2017 ANNUAL REPORT
WHY INVEST IN
SCOTIABANK?
DIVIDEND
GROWTH
Dollars per share
$3.05
CAGR = 6%
13 14 15 16
17
13 14 15 16 17
3.5 -
3.5
3.0 -
3.0
2.5 -
2.5
2.0 -
2.0
EARNINGS
PER SHARE*
Diluted, dollars per share
• Diversified by business and
• Focused on digitization to
geography; providing sustainable
and growing earnings
strengthen customer experience
and improve efficiency
• Earnings momentum in personal,
• Strong risk management culture
3.5
commercial and wealth businesses
– globally
3.0
2.5
• Attractive growth opportunities
in our key Pacific Alliance markets
2.0
3.5
3.0
RETURN
ON EQUITY:* 14.6%
2.5
• Consistent record of dividend
increases
• Strong balance sheet with prudent
capital and liquidity positions
VS
14.3%
in 2016
6.5 -
6.5
6.0 -
6.0
5.5 -
5.5
5.0 -
5.0
$6.49
2.0
6.5
STRONG CAPITAL POSITION
6.0
CAGR = 7%
13 14 15 16
17
13 14 15 16 17
5.5
5.0
*Adjusted - please refer to page 14 of the MD&A
6.5
6.0
5.5
5.0
CONTENTS
1 Message from the President
and Chief Executive Officer
7 Executive Management Team
8 Board of Directors
9 Message from the
Chairman of the Board
11 Management’s Discussion
and Analysis
125 Consolidated Financial Statements
We believe every customer –
corporate, commercial, wealth
and retail – has the right to become
better off. Through advice, financial
services and community support,
we are committed to building the
personal economy of every one of
our customers. We know that
when our customers and the
communities they live and work
in prosper, we all prosper.
CEO’S
MESSAGE
to Shareholders
Brian Porter
President and
Chief Executive Officer
Dear fellow Shareholders,
At 185 years old, Scotiabank is older than the country
of Canada itself. From our humble beginnings in Halifax,
Nova Scotia, we have become one the world’s largest and
soundest banks. We are proud to be a critical part of the
economic fabric of the countries in which we operate.
This is a responsibility that Scotiabankers take seriously,
and we are honoured by the trust placed in us by our
customers and shareholders.
The Bank’s history is a testament to our past success, but it
does not guarantee our future success. That is why, since
becoming President and CEO four years ago, I have been
most focused on setting and implementing a Strategic Agenda
that positions our Bank for a successful future. Our strategy
considers how to deploy shareholder capital strategically and
responsibly, while delivering a superior banking experience
for our customers. As you will read in the letter below, we
are pleased with the progress we have made to date and
vigilant about the need to drive continuous change.
Financial Results
2017 was another good year for the Bank. Each of our
business lines delivered strong results – despite only
moderate growth in some key countries, increased
competitive pressures, elevated regulatory requirements,
geopolitical challenges and an unusually high number of
natural disasters across our footprint.
Our good momentum can be seen by the strong relative
performance of our stock price for the past two fiscal years.
Our shares appreciated more than 35% since the end of 2015,
compared to the peer average of 29%, and had the 2nd
strongest performance among our Big 5 peer group.
Canadian Banking generated record earnings in 2017,
delivering good revenue growth and meaningful cost
savings – a portion of which are being re-invested to build
a better banking experience for our customers. Since I
took over as President and CEO, we have increased our
focus on actively managing our business mix. Among our
Canadian peer group, we are the only bank to have
improved our Net Interest Margin over the past four-year
period – an accomplishment we are proud of, particularly
in a low interest-rate-environment.
Our ongoing focus on the Pacific Alliance region
(comprised of Mexico, Peru, Chile and Colombia)
continues to translate into very strong earnings growth in
International Banking. Once again, the division delivered
record earnings and achieved year-over-year gains in loan
market share across the Pacific Alliance region. Scotiabank
now ranks as the 5th largest bank in Mexico, and we
improved our competitive position in Chile.
Good results in our core personal and commercial banking
businesses have contributed to strong Return on Equity
(ROE) at the all-Bank level. International Banking ROE,
in particular, has improved by approximately 300 bps
from 11.7% since 2014 to 14.6% today.
Our footprint is key to our investment thesis, and an
important differentiator for us as Canada’s International Bank.
Some people are surprised to learn that more than 50,000
of our 88,000 employees reside outside of Canada. We remain
highly-confident in the above-average earnings potential
of our international business, particularly in the Pacific
Alliance region, which we will continue to grow organically
and through selective acquisitions within our footprint.
Global Banking and Markets (GBM) had a stronger year
in 2017. Earnings were up 16% over 2016, and we saw
some encouraging growth of our presence and relevance in
Latin American markets. As an example, for the better part
of the year, Scotiabank was at the top of Bloomberg’s
Bookrunner League Table for Syndicated Loans in Latin America.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
| 1
We will continue to implement our strategy for GBM,
which includes expanding our investment banking and
capital markets capabilities in Canada, and better
leveraging the Bank’s wholesale capabilities into the
Pacific Alliance region.
Building an Even Better Bank
In addition to delivering strong financial results in 2017,
we also made considerable progress on our Strategic
Agenda, which guides us as we build an even better Bank
and create value for you, our shareholders.
We are pleased to highlight a few notable achievements
below, which represent a small sample of the many
significant changes we are making across the Bank:
Customer Focus
The core of our Strategic Agenda continues to be our focus
on our 24 million customers. This means ensuring that the
voice of the customer is directly embedded into everything
we do, on a continuous basis. Throughout the year, we
rolled-out a number of initiatives to do exactly that. One
example is our implementation of a bank-wide customer
experience management system – called The Pulse or El Pulso.
The Pulse is a powerful digital system that allows us to
continuously gather feedback from our customers, through
the channels in which they choose to bank with us. We have
already received feedback from more than 2 million customers
and made 150,000 call-backs to customers. The rich data
we are gathering allows us to better understand our
customers’ needs and prioritize investments to improve
their banking experience.
Digital
Two years ago, we embarked on a digital transformation
journey to better serve our customers and become
more efficient. To demonstrate our commitment to digital
leadership, in 2017, we were the first bank in Canada to
hold a Digital Banking Update. At the event, we communicated
our digital vision and strategy for achieving that vision to
the investment community. The targets we presented in
February are bold and aspirational. We have more work to
do, but we are pleased by the progress we are making. A
good example is our Digital Factory Network, which is now
fully-operational in Canada, Mexico, Peru, Chile and
Colombia. The Network features a global operating model
and is a key pillar of our digital strategy, as it leverages our
international scale and diversity of talent across our
footprint. It is also a driver of internal innovation.
Financial Strength
Our increased attention to business mix has led to us focus
equally on both sides of the balance sheet. We have grown
deposits to support a reduction of wholesale funding.
To date, we have reduced our wholesale funding ratio by
approximately 20%. As a result, we have lowered our
funding costs and further strengthened our financial position.
Capital Deployment
Scotiabank has the strongest Common Equity Tier 1 (CET1)
ratio in our peer group at 11.5%. Our strong capital position
provides us with optionality to deploy capital for organic
growth, acquisitions, dividends and share buybacks. We are
focused on deploying internally-generated capital to grow
the Bank and provide returns to you, our shareholders, through
active capital management. Over the past four years, the Bank
has generated approximately $30 billion of internal capital.
STRATEGIC
PRIORITIES
2 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
DIGITAL
TRANSFORMATION
STRATEGY
Alignment
Technology
Modernization
Culture
& Talent
Customer Experience
Operational Efficiency
Approximately half of this capital has been returned to
shareholders in the form of dividends and selective share
buybacks. The Bank has repurchased approximately 36 million
shares at an average price of $67 – for context, our share
price as of October 31 was $83.28. A quarter of the remaining
capital was deployed to support organic business growth
in the Bank, while the balance was used for technology
investments, and to further build the Bank’s capital levels.
Low Cost by Design
During 2016, we announced a major undertaking to
significantly transform the Bank’s cost structure – something
we refer to internally as our Structural Cost Transformation
(SCT) program. 2017 was the first full year of our SCT program,
and I am pleased to report that it is progressing very well.
It has generated $500 million in savings, which is 40% better
than the commitment we made in 2016. We are also on
track to achieve our productivity ratio target of 52% by
the end of 2019. Our SCT program continues to grow in
scope, as we look at all opportunities across the Bank to
reduce structural costs, while better serving our customers.
The SCT program is a great example of how we are
making the Bank better over the medium and longer-term,
while also instilling a culture of continuous improvement.
Leadership
Over the past few years, we have invested significantly
in our leadership teams. In addition to making several
appointments at senior levels of the Bank, we have
strengthened the Bank’s leadership capabilities with an
infusion of new leaders from other businesses and industries.
These new Scotiabankers have brought depth and a diversity
of thought that continues to meaningfully improve our
Bank’s strength and efficiency. At the same time, we have
invested heavily in internal training programs for our
employees – several of our programs have received external
recognition for leadership development.
Diversity & Inclusion
As Canada’s International Bank, we are inherently diverse.
Scotiabankers understand that diversity leads to improved
performance and a more inclusive work environment. That
is why we are committed to diversity – including diversity of
thought, experience, gender, culture, race, religion and
sexual orientation at every decision-making table, and in all
settings across the Bank. Tone from the top is critical in this
regard, which is why I chair Scotiabank’s Inclusion Council.
I am proud of the fact that since I was appointed President
and CEO, the percentage of women at the VP+ level in
Canada is at an all-time high of nearly 40% – up from 30%
in 2014. While we have made some good progress in this
area, our work is not done, particularly at the enterprise
level. We have a number of initiatives underway to bring
even greater diversity of all types to our leadership teams.
Building our Brand
Earlier this year, we were very proud to announce an
expanded, 20-year partnership with Maple Leaf Sports &
Entertainment (MLSE). The partnership includes naming
rights for one of the most recognizable entertainment
complexes in North America, and many other initiatives
that will substantially enhance our brand as Canada’s
Hockey Bank, create multiple opportunities to acquire new
customers, and deepen existing customer relationships.
In 2017, the Bank reached the important milestone of
supporting more than one million kids through our
commitment to community hockey across Canada.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
| 3
DIGITAL VISION: PROGRESS UPDATE
Transactions
in-branch
400
basis points
improvement
Digital
Adoption
200
basis points
improvement
Digital
Sales
PROGRESSING
WELL
in priority
products
Customer
Pulse
100%
deployed in our
5 key markets
Will improve All-Bank productivity ratio
Our historic agreement with MLSE provides us with even
more opportunities to give back to the communities in
which our customers and employees live and work.
More Work Ahead
While we are proud of our progress to date, we still have a lot
of work ahead of us on our journey to build an even better Bank.
In particular, we need to move faster and with more agility.
We also need to continue to sharpen our focus and discipline.
We talk internally about these efforts as ‘strengthening the
core’ – a metaphor drawn from the world of physical fitness,
where core strength is foundational to overall strength, balance
and agility. Let me outline a few relevant examples of the
efforts we have undertaken to get the Bank in better shape.
On culture, Scotiabank has a lot to be proud of. As I told our
shareholders at our 2017 annual meeting, the Bank’s solid
cultural foundation and strong moral compass have helped
us successfully navigate periods of uncertainty and change.
Scotiabankers possess qualities such as entrepreneurialism,
integrity and courage to take risks. That said, some of the
elements that we will need in the future will be different than
what served us so well over the past 185 years. We have many
initiatives underway to ensure our successful future, including
efforts to drive a more performance-oriented culture.
On pace, we are focused on simplifying internal decision-making,
improving or eliminating inefficient processes and acting
with an increased sense of urgency. When it comes to
prioritizing our use of scarce resources, we are laser-focused
on those areas that will move the dial for our customers
and for you, our shareholders.
On innovation, we are making strategic investments to
provide superior products and services for our customers,
as well as strengthen internal systems and processes.
Technology investments are improving our customers’
experience, and also helping to increase the efficiency
and effectiveness of our employees, whether they are
customer-facing or serving in our corporate functions. In 2017,
the Bank invested more than $3 billion in technology and
related expenses – up 14% compared to 2016, in line with
our global peers. Our investments in technology are up
meaningfully from previous years, which is consistent with
our strong commitment to digital leadership. We recognize
that getting technology right is mission critical for Scotiabank
and we will continue to make the necessary investments to
achieve our goals.
One good example is Artificial Intelligence (AI). Developing
and deploying AI capabilities is increasingly critical to all firms
for improving a wide range of business outcomes, including
customer experience, supply chains and cyber-security. We are
actively deploying AI across many areas at the Bank and are
committed to further developing our AI capabilities. To do so,
we have entered into a number of partnerships with experts
in the field, including the University of Toronto’s Rotman
School of Business, the Vector Institute, and the Creative
Destruction Labs at the University of Toronto and the University
of British Columbia. Canada is well-positioned as a global
leader in AI, and Scotiabank fully intends to leverage this as
a competitive advantage in Canada as well as in our key
international markets.
Giving Back
We believe in partnerships as key enablers in giving back to the
communities in which we live and work. That is why we build
soccer fields in communities across Latin America and deliver
sporting equipment to young people in Canada’s North.
4 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
That is why we sponsor several groups of young Canadian students to travel to
Vimy, France and learn about the important contributions that brave Canadian
soldiers made in World War I. And that is why, when our customers and employees
face terrible natural disasters, we do what we can to help.
It was a very challenging year for many Scotiabankers, as well as many of our
customers who faced flooding and wildfires in Canada; flooding and mudslides in
Peru; flooding in Texas; Hurricanes Irma and Maria in the Caribbean; and earthquakes
in Mexico. Our teams across the Bank played an important role in the relief effort
each time a disaster hit – ensuring that our employees and customers were safe,
and also had access to the necessary supplies and financial services. The Bank was
proud to support the Red Cross and local charities with a number of large
financial gifts. We also provided Canadians with the opportunity to donate to
the Red Cross in any of our Scotiabank branches across Canada.
We fundamentally believe that the changes we are
driving will make us a stronger, more innovative and
more competitive organization.
