bank’s annual Corporate Social Responsibility
Report.
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.
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 | 2 0 1 6 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 130.
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 the Group Head and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
As of October 31, 2016, the Bank’s management, with the participation of the President and Chief Executive Officer and Group Head and Chief
Financial Officer, 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, 2016.
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, 2016.
Critical Accounting Estimates
The Bank’s accounting policies are integral to understanding and interpreting the financial results reported in this annual report. Note 3 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 2016 than in 2015 across all business lines.
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 99
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
$71 million (2015 – $73 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, 2016, was $3,498 million, an increase of $238 million from a year earlier. This year
included an increase in collective allowance against performing loans of $50 million primarily related to the energy sector. Of the collective allowance
amount, $662 million is attributable to business and government performing loans (2015 - $644 million), with the remainder allocated to personal
lending and credit cards of $2,258 million (2015 - $1,941 million) and residential mortgages of $578 million (2015 - $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 or loss or available-for-sale at inception. All other financial instruments, including those designated as fair value
through profit or 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 $119 million as at October 31, 2016, (2015 –
$27 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, 2016, a funding valuation adjustment (FVA) of $92 million pre-tax (2015 – $42 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 | 2 0 1 6 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 6. The percentage of each
asset and liability category by fair value hierarchy level are outlined as follows:
T58 Fair value hierarchy of financial instruments carried at fair value
Fair value hierarchy
As at October 31, 2016
Level 1
Level 2
Level 3
Trading
assets
(incl. precious
metals)
56%
43%
1%
100%
Assets
Available-
for-sale
securities
62%
36%
2%
100%
Liabilities
Obligations
related to
securities
sold short
85%
15%
–%
100%
Derivatives
1%
98%
1%
100%
Derivatives
2%
98%
–%
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, the criteria for assessment of impairment is consistent with the criteria for 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, 2016, the gross unrealized gains on available-for-sale securities recorded in accumulated other comprehensive income were
$740 million (2015 – $1,058 million), and the gross unrealized losses were $285 million (2015 – $291 million). Net unrealized gains were therefore
$455 million (2015 – $767 million) before hedge amounts. The net unrealized gains after hedge amounts were $26 million (2015 – $267 million).
At October 31, 2016, the unrealized loss recorded in accumulated other comprehensive income relating to securities in an unrealized loss position for
more than 12 months was $206 million (2015 – $191 million). This unrealized loss was comprised of $11 million (2015 – $24 million) in debt
securities, $160 million (2015 – $164 million) related to preferred shares and $35 million (2015 – $3 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 assumptions with the greatest
potential impact are the discount rates. These rates are used for measuring the benefit obligation, service cost and interest cost. The discount rate
used to determine the defined benefit obligation is based on the yield at the reporting date on high quality corporate bonds that have durations that
match the terms of the Bank’s obligations. Prior to 2016, the discount rate used to determine the annual benefit expense was the same as the rate
used to determine the defined benefit obligation. Beginning in 2016, separate discount rates were used to determine the annual benefit expense in
Canada and the U.S. These rates were determined with reference to the yields on high quality corporate bonds with durations that match the various
components of the annual defined benefit expense. The discount rate used to determine the annual benefit expense for all other plans continues to
be same as the rate used to determine the defined benefit obligation. If the assumed discount rates were 1% lower, the benefit expense for 2016
would have been $116 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.
The Bank uses a measurement date of October 31, and based on this measurement date, the Bank reported a deficit of $1,369 million in its principal
pension plans as at October 31, 2016, as disclosed in Note 27 to the consolidated financial statements.
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 27 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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 101
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 $484 million as at October 31,
2016 (2015 – $539 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 $55 million (2015 – $166 million). The amount related to unrecognized
tax losses was $14 million, which will expire as follows: $13 million in 2018 and beyond and $1 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.
In November 2016 the Bank received a federal reassessment of $179 million for tax and interest as a result of the Canada Revenue Agency denying
the tax deductibility of certain Canadian dividends received during the 2011 taxation year. The circumstances of the dividends subject to the
reassessment are similar to those prospectively addressed by recently enacted rules which had been introduced in the 2015 Canadian federal budget.
The Bank is confident that its tax filing position was appropriate and in accordance with the relevant provisions of the Income Tax Act (Canada), and
intends to vigorously defend its position.
Note 26 of the 2016 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 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 2016, 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 14 to the consolidated financial statements and in the discussion of off-balance sheet arrangements, 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.
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.
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 Bank determines the carrying value of the CGU using a regulatory capital approach based on credit, market, and operational risks, and leverage,
consistent with the Bank’s capital attribution for business line performance measurement. 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.
102 | 2 0 1 6 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
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, 2016, 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, 2016, 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.
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.
Restructuring
Certain of the Banks provisions relate to restructuring as part of the Bank’s efforts to enhance the customer experience, drive digital transformation
and improve productivity. Restructuring provisions are primarily related to employee severance and require managements best estimate of the amount
required to settle the obligation. Uncertainty exists with respect to when the obligation will be settled and the amounts ultimately paid, as this will
largely depend upon individual facts and circumstances. The restructuring provision is expected to be utilized in line with the approved plans; the
actual utilization will be assessed quarterly and may lead to changes in the provision amount recorded.
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 regulatory 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 or regulatory proceedings will have a material adverse effect on the
Consolidated Statement of Financial Position or results of operations of the Bank.
Legal provisions are established when it becomes probable that the Bank will incur an expense related to a legal action and the amount can be reliably
estimated. Such provisions are recorded at the best estimate of the amount required to settle any obligation related to these legal actions as at the
balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Management and internal and external experts are
involved in estimating any amounts that may be required. The actual costs of resolving these claims may vary significantly from the amount of the
legal provisions. The Bank’s estimate involves significant judgement, given the varying stages of the proceedings, the fact that the Bank’s liability, if
any, has yet to be determined and the fact that the underlying matters will change from time to time. As such, there is a possibility that the ultimate
resolution of those legal actions may be material to the Bank’s consolidated results of operations for any particular reporting period.
Future Accounting Developments
The Bank actively monitors developments and changes in accounting standards from the IASB as well as regulatory requirements from the Canadian
Securities Administrators and OSFI.
Effective November 1, 2017
IFRS 9 Financial instruments
On July 24, 2014, the IASB issued IFRS 9 Financial Instruments (“the Standard”), which will replace IAS 39. The Standard covers three broad topics:
Classification and Measurement, Impairment and Hedging. In line with OSFI’s advisory, all Canadian D-SIBs, including the Bank are required to early
adopt IFRS 9 effective November 1, 2017.
In June 2016, OSFI issued “IFRS 9 Financial Instruments and Disclosures” which provides guidance on the application of IFRS 9 that is consistent with
the BCBS guidance issued in 2015.
In light of IASB and FASB’s new standards on expected credit loss (“ECL”) accounting, the Basel Committee appointed the Task Force on Provisioning
(TFP) to consider the implications of this change in accounting for regulatory capital. The TFP published in October 2016:
(cid:129) A Consultative Document outlining the Committee’s proposal in the interim along with possible transitional arrangements – this document
proposes to retain in the interim the current regulatory treatment of provisions in each jurisdiction. There are three approaches that all
propose to transition the impact over a number of years.
The TFP also issued for discussion a document that assesses regulatory capital policy options for the longer-term.
(cid:129)
Governance and project management
The adoption of IFRS 9 is a significant initiative for the Bank that commenced in 2014, involving substantial finance, risk management and technology
resources. The project is managed through a governance structure that includes an Executive Steering Committee (EC) comprised of senior levels of
management from risk management, finance, technology, and the business units. Periodic reporting on the progress against plan is provided to the
Executive Steering committee and Bank senior management.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 103
MANAGEMENT’S DISCUSSION AND ANALYSIS
To date, as per the plan, the Bank’s efforts have largely been focused on updating accounting policies to address key aspects of the Standard,
developing risk models and associated methodologies, and conducting training sessions to impacted internal stakeholders. The Bank will complete the
development and validation of the impairment models for the calculation of expected credit losses in 2017 to support a parallel run during 2017. The
Bank will update accounting policy manuals, internal control documents, implement changes to business and financial reporting processes and
systems, and enhance the Bank’s existing governance process to support the high quality implementation of the Standard by November 1, 2017.
The following is a summary of some of the more significant items that are likely to be important in understanding the impact of the implementation
of IFRS 9:
Classification and measurement, and hedging
The Standard introduces new requirements to determine the measurement basis of financial assets, involving the cash flow characteristics of assets
and the business models under which they are managed. Accordingly, 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. This Standard affects the
accounting for available-for-sale equity securities, requiring a designation, by portfolio, between recording both unrealized and realized gains either
through (i) OCI or (ii) Income Statement. As a result, the amount of equity securities gains recorded through income is expected to be lower than
current levels and levels recorded in recent years. For other financial instruments, based on assessments completed to date, the Bank does not expect
the implementation will result in a significant change in the classification and measurement of the Bank’s financial assets, between Amortized cost,
Fair Value through OCI and Fair Value through Income Statement.
The Standard expands the scope of eligible hedged items and aims to better align the accounting with risk management activities. The Bank is
permitted to adopt the hedge accounting requirements of IFRS 9 concurrently or to defer the adoption of the hedge accounting requirements of the
standard to a future period. The Bank is currently considering deferring the adoption of these requirements, although it will implement the revised
hedge accounting disclosures.
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 forward
looking compared to the current incurred loss approach. Expected credit losses under IFRS 9 are the present value of all cash shortfalls related to
default events either (i) over the following twelve months or (ii) over the expected life of a financial instrument depending on credit deterioration from
inception. ECL should reflect an unbiased, probability-weighted outcome as opposed to the single best estimate allowed under the current approach.
The probability-weighted outcome considers multiple scenarios based on reasonable and supportable forecasts.
The Bank’s approach leverages the existing regulatory capital models and processes to the extent possible. New models and systems are being
developed to meet the requirements of IFRS 9. While most of the Bank’s loan portfolios use the existing Advanced Internal Ratings Based (AIRB) credit
models for Basel purposes and can be leveraged for developing IFRS 9 models, for other Standardized portfolios the Bank will develop new
methodologies and models taking into account the relative size, quality and complexity of the portfolios.
IFRS 9 considers the calculation of ECL by multiplying the Probability of default (PD), Loss Given Default (LGD) and Exposure at Default (EAD).
IFRS 9 Impairment model uses a three stage approach based on the extent of credit deterioration since origination:
Stage 1 – 12-month ECL applies to all financial assets that have not experienced a significant increase in credit risk (SIR) since origination and are not
credit impaired. The ECL will be computed using a 12-month PD that represents the probability of default occurring over the next 12 months or less in
line with the maturity profile of the asset. This is different than the current approach which estimates a collective allowance to recognize losses that
have been incurred but not reported on performing loans.
Stage 2 – When a financial asset experiences a SIR since origination but is not credit impaired, it is considered to be in Stage 2. This requires the
computation of ECL based on lifetime PD that represents the probability of default occurring over the remaining lifetime of the financial asset.
Provisions are higher in this stage because of an increase in risk and the impact of a longer time horizon being considered compared to 12 months in
Stage 1.
Stage 3 – Financial assets that have an objective evidence of impairment will be included in this stage. Similar to stage 2, the allowance for credit
losses will continue to capture the lifetime expected credit losses for such loans. As the Bank’s definition of default is not likely to change materially
and will align with the regulatory definition, the treatment of loans in stage 3 remains substantially the same as the current treatment of impaired
loans under IAS 39.
Some of the key concepts in IFRS 9 that have the most significant impact and require a high level of judgement are:
Assessment of Significant Increase in Credit Risk
The assessment of a significant increase in credit risk is done on a relative basis. To assess whether the credit risk on a financial asset has increased
significantly since origination, the Bank will compare the risk of default at the reporting date to the risk of default at origination, using key risk
indicators that are used in the Bank’s existing risk management processes. At each reporting date, the assessment of a change in credit risk will be
individually assessed for those considered individually significant and at the segment level for retail exposures. This assessment is symmetrical in
nature, allowing credit risk of financial assets to move back to Stage 1 if the increase in credit risk since origination has reduced and is no longer
deemed to be significant.
Macroeconomic Factors, Forward Looking Information (FLI) and Multiple Scenarios
IFRS 9 requires an unbiased and probability weighted estimate of credit losses by evaluating a range of possible outcomes that incorporates forecasts
of future economic conditions.
Macroeconomic factors and FLI are required to be incorporated into the measurement of ECL as well as the determination of whether there has been
a significant increase in credit risk since origination. Measurement of ECLs at each reporting period should reflect reasonable and supportable
information at the reporting date about past events, current conditions and forecasts of future economic conditions. The assessment of whether there
has been a SIR is to be performed at each reporting date.
The Bank will use multiple scenarios that will be probability weighted to determine ECL, leveraging its existing Enterprise Wide Stress Testing modeling
framework.
Expected Life
When measuring ECL, the Bank must consider the maximum contractual period over which the Bank is exposed to credit risk. All contractual terms
should be considered when determining the expected life, including prepayment options and extension and rollover options.
104 | 2 0 1 6 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
For certain revolving credit facilities, such as credit cards which qualify for a narrow exception under IFRS 9, the expected life is extended beyond the
contractual period and is estimated based on the period over which the Bank is exposed to credit risk and where the credit losses would not be
mitigated by management actions.
Definition of Default and Write-off
The Bank’s definition of default described in Note 3 is not expected to be materially different and will align with the regulatory definition of default
upon implementation of IFRS 9. The Bank does not expect to rebut the presumption in IFRS 9 that loans which are 90 days past due are in default for
retail loans. The policy on the write-off of loans is expected to remain unchanged.
The main adjustments to the regulatory capital risk components are summarized in the following chart:
PD
LGD
EAD
Regulatory capital
IFRS 9
Through the cycle (represents long-run
average PD throughout a full economic cycle)
Point in time (based on current conditions, adjusted to
take into account estimates of future conditions that will
impact PD).
12 month PD is used.
Downturn LGD based on losses that would
be expected in an economic downturn and
subject to certain regulatory floors. Both
direct and indirect collection costs are
considered.
Based on the drawn balance plus expected
utilization of any undrawn portion prior to
default, and cannot be lower than the
drawn balance.
12 month PD for Stage 1 ECL and Lifetime PD for
Stage 2 and Stage 3 ECL.
Expected LGD based on historical charge-off events and
recovery payments, current information about attributes
specific to borrower, and direct costs. Forward-looking
macroeconomic variables and expected cash flows from
credit enhancements will be incorporated as appropriate
and excludes floors and undue conservatism.
EAD represents the expected balance at default over the
lifetime and is conditional on forward looking
expectations.
Expected credit losses are discounted from default date
to the reporting date
Discounting factors
Not applicable
Transition and impact
The new requirements will be applied retrospectively by adjusting the opening balance sheet for the transition impact at November 1, 2017 with no
requirement to restate comparative periods. The impact of IFRS 9 on the Bank’s consolidated financial results at the time of adoption is dependent
upon prevailing market factors and economic conditions at that time, as well as future forecasts of macro-economic factors and forward looking
information. The Bank will disclose the impact on transition to the balance sheet and regulatory capital, when reliable estimates are available and this
will be no later than in the annual report of 2017.
At transition, we expect the existing Collective Allowances against performing loans to contribute a significant component of allowance levels
required for Stage 1 and Stage 2 assets under IFRS 9 at transition. The existing Specific Allowances and Collective Allowances against impaired loans
should not change significantly for Stage 3 assets under IFRS 9 at transition. Under the existing accounting practice by the Bank, the change to
Collective Allowance against performing loans is recorded in the Other business segment on a periodic basis as risk changes and/or if volumes change
over a period of time. Under IFRS 9, the change in allowances on performing loans (Stage 1 and Stage 2) will now be recorded in the Bank’s three
main business lines on a regular quarterly basis.
For a description of the changes in requirements please refer to Note 4 of the 2016 consolidated financial statements.
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’s assessment will be fees and commission revenues from wealth management and other banking services.
On April 12, 2016, the IASB issued amendments to the revenue standard, IFRS 15 Revenue From Contracts with Customers. The amendments provide
additional clarification on the identification of a performance obligation in a contract, determining the principal and agent in an agreement, and
determining whether the licensing revenues should be recognized at a point in time or over a specific period. The amendments also provide additional
practical expedients upon transition to IFRS 15. The amendments are effective for the Bank on November 1, 2018, consistent with the effective date
of the standard.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 105
MANAGEMENT’S DISCUSSION AND ANALYSIS
Effective November 1, 2019
Leases
On January 13, 2016, the IASB issued IFRS 16 Leases, which requires a lessee to recognize an asset for the right to use the leased item and a liability
for the present value of its future lease payments. IFRS 16 will result in leases being recorded on the Bank’s balance sheet, including those currently
classified as operating leases except for short-term leases and leases with low value of the underlying asset. IFRS 16 substantially carries forward the
lessor accounting requirements in IAS 17.
IFRS 16 is effective for the Bank on November 1, 2019, with early adoption permitted from the date the Bank applies IFRS 15 Revenue from Contracts
with Customers on or before the date of initial application of IFRS 16. On transition there are practical expedients available whereby the Bank will not
need to reassess whether a contract is, or contains a lease, or reassess the accounting of sale leaseback transactions recognized prior to the date of
initial application.
A lessee will apply IFRS 16 to its leases either retrospectively to each prior reporting period presented; or retrospectively with the cumulative effect of
initially applying IFRS 16 being recognized at the date of initial application.
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 continues to monitor these and other developments and
is working to ensure business impacts, if any, are minimized.
Bank recapitalization regime
On June 22, 2016, the Federal Government passed legislation to implement a “bail-in” regime, in accordance with regulations to the Canada Deposit
Insurance Corporation Act that have not yet been prescribed (the “CDIC Act Regulations”), for the largest six Canadian banks, including The Bank of
Nova Scotia, designated as domestic systemically important banks (D-SIBs). The legislation aims to enhance the resolution toolkit for D-SIBs, including
the framework for the conversion of certain eligible shares and liabilities of the D-SIB into common equity of the bank (or any of its affiliates) in the
event the D-SIB becomes non-viable. This bail-in regime is aimed at ensuring that in the unlikely event of a failure of a D-SIB, it is the D-SIB’s
shareholders and creditors that are responsible for the institution’s risks and not the taxpayers. The types of eligible shares and liabilities subject to the
statutory conversion power will be set out in the CDIC Act Regulations, and while these regulations have not yet been prescribed, in its previous
consultation paper, the Federal Government had proposed that certain unsecured debt would be subject to the conversion power and customer
deposits would be excluded. 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 shares and 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, much of the detail will be set out in the CDIC Act Regulations, and timing for implementation has yet to
be determined, but these proposed changes could adversely impact the Bank’s cost of funding.
Synthetic Equity Arrangement Rules
Proposed tax rules for synthetic equity arrangements, which impact the tax deductibility of Canadian dividends in certain circumstances, have been
enacted. These rules are not expected to materially affect the Bank’s overall financial results.
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted in the U.S. in July 2010. The Dodd-Frank Act
contains many broad reforms impacting the financial services industry. These reforms impact every financial institution in the U.S. and many financial
institutions that operate outside the U.S. Certain portions of the Dodd-Frank Act became effective immediately, and many are now effective following
transition periods or final rulemakings, while the effectiveness of some other portions is still subject to final rulemakings by U.S. government agencies,
or the expiration of transition periods.
The Bank is subject to a number of specific requirements, including, among other things, mandatory clearing, trade reporting and registration of OTC
derivative trading activities, heightened capital liquidity and prudential standards, such as the enhanced prudential standards and early remediation
requirements under Sections 165 and 166 of the Dodd-Frank Act, and restrictions on proprietary trading, private equity and hedge fund activities,
commonly known as the Volcker Rule. The Bank continues to devote resources necessary to ensure that it implements the requirements in compliance
with all applicable regulations under the Dodd-Frank Act. The Bank continually monitors developments to prepare for rulemakings that have the
potential to impact its operations in the U.S. and elsewhere.
More recently, on April 14, 2016, the SEC adopted final rules requiring securities-based swap dealers (SBSDs) to establish a supervisory regime for
their securities-based swaps activities, including designating a Chief Compliance Officer. The final rule also requires SBSDs to disclose risks, conflicts,
and other material information about a swap to a counterparty, and ensure any recommendations made to a counterparty are suitable. Most recently,
on August 12, 2016, the SEC adopted amendments and guidance related to rules regarding the regulatory reporting and public dissemination of
security-based swap transactions, known as Regulation SBSR.
On May 31, 2016, the U.S. Commodity Futures Trading Commission (CFTC) issued a final rule establishing margin requirements for uncleared cross-
border swaps (to the extent not already covered by its previously adopted uncleared swaps rules), and is expected to issue final rules on algorithmic
trading by the end of 2016. The CFTC is also considering the adoption of final rules that would impose limits on the size of positions that may be
entered into in certain derivatives contracts.
The Bank does not expect costs and restrictions associated with the new regulations to have a material impact on our financial results.
106 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Over-the-counter derivatives reform
In March 2015, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions published a framework
establishing minimum standards for margin requirements for non-centrally cleared derivatives for financial firms and systemically important non-
financial entities (“BCBS Framework”). On February 29, 2016, the Office of the Superintendent of Financial Institutions (“OSFI”) issued the final
version of Guideline E-22 to implement the BCBS Framework for federally regulated financial institutions. The Guideline is effective September 1,
2016 with compliance to be phased in over the next four years in accordance with the BCBS Framework. The regulatory dates for the Bank are March
1, 2017 for variation margin and September 1, 2019 for initial margin. Margin requirements are designed to be coordinated with the rules established
in the U.S., the European Union and other relevant jurisdictions with respect to cross-border activities. The Bank expects to meet all obligations
imposed by the Guideline as the relevant requirements come into effect.
The Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS)
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 CRS. Implementation of the CRS commenced in January 2016 in countries that signed on as “early
adopters.” Draft legislation to implement the CRS in Canada was released by the Department of Finance on October 14, 2016. More than 40
countries where the Bank has a presence have now signed on to the CRS, and 17 of these 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 and CRS related obligations
worldwide while minimizing negative impact on the client experience.
The Bank will meet all obligations imposed under FATCA, CRS, and other tax information exchange regimes, in accordance with local law.
United Kingdom’s Membership in the European Union (Brexit)
On June 23, 2016, the United Kingdom (UK) held a referendum to decide on its membership in the European Union. The resulting vote was to leave
the European Union. There are a number of uncertainties in connection with the future of the UK and its relationship with the European Union,
including the terms of the agreement it reaches in relation to its withdrawal from the European Union. The negotiation of the UK’s exit terms is likely
to take a number of years. Until the terms and timing of the UK’s exit from the European Union are clearer, it is not possible to determine the longer
term impact that the referendum, the UK’s departure from the European Union and/or any related matters may have on the Bank or its business. UK’s
exit from the European Union may result in significant changes in law, which may include changes in statutory, tax and regulatory regimes in the UK
and in Europe. Such changes may impact the Bank’s business, financial condition and results of operations and could adversely impact the Bank’s cost
of funding in Europe. The Bank continually monitors developments to prepare for changes that have the potential to impact its operations in the UK
and elsewhere in Europe.
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 and Group Heads.
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
T59 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.
2016
$ 20
24
3
$ 47
2015
$ 13
20
3
$ 36
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 25 – Share-based payments for further details of these plans.
T60 Loans and deposits of key management personnel
Loans are currently granted to key management personnel at market terms and conditions.
As at October 31 ($ millions)
Loans
Deposits
2016
$ 6
$11
2015
$ 5
$ 5
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 107
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank’s committed credit exposure to companies controlled by directors totaled $99.5 million as at October 31, 2016 (October 31, 2015 –
$182.9 million) while actual utilized accounts were $3.9 million (October 31, 2015 – $6.7 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as
related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions
and are as follows:
T62 Transactions with associates and joint ventures
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
Scotiabank principal pension plan
2016
$ (45)
788
338
99
$
2015
$ (27)
747
187
84
$
The Bank manages assets of $1.9 billion (October 31, 2015 – $2.0 billion) which is a portion of the Scotiabank principal pension plan assets and
earned $4 million (October 31, 2015 – $4 million) in fees.
Oversight and governance
The oversight responsibilities of the Audit and Conduct Review Committee (ACRC) with respect to related party transactions include reviewing policies
and practices for identifying transactions with related parties that may materially affect the Bank, and reviewing the procedures for ensuring
compliance with the Bank Act for related party transactions. The Bank Act requirements encompass a broader definition of related party transactions
than is set out in IFRS. The Bank has various procedures in place to ensure that related party information is identified and reported to the ACRC on a
semi-annual basis. The ACRC is provided with detailed reports that reflect the Bank’s compliance with its established procedures.
The Bank’s Internal Audit department carries out audit procedures as necessary to provide the ACRC with reasonable assurance that the Bank’s
policies and procedures to identify, authorize and report related party transactions are appropriately designed and operating effectively.