In 2017, Scotiabank contributed more than $80 million globally in donations,
sponsorships and other forms of assistance, and Scotiabank employees contributed
more than 400,000 hours of volunteering and fundraising time. I want to take
this opportunity to thank all of the Scotiabankers for coming together to help
our customers and each other during the past year. Your contributions have
helped to make a real difference for our customers and employees.
Looking Forward with Optimism
Transformation on the scale we are pursuing is not easy, but it is necessary.
We know that we have a lot of work ahead of us, particularly when it comes to
strengthening our culture, increasing our pace, and becoming a digital leader
in our industry. We also understand that it will take time and resiliency to fully
achieve our strategic agenda. But if I can leave you, our shareholders, with
one takeaway from this year’s letter, it is this: We are deeply committed to our
journey because we fundamentally believe that the changes we are driving will
make us a stronger, more innovative and more competitive organization.
In closing, it continues to be an honour and privilege to serve your Bank as
President and CEO. I am grateful to our customers, our shareholders and our
Board Members for their trust. I also want to thank each and every Scotiabanker
across our footprint for working hard over the past year on behalf of our
customers and to deliver strong results for our shareholders.
While our Bank’s 185-year history has been written, the future is ours to
determine, and I think that future is very exciting indeed.
AVERAGE
ASSETS BY
GEOGRAPHY
(in $ billions)
$162
$539
$86
$111
$898
Total
n Canada ........................................... 60%
n U.S. ................................................. 12%
n Pacific Alliance ................................. 10%
n Other International .......................... 18%
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
| 5
DIGITAL TRANSFORMATION HIGHLIGHTS
October 2015 | Scotiabank’s first
Digital Factory is launched
March 2016 | Announced
Scotiabank Digital Banking Lab
at Ivey Business School
June 2016 | Global Digital Banking
organization is created
September 2016 | Scotiabank
accelerates the development of the
entrepreneurial ecosystem in Canada,
specifically in artificial intelligence and
science-based ventures, through its support
of the Rotman School of Management at
the University of Toronto and the Creative
Destruction Lab.
January 2017 | Grand
Opening of new Digital
Factory in Toronto
March 2017 | Grand Opening of
new Digital Factory in Mexico
June 2017 | Kicked off the Digital Advisory Council,
four prominent external digital leaders and practitioners
to provide practical advice and counsel to the Bank
October 2017 | Grand Opening
of new Digital Factory in Peru
November 2017 | First Canadian
bank to offer FaceID authentication
for mobile banking on iPhoneX
(iPhone 10) devices.
6 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
January 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
July 2016 | Announced partnership
and investment in Georgian Partners
that is focused on security, messaging
and artificial intelligence
December 2016 | Appointed five leaders
for Digital Factories in Canada, Mexico, Peru, Chile
and Colombia, including several external hires.
December 2016 | Announced
partnership with QED Investors to
inject capital and industry expertise into
select Latin American FinTech companies
February 2017 | Digital Banking
Update, outlining the global strategy
and goals for Digital
May 2017 | Grand Opening of
new Digital Factory in Colombia
October 2017 | Announced
partnership with NXTP Labs, Latin
America’s leading start-up accelerator,
to access the most promising FinTechs
in the Pacific Alliance
EXECUTIVE
MANAGEMENT
TEAM
Brian J. Porter
President and
Chief Executive Officer
Ignacio “Nacho”
Deschamps
Group Head,
International Banking
and Digital Transformation
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
Deborah M. Alexander
Executive Vice President
and General Counsel
Ian Arellano
Executive Vice President, Legal
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
Mike Henry
Executive Vice President
and Chief Data Officer
Marian Lawson
Executive Vice President,
Global Financial Institutions
and Transaction Banking
James McPhedran
Executive Vice President,
Canadian Banking
Daniel Moore
Chief 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
and Chief Digital Officer
Anya Schnoor
Executive Vice President,
Retail Payments, Deposits
and Unsecured Lending
Laurie Stang
Executive Vice President,
Canadian Branch Banking
Maria Theofilaktidis
Executive Vice President,
Chief Compliance and
Regulatory Officer
Michael Zerbs
Chief Technology Officer
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
| 7
BOARD OF
DIRECTORS
Thomas C. O’Neill
Chairman of the Board
Scotiabank director since
May 26, 2008
Committee Chairs
Tiff Macklem, Ph.D.
Dean of the Rotman School
of Management at the
University of Toronto
Risk Committee Chair
Scotiabank director since
June 22, 2015
Una M. Power
Corporate director
Audit Committee Chair
Scotiabank director since
April 12, 2016
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
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
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
Eduardo Pacheco
Chief Executive Officer
and a director of Mercantil
Colpatria S.A.
Scotiabank director since
September 25, 2015
Michael D. Penner
Chairman of the Board of
Directors of Hydro-Québec
Scotiabank director since
June 26, 2017
Brian J. Porter
President and Chief Executive
Officer of Scotiabank
Scotiabank director since
April 9, 2013
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 7 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 Scotiabank’s
Board of Directors
Dear fellow Shareholders,
The Board is pleased with the continued progress that the
Bank’s management team is making against its Strategic
Agenda, which is designed to deliver value for our customers
and shareholders over the longer term.
In particular, the shift towards becoming a more customer-
focused organization is resonating across the Bank’s
footprint. In October, our Board, and some of the Bank’s
senior leaders, travelled to Peru to visit our operations in
Lima. In our discussions with the local management team,
board members and customers, it was evident that the Bank’s
commitment to our 24 million customers transcends country
boundaries. In each of the nearly 50 countries in which we
operate, Scotiabankers are focused on delivering a superior
banking experience and easy to use products and services.
Putting the customer at the centre of everything we do has
been key to our present strength and success, and that will
continue to be so going forward.
The Bank’s digital transformation is also progressing well.
Embracing digital technology brings exciting opportunities for
our customers and our employees. In addition, by leveraging
technology and building strategic digital partnerships, we are
better able to protect our customers and the Bank.
Our Corporate Governance
Sound and effective corporate governance is essential for
the long-term success of the Bank and the execution of
our strategic vision. The Board is comprised of a diverse
and dedicated group of business professionals from
around the world, who bring sound business insight
and expertise to the table. Currently 13 of your Bank’s
15 directors are independent, and our board includes
directors of varying ages, cultures and geographic
backgrounds.
During the year, we welcomed one new director and bid
farewell to three others.
• In June, we were fortunate to have Michael Penner
join the board. Michael brings a wide range of public
and private sector leadership experience and his
knowledge of the energy and retail sectors will be
a tremendous asset.
• Ronald Brenneman, Paul Sobey and William Fatt retired
in 2017. Their leadership and commitment has been
invaluable to our success. We thank them for their years
of service and their commitment to the Bank and our
shareholders.
In closing, I would like to thank our President and CEO
Brian Porter for his dedication to the Bank, and for the
leadership he provides to the team of more than 88,000
Scotiabankers. Thanks also to our shareholders for their
ongoing confidence and support.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
| 9
COMMON EQUITY
TIER 1 CAPITAL RATIO %
100%
11.0
11.5
10.3
MD&A
HIGHLIGHTS
50%
0%
2016
16
For more information, please see page 44
2015
15
2017
17
EARNINGS BY
BUSINESS LINE %
n Canadian Banking
n International
Banking
n Global Banking
and Markets n
22
29
% INCOME BY
GEOGRAPHY
17
n Canada
n U.S.
18
n Pacific Alliance
n Other
International
7
TOTAL RETURN
TO COMMON
SHAREHOLDERS
Scotiabank n
S&P/TSX Banks Total Return Index n
S&P/TSX Composite Total Return Index n
1 0 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
Total Assets
$915
Billion
Revenue
$27
Billion
Deposits
$625
Billion
Loans
$504
Billion
Net Income
Total Taxes Paid
$8.2
Billion
$3.2
Billion
MEDIUM-TERM FINANCIAL OBJECTIVES
49
Objective:
2017 Results:
Return on Equity:14%
Earnings Per Share Growth: 5 - 10%*
Maintain Strong Capital Ratios
58
Achieve Positive Operating Leverage*
*Adjusted - please refer to page 14 of the MD&A
14.6%
8.0%
11.5%
-0.2%
250
200
150
100
50
Share price appreciation plus dividends
reinvested, 2006 = 100
Scotiabank
S&P/TSX Banks Total Return Index
S&P/TSX Composite Total Return Index
07
08
09
10
11
12
13
14
15
16
17
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.
Pages
Financial
Statements
Supplementary
Regulatory
Capital
Disclosures
182-183
1-2
4, 5, 7
6
7
MD&A
64, 67, 75
60, 63
57, 66, 72-74
43-44, 84-85,
102-104
58-60
60-63
64-65
62
43-44
45
46-47
43-44
49-53, 65, 112
160, 208
49-53 160, 200-207
49-53
201
49-53
51-52
10-12
11-19, 23-26
11-19, 22-25
9
82-85
84
88-90
86-88
81
76-82
76-82
205-208
205-208
76-82
207-208
72-74, 105-
112
167-168,
202-203
140-142, 168
12-20, 16-22(1)
168
17-18(1)
158, 160
71, 106-107,
109, 110
69-70
69-70, 72
53, 91
57
(1) In the Supplementary Financial Information Package
2 0 1 7 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
TABLE OF CONTENTS
53 Off-balance sheet arrangements
56
57
Financial instruments
Selected credit instruments – publically known
risk items
Risk Management
Risk management framework
58
67 Credit risk
75 Market risk
82
Liquidity risk
91 Other risks
Controls and Accounting Policies
95 Controls and procedures
95 Critical accounting estimates
99
102 Regulatory developments
104 Related party transactions
Future accounting developments
Supplementary Data
105 Geographic information
108 Credit risk
113 Revenues and expenses
115 Selected quarterly information
116 Eleven-year statistical review
Forward-looking statements
13
14 Non-GAAP measures
15
Financial highlights
Overview of Performance
Financial results: 2017 vs 2016
16
16 Medium Term Objectives
Shareholder returns
16
Economic outlook
17
Impact of foreign currency translation
17
Group Financial Performance
Provision for credit losses
18 Net income
18 Net interest income
20 Non-interest income
21
23 Non-interest expenses
24
25
27
29
Income taxes
Financial results review: 2016 vs 2015
Fourth quarter review
Trending analysis
Business Line Overview
30 Overview
31 Canadian Banking
International Banking
34
37 Global Banking and Markets
40 Other
Group Financial Condition
Statement of financial position
42
43 Capital management
12 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Our public communications often include oral or written forward-looking statements. Statements of this type are included in this document, and may
be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such
statements are made pursuant to the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995 and any applicable
Canadian securities legislation. Forward-looking statements may include, but are not limited to, statements made in this document, the
Management’s Discussion and Analysis in the Bank’s 2017 Annual Report under the headings “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; 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 2017 Annual Report) and updated by quarterly reports; global capital markets activity; the Bank’s ability to attract
and retain key executives; reliance on third parties to provide components of the Bank’s business infrastructure; unexpected changes in consumer
spending and saving habits; technological developments; fraud by internal or external parties, including the use of new technologies in unprecedented
ways to defraud the Bank or its customers; increasing cyber security risks which may include theft of assets, unauthorized access to sensitive
information or operational disruption; anti-money laundering; consolidation in the financial services sector in Canada and globally; competition, both
from new entrants and established competitors; judicial and regulatory proceedings; natural disasters, including, but not limited to, earthquakes and
hurricanes, and disruptions to public infrastructure, such as transportation, communication, power or water supply; the possible impact of
international conflicts and other developments, including terrorist activities and war; the effects of disease or illness on local, national or international
economies; and the Bank’s anticipation of and success in managing the risks implied by the foregoing. A substantial amount of the Bank’s business
involves making loans or otherwise committing resources to specific companies, industries or countries. Unforeseen events affecting such borrowers,
industries or countries could have a material adverse effect on the Bank’s financial results, businesses, financial condition or liquidity. These and other
factors may cause the Bank’s actual performance to differ materially from that contemplated by forward-looking statements. For more information,
see the “Risk Management” section of the Bank’s 2017 Annual Report.
Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2017 Annual Report under
the headings “Outlook”, as updated by quarterly reports. 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 forward-
looking statements contained in this document are presented for the purpose of assisting the holders of the Bank’s securities and financial analysts in
understanding the Bank’s financial position and results of operations as at and for the periods ended on the dates presented, as well as the Bank’s
financial performance objectives, vision and strategic goals, and may not be appropriate for other purposes. Except as required by law, the Bank does
not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by 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 28, 2017
2 0 1 7 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 & 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, 2017. The MD&A should be read in conjunction with the Bank’s 2017 Consolidated Financial Statements and
Notes. This MD&A is dated November 28, 2017.
Additional information relating to the Bank, including the Bank’s 2017 Annual Report, are available on the Bank’s website at www.scotiabank.com.
As well, the Bank’s 2017 Annual Report and Annual Information Form are available on the SEDAR website 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 Adjusted diluted earnings per share
The adjusted diluted earnings per share is calculated as follows:
2017
2016
2015
For the year ended October 31 ($ millions)
Diluted
EPS(1)
Net income attributable to common shareholders (diluted) (refer to Note 33)
2016 Restructuring charge
$ 7,935
–
$ 6.49
–
$ 7,070
278
Diluted
EPS(1)
$ 5.77
0.23
$ 6,983
–
Diluted
EPS(1)
$ 5.67
–
Net income attributable to common shareholders (diluted) adjusted for
restructuring charge
Amortization of intangible assets, excluding software
7,935
60
6.49
0.05
7,348
76
6.00
0.05
6,983
65
5.67
0.05
Adjusted net income attributable to common shareholders (diluted)
$ 7,995
$ 6.54
$ 7,424
$ 6.05
$ 7,048
$ 5.72
Weighted average number of diluted common shares outstanding (millions)
1,223
1,226
1,232
(1) Adjusted diluted earnings per share calculations are based on full dollar and share amounts.
T2 Impact of the 2016 restructuring charge
The table below reflects the impact of the 2016 restructuring charge of $378 million pre-tax ($278 million after tax)(1).
For the year ended October 31, 2017 ($ millions)
Operating leverage
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.