108 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
SUPPLEMENTARY DATA
Geographic information
T63 Net income by geographic segment
2016
2015
2014
Canada U.S. Mexico
Peru Chile Colombia
Other
Inter-
national
Total Canada U.S. Mexico
Peru Chile Colombia
Other
Inter-
national
Total Canada U.S. Mexico
Peru Chile Colombia
Other
Inter-
national
Total
For the fiscal years
($ millions)
Net interest
income
$7,022 $479 $1,224 $1,231 $763
$674
$2,950 $14,343 $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
Non-interest
income
6,893
871
554
600 325
419
2,409
12,071
6,272 882
561
601 231
372
2,163
11,082
7,071 810
599 534 226
391
2,049
11,680
Provision for
credit losses
876
112
225
315 113
320
401
2,362
728
6
260
266 108
246
268
1,882
662
6
240 267
74
145
309
1,703
Non-interest
expenses
7,339
633
1,121
740 605
550
3,036
14,024
6,936 507 1,160
744 431
541
2,745
13,064
6,986 513 1,154 645 348
556
2,495
12,697
Income tax
expense
1,235
155
69
201
45
89
497
2,291
1,038 267
27
195
24
84
401
2,036
1,156 237
35 175
16
141
340
2,100
Total
$4,465 $450 $ 363 $ 575 $325
$134
$1,425 $ 7,737 $4,028 $574 $ 360 $ 473 $222
$178
$1,380 $ 7,215 $4,486 $494 $ 350 $382 $195
$275
$1,348 $ 7,530
Corporate
adjustments
Net Income
(369)
$ 7,368
(2)
$ 7,213
(232)
$ 7,298
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 109
MANAGEMENT’S DISCUSSION AND ANALYSIS
T64 Loans and acceptances by geography (1)
As at October 31 ($ billions)
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
2016
2015
2014
2016
2014
Percentage mix
$
26.7
29.7
156.7
17.0
50.8
47.6
328.5
$
25.6
28.5
150.7
16.5
49.6
44.5
315.4
$
25.5
27.7
145.1
15.1
46.3
43.0
302.7
38.5
20.8
17.8
19.4
9.3
6.4
8.4
32.6
15.0
62.4
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
5.4%
6.0
31.5
3.4
10.2
9.6
66.1
7.7
4.2
3.6
3.9
1.9
1.3%
1.7
6.6
3.0
5.8%
6.3
33.1
3.4
10.6
9.8
69.0
5.4
3.7
3.0
3.2
2.1
1.2%
1.5
6.3
4.6
12.6
13.6
Total allowance for loan losses(2)
(4.6)
(4.2)
(3.6)
Total loans and acceptances net of allowance for loan losses
$ 492.1
$ 468.9
$ 434.2
(1) Prior periods have been restated to reflect the current period presentation.
(2) Total allowance includes a collective allowance on performing loans of $1,444 million in 2016 and $1,404 million in 2015. The increase reflects an overall increase in the collective allowance of $50 million and a $10 million
reallocation to reserves against unfunded commitments and other off-balance-sheet items.
$ 496.7
$ 473.1
$ 437.8
100.0%
100.0%
T65 Gross impaired loans by geographic segment
As at October 31 ($ millions)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Total
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
T66 Provision against impaired loans by geographic segment
For the fiscal years ($ millions)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Total
2016(1)
2015(1)
$ 1,258
210
301
764
499
381
1,981
$ 1,189
11
271
603
405
356
1,823
$ 5,394
$ 4,658
2014(1)
$ 1,116
11
314
423
381
332
1,623
$ 4,200
2016
$ 876
112
224
317
112
320
401
$2,362
2015
2014
$
727
6
260
265
108
247
269
$
662
6
240
267
74
146
308
$ 1,882
$ 1,703
110 | 2 0 1 6 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
($ 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)
$
2016
Total
5,205
1,893
3,249
1,564
1,736
1,108
1,756
269
1,404
$
2015
Total
8,248
3,144
3,074
2,626
1,827
1,423
730
1,173
1,460
$ 18,184
$ 23,705
$
6,314
6,464
5,198
6,760
2,940
632
$
6,387
6,374
6,050
6,112
2,476
667
$
$
$
69
21
14
281
52
3
34
32
5
511
47
40
718
60
4
–
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
T67 Cross-border exposure to select countries(1)
Loans
Trade
Interbank
deposits
Government
and other
securities
Investment in
subsidiaries
and affiliates
Other
$
2,893
1,641
143
1,213
1,468
793
324
112
1,101
$
938
231
4
70
178
–
11
16
247
$
414
–
476
–
38
1
114
72
51
$
206
–
–
–
–
–
1,273
37
–
$
685
–
2,612
–
–
311
–
–
–
$
9,688
$ 1,695
$ 1,166
$ 1,516
$
3,608
$
2,479
2,772
3,132
2,310
1,122
80
$
276
367
1,024
139
216
7
$ 11,895
$ 2,029
$
4,025
1,543
788
961
51
1,638
$
126
131
26
69
2
72
$
$
$
–
–
–
–
–
–
–
45
–
–
81
–
1
$
200
144
99
205
6
–
$
3,312
3,141
225
4,046
1,592
545
$
654
$ 12,861
$
869
$ 28,308
$ 28,066
$
$
–
–
–
–
–
9
9
$
$
297
1,090
646
–
690
463
$
3,186
$
2
3
–
2
–
–
7
$
4,495
2,767
1,460
1,113
743
2,183
$
3,646
2,213
1,209
892
747
2,267
$ 12,761
$ 10,974
Total
$
9,006
$
426
$
127
As at October 31, 2016
$ 30,589
$ 4,150
$ 1,293
As at October 31, 2015
$ 33,509
$ 7,602
$ 1,292
$ 2,179
$ 1,723
$ 19,655
$ 1,387
$ 59,253
$ 17,304
$ 1,316
$ 62,745
(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.
(2)
(3)
(4)
Includes Indonesia, Macau, Singapore, Vietnam and Turkey.
Includes Venezuela and Uruguay
Includes other English and Spanish Caribbean countries, such as Bahamas, Barbados, British Virgin Islands, Trinidad & Tobago, Turks & Caicos.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 111
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit Risk
T68 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
Energy
Transportation
Automotive
Agriculture
Hospitality and leisure
Mining
Metals refinery and processing
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 $3.2 in financing products, $2.4 in services and $2.0 in wealth management (2015 – $2.3, $1.5, and $1.5 respectively).
(3)
(4) 2015 and 2014 numbers have been restated to reflect the separate Mining and Metals Refinery and Processing.
Includes central banks, regional and local governments, and supra-national agencies.
T69 Off-balance sheet credit instruments
As at October 31 ($ 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.
2016
Balance
% of total
2015(4)
2014(4)
$ 222.9
99.5
$ 322.4
44.9% $ 217.5
91.5
20.0
$ 212.6
84.2
64.9% $ 309.0
$ 296.8
$
16.1
3.7
22.1
22.6
15.6
9.0
11.5
8.8
3.5
5.4
2.5
7.8
5.2
11.8
1.6
4.9
2.5
14.7
5.0
3.2% $
0.7
4.5
4.5
3.1
1.8
2.3
1.8
0.7
1.1
0.5
1.6
1.1
2.4
0.3
1.0
0.5
3.0
1.0
14.3
6.7
21.5
19.5
16.5
9.1
10.4
8.1
3.6
4.5
2.8
5.8
5.0
9.1
2.0
4.9
1.7
13.6
5.0
$
13.4
8.9
16.6
15.5
12.8
8.1
8.1
7.1
3.6
3.2
2.8
5.9
3.5
5.4
1.4
3.9
1.3
15.3
4.2
$ 174.3
$ 496.7
(4.6)
$ 492.1
35.1% $ 164.1
$ 141.0
100.0% $ 473.1
$ 437.8
(4.2)
(3.6)
$ 468.9
$ 434.2
2016
2015
2014
$ 174.2
34.5
40.0
$ 166.4
30.9
42.8
$ 248.7
$ 240.1
$ 137.3
26.0
38.9
$ 202.2
112 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
T70 Changes in net impaired loans(1)
For the fiscal years ($ millions)
Gross impaired loans
Balance at beginning of year
Net additions
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
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
T71 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
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
2016
2015
2014
$ 4,658
$ 4,200
$ 3,701
4,684
(24)
(1,344)
(95)
3,221
(201)
(1,279)
(671)
(428)
(2,579)
94
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
$ 5,394
$ 4,658
$ 4,200
$ 2,573
2,362
(2,579)
$ 2,198
1,916
(2,228)
$ 1,893
1,668
(1,897)
20
305
217
40
582
10
35
260
82
52
429
258
68
224
107
93
492
42
$ 2,948
$ 2,573
$ 2,198
$ 2,085
736
(375)
$ 2,002
458
(375)
$ 1,808
499
(305)
$ 2,446
$ 2,085
$ 2,002
2016
2015
2014
$ 3,072
(110)
(600)
2,362
50
$ 2,435
(68)
(485)
1,882
60
$ 2,312
(99)
(510)
1,703
–
$ 2,412
$ 1,942
$ 1,703
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 113
MANAGEMENT’S DISCUSSION AND ANALYSIS
T72 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
Energy
Transportation
Automotive
Agriculture
Hospitality and leisure
Mining
Metals refinery and processing
Utilities
Health care
Technology and media
Chemical
Food and beverage
Forest products
Other
Sovereign
Business and government
Total provisions against impaired loans
T73 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
Energy
Transportation
Automotive
Agriculture
Hospitality and leisure
Mining
Metals refinery and processing
Utilities
Health care
Technology and media
Chemical
Food and beverage
Forest products
Other
Sovereign
Business and government
Total
2016
2015
2014
$
100
1,677
$
118
1,526
$
–
1,414
$ 1,777
$ 1,644
$ 1,414
(1)
2
61
34
290
45
28
14
25
6
11
20
9
14
(7)
6
1
23
4
585
$
(1)
(1)
62
30
48
23
9
12
1
7
4
–
9
4
4
16
4
6
1
238
$
5
–
58
61
3
12
1
7
44
13
(1)
24
15
32
–
9
–
6
–
289
$
$ 2,362
$ 1,882
$ 1,703
2016(1)
Allowance
for credit
losses
$
458
1,596
$ 2,054
8
2
193
105
89
84
38
37
27
6
25
53
29
28
6
44
6
108
6
894
$
$ 2,948
Gross
$ 1,608
1,622
$ 3,230
23
2
290
234
324
214
70
75
83
14
159
252
49
32
15
110
23
150
45
$ 2,164
$ 5,394
Net
$ 1,150
26
$ 1,176
15
–
97
129
235
130
32
38
56
8
134
199
20
4
9
66
17
42
39
$ 1,270
$ 2,446
Gross
$ 1,668
1,332
$ 3,000
21
–
260
266
165
152
35
95
60
7
20
274
46
18
23
64
19
123
10
$ 1,658
$ 4,658
2015(1)
Allowance
for credit
losses
$
529
1,327
$ 1,856
9
–
174
120
61
43
12
39
8
4
13
30
30
14
23
37
5
91
4
717
$
Net
$ 1,139
5
$ 1,144
12
–
86
146
104
109
23
56
52
3
7
244
16
4
–
27
14
32
6
941
$
$ 2,573
$ 2,085
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
114 | 2 0 1 6 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
T74 Total credit risk exposures by geography(1)(2)
As at October 31 ($ millions)
Drawn
Undrawn
exposures(3)
Non-Retail
2016
Other
$
89,894
79,932
15,331
16,693
10,384
4,891
23,164
19,048
7,258
23,971
$ 32,953
27,951
1,183
1,413
782
186
5,936
1,704
522
4,115
$
42,208
35,925
1,725
2,984
1,374
518
12,425
1,564
495
2,843
Retail
Total
$ 303,868
–
8,634
7,238
10,970
5,348
–
18,852
633
–
$ 468,923
143,808
26,873
28,328
23,510
10,943
41,525
41,168
8,908
30,929
2015
Total
$ 435,953
153,285
23,808
27,007
19,777
9,899
40,048
39,831
8,962
36,052
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Europe
Caribbean and Central America
Latin America (other)
Other
Total
As at October 31, 2015
$ 290,566
$ 76,745
$ 102,061
$ 355,543
$ 824,915
$ 794,622
$ 280,942
$ 72,434
$ 105,581
$ 335,665
$ 794,622
(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.
T75 AIRB credit risk exposures by maturity(1)(2)
Residual maturity as at October 31 ($ millions)
2016
Drawn
Undrawn
exposures(3)
Other
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
$ 109,752
112,975
10,351
$ 233,078
$
28,829
167,999
20,243
37,177
$
$
$
22,766
46,971
1,239
70,976
15,386
–
–
21,108
$ 254,248
$
36,494
$ 487,326
$ 107,470
$
$
$
$
$
62,851
28,805
7,290
98,946
–
–
–
–
–
Total
$ 195,369
188,751
18,880
$ 403,000
$
44,215
167,999
20,243
58,285
$ 290,742
98,946
$ 693,742
2015
Total
$ 213,600
163,961
17,937
$ 395,498
$
45,368
160,660
20,682
54,555
$ 281,265
$ 676,763
As at October 31, 2015
$ 475,832
$
98,446
$ 102,485
$ 676,763
(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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 115
MANAGEMENT’S DISCUSSION AND ANALYSIS
T76 Total credit risk exposures and risk-weighted assets
AIRB
Standardized(1)
Total
2016
2015
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
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
$ 128,742
67,990
37,024
$ 71,771
28,839
13,455
$ 47,042
5,721
2,919
$ 45,407
5,660
2,901
$ 175,784
73,711
39,943
$ 117,178
34,499
16,356
$ 157,514
58,915
40,425
$ 112,836
29,035
15,476
233,756
114,065
55,682
53,968
289,438
168,033
256,854
157,347
23,978
1,944
12,979
38,901
80,358
1,042
497
81,897
233,078
70,976
50,500
5,211
334
2,371
7,916
3,861
112
12
3,985
80,843
29,285
15,838
2,044
38
196
2,278
8,402
10
–
8,412
57,488
5,769
3,115
1,356
34
196
1,586
1,300
7
–
1,307
26,022
1,982
13,175
41,179
88,760
1,052
497
90,309
6,567
368
2,567
9,502
5,161
119
12
5,292
48,063
5,701
3,097
290,566
76,745
53,615
128,906
34,986
18,935
27,165
11,386
14,906
53,457
96,263
2,133
1,016
99,412
280,942
72,434
56,347
8,344
3,726
3,253
15,323
4,203
355
36
4,594
125,383
33,116
18,765
$ 354,554
$ 125,966
$ 66,372
$ 56,861
$ 420,926
$ 182,827
$ 409,723
$ 177,264
$ 190,052
$ 10,228
$ 30,865
$ 14,800
$ 220,917
$ 25,028
$ 215,590
$ 24,967
190,052
10,228
30,865
14,800
220,917
25,028
215,590
24,967
19,233
14,587
33,820
16,717
21,108
37,825
28,246
799
29,045
254,248
36,494
4,497
1,359
5,856
9,463
2,656
12,119
13,055
203
13,258
37,243
4,218
–
–
–
–
–
–
–
–
–
–
–
–
33,936
–
33,936
64,801
–
24,951
–
24,951
39,751
–
19,233
14,587
33,820
16,717
21,108
37,825
62,182
799
62,981
319,049
36,494
4,497
1,359
5,856
9,463
2,656
12,119
38,006
203
38,209
76,994
4,218
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
$ 290,742
$ 41,461
$ 64,801
$ 39,751
$ 355,543
$ 81,212
$ 335,665
$ 74,749
25,025
23,421
–
2,613
6,599
–
–
–
–
–
–
4,165
25,025
23,421
–
2,613
6,599
4,165
21,000
28,234
–
2,759
8,232
7,183
$ 693,742
$ 176,639
$ 131,173
$ 100,777
$ 824,915
$ 277,416
$ 794,622
$ 270,187
2,042
–
2,042
–
–
49,829
–
24,659
2,042
49,829
2,042
24,659
2,985
50,873
2,985
24,265
factor
$ 695,784
$ 178,681
$ 181,002
$ 125,436
$ 876,786
$ 304,117
$ 848,480
$ 297,437
Add-on for 6% scaling factor(6)
–
10,705
–
–
–
10,705
–
10,597
Total credit risk
$ 695,784
$ 189,386
$ 181,002
$ 125,436
$ 876,786
$ 314,822
$ 848,480
$ 308,034
(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, 2016, 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 0.64, 0.71 and 0.77 in 2015).
(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.
116 | 2 0 1 6 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
T77 Volume/rate analysis of change in net interest income
($ 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
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:
2016 versus 2015
Increase (decrease) due to change in:
2015 versus 2014
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
$ 1,859
515
$ 1,344
$
(14)
(7)
–
407
147
701
625
1,473
$ 1,859
$
174
151
47
372
22
62
59
$ 13
157
$(144)
$ 116
(6)
(4)
(79)
(311)
44
253
(14)
$ 1,872
672
$ 1,200
$ 1,304
428
$
876
$ (558)
(466)
$
(92)
$ 746
(38)
$ 784
$
102
(13)
(4)
328
(164)
745
878
$
48
(2)
17
46
127
597
471
1,459
1,195
$
(19)
52
(34)
(95)
(195)
(77)
(190)
(462)
$
29
50
(17)
(49)
(68)
520
281
733
$ 13
$ 1,872
$ 1,304
$ (558)
$ 746
$ (95)
359
79
343
(64)
(17)
(105)
$
79
510
126
715
(42)
45
(46)
$
125
290
(8)
407
11
11
(1)
$ (261)
(393)
28
(626)
(53)
(28)
241
$ (136)
(103)
20
(219)
(42)
(17)
240
Total interest-bearing liabilities
$
515
$ 157
$
672
$
428
$ (466)
$
(38)
T78 Provision for income taxes
For the fiscal years ($ millions)
Income taxes
Income tax expense
Other taxes
Payroll taxes
Business and capital taxes
Harmonized sales tax and other
Total other taxes
Total income and other taxes(1)
Net income before income taxes
Effective income tax rate (%)
Total tax rate (%)(2)
(1) Comprising $1,742 of Canadian taxes (2015 – $1,849; 2014 – $1,679) and $1,401 of foreign taxes (2015 – $1,004; 2014 – $1,244).
(2) Total income and other taxes as a percentage of net income before income and other taxes.
2016
2015
2014
2016
versus
2015
$2,030
$ 1,853
$ 2,002
10%
347
403
363
1,113
$3,143
$9,398
21.6
29.9
329
361
310
1,000
312
314
295
921
$ 2,853
$ 2,923
$ 9,066
$ 9,300
20.4
28.3
21.5
28.6
6
12
17
11
10%
4%
1.2
1.6
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 117
MANAGEMENT’S DISCUSSION AND ANALYSIS
T79 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
T80 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 (2015 – nil; 2014 – $(0.9)).
2016
2015
2014
$
$
$
163.5
106.4
269.9
139.2
63.7
472.8
47.9
125.1
19.7
$
$
$
155.9
100.2
256.1
130.7
67.1
453.9
43.0
117.7
18.3
$
$
$
148.8
95.1
243.9
122.5
61.1
427.5
35.7
110.6
18.5
$
192.7
$
179.0
$
164.8
2016
2015
2014
$
453.9
4.3
14.6
$
427.5
14.3
12.1
$
377.8
22.0
27.7
$
472.8
$
453.9
$
427.5
As at October 31 ($ billions)
2016
2015
2014
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 (2015 – nil; 2014 – $(0.9)).
T81 Fees paid to the shareholders’ auditors
For the fiscal years ($ millions)
Audit services
Audit-related services
Tax services outside of the audit scope
Other non-audit services
Total
$
179.0
6.6
7.1
$
164.8
8.2
6.0
$
145.5
6.5
12.8
$
192.7
$
179.0
$
164.8
2016
26.1
0.7
–
0.4
27.2
$
$
2015
25.5
0.9
–
0.4
26.8
$
$
2014
24.6
0.6
–
0.7
25.9
$
$
118 | 2 0 1 6 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
T82 Selected quarterly information
As at and for the quarter ended
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2016
2015
Operating results ($ millions)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income tax expense
Net income
Net income attributable to common shareholders
Operating performance
Basic earnings per share ($)
Diluted earnings per share ($)
Adjusted diluted earnings per share ($)(1)
Return on equity (%)
Productivity ratio (%)(2)
Core banking margin (%)(1)(2)
Financial position information ($ billions)
Cash and deposits with financial institutions
Trading assets
Loans
Total assets
Deposits
Common equity
Preferred shares
Assets under administration
Assets under management
Capital and liquidity measures
Common Equity Tier 1 (CET1) capital ratio (%)
Tier 1 capital ratio (%)
Total capital ratio (%)
Leverage ratio (%)
CET1 risk-weighted assets ($ billions)(3)
Liquidity coverage ratio (LCR)(%)
Credit quality
Net impaired loans ($ millions)(4)
Allowance for credit losses ($ millions)
Net impaired loans as a % of loans and acceptances(4)
Provision for credit losses as a % of average net loans and acceptances
(annualized)
Common share information
Closing share price ($) (TSX)
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends per share ($)
Dividend yield (%)(5)
Market capitalization ($ billions) (TSX)
Book value per common share ($)
Market value to book value multiple
Price to earnings multiple (trailing 4 quarters)
3,653
3,098
6,751
550
3,650
540
2,011
1,908
1.58
1.57
1.58
14.7
54.1
2.40
46.3
108.6
480.2
896.3
611.9
52.7
3.6
472.8
192.7
11.0
12.4
14.6
4.5
364.0
127
2,446
4,626
0.49
3,602
3,038
6,640
571
3,505
605
1,959
1,860
1.55
1.54
1.55
14.8
52.8
2.38
69.8
103.9
472.8
906.8
631.3
50.8
3.1
464.9
187.9
10.5
11.8
14.1
4.2
357.7
125
2,491
4,542
0.51
3,518
3,076
6,594
752
3,817
441
1,584
1,489
1.24
1.23
1.48
12.1
57.9
2.38
61.2
101.4
466.8
895.0
609.3
48.9
3.4
453.5
179.4
10.1
11.4
13.6
4.1
356.9
121
2,347
4,402
0.49
3,519
2,846
6,365
539
3,568
444
1,814
1,730
1.44
1.43
1.44
13.8
56.1
2.38
75.3
104.3
476.6
919.6
630.9
50.9
3.3
452.6
179.0
10.1
11.2
13.4
4.0
374.5
124
2,335
4,354
0.48
3,371
2,754
6,125
551
3,286
445
1,843
1,754
1.46
1.45
1.46
14.2
53.6
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
2,770
6,124
480
3,334
463
1,847
1,767
1.46
1.45
1.47
14.7
54.4
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
2,739
5,937
448
3,224
468
1,797
1,727
1.43
1.42
1.43
15.1
54.3
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
2,694
5,863
463
3,197
477
1,726
1,649
1.36
1.35
1.36
14.2
54.5
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
0.45
0.47
0.64
0.45
0.47
0.42
0.41
0.42
72.08
66.33
65.80
57.39
61.49
64.19
66.53
61.06
1,206
1,226
1,208
0.74
4.3
87.1
43.59
1.7
12.4
1,203
1,222
1,205
0.72
4.5
79.9
42.14
1.6
11.7
1,203
1,228
1,203
0.72
4.9
79.1
40.70
1.6
11.8
1,203
1,225
1,203
0.70
4.9
69.0
42.32
1.4
9.9
1,205
1,227
1,203
0.70
4.8
74.0
40.80
1.5
10.8
1,210
1,231
1,208
0.68
4.3
77.5
40.30
1.6
12.0
1,210
1,231
1,210
0.68
4.2
80.5
38.61
1.7
11.6
1,215
1,220
1,210
0.66
4.0
73.9
38.75
1.6
10.7
(1) Refer to page 13 for a discussion of non-GAAP measures.
(2) Effective Q3, 2016 the tax equivalent adjustment was no longer included in the calculation. Prior period amounts have been restated.
(3) 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 in 2016.
(4) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(5) Based on the average of the high and low common share price for the period.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 119
MANAGEMENT’S DISCUSSION AND ANALYSIS
Eleven-Year Statistical Review
T83 Consolidated Statement of Financial Position
As at October 31 ($ millions)
2016
2015
2014
2013(1)
2012(1)
2011
IFRS
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
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
$
46,344
8,442
$
73,927
10,550
$
56,730
7,286
$
53,338
8,880
$
47,337
12,387
$
38,723
9,249
87,287
19,421
1,853
108,561
221
92,129
41,657
72,919
222,888
99,502
162,400
484,790
4,626
480,164
11,978
2,520
4,299
12,141
2,021
12,870
45,829
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
$ 896,266
$ 856,497
$ 805,666
$ 743,644
$ 668,225
$ 594,423
$ 199,302
372,303
40,272
611,877
1,459
$ 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
11,978
23,312
42,387
97,083
7,633
–
42,716
225,109
838,445
15,513
34,752
2,240
152
52,657
3,594
56,251
1,570
–
57,821
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
$ 896,266
$ 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.
120 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
T84 Consolidated Statement of Income
IFRS
For the year ended October 31 ($ millions)
2016
2015
2014
2013(1)
2012(1)
2011
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
Dividends per common share (in dollars)
$ 20,419
1,237
158
394
$ 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
22,208
20,287
19,540
18,828
17,159
15,855
6,793
232
–
891
7,916
14,292
12,058
26,350
2,412
14,540
9,398
2,030
7,368
251
251
–
7,117
130
6,987
5.80
5.77
2.88
$
$
$
$
$
$
$
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
2.72
$
$
$
$
$
$
$
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
2.56
$
$
$
$
$
$
$
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
2.39
$
$
$
$
$
$
$
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
2.19
$
$
$
$
$
$
$
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
2.05
$
$
$
$
$
$
$
(1) 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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 121
MANAGEMENT’S DISCUSSION AND ANALYSIS
T83A Consolidated Balance Sheet – CGAAP
As at October 31 ($ millions)
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
122 | 2 0 1 6 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
CGAAP
$
46,027
$
43,278
$
37,318
$
29,195
$
23,376
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
205,381
2,607
284,224
266,302
288,680
227,147
202,774
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
$ 526,657
$ 496,516
$ 507,625
$ 411,510
$ 379,006
$ 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
7,616
40,286
21,519
31,990
28,947
9,583
36,568
14,688
28,806
24,682
11,969
36,506
11,700
42,811
31,063
11,538
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
9,555
33,470
13,396
12,869
24,799
94,089
2,271
750
3,975
3,710
2,860
1,635
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
$ 526,657
$ 496,516
$ 507,625
$ 411,510
$ 379,006
T84A Consolidated Statement of Income – CGAAP
For the year ended October 31 ($ millions)
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.
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
CGAAP
2010
2009
2008
2007
2006
$ 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
16,891
18,935
22,316
21,035
17,682
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
14,266
12,713
11,246
12,220
10,992
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
$
$
$
$
$
$
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 123
MANAGEMENT’S DISCUSSION AND ANALYSIS
T85 Consolidated Statement of Changes in Equity
For the year ended October 31 ($ millions)
2016
2015
2014
2013(1)
2012(1)
2011
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
Adjustments
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
$ 15,141
391
(19)
$ 15,513
31,316
–
31,316
–
6,987
–
(3,468)
(61)
(22)
$ 34,752
2,455
–
2,455
–
(215)
2,240
$
173
7
(28)
$
152
$ 52,657
2,934
130
(130)
1,350
(690)
3,594
$
1,460
–
1,460
251
(116)
(25)
1,570
$
$ 57,821
$ 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
$
$
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
(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 ($152).
(7) To reflect the adoption of the own credit risk provisions of IFRS 9 pertaining to financial liabilities designated at fair value through profit or loss.
(8) Relates to the adoption of the new accounting standard for impairment and classification of financial instruments under CGAAP.
(9) Under CGAAP, amounts represent Contributed Surplus.
T86 Consolidated Statement of Comprehensive Income
For the year ended October 31 ($ 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
IFRS
2016
2015
2014
2013(1)
2012(1)
2011
$ 7,368
$ 7,213
$ 7,298
$ 6,610
$ 6,390
$ 5,330
396
(172)
258
31
(716)
(16)
(10)
(229)
$ 7,139
$ 6,772
130
237
–
$ 7,139
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
346
110
93
20
563
N/A
–
1,132
$ 7,742
$ 7,298
217
227
–
$ 7,742
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.
124 | 2 0 1 6 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
–
19,916
–
4,239
(201)
(2,023)
–
1
$ 21,932
(3,800)
–
(3,800)
–
(251)
$ (4,051)
–
25
–
$
25
$ 23,656
3,710
–
–
265
–
3,975
$
554
–
554
100
(35)
(40)
579
$
$ 28,210
2009
3,829
1,117
–
4,946
$
$
18,549
–
18,549
–
3,547
(186)
(1,990)
–
(4)
$ 19,916
(3,596)
–
(3,596)
595(8)
(799)
$ (3,800)
–
–
–
$
–
$ 21,062
2,860
–
–
850
–
3,710
$
502
–
502
114
(36)
(26)
554
$
$ 25,326
CGAAP
2008
2007
2006
$
$
3,425
184
(43)
3,566
$
$
3,316
135
(26)
3,425
(61)(2)
(25)(3)
15,843
–
15,843
4,045
(51)
(1,720)
(586)
(10)
$ 17,460
14,126
–
14,126
3,579
(30)
(1,483)
(324)
–
$ 15,843
(2,321)
–
(2,321)
683
(2,219)
$ (3,857)
–
–
–
$
–
$ 17,169
600
–
–
1,035
–
1,635
$
N/A
–
N/A
N/A
N/A
N/A
497
$
$ 19,301
(1,961)
–
(1,961)
–
(360)
$ (2,321)
1
(1)
–
$
–
$ 16,947
600
–
–
–
–
600
$
N/A
–
N/A
N/A
N/A
N/A
435
$
$ 17,982
$
$
3,566
266
(3)
3,829
17,460
–
17,460
–
3,140
(107)
(1,896)
(37)
(11)
$ 18,549
(3,857)
–
(3,857)
–
261
$ (3,596)
–
–
–
$
–
$ 18,782
1,635
–
–
1,225
–
2,860
$
N/A
–
N/A
N/A
N/A
N/A
502
$
$ 22,144
CGAAP
2010
2009
2008
2007
2006
$ 4,339
$ 3,661
$ 3,259
$ 4,163
$ 3,677
(591)
278
62
–
–
N/A
–
(251)
$ 4,088
$ 3,787
201
100
–
$ 4,088
(1,736)
894
43
–
–
N/A
–
(799)
$ 2,862
$ 2,562
186
114
–
$ 2,862
2,368
(1,588)
(519)
–
–
N/A
–
261
$ 3,520
$ 3,294
107
119
–
$ 3,520
(2,228)
(67)
(360)
–
76
–
–
N/A
–
(2,219)
$ 1,944
$ 1,775
51
118
–
$ 1,944
–
–
–
N/A
–
(360)
$ 3,317
$ 3,189
30
98
–
$ 3,317
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 125
MANAGEMENT’S DISCUSSION AND ANALYSIS
T87 Other statistics
For the year ended October 31
2016
2015
2014
2013(1)
2012(1)
2011
IFRS
Operating performance
Basic earnings per share ($)
Diluted earnings per share ($)
Return on equity (%)
Productivity ratio (%)(2)
Return on assets (%)
Core banking margin (%)(2)(3)
Net interest margin on total average assets (%)
Capital measures(4)
Common Equity Tier 1 (CET1) capital ratio (%)
Tier 1 capital ratio (%)
Total capital ratio (%)
Leverage ratio (%)
Common share information
Closing share price ($)(TSX)
Number of shares outstanding (millions)
Dividends per share ($)
Dividend yield (%)(5)
Price to earnings multiple (trailing 4 quarters)
Book value per common share ($)
Other information
Average total assets ($ millions)
Number of branches and offices
Number of employees
Number of automated banking machines
5.80
5.77
13.8
55.2
0.81
2.38
N/A
11.0
12.4
14.6
4.5
72.08
1,208
2.88
4.7
12.4
43.59
5.70
5.67
14.6
54.2
0.84
2.39
N/A
10.3
11.5
13.4
4.2
61.49
1,203
2.72
4.4
10.8
40.80
5.69
5.66
16.1
53.4
0.92
2.39
N/A
10.8
12.2
13.9
N/A
69.02
1,217
2.56
3.8
12.1
36.96
5.15
5.11
16.6
54.8
0.88
2.31
N/A
9.1
11.1
13.5
N/A
63.39
1,209
2.39
4.1
12.3
33.23
5.27
5.18
19.9
53.1
0.97
2.31
N/A
N/A
13.6
16.7
N/A
54.25
1,184
2.19
4.2
10.3
28.99
4.63
4.53
20.3
54.8
0.91
2.32
N/A
N/A
12.2
13.9
N/A
52.53
1,089
2.05
3.7
11.3
24.20
913,844
860,607
795,641
748,901
659,538
586,101
3,113
88,901
8,144
3,177
89,214
8,191
3,288
86,932
8,732
3,330
86,690
8,471
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) Effective 2016, the taxable equivalent adjustment was no longer included in the calculation. Prior period amounts have been restated.
(3) Refer to page 13 for a discussion of non-GAAP measures.
(4) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules as an all-in basis. 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.
(5) Based on the average of the high and low common share price for the year.
126 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
2010
2009
3.91
3.91
18.3
52.8
0.84
N/A
1.67
N/A
11.8
13.8
N/A
54.67
1,043
1.96
3.9
14.0
22.68
3.32
3.31
16.7
54.8
0.71
N/A
1.62
N/A
10.7
12.9
N/A
45.25
1,025
1.96
5.4
13.6
20.55
CGAAP
2008
3.07
3.05
16.7
61.4
0.72
N/A
1.66
N/A
9.3
11.1
N/A
2007
2006
4.04
4.01
22.0
56.0
1.03
N/A
1.76
N/A
9.3
10.5
N/A
3.59
3.55
22.1
57.5
1.05
N/A
1.83
N/A
10.2
11.7
N/A
40.19
53.48
49.30
992
1.92
4.3
13.1
984
1.74
3.4
13.2
990
1.50
3.3
13.7
18.94
17.45
17.13
515,991
513,149
455,539
403,475
350,709
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
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 127
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, 2016, 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
November 29, 2016
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, 2016, 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,
2016, 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, 2016 and October 31,
2015, 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, 2016, and notes, comprising a summary of significant accounting policies and other explanatory information, and our report dated
November 29, 2016 expressed an unmodified (unqualified) opinion on those consolidated financial statements.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 29, 2016
128 | 2 0 1 6 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
130 Management’s Responsibility for Financial Information
131
Independent Auditors’ Report of Registered Public Accounting Firm
132
Consolidated Statement of Financial Position
133
Consolidated Statement of Income
134
Consolidated Statement of Comprehensive Income
135
Consolidated Statement of Changes in Equity
136
Consolidated Statement of Cash Flows
137
Notes to the 2016 Consolidated Financial Statements
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 129
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 Scotiabank’s Code of
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, 2016 and October 31, 2015 and its consolidated financial performance and its consolidated cash flows for each of the years in the three-
year period ended October 31, 2016 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 opinions 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
November 29, 2016
130 | 2 0 1 6 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, 2016 and October 31, 2015, 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, 2016, 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, 2016 and October 31, 2015 and its consolidated financial performance and its consolidated cash flows for each of the years
in the three-year period ended October 31, 2016 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, 2016, 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 November 29, 2016
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
November 29, 2016
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 131
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
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.
132 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Note
2016
2015
5
7(a)
7(b)
8
9
11
12
12
12
12(d)
15
16
17
26(c)
18
19
19
19
8
9
20
21
23(a)
23(b)
30(b)
$ 46,344
8,442
$ 73,927
10,550
87,287
19,421
1,853
108,561
221
92,129
41,657
72,919
222,888
99,502
162,400
484,790
4,626
480,164
11,978
2,520
4,299
12,141
2,021
12,870
45,829
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
$ 896,266
$ 856,497
$ 199,302
372,303
40,272
611,877
1,459
$ 190,044
375,144
35,731
600,919
1,486
11,978
23,312
42,387
97,083
7,633
42,716
225,109
838,445
15,513
34,752
2,240
152
52,657
3,594
56,251
1,570
57,821
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
$ 896,266
$ 856,497
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
2016
2015
2014
31
31
32
11(e)
16
12(d)
$ 20,419
1,237
158
394
22,208
$ 18,912
922
161
292
20,287
$ 18,176
921
180
263
19,540
6,793
232
891
7,916
6,070
187
938
7,195
6,173
204
858
7,235
14,292
13,092
12,305
3,669
3,282
594
540
1,403
534
414
603
1,019
12,058
26,350
2,412
23,938
7,025
2,238
684
442
617
693
403
2,438
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
14,540
13,041
12,601
9,398
2,030
9,066
1,853
9,300
2,002
$ 7,368
$ 7,213
$ 7,298
Net income attributable to non-controlling interests in subsidiaries
30(b)
$
251
$
199
$
227
Net income attributable to equity holders of the Bank
Preferred shareholders
Common shareholders
Earnings per common share (in dollars)
Basic
Diluted
Dividends per common share (in dollars)
The accompanying notes are an integral part of these consolidated financial statements.
$ 7,117
130
$ 6,987
$ 7,014
117
$ 6,897
$ 7,071
155
$ 6,916
33
33
23(a)
$
$
$
5.80
5.77
2.88
$
$
$
5.70
5.67
2.72
$
$
$
5.69
5.66
2.56
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 133
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(1)
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
Income tax expense (benefit):
Net gains (losses) on derivative instruments designated as cash flow hedges
Reclassification of net (gains) losses
Other comprehensive income (loss) 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:
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 (loss) 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
(1)
Includes amounts related to qualifying hedges.
The accompanying notes are an integral part of these consolidated financial statements.
2016
2015
2014
$ 7,368
$ 7,213
$ 7,298
614
(300)
(3)
(79)
396
308
(549)
82
(151)
(172)
(7)
357
9
83
258
31
(972)
(256)
(716)
(23)
(7)
(16)
(10)
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
(229)
1,436
1,607
(943)
25
(250)
889
801
(934)
186
(281)
(38)
441
(447)
137
(137)
(6)
60
(432)
(112)
(320)
–
–
–
(2)
583
$ 7,139
$ 8,649
$ 7,881
$
237
$
124
$
249
$ 6,902
130
$ 6,772
$ 8,525
117
$ 8,408
$ 7,632
155
$ 7,477
134 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
l
a
t
o
T
9
7
4
,
3
5
$
)
9
2
2
(
8
6
3
,
7
9
3
1
,
7
3
1
7
,
1
)
0
7
7
(
)
8
6
4
,
3
(
)
0
3
1
(
)
6
1
1
(
7
)
3
3
(
$
1
2
8
,
7
5
$
3
1
2
,
7
6
3
4
,
1
1
1
2
,
9
4
$
9
4
6
,
8
$
7
8
)
7
1
1
(
)
5
5
9
(
)
9
8
2
,
3
(
)
6
8
(
4
1
)
5
3
(
9
7
4
,
3
5
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0
4
7
)
5
5
1
(
)
0
7
4
,
1
(
)
0
1
1
,
3
(
)
6
7
(
0
3
)
6
1
(
3
8
5
8
9
2
,
7
7
8
3
,
5
4
1
8
8
,
7
$
1
1
2
,
9
4
$
–
–
–
–
–
–
–
–
–
–
–
–
)
4
6
1
,
1
(
1
5
5
,
6
4
$
3
4
7
)
3
4
7
(
$
$
$
$
$
$
$
$
–
–
–
–
)
4
(
)
1
1
(
–
)
6
1
1
(
)
4
1
(
1
5
2
7
3
2
$
)
5
1
2
(
7
1
1
,
7
2
0
9
,
6
3
1
7
,
1
)
0
3
1
(
)
0
7
7
(
)
8
6
4
,
3
(
–
7
)
2
2
(
$
–
0
3
1
)
0
9
6
(
0
3
1
0
5
3
,
1
–
)
0
3
1
(
–
–
–
)
5
1
2
(
7
8
9
6
,
$
2
7
7
6
,
$
–
–
7
)
2
2
(
)
0
8
(
3
6
3
)
8
6
4
3
(
,
–
–
–
)
8
2
(
–
–
–
–
7
–
–
)
4
1
7
(
7
–
7
5
2
–
)
0
8
1
(
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
)
4
1
7
(
$
7
5
2
$
)
0
8
1
(
$
–
2
2
4
2
2
4
–
–
–
–
–
–
–
–
7
8
9
6
,
$
7
8
9
6
,
$
–
–
–
)
2
2
(
–
)
1
6
(
)
8
6
4
3
(
,
–
–
–
)
9
1
(
1
9
3
–
–
–
–
–
$
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
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
t
e
N
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
d
e
m
e
e
d
e
r
/
d
e
s
a
h
c
r
u
p
e
r
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
d
e
u
s
s
i
s
e
r
a
h
S
0
6
4
,
1
$
9
1
0
,
2
5
$
4
3
9
,
2
$
5
8
0
9
4
,
$
3
7
1
$
)
9
7
3
(
$
$
4
9
1
$
3
3
6
2
,
$
6
1
3
1
3
,
$
1
4
1
,
5
1
$
5
1
0
2
,
1
r
e
b
m
e
v
o
N
t
a
s
a
e
c
n
a
l
a
B
0
7
5
,
1
$
1
5
2
,
6
5
$
4
9
5
,
3
$
7
5
6
2
5
,
$
2
5
1
$
)
3
9
0
1
(
$
,
4
6
2
$
4
1
$
5
5
0
3
,
$
2
5
7
4
3
,
$
3
1
5
,
5
1
$
6
1
0
2
,
1
3
r
e
b
o
t
c
O
t
a
s
a
e
c
n
a
l
a
B
)
5
7
(
9
9
1
4
2
1
–
–
–
–
–
)
6
8
(
)
4
(
0
1
1
$
5
2
5
,
8
$
4
1
0
,
7
1
1
5
,
1
7
8
)
7
1
1
(
)
5
5
9
(
)
9
8
2
,
3
(
–
4
1
)
5
4
1
(
–
7
1
1
7
1
1
–
–
–
)
7
1
1
(
–
–
–
7
9
8
6
,
1
1
5
1
,
$
8
0
4
8
,
$
7
8
)
5
5
9
(
)
9
8
2
3
,
(
–
–
4
1
)
5
4
1
(
–
–
–
)
7
1
(
–
–
–
–
–
4
1
$
–
)
7
(
)
7
(
–
–
–
–
–
–
)
6
(
)
5
(
$
0
6
4
,
1
$
9
1
0
,
2
5
$
4
3
9
,
2
$
5
8
0
9
4
,
$
3
7
1
$
)
9
7
3
(
$
–
5
5
5
5
–
–
–
–
–
–
–
7
–
)
0
7
4
(
–
0
0
7
3
3
9
1
,
–
7
9
8
6
,
$
)
0
7
4
(
$
3
3
9
1
,
$
7
9
8
6
,
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
)
5
(
)
0
4
1
(
–
)
1
6
7
(
)
9
8
2
3
,
(
–
–
–
4
0
1
)
4
9
1
(
–
–
–
–
–
$
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
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
t
e
N
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
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
$
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
l
a
B
2
1
3
,
1
$
9
9
8
,
7
4
$
4
3
9
,
2
$
5
6
9
4
4
,
$
6
7
1
$
)
7
6
3
(
$
)
8
4
(
$
4
6
6
$
$
9
0
6
,
8
2
$
1
3
2
,
5
1
$
4
1
0
2
,
1
r
e
b
m
e
v
o
N
t
a
s
a
e
c
n
a
l
a
B
)
7
1
(
8
3
1
,
1
2
2
7
2
2
9
4
2
–
–
–
–
)
4
(
1
–
)
6
7
(
$
2
3
6
,
7
$
)
4
0
4
(
1
6
5
1
7
0
,
7
9
4
2
,
4
4
0
4
7
)
5
5
1
(
)
0
7
4
,
1
(
)
0
1
1
,
3
(
–
0
3
)
7
1
(
–
5
5
1
4
8
0
,
4
–
–
5
5
1
–
)
5
5
1
(
)
0
5
1
,
1
(
–
–
–
)
4
0
4
(
1
6
5
6
1
9
6
,
5
6
1
0
4
,
$
7
7
4
7
,
$
–
–
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
)
7
5
1
(
)
2
0
1
(
–
)
5
6
2
(
$
)
5
6
2
(
$
–
)
2
4
(
–
)
6
(
)
6
(
$
–
–
5
0
7
)
1
4
(
)
1
4
(
$
–
)
3
7
1
(
–
3
7
8
3
7
8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
$
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
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
l
s
e
c
n
a
a
b
d
e
t
a
t
s
e
R
e
m
o
c
n
i
t
e
N
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
d
e
m
e
e
d
e
r
/
d
e
s
a
h
c
r
u
p
e
r
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
d
e
u
s
s
i
s
e
r
a
h
S
)
7
4
2
(
–
)
7
(
t
n
e
m
j
t
s
u
d
a
g
n
n
e
p
O
i
5
5
1
,
1
$
3
5
6
,
4
4
$
4
8
0
,
4
$
9
6
5
0
4
,
$
3
9
1
$
$
)
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
l
a
B
$
2
1
3
,
1
$
9
9
8
,
7
4
$
4
3
9
,
2
$
5
6
9
4
4
,
$
6
7
1
$
)
7
6
3
(
$
)
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
l
a
B
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
N
l
a
t
i
p
a
C
t
n
e
m
u
r
t
s
n
i
s
r
e
d
o
h
l
y
t
i
u
q
e
n
i
s
t
s
e
r
e
t
n
i
i
s
e
i
r
a
d
i
s
b
u
s
)
)
b
(
0
3
e
t
o
N
(
g
n
i
l
l
o
r
t
n
o
c
-
n
o
N
y
t
i
u
q
e
n
o
m
m
o
c
l
a
t
o
T
d
e
r
r
e
f
e
r
p
d
n
a
s
e
r
a
h
s
d
e
r
r
e
f
e
r
P
)
3
2
e
t
o
N
(
l
a
t
o
T
y
t
i
u
q
e
n
o
m
m
o
c
r
e
h
t
O
)
3
(
s
e
v
r
e
s
e
r
)
2
(
r
e
h
t
O
s
e
g
d
e
h
w
o
l
f
h
s
a
C
l
-
e
b
a
l
i
a
v
A
l
e
a
s
-
r
o
f
s
e
i
t
i
r
u
c
e
s
i
n
g
e
r
o
F
y
c
n
e
r
r
u
c
i
d
e
n
a
t
e
R
n
o
i
t
a
l
s
n
a
r
t
)
1
(
s
g
n
n
r
a
e
i
n
o
m
m
o
C
s
e
r
a
h
s
)
3
2
e
t
o
N
(
)
s
n
o
i
l
l
i
m
$
(
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
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
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
.
5
1
0
2
n
i
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
S
R
F
i
i
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
.
)
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
.
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
.
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
)
2
5
$
–
4
1
0
2
;
1
6
$
–
5
1
0
2
(
i
3
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
.
)
5
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
.
k
s
i
r
t
i
d
e
r
c
n
w
O
d
n
a
s
t
i
f
e
n
e
b
e
e
y
o
p
m
E
l
,
s
e
t
a
i
c
o
s
s
a
m
o
r
f
e
r
a
h
S
s
e
d
u
l
c
n
I
.
r
e
h
t
o
d
n
a
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
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
i
a
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
)
1
(
)
2
(
)
3
(
)
4
(
)
5
(
)
6
(
)
7
(
)
8
(
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 135
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
Net gain on disposition of business
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
Income tax expense
Restructuring charge
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
Proceeds from common shares issued
Proceeds from preferred shares issued
Redemption of preferred shares
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(1)
Cash and cash equivalents at end of year(1)
(1) Represents cash and non-interest bearing deposits with financial institutions (refer to Note 5).
The accompanying notes are an integral part of these consolidated financial statements.
136 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
2016
2015
2014
$ 7,368
$
7,213
$
7,298
(14,292)
684
2,412
7
(534)
(116)
–
–
(414)
2,030
378
(10,044)
(5,363)
(20,355)
6,702
4,007
20,865
(3,806)
1,856
873
21,099
(7,787)
(1,471)
4,099
28,447
(94,441)
65,069
(1,050)
(348)
(431)
(2,754)
2,465
(1,035)
391
1,350
(690)
(80)
(3,598)
(116)
117
(1,196)
(18)
131
6,724
$ 6,855
$
(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
6,724
(12,305)
526
1,703
30
(741)
–
(469)
(174)
(428)
2,002
148
(13,848)
(7,526)
(16,785)
20,224
1,506
7,306
(1,147)
7,033
1,063
18,438
(7,509)
(1,401)
4,944
213
(47,328)
44,876
2,045
(277)
(115)
(586)
–
(1,000)
753
–
(1,150)
(320)
(3,265)
(76)
872
(4,186)
207
379
5,449
5,828
$
N O T E S T O T H E 2 0 1 6 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
Reporting entity
Basis of preparation
Page Note
180 19
Deposits
180 20
Subordinated debentures
Significant accounting policies
181 21
Other liabilities
Future accounting developments
181 22
Provisions
Cash and deposits with financial institutions
182 23
Common and preferred shares
Fair value of financial instruments
185 24
Capital management
Trading assets
185 25
Share-based payments
Page Note
138
138
139
151
153
153
159
160
161
1
2
3
4
5
6
7
8
9
Financial instruments designated at fair value
through profit or loss
Derivative financial instruments
165
10
Offsetting financial assets and financial
liabilities
167
170
173
174
177
177
178
11
12
13
14
15
16
17
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
179 18
Other assets
188 26
Corporate income taxes
190 27
Employee benefits
195 28
Operating segments
197 29
Related party transactions
198 30
Principal subsidiaries and non-controlling
interests in subsidiaries
199 31
Non-interest income
200 32
Trading revenues
200 33
Earnings per share
200 34
Guarantees, commitments and pledged assets
202 35
Financial instruments – risk management
210 36
Business combinations and divestitures
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 137
CONSOLIDATED FINANCIAL STATEMENTS
1
Reporting Entity
The Bank of Nova Scotia (the Bank) is a chartered schedule I bank under the Bank Act (Canada) (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, 2016 have been approved by the Board of Directors for issue on November 29,
2016.
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. 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, goodwill, provisions, 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.
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.
138 | 2 0 1 6 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 12(d)
Note 3
Note 6
Note 3
Note 26
Note 3
Note 27
Note 3
Note 17
Note 3
Note 36
Note 3
Note 11
Note 3
Note 15
Note 3
Note 14
Note 3
Note 30
Note 3
Note 13
Note 3
Note 22
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.
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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 139
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.
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 joint venture, 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, equipment and leasehold improvements of the Bank, purchased in foreign currency, 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.
140 | 2 0 1 6 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 only 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 have 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 at fair value. 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. 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 as part of non-interest income – trading revenues. 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. 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 on
a different basis; or
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 141
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, in the Consolidated Statement of Income.
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 instruments
Derivative instruments are contracts whose value is derived from interest rates, foreign exchange rates, commodities, equity prices or other financial
variables. Most derivative instruments can be characterized as interest rate contracts, foreign exchange and gold contracts, commodity contracts,
equity contracts or credit contracts. Derivative 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 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 only 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.
142 | 2 0 1 6 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 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 accumulated other comprehensive income.
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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 143
CONSOLIDATED FINANCIAL STATEMENTS
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
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 the 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.
144 | 2 0 1 6 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
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.
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:
(a) historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product);
(b)
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
(c) 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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 145
CONSOLIDATED FINANCIAL STATEMENTS
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.
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 – lease term determined by the Bank. Depreciation expense is
included in the Consolidated Statement of Income under non-interest 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
146 | 2 0 1 6 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
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,
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 Bank determines the carrying value of the CGU using a regulatory capital approach based on credit, market, and operational risks, and leverage,
consistent with the Bank’s capital attribution for business line performance measurement. 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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 147
CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
148 | 2 0 1 6 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
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.
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 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), and 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 used to determine the defined benefit obligation is based on the yield at the reporting date on high quality
corporate bonds that have durations that match the terms of the Bank’s obligations. Prior to 2016, the discount rate used to determine the annual
benefit expense was the same as the rate used to determine the defined benefit obligation. Beginning in 2016, separate discount rates were used to
determine the annual benefit expense in Canada and the U.S. These rates were determined with reference to the yields on high quality corporate
bonds with durations that match the various components of the annual defined benefit expense. The discount rate used to determine the annual
benefit expense for all other plans continues to be same as the rate used to determine the defined benefit obligation.
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 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 similarly 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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 149
CONSOLIDATED FINANCIAL STATEMENTS
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 are recorded in trading revenues.
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.
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.
150 | 2 0 1 6 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
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.