Core banking assets
Reported
Impact of the 2016
restructuring charge
Adjusted for the
restructuring charge
2.4%
(2.6)%
(0.2)%
Reported
$ 7,368
5.77
$
13.8%
55.2%
(1.9)%
Impact of the 2016
restructuring charge
Adjusted for the
restructuring charge
$ 278
$ 0.23
0.5%
(1.5)%
2.9%
$ 7,646
6.00
$
14.3%
53.7%
1.0%
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.
14 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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 ($)(1)(2)
Return on equity (%)
Productivity ratio (%)
Operating leverage (%)
Core banking margin (%)(1)
Financial position information ($ millions)
Cash and deposits with financial institutions
Trading assets
Loans
Total assets
Deposits
Common equity
Preferred shares and other equity instruments
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)(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
Common share information
Closing share price ($)(TSX)
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends paid per share ($)
Dividend yield (%)(5)
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
2017
2016
2015
15,035
12,120
27,155
2,249
14,630
2,033
8,243
7,876
6.55
6.49
6.54
14.6
53.9
2.4
2.46
59,663
98,464
504,369
915,273
625,367
55,454
4,579
470,198
206,675
11.5
13.1
14.9
4.7
376,379
125
2,243
4,327
0.43
0.45
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
83.28
72.08
61.49
1,203
1,223
1,199
3.05
4.0
99,872
46.24
1.8
12.7
88,645
3,003
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) Refer to page 14 for a discussion of Non-GAAP measures.
(2) Refer to table T1 Adjusted diluted earnings per share.
(3) As at October 31, 2017, credit valuation adjustment (CVA) risk-weighted assets were calculated using scalars of 0.72, 0.77 and 0.81 to compute CET1, Tier 1 and Total Capital ratios, respectively.
(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 year.
2 0 1 7 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
Overview of Performance
Financial Results: 2017 vs 2016
The Bank’s net income for the year was $8,243 million, up 12% from $7,368 million. Diluted earnings per share (EPS) were $6.49 compared to $5.77.
Return on equity was 14.6% compared to 13.8%.
Adjusting for the impact of the restructuring charge in the prior year of $278 million after tax ($378 million pre-tax), or $0.23 per share1, net income
and diluted earnings per share increased 8%. Return on equity was 14.6% compared to 14.3% last year on an adjusted basis.
Net income was positively impacted by increases in net interest income and banking fees, as well as lower provision for credit losses and a lower
effective tax rate. Partially offsetting were lower trading revenues, as well as higher non-interest expenses and the unfavourable impact of foreign
currency translation. Lower net gain on investment securities was partly offset by higher gains on sale of real estate. This year’s gain on sale of
HollisWealth, a wealth management business, was lower than last year’s gain on sale of a non-core lease financing business (“gain on sale of
businesses”) in Canadian Banking.
Net interest income increased $743 million or 5%, due primarily to growth in retail and commercial lending in Canadian Banking and International
Banking, partly offset by the unfavourable impact of foreign currency translation. The core banking margin improved eight basis points to 2.46%,
driven by higher margins in all business lines.
Non-interest income increased to $12,120 million from $12,058 million. Higher banking and credit card revenues were partly offset by lower trading
revenues and lower fee and commission revenues due to the sale of HollisWealth business. Lower gain on sale of businesses in Canadian Banking,
lower net gain on investment securities and the negative impact of foreign currency translation were partly offset by higher gains on sale of real
estate.
Provision for credit losses was $2,249 million, down $163 million from last year, due primarily to lower provisions related to energy exposures and the
impact of last year’s increase in the collective allowance against performing loans of $50 million. Lower commercial provisions in Canadian Banking
and International Banking were partly offset by higher retail provisions. The provision for credit losses ratio improved five basis points to 45 basis
points.
Non-interest expenses were $14,630 million this year compared to $14,540 million. Adjusting for the impact of the restructuring charge last year,
non-interest expenses increased $468 million or 3%, reflecting higher employee costs, including pension and other benefit costs, as well as
performance-based compensation and the impact of acquisitions. Increased investments in technology and digital banking also contributed to the
year-over-year increase. Partly offsetting were savings from cost-reduction initiatives, the impact from the sale of a wealth management business, and
the impact of foreign currency translation.
The productivity ratio was 53.9% compared to 55.2%, or 53.7% adjusting for the impact of the restructuring charge last year. Operating leverage
was positive 2.4%, or negative 0.2% adjusting for the restructuring charge.
The provision for income taxes was $2,033 million in line with last year. The Bank’s effective tax rate for the year was 19.8% compared to 21.6%, due
primarily to higher tax-exempt dividends related to client-driven equity trading activities and lower taxes in certain foreign jurisdictions this year.
The all-in Basel III Common Equity Tier 1 ratio was 11.5% as at October 31, 2017, compared to 11.0% last year, and remained well above the
regulatory minimum.
Medium-term financial objectives
Diluted earnings per share growth of 5-10%
Return on equity of 14%+
Achieve positive operating leverage
Maintain strong capital ratios
Shareholder Returns
2017 Results
Reported
Adjusted(1)
8%
14.6%
Negative 0.2%
CET1 capital ratio of 11.5% CET1 capital ratio of 11.5%
12%
14.6%
Positive 2.4%
C1 Closing common share price
as at October 31
In fiscal 2017, the total shareholder return on the Bank’s shares was 20.3%, which outperformed
the 8.3% 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
13.7%, and 9.0% over the past 10 years. This exceeded the total annual return of the S&P/TSX
Composite Index, which was 8.4% over the past five years and 3.9% over the last 10 years.
Quarterly dividends were raised twice during the year – a two cent increase effective the second
quarter and a further three cent increase effective in the fourth quarter. As a result, dividends per
share totaled $3.05 for the year, up 6% from 2016. The dividend payout ratio of 46.6% for the
year was in line with the Bank’s target payout range of 40-50%.
$90
80
70
60
50
40
30
07
09
11
13
15
17
1
Refer to Non-GAAP Measures on page 14.
16 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
T4 Shareholder returns
For the years ended October 31
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)(1)
Increase (decrease) in share price (%)
Total annual shareholder return (%)(2)
2017
83.28
3.05
4.0
15.5
20.3
2016
72.08
2.88
4.7
17.2
22.5
2015
61.49
2.72
4.4
(10.9)
(7.0)
(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.
Economic Outlook
C2 Return to common shareholders
Share price appreciation plus dividends
reinvested, 2007=100
240
200
160
120
80
07
09
11
13
15
17
Scotiabank
S&P/TSX Banks Total Return Index
S&P/TSX Composite Total Return Index
The sources of global growth are strengthening and diversifying, both within countries and across regions. This synchronized global recovery is
contributing to a re-assessment of monetary policy prospects in a number of countries, with a shift in both tone and action from several major central
banks as they prepare to follow the US Fed’s lead and begin withdrawing exceptional stimulus measures. The Bank of Canada raised its overnight rate
for the first time in nearly seven years in July 2017 and again in September, and the Bank of England followed earlier in November. The European
Central Bank (ECB) and Bank of Japan are unlikely to change their policy stance in the near-term given weak inflation. While it is possible that this may
increase volatility as markets digest the implications of reduced central bank support, this shift in stance from central bankers signals that global
economic recovery is self-sustaining and less reliant on exceptional policy measures.
In Canada, GDP growth is now tracking to hit 3.1% in 2017. This is the highest annual growth rate since 2011 and puts Canada on track to be one of
the fastest-growing countries in the industrialized world. As the US economy heads into the eighth year of its third-longest expansion on record, the
fundamentals for continued solid growth remain in place, though any slack in the economy is rapidly closing.
In Latin America, economic growth is projected to substantially accelerate next year, but it is likely to be affected by political uncertainty stemming
from looming presidential elections in Mexico, Chile, and Colombia, and political divisions in Peru. Similarly, investor support for Brazil will be
intimately tied to the fate of the current government’s reform program.
In the Eurozone, survey indicators are extremely strong: they imply that GDP growth should continue to accelerate throughout 2017 to an annual
average growth rate of 2.3%, twice the currency area’s potential growth rate. In contrast, the outlook for the UK has softened since earlier in the year
and the headwinds to growth are expected to build through 2018.
The Chinese government will likely continue its sizeable fiscal injections to keep the economy’s growth trajectory in line with the official growth target
of “around 6.5%” in 2017; we expect output to expand by 6.7% this year and 6.3% in 2018 as the level of policy support fades.
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
|
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W
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Impact of Foreign Currency Translation
The impact of foreign currency translation on net income is shown in the table below.
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.
2017
2016
2015
Average
exchange rate
% Change
Average
exchange rate
% Change
Average
exchange rate
% Change
0.765
14.608
2.513
2,265
500.108
1.4%
6.9%
(1.0)%
(1.8)%
(2.8)%
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%
2017
vs. 2016
2016
vs. 2015
2015
vs. 2014
$ (112)
(65)
99
18
$
(60)
$ (0.05)
$
(4)
(14)
(12)
(30)
$
(51)
182
86
(34)
$ 183
$ 0.15
$
14
44
65
60
$ 232
243
(151)
(62)
$ 262
$ 0.21
$
20
84
110
48
$
(60)
$ 183
$ 262
2 0 1 7 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 $8,243 million, up 12% compared to $7,368 million last year. Last year’s results included a restructuring charge of $378 million
pre-tax, or $278 million after tax. Adjusting for the restructuring charge last year, net income increased $597 million or 8%.
Net Interest Income
Net interest income was $15,035 million, an increase of $743 million or 5% from the previous year. This increase was driven by a 2% growth in core
banking assets and a 3% increase in the core banking margin.
Net interest income in Canadian Banking was up $339 million or 5% driven by solid asset and deposit growth and an increase in margin. Net interest
income increased $367 million or 6% in International Banking due primarily to strong asset growth and improved margins. Global Banking and
Markets net interest income rose $43 million or 3%.
Core banking assets increased $11 billion to $609 billion. The increase was driven by strong growth in retail and commercial lending in Canadian
Banking as well as International Banking. Partially offsetting were lower volumes of deposits with financial institutions, corporate loans in Global
Banking and Markets and the negative impact of foreign currency translation.
The core banking margin improved eight basis points to 2.46%, driven by higher margins across all business lines.
Outlook
Net interest income is expected to increase in 2018 driven by growth in core banking assets across all business lines and higher margins, partly offset
by the unfavourable impact of foreign currency translation. The core banking margin is expected to benefit in a rising interest rate environment.
T6 Net interest income and core banking margin(1)
($ 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
$ 912.6
249.2
$ 663.4
54.6
2017
Interest
$ 15.0
–
$ 15.0
Average
rate
Average
balance
$ 913.8
259.4
2.26% $ 654.4
2016
Interest
$ 14.3
–
$ 14.3
Average
rate
Average
balance
$ 860.6
258.1
2.18% $ 602.5
2015
Interest
$ 13.1
–
$ 13.1
Average
rate
2.18%
56.6
54.4
Core banking assets and margin
$ 608.8
$ 15.0
2.46% $ 597.8
$ 14.3
2.38% $ 548.1
$ 13.1
2.39%
(1) Net interest income from Capital Markets trading assets is recorded in trading revenues in non-interest income.
18 | 2 0 1 7 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
2017
Average
balance
Interest
Average
rate
Average
balance
2016
Interest
Average
rate
Average
balance
2015
Interest
Average
rate
$
53.2
107.2
$
97.0
74.8
228.3
100.9
165.0
(4.5)
$ 489.7
$ 821.9
12.3
78.4
0.5
0.1
0.3
1.3
7.4
7.8
6.5
0.98% $
0.13%
67.8
107.2
$
0.29%
1.68%
3.23%
7.78%
3.94%
99.8
67.8
218.6
96.8
161.4
(4.6)
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
$ 21.7
$ 23.9
4.43% $ 472.2
2.91% $ 814.8
$ 20.2
$ 22.0
4.28% $ 440.1
2.70% $ 766.0
$ 18.7
$ 20.1
11.4
87.6
11.4
83.2
0.41%
0.17%
0.16%
1.69%
3.51%
7.52%
3.25%
4.26%
2.63%
$ 912.6
$ 23.9
2.62% $ 913.8
$ 22.0
2.41% $ 860.6
$ 20.1
2.34%
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
Obligations related to securities sold
under repurchase agreements and
securities lent
Subordinated debentures
Other interest-bearing liabilities
$
$
$ 203.8
374.7
42.1
$ 620.6
102.3
7.1
58.5
2.7
4.7
0.5
7.9
0.2
0.2
0.6
8.9
Total interest-bearing liabilities
$ 788.5
$
Other liabilities including acceptances
Equity(2)
Total liabilities and equity
Net interest income
65.3
58.8
$ 912.6
$
8.9
$ 15.0
(1) Average of daily balances.
(2)
Includes non-controlling interests of $1.6 in 2017, $1.5 in 2016 and $1.3 in 2015.
1.30% $ 195.1
384.7
1.26%
42.8
1.23%
1.27% $ 622.6
$
$
0.21%
3.19%
0.99%
99.1
7.5
54.9
1.13% $ 784.1
$
2.4
3.9
0.4
6.7
0.2
0.2
0.6
7.7
74.4
55.3
0.97% $ 913.8
$
7.7
$ 14.3
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%
0.91%
0.85%
1.02%
0.26%
3.33%
1.20%
0.96%
0.81%
2 0 1 7 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
Non-Interest Income
T8 Non-interest income
For the fiscal years ($ millions)
2017
2016
2015
2017
versus
2016
Banking
Card revenues
Deposit and payment services
Deposit services
Other payment services
Credit fees
Commitment and other credit fees
Acceptance fees
Other
$ 1,514
$ 1,359
$ 1,089
11%
989
335
1,324
846
307
1,153
472
949
330
1,279
870
284
1,154
436
928
307
1,235
787
266
1,053
406
$ 4,463
$ 4,228
$ 3,783
Banking fee related expenses
608
559
423
Total banking
$ 3,855
$ 3,669
$ 3,360
Wealth management
Mutual funds
Brokerage fees
Investment management and trust
Investment management and custody
Personal and corporate trust
$ 1,639
1,021
$ 1,624
1,010
$ 1,619
1,006
453
205
658
443
205
648
440
204
644
4
2
4
(3)
8
–
8
6%
9
5%
1%
1
2
–
2
C3 Sources of non-interest income
21%
12%
10%
10%
14%
Underwriting and
other advisory fees
Non-trading foreign
exchange fees
Trading revenues
Other non-interest
income
10%
5%
5%
5%
8%
Card revenues
Deposit and
payment services
and other banking
fees
Credit fees
Mutual funds
Brokerage Fees
Investment
management and
trust
Total wealth management
$ 3,318
$ 3,282
$ 3,269
1%
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
598
557
1,259
380
407
626
1,120
594
540
1,403
534
414
603
1,019
525
492
1,185
639
405
556
526
1
3
(10)
(29)
(2)
4
10
Total non-interest income
$12,120
$12,058
$10,957
1%
Non-interest income was $12,120 million, up $62 million or 1%, primarily from growth in banking, wealth management and insurance, partly offset
by lower trading revenues, lower net gain on sale of businesses and the negative impact of foreign currency translation. Higher gains on sales of real
estate were more than offset by lower net gain on investment securities.