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
Future Accounting Developments
The Bank actively monitors developments and changes in accounting standards from the IASB, as well as requirements from the other regulatory
bodies, including OSFI. The Bank is currently assessing the measurement impact the adoption of new standards issued by the IASB will have on its
consolidated financial statements and also evaluating the alternative elections available on transition.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 151
CONSOLIDATED FINANCIAL STATEMENTS
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. IFRS 9 must be adopted retrospectively. Restatement of comparatives is not required, though it is permitted.
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.
On June 21, 2016, OSFI issued revised accounting and disclosure guidelines for IFRS 9 Financial Instruments, that provide application guidance for
federally regulated entities. The guidelines are effective for the Bank with the adoption of IFRS 9 on November 1, 2017 and are consistent with Basel
Committee on Banking Supervision (BCBS) Guidance on credit risk and accounting for expected credit losses issued in December 2015.
On October 11, 2016, BCBS published a consultative document: Regulatory treatment of accounting provisions – interim approach and transitional
arrangements and a discussion document: Regulatory treatment of accounting provisions on the policy considerations related to the regulatory
treatment of accounting provisions under the Basel III capital framework. BCBS is seeking comments on these documents by January 13, 2017.
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 flow characteristics of the assets. Based on these criteria, debt instruments are
measured at amortized cost, fair value through OCI, or fair value through the Consolidated Statement of Income.
Equity investments are measured at fair value through the Consolidated Statement of Income. However, the Bank may, at initial recognition of a non-
trading equity investment, irrevocably elect to designate the investment as fair value through OCI, with no subsequent recycling to the Consolidated
Statement of Income and dividend income recognized in the Consolidated Statement of Income. This designation is also available to existing non-
trading equity investments at the date of adoption of IFRS 9.
In addition, the Bank may, at initial recognition, irrevocably elect to designate a financial asset as fair value through the Consolidated Statement of
Income, if doing so eliminates or significantly reduces an accounting mismatch which would otherwise arise. This designation is also available to
existing financial assets at the date of adoption of IFRS 9.
IFRS 9 requirements related to financial liabilities have been carried forward substantially unchanged from IAS 39, apart from the requirements on
own credit risk of liabilities designated at fair value through the Consolidated Statement of Income.
At the date of transition, the Bank is permitted to make a one-time irrevocable reassessment of its fair value through the Consolidated Statement of
Income designations for its financial assets and liabilities. The Bank is currently evaluating the extent to which it will apply these designations to its
financial instruments upon transition.
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 and 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 risk management activities. The Bank is permitted to adopt the hedge accounting requirements of IFRS 9 concurrently or to defer the
adoption to a future period and continue to apply the hedge accounting requirements of IAS 39. However, the hedging disclosure requirements of
IFRS 9 will continue to apply to the Bank regardless of the choice made.
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.
152 | 2 0 1 6 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 meet the definition of financial instruments and remain 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.
On April 12, 2016, the IASB issued amendments to the revenue standard, IFRS 15 Revenue From Contracts with Customers. The amendments provide
additional clarification on the identification of a performance obligation in a contract, determining the principal and agent in an agreement, and
determining whether the licensing revenues should be recognized at a point in time or over a specific period. The amendments also provide additional
practical expedients upon transition to IFRS 15. The amendments are effective for the Bank on November 1, 2018, consistent with the effective date
of the standard.
Effective November 1, 2019
Leases
On January 13, 2016, the IASB issued IFRS 16 Leases, which requires a lessee to recognize an asset for the right to use the leased item and a liability
for the present value of its future lease payments. IFRS 16 will result in leases being recorded on the Bank’s balance sheet, including those currently
classified as operating leases except for short-term leases and leases with low value of the underlying asset. IFRS 16 substantially carries forward the
lessor accounting requirements in IAS 17.
IFRS 16 is effective for the Bank on November 1, 2019, with early adoption permitted from the date the Bank applies IFRS 15 Revenue from Contracts
with Customers on or before the date of initial application of IFRS 16. On transition there are practical expedients available whereby the Bank will not
need to reassess whether a contract is, or contains a lease, or reassess the accounting of sale leaseback transactions recognized prior to the date of
initial application.
A lessee will apply IFRS 16 to its leases either retrospectively to each prior reporting period presented; or retrospectively with the cumulative effect of
initially applying IFRS 16 being recognized at the date of initial application.
Cash and Deposits with Financial Institutions
5
As at October 31 ($ millions)
Cash and non-interest-bearing deposits with financial institutions
Interest-bearing deposits with financial institutions
Total
2016
2015
$ 6,855
$ 6,724
39,489
67,203
$ 46,344
$ 73,927
The Bank is required to maintain balances with central banks, other regulatory authorities and certain counterparties and these amounted to
$7,616 million (2015 – $6,219 million).
6
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 158.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 153
CONSOLIDATED FINANCIAL STATEMENTS
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 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 IPV 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 the Bank 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:
(a) 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).
(b) 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).
154 | 2 0 1 6 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
(c)
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).
(d) 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).
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 – available-for-sale
Investment securities – held-to-maturity
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
2016
Total
fair
value
Total
carrying value
Favourable/
(Unfavourable)
Total
fair
value
2015
Total
carrying
value
Favourable/
(Unfavourable)
$
46,344
108,561
$
46,344
108,561
$
221
221
92,129
41,657
50,509
22,567
484,815
11,978
9,973
92,129
41,657
50,509
22,410
480,164
11,978
9,973
–
–
–
–
–
–
157
4,651
–
–
$ 73,927
99,140
$ 73,927
99,140
$
320
320
87,312
41,003
42,565
716
463,047
10,296
9,024
87,312
41,003
42,565
651
458,628
10,296
9,024
–
–
–
–
–
–
65
4,419
–
–
613,858
611,877
(1,981)
602,606
600,919
(1,687)
1,459
11,978
23,312
42,387
97,083
7,804
24,304
1,459
11,978
23,312
42,387
97,083
7,633
23,796
–
–
–
–
–
(171)
(508)
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)
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 or
loss, the carrying value is adjusted regularly to reflect the fair value.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 155
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
2016
2015
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
Equity securities
Other(2)
Financial assets designated at fair
value through profit or loss
Investment securities(3)
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
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 liabilities designated at fair
value through profit or loss
Obligations related to securities sold
$
$
$
$
–
17
321
–
321
659
–
–
short
$ 19,870
–
3
327
–
312
642
Derivative financial instruments
Interest rate contracts
Foreign exchange and gold contracts
Equity contracts
Credit contracts
Commodity contracts
Instruments not carried at fair value(5):
Assets:
Investment securities – Held to maturity
Loans(6)
$
$
$
Liabilities:
Deposits(6)(7)
Subordinated debt
Other liabilities
$
–
–
10,830
–
10,182
4,724
75
1,424
36,814
1,853
$
8,442
$
19,421
–
9,608
–
1,783
9,844
648
133
–
–
–
–
–
–
–
31
1,186
5
–
$
8,442
$
19,421
10,830
9,608
10,182
6,507
9,950
3,258
36,952
1,853
–
–
7,295
–
5,313
9,512
163
93
32,553
2,419
1,222
$ 117,003
$ 57,348
–
$
221
$
16
$ 65,902
$ 49,879
$
16
$
205
$ 11,464
934
9,901
6,703
745
276
1,411
$
2,157
2,558
176
8,473
3,852
751
199
$ 31,434
$ 18,166
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
13,621
3,492
10,077
15,531
4,678
1,027
2,083
$
5,752
1,085
9,678
6,003
921
97
1,665
50,509
$ 25,201
15,707
21,659
1,931
148
2,212
41,657
1,127
1,459
$
$
$
$
–
1
173
–
1,656
1,830
–
–
23,312
$ 17,073
14,486
21,643
2,380
1,475
2,403
$
–
3
233
–
1,201
–
–
–
355
81
–
473
909
54
–
64
–
–
–
–
187
–
167
–
–
354
$ 40,880
$
118
(36) $
1,163
$ 15,653
21,642
1,546
148
1,891
$
$
$
1,459
3,442
$ 14,299
21,640
1,886
1,475
2,091
$
10,550
$
18,341
–
5,281
368
1,515
13,162
1,728
107
–
51,052
279
1,997
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
–
–
–
–
–
–
67
1,218
5
–
$
10,550
18,341
7,295
5,281
5,681
11,027
13,392
3,039
32,665
2,419
1,290
$ 109,690
25
$
320
–
–
–
447
137
23
1,133
1,740
36
–
102
–
–
138
1,192
–
–
81
–
170
12
–
263
$
$
$
$
$
$
$
$
7,749
3,706
9,828
12,683
5,270
307
3,022
42,565
14,620
19,742
2,307
850
3,484
41,003
1,235
1,486
20,212
13,524
21,473
2,575
2,554
5,144
$
45,270
$ 41,391
$
$
42,387
$
1,437
$
43,570
$
4,972
–
$ 17,595
–
$
–
276,462
$
22,567
276,462
$
$
131
–
585
–
$
–
260,583
$
716
260,583
–
–
–
271,170
7,804
11,303
–
–
–
271,170
7,804
11,303
–
–
–
252,382
6,234
11,041
–
–
–
252,382
6,234
11,041
(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 $22,410 (2015 – $651).
(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.
156 | 2 0 1 6 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
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 private equity securities, income funds, complex derivatives, and embedded derivatives in
structured deposit notes.
The following table summarizes the changes in Level 3 instruments carried at fair value for the year ended October 31, 2016.
All positive balances represent assets and negative balances represent liabilities. Consequently, positive amounts indicate purchases of assets or
settlements of liabilities and negative amounts indicate sales of assets or issuances of liabilities.
As at October 31, 2016
Fair value
November 1
2015
Gains/(losses)
recorded in
Gains/(losses)
recorded in
income(1)
OCI(2)
Purchases/
Issuances
Sales/
Settlements
Transfers
into/out of
Level 3
Fair value
October 31
2016
Change in
unrealized
gains/(losses)
recorded in
income for
instruments
still held(3)
$
67
1,243
5
1,315
$
1
(23)
–
(22)
$
$
–
–
–
–
447
137
23
1,133
1,740
36
102
(81)
(170)
(12)
(125)
(1,192)
1,738
5
5
–
185
195
4
(20)
54
(127)
4
(85)
29
117
(17)
14
(1)
(213)
(217)
–
–
–
–
–
–
–
(217)
–
–
–
–
579
49
–
78
706
23
22
(170)
(14)
–
(139)
–
567
$
$
(37)
(34)
–
(71)
(659)
(124)
(22)
(710)
(1,515)
(9)
(202)
10
348
–
147
–
(1,439)
–
–
–
–
–
–
–
–
–
–
162
–
(204)
8
(34)
–
(34)
$
31
1,186
5
1,222
$
(1)
(23)(5)
–
(24)
355
81
–
473
909
54
64
(187)
(167)
–
(236)
(1,163)
732
n/a
n/a
n/a
n/a
n/a
6
(14)(6)
52
(71)(6)
4
(23)
29(5)
(18)
($ millions)
Trading assets(4)
Corporate and other debt
Income 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
Derivative financial instruments – liabilities
Interest rate contracts
Equity contracts
Credit contracts
Deposits(7)
Total
(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 gains on income fund units are mostly offset by the mark-to-market changes in an equity-linked deposit 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, 2015.
($ millions)
Trading assets(2)
Investment securities
Derivative financial instruments
Deposits(3)
As at October 31, 2015
Fair value
November 1
2014
Gains/(losses)
recorded in
income(1)
Gains/(losses)
recorded
in OCI
$ 1,386
1,956
254
(1,011)
$ 196
145
12
(181)
$ –
90
–
–
Purchases/
Issuances
Sales/
Settlements
$ 54
838
(26)
–
$ (321)
(1,289)
298
–
Transfers
into/out of
Level 3
$
–
–
(663)
–
Fair value
October 31
2015
$ 1,315
1,740
(125)
(1,192)
(1) Gains or losses for items in Level 3 may be offset with losses or 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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 157
CONSOLIDATED FINANCIAL STATEMENTS
Significant transfers
Significant transfers can occur between the fair value hierarchy levels when additional or new information regarding valuation inputs and their
refinement and observability become available. 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, 2016:
A net amount of derivative assets of $162 million was transferred into Level 3 from Level 2 for equity derivatives. A net amount of derivative liabilities
of $196 million was transferred into Level 3 from Level 2 primarily for equity derivatives.
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 $1 million was transferred out of
Level 1.
All transfers were as a result of new information being obtained regarding the observability of inputs used in the valuation.
Level 3 sensitivity analysis
The table below sets out information about significant unobservable inputs used in measuring financial instruments categorized as Level 3 in the fair
value hierarchy.
Valuation technique
Significant
unobservable inputs
Range of estimates for
unobservable inputs(1)
Changes in fair value
from reasonably
possible alternatives
($ millions)
Investment securities(2)
Other foreign governments’ debt
Price based
Price
100%
(1)/–
Derivative financial instruments
Interest rate contracts
Option pricing
model
Interest rate
volatility
Equity contracts
Option pricing
Equity volatility
13% - 98%
5% - 124%
(53)/53
(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 and income fund investments 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.
model
Single stock correlation
(77)% - 98%
(6)/6
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.
158 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
7
Trading Assets
(a) Trading securities
An analysis of the carrying value of trading securities is as follows:
As at October 31, 2016 ($ millions)
Remaining term to maturity
Trading securities:
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
Common shares
Other
Total
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
Total trading securities
Within three
months
Three to
twelve
months
One to
five years
Five to ten
years
Over ten
years
No specific
maturity
Carrying
value
$
235
1,713
2,688
1,346
–
913
$ 6,895
$ 2,161
3,199
176
1,359
$ 6,895
$ 2,620
950
400
760
–
1,504
$ 6,234
$ 3,714
1,502
82
936
$ 6,234
$
4,651
1,483
4,304
1,924
–
4,853
$ 17,215
$
6,832
7,792
160
2,431
$ 17,215
$ 1,079
2,907
957
1,369
–
1,693
$ 8,005
$ 4,442
2,156
6
1,401
$ 8,005
$ 2,245
2,555
1,833
1,108
–
987
$ 8,728
$ 5,185
2,448
8
1,087
$ 8,728
$
–
–
–
–
40,210
–
$ 40,210
$ 15,033
8,178
1,536
15,463
$ 40,210
$ 10,830
9,608
10,182
6,507
40,210
9,950
$ 87,287
$ 37,367
25,275
1,968
22,677
$ 87,287
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
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
Trading securities:
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
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 159
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
2016
2015
$ 11,235
4,163
2,555
340
1,128
$ 19,421
$ 9,990
3,525
3,657
394
775
$ 18,341
(1) Geographic segmentation of trading loans is based upon the location of the ultimate risk of the underlying asset.
(2) Loans are denominated in U.S. dollars.
(3)
Includes trading loans that serve as a hedge to loan-based credit total return swaps of $7,098 (2015 – $7,094), while the remaining relates to short-term precious metals trading
and lending activities.
(4) These loans are primarily related to short-term precious metals trading and lending activities.
8
Financial Instruments Designated at Fair Value Through Profit or Loss
In accordance with its risk management strategy, the Bank has elected to designate certain investments, loans and deposit note liabilities at fair value
through profit or loss to reduce an accounting mismatch between fair value changes in these instruments and fair value changes in related derivatives,
and where a hybrid instrument contains one or more embedded derivatives that are not closely related to the host contract. Changes in fair value
arising from changes in the Bank’s own credit risk are recognized in other comprehensive income, without subsequent reclassification to net income.
The cumulative fair value adjustment due to own credit risk is determined at a point in time by comparing the present value of expected future cash
flows over the term of these liabilities discounted at the Bank’s effective funding rate, and the present value of expected future cash flows discounted
under a benchmark rate. The change in fair value attributable to change in credit risk is determined by the change in the cumulative fair value
adjustment due to own credit risk.
The following table presents the fair value of financial assets and liabilities designated at fair value through profit or loss and their changes in fair
value.
October 31 ($ millions)
Investment securities(2)
Loans(3)
Deposit note liabilities(4)
Fair value
As at
Change in fair value
Cumulative change in FV(1)
For the year ended
$
2016
16
205
1,459
2015
2016
$
107
213
1,486
$ (1)
(9)
245
$
2015
(1)
18
106
2016
2015
$ 11
8
15
$ 12
18
124
(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 are recorded in non-interest income – trading revenues.
(4) 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 – trading revenues.
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.
Deposit Note Liabilities
Difference
between
carrying value
and
contractual
maturity
amount
$
15
$ 124
Changes in fair value
for the period
attributable to
changes in own
credit risk
recorded in other
comprehensive
income
Cumulative changes
in fair value
attributable to
changes in own
credit risk(1)
$ (23)
$ 20
$ (8)
$ 15
Contractual
maturity
amount(1)
$ 1,474
$ 1,610
Carrying Value
$ 1,459
$ 1,486
As at October 31, 2016
As at October 31, 2015
(1) The cumulative change in fair value is measured from the instruments’ date of initial recognition.
160 | 2 0 1 6 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
9 Derivative Financial Instruments
(a) Notional amounts(1)
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. 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.
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
Credit
Commodity and other contracts
Over-the-counter:
Equity
Credit
Commodity and other contracts
Over-the-counter (settled through central
counterparties):
Equity
Credit
Commodity and other contracts
Total
Total notional amounts outstanding
2016
2015
Trading
Hedging
Total
Trading
Hedging
Total
$
–
–
–
–
$
112,196
15,427
3,283
130,906
1,721
479,029
35,404
36,864
553,018
$
$
–
–
–
–
–
25,537
–
–
25,537
112,196
15,427
3,283
130,906
1,721
504,566
35,404
36,864
578,555
$
140,240
29,670
28,755
198,665
4,613
582,414
31,734
32,900
651,661
308,186
1,702,488
–
–
2,010,674
$ 2,694,598
–
87,480
–
–
87,480
$ 113,017
308,186
1,789,968
–
–
2,098,154
$ 2,807,615
852,416
2,136,724
–
–
2,989,140
$ 3,839,466
$
$
$
35,862
257
–
36,119
425,033
302,107
16,359
16,245
759,744
13
–
–
–
13
795,876
19,625
–
41,888
61,513
67,604
37,910
36,508
142,022
$
$
$
–
–
–
–
24,244
51,355
–
–
75,599
–
–
–
–
–
75,599
–
–
–
–
679
–
–
679
$
$
$
35,862
257
–
36,119
449,277
353,462
16,359
16,245
835,343
13
–
–
–
13
871,475
19,625
–
41,888
61,513
68,283
37,910
36,508
142,701
$
$
$
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
852,416
2,201,718
–
–
3,054,134
$ 3,935,740
$
$
$
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
–
11,148
357
11,505
$
215,040
$ 3,705,514
–
–
–
–
$
679
$ 189,295
–
11,148
357
11,505
$
215,719
$ 3,894,809
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
(1) The notional amounts represent the amount to which a rate or price is applied to determine the amount of cash flows to be exchanged.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 161
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, 2016 ($ 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
Total
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
$
112,183
279,035
663,184
13,169
6,956
1,074,527
$
–
30,872
1,114,988
29,392
24,700
1,199,952
$
13
–
516,362
8,270
8,491
533,136
$
112,196
309,907
2,294,534
50,831
40,147
2,807,615
858
400,914
61,029
8,375
9,690
480,866
63,485
22,911
37,001
123,397
35,004
47,590
203,554
8,241
6,555
300,944
24,265
22,852
41,612
88,729
–
786
88,879
–
–
89,665
158
3,295
140
3,593
35,862
449,290
353,462
16,616
16,245
871,475
87,908
49,058
78,753
215,719
$ 1,678,790
$ 1,589,625
$ 626,394
$ 3,894,809
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
(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 generally 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, 2016. 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.
162 | 2 0 1 6 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 73 of
the 2016 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)
2016
Credit risk
amount
Credit
equivalent
amount
CET1 Risk
Weighted
2015
Credit risk
amount
Credit
equivalent
amount
Risk
Weighted
Assets(1)
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)
$
112,196
$
–
$
–
$
–
$
140,240
$
–
$
3
$
–
309,907
2,294,534
50,831
40,147
2,807,615
35,862
449,290
353,462
16,616
16,245
871,475
87,908
49,058
78,753
215,719
9
2,703
6
–
2,718
–
2,057
2,596
322
–
4,975
871
32
1,109
2,012
100
7,331
107
1
7,539
38
5,420
5,919
532
127
12,036
5,308
2,032
6,493
13,833
17
2,125
52
–
2,194
16
1,326
1,585
129
19
3,075
1,677
340
645
2,662
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
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
–
–
–
4,165
–
–
–
7,183
Total derivatives
$ 3,894,809
$ 9,705
$ 33,408
$ 12,096
$ 5,019,129
$ 10,535
$ 47,528
$ 18,016
Amount settled through
central counterparties(3)
Exchange-traded
Over-the-counter
228,538
2,109,672
$ 2,338,210
$
–
–
–
5,521
2,174
7,695
$
110
43
153
$
325,317
3,065,346
$ 3,390,663
$
–
–
–
8,172
6,331
$ 14,503
163
127
290
$
(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 $31,952 (2015 –
$30,467) for CRA, and $51,072 (2015 – $50,078) for CEA.
(2) As per OSFI guideline, effective 2014, Credit Valuation Adjustment (CVA) to CET1 RWA for derivatives was phased-in at 0.57. In 2016, the CVA was 0.64 (2015 – 0.64).
(3) Amounts are included under total derivatives above. Amounts include exposures settled directly through central counterparties and exposures settled through clearing members of
central counterparties.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 163
CONSOLIDATED FINANCIAL STATEMENTS
Fair value
(d)
The following table summarizes the fair value of derivatives segregated by type and segregated between trading and those derivatives designated in
hedging relationships.
As at October 31 ($ millions)
2016
2016
2015
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)
Average fair value
Year-end fair value
Year-end fair value(1)
Favourable
Unfavourable
Favourable
Unfavourable
Favourable
Unfavourable
$
155
15,198
91
15,444
$
3
14,566
92
14,661
$
63
14,153
65
14,281
$
3
13,814
82
13,899
$
250
12,871
107
13,228
$
3
12,770
104
12,877
6,163
10,985
248
17,396
2,248
674
2,861
5,783
$ 38,623
6,294
13,141
232
19,667
2,490
1,840
3,993
8,323
$ 42,651
5,939
11,506
410
17,855
1,905
148
2,212
4,265
$ 36,401
5,362
12,369
325
18,056
2,380
1,475
2,403
6,258
$ 38,213
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
$
1,426
$
587
$
1,316
$
679
333
3,471
3,804
26
5,256
$
$
$
241
3,346
3,587
–
4,174
$
$
$
301
3,223
3,524
32
4,872
$
$
$
578
2,025
$ 2,603
$
–
$ 3,282
$ 41,657
$ 42,387
$ 41,003
$ 45,270
31,952
9,705
$
31,952
$ 10,435
30,468
$ 10,535
30,468
$ 14,802
(1) The average fair value of trading derivatives’ market valuation for the year ended October 31, 2015 was: favourable $38,950 and unfavourable $43,019. Average fair value
amounts are based on the latest 13 month-end balances.
(2) Master netting agreement amounts are based on the capital adequacy criteria of the Basel Committee on Banking Supervision (BCBS) and OSFI. These criteria allow netting where
there are legally enforceable contracts which enable net settlement in the event of a default, bankruptcy, liquidation or similar circumstances.
(e) Hedging activities
The Bank’s hedging activities that qualify for hedge accounting consist of fair value hedges, cash flow hedges, and net investment hedges.
Ineffectiveness of hedge relationships
Due to the ineffective portion of designated hedges, the Bank recorded the following amounts in non-interest income – other:
For the year ended October 31 ($ 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:
2016
2015
$
$
$
11
(51)
(40)
11
$
$
$
(220)
198
(22)
(27)
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
2016
2015
Favourable
Unfavourable
Favourable
Unfavourable
$
$
1,622
3,568
66
5,256
$
$
643
3,291
240
4,174
$
$
1,557
3,205
110
4,872
$
$
715
2,055
512
3,282
(1) As at October 31, 2016, the fair value of non-derivative instruments designated as net investment hedges and fair value hedges was $6,905 (2015 – $7,428). These non-derivative
hedging instruments are presented as deposits – financial institutions on the Consolidated Statement of Financial Position.
164 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Cash flow hedges
The period when cash flows of designated hedged items are expected to occur and impact the Consolidated Statement of Income are as follows:
As at October 31, 2016 ($ millions)
Cash inflows from assets
Cash outflows from liabilities
Net cash flows
As at October 31, 2015 ($ millions)
Cash inflows from assets
Cash outflows from liabilities
Net cash flows
Within
one year
Within one
to five years
More than
five years
$ 12,672
(22,187)
$ 26,838
(30,870)
$ 8,998
(7,666)
$ (9,515)
$ (4,032)
$ 1,332
Within
one year
Within one
to five years
More than
five years
$
1,431
(14,803)
$ (13,372)
$
$
9,543
(18,172)
$ 3,801
(3,296)
(8,629)
$
505
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.
10 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, 2016 ($ 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)
$
63,329
$ (21,672)
$
41,657
$ (25,115)
$
(7,184)
$
9,358
Types of financial assets
Derivative financial instruments(4)
Securities purchased under resale agreements
and securities borrowed
98,909
(6,780)
92,129
(9,447)
(75,365)
7,317
Total
$ 162,238
$ (28,452)
$ 133,786
$ (34,562)
$ (82,549)
$ 16,675
As at October 31, 2016 ($ millions)
Types of financial liabilities
Derivative financial instruments(4)
Obligations related to securities sold under
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
Gross amounts
of recognized
financial liabilities
Related amounts not offset
in the consolidated statement
of financial position
Impact of
master netting
arrangements
or similar
agreements(1)
Collateral(2)
Net amount
$
64,059
$ (21,672)
$
42,387
$ (25,115)
$
(7,318)
$
9,954
repurchase agreements and securities lent
103,863
(6,780)
97,083
(9,447)
(73,929)
13,707
Total
$ 167,922
$ (28,452)
$ 139,470
$ (34,562)
$ (81,247)
$ 23,661
(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 2016, the cash collateral received against the positive market values of derivative financial instruments of $1,398 and the cash collateral pledged towards the negative
(4)
mark to market of derivative financial instruments of $875 are recorded within other liabilities and other assets, respectively.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 165
CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2015 ($ millions)
Types of financial assets
Derivative financial instruments(4)
Securities purchased under resale agreements
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
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)
Types of financial liabilities
Derivative financial instruments(4)
Obligations related to securities sold under
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
Gross amounts
of recognized
financial liabilities
Related amounts not offset
in the consolidated statement
of financial position
Impact of
master netting
arrangements
or similar
agreements(1)
Collateral(2)
Net amount
$
69,293
$ (24,023)
$
45,270
$ (22,357)
$
(8,560)
$ 14,353
repurchase agreements and securities lent
85,460
(8,445)
77,015
(8,107)
(58,090)
10,818
Total
$ 154,753
$ (32,468)
$ 122,285
$ (30,464)
$ (66,650)
$ 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 $675 are recorded within other liabilities and other assets, respectively.
166 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
11 Investment Securities
Investment securities includes held-to-maturity securities and available-for-sale securities.
(a) An analysis of the carrying value of investment securities is as follows:
As at October 31, 2016 ($ 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) %
Other debt
Yield(1) %
Preferred shares
Common shares
Total available-for-sale securities
Held-to-maturity
Canadian federal and provincial government issued
or guaranteed debt
U.S. treasury and other U.S. agency debt
Other foreign government debt
Corporate debt
Total held-to-maturity securities
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
$
51
0.8
–
0.0
481
0.3
4,645
1.7
846
1.7
–
–
6,023
123
–
–
523
646
$
53
1.0
252
1.0
2,134
0.6
3,620
3.0
1,145
0.1
–
–
7,204
432
335
344
1,578
2,689
$ 11,507
1.0
2,869
1.4
5,823
1.0
5,602
3.2
3,454
1.4
–
–
29,255
5,335
4,281
2,547
6,617
18,780
$
857
2.5
352
2.1
1,296
0.9
1,424
4.4
81
3.0
–
–
4,010
281
–
7
7
295
$ 1,153
3.0
19
2.9
343
1.2
240
5.2
179
2.5
–
–
1,934
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
264
1,819
2,083
–
–
–
–
–
$ 13,621
1.3
3,492
1.5
10,077
0.9
15,531
2.9
5,705
1.2
264
1,819
50,509
6,171
4,616
2,898
8,725
22,410
Total investment securities
$ 6,669
$ 9,893
$ 48,035
$ 4,305
$ 1,934
$ 2,083
$ 72,919
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
$
8
1,485
878
4,298
$
430
5,146
264
4,053
$ 16,588
26,959
1,496
2,992
$ 1,239
2,086
247
733
$ 1,192
514
77
151
$
721
930
12
420
$ 20,178
37,120
2,974
12,647
Total investment securities
$ 6,669
$ 9,893
$ 48,035
$ 4,305
$ 1,934
$ 2,083
$ 72,919
(1) Represents the weighted-average yield of fixed income securities.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 167
CONSOLIDATED FINANCIAL STATEMENTS
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) %
Other debt
Yield(1) %
Preferred shares
Common shares
Total available-for-sale securities
Held-to-maturity
Canadian federal and provincial government issued
or guaranteed debt
U.S. treasury and other U.S. agency debt
Other foreign government debt
Corporate debt
Total held-to-maturity securities
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
Three to
twelve
months
One to
five years
Five to
ten years
Over ten
years
No specific
maturity
Carrying
value
$
2
0.6
12
0.1
373
0.2
2,274
2.4
846
1.2
–
–
3,507
–
–
–
–
–
$
199
1.0
1,034
1.3
1,118
0.3
4,838
2.0
947
0.7
–
–
8,136
–
–
69
–
69
$
5,105
1.3
2,482
1.3
8,197
1.1
4,323
3.3
3,503
1.5
–
–
23,610
74
131
107
262
574
$ 1,279
2.2
166
2.3
140
1.6
1,053
4.3
67
1.7
–
–
2,705
–
–
8
–
8
$ 1,164
3.1
12
2.9
–
–
195
5.4
214
2.3
–
–
1,585
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
255
2,767
3,022
$
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
131
184
262
651
$ 3,507
$ 8,205
$ 24,184
$ 2,713
$ 1,585
$ 3,022
$ 43,216
$
5
674
161
2,667
$
761
2,033
997
4,414
$
5,899
13,796
1,259
3,230
$ 3,507
$ 8,205
$ 24,184
$ 1,359
498
120
736
$ 2,713
$ 1,207
193
83
102
$ 1,585
$
956
1,536
40
490
$ 3,022
$ 10,187
18,730
2,660
11,639
$ 43,216
(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, 2016 ($ 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
Total available-for-sale securities
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
Total available-for-sale securities
168 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Cost
$ 13,347
3,469
10,050
15,490
5,650
414
1,634
$ 50,054
$
Cost
7,558
3,685
9,806
12,701
5,531
413
2,104
Gross
unrealized
gains
Gross
unrealized
losses
$
$
280
33
53
62
59
10
243
740
Gross
unrealized
gains
$
202
25
29
32
58
6
706
$
6
10
26
21
4
160
58
$ 285
Gross
unrealized
losses
$
11
4
7
50
12
164
43
Fair value
$ 13,621
3,492
10,077
15,531
5,705
264
1,819
$ 50,509
$
Fair value
7,749
3,706
9,828
12,683
5,577
255
2,767
$ 41,798
$ 1,058
$ 291
$ 42,565
The net unrealized gain on available-for-sale securities of $455 million (2015 – gain of $767 million) decreases to a net unrealized gain of $26 million
(2015 – gain of $267 million) after the impact of qualifying hedges is taken into account. The net unrealized gain on available-for-sale securities is
recorded in Accumulated Other Comprehensive Income.
(c) An analysis of the fair value and carrying value of held-to-maturity securities is as follows:
As at October 31 ($ millions)
Canadian federal and provincial government issued or guaranteed debt
U.S. treasury and other U.S. agency debt
Other foreign government debt
Corporate debt
Total held-to-maturity securities
(d) An analysis of available-for-sale securities with continuous unrealized losses:
Fair value
Carrying value
$
2016
6,207
4,672
2,901
8,787
$
2015
74
131
189
322
$ 22,567
$ 716
2016
$ 6,171
4,616
2,898
8,725
$22,410
$
2015
74
131
184
262
$ 651
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, 2016 ($ 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
$
1,867 $
807
2,238
2,812
877
6
303
1,861
798
2,212
2,799
875
6
280
6
9
26
13
2
–
23
79
$ 1,104 $ 1,104
192
–
567
407
222
105
193
–
575
409
382
140
$
–
1
–
8
2
160
35
$
2,971 $
1,000
2,238
3,387
1,286
388
443
2,965
990
2,212
3,366
1,282
228
385
$
6
10
26
21
4
160
58
$ 2,803 $ 2,597
$ 206
$ 11,713 $ 11,428
$ 285
Total available-for-sale securities
$
8,910 $
8,831
$
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
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
$
2,362 $
1,302
977
3,532
1,625
1
419
2,351
1,298
973
3,499
1,617
1
379
$ 10,218 $ 10,118
$
11
4
4
33
8
–
40
$ 100
$
– $
–
10
1,140
132
383
39
–
–
7
1,123
128
219
36
$ 1,704 $ 1,513
$
–
–
3
17
4
164
3
$ 191
$
2,362 $
1,302
987
4,672
1,757
384
458
2,351
1,298
980
4,622
1,745
220
415
$ 11,922 $ 11,631
$
11
4
7
50
12
164
43
$ 291
As at October 31, 2016, the cost of 474 (2015 – 610) available-for-sale securities exceeded their fair value by $285 million (2015 – $291 million). This
unrealized loss is recorded in accumulated other comprehensive income as part of unrealized gains (losses) on available-for-sale securities. Of the 474
(2015 – 610) available-for-sale securities, 140 (2015 – 110) have been in an unrealized loss position continuously for more than a year, amounting to
an unrealized loss of $206 million (2014 – $191 million).
Investment securities are considered to be impaired only if objective evidence indicates one or more loss events have occurred and have affected the
estimated future cash flows after considering available collateral.
Collateral is not generally obtained directly from the issuers of debt securities. However, certain debt securities may be collateralized by specifically
identified assets that would be obtainable in the event of default.
Investment securities are evaluated for impairment at the end of each reporting date, or more frequently, if events or changes in circumstances
indicate the existence of objective evidence of impairment.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 169
CONSOLIDATED FINANCIAL STATEMENTS
(e) Net gain on sale of investment securities
An analysis of net gain on sale of investment securities is as follows:
For the year ended October 31 ($ millions)
Net realized gains or losses
Impairment losses(1)
Net gain on sale of investment securities
2016
2015
2014
$ 570
36
$ 534
$ 646
7
$ 639
$ 755
14
$ 741
(1)
Impairment losses (gains) are comprised of $36 from equity securities (2015 – $8; 2014 – $14) and nil from other debt securities (2015 – $(1); 2014 – nil).
12 Loans, Impaired Loans and Allowance for Credit Losses
(a)
Loans and acceptances outstanding by geography(1)
As at October 31 ($ 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
Chile:
Residential mortgages
Personal and credit cards
Business and government
Peru:
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
2016
2015
$ 193,303
74,698
48,653
$ 190,123
70,263
44,808
316,654
305,194
1,844
36,613
38,457
6,346
3,079
11,384
20,809
6,300
4,632
8,466
19,398
2,586
4,573
10,661
17,820
1,497
3,850
3,948
9,295
12,856
6,826
42,675
62,357
484,790
11,978
496,768
1,558
28,593
30,151
6,043
3,076
9,473
18,592
5,068
3,681
7,710
16,459
2,367
4,317
10,287
16,971
1,286
2,956
4,441
8,683
12,611
5,626
48,538
66,775
462,825
10,296
473,121
(4,626)
(4,197)
$ 492,142
$ 468,924
(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 $103,503 (2015 – $95,581), in Mexican pesos $15,954 (2015 – $14,054), Chilean pesos $15,214 (2015 – $12,566), and
in other foreign currencies $44,870 (2015 – $42,570).
170 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
(b)
Loan maturities
As at October 31, 2016
($ 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
$ 41,127 $ 160,713 $ 9,745 $ 9,520 $ 1,783 $ 222,888 $ 55,543 $ 165,189 $ 2,156 $ 222,888
99,502
162,400
99,502
162,400
40,163
111,384
48,391
5,616
31,191
79,960
14,107
70,051
58,439
48,183
4,820
6,278
900
2,833
993
495
Total
$ 125,285 $ 271,864 $ 20,843 $ 11,008 $ 55,790 $ 484,790 $ 207,090 $ 271,811 $ 5,889 $ 484,790
Allowance for credit losses
–
–
–
–
(4,626)
(4,626)
–
–
(4,626)
(4,626)
Total loans net of allowance
for credit losses
$ 125,285 $ 271,864 $ 20,843 $ 11,008 $ 51,164 $ 480,164 $ 207,090 $ 271,811 $ 1,263 $ 480,164
As at October 31, 2015
Remaining term to maturity
Rate sensitivity
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)
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
$ 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
11,872
70,079
29,709
72,195
51,465
50,803
4,595
6,186
1,124
501
875
2,555
$ 125,610 $ 253,589 $ 20,219 $ 12,553 $ 50,854 $ 462,825 $ 201,182 $ 256,164 $ 5,479 $ 462,825
(4,197)
(4,197)
(4,197)
(4,197)
–
–
–
–
–
–
for credit losses
$ 125,610 $ 253,589 $ 20,219 $ 12,553 $ 46,657 $ 458,628 $ 201,182 $ 256,164 $ 1,282 $ 458,628
(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)
$ 1,608
1,622
2,164
$ 5,394
2016
Allowance
for credit
losses
$
458(3)
1,596(3)
894(4)
$ 2,948
Net
$ 1,150
26
1,270
$ 2,446
$
435
163
86
263
262
142
1,095
$ 2,446
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
Interest income recognized on impaired loans during the year ended October 31, 2016 was $18 (2015 – $13).
(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 $94 (2015 – $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, 2016 and 2015, the Bank would have recorded additional interest income of $367 million and $337 million,
respectively, on impaired loans, if these impaired loans were classified as performing loans.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 171
CONSOLIDATED FINANCIAL STATEMENTS
(d) Allowance for credit losses
($ millions)
Individual
Collective
Total before loans acquired under FDIC guarantee
Loans acquired under FDIC guarantee(2)
($ millions)
Individual
Collective
Total before loans acquired under FDIC guarantee
Loans acquired under FDIC guarantee(2)
As at October 31, 2016
Balance at
beginning
of year
$
717
3,260
3,977
220
Write-offs(1)
Recoveries
$
(428)
(2,151)
(2,579)
(9)
$
40
542
582
18
$
Provision
for credit
losses
585
1,827
2,412
–
Other, including
foreign currency
adjustment
$ (20)
20
–
5
5
$ 4,197
$ (2,588)
$ 600
$ 2,412
$
As at October 31, 2015
Balance at
beginning
of year
$
614
2,856
3,470
171
Write-offs(1)
Recoveries
$
(320)
(1,908)
(2,228)
(2)
$
52
377
429
56
Provision
for credit
losses
$
255
1,721
1,976
(34)
Other, including
foreign currency
adjustment(3)
$ 116
214
330
29
Balance at
end of
year
$
894
3,498
4,392
234
$ 4,626
Balance at
end of
year
$
717
3,260
3,977
220
$ 3,641
$ (2,230)
$ 485
$ 1,942
$ 359
$ 4,197
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(2)
2016
2015
$ 2,948
1,444
4,392
234
$ 2,573
1,404
3,977
220
$ 4,626
$ 4,197
(1) For the wholesale portfolios, impaired loans restructured during the year amounted to $111 (2015 – $81). Write-offs of impaired loans restructured during the year were nil (2015 –
nil). Non-impaired loans restructured during the year amounted to $55 (2015 – $93).
(2) This represents the gross amount of allowance for credit losses as the receivable from FDIC is separately recorded in other assets.
(3)
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.
(4) The allowance for performing loans is attributable to business and government loans $662 (2015 –$644) with the remainder allocated to personal and credit card loans $662
(2015 – $614) and residential mortgages $120 (2015 – $146).
(e)
Loans acquired under FDIC guarantee
As at October 31, 2016 ($ millions)
R-G Premier Bank
Unpaid principal balance
Fair value adjustments
Net carrying value
Allowance for credit losses
As at October 31, 2015 ($ 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
$ 353
135
488
(157)
$ 1,939
(211)
1,728
(77)
Total
$ 2,292
(76)
2,216
(234)
$ 331
$ 1,651
$ 1,982
Non-single
family home
loans
Single
family home
loans
$ 417
136
553
(160)
$ 2,136
(291)
1,845
(60)
Total
$ 2,553
(155)
2,398
(220)
$ 393
$ 1,785
$ 2,178
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. The FDIC guarantee on non-single family loans expired in 2015. The guarantee for single family home loans will expire in
April 2020.
As at October 31, 2016, the carrying value of loans acquired under the FDIC guarantee was $2.0 billion (2015 – $2.2 billion) and the carrying value of
loans for which claims for losses under the guarantee expired during the year was $331 million. A net receivable of $116 million (2015 – $218 million)
from the FDIC is included in Other assets in the Consolidated Statement of Financial Position.
172 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Loans past due but not impaired(1)
(f)
A loan is considered past due when a counterparty has not made a payment by the contractual due date. The following table presents the carrying
value of loans that are contractually past due but not classified as impaired because they are either less than 90 days past due or fully secured and
collection efforts are reasonably expected to result in repayment, or restoring it to a current status in accordance with the Bank’s policy.
As at October 31 ($ millions)
Residential mortgages
Personal and credit cards
Business and government
Total
2016(2)(3)
2015(2)(3)
31 – 60
days
$ 1,194
784
186
$ 2,164
61 – 90
days
$ 472
447
44
$ 963
91 days
and
greater
$ 123
94
189
$ 406
Total
$ 1,789
1,325
419
$ 3,533
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
Loans past due 30 days or less are not presented in this analysis as they are not administratively considered past due.
(1)
(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.
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
13 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
2016(1)
2015(1)
$ 17,570
3,102
$ 18,313
3,296
19,836
20,816
(1) The fair value of the transferred assets is $20,776 (2015 – $21,728) and the fair value of the associated liabilities is $20,493 (2015 – $21,416), for a net position of $283 (2015 –
$312).
(2) These include cash held in trust and trust permitted investment assets acquired as part of principal reinvestment account that the Bank is required to maintain in order to participate
in the programs.
Securitization of personal lines of credit, credit cards and auto loans
The Bank securitizes a portion of its unsecured personal lines of credit, credit card and auto loan receivables through consolidated structured entities.
These receivables continue to be recognized on the Consolidated Statement of Financial Position as personal and credit cards loans. For further details,
refer to Note 14.
Securities sold under repurchase agreements and securities lent
The Bank enters into transactions, such as repurchase agreements and securities lending agreements, where the Bank transfers assets under
agreements to repurchase them on a future date and retains all the substantial risks and rewards associated with the assets. The transferred assets
remain on the Consolidated Statement of Financial Position.
The following table provides the carrying amount of the transferred assets and the associated liabilities:
As at October 31 ($ millions)
Carrying value of assets associated with:
Repurchase agreements(2)
Securities lending agreements
Total
Carrying value of associated liabilities(3)
2016(1)
2015(1)
$ 87,402
38,668
126,070
$
67,052
41,190
108,242
$ 97,033
$
77,015
(1) The fair value of transferred assets is $126,070 (2015 – $108,242) and the fair value of the associated liabilities is $97,033 (2015 – $77,015), for a net position of $29,037 (2015 –
$31,227).
(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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 173
CONSOLIDATED FINANCIAL STATEMENTS
14 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 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 and investment in the conduit’s
subordinated note, gives 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, Hollis Receivables Term Trust II, Trillium Credit
Card Trust II and Securitized Term Auto Receivables Trust 2016-1.
Activities of these structured entities are generally limited to holding an interest in 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, 2016, $6.0 billion (2015 – $8.5 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 issued under this program are denominated in U.S. dollars.
As at October 31, 2016, assets pledged in relation to these covered bonds were insured residential mortgages denominated in Canadian dollars of
$4.8 billion (2015 – $6.8 billion).
Scotiabank Covered Bond Guarantor Limited Partnership
The Bank has a registered covered bond program through 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, 2016, $23.9 billion (2015 – $13.7 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, 2016, assets pledged in relation to these covered bonds were uninsured residential mortgages denominated in
Canadian dollars of $25.7 billion (2015 – $14.5 billion).
Personal line of credit securitization trust
The Bank securitizes a portion of its unsecured personal line of credit receivables (receivables) 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 co-ownership
interests in receivables originated by the Bank. Recourse of the note holders is limited to the purchased interests.
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, 2016, $1.5 billion notes (2015 – $2.0 billion) were outstanding and included in Deposits –
Business and government on the Consolidated Statement of Financial Position. As at October 31, 2016, assets pledged in relation to these notes were
$1.8 billion (2015 – $2.5 billion).
Credit card receivables securitization trust
The Bank securitizes a portion of its credit card receivables (receivables) through Trillium Credit Card Trust II (Trillium), a Bank-sponsored structured
entity. Trillium issues notes to third-party investors and the Bank, and the proceeds of such issuance are used to purchase co-ownership interests in
receivables originated by the Bank. Recourse of the note holders is limited to the purchased interest.
174 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
The Bank is responsible for servicing the transferred receivables as well as performing administrative functions for Trillium. The subordinated notes
issued by Trillium are held by the Bank. As at October 31, 2016, $1.2 billion Class A notes, denominated in U.S. dollars, were outstanding and
included in Deposits – Business and government on the Consolidated Statement of Financial Position. As at October 31, 2016 assets pledged in
relation to these notes were credit card receivables, denominated in Canadian dollars, of $1.3 billion.
Auto loan receivables securitization trust
The Bank securitizes a portion of its Canadian auto loan receivables (receivables) through Securitized Term Auto Receivables Trust 2016-1 (START), a
Bank-sponsored structured entity. START issues multiple series of Class A notes to third-party investors and subordinated notes to the Bank, and the
proceeds of such issuances are used to purchase a discrete pool of retail indirect auto loan receivables from the Bank on a fully serviced basis.
Recourse of the note holders is limited to the receivables.
The Bank is responsible for servicing the transferred receivables as well as performing administrative functions for START. The subordinated notes
issued by START are held by the Bank. As at October 31, 2016, $0.7 billion Class A notes were outstanding and included in Deposits – Business and
government on the Consolidated Statement of Financial Position. START’s outstanding Class A notes are denominated in U.S. dollars. As at October
31, 2016, assets pledged in relation to these notes were auto loan receivables denominated in Canadian dollars of $0.7 billion.
Other
Assets of other consolidated structured entities are comprised of securities, deposits with banks and other assets to meet the Bank’s and customer
needs.
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
(b) Unconsolidated structured entities
The following table provides information about other structured entities in which the Bank has a significant interest but does not control and
therefore does not consolidate. A significant interest is generally considered to exist where the Bank is exposed to 10% or more of the unconsolidated
structured entities maximum exposure to loss.
($ millions)
As at October 31, 2016
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles
Other
Total
Total assets (on structured entity’s financial statements)
$
4,401
$ 7,653
$ 1,520
$
68
$ 13,642
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
Derivative financial instruments
Bank’s maximum exposure to loss
($ 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
2
–
–
2
–
2
2
467
1,147
712
2,326
–
–
–
–
15
47
62
1,400
–
1,400
–
20
–
20
–
–
–
469
1,182
759
2,410
1,400
2
1,402
4,401
$ 2,326
$
62
$
20
$
6,809
As at October 31, 2015
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles
Other
Total
2,491
$ 7,813
$ 1,520
$ 950
$ 12,774
$
$
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
Bank’s maximum exposure to loss
$
2,491
$ 2,330
$
62
$ 178
$
5,061
(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, 2016, the Bank has recorded
$2.4 billion (2015 – $2.6 billion), primarily its interest in the structured entities, on its Consolidated Statement of Financial Position.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 175
CONSOLIDATED FINANCIAL STATEMENTS
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 (2015 – $1.4 billion) based on future asset purchases by these conduits.
Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns, which results in the Bank not
consolidating the two Canadian conduits.
Structured finance entities
The Bank has interests in structured entities used to assist corporate clients in accessing cost-efficient financing through their securitization structures.
The Bank may act as an administrator, an investor or a combination of both in these types of structures.
Capital funding vehicles
These entities are designed to pass the Bank’s credit risk to the holders of the securities. Therefore the Bank does not have exposure or rights to
variable returns from these entities.
Other
Other includes investments in managed funds, collateralized debt obligation entities, and other structured entities. The Bank’s maximum exposure to
loss is limited to its net investment in these funds.
(c) Other unconsolidated Bank-sponsored entities
The Bank sponsors unconsolidated structured entities in which it has insignificant or no interest at the reporting date. The Bank is a sponsor when it is
significantly involved in the design and formation at inception of the structured entities, and the Bank’s name is used by the structured entities to
create an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also considers other factors, such as its
continuing involvement and obligations to determine if, in substance, the Bank is a sponsor. The Bank considers mutual funds and managed
companies as sponsored entities.
The following table provides information on revenue from unconsolidated Bank-sponsored entities.
As at October 31 ($ millions)
Revenue
(1)
Includes mutual funds, other funds and trusts.
2016
Scotia
Managed
Companies
Funds(1)
2015
Scotia
Managed
Companies
Total
Total
Funds(1)
$ 1,960
$ 8
$ 1,968
$ 1,964
$ 13
$ 1,977
The Bank earned revenue of $1,968 million (2015 – $1,977 million) from its involvement with the unconsolidated Bank-sponsored structured entities
for the year ended October 31, 2016, which was comprised of interest income of $2 million (2015 – $3 million), non-interest income – banking of
$134 million (2015 – $133 million) and non-interest income – wealth management of $1,832 million (2015 – $1,841 million), including mutual fund,
brokerage and investment management and trust fees.
176 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
15 Property and Equipment
($ millions)
Cost
Balance as at October 31, 2014
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2015
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2016
Accumulated depreciation
Balance as at October 31, 2014
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2015
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2016
Net book value
Balance as at October 31, 2015
Balance as at October 31, 2016
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
Land
Buildings
Equipment
Leasehold
improvements
Total
$ 266
19
(11)
60
$ 1,687
135
(243)
70
$ 3,378
262
(118)
17
$ 1,224
100
(57)
38
$ 6,555
516
(429)
185
$ 334
$ 1,649
$ 3,539
$ 1,305
$ 6,827
39
17
(42)
(19)
117
239
(244)
(19)
60
223
(102)
(9)
26
98
(61)
(11)
242
577
(449)
(58)
$ 329
$ 1,742
$ 3,711
$ 1,357
$ 7,139
$
$
$
–
–
–
–
–
–
–
–
–
$
$
715
47
(17)
9
754
99
(69)
(18)
$ 2,815
178
(46)
31
$ 2,978
170
(121)
(12)
$
$
753
78
(27)
5
809
56
(18)
(9)
$ 4,283
303
(90)
45
$ 4,541
325
(208)
(39)
$
766
$ 3,015
$
838
$ 4,619
$ 334
$ 329
$
$
895
976
$
$
561
696
$
$
496
519
$ 2,286(1)
$ 2,520(1)
(1)
Includes $20 (2015 – $27) of investment property.
16 Investments in Associates
The Bank had significant investments in the following associates:
As at October 31 ($ 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
2016
2015
Carrying
value
Thailand
Banking
49.0%
September 30, 2016
$
2,612
$ 2,415
Canada
China
Curacao
Venezuela
Financial Services
Banking
Banking
Banking
20.0%
19.9%
48.1%
26.6%
September 30, 2016
September 30, 2016
September 30, 2016
September 30, 2016
532
654
280
26
538
610
264
30
(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, 2016 these reserves amounted to $63 (2015 – $61).