Banking revenues, excluding related expenses, grew $235 million or 6% to $4,463 million reflecting strong growth in card revenues from higher fees
in Canadian Banking and International Banking. Fees from deposit and payment services were up $45 million or 4%, mostly in Canadian Banking.
Banking fee related expenses rose $49 million or 9%, primarily due to credit card expenses driven by higher transaction volumes.
Wealth management revenues increased $36 million or 1% to $3,318 million due primarily to higher fee-based brokerage and mutual fund revenues,
partly offset by the impact of the sale of the HollisWealth business.
Trading revenues of $1,259 million were lower by $144 million or 10% from the prior year, primarily due to lower revenues in the equity, fixed
income and commodities businesses.
Insurance underwriting income was up $23 million or 4% year over year, mostly from strong business growth in the Canadian market.
Other income was $1,120 million, up $101 million due primarily to higher gains on sale of real estate, partly offset by lower gain on sale of
businesses.
Outlook
Non-interest income in 2018 is expected to benefit from higher credit card revenues, banking fees and trading revenues, while gains on investment
securities and real estate sales are expected to be lower.
20 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
T9 Trading revenues
For the fiscal years ($ millions)
By trading products:
Interest rate and credit
Equities
Commodities
Foreign exchange
Other
Total trading revenues
% of total revenues
2017
2016
2015
$
575
47
295
250
92
$
613
101
376
262
51
$
400
177
345
201
62
$ 1,259
$ 1,403
$ 1,185
4.6%
5.3%
4.9%
Provision for Credit Losses
Provision for credit losses was $2,249 million, down $163 million from last year due primarily to lower provisions related to energy exposures and the
impact of last year’s increase in the collective allowance against performing loans of $50 million. The provision for credit losses ratio was 45 basis
points compared to 50 basis points in the prior year.
The provision for credit losses in Canadian Banking was $913 million, an increase of $81 million due to higher provisions in retail portfolios, primarily
in credit cards and lines of credit. The provision for credit losses ratio was 29 basis points in Canadian Banking, in line with the prior year.
The provision for credit losses in International Banking increased $13 million to $1,294 million. Retail provision increases in Colombia, Chile, Uruguay
and Peru were partly offset by lower provisions in Mexico and the Caribbean and Central America. Commercial provisions were lower in Colombia,
the Caribbean, and Mexico, and were partly offset by higher provisions, primarily in Chile and Central America. Overall, the provision for credit losses
ratio improved five basis points to 1.21%.
The provision for credit losses in Global Banking and Markets decreased $207 million to $42 million due primarily to higher energy sector provisions
last year. The provision for credit losses ratio was five basis points, down 25 basis points from last year.
The collective allowance against performing loans of $1,562 million, held in the Other segment, remained unchanged. An increase in the allowance
for exposures related to recent hurricanes in the Caribbean and Puerto Rico, was offset by a reduction in the amount held against energy exposures.
Outlook
The quality of the Bank’s credit portfolio is expected to remain strong given its broad global diversification. The total provision for credit losses is
expected to increase in 2018 mostly due to higher provisions attributable to performing loans under IFRS 9 accounting standards. We also expect
greater volatility from implementation of the new accounting standards. However, underlying performance remains strong, and in Canadian Banking,
retail and commercial credit quality is expected to remain stable. In International Banking, the retail provision for credit losses is expected to rise due
mainly to lower acquisition-related benefits and seasoning of unsecured growth in 2017, while commercial credit quality is expected to remain stable.
In Global Banking and Markets, the credit quality is expected to improve slightly.
T10 Provisions against impaired loans by business line
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
For the fiscal years ($ 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
2017
2016
2015
$
$
$
857
56
913
215
193
329
145
337
75
$
$
$
770
62
832
250
224
317
112
320
58
1,079
1,031
$
$
$
642
45
687
184
260
265
108
247
64
944
$ 1,294
$ 1,281
$ 1,128
$
(6)
(15)
63
$
43
113
93
$
42
$
249
$
$
42
4
21
67
$ 2,249
$ 2,362
$ 1,882
2 0 1 7 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.
2017
2016
2015
0.32%
0.13
0.29
0.29%
0.15
0.28
0.25%
0.12
0.23
2.09
0.37
1.21
0.05
0.45
–
2.08
0.52
1.26
0.30
0.49
0.01
2.33
0.26
1.24
0.10
0.42
0.01
0.45%
0.50%
0.43%
2017
2016
2015
0.34%
0.18
0.32
2.17
0.50
1.31
0.11
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
0.50%
0.41%
0.39%
22 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
Non-Interest Expenses
T13 Non-interest expenses and productivity
For the fiscal years ($ millions)
2017
2016
2015
Salaries and employee benefits
Salaries
Performance-based compensation
Share-based payments
Other employee benefits
Premises and technology
Premises
Occupancy
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
$
4,220
1,599
209
1,347
$
4,071
1,538
243
1,173
$
4,019
1,438
220
1,004
$
7,375
$
7,025
$
6,681
444
93
432
969
1,467
2,436
340
421
761
437
581
775
383
40
423
$
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
2017
versus
2016
4%
4
(14)
15
5%
4
4
–
2%
14%
9%
5
17
11%
(1)%
(6)%
12%
8
(15)
5%
Other
$
1,842
$
2,438
$
1,755
(24)%
Total non-interest expenses
$ 14,630
$ 14,540
$ 13,041
1%
Productivity ratio
53.9%
55.2%
54.2%
Non-interest expenses
$ millions
C4
16000
14000
12000
10000
8000
6000
4000
2000
15
16
17
Salaries & employee benefits
Premises & technology
Depreciation and amortization
Communications & advertising
Professional & taxes
Other
Direct and indirect taxes
$ millions
15
16
17
Provision for income taxes
Total other taxes
C5
3500
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 7 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 were $14,630 million, an increase of $90 million or 1%. Adjusting for the impact of the prior year’s restructuring charge of
$378 million, non-interest expenses increased by $468 million or 3%.
The increase was due mostly to higher technology costs, professional fees and software amortization. As well, there were increases in employee costs,
including benefit expenses and performance-based compensation, higher business taxes, and the impact of acquisitions. These were partly offset by
the positive impact of foreign currency translation and the impact of the sale of HollisWealth.
The Bank’s total technology cost, that includes Technology expenses in Table T13 and those included within Salaries, Professional, Amortization of
intangible assets and Depreciation, amounted to $3.1 billion, an increase of 14% from $2.7 billion incurred in 2016. This increase reflects the Bank’s
investment in its digital transformation and technology modernization efforts. The Bank achieved savings of approximately $500 million in 2017
arising from cost-reduction initiatives relating to the 2016 restructuring charge. The Bank’s strategy to reduce structural costs will lead to productivity
gains and partially fund these larger technology investments.
The productivity ratio was 53.9% compared to 55.2%, or 53.7% adjusting for last year’s restructuring charge.
Operating leverage was positive 2.4%, or negative 0.2% adjusting for the restructuring charge.
Outlook
Non-interest expenses are expected to rise in 2018. This is driven by business growth and ongoing strategic and technology investments. The growth
will be partly offset by further savings from structural cost reduction initiatives.
Income Taxes
The provision for income taxes was $2,033 million, in line with last year. The Bank’s overall effective tax rate for the year was 19.8% compared to
21.6% for 2016. The decrease in the effective tax rate was due primarily to higher tax-exempt income from client-driven equity trading activities and
lower taxes in certain foreign jurisdictions this year.
Outlook
The Bank’s consolidated effective tax rate is expected to be in the range of 22% to 25% in 2018.
24 | 2 0 1 7 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: 2016 vs. 2015
In order to identify key business trends between 2016 and 2015, commentary and the related financial results are below.
Net income
The Bank had net income of $7,368 million in 2016, up 2% from $7,213 million in 2015. Diluted earnings per share (EPS) were $5.77 compared
to $5.67 in 2015. Return on equity was 13.8% in 2016 compared to 14.6% in 2015.
The Bank recorded a restructuring charge of $378 million pre-tax, or $278 million after tax, in 2016 (refer T2). Adjusting for the restructuring
charge, net income was $7,646 million and diluted earnings per share was $6.00, up 6% compared to 2015. Return on equity was 14.3% on an
adjusted basis compared to 14.6% in 2015.
The 2016 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. 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.
Net interest income
Net interest income increased $1,200 million or 9% to $14,292 million in 2016, 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 2015.
Non-interest income
Non-interest income increased $1,101 million or 10% to $12,058 million in 2016. 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 in 2016 was a gain on sale
of a non-core lease financing business in Canada, while gains on sale of real estate in 2016 were largely offset by lower net gains on investment
securities. 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 gain on investment securities.
Provision for credit losses
The total provision for credit losses was $2,412 million in 2016, up $470 million from 2015, and net of acquisition-related benefits of
$152 million. 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. The 2016 provision for credit losses included a
$50 million increase in the collective allowance against performing loans compared to an increase of $60 million in 2015.
Non-interest expenses
Non-interest expenses were $14,540 million in 2016, an increase of $1,499 million or 11% over 2015. Adjusting for the restructuring charge
(refer T2), 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, there
were higher employee pension and benefit expenses as 2015 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 the
2016 restructuring charge, as well as the reorganization cost incurred in 2015. Operating leverage was negative 1.9% on a reported basis, or
positive 1.0% adjusting for the restructuring charge (refer T2).
Income taxes
The provision for income taxes was $2,030 million, an increase of $177 million from 2015. The Bank’s overall effective tax rate for 2016 was
21.6% compared to 20.4% in 2015. The increase in the effective tax rate was due primarily to lower tax-exempt income and higher taxes in
foreign jurisdictions in 2016.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
G
R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
T14 Financial Results Review
For the year ended October 31, 2016 ($ 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
$
7,024
5,164
$ 12,188
832
6,324
1,296
$ 6,359
3,482
$ 9,841
1,281
5,523
707
$ 1,293
3,139
$ 4,432
249
2,040
572
$ (384)
273
$ (111)
50
653
(545)
$ 14,292
12,058
$ 26,350
2,412
14,540
2,030
$
3,736
$ 2,330
$ 1,571
$ (269)
$
7,368
Net income attributable to non-controlling interests
–
251
–
–
251
Net income attributable to equity holders of the Bank
$
3,736
$ 2,079
$ 1,571
$ (269)
$
7,117
(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, 2016 – $299 to arrive at the amounts reported in Consolidated Statement of income, and differences in the actual amount of costs incurred and charged to the operating
segments.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended October 31, 2015 ($ 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 – $390 to arrive at the amounts reported in Consolidated Statement of income, and differences in the actual amount of costs incurred and charged to the operating
segments.
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Fourth Quarter Review
T15 Fourth quarter financial results
($ 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 and other equity instrument holders
Common shareholders
Net income
Q4 2017 vs Q4 2016
For the three months ended
October 31
2017
$ 3,831
2,981
$ 6,812
536
3,668
538
July 31
2017
$ 3,833
3,061
$ 6,894
573
3,672
546
$ 2,070
$ 2,103
$
55
$
58
$ 2,015
29
$ 1,986
$ 2,045
29
$ 2,016
October 31
2016
$ 3,653
3,098
$ 6,751
550
3,650
540
$ 2,011
$
72
$ 1,939
31
$ 1,908
Net income was $2,070 million, an increase of $59 million or 3%. Asset growth and an improved net interest margin, a lower provision for credit
losses and a lower effective tax rate were partly offset by a decline in non-interest income.
Q4 2017 vs Q3 2017
Net income was $2,070 million, a decrease of $33 million or 2%, due primarily to the negative impact of foreign currency translation. Lower non-
interest income was partly offset by lower provision for credit losses.
Net interest income
Q4 2017 vs Q4 2016
Net interest income was $3,831 million, an increase of $178 million or 5%. Adjusting for the negative impact of foreign currency translation, net
interest income grew by 7%. The increase was attributable to asset growth in retail and commercial lending in Canadian Banking and International
Banking, as well as higher core banking margin.
The core banking margin improved four basis points to 2.44%, driven by higher margins in Global Banking and Markets and Canadian Banking, partly
offset by lower margins in International Banking.
Q4 2017 vs Q3 2017
Net interest income was $3,831 million, a decrease of $2 million. Adjusting for the negative impact of foreign currency translation, net interest
income grew by 2%. Growth in retail and commercial lending in Canadian Banking was partly offset by the impact of lower margin.
The core banking margin of 2.44% was down two basis points, mainly from lower margins in International Banking, partly offset by higher margins in
Global Banking and Markets.
Non-interest income
Q4 2017 vs Q4 2016
Non-interest income of $2,981 million was down $117 million or 4%. This was due mainly to lower trading revenues, lower fee and commission
revenue due to the sale of HollisWealth business (“Sale of business”) and lower gains on sale of real estate. Partly offsetting were higher card
revenues, higher net gain on investment securities, and the gain on Sale of business.
Q4 2017 vs Q3 2017
Non-interest income was $2,981 million, down $80 million or 3%. Half of the decrease was due to the negative impact of foreign currency
translation. The remaining decrease was due to lower fee and commission revenue due to the Sale of business, lower banking fees and trading
revenues, and lower gains on sale of real estate. Partly offsetting were higher net gains on investment securities, and the gain on Sale of business.