(4) As at October 31, 2016, the Bank’s total net investment in Banco del Caribe, along with monetary assets, comprising of cash and dividend receivable was translated at the
DICOM exchange rate of 1 USD to 660 VEF replacing the SIMADI exchange rate (2015 – 1 USD to 198 VEF).
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 177
CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of the Bank’s significant associates are as follows.
($ 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
Canadian Tire’s Financial Services business (CTFS)
Bank of Xi’an Co. Ltd.
Maduro & Curiel’s Bank N.V.
Banco del Caribe
(1) Based on the most recent available financial statements.
17 Goodwill and Other Intangible Assets
For the twelve months ended and as at September 30, 2016(1)
Revenue
$ 1,622
999
915
347
90
Net
income
$ 449
305
427
101
(46)
Total assets
Total liabilities
$ 37,372
5,490
38,083
5,456
703
$ 32,637
4,469
35,022
4,855
601
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
Goodwill
The changes in the carrying amounts of goodwill by cash-generating unit (CGU) are as follows:
($ millions)
Canadian
Banking
Global Wealth
& Insurance
Balance as at October 31, 2014
Transfers November 1, 2014
Acquisitions
Foreign currency adjustments and
other
$ 1,633
1,728
–
–
Balance as at October 31, 2015
3,361
Acquisitions
Foreign currency adjustments and
other
49
(7)
Balance as at October 31, 2016
$ 3,403
$
2,292
(2,292)
–
–
–
–
–
–
Global
Capital
Markets
100
(100)
–
–
–
–
–
–
$
Global
Corporate &
Investment
Banking
123
(123)
–
–
–
–
–
–
$
Global
Banking and
Markets
–
223
–
35
258
–
7
Caribbean
and
Central
America
Asia
Pacific
720
151
–
134
1,005
241
9
–
–
–
–
–
–
–
Latin
America
2,041
413
116
(179)
2,391
–
70
Total
6,909
–
116
(10)
7,015
290
79
$ 265
$ 2,461
$ 1,255
$ –
$ 7,384
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.
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 bank determines the carrying value of the CGU using a regulatory capital approach based on credit, market, and operational risks, and leverage,
consistent with the Bank’s capital attribution for business line performance measurement. 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 13 times (2015 – 10 to 12.5 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, 2016 and July 31, 2015 and no impairment was determined to exist.
178 | 2 0 1 6 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
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.
($ millions)
Cost
Balance as at October 31, 2014
Acquisitions
Additions
Foreign currency adjustments and other
Balance as at October 31, 2015
Acquisitions
Additions
Foreign currency adjustments and other
Balance as at October 31, 2016
Accumulated amortization
Balance as at October 31, 2014
Amortization Expense
Foreign currency adjustments and other
Balance as at October 31, 2015
Amortization Expense
Foreign currency adjustments and other
Balance as at October 31, 2016
Net book value
As at October 31, 2015
As at October 31, 2016
Finite life
Indefinite life
Computer
software
Other
intangibles
Fund management
contracts(1)
Other
intangibles
Total
$ 1,771
$ 1,231
$ 2,325
$ 67
$ 5,394
5
474
(57)
$ 2,193
–
584
(40)
$ 2,737
296
–
(17)
$ 1,510
61
31
29
$ 1,631
$
629
$
790
$
191
(42)
778
255
(24)
$
90
4
884
104
7
$ 1,009
$ 995
–
–
–
$ 2,325
–
–
–
$ 2,325
$
$
$
–
–
–
–
–
–
–
–
–
1
$ 68
–
–
–
$ 68
$
$
$
–
–
–
–
–
–
–
$ 1,415(2)
$ 1,728(2)
$
$
626
636
$ 2,325
$ 2,325
$ 68
$ 68
301
474
(73)
$ 6,096
61
615
(11)
$ 6,761
$ 1,419
281
(38)
$ 1,662
359
(17)
$ 2,004
$ 4,434
$ 4,757
Fund management contracts are attributable to HollisWealth Inc. (formerly DundeeWealth Inc.).
(1)
(2) Computer software comprises of purchased software of $377 (2015 – $256), internally generated software of $948 (2015 – $619), and in process software not subject to
amortization of $403 (2015 – $540).
Impairment testing of intangible assets
Indefinite life intangible assets are not amortized and are assessed for impairment annually or more frequently if events or changes in circumstances
indicate that the asset may be impaired. Impairment is assessed by comparing the carrying value of the indefinite life intangible asset to its recoverable
amount. The recoverable amount of the fund management contracts is based on a value in use approach using the multi-period excess earnings
method. This approach uses cash flow projections from management-approved financial budgets which include key assumptions related to market
appreciation, net sales of funds, and operating margins taking into consideration past experience and market expectations. The forecast cash flows
cover a 5-year period, with a terminal growth rate of 4.5% (2015 – 4.5%) applied thereafter. These cash flows have been discounted at a rate of
10% (2015 – 10%). Management believes that reasonable negative changes in any one key assumption used to determine the recoverable amount
would not result in an impairment.
Indefinite life intangible assets were assessed for annual impairment as at July 31, 2016 and July 31, 2015 and no impairment was determined to
exist.
18 Other Assets
As at October 31 ($ millions)
Accrued interest
Accounts receivable and prepaids
Current tax assets
Margin deposit derivatives
Pension assets (Note 27)
Receivable from brokers, dealers and clients
Receivable from the Federal Deposit Insurance Corporation (Note 12)
Other
Total
$
2016
1,986
1,939
422
4,604
184
796
116
2,823
$
2015
1,742
1,983
649
4,085
183
504
218
2,939
$ 12,870
$
12,303
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 179
CONSOLIDATED FINANCIAL STATEMENTS
19 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)
2016
2015
Payable on demand(1)
Interest-
bearing
$ 10,296
69,348
3,583
$ 83,227
$ 69,542
6,236
–
–
2,479
62
106
4,802
$ 83,227
Non-interest
bearing
$
6,118
22,346
2,464
Payable after
Payable on a
notice(2)
fixed date(3)
Total
$ 111,956
26,363
2,958
$ 70,932
254,246
31,267
$ 199,302
372,303
40,272
$ 30,928
$ 141,277(4)
$ 356,445
$ 611,877
$ 16,938
330
–
4,055
592
1,659
557
6,797
$ 113,739
1,075
307
4,753
4,474
74
2,833
14,022
$ 234,665
47,356
14,949
7,456
8,002
9,006
3,776
31,235
$ 434,884
54,997
15,256
16,264
15,547
10,801
7,272
56,856
$
$
$
190,044
375,144
35,731
600,919
409,415
79,015
14,547
15,794
14,727
7,940
6,825
52,656
$ 30,928
$ 141,277
$ 356,445
$ 611,877
$
600,919
(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 $217,850 (2015 – $227,320) deposits denominated in Mexican pesos amount to $14,464 (2015 – $14,034) and deposits
Includes $135 (2015 – $120) of non-interest bearing deposits.
denominated in other foreign currencies amount to $76,777 (2015 – $66,860).
The following table presents the maturity schedule for term deposits in Canada greater than $100,000(1).
($ millions)
As at October 31, 2016
As at October 31, 2015
Within three
months
$
$
40,211
24,170
Three to six
months
Six to
twelve months
$
$
24,077
18,890
$
$
23,690
27,219
$
$
One to
five years
99,905
90,927
Over
five years
12,451
17,231
$
$
$
$
200,334
178,437
(1) The majority of foreign term deposits are in excess of $100,000.
20 Subordinated Debentures
These debentures are direct, unsecured obligations of the Bank and are subordinate to the claims of the Bank’s depositors and other creditors. The
Bank, where appropriate, enters into interest rate and cross-currency swaps to hedge the related risks.
As at October 31 ($ millions)
Maturity date
January 2021
August 2022
Interest
rate (%)
6.65
2.898
October 2024
3.036
June 2025
8.90
December 2025(3) 3.37
December 2025(3) 4.50
March 2027(3)
2.58
November 2037
April 2038
August 2085
3.015
3.37
Floating
Terms(1)
Redeemed on January 22, 2016.
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 December 8, 2020. After December 8, 2020, interest will be
payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 2.19%.
US$1,250 million. Interest will be payable semi-annually in arrears on June 16 and
December 16 of each year.
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%.
JPY ¥10 billion. Redeemable on November 20, 2017.
JPY ¥10 billion. Redeemable on April 9, 2018.
US$99 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.
2016
Carrying
value(2)
2015
Carrying
value(2)
$
–
$ 1,000
1,500
1,798
262
759
1,677
1,271
118
116
1,501
1,806
263
–
–
1,247
100
100
132
$ 7,633
165
$ 6,182
(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) These 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 or, where applicable, the US dollar equivalent of $5.00 (subject to adjustments in certain events as set out in the respective prospectus supplements, and (ii) the
current market price of the Bank’s common shares at the time of the trigger event (10-day weighted average).
180 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
21 Other Liabilities
As at October 31 ($ millions)
Accrued interest
Accounts payable and accrued expenses
Current tax liabilities
Deferred tax liabilities (Note 26)
Gold and silver certificates and bullion
Margin and collateral accounts
Payables to brokers, dealers and clients
Provisions (Note 22)
Pension liabilities (Note 27)
Other liabilities of subsidiaries and structured entities
Other
Total
22 Provisions
($ millions)
As at November 1, 2014
Provisions made during the year
Provisions utilized / released during the year
Balance as at October 31, 2015
Provisions made during the year
Provisions utilized / released during the year
Balance as at October 31, 2016
2016
2015
$
2,033
5,427
587
611
8,430
6,708
528
536
1,613
10,950
5,293
$
1,888
5,225
584
599
7,812
8,848
226
315
722
10,835
4,584
$ 42,716
$ 41,638
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
Off-balance sheet
credit risks
Restructuring
Other
Total
$ 184
–
(72)
$ 112
26
–
$ 138
$ 136
–
(87)
$
49
378
(150)
$ 277
$ 198
66
(110)
$ 154
85
(118)
$ 121
$ 518
66
(269)
$ 315
489
(268)
$ 536
Off-balance sheet credit risks
The provision for off-balance sheet credit risks relates primarily to credit risks such as undrawn lending commitments, letters of credit and letters of
guarantee. These are collectively assessed at each reporting period in a manner consistent with the collective allowance for performing on-balance
sheet credit risks.
Restructuring charge
During fiscal 2016, the Bank recorded a restructuring provision of $378 million ($278 million after tax) as part of the Bank’s efforts to enhance
customer experience, reduce costs in a sustainable manner, to achieve greater operational efficiencies, and to simplify the organization. The
restructuring charge primarily related to employee severance and was recorded within non-interest expenses. As at October 31, 2016, $265 million of
the restructuring provision remains and is expected to be utilized in line with the approved plans, during fiscal 2017 and early part of fiscal 2018. This
amount represents the Bank’s best estimate of the amount required to settle the obligation. Uncertainty exists with respect to when the obligation will
be settled and the amounts ultimately paid, as this will largely depend upon individual facts and circumstances.
In the fourth quarter of 2014, a restructuring charge of $148 million was recorded in non-interest expenses, primarily relating to employee severance
costs. As at October 31, 2016, the restructuring provision has been substantially utilized.
Litigation and Other
Other primarily includes provisions related to litigation. 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 regulatory 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 or
regulatory proceedings will have a material adverse effect on the Consolidated Statement of Financial Position or results of operations of the Bank.
Legal provisions are established when it becomes probable that the Bank will incur an expense related to a legal action and the amount can be reliably
estimated. Such provisions are recorded at the best estimate of the amount required to settle any obligation related to these legal actions as at the
balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Management and internal and external experts are
involved in estimating any amounts that may be required. The actual costs of resolving these claims may vary significantly from the amount of the
legal provisions. The Bank’s estimate involves significant judgement, given the varying stages of the proceedings, the fact that the Bank’s liability, if
any, has yet to be determined and the fact that the underlying matters will change from time to time. As such, there is a possibility that the ultimate
resolution of those legal actions may be material to the Bank’s consolidated results of operations for any particular reporting period.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 181
CONSOLIDATED FINANCIAL STATEMENTS
23 Common and Preferred Shares
(a) Common shares
Authorized:
An unlimited number of common shares without nominal or par value.
Issued and fully paid:
As at October 31 ($ millions)
2016
2015
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 25)
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
1,202,937,205
2,234,037
4,228,124
29,138
(1,534,900)
1,207,893,604(2)
$ 15,141
153
236
2
(19)
$ 15,513
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) Effective June 30, 2016, the Bank commenced issuing shares from Treasury for the Dividend and Share Purchase options of the Plan. As at October 31, 2016, there were 7,786,784
(2)
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
2016, the number of such shares bought and sold was 13,912,150 (2015 – 12,466,541).
Dividend
The dividends paid on common shares in fiscal 2016 and 2015 were $3,468 million ($2.88 per share) and $3,289 million ($2.72 per share),
respectively. The Board of Directors approved a quarterly dividend of 74 cents per common share at its meeting on November 28, 2016. This quarterly
dividend applies to shareholders of record as of January 3, 2017, and is payable January 27, 2017.
Normal Course Issuer Bid
During the year ended October 31, 2016, under normal course issuer bids, the Bank repurchased and cancelled approximately 1.5 million common
shares (2015 –15.5 million) at an average price of $52.34 per share (2015 – $61.64) for a total amount of approximately $80 million (2015 – $955
million).
On May 31, 2016, 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, which represented approximately 1% of the Bank’s common shares
issued and outstanding as of May 26, 2016. Purchases under the new bid commenced on June 2, 2016, and will end on the earlier of June 1, 2017,
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 not repurchased any common shares.
On May 29, 2015, the Bank announced that OSFI and the TSX approved its normal course issuer bid pursuant to which it may repurchase for
cancellation up to 24 million of the Bank’s common shares, which represented approximately 2% of the Bank’s common shares issued and
outstanding as of May 25, 2015. The bid ended on June 1, 2016. Under this bid, the Bank repurchased and cancelled approximately 9.5 million
common shares at an average price of $58.94 per share.
(b) Preferred shares
Authorized:
An unlimited number of preferred shares without nominal or par value.
Issued and fully paid:
As at October 31 ($ millions)
Preferred shares:(a)
Series 14(b)
Series 15(c)
Series 16(d)
Series 17(e)
Series 18(f)(g)
Series 19(f)(g)
Series 20(f)(h)
Series 21(f)(h)
Series 22(f)(i)
Series 23(f)(i)
Series 30(f)(j)
Series 31(f)(j)
Series 32(f)(k)
Series 33(f)(k)
Series 34(f)(l)(o)
Series 36(f)(m)(o)
Series 38(f)(n)(o)
2016
2015
Number of shares
Amount
–
–
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
11,161,422
5,184,345
14,000,000
20,000,000
20,000,000
$
–
–
345
230
187
158
201
149
234
66
154
111
279
130
350
500
500
Dividends
declared
per share
0.562500
0.843750
1.312500
1.400000
0.837500
0.628938
0.902500
0.541438
0.957500
0.586438
0.455000
0.366438
0.638235
0.334959
1.184800
0.852350
–
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
–
–
–
–
Dividends
declared
per share
1.125000
1.125000
1.312500
1.400000
0.837500
0.697813
0.902500
0.610313
0.957500
0.655313
0.708750
0.197313
0.925000
–
–
–
–
Total preferred shares
143,745,767
$ 3,594
117,345,767
$ 2,934
182 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Terms of preferred shares
Preferred shares(a):
Series 14(b)
Series 15(c)
Series 16(d)
Series 17(e)
Series 18(f)(g)
Series 19(f)(g)
Series 20(f)(h)
Series 21(f)(h)
Series 22(f)(i)
Series 23(f)(i)
Series 30(f)(j)
Series 31(f)(j)
Series 32(f)(k)
Series 33(f)(k)
Series 34(f)(l)(o)
Series 36(f)(m)(o)
Series 38(f)(n)(o)
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
Issue date
Issue
price
Initial
dividend
Initial dividend
payment date
January 24, 2007
April 5, 2007
April 17, 2007
October 12, 2007
25.00
25.00
0.283560
0.348290
April 26, 2007
July 27, 2007
25.00
0.391950
January 29, 2008
January 31, 2008
25.00
0.337530
April 28, 2008
Rate
reset
spread
–
–
–
–
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
June 10, 2008
October 26, 2013
25.00
25.00
0.167800
0.167875
July 29, 2008
January 29, 2014
September 9, 2008
January 26, 2014
25.00
25.00
0.482900
0.173875
January 28, 2009
April 28, 2014
April 12, 2010
April 26, 2015
25.00
25.00
0.282200
0.095500
July 28, 2010
July 29, 2015
February 1, 2011
February 28, 2011
February 2, 2016
25.00
0.215410
April 27, 2011
25.00
0.105690
April 27, 2016
December 17, 2015
March 14, 2016
September 16, 2016
25.00
25.00
25.00
0.497300
0.508600
0.441800
April 27, 2016
July 27, 2016
January 27, 2017
Redemption date
Redemption
price
April 27, 2016
July 27, 2016
January 27, 2016 to
January 26, 2017
April 27, 2016 to
April 25, 2017
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
1.88%
January 26, 2019
1.88% January 26, 2014 to
January 26, 2019
April 26, 2020
April 26, 2015 to
April 26, 2020
February 2, 2021
1.00%
1.00%
1.34%
1.34% February 2, 2016 to
February 2, 2021
April 26, 2021
July 26, 2021
January 27, 2022
4.51%
4.72%
4.19%
25.00
25.00
25.25
25.25
25.00
25.50
25.00
25.50
25.00
25.50
25.00
25.50
25.00
25.50
25.00
25.00
25.00
(a) Non-cumulative preferential cash dividends on Series 16, 17, 18, 19, 20, 21, 22, 23, 30, 31, 32, 33, 34, 36 and 38 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) and the Non-
cumulative 5-Year Rate Reset Preferred Shares Non Viability Contingent Capital (NVCC) (Series 34, 36, and 38) 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, 33, 35, 37 and 39 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) and the Non-cumulative 5-Year Rate Reset Preferred Shares NVCC (Series 35, 37 and 39) 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) On April 27, 2016, the Bank redeemed all outstanding Series 14 Non-cumulative Preferred Shares at $25.00 per share together with declared and
unpaid dividends.
(c) On July 27, 2016, the Bank redeemed all outstanding Series 15 Non-cumulative Preferred shares at $25.00 per share together with declared and
unpaid dividends.
(d) With regulatory approval, the Series 16 Non-cumulative Preferred Shares may be redeemed by the Bank during the period commencing
January 27, 2016 and ending January 26, 2017 at $25.25 per share, together with declared and unpaid dividends to the date then fixed for
redemption and at $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 27,
2016 and ending April 25, 2017 at $25.25 per share, together with declared and unpaid dividends to the date then fixed for redemption and at
$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, 32 and 33, 34 and 35, 36 and 37, and 38 and 39, 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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 183
CONSOLIDATED FINANCIAL STATEMENTS
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 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 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 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, 2021 and on February 2 every five years thereafter. With regulatory approval, the
Series 32 preferred shares may be redeemed by the Bank on February 2, 2021, and every five years thereafter, respectively, at $25.00 per share,
together with declared and unpaid dividends. With regulatory approval, the Series 33 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 February 2,
2021 and on February 2 every five years thereafter, or (ii) $25.50 together with all declared and unpaid dividends to the date fixed redemption on
any other date after February 2, 2016.
(l) Holders of Series 34 Non-cumulative 5-Year Rate Reset Preferred Shares (NVCC) will have the option to convert shares into an equal number of
Series 35 non-cumulative floating rate preferred shares on April 26, 2021, and on April 26 every five years thereafter. With regulatory approval,
Series 34 preferred shares may be redeemed by the Bank on April 26, 2021, and for Series 35 preferred shares (NVCC), if applicable, on April 26,
2026 and every five years thereafter, respectively, at $25.00 per share, together with declared and unpaid dividends.
(m) Holders of Series 36 Non-cumulative 5-Year Rate Reset Preferred Shares (NVCC) will have the option to convert shares into an equal number of
Series 37 non-cumulative floating rate preferred shares (NVCC) on July 26, 2021, and on July 26 every five years thereafter. With regulatory
approval, Series 36 preferred shares may be redeemed by the Bank on July 26, 2021, and for Series 37 preferred shares, if applicable, on July 26,
2026 and every five years thereafter, respectively, at $25.00 per share, together with declared and unpaid dividends.
(n) Holders of Series 38 Non-cumulative 5-Year Rate Reset Preferred Shares (NVCC) will have the option to convert shares into an equal number of
Series 39 non-cumulative floating rate preferred shares (NVCC) on January 27, 2022, and on January 27 every five years thereafter. With
regulatory approval, Series 38 preferred shares may be redeemed by the Bank on January 27, 2022, and for Series 39 preferred shares, if
applicable, on January 27, 2027 and every five years thereafter, respectively, at $25.00 per share, together with declared and unpaid dividends.
The initial dividend, if declared will be payable on January 27, 2017 and will be $0.4418 per share of Preferred Shares Series 38.
(o) These preferred shares contain NVCC provisions necessary for the shares to qualify as Tier 1 regulatory capital under Basel III.
NVCC provisions require the conversion of capital instruments 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, NVCC preferred shares Series 34,
Series 35, Series 36, Series 37, Series 38 and Series 39, if outstanding, would be converted into common shares pursuant to an automatic conversion
formula defined as 100% times the share value of $25.00 plus declared and unpaid dividends divided by the conversion price. NVCC subordinated
debentures due March 30, 2027, December 8, 2025, and December 16, 2025, 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 or, where applicable, the U.S. dollar equivalent of $5.00 (subject in each case to adjustments in certain
events as set out in their respective prospectus supplements), 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, 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 subordinated debentures and preferred shares would be
1,373 million common shares.
184 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
(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 and 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.
24 Capital Management
The primary regulator over the Bank’s 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).
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% across all tiers of
capital effective January 1, 2016, in line with the requirements for global systemically important banks.
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. 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.
The Bank’s regulatory capital ratios were as follows:
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)
Capital
Common Equity Tier 1 Capital
Net Tier 1 Capital
Total regulatory capital
Risk-weighted assets/exposures used in calculation of capital ratios
CET1 risk-weighted assets(1)
Tier 1 risk-weighted assets(1)
Total risk-weighted assets(1)
Leverage exposures
Capital ratios
Common Equity Tier 1 Capital ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
2016
2015
All-in
Transitional
All-in
Transitional
$
$
$
39,989
45,066
53,330
$
$
$
45,816
47,668
55,824
$
$
$
36,965
41,366
48,230
$
$
$
44,811
44,811
51,501
$ 364,048
$ 364,504
$ 364,894
$ 1,010,987
$ 368,215
$ 368,215
$ 368,215
$ 1,013,346
$ 357,995
$ 358,780
$ 359,453
$ 980,212
$ 364,824
$ 364,824
$ 364,824
$ 983,318
11.0%
12.4%
14.6%
4.5%
12.4%
12.9%
15.2%
4.7%
10.3%
11.5%
13.4%
4.2%
12.3%
12.3%
14.1%
4.6%
(1)
In accordance with OSFI’s requirements, scalars for CVA risk-weighted assets of 0.64, 0.71 and 0.77 (0.64, 0.71 and 0.77 in 2015) were used to compute the CET1 capital ratio,
Tier 1 capital ratio and Total capital ratio, respectively.
The Bank substantially exceeded the OSFI capital targets as at October 31, 2016. OSFI has also prescribed an authorized leverage ratio and the Bank
was above the regulatory minimum as at October 31, 2016.
25 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
99.4 million common shares have been issued as a result of the exercise of options and 19.6 million common shares are committed under outstanding
options, leaving 10.0 million common shares available for issuance as options. Outstanding options expire on dates ranging from December 13, 2016
to December 3, 2025.
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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 185
CONSOLIDATED FINANCIAL STATEMENTS
The stock option plans include:
Š Tandem stock appreciation rights
Employee stock options granted between December 13, 2006 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, 2016, 57,800 Tandem SARs were outstanding (2015 – 175,876).
The share-based payment liability recognized for vested Tandem SARs as at October 31, 2016 was $2 million (2015 – $3 million). The corresponding
intrinsic value of this liability as at October 31, 2016 was $2 million (2015 – $3 million).
In 2016, an expense of $0.4 million (2015 – $0.3 million benefit) was recorded in salaries and employee benefits in the Consolidated Statement of
Income. This expense is net of gains arising from derivatives used to manage the volatility of share-based payments of $0.6 million (2015 –
$1.1 million losses).
Š 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, 2016 was $161 million (2015 – $182 million).
In 2016, an expense of $7 million (2015 – $13 million) was recorded in salaries and employee benefits in the Consolidated Statement of Income. As
at October 31, 2016, future unrecognized compensation cost for non-vested stock options was $4 million (2015 – $5 million) which is to be
recognized over a weighted-average period of 1.80 years (2015 – 1.90 years).
Š 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 2016, 77,298 SARs were granted (2015 – 88,768) and as at October 31, 2016, 1,541,368 SARs were outstanding (2015 – 1,791,458),
of which 1,478,854 SARs were vested (2015 – 1,726,644).
The share-based payment liability recognized for vested SARs as at October 31, 2016 was $25 million (2015 – $17 million). The corresponding
intrinsic value of this liability as at October 31, 2016 was $25 million (2015 – $17 million).
In 2016, a benefit of $2 million (2015 – benefit of $3 million) was recorded in salaries and employee benefits in the Consolidated Statement of
Income. This benefit is net of gains arising from derivatives used to manage the volatility of share-based payment of $18 million (2015 – $6 million
losses).
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:
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
2016
2015
0.56% - 0.81%
3.92%
16.28% - 30.40%
0.00 - 4.48 years
0.57% – 0.82%
4.33%
16.34% – 28.12%
0.05 – 4.43 years
$
17.69
$
10.23
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 2016 and 2015 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
2016 Grant
2015 Grant
1.20%
4.49%
20.10%
6.65 years
1.60%
3.86%
21.90%
6.69 years
$
5.27
$
7.63
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.
186 | 2 0 1 6 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
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
As at October 31, 2016
Range of exercise prices
$33.89 to $47.75
$49.93 to $52.57
$55.21 to $60.67
$63.98 to $68.32
2016
2015
Number of stock
options (000’s)
Weighted average
exercise price
Number of stock
options (000’s)
Weighted average
exercise price
22,957
1,263
(4,224)
(28)
(92)
(24)
19,852
14,617
10,198
$ 53.19
60.67
48.81
48.41
62.49
61.47
$ 54.55
$ 51.57
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
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
3,770
3,897
7,639
4,546
19,852
2.67
3.88
5.76
7.24
5.15
$ 41.70
$ 50.66
$ 56.44
$ 65.39
$ 54.55
3,770
3,897
5,435
1,515
14,617
$ 41.70
$ 50.66
$ 55.61
$ 63.98
$ 51.57
(1) Excludes SARs.
(2)
(3)
Includes outstanding options of 57,800 Tandem SARs (2015 – 175,876) and 257,170 options originally issued under HollisWealth plans (2015 – 301,950).
Includes exercisable options of 57,800 Tandem SARs (2015 – 175,876) and 257,170 options originally issued under HollisWealth plans (2015 – 301,950).
(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. In Canada, the
maximum dollar amounts were increased effective January 1, 2016. During 2016, the Bank’s contributions totalled $49 million (2015 – $31 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, 2016, an aggregate of 19 million common shares were held under the employee share ownership plans (2015 – 19 million). The
shares in the employee share ownership 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 2016, an aggregate expense of $237 million (2015 – $209 million) was recorded in salaries and employee benefits in the Consolidated Statement
of Income for these plans. This expense includes gains from derivatives used to manage the volatility of share-based payment of $121 million (2015 –
$72 million losses).
As at October 31, 2016, the share-based payment liability recognized for vested awards under these plans was $849 million (2015 – $754 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, 2016, there were 703,168 units (2015 –
1,325,679) awarded and outstanding of which 703,168 units were vested (2015 – 1,325,679).
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, 2016,
there were 348,197 units outstanding (2015 – 337,413).
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
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 187
CONSOLIDATED FINANCIAL STATEMENTS
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, 2016, there were 2,214,543 units
(2015 – 2,147,971) awarded and outstanding of which 1,537,076 were vested (2015 –1,566,333).
Performance Share Unit Plan (PSU)
Eligible executives receive an award of performance share units, for the majority of grants 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, 2016, there were 8,588,753 units (2015 – 9,025,306) outstanding subject to performance criteria, of which 7,035,242
units were vested (2015 – 7,686,580).
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, 2016, there were 1,802,540 units outstanding (2015 – 1,940,375).
26 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
Total provision for income taxes in the Consolidated Statement of Income
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 expense (benefit) of previously unrecognized tax losses, tax credits and temporary
differences
188 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
2016
2015
2014
$
467
386
4
935
(19)
$
528
459
23
897
2
$
565
423
(70)
865
(3)
1,773
1,909
1,780
141
70
46
(16)
(20)
(20)
141
66
15
257
$ 2,030
(56)
$ 1,853
222
$ 2,002
$
(158)
(168)
(326)
$
(496)
(8)
(504)
$
(248)
(174)
(422)
(322)
(10)
1
5
(326)
$ 1,704
$
$
372
(4)
(111)
257
(464)
(43)
1
2
(504)
$ 1,349
$
$
118
(2)
(172)
(56)
(432)
4
1
5
(422)
$ 1,580
$
$
163
–
59
222
(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
2016
2015
2014
Percent
of pre-tax
income
Amount
Percent
of pre-tax
income
Percent
of pre-tax
income
Amount
Amount
$ 2,485
26.4% $ 2,386
26.3% $ 2,439
26.2%
(234)
(220)
(2.5)
(2.3)
(233)
(281)
(2.6)
(3.1)
(177)
(212)
(4)
3
$ 2,030
–
–
(2)
(17)
21.6% $ 1,853
–
–
(0.2)
(48)
20.4% $ 2,002
(1.9)
(2.3)
–
(0.5)
21.5%
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
The change in the statutory tax rate between 2016 and 2015 was primarily due to an increase in certain provincial tax rates.
(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
2016
2015
2016
2015
$
57
3
(14)
18
99
18
139
57
$ 377
$
5
7
25
19
(129)
193
$ 120
$ 257
$
$
$
80
(93)
50
46
(72)
54
8
(10)
63
39
1
22
(26)
38
45
$
484
852
224
289
101
937
162
511
$
539
812
215
301
186
676
138
408
$ 3,560
$ 3,275
$
122
75
146
221
1,043
543
$
114
65
153
68
914
526
$ 119
$ (56)
$ 2,150
$ 1,410
$ 1,840
$ 1,435
(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 $1,410 (2015
– $1,435) are represented by deferred tax assets of $2,021 (2015 – $2,034), and deferred tax liabilities of $611 (2015 – $599) on the Consolidated Statement of Financial Position.
The major changes to net deferred taxes were as follows:
For the year ended October 31 ($ 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
2016
2015
$ 1,435
(257)
168
71
(7)
$ 1,410
$ 1,309
56
8
27
35
$ 1,435
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 $55 million (2015 – $166 million). The amount related to unrecognized tax losses is $14 million, which will
expire as follows: $13 million in 2018 and beyond and $1 million have no fixed expiry date.
Included in the net deferred tax asset are tax benefits of $73 million (2015 – $41 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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 189
CONSOLIDATED FINANCIAL STATEMENTS
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
will not reverse in the foreseeable future. At the end of the year taxable temporary differences of $52.5 billion (2015 – $46.0 billion) related to the
Bank’s investment in subsidiaries were not recognized as deferred tax liabilities in line with these requirements.
Reassessment of dividend deductions
In November 2016 the Bank received a federal reassessment of $179 million for tax and interest as a result of the Canada Revenue Agency denying
the tax deductibility of certain Canadian dividends received during the 2011 taxation year. The circumstances of the dividends subject to the
reassessment are similar to those prospectively addressed by recently enacted rules which had been introduced in the 2015 Canadian federal budget.
The Bank is confident that its tax filing position was appropriate and in accordance with the relevant provisions of the Income Tax Act (Canada), and
intends to vigorously defend its position.
27 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 independent member representation 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, 2015. 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.
Other benefit plans
The principal other benefit plans include plans in Canada, the US, Mexico, Uruguay, the UK, Jamaica, Panama, 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 used to determine the defined benefit obligation, which is set by reference to the yields on high quality corporate
bonds with matching durations. Prior to 2016, the discount rate used to determine the annual benefit expense was the same as the rate used to
determine the defined benefit obligation. Beginning in 2016, separate discount rates were used to determine the annual benefit expense in Canada
and the US. These rates were determined with reference to the yields on high quality corporate bonds with durations that match the various
components of the annual defined benefit expense. The discount rate used to determine the annual benefit expense for all other plans continues to
be same as the rate used to determine the defined benefit obligation. 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.
190 | 2 0 1 6 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
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, 2016
Percentage of total benefit obligations
Percentage of total plan assets
Percentage of total benefit expense(1)
For the year ended October 31, 2015
Percentage of total benefit obligations
Percentage of total plan assets
Percentage of total benefit expense(1)
Pension plans
Other benefit plans
Canada
SPP
Other
International
Canada
International
73% 11%
76%
6%
76% 17%
16%
18%
7%
63%
19%
46%
37%
81%
54%
Pension plans
Other benefit plans
Canada
SPP
Other
International
Canada
International
72% 11%
6%
76%
78% 16%
17%
18%
6%
62%
20%
63%
38%
80%
37%
(1) Excludes non-routine benefit expense items such as past service costs, curtailment charges and settlement charges.
(b) Cash contributions and payments
The table below shows the cash contributions and payments made by the Bank to its principal plans in 2016, and the two prior years.
Contributions to the principal plans for the year ended October 31 ($ millions)
2016
2015
2014
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)
$ 187
77
45
31
$ 340
$ 236
60
42
29
$ 367
$ 268
75
46
21
$ 410
(1) Based on preliminary estimates, the Bank expects to make contributions of $174 to the SPP, $216 to all other defined benefit pension plans, $54 to other benefit plans and $32 to
all other defined contribution plans for the year ending October 31, 2017.
(c) Funded and unfunded plans
The excess (deficit) of the fair value of assets over the benefit obligation at the end of the year includes the following amounts for plans that are
wholly unfunded and plans that are wholly or partly funded.
As at October 31 ($ millions)
2016
2015
2014
2016
2015
2014
Benefit obligation
Benefit obligation of plans that are wholly unfunded
Benefit obligation of plans that are wholly or partly funded
$
408
8,731
$
373
7,740
$
376
7,571
$ 1,310
372
$ 1,231
408
$ 1,201
418
Pension plans
Other benefit plans
Funded status
Benefit obligation of plans that are wholly or partly funded
Fair value of assets
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
$ 8,731
7,770
$ 7,740
7,615
$ 7,571
7,323
$
372
284
$
408
307
$
418
341
$ (961)
408
$
$(1,369)
(60)
$
$
$
(125)
373
(498)
(41)
$
$
$
(248)
376
(624)
(76)
$
(88)
$ 1,310
$(1,398)
–
$
(101)
$ 1,231
$ (1,332)
–
$
(77)
$ 1,201
$ (1,278)
–
Net asset (liability) at end of year
$(1,429)
$
(539)
$
(700)
$(1,398)
$ (1,332)
$ (1,278)
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 191
CONSOLIDATED FINANCIAL STATEMENTS
(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
Business combination
Settlements
Foreign exchange
Benefit obligation at end of year
Pension plans
Other benefit plans
2016
2015
2014
2016
2015
2014
$ 8,113
284
314
24
(593)
1,119
(16)
–
–
(106)
$ 9,139
$ 7,947
304
350
23
(498)
152
(241)
–
(48)
124
$ 8,113
$ 6,940
262
342
21
(393)
731
(19)
–
–
63
$ 7,947
$ 1,639
39
77
–
(71)
95
(77)
9
–
(29)
$ 1,682
$ 1,619
43
84
–
(73)
(52)
3
–
(2)
17
$ 1,639
$ 1,510
41
84
–
(66)
35
7
–
(23)
31
$ 1,619
275
264
24
(593)
(12)
–
–
(113)
$ 7,770
$ (1,369)
(60)
$ (1,429)
$
184
(1,613)
$ (1,429)
$
$
$
$
$
284
9
13
(16)
–
–
290
31
(275)
1,119
18
862
$ 1,183
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
assets
Employer contributions
Employee contributions
Benefits paid
Administrative expenses
Business combination
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
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
Other liabilities in the Bank’s Consolidated Statement of Financial
of year
Position
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)
Actual return on assets (net of administrative expenses)
Actuarial (gains) and losses from changes in demographic
and losses
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
$ 7,615
310
$ 7,323
343
$ 6,647
343
$
55
296
23
(498)
(12)
–
(39)
124
$ 7,615
310
343
21
(393)
(9)
–
–
61
$ 7,323
$
307
22
5
45
–
(71)
–
2
–
(26)
284
$
$
341
23
(12)
42
–
(73)
–
–
–
(14)
307
$
$
332
25
11
46
–
(66)
–
–
(18)
11
341
$
$
$
$
$
$
$
$
$
$
(498)
(41)
(539)
183
(722)
(539)
304
15
10
(241)
(9)
–
79
29
(55)
152
(49)
48
156
$
$
$
$
$
$
$
$
$
$
262
6
9
(19)
–
–
258
21
(310)
731
(8)
413
692
(624)
(76)
(700)
$ (1,398)
–
$ (1,398)
$ (1,332)
–
$ (1,332)
$ (1,278)
–
$ (1,278)
117
$
–
$
–
$
–
(817)
(700)
(1,398)
$ (1,398)
(1,332)
$ (1,332)
(1,278)
$ (1,278)
$
$
$
$
$
$
$
$
$
39
55
–
(77)
–
(20)
(3)
–
(3)
113
–
110
107
27
(5)
133
(33)
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
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)
–
–
–
–
–
–
–
$
573
$
386
$
644
$
$
9
1,116
(6)
410
5
41
5
18
(4)
60
$
$
91
22
39
404
5
77
8
(49)
5
41
$
$
54
645
32
556
4
77
7
(8)
–
76
(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.
192 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
(e) Maturity profile of the defined benefit obligation
The weighted average duration of the total benefit obligation at October 31, 2016 is 15.3 years (2015 – 15.3 years, 2014 – 14.7 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
2016
2015
2014
2016
2015
2014
60% 58% 58% 33% 35% 36%
40% 42% 42% 67% 65% 64%
100% 100% 100% 100% 100% 100%
29% 30% 35% 57% 58% 59%
71% 70% 65% 43% 42% 41%
100% 100% 100% 100% 100% 100%
33% 39% 40% 38% 37% 36%
67% 61% 60% 62% 63% 64%
100% 100% 100% 100% 100% 100%
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
(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
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 for defined benefit obligations
Discount rate for net interest cost
Discount rate for service cost
Discount rate for interest on service cost
Discount rate – Canadian plans only
Discount rate for defined benefit obligations
Discount rate for net interest cost
Discount rate for service cost
Discount rate for interest on service cost
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
Pension plans
Other benefit plans
2016
2015
2014
2016
2015
2014
3.86% 4.64% 4.46% 4.74% 5.33% 5.24%
3.60% 4.40% 4.20% 3.42% 4.27% 4.12%
2.72% 2.75% 2.77% 4.09% 4.41% 4.51%
4.64% 4.46% 5.04% 5.33% 5.24% 5.56%
4.03% 4.46% 5.04% 4.91% 5.24% 5.56%
4.83% 4.46% 5.04% 5.62% 5.24% 5.56%
4.31% 4.46% 5.04% 5.56% 5.24% 5.56%
4.40% 4.20% 4.80% 4.27% 4.12% 4.80%
3.70% 4.20% 4.80% 3.67% 4.12% 4.80%
4.60% 4.20% 4.80% 4.54% 4.12% 4.80%
4.00% 4.20% 4.80% 4.44% 4.12% 4.80%
2.75% 2.77% 2.84% 4.41% 4.51% 4.49%
n/a
n/a
n/a
23.2
24.3
24.2
25.3
21.3
23.8
21.7
24.0
23.0
24.7
23.7
25.6
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
6.12% 6.29% 6.37%
4.93% 4.97% 5.02%
2030
2030
2029
23.2
24.3
24.2
25.3
21.3
23.8
21.7
24.0
23.0
24.7
23.7
25.6
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
(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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 193
CONSOLIDATED FINANCIAL STATEMENTS
(g) Sensitivity analysis
The sensitivity analysis presented below represents the impact of a change in a single assumption with other assumptions left unchanged. 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, 2016 ($ 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
$ 1,697
102
n/a
n/a
170
3
9
$ 100
7
n/a
n/a
7
–
–
$ 284
1
166
(132)
27
4
5
$ 16
–
17
(13)
1
–
–
(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.
Pension plans
Other benefit plans
Actual
2016
Actual
2015
Actual
2014
Actual
2016
Actual
2015
Actual
2014
2%
2%
4%
2%
2%
2%
44%
16%
60%
4%
27%
31%
44%
19%
63%
5%
25%
30%
42%
22%
64%
6%
23%
29%
45%
–%
45%
29%
24%
53%
45%
–%
45%
28%
25%
53%
46%
–%
46%
28%
24%
52%
1%
6%
7%
–%
–%
–%
100% 100% 100% 100% 100% 100%
–%
3%
3%
–%
5%
5%
–%
–%
–%
–%
–%
–%
Pension plans
Other benefit plans
–%
60%
33%
7%
100%
2%
45%
53%
–%
100%
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
Quoted in an active market
Non quoted
Total
Target asset allocation at October 31, 2016
Asset category %
Cash and cash equivalents
Equity investments
Fixed income investments
Other
Total
194 | 2 0 1 6 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
28 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:
Š 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.
Š 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.
Scotiabank’s results, and average assets and liabilities, allocated by these operating segments, are as follows:
For the year ended October 31, 2016
Taxable equivalent basis ($ millions)
Net interest income(2)
Non-interest income(3)
Total revenues
Provision for credit losses
Depreciation and amortization
Non-interest expenses
Income tax expense
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
International
Banking
Global Banking
and Markets
Other(1)
Total
$ 7,024
5,164
12,188
832
340
5,984
1,296
$6,359
3,482
9,841
1,281
265
5,258
707
$1,293
3,139
4,432
249
68
1,972
572
$(384)
273
(111)
50
11
642
(545)
$14,292
12,058
26,350
2,412
684
13,856
2,030
$ 3,736
$2,330
$1,571
$(269)
$ 7,368
–
3,736
309
232
251
2,079
143
109
–
1,571
351
270
–
(269)
111
247
251
7,117
914
858
(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, 2016 amounting to $299 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 – $78; International Banking – $473 and Other – $(137).
For the year ended October 31, 2015
Taxable equivalent basis ($ millions)
Net interest income(2)
Non-interest income(3)
Total revenues
Provision for credit losses
Depreciation and amortization
Non-interest expenses
Income tax expense
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
Other(1)
Total
$ 5,706
3,137
$ 1,071
2,953
$ (100)
35
$ 13,092
10,957
8,843
1,128
242
4,853
568
4,024
67
57
1,789
558
(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 amounting to $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 – $(137).
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 195
CONSOLIDATED FINANCIAL STATEMENTS
For the year ended October 31, 2014
Taxable equivalent basis ($ millions)
Net interest income(2)
Non-interest income(3)
Total revenues
Provision for credit losses
Depreciation and amortization
Non-interest expenses
Income tax expense
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
$ 5,155
2,945
Global Banking
and Markets
$ 1,064
3,167
8,100
1,024
224
4,466
544
4,231
16
56
1,824
665
Other(1)
Total
$
90
(76)
14
–
11
221
(320)
$ 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)
(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, 2014 amounting to $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 – $(140).
Geographical segmentation(1)
The following table summarizes the Bank’s financial results by geographic region. Revenues and expenses which have not been allocated back to
specific operating business lines are reflected in corporate adjustments.
For the year ended October 31, 2016 ($
millions)
Net interest income
Non-interest income(1)
Total revenues(2)
Provision for credit losses
Non-interest expenses
Income tax expense
$
Canada
7,022
6,893
13,915
876
7,339
1,235
$
United
States
479
871
1,350
112
633
155
$
Mexico
1,224
554
1,778
225
1,121
69
$
Peru
1,231
600
1,831
315
740
201
$
Chile
763
325
1,088
113
605
45
Colombia
$
674
419
1,093
320
550
89
Other
International
$
2,950
2,409
5,359
401
3,036
497
$
4,465
$
450
$
363
$
575
$
325
$
134
$
1,425
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
$
529
$
126
$
27
$
23
$
20
$
10
$
165
Total
14,343
12,071
26,414
2,362
14,024
2,291
7,737
(369)
7,368
251
7,117
900
14
914
$
$
$
$
$
$
Includes net income from investments in associated corporations for Canada – $78; Peru – $5 and Other International – $468.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
For the year ended October 31, 2015 ($ millions)
Net interest income
Non-interest income(1)
Total revenues(2)
Provision for credit losses
Non-interest expenses
Income tax expense
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
United
States
Mexico
Peru
Chile
Colombia
$ 6,458
6,272
$ 472
882
$1,246
561
$1,077
601
12,730
728
6,936
1,038
1,354
6
507
267
1,807
260
1,160
27
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
$
502
$ 125
$
26
$
21
$ 17
$
10
$ 148
Total
$13,115
11,082
24,197
1,882
13,064
2,036
$ 7,215
(2)
$ 7,213
199
$ 7,014
$
$
849
12
861
Includes net income from investments in associated corporations for Canada – $66; Peru – $4 and Other International – $472.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
196 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
For the year ended October 31, 2014 ($ millions)
Net interest income
Non-interest income(1)
Total revenues(2)
Provision for credit losses
Non-interest expenses
Income tax expense
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
United
States
Mexico
Peru
Chile
Colombia
$ 6,219
7,071
$ 440
810
$1,180
599
$ 935
534
$407
226
13,290
662
6,986
1,156
1,250
6
513
237
1,779
240
1,154
35
1,469
267
645
175
633
74
348
16
$ 726
391
1,117
145
556
141
Other
International
$2,443
2,049
4,492
309
2,495
340
$ 4,486
$ 494
$ 350
$ 382
$195
$ 275
$1,348
$
470
$ 117
$
24
$
17
$ 15
$
10
$ 130
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
Total
$12,350
11,680
24,030
1,703
12,697
2,100
$ 7,530
(232)
$ 7,298
227
$ 7,071
$
$
783
13
796
Includes net income from investments in associated corporations for Canada – $156; Peru – $6 and Other International – $405.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
29 Related Party Transactions
Compensation of key management personnel of the Bank
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank,
directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and
Chief Executive Officer and Group Heads.
For the year ended October 31 ($ 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.
2016
2015
$
$
20
24
3
47
$
$
13
20
3
36
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 25 for further details of these plans.
Loans and deposits of key management personnel
Loans are currently granted to key management personnel at market terms and conditions.
As at October 31 ($ millions)
Loans
Deposits
2016
2015
$
$
6
11
$
$
5
5
The Bank’s committed credit exposure to companies controlled by directors totaled $99.5 million as at October 31, 2016 (2015 – $182.9 million),
while actual utilized amounts were $3.9 million (2015 – $6.7 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as
related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions
and were recorded as follows:
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
$
2016
(45)
788
338
99
$
2015
(27)
747
187
84
$
2014
11
553
223
75
Scotiabank principal pension plan
The Bank manages assets of $1.9 billion (2015 – $2.0 billion) which is a portion of the Scotiabank principal pension plan assets and earned $4 million
(2015 – $4.0 million) in fees.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 197
CONSOLIDATED FINANCIAL STATEMENTS
30 Principal Subsidiaries and Non-Controlling Interests in Subsidiaries
(a) Principal subsidiaries(1)
The following table presents the major operating subsidiaries the Bank owns, directly or indirectly. All of these subsidiaries are included in the Bank’s
consolidated financial statements.
As at October 31 ($ 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
BNS 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) Designated Activity Company
Scotiabank (Turks and Caicos) Ltd.
Grupo Financiero Scotiabank Inverlat, S.A. de C.V. (97.4%)
Nova Scotia Inversiones Limitada
Scotiabank Chile, S.A. (99.6%)
Scotia Holdings (US) Inc.(2)
Scotiabanc Inc.
Scotia Capital (USA) Inc.(2)(3)
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. (99.6%)
Scotiabank Europe plc
Scotiabank Peru S.A.A. (98.05%)
Principal office
Toronto, Ontario
Toronto, Ontario
Montreal, Quebec
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Stratford, Ontario
Calgary, Alberta
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
Houston, Texas
Houston, Texas
New York, New York
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
2016
2015
$ 1,762
13,733
$ 1,241
12,746
411
3,499
650
175
1,194
509
166
941
80
3,489
392
3,632
608
58
1,598
445
206
797
53
3,443
1,302
311
17,815
1,259
288
16,310
3,141
3,200
2,986
2,585
387
899
225
1,658
145
1,311
1,371
646
2,546
4,046
1,316
597
2,472
3,418
(1) The Bank (or immediate parent of an entity) owns 100% of the outstanding voting shares of each subsidiary unless otherwise noted.
(2) The carrying value of this subsidiary is included with that of its parent, BNS Investments Inc.
(3) The carrying value of this subsidiary is included with that of its parent, Scotia Holdings (US) Inc.
198 | 2 0 1 6 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
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
2016
2015
2016
2015
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)
$
471
311
359
139
290
$
417
307
353
111
272
$
85
36
62
38
30
$
25
17
54
10
10
$
75
37
54
–
33
$ 27
17
33
–
9
$ 86
Total
$ 1,570
$ 1,460
$ 251
$ 116
$ 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
Cencosud Administradora de Tarjetas S.A.
31 Non-Interest Income
As at and for the year ended October 31, 2016
Total
comprehensive
income
$ 152
71
118
85
Total assets
$ 11,081
5,001
4,780
2,114
Total
liabilities
$ 10,345
3,860
3,889
1,755
As at and for the year ended October 31, 2015
Total
comprehensive
income
$ (165)
263
214
(1)
Total assets
$ 10,969
4,877
4,670
1,772
Total
liabilities
$ 10,207
3,667
3,731
1,265
Revenue
$ 973
407
318
350
Revenue
$ 942
383
283
125
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
2016
2015
2014
$ 1,359
1,279
1,154
436
4,228
559
$ 1,089
1,235
1,053
406
3,783
423
$
933
1,183
1,014
379
3,509
339
$ 3,669
$ 3,360
$ 3,170
$ 1,624
1,010
648
$ 3,282
$ 1,619
1,006
644
$ 3,269
$ 1,468
942
613
$ 3,023
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 199
CONSOLIDATED FINANCIAL STATEMENTS
32 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
33 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(1) (in dollars)
Diluted earnings per common share
Net income attributable to common shareholders
Adjustments to net income due to share-based payment options and others(2)
Net income attributable to common shareholders (diluted)
Weighted average number of common shares outstanding (millions)
Adjustments to average shares due to share-based payment options and others(2) (millions)
Weighted average number of diluted common shares outstanding (millions)
Diluted earnings per common share(1) (in dollars)
$
2016
613
101
376
262
51
$
2015
400
177
345
201
62
$
2014
415
92
359
208
40
$ 1,403
$ 1,185
$ 1,114
2016
2015
2014
$ 6,987
1,204
$ 6,897
1,210
$ 6,916
1,214
$
5.80
$
5.70
$
5.69
$ 6,987
83
$ 6,897
86
$ 6,916
8
$ 7,070
$ 6,983
$ 6,924
1,204
22
1,226
5.77
$
1,210
22
1,232
5.67
$
1,214
8
1,222
5.66
$
(1) Earnings per share calculations are based on full dollar and share amounts.