Provision for credit losses
Q4 2017 vs Q4 2016
The provision for credit losses was $536 million, down $14 million. The decrease was due primarily to lower provisions in Global Banking and Markets,
partly offset by higher provisions in International Banking. The collective allowance against performing loans of $1,562 million, held in the Other
segment, remained unchanged. An increase in the allowance for exposures related to recent hurricanes in the Caribbean was primarily offset by a
reduction in the amount held against energy exposures. The provision for credit losses ratio improved three basis points to 42 basis points.
Q4 2017 vs Q3 2017
The provision for credit losses was $536 million, a decline of $37 million. The decrease was due primarily to lower provisions in Global Banking and
Markets and lower retail provisions. The provision for credit losses ratio improved three basis points to 42 basis points.
2 0 1 7 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
Non-interest expenses
Q4 2017 vs Q4 2016
Non-interest expenses were $3,668 million, up 1%, primarily reflecting investments in technology, digital banking and other initiatives and higher
employee pension and benefit costs. The growth was partly offset by savings from cost-reduction initiatives, the impact of the Sale of business and the
positive impact of foreign currency translation.
The productivity ratio was 53.8% compared to 54.1%.
Q4 2017 vs Q3 2017
Non-interest expenses were in line with last quarter or up 2% adjusting for the positive impact of foreign currency translation. Higher technology,
professional and marketing expenses were partly offset by decreases from the impact of the Sale of business, as well as lower employee benefit and
shared-based compensation expenses.
The productivity ratio was 53.8% compared to 53.3%.
Income taxes
Q4 2017 vs Q4 2016
The effective tax rate was 20.6% compared to 21.2% due primarily to higher tax-exempt income and lower taxes on the gain on Sale of business.
Q4 2017 vs Q3 2017
The effective tax rate was in line with the prior quarter. Higher taxes in foreign jurisdictions and lower tax-exempt income in the quarter were offset by
lower taxes on the gain on Sale of business.
28 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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Trending Analysis
T16 Quarterly financial highlights
($ 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
2017
July 31
2017
April 30
2017
January 31
2017
October 31
2016
July 31
2016
April 30
2016
January 31
2016
$ 3,831
2,981
$ 6,812
536
3,668
538
$ 3,833
3,061
$ 6,894
573
3,672
546
$ 3,728
2,853
$ 6,581
587
3,601
332
$ 3,643
3,225
$ 6,868
553
3,689
617
$ 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
$ 2,070
$ 2,103
$ 2,061
$ 2,009
$ 2,011
$ 1,959
$ 1,584
$ 1,814
1.66
1.64
1.68
1.66
1.63
1.62
1.58
1.57
1.58
1.57
1.55
1.54
1.24
1.23
1.44
1.43
The Bank recorded strong net income over the past eight quarters, with earnings generally trending upwards over the period. The second quarter of
2016 was impacted by a restructuring charge of $278 million ($378 million pre-tax).
Net interest income
Net interest income generally increased over the period, driven by steady growth in retail and commercial loans in both Canadian and International
Banking, as well as corporate loans in Global Banking and Markets. Additionally, the average balance of low-spread deposits with banks has declined
over the period. The margin has remained solid, with moderate increases in most periods. The margin was 2.44% this quarter, down two basis points
from the prior quarter mainly from lower margins in International Banking driven by asset mix changes and lower inflation, partly offset by wider
margins in Global Banking and Markets. The second quarter of 2017 experienced a 14 basis point increase to 2.54% driven by improved margins in
International Banking mainly reflecting business mix changes and Central Bank rate changes, as well as higher contributions from asset/liability
management activities. The margin decreased to 2.46% in the third quarter of 2017, due mainly to asset mix changes in International Banking.
Non-interest income
Non-interest income increased in most quarters over the period. Banking revenues trended upward from growth in card fees in Canadian and
International Banking. Wealth management fees were also strong over the period, but decreased this quarter due to the sale of HollisWealth. Trading
revenues were generally strong over the period, but declined in the second quarter of 2017 due to lower trading revenues in the equities and fixed
income businesses. The lower net gain on investment securities in 2017 compared to the prior year was partly offset by higher gains on sale of real
estate. The gain on Sale of business this quarter was lower than the gain on disposition of a non-core lease finance business in Canadian Banking in
the second quarter of 2016.
Provision for credit losses
Provision for credit losses has remained relatively stable over the period, but peaked in the second quarter of 2016 due primarily to provisions against
exposures in the energy sector and an increase of $50 million in the collective allowance against performing loans. Asset quality has remained strong
over the period despite increased lending activity.
Non-interest expenses
Non-interest expenses have generally trended upwards over the period, mostly to support business growth and the Bank’s investments in strategic
initiatives and in technology. There have also been increases in performance-based compensation and employee-related benefits over the period. The
second quarter of 2016 included a restructuring charge of $378 million.
Income taxes
The effective tax rate was 20.6% this quarter and averaged 20.6% over the period, with a range of 13.9% to 23.6%. In the second quarter of 2017,
the tax rate was 13.9% reflecting a higher amount of tax-exempt dividends related to client driven equity trading activities. Effective tax rates in other
quarters were impacted by different levels of income earned in foreign tax jurisdictions, as well as the variability of tax-exempt dividend income.
2 0 1 7 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
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 2017.
CANADIAN BANKING
Canadian Banking reported net income to equity holders of $4,064 million in 2017, up 9% from last year. This year’s gain on sale of HollisWealth, a
wealth management business, was lower than last year’s gain on sale of a non-core lease financing business (collectively, “gain on sale of
businesses”). The higher gains on sale of real estate offset by the lower gain on sale of businesses this year, positively impacted net income growth by
2%.
Solid growth in assets and deposits, along with improving margin driven primarily from the recent Bank of Canada interest rate increase and higher
non-interest income contributed to strong growth in 2017. Revenue growth was partially offset by higher provision for credit losses and non-interest
expenses. Return on equity was 22.8%, compared with 22.0% last year.
INTERNATIONAL BANKING
International Banking reported net income attributable to equity holders of $2,390 million, up $311 million or 15% from last year. The increase
reflects higher net interest income and fees driven by good loan growth, lower commercial provisions for credit losses and the benefits of cost-
reduction initiatives. This was partly offset by higher income taxes and the negative impact of foreign currency translation. Return on equity was
14.7% compared to 12.8% last year.
GLOBAL BANKING AND MARKETS
Global Banking and Markets reported net income attributable to equity holders of $1,818 million, an increase of $247 million or 16% from last year.
Stronger results in the equities business, as well as lower provision for credit losses, were partly offset by higher expenses. Return on equity was
16.0% compared to 12.6% last year.
KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES
Management uses a number of key metrics to monitor business line performance:
(cid:129) Net income
(cid:129) Return on equity
(cid:129) Productivity ratio
(cid:129) Provision for credit losses ratio
(cid:129) Employee engagement
T17 2017 Financial performance
($ millions)
Net interest income(2)
Non-interest income(2)
Total revenue(2)
Provision for credit losses
Non-interest expenses
Provision for income taxes(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)
Total average assets ($ billions)
Total average liabilities ($ billions)
Canadian
Banking
International
Banking
Global Banking
and Markets
Other(1)
Total
$
7,363
5,488
12,851
913
6,487
1,387
$
4,064
–
4,064
22.8%
323
244
$
$
$
$ 6,726
3,688
10,414
1,294
5,664
828
$ 2,628
238
$ 2,390
14.7%
148
115
$
$
$ 1,336
3,288
4,624
42
2,160
604
$ 1,818
$ (390)
(344)
(734)
–
319
(786)
$ 15,035
12,120
27,155
2,249
14,630
2,033
$ (267)
$
8,243
–
–
$ 1,818
$ (267)
16.0%
336
267
$
$
–%
$
$
106
228
$
$
$
238
8,005
14.6%
913
854
(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. Refer to Glossary.
(3) Refer to Glossary.
30 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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Canadian Banking
2017 Achievements
(cid:129) Customer Focus - Deliver an excellent customer experience across our businesses and channels.
(cid:129) Completed the roll-out of Customer Pulse (rebranded from Net Promoter System) across our retail channels, our proprietary customer
experience system, in Canada and have received over 1 million customer survey responses to date.
(cid:129) Continued our branch transformation roll out, delivering new roles, processes, and tools to more than half of our branches.
(cid:129)
(cid:129)
(cid:129)
(cid:129)
Tangerine achieved the highest customer satisfaction among mid-sized banks for the sixth straight year in the 2017 J.D. Power
Canadian Retail Banking Customer Satisfaction Study.
Scotiabank received 8 Best Banking Awards by Ipsos in 2017.
Expanded our partnership with Maple Leaf Sports and Entertainment – we will continue to be the official sponsor of the Toronto Maple
Leafs, as well as a partner of the MLSE Foundation. In July 2018, the Air Canada Centre will be renamed the Scotiabank Arena.
Scotiabank iTRADE selected by MoneySense Magazine as a Top 3 pick in best online brokerages in Canada.
(cid:129) Structural Cost Transformation - Reduce structural costs to build the capacity to invest in our businesses and technology.
(cid:129)
Exceeded this year’s structural cost reduction, productivity ratio, and operating leverage targets.
(cid:129) Delivered positive operating leverage.
(cid:129) Digital Transformation - Enhance our digital offering and e-commerce capabilities to drive digital sales and engagement.
(cid:129)
Launched the flagship Digital Factory in Toronto to drive our digital products, applications and services as we increase the percentage of
digital sales, reduce the percentage of transactions made in branches, and increase the proportion of customers adopting digital
channels.
(cid:129) Ranked 1st by J.D. Power among Big 5 peers in mobile satisfaction and performance.
(cid:129) Developed a new on-boarding engine that strengthen controls, and provides a seamless onboarding experience for our customers by
allowing instant Know Your Customer for credit cards, Day-to-Day and Small Business customers.
(cid:129) Business Mix Alignment - Optimize our business mix by growing higher margin assets, building core deposits, and earning higher fee
income.
(cid:129) As we focus on strengthening our credit card portfolio, we were awarded by MoneySense Magazine as having the best rewards,
cashback, and student credit card offerings, solidifying our position as the “Bank of Rewards” with market leading offerings.
(cid:129)
(cid:129)
Launched the MomentumPlus Savings Account, an innovative solution that allows customers to save for multiple goals in one account,
as we continue to focus on core deposits.
Successfully piloted a virtual Small Business Advisor role to capitalize on significant growth opportunities in this segment.
(cid:129) Completed sale of HollisWealth to refocus efforts as we continue to actively manage our businesses.
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 963 branches and
more than 3,600 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 everyday banking products, including chequing and saving accounts, credit cards, investments and loans 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, and institutional customer services, 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 alignment, operational improvements and digital
transformation.
2018 Priorities
(cid:129) Customer focus: Deliver a leading customer experience and deepen relationships with customers across our businesses and channels.
(cid:129) Structural cost transformation: Reduce structural costs to build the capacity to invest in our businesses and technology to drive shareholder
return.
(cid:129) Digital transformation: Leverage digital as the foundation of all our activities to improve our operations, enhance the client experience, and drive
digital sales.
(cid:129) Business mix alignment: Optimize our business mix by growing higher margin assets, building core deposits, and earning higher fee income.
(cid:129) Leadership: Grow and diversify talent and engage employees through a performance-focused culture.
2 0 1 7 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
T18 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
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 (TEB).
(2) Includes net income from investments in associated corporations of $66 (2016 – $78; 2015 – $66).
(3) Refer to Glossary.
(4) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
2017
7,363
5,488
12,851
913
6,487
1,387
4,064
–
4,064
$
$
$
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
$
$
$
22.8%
50.5%
2.40%
0.29%
22.0%
51.9%
2.38%
0.28%
21.0%
53.5%
2.23%
0.23%
$ 315,916
322,712
233,260
243,748
$ 302,648
309,232
224,006
232,498
$ 293,460
299,929
210,241
217,753
$
$
315
155
$
$
318
145
$
$
310
135
32 | 2 0 1 7 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 $4,064 million in 2017, an increase
of $328 million or 9%. This year’s gain on sale of HollisWealth, a wealth management business, was
lower than last year’s gain on sale of a non-core lease financing business (“gain on sale of
businesses”). The higher gains on sale of real estate offset by the lower gain on sale of businesses
positively impacted net income growth by 2%. Strong performance from retail and small business
banking, commercial banking and wealth management contributed to strong growth in 2017.
Assets and liabilities
Average assets rose $14 billion or 4% to $323 billion. The growth reflected $9 billion or 5% in
residential mortgages, $4 billion or 10% in business loans and acceptances, as well as $3 billion or
4% in personal loans, which was partially offset by the Tangerine broker-originated and white-label
mortgage run-off portfolios.
Average liabilities rose $11 billion or 5% to $244 billion. Retail banking experienced strong growth in
chequing accounts of $2 billion or 10% and savings deposits of $7 billion or 10%. There was also
growth of $4 billion or 9% in small business and commercial banking business operating accounts.
Partially offsetting was a decline in lower spread GICs of $3 billion or 4%.
Assets under management (AUM) and assets under administration (AUA)
AUM of $155 billion increased $10 billion or 6%. Growth was driven by market appreciation and net
sales. The sale of HollisWealth reduced AUM growth by 4%. AUA of $315 billion decreased $3 billion
or 1%. Growth was driven primarily by market appreciation, which was more than offset by the 12%
decrease due to sale of HollisWealth.
Revenues
Canadian Banking reported total revenues of $12,851 million in 2017, an increase of
$663 million or 5%.
Net interest income increased $339 million or 5% to $7,363 million. The increase was driven by a two
basis point increase in the margin to 2.40%, and solid growth in assets and deposits. The increase in
margin was primarily driven by margin expansion in retail deposits due to recent interest rate increases
by the Bank of Canada. Margin also benefited from the run-off of lower spread Tangerine mortgages.
Non-interest income increased $324 million or 6%. The higher gains on sale of real estate offset
by the lower gain on sale of businesses positively impacted non-interest income by 2%. The
remaining increase was driven by strong growth in credit cards, retail and commercial banking,
insurance and wealth management businesses.
Retail & Small Business Banking
Total retail and small business banking revenues were $7,348 million, up $505 million or 7%. Net
interest income grew $225 million or 4%, primarily driven by a three basis point improvement in
the margin and solid growth in residential mortgages and deposits. Non-interest income
increased $280 million or 16%, primarily due to growth in credit card revenues, deposit payment
service fees, insurance revenues and higher gain on sale of real estate.
Commercial Banking
Total commercial banking revenues increased $42 million or 2% to $2,175 million. Net interest
income rose $91 million or 6% due mainly to growth in loans and business operating accounts,
partly offset by a margin decline of two basis points. Non-interest income decreased due to last
year’s gain on sale of a non-core lease financing business, offset by higher acceptance fees and
securities gains.
Wealth Management
Total wealth management revenues were $3,328 million, an increase of $116 million or 4%,
primarily due to the gain on sale of HollisWealth which was partially offset by lower revenue as a
result of the sale. Net interest income rose $22 million or 6% mainly due to growth in deposits and
loans and improvements in deposit margin. Non-interest income was also up from higher fee
based brokerage and investment management fees. Slightly lower mutual funds revenues from
reduced net sales, change in asset mix and fee-rate reductions were offset by market appreciation.
Non-interest expenses
Non-interest expenses were $6,487 million for the year, an increase of $163 million or 3%,
primarily reflecting higher investments in digital and technology to support business growth.
These were partially offset by benefits realized from cost-reduction initiatives and lower expenses
as a result of the sale of HollisWealth.
Operating Leverage
Operating leverage for the year was positive 2.9%, compared with positive 3.2% last year.
Provision for credit losses
Provision for credit losses in the retail portfolio was $857 million, up $87 million or 11% from last
year driven by growth in relatively higher spread loans. The provision for credit losses in the
commercial portfolio were $56 million, down $6 million or 10% from last year.
Provision for income taxes
The effective tax rate decreased to 25.5%, compared to 25.8% primarily from lower taxes on the
gains on sale of HollisWealth and real estate.
Outlook
Canadian Banking’s growth in 2018 will be driven in part by a favourable economic outlook and
rising interest rate environment in Canada. Assets are projected to grow across retail and
business lending products. Deposits are also expected to grow across retail chequing and savings,
small business and commercial banking. Margins are expected to improve during 2018.
Non-interest revenues are expected to be lower due to the impact of the HollisWealth sale and
expected lower real estate gains. Operational improvements will continue to be a focus that will
lead to gains in productivity.
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C6
Total revenue
26%
17%
57%
Retail & Small Business Banking
Commercial Banking
Wealth Management
Total revenue by sub-segment
$ millions
C7
12000
10000
8000
6000
4000
2000
15
16
17
Wealth Management
Commercial Banking
Retail & Small Business Banking
Average loans and acceptances
$ billions
15
16
17
Commercial loans/acceptances
Retail loans (except mortgages)
Residential mortgages
Canadian wealth management asset
growth
$ billions, as at October 31
175
150
125
100
75
50
25
15
16
17
Assets under administration (left scale)
Assets under management (right scale)
C8
300
250
200
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C9
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250
200
150
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2 0 1 7 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
International Banking
2017 Achievements
(cid:129) Customer Focus
(cid:129) Completed the roll-out of Customer Pulse, our proprietary customer experience systems, allowing us to receive direct feedback from our
(cid:129)
customers in the Pacific Alliance countries.
Launched the Employee Pulse program empowering our employees to listen, identify and escalate any opportunity to deliver an excellent
experience to our customers in the Pacific Alliance countries.
(cid:129) Grew our number of Primary Customers in Retail and Commercial Banking allowing us to establish stronger, long-term relationships.
(cid:129) Recognized as the Latin American Retail Bank of the Year by Retail Banker International.
(cid:129) Leadership
(cid:129)
Launched Workplace, Facebook’s enterprise internal communication and productivity platform, across the Pacific Alliance countries and at Head
Office in Toronto to drive engagement and collaboration across the Bank.
Increased the representation of women in leadership positions by 9% year-over-year.
(cid:129)
(cid:129) Structural Cost Transformation
Surpassed the 2017 structural cost reduction target and progressed well toward our productivity ratio goal.
(cid:129)
(cid:129) Delivered positive operating leverage.
(cid:129) Digital Transformation
(cid:129) Opened Digital Factories in our priority markets of Mexico, Colombia, Chile and Peru to drive innovation and development of online and mobile
banking solutions for our customers.
(cid:129) Held our first Digital Investor Day and provided key digital banking targets of which, significant progress has already been made in increasing the
percentage of digital sales, reducing the percentage of transactions made in branches, and increasing the proportion of customers adopting
digital channels.
Established partnerships with venture capital firms, Fintechs, accelerators, and academic institutions to advance the Bank’s digital transformation
and build synergies with the Pacific Alliance countries’ digital innovation ecosystems.
(cid:129)
(cid:129) Named the “World’s Best Consumer Digital Bank 2017” in 24 countries across Latin America and the Caribbean, and received the award for
“Best in Mobile Banking” in the region from Global Finance magazine.
(cid:129) Business Mix Alignment
Increased loan market share in most key markets.
(cid:129)
(cid:129) Achieved strong deposit growth across several regions and divisions.
Business Profile
International Banking (IB) has a well-established, diversified franchise that serves more than 15 million Retail, Corporate, and Commercial customers
across our footprint. These customers are supported by over 50,000 employees, more than 1,800 branches and a network of contact and business
support centers. IB is focused on growing operations in 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 America countries are more mature markets, but still
very profitable. We see continued opportunities to optimize operations, improve customer profitability and reduce structural costs.
Strategy
International Banking continues to execute on a long-term strategy focused on grow in the Pacific Alliance countries and optimizing operations in
Central America and the Caribbean. Our strategy is organized around five areas: customer focus, leadership, structural cost transformation, digital
transformation and business mix alignment.
2018 Priorities
Our primary focus to further our strategy and grow across our footprint is to focus on the following key initiatives:
(cid:129) Customer focus: Take customer experience to the next level by leveraging the Customer Pulse program and implement the Employee Pulse
program to gather feedback from front-line employees on how to better serve our customers.
(cid:129) Leadership: Continue to strengthen our teams across our business lines and functions.
(cid:129) Structural cost transformation: Continue to make progress on our cost reduction programs, while focusing on developing new capabilities across
the Bank.
(cid:129) Digital transformation: Scale-up our digital banking units across the four Pacific Alliance countries (and Canada), continue driving digital sales on
priority products, and accelerate digital adoption and transaction migration.
(cid:129) Business mix alignment: Strategically grow in key areas, including core deposits, to improve profitability and reduce funding costs.
34 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
T19 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(5)
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 $482 (2016 – $473; 2015 – $476).
(1) Taxable equivalent basis.
(2)
(3) Refer to Glossary.
(4) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
(5)
Includes bankers acceptances.
2017
6,726
3,688
10,414
1,294
5,664
828
2,628
238
2,390
$
$
$
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
$
$
$
14.7%
54.4%
4.79%
1.21%
12.8%
56.1%
4.71%
1.26%
13.0%
57.6%
4.71%
1.24%
$ 140,471
147,537
95,232
114,694
$ 135,167
142,582
87,508
109,302
$ 121,130
128,248
73,946
94,340
$
$
88,189
52,553
$
$
85,888
47,287
$
$
80,606
43,560
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2 0 1 7 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
Financial Performance
Net income attributable to equity holders was $2,390 million, up 15% from $2,079 million, with
strong results in Latin America and the Caribbean and Central America. The increase reflects
higher net interest income and fees driven by good loan growth, lower commercial provisions for
credit losses and the benefits of cost-reduction initiatives. This was partly offset by higher income
taxes.
Assets and Liabilities
Average assets of $148 billion were up $5 billion or 3%. Adjusting for the impact of foreign
currency translation, retail loan growth was 8% and commercial loan growth was 5%, with Latin
America driving the growth of 13% and 7% respectively. Average liabilities increased $5 billion
or 5% to $115 billion largely due to 9% growth in deposits, or 10% adjusting for the impact of
foreign currency translation, including demand and savings deposits up 8% and term deposits up
11%.
Revenues
Total revenues of $10,414 million increased $573 million or 6%. Net interest income increased
$367 million or 6% driven by good loan growth, acquisitions in Central America, and a higher
net interest margin. The net interest margin rose eight basis points to 4.79% due to changes in
business mix, as retail loan growth outpaced commercial loan growth, and higher spreads mainly
related to Central Bank rate changes in Latin America last year. Non-interest income increased
$206 million or 6%. This increase was largely driven by higher net fee and commission revenues
which increased $176 million or 7%.
Latin America
Total revenues of $6,949 million increased 8% from last year. Net interest income increased
$347 million or 8%, or 9% excluding the impact of foreign currency translation, reflecting the
impact of strong asset growth and a higher net interest margin. The net interest margin rose
12 basis points to 4.85% due to business mix and Central Bank rate changes. Non-interest
income increased $146 million or 7% primarily from net fee and commission revenues up
$140 million or 7% largely driven by transaction fees and card revenues.
Caribbean and Central America
Total revenues were $3,032 million, up 2% versus last year or 5% adjusting for the negative
impact of foreign currency translation. Net interest income increased $20 million or 1%;
however, 4% adjusting for the negative impact of foreign currency translation driven by asset
growth primarily in Central America and Dominican Republic. Non-interest income was up
$45 million or 5%; however, 7% adjusting for the negative impact of foreign currency translation
as a result of strong growth in transaction fees, credit card revenues and wealth fees.
Asia
Total revenues were $433 million, up 3% versus last year. This was primarily driven by a higher
contribution from Thanachart Bank, partly offset by a lower contribution from Bank of Xi’an.
Non-interest expenses
Non-interest expenses of $5,664 million increased $141 million or 3% from last year. The
increase reflected business volume growth, inflationary increases, increased technology spending,
and the impact of acquisitions, partly offset by the positive impact of foreign currency translation
and the benefits of expense management programs. Operating leverage was a positive 3.3%.
Provision for credit losses
The provision for credit losses increased $13 million or 1% to $1,294 million. Retail provisions for
credit losses increased in line with loan growth. Commercial provisions for credit losses
decreased, mainly in Colombia, the Caribbean and Mexico, relative to the high levels last year.
Overall, the provision for credit losses ratio improved five basis points to 1.21%.
Provision for income taxes
The effective tax rate was 24.0% compared to 23.3% last year due primarily to lower tax
benefits in Mexico.
Outlook
International Banking’s earnings growth in 2018 will be achieved through leveraging its
diversified footprint, with particular focus on the Pacific Alliance countries. Economic growth is
expected to improve in these countries, driving low double digit loan growth in this region.
Margins and credit quality are expected to remain stable. Expense management and delivery of
positive operating leverage remain key business priorities. The current strength of the Canadian
dollar has the potential to negatively impact reported earnings growth in International Banking in
2018. While the primary business focus remains on organic growth, acquisition opportunities
that are strategically aligned and complement current operations within International Banking’s
existing footprint will be considered.
36 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
C10 Total revenue
4.2%
29.1%
66.7%
Caribbean and Central America
Latin America
Asia
C11 Total revenue by region
$ millions
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
15
16
17
Asia
Caribbean and Central America
Latin America
C12 Average loans and acceptances
$ billions
120
100
80
60
40
20
15
16
17
Residential mortgages
Retail loans (except mortgages)
Business loans/acceptances
C13 Average earning assets(1) by region
$ billions
140
120
100
80
60
40
15
16
17
Asia
Caribbean and Central America
Latin America
(1) Average earning assets excluding bankers acceptances
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Global Banking and Markets
2017 Achievements
In 2017, we continued to build our franchise as a leading wholesale bank in Canada and the Pacific Alliance and made significant progress on our
key priorities:
(cid:129) Customer Focus
(cid:129) Enhanced our customer focus and delivered superior service and solutions to our customers – a sample of our Awards and Recognitions,
along with Deal Highlights from 2017, are listed below.
(cid:129) Expanded our investment banking franchise across the Bank’s global footprint to better align our enhanced customer-focused strategy in
our priority markets.
(cid:129) Business Mix Alignment
(cid:129) Shifted our business mix to focus our resources on our priority markets and businesses.
(cid:129) Resource Productivity
(cid:129) Made significant investments in people, process and technology, and improved our resource productivity. We continue to optimize and
modernize our operations and systems to better serve our customers and reduce costs.
(cid:129) Digital Transformation
(cid:129) Continued investment in digital technologies and automation to provide a better customer experience. In 2017, we became the first
Canadian bank to launch a mobile banking app for business with an integrated digital security token.
Awards and Recognitions
(cid:129) Ranked #3 in Thomson Reuters LPC’s League Table for Investment Grade Loan Syndications in Canada, and #16 in the United States, for the
first three quarters of 2017.
(cid:129) Ranked #2 in Bloomberg’s League Table for Loan Syndications in Latin America, for the first three quarters of 2017.
(cid:129) Recognized with four Latin America Project & Infrastructure Finance Awards by LatinFinance during 2017:
(cid:129) Best Airport Financing: Mexico City Airport Trust (Bond Financing)
(cid:129) Best Transport Financing: Mexico City Airport Trust (Bond Financing)
(cid:129) Best Infrastructure Financing – Mexico: Red Compartida (Project Financing)
(cid:129) Best Infrastructure Financing – Caribbean: Aeropuertos Dominicanos Siglo XXI (Loan and Bond Financing)
(cid:129) Scotiabank’s Equity Research team achieved eight #1 industry rankings and 18 top-tier sector rankings overall in the 2017 Canadian Equity
Investors Study by Greenwich Associates.
Deal Highlights
(cid:129) Acted as Financial Advisor to Royal Dutch Shell (Shell) on the sale of its 60% interest in the Athabasca Oil Sands Project and 100% interest in
the Peace River Complex for C$11.1 billion to Canadian Natural Resources Limited (CNRL), as well as the concurrent joint acquisition by Shell
and CNRL of Marathon Oil Canada Corporation for US$2.5 billion. Scotiabank also acted as Joint Lead Arranger on CNRL’s related C$9 billion
bridge credit facility.