(2) Certain tandem stock appreciation rights or options that the Bank may settle at its own discretion by issuing common shares were not included in the calculation of diluted earnings
per share as they were anti-dilutive.
34 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
2016
2015
Maximum potential
amount of future
Maximum potential
amount of future
payments(1)
payments(1)
$ 34,520
5,814
4,129
597
$ 30,944
3,874
5,206
568
(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, 2016,
$19 million (2015 – $4 million) was included in other liabilities in the Consolidated Statement of Financial Position with respect to these guarantees.
Liquidity facilities
(ii)
The Bank’s backstop liquidity facilities are committed liquidity and provided 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.
200 | 2 0 1 6 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
(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, 2016, $333 million (2015 – $891 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, 2016, $3 million (2015 – $3 million) was included in
other liabilities in the Consolidated Statement of Financial Position with respect to indemnifications.
(b) Other indirect commitments
In the normal course of business, various other indirect commitments are outstanding which are not reflected on the Consolidated Statement of
Financial Position. These may include:
Š Commercial letters of credit which require the Bank to honour drafts presented by a third-party when specific activities are completed;
Š Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financings for specific amounts
and maturities, subject to specific conditions;
Š Securities lending transactions under which the Bank, acting as principal or agent, agrees to lend securities to a borrower. The borrower must fully
collateralize the security loan at all times. The market value of the collateral is monitored relative to the amounts due under the agreements, and
where necessary, additional collateral is obtained; and
Š Security purchase commitments which require the Bank to fund future investments.
These financial instruments are subject to normal credit standards, financial controls and monitoring procedures.
The table below provides a detailed breakdown of the Bank’s other indirect commitments expressed in terms of the contractual amounts of the
related commitment or contract which are not reflected on the Consolidated Statement of Financial Position.
As at October 31 ($ 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.
(c)
Lease commitments
2016
$
777
$
2015
921
69,865
104,380
38,668
538
64,522
101,874
41,190
682
$ 214,228
$ 209,189
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
$
2016
344
922
536
$
2015
328
880
546
$ 1,802
$ 1,754
Building rent expense, included in premises and technology expense in the Consolidated Statement of Income, was $428 million (2015 – $433 million).
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 201
CONSOLIDATED FINANCIAL STATEMENTS
(d) Assets pledged and repurchase agreements
In the ordinary course of business, securities and other assets are pledged against liabilities. As well, securities are sold under repurchase agreements.
The carrying value of pledged assets and details of related activities are shown below.
As at October 31 ($ 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 in relation to over-the-counter derivative transactions
Assets pledged as collateral related to securities borrowing and lending
Assets pledged in relation to covered bond program (Note 14)
Assets pledged in relation to other securitization programs (Note 14)
Assets pledged under CMHC programs (Note 13)
Other
Total assets pledged
Obligations related to securities sold under repurchase agreements
Total(2)
2016
2015
$
25
3,080
1,400
2,128
10,505
107,901
30,491
3,919
20,672
1,031
$
25
2,933
1,557
1,512
12,447
88,839
21,293
2,467
21,609
569
$ 181,152
87,402
$ 153,251
67,052
$ 268,554
$ 220,303
(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.
35 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, 2015:
(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 6. Note 9 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.
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, product specific
models assign accounts into homogeneous segments using internal and external borrower/facility-level credit experience. This process provides for a
meaningful differentiation of risk, and allows for appropriate and consistent estimation of loss characteristics at the model and segment level. Further
details on credit risk relating to derivatives are provided in Note 9(c).
202 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
(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.
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)
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
2016
Exposure at default(1)
2015
Drawn(2)
Undrawn
commitments
Other
exposures(3)
Total
Total
$ 130,387
23,978
181,227
335,592
47,042
2,044
8,402
57,488
$ 393,080
$ 106,771
16,717
28,246
151,734
30,865
33,936
64,801
$ 216,535
$ 609,615
$ 357,268
79,932
23,965
23,931
21,354
10,239
23,164
37,900
7,891
23,971
$
$
$
67,990
1,944
1,042
70,976
5,721
38
10
5,769
76,745
14,587
21,108
799
36,494
$
69,777
23,740
5,429
98,946
2,919
196
–
3,115
$ 102,061
$
–
–
–
–
–
–
–
$
36,494
$ 113,239
–
–
–
$
–
$ 102,061
$
69,447
27,951
1,183
1,413
782
186
5,936
1,704
522
4,115
$
42,208
35,925
1,725
2,984
1,374
518
12,425
1,564
495
2,843
$ 268,154
49,662
187,698
505,514
55,682
2,278
8,412
66,372
$ 571,886
$ 121,358
37,825
29,045
188,228
30,865
33,936
64,801
$ 253,029
$ 824,915
$ 468,923
143,808
26,873
28,328
23,510
10,943
41,525
41,168
8,908
30,929
$ 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
$ 609,615
$ 113,239
$ 102,061
$ 824,915
$ 794,622
(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 $20 (2015 –
$48), derivatives and repo-style transactions (reverse repurchase agreements, repurchase agreements, securities lending and securities borrowing), net of related collateral. Not
applicable for retail exposures.
(4) During the year 2015, the Bank implemented new retail probability of default (PD), exposure at default (EAD) and loss given default (LGD) models for mortgages and term loans.
(5) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 203
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Financial Position asset categories cross-referenced to credit risk exposures
The table below provides mapping of on-balance sheet asset categories that are included in the various Basel III exposure categories as presented in
the credit risk exposure summary table of these consolidated financial statements. In addition, it also provides other exposures which are subject to
market risk and/or other assets which are not subject to market and credit risk with a reconciliation to the balance sheet. The credit risk exposures on
certain assets such as cash, precious metals, investment securities (equities) and other assets are not included on the credit risk exposure summary
table. Also excluded from the credit risk exposures are certain trading assets and all assets of the Bank’s insurance subsidiaries.
Credit Risk Exposures
Other Exposures
Drawn(1)
Other Exposures
Market Risk Exposures
As at October 31, 2016 ($ 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)
$ 44,001 $
–
–
11,485
–
16
–
–
68,134
104,890
–
152,720
(781)
11,978
–
–
–
637
–
–
–
–
–
–
–
–
–
117,839
95,825
2,489
–
–
–
–
–
383
$
$
–
–
–
–
–
–
$
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
11,485
–
87,287
7,936
1,853
–
205
$
– $
–
–
8,442
$ 2,343 $ 46,344
8,442
–
–
–
832
–
2,418
7,161
–
–
–
–
–
–
92,129
–
–
–
41,657
–
–
–
2,042
–
36,401
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,911
159
1,259
30
(3,845)
–
2,520
4,299
12,141
13,871
87,287
19,421
1,853
221
92,129
41,657
72,919
222,888
99,502
162,400
(4,626)
11,978
2,520
4,299
12,141
14,891
Total
$ 393,080 $ 216,536
$ 10,411
$ 92,129
$ 41,657
$ 2,042
$ 47,886 $ 105,723
$ 34,688 $ 896,266
Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks.
Includes $100.9 billion in mortgages guaranteed by Canada Mortgage Housing Corporation including 90% of privately insured mortgages.
(1)
(2)
(3) Amounts for AIRB exposures are reported gross of allowances and amounts for standardized exposures are reported net of allowances.
Credit Risk Exposures
Other Exposures
Drawn(1)
Other Exposures
Market Risk Exposures
As at October 31, 2015 ($ 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
–
–
–
–
–
–
–
–
–
128,398
89,220
–
–
–
–
–
–
168
$
– $
–
–
–
–
–
–
–
–
–
2,240
6,599
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
87,312
–
–
–
41,003
–
$
–
–
–
–
–
25
–
–
2,960
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
$
–
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) Amounts for AIRB exposures are reported gross of allowances and amounts for standardized exposures are reported net of allowances.
204 | 2 0 1 6 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
(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, 2016, and October 31, 2015, 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, 2015.
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% – 0.0510%
0.0510% – 0.1321%
0.0618% – 0.1517%
0.0969% – 0.2429%
0.1381% – 0.3383%
0.1969% – 0.4714%
0.3059% – 0.5239%
0.4751% – 0.5822%
0.5822% – 0.7380%
0.7380% – 1.4180%
1.4180% – 2.7248%
2.7248% – 9.9903%
9.9903% – 19.0626%
19.0626% – 35.9847%
35.9847% – 59.9872%
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
2016
Exposure at Default(1)
Undrawn
commitments
Other
exposures(2)
$
1,920
7,005
14,127
10,109
10,446
9,870
8,314
3,900
2,355
1,143
422
208
285
487
1
384
$
$ 15,719
23,209
21,597
8,806
10,707
8,282
3,689
1,907
2,554
1,143
239
73
311
214
1
475
Total
77,441
54,007
56,845
42,398
40,271
38,044
36,135
23,941
15,941
7,307
4,692
1,297
1,221
2,465
100
2,520
$
2015
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
IG Code
99 – 98
95
90
87
85
83
80
77
75
73
70
65
60
40
30
27 – 21
$
Drawn
59,802
23,793
21,121
23,483
19,118
19,892
24,132
18,134
11,032
5,021
4,031
1,016
625
1,764
98
1,661
Total, excluding residential mortgages
Government guaranteed residential mortgages(3)
Total
$ 234,723
100,869
$ 335,592
$ 70,976
–
$ 70,976
$ 98,926
–
$ 98,926
$ 404,625
100,869
$ 505,494
$ 395,449
86,832
$ 482,281
(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 $20 (2015 – $48), 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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 205
CONSOLIDATED FINANCIAL STATEMENTS
Non-retail standardized portfolio
Non-retail standardized portfolio as at October 31, 2016 comprised of drawn, undrawn and other exposures to corporate, bank and sovereign
counterparties amounted to $66 billion (October 31, 2015 – $63 billion). Exposures to most Corporate/Commercial counterparties mainly in the
Caribbean and Latin American region are to non-investment grade counterparties based on the Bank’s internal grading systems.
(iii) Credit quality of retail exposures
The Bank’s retail portfolios consist of a number of relatively small loans to a large number of borrowers. The portfolios are distributed across Canada
and a wide range of countries. As such, the portfolios inherently have a high degree of diversification. In addition, as of October 31, 2016, 57% of
the Canadian banking residential mortgage portfolio is insured and the average loan-to-value ratio of the uninsured portion of the portfolio is 50%.
Retail AIRB portfolio
The data in the table below provides a distribution of the retail AIRB exposure within each PD range by asset class:
As at October 31 ($ millions)
Category of (PD) grades
Exceptionally Low
Very Low
Low
Medium Low
Medium
High
Extremely High
Default
Total
(1) After credit risk mitigation.
2016
Exposure at default(1)
Real estate secured
PD range
Mortgages
0.0000% – 0.0499% $ 35,903
29,193
0.0500% – 0.1999%
16,371
0.2000% – 0.9999%
$
1.0000% – 2.9999%
3.0000% – 9.9999%
10.0000% – 19.9999%
20.0000% – 99.9999%
100%
4,635
638
299
284
215
HELOC
–
15,846
11,532
4,760
1,035
311
279
57
$
Qualifying
revolving
8,036
7,854
10,130
7,160
2,281
1,365
803
196
$
Other retail
417
6,616
14,228
4,296
2,311
22
946
209
$
Total
44,356
59,509
52,261
20,851
6,265
1,997
2,312
677
$
2015
Total
49,414
59,484
53,094
21,545
5,551
2,213
2,521
611
$ 87,538
$ 33,820
$ 37,825
$ 29,045
$ 188,228
$ 194,433
Retail standardized portfolio
The retail standardized portfolio of $65 billion as at October 31, 2016 (2015 – $54 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, $31 billion
(2015 – $28 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, 2016, the approximate market value of collateral accepted that may be sold or repledged by the Bank was $99 billion (2015 –
$117 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 34(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, 2016 was $404 million (2015 – $310 million) mainly
comprised of real estate and was classified as either held-for-sale or held-for-use as appropriate.
206 | 2 0 1 6 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
(b) Liquidity risk
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 Note 9(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 or 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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 207
CONSOLIDATED FINANCIAL STATEMENTS
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.
Immediately
rate sensitive
Within
3 months
Three to
12 months
One to 5 years
Over 5 years
Non-rate
sensitive
Total
As at October 31, 2016 ($ millions)
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
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
$
21,400
–
–
$
17,928
–
26,385
–
–
13,593
–
24,180
–
59,173
41,300
15,667
222,268
–
$ 323,548
85,878
$ 310,666
$
$
–
42
67,895
–
849
–
35
280
25,334
–
2,471
958
Total liabilities and equity
$ 154,664
$ 339,744
On-balance sheet gap
Off-balance sheet gap
Interest rate sensitivity gap based on
contractual repricing
Adjustment to expected repricing
Total interest rate sensitivity gap
$ (95,491)
–
$ (95,491)
143,969
$
48,478
$
$
$
(16,196)
(29,682)
(45,878)
(10,504)
(56,382)
As at October 31, 2015 ($ millions)
$
$
$
$
$
$
$
183
–
8,037
205
8,287
9,275
52,946
–
78,933
$
345
–
16,209
$
–
–
15,432
$
6,488
8,442
42,498
$
46,344
8,442
108,561
16
–
–
221
–
41,482
162,402
–
–
4,908
17,108
–
28,949
1,587(1)
1,260(2)
87,486
92,129
72,919
480,164
87,486
$ 220,454
$ 37,448
$ 176,710
$ 896,266
68,693
$ 106,025
$
8,549
$
32,066
$ 611,877
4
1,147
273
–
1,459
1,309
7,256
9,038
5,387
23,312
2,901
1,632
1,108
230
1
2,792
2,692
1,905
–
3,209
3,686
500
952
–
86,275
54,228
97,083
7,633
97,081
57,821
75,877
$ 121,818
$ 25,255
$ 178,908
$ 896,266
3,056
(1,748)
$
98,636
23,409
$ 12,193
7,589
1,308
(14,262)
$ 122,045
(54,507)
$ 19,782
(29,223)
(12,954)
$
67,538
$ (9,441)
$
$
$
(2,198)
432
(1,766)
(35,473)
(37,239)
$
$
$
–
–
–
–
–
–
Total interest rate sensitivity gap
$
61,735
$
(37,345)
$
(29,091)
$
30,707
$
7,012
$
(33,018)
$
(1) Represents common shares, preferred shares, and equity accounted investments.
Includes net impaired loans, less the collective allowance on performing loans.
(2)
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)
2016
2015
100 bp increase
100 bp decrease(1)
200 bp increase
200 bp decrease(1)
Net income
Economic value of equity
Canadian
dollar
Other
currencies
$
$
$
$
(76)
76
(152)
152
$
$
$
$
44
(44)
88
(86)
Total
$ (32)
$ 32
$ (64)
$ 66
Canadian
dollar
$
$
$
$
(255)
52
(624)
(428)
Other
currencies
(530)
$
$
598
$ (1,006)
$ 1,122
Total
(785)
$
$
650
$ (1,630)
694
$
Net
income
$ 242
$ (240)
$ 488
$ (483)
Economic value
of equity
(488)
$
$
418
$ (1,035)
412
$
(1) The annual income sensitivities for CAD, USD, EUR, and GBP exposures are now measured using 100 and 200 basis point decline. Prior period items have been restated to reflect
this change.
208 | 2 0 1 6 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
(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.
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, 2016, 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 (2015 – $60 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, 2016 would increase (decrease) the unrealized foreign currency
translation losses in the accumulated other comprehensive income of equity by approximately $366 million (2015 – $315 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 11.
(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 or 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 historical resampling. The table below shows the Bank’s VaR by risk factor:
($ millions)
As at October 31, 2016
Average
High
Low
As at October 31, 2015
For the year ended October 31, 2016
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
8.0
8.5
2.0
2.1
2.0
4.2
(7.6)
$ 13.2
$ 21.2
$ 10.6
8.3
6.4
2.7
1.3
2.4
6.3
(10.7)
$ 12.6
$ 27.6
$ 16.4
13.6
10.0
6.4
2.9
3.9
12.6
N/A
$ 20.3
$ 37.4
$
7.5
4.5
3.0
0.8
0.6
1.3
3.7
N/A
$
8.7
$ 18.0
$ 10.6
8.1
4.3
4.1
0.8
2.0
7.4
(12.9)
$ 11.9
$ 22.3
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 209
CONSOLIDATED FINANCIAL STATEMENTS
Below are the market risk capital requirements as at October 31, 2016.
($ millions)
All-Bank VaR
All-Bank stressed VaR
Incremental risk charge
Comprehensive risk measure
Standardized approach
Total market risk capital
$ 105
209
407
77
48
$ 846(1)
(1) Equates to $10,571 of risk-weighted assets (2015 – $14,350).
(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.
36 Business Combinations and Divestitures
Current year:
Acquisitions
JPMorgan Canadian Credit Card Business
On November 16, 2015, the Bank acquired a MasterCard and private label credit card portfolio and the related Canadian credit card operations from
JPMorgan Chase Bank, N.A. for cash consideration of $1.7 billion. The acquisition was accounted for as a business combination and resulted in the
recognition of approximately $1.7 billion in assets, primarily credit card loans. The acquisition forms part of the Canadian Banking business operating
segment. The Bank recorded fair value adjustments to the acquired loans, representing a credit mark of $121 million and an interest rate mark of $28
million, finite life intangible assets of $38 million relating to client relationships, and goodwill of $49 million.
Citibank Panama and Costa Rica Retail Banking Operations
On February 1, 2016, the Bank acquired 100% of the issued and outstanding common shares of Citigroup Panama and Citigroup Costa Rican entities
(renamed Scotiabank Transformandose in both countries) for cash consideration of US$360 million. The acquisitions were accounted for as a business
combination and resulted in the recognition of approximately $1.9 billion in assets (mainly consumer and credit card loans) and $1.6 billion in
liabilities (mainly deposits). The acquisition forms part of the International Banking business operating segment. The Bank recorded preliminary fair
value adjustments to the acquired loans, representing a credit mark of $190 million, finite life intangible assets of $23 million relating to client
relationships, low cost deposits and insurance contracts, and goodwill of $241 million. The Bank continues to evaluate the fair values of all assets
acquired and liabilities assumed.
Divestiture
Roynat Lease Finance
On April 29, 2016, the Bank, through its wholly owned subsidiary, Roynat Inc., completed the sale of the business operations and assets of Roynat
Lease Finance. Assets sold comprised mainly commercial lease receivables previously classified with Business and government loans. As a result of the
transaction, the Bank recorded a gain on disposal of $116 million pre-tax ($100 million after tax), including deal and transaction costs, in non-interest
income.
Prior 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.
210 | 2 0 1 6 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 185th Annual Meeting of Holders
of Common Shares, to be held on April 4, 2017, at Scotiabank Centre,
Scotia Plaza, 40 King Street West, 2nd Floor, Toronto, Ontario
beginning at 9:00 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 7, 2017.
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 16, Series 17, Series 18, Series 19, Series 20, Series 21, Series 22,
Series 23, Series 30, Series 31, Series 32, Series 33, Series 34, Series 36
and Series 38 preferred shares of the Bank are listed on the Toronto
Stock Exchange.
Stock Symbols
STOCK
Common shares
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
Series 33, Preferred
Series 34, Preferred
Series 36, Preferred
Series 38, Preferred
TICKER
SYMBOL
BNS
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
BNS.PR.F
BNS.PR.E
BNS.PR.G
BNS.PR.H
CUSIP
NO.
064149 10 7
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
064149 59 4
064149 55 2
064151 20 2
064151 11 1
Dividend Dates for 2017
Record and payment dates for common and preferred shares, subject
to approval by the Board of Directors.
RECORD DATE
January 3
April 4
July 4
October 3
PAYMENT DATE
January 27
April 26
July 27
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
DBRS
AA
Fitch
AA -
Aa3
Moody’s
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
Moody’s
A3
Standard & Poor’s A -
NON-CUMULATIVE PREFERRED SHARES
Pfd-2(high)
DBRS
Moody’s
Baa2(hyb)
Standard & Poor’s BBB/P-2*
*Canadian scale
Credit ratings are one of the factors that 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 credit ratings and outlook that the rating
agencies assign to the Bank are based on their own views and
methodologies.
The Bank continues to have strong credit ratings and is rated AA by DBRS,
Aa3 by Moody’s, AA- by Fitch and A+ by Standard and Poor’s (S&P).
On December 11, 2015, S&P affirmed the Bank’s A+ rating for deposits
and senior debt, as well as the A-1 rating for short-term instruments.
The Bank’s outlook was changed to stable from negative. The outlook
change was predicated on S&P’s belief that the potential negative
ratings impact from the proposed bail-in regime has subsided, with a
view that the implementation timetable could be two years or more to
2018 or later.
On January 25, 2016, Moody’s downgraded the Bank’s long-term
ratings by one notch to Aa3 from Aa2, while affirming the Bank’s
short-term deposit rating of P-1.
On August 22, 2016, DBRS confirmed the Bank’s long and short-term
rating of AA and R-1 (high), respectively.
On October 27, 2016, Fitch affirmed the Bank’s long and short-term
rating of AA- and F1+, respectively.
Fitch and S&P have a stable outlook on the Bank. Meanwhile, DBRS
and Moody’s continue to maintain their negative outlook for all
Canadian banks citing the uncertainty around the federal government’s
proposed new bail-in regime for senior unsecured debt, to reflect the
greater likelihood that such debt may incur losses in the unlikely event
of a distress scenario.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 211
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 (AUA): 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): 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.
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.
Core Banking Margin: This ratio represents net interest income 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.
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.
212 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
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.
Liquidity Coverage Ratio (LCR): The ratio of high quality liquid assets
to stressed net cash outflows over a 30 calendar day time horizon, as
defined within the OSFI Liquidity Adequacy Requirements Guideline.
Marked-To-Market: The valuation of certain financial instruments at
fair value as of the Consolidated Statement of Financial Position date.
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 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.
Pacific Alliance: Comprises the countries of Chile, Colombia, Mexico
and Peru.
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. 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. With respect to the Bank’s main business
segments, the Bank attributes capital that approximates 9.5% of
Basel III common equity capital requirements based on credit, market
and operational risks and leverage inherent in each business segment.
Return on equity for the business segments is calculated as a ratio of
net income attributable to common shareholders of the business
segment and the capital attributed.
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.
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.
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: Credit cards and unsecured
lines of credit for individuals.
Other Retail: All other personal loans.
Structured Credit Instruments: A wide range of financial products
which includes Collateralized Debt Obligations, Collateralized Loan
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.
Yield Curve: A graph showing the term structure of interest rates,
plotting the yields of similar quality bonds by term to maturity.
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.
2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T | 213
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
@ScotiabankHelps
Finance Department
Scotiabank
CONNECT WITH US
@ScotiabankViews
ScotiabankSnaps
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
214 | 2 0 1 6 S C O T I A B A N K A N N U A L R E P O R T
Scotiabank’s Digital Transformation Highlights
Spring 2014 | Embraced innovative
and progressive banking alternatives
with Tangerine.
Sept. 2015 | First Canadian bank to take its
Board of Directors to Silicon Valley.
Spring 2014 | First Scotiabank
Rapid Lab launched to tackle the
mortgage onboarding process in Canada.
Fall 2015 | Scotiabank’s donation establishes
new Master’s program and professorship
at Saint Mary’s University in Halifax.
Oct. 2015 | Scotiabank Digital Factory
launched to deliver customer-centric
digital solutions.
Feb. 2016 | Mexico unveils enhanced
online and mobile platforms.
Winter 2016 | Scotiabank hosts
hackathon, with over 150 developers, designers
and entrepreneurs teaming up to create creative
solutions to help Canadians better manage debt.
March 2016 | Announced the
Scotiabank Digital Banking Lab
at Ivey Business School, University
of Western Ontario.
May 2016 | Scotiabank Centre for
Customer Analytics opens at Queen’s
University’s Smith School of Business.
May 2016 | Named Global Bank with the Best Digital
Strategy Award for 2016 by Retail Banker International.
June 2016 | Scotiabank and
Kabbage partner to provide small
business loans to customers.
Sept. 2016 | Scotiabank gives
$1.7 million to create The Scotiabank
Emerging Technologies Program at
Rotman School of Management at the
University of Toronto.
Summer 2016 | New Express and Solutions
concept branches open in Canada offering digital
tools to better meet the needs of customers.
Scotiabank’s Digital Transformation Highlights Spring 2014 | Embraced innovative and progressive banking alternatives with Tangerine. Sept. 2015 | First Canadian bank to take its Board of Directors to Silicon Valley. Oct. 2015 | Scotiabank Digital Factory launched to deliver customer-centric digital solutions. Winter 2016 | Scotiabank hosts first hackathon, with over 150 developers, designers and entrepreneurs teaming up to create creative solutions to help Canadians better manage debt. May 2016 | Scotiabank Centre for Customer Analytics opens at Queen’s University’s Smith School of Business. Kabbage June 2016 | Scotiabank and Kabbage partner to provide small business loans to customers. Summer 2016 | New Express and Solutions concept branches open in Canada offering digital tools to better meet the needs of cutomers. Spring 2014 | First Scotiabank Rapid Lab launched to tackle the mortgage onboarding process in Canada. Fall 2015 | Scotiabank’s donation establishes new Master’s program and professorship at Saint Mary’s University in Halifax. Feb. 2016 | Mexico unveils enhanced online and mobile platforms. March 2016 | Announced the Scotiabank Digital Banking Lab at lvey Business School, University of Western Ontario. May 2016 | Named Global Bank with the Best Digital Strategy Award for 2016 by Retail Banker International. Sept. 2016 | Scotiabank gives $1.7 million to create The Scotiabank Emerging Technologies Program at
Rotman School of Management at the University of Toronto.
Scotiabank is Canada’s international bank and a leading financial services provider in North America, Latin America,
the Caribbean and Central America, and Asia-Pacific. 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.
® Registered trademark of The Bank of Nova Scotia.