(cid:129) Acted as Exclusive Financial Advisor to Veresen Inc. on its acquisition by Pembina Pipeline Corporation. The transaction, valued at
C$9.4 billion, created one of the largest energy infrastructure companies in Canada.
(cid:129) Acted as Joint Lead Arranger and Underwriter of 50% of a new US$1.2 billion financing to support Jacobs Engineering’s acquisition of CH2M
Hill. In addition, Scotiabank backstopped 50% of the company’s existing US$1.6 billion credit facility in connection with the acquisition.
(cid:129) Acted as Global Coordinator, Joint Bookrunner and Billing & Delivery Agent on the inaugural PEN10 billion Euroclearable bond issuance due
2032 by the Republic of Peru. This transaction represents the first PEN-denominated issuance ever to clear and settle through Euroclear.
(cid:129) Acted as Bookrunner on a £4.0 billion syndicated re-opening of the Conventional Gilt due 2065 for the UK Debt Management Office (UK
DMO). This was Scotiabank’s first ever bookrunner role in a Conventional Gilt syndication, and was the second bookrunner mandate received
from the UK DMO in the past 12 months.
(cid:129) Acted as Mandated Lead Arranger, Underwriter, Bookrunner and Hedge Provider on a A$5.9 billion debt facility for the acquisition of the
Endeavour Energy electricity network in Australia by MIRA, AMP Capital, BCIMC and Qatar Investment Authority.
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.
Strategy
Global Banking and Markets continues to build its franchise as a leading wholesale bank in Canada and the Pacific Alliance, while maintaining a
relevant presence in other regions to support its multi-regional customers.
2018 Priorities
(cid:129) Enhance Customer Focus: We continue to place the customer at the centre of everything we do. We are improving the end-to-end customer
experience to seamlessly offer our full capabilities, thereby deepening and strengthening our relationships, while leveraging our global footprint to
better serve our multi-regional customers.
2 0 1 7 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
(cid:129) Leaders in our Primary Markets: We are investing in people, process and technology, enhancing our capabilities in our primary markets of
Canada and the Pacific Alliance. We are expanding our investment banking and capital markets expertise to increase our relevance and deepen our
customer relationships in these markets.
(cid:129) Optimize Effectiveness: We are controlling costs and investing in the right areas to drive shareholder value, while optimizing our use of capital
and funding. We are investing in technology to enhance the customer experience, improve our data and analytics capabilities, and increase
operational effectiveness.
T20 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)(4)
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) Business Banking only.
(4) Net interest income (TEB) as % of average earning assets excluding bankers’ acceptances.
2017
1,336
3,288
4,624
42
2,160
604
1,818
–
1,818
$
$
$
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
$
$
$
16.0%
46.7%
1.75%
0.05%
12.6%
46.0%
1.67%
0.30%
13.0%
45.9%
1.65%
0.10%
$ 103,861
79,937
291,870
335,599
77,158
267,377
$ 103,316
81,662
298,664
350,627
77,261
269,755
$ 108,137
70,103
290,482
342,389
63,308
239,628
38 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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Financial Performance
Global Banking and Markets reported net income attributable to equity holders of $1,818 million
in 2017, an increase of $247 million or 16% from last year. Stronger results in the equities
business related primarily to higher client trading activity contributed approximately 6% of the
earnings growth. As well, significantly lower provision for credit losses were partly offset by
higher non-interest expenses.
Average assets
Average assets decreased by $15 billion or 4% to $336 billion this year. Adjusting for the impact
of foreign currency translation, assets decreased by $9 billion or 2%, as decreases in securities
purchased under resale agreements and derivative-related assets were partly offset by higher
trading securities.
Average liabilities
Average liabilities decreased by $3 billion or 1% to $267 billion this year. Adjusting for the
impact of foreign currency translation, liabilities increased by $2 billion or 1% due to growth in
securities sold under repurchase agreements and bullion deposits, partly offset by lower
derivative-related liabilities.
Net interest income
Net interest income increased by 3% to $1,336 million, mainly driven by higher deposit volumes
and higher lending volumes in the U.S. and Canada. The net interest margin was 1.75%, an
increase of eight basis points.
Non-interest income
Non-interest income of $3,288 million increased by $149 million or 5%. Stronger trading
revenues in equities, net gains on investment securities and higher underwriting fees contributed
to the growth. This was partly offset by lower banking fees and lower trading revenues in metals
and fixed income.
Non-interest expenses
Non-interest expenses increased by $120 million or 6% to $2,160 million in 2017. This was due
primarily to higher regulatory, compliance and technology costs. Operating leverage was negative
1.5%.
Provision for credit losses
The provision for credit losses decreased $207 million to $42 million due primarily to higher
energy sector provisions last year. The provisions this year were primarily in Asia and Europe. The
provision for credit losses ratio was down 25 basis points to five basis points.
Provision for income taxes
The effective tax rate of 25.0% was 1.7% lower than the prior year, due to lower taxes in certain
foreign operations.
Outlook
With the execution of our client-focused strategies, investment in our people and capabilities
including our Global Investment Banking platform, we expect continued strong growth in
deposits and improved Corporate Banking results. This growth is expected to be partly offset by
lower revenues from certain client-driven capital market transactions. Expenses are expected to
rise to support higher regulatory and technology investments.
C14 Total revenue
50%
50%
Business Banking
Capital Markets
C15 Business banking revenue
$ millions
2500
2000
1500
1000
500
15
16
17
Metals
Lending
C16 Capital markets revenue
by business line
$ millions
2500
2000
1500
1000
500
15
16
17
Global Investment Banking
Global Equities
Fixed Income & Commodities
C17 Composition of average
earning assets
$ billions
400
350
300
250
200
150
100
50
15
16
17
Other
Securities purchased under resale agreement
Trading assets
Corporate loans and acceptances
C18 Trading day losses
14
12
10
8
6
4
2
16
17
2 0 1 7 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
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
T21 Other financial performance
($ millions)
Net interest income(1)
Non-interest income(1)(2)
Total revenue(1)
Provision for (recovery of) credit losses
Non-interest expenses
Income tax expense(1)
Net income
Net income attributable to equity holders of the Bank
2017
2016
2015
$ (390)
(344)
$ (384)
273
$ (100)
35
(734)
–
319
(786)
(111)
50
653
(545)
(65)
60
86
(475)
$ (267)
$ (269)
$ (267)
$ (269)
$
$
264
264
(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 $(141) in 2017; (2016 – $(137); 2015 – $(137)).
Net interest income, other operating income, and the provision for income taxes in each period include the elimination of tax-exempt income
gross-up. This amount is included in the operating segments, which are reported on a taxable equivalent basis. The elimination was $562 million in
2017, compared to $299 million in 2016.
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 $267 million in 2017. Adjusting for the restructuring charge of $378 million
($278 million after tax), net income was $9 million in 2016.
Revenues
Revenues declined by $623 million mainly due to higher taxable equivalent basis offsets (eliminated in tax expenses), lower net gain on investment
securities, lower net gain on sale of real estate, and the negative impact of foreign currency translation (including hedges).
Provision for credit losses
The decrease in provision for credit losses relates to an increase of $50 million in the collective allowance for credit losses against performing loans in
the prior year.
Non-interest expenses
Non-interest expenses were $319 million in 2017. Adjusting for the Bank’s restructuring charge of $378 million in Q2 2016, non-interest expenses
increased by $44 million compared to 2016. The increase was largely due to lower employee benefit expenses in the prior year.
40 | 2 0 1 7 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: 2016 vs. 2015
Canadian Banking
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. Return on equity was 22.0% up from
21.0% in 2015.
International Banking
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. Return on
equity was 12.8%, versus 13.0% in 2015.
Global Banking and Markets
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
2015. 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. Return on equity was 12.6% versus 13.0% in
2015.
Other
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 T2), net income was $9 million in 2016. Net income attributable to equity holders was $264 million in 2015 which
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 ($45 million after tax).
M
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2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 41
MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL CONDITION
T22 Condensed statement of financial position
As at October 31 ($ billions)
2017
2016
2015
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
$
65.4
98.5
$ 54.8
108.6
$ 84.5
99.1
95.3
69.3
504.4
82.4
92.1
72.9
480.2
87.7
87.3
43.2
458.6
83.8
$ 915.3
$896.3
$856.5
C19 Loan portfolio
loans & acceptances, $ billions, as at
October 31
560
480
400
320
240
160
80
15
16
17
Business & government
Personal & credit cards
Residential mortgages
Liabilities
Deposits
Obligations related to securities sold under repurchase
agreements and securities lent
Other liabilities
Subordinated debentures
Total liabilities
Equity
Common equity
Preferred shares and other equity instruments
Non-controlling interests in subsidiaries
Total equity
Total liabilities and shareholders’ equity
Statement of Financial Position
Assets
$ 625.4
$611.9
$600.9
$ billions, as at October 31
C20 Deposits
95.8
126.5
5.9
97.1
121.8
7.6
77.0
118.9
6.2
$ 853.6
$838.4
$803.0
55.5
4.6
1.6
$
61.7
$ 915.3
52.7
3.6
1.6
$ 57.9
$896.3
49.1
2.9
1.5
$ 53.5
$856.5
700
600
500
400
300
200
100
15
16
17
Banks
Business & government
Personal
The Bank’s total assets as at October 31, 2017 were $915 billion, up $19 billion or 2% from October 31, 2016. Adjusting for the impact of foreign
currency translation, total assets were up $32 billion. This growth was primarily in loans, while increases in deposits with financial institutions were
offset by lower trading assets and investment securities.
Cash and deposits with financial institutions increased $13 billion, while trading assets decreased $10 billion due primarily to a decrease in trading
securities.
Investment securities decreased $4 billion from October 31, 2016 due primarily to lower holdings of held-to-maturity securities. The unrealized gain
on available-for-sale securities, after the impact of qualifying hedges, decreased $74 million to an unrealized loss of $48 million as at October 31,
2017, due mainly to realized gains on disposals and changes in interest rates.
Loans increased $24 billion or 5% from October 31, 2016. Adjusting for the impact of foreign currency translation, loans increased $30 billion.
Residential mortgages increased $15 billion and personal loans and credit cards were up $5 billion primarily in Canada and Latin America. Business
and government loans were up $10 billion, mainly in Canada and Latin America.
Derivative instrument assets decreased $6 billion due primarily to lower mark-to-market amounts related to interest rate contracts.
42 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
M
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Liabilities
Total liabilities were $854 billion as at October 31, 2017, up $15 billion or 2% from October 31, 2016. Adjusting for the impact of foreign currency
translation, total liabilities were up $29 billion.
Total deposits increased $13 billion. Adjusting for the impact of foreign currency translation, total deposits increased $23 billion. Personal deposits
grew by $2 billion, primarily in Canada and Latin America, and business and government deposits grew by $20 billion, mainly in Canada, the U.S. and
Latin America.
Obligations related to securities sold short increased by $7 billion. Derivative instrument liabilities decreased by $8 billion, which was similar to the
decrease in derivative instrument assets. Total wholesale funding decreased by $8 billion.
Equity
Total shareholders’ equity increased $3,804 million from October 31, 2016. This increase was driven mainly by current year earnings of $8,243 million
and a net increase in preferred shares and other equity instruments of $985 million. Partly offsetting was a reduction in other comprehensive income
of $709 million, due primarily to a decrease in unrealized foreign currency translation gains on the Bank’s investments in its foreign operations,
dividends paid of $3,797 million and the repurchase and cancellation of approximately 14 million common shares for $1,009 million.
Outlook
Assets and deposits are expected to continue to increase in 2018 across all business lines. In Canada, while growth in residential mortgages is
expected to moderate, other retail and commercial lending should continue to expand. Internationally, lending assets and personal deposits are
expected to increase 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”. 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 2017, the scalars for CVA risk-weighted
assets of 0.72, 0.77 and 0.81 were used to compute the CET1, Tier 1 and Total capital ratios, respectively (October 31, 2016 – scalars of 0.64,
0.71 and 0.77, respectively). The scalars will increase to 0.80, 0.83 and 0.86, respectively, effective in the first quarter of 2018.
2 0 1 7 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
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.
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.
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.
Regulatory developments related to capital
Effective Q1 2017, new OSFI requirements were implemented for Canadian uninsured loans secured by residential real estate in response to evolving
risks, such as risks associated with elevated house prices in certain markets, and increasing levels of household debt. The new requirements for loss
given default (LGD) capital models under the Advanced Internal Ratings-Based (AIRB) Approach introduced a risk-sensitive floor which is tied to
increases in local property prices and/or to house prices that are high relative to borrower income. The changes apply to new originations, refinances
and renewals of all uninsured real estate secured products 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 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 other equity instruments, and subordinated debentures, net of redemptions.
Capital instruments 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.
Regulatory capital ratios
The Bank continues to maintain strong, high quality capital levels which position it well for future business growth. The Basel III all-in Common Equity
Tier 1 (CET1) ratio as at October 31, 2017 was 11.5%. The CET1 ratio grew by 50 basis points in 2017 primarily from strong internal capital
generation.
The Bank’s Basel III all-in Tier 1 and Total capital ratios were 13.1% and 14.9%, respectively, as at October 31, 2017. In addition, the Leverage ratio
also improved to 4.7%. The Tier 1, Total capital ratios and the Leverage ratio also benefited from the US$1.25 billion issuance of subordinated NVCC
additional Tier 1 capital during the fourth quarter.
The Bank’s capital ratios continue to be well in excess of OSFI’s minimum capital ratio requirements for 2017 (including the 1% D-SIB surcharge) of
8%, 9.5% and 11.5% for CET1, Tier 1 and Total Capital, respectively. The Bank was well above the OSFI prescribed minimum Leverage ratio as at
October 31, 2017.
Outlook
The Bank will continue to have a strong capital position in 2018. Capital will be prudently managed to support organic growth initiatives, selective
acquisitions that enhance shareholder returns, and meet higher capital requirements from evolving accounting and regulatory changes.
44 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
T23 Regulatory capital(1)
As at October 31 ($ 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)
Subordinated additional Tier 1 capital securities (NVCC)
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
Basel I capital floor adjustment(6)
CET1 risk-weighted assets(6)(7)
Capital ratios(8)
Common Equity Tier 1
Tier 1
Total
Leverage:
Leverage exposures
Leverage ratio
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Basel III All-in
2017
2016
2015
$
$
55,454
636
(11,505)
52,657
597
(11,589)
$
49,085
557
(11,018)
(271)
(417)
(545)
(435)
(484)
(757)
(664)
(539)
(456)
43,352
39,989
36,965
3,019
1,560
1,400
142
3,594
–
1,400
83
2,934
–
1,400
67
49,473
45,066
41,366
5,935
602
103
–
6,640
7,633
528
103
–
8,264
6,182
486
196
–
6,864
56,113
53,330
48,230
315.2
7.8
40.6
12.8
314.8
10.6
38.6
–
308.0
14.4
35.6
–
$
376.4
$
364.0
$
358.0
11.5%
13.1%
14.9%
11.0%
12.4%
14.6%
10.3%
11.5%
13.4%
$1,052,891
$ 1,010,987
$ 980,212
4.7%
4.5%
4.2%
(1) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis.
(2) Reported amounts are based on OSFI’s requirements that goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes.
(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) Since the introduction of Basel II in 2008, OSFI has prescribed a minimum capital floor for institutions that use the advanced internal ratings-based approach for credit risk. The Basel I capital floor add-on is determined by
comparing a capital requirement calculated by reference to Basel I against the Basel III calculation, as specified by OSFI. A shortfall in the Basel III capital requirement as compared with the Basel I floor is added to RWA. As at
October 31, 2017, CET1 RWA included a Basel I floor adjustment of $12.8 billion (2016 and 2015 - nil).
(7) As at October 31, 2017, CVA risk-weighted assets were calculated using scalars of 0.72, 0.77, and 0.81 to compute CET1, Tier 1 and Total capital ratios, respectively, (scalars of 0.64, 0.71, and 0.77 in 2016).
(8) OSFI designated the Bank as a domestic systemically important bank (D-SIB), increasing its minimum capital ratio requirements by 1% for the identified D-SIBs. This 1% surcharge was applicable to all minimum capital ratio
requirements for CET1, Tier 1 and Total Capital, by January 1, 2016, in line with the requirements for global systemically important banks.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 45
MANAGEMENT’S DISCUSSION AND ANALYSIS
T24 Changes in regulatory capital(1)
For the fiscal years ($ 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
(1) Regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis.
(2) Reported amounts are based on OSFI’s requirements that goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes.
Basel III All-in
2017
2016
2015
$ 53,330
$ 48,230
$ 43,592
7,876
(3,668)
313
(1,009)
185
(634)
39
84
177
67
129
35
(54)
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)
$
3,363
$
3,024
$
3,223
1,560
(575)
59
1,350
(690)
16
$
1,044
$
676
$
–
(1,500)
74
(198)
2,502
(1,035)
42
(109)
–
–
70
70
1,250
–
17
78
$ (1,624)
$
2,783
$
$
1,400
5,100
$
$
1,345
4,638
$ 56,113
$ 53,330
$ 48,230
46 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
C21 CET1 capital
%, as at October 31
14
12
10
8
6
4
2
15
16
17
C22 Dividend growth
dollars per share
4
3
2
1
07
09
11
13
15
17
C23 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
15
16
17
M
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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,
qualifying other equity instruments (as described in Note 23), and 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 CET1 capital was $43.4 billion as at October 31, 2017, an increase of $3.4 billion
from the prior year primarily from:
(cid:129) $4.2 billion growth from internal capital generation; and,
(cid:129) $0.5 billion from decreases in regulatory capital deductions and other regulatory capital
adjustments.
Partly offset by:
(cid:129) $0.7 billion from common share buybacks net of common shares issuances under the Bank’s
employee share purchase and stock option plans; and,
(cid:129) $0.6 billion decrease from movements in Accumulated Other Comprehensive Income,
excluding cash flow hedges, primarily from the impact of foreign currency translation, partly
offset by gains from employee pensions and benefits plans.
The Bank’s Tier 1 and Total capital ratios also benefited from the above changes and the issuance
of US$1.25 billion of NVCC subordinated additional Tier 1 capital securities, partly offset by the
planned redemptions of non-NVCC preferred shares of $0.6 billion. In addition, Total capital was
lower due to the $1.5 billion planned 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 2017.
The annual dividend in 2017 was $3.05, compared to $2.88 in 2016, an increase of 6%. The
dividend payout ratio was 46.6% in line with the Bank’s Board approved target dividend payout
ratio of 40-50%.
T25 Selected capital management activity
For the fiscal years ($ millions)
2017
2016
2015
Dividends
Common
Preferred
Common shares issued(1)(2)
Common shares repurchased for cancellation under the Normal
Course Issuer Bid(2)
Preferred shares and other equity instruments issued
Preferred shares and other equity instruments redeemed
Subordinated debentures issued
Maturity, redemption and repurchase of subordinated debentures
$ 3,668
129
313
$ 3,468
130
391
$ 3,289
117
104
1,009
1,560
575
–
1,500
80
1,350
690
2,502
1,035
955
–
–
1,250
20
(1) Represents primarily cash received for stock options exercised during the year, common shares issued pursuant to the Dividend and Share Purchase
Plan.
(2) Represents reduction to Common shares and Retained earnings (refer to the Consolidated Statement of Changes in Equity).
Normal Course Issuer Bid
During the year ended October 31, 2017, under normal course issuer bids, the Bank repurchased and cancelled approximately 14 million common
shares (2016 – 1.5 million) at an average price of $72.09 per share (2016 – $52.34) for a total amount of approximately $1,009 million (2016 –
$80 million).
On May 30, 2017, the Bank announced that OSFI and the Toronto Stock Exchange (TSX) approved a normal course issuer bid (the “2017 NCIB”)
pursuant to which it may repurchase for cancellation up to 24 million of the Bank’s common shares. Purchases under the 2017 NCIB will terminate
upon the earlier of: (i) the Bank purchasing the maximum number of common shares under the NCIB, (ii) the Bank providing a notice of termination,
or (iii) June 1, 2018. On a quarterly basis, the Bank will notify OSFI prior to making purchases. Under this bid, the Bank has repurchased and cancelled
4 million common shares at an average price of approximately $74.83 per share.
On May 31, 2016, the Bank announced that OSFI and the TSX approved a normal course issuer bid (the “2016 NCIB”) pursuant to which it may
repurchase for cancellation up to 12 million of the Bank’s common shares. The 2016 NCIB terminated on June 1, 2017. On January 4, 2017 and
March 17, 2017 the TSX approved amendments to the 2016 NCIB, including to allow the Bank to purchase common shares by private agreement or
under a specific share repurchase program, respectively. Under the 2016 NCIB, the Bank repurchased and cancelled 10 million common shares at an
average price of approximately $71.00 per share.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 47
MANAGEMENT’S DISCUSSION AND ANALYSIS
Share data and other capital instruments
The Bank’s common and preferred share data, as well as other capital instruments, are shown in T26. Further details, including exchangeability
features, are discussed in Note 20 and Note 23 of the Consolidated Financial Statements.
T26 Shares and other instruments
As at October 31, 2017
Common shares(2)
Preferred shares
Preferred shares Series 16(3)
Preferred shares Series 17(3)
Preferred shares Series 18(4)(5)(6)
Preferred shares Series 19(4)(5)(7)
Preferred shares Series 20(4)(5)(8)
Preferred shares Series 21(4)(5)(9)
Preferred shares Series 22(4)(5)(10)
Preferred shares Series 23(4)(5)(11)
Preferred shares Series 30(4)(5)(12)
Preferred shares Series 31(4)(5)(13)
Preferred shares Series 32(4)(5)(14)
Preferred shares Series 33(4)(5)(15)
Preferred shares Series 34(4)(5)(16)(17)
Preferred shares Series 36(4)(5)(16)(18)
Preferred shares Series 38(4)(5)(16)(19)
Additional Tier 1 securities
Amount
($ millions)
Dividends
declared
per share(1)
Number
outstanding
(000s)
Conversion
features
$
15,644
$
3.05
1,199,232
n/a
–
–
187
158
201
149
234
66
154
111
279
130
350
500
500
–
–
0.837500
0.642626
0.902500
0.554501
0.957500
0.600126
0.455000
0.380126
0.515752
0.465159
1.375000
1.375000
1.351175
–
–
7,498
6,302
8,039
5,961
9,377
2,623
6,143
4,457
11,161
5,184
14,000
20,000
20,000
Amount
($ millions)
Distribution(20)
Yield (%)
–
–
Series 19
Series 18
Series 21
Series 20
Series 23
Series 22
Series 31
Series 30
Series 33
Series 32
Series 35
Series 37
Series 39
Number
outstanding
(000s)
750
650
1,250
Interest
Rate (%)
2.58
3.37
4.50
Number
outstanding
(000s)
15,555
Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust(21a,c,d)
Scotiabank Tier 1 Securities – Series 2009-1 issued by Scotiabank Tier 1 Trust(21b,c,d)
Subordinated additional Tier 1 capital securities (NVCC)(22)
$
US$
750
650
1,250
US$
28.25
39.01
23.25
NVCC subordinated debentures
Subordinated debentures due March 2027
Subordinated debentures due December 2025
Subordinated debentures due December 2025
Options
Outstanding options granted under the Stock Option Plans to purchase common shares(2)(23)
5.650
7.802
4.650
Amount
($ millions)
$
US$
1,250
750
1,250
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
Dividends declared as at August 29, 2017.
Dividends on common shares are paid quarterly, if and when declared. As at November 17, 2017, the number of outstanding common shares and options was 1,199,380 thousand and 15,345 thousand, respectively.
On January 27, 2017 and on April 26, 2017, the Bank redeemed all outstanding Non-cumulative Preferred shares Series 16 and Series 17 and paid dividends of $0.328125 and $0.350000 per share respectively.
These preferred shares are entitled to non-cumulative preferential cash dividends payable quarterly. Refer to Note 23 of the Consolidated Financial Statements in the Bank’s 2017 Annual Report for further details.
These preferred shares have conversion features. Refer to Note 23 of the Consolidated Financial Statements in the Bank’s 2017 Annual Report 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 in the
Bank’s 2017 Annual Report for further details.
Subsequent to the initial five-year fixed rate period ending on April 25, 2021, 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 4.51%, multiplied by $25.00.
Subsequent to the initial five-year fixed rate period ending on July 25, 2021, 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 4.72%, multiplied by $25.00.
Subsequent to the initial five-year fixed rate period ending on January 26, 2022, 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 4.19%, multiplied by $25.00.
Per face amount of $1,000 or US$1,000, as applicable.
(20)
(21)(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 in the Bank’s 2017 Annual
Report]. Under the circumstances outlined in 21(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.
(21)(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 21(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 III Series 2009-1 into Preferred
Shares Series R of the Bank, then the Bank would become the sole beneficiary of the Trust.
48 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
(21)(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.
(21)(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].
(22) On October 12, 2017, the Bank issued US$1.25 billion 4.650% fixed to floating rate non-cumulative subordinated additional Tier 1 capital securities (NVCC). Refer to Note 23(b) – Preferred shares and other equity instruments.
(23)
Included are 5,900 stock options with tandem stock appreciation rights (Tandem SAR) features.
Credit ratings
Credit ratings are one of the factors that impact 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.
On May 10, 2017, Moody’s downgraded the long-term ratings of all Canadian banks, citing concerns around expanding levels of private sector debt,
which could increase the likelihood of weaker asset quality in the future. Moody’s downgraded the Bank’s long-term ratings by one notch to A1 from
Aa3, while affirming the Bank’s short-term deposit rating of P-1.
The Bank continues to have strong credit ratings and is rated AA by DBRS, A1 by Moody’s, AA- by Fitch and A+ by Standard and Poor’s (S&P). 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. (Refer to Shareholder Information section for ratings of other securities).
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. CET1, Tier 1 and Total Capital RWA were $376.4 billion at year end, representing
increases from 2016 of approximately $12.3 billion, $11.9 billion and $11.5 billion, respectively.
Since the introduction of Basel II in 2008, OSFI has prescribed a minimum capital floor for institutions that use the advanced internal ratings-based
approach for credit risk. The Basel I capital floor add-on is determined by comparing a capital requirement calculated by reference to Basel I against
the Basel III calculation, as specified by OSFI. A shortfall in the Basel III capital requirement as compared with the Basel I floor is added to RWA.
Increases to CET1, Tier 1 and Total Capital RWA during the year are due to Basel I floor adjustments of $12.8 billion, $12.6 billion and $12.4 billion,
respectively, and higher operational risk RWA of $1.9 billion, and credit risk RWA of approximately $0.3 billion (including the impact of foreign
currency translation of -$6.9 billion), partly offset by lower market risk RWA of $2.7 billion.
CET1 Credit risk-weighted assets
As shown in Table T27, CET1 credit risk-weighted assets increased by approximately $0.3 billion to $315.2 billion primarily due to the following
components:
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
(cid:129) Higher volumes increased RWA by $14.2 billion;
(cid:129) Book quality changes, including parameter recalibrations, reduced RWA by $5.8 billion;
(cid:129) Model updates decreased RWA by $2.2 billion;
(cid:129) Implementation of methodology and policy changes during the year increased RWA by $1.1 billion; and,
(cid:129) The impact of foreign exchange translation decreased RWA by $6.9 billion.
T27 Flow statement for Basel III All-in credit risk-weighted assets ($ 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)
2017
2016
Credit risk
$ 314,822
14,219
(5,812)
(2,248)
1,062
–
(6,884)
–
$ 315,159
208
315,367
166
$ 315,533
Of which
counterparty
credit risk
$ 16,432
797
(1,209)
219
521
–
(266)
–
$ 16,494
208
16,702
166
$ 16,868
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
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, 2017, risk-weighted assets were calculated using scalars of 0.72, 0.77, and 0.81 to compute CET1, Tier 1, and Total capital ratios, respectively, (scalars were 0.64, 0.71, and 0.77 in 2016).
2 0 1 7 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
T28 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% – 0.0448%
0.0448% – 0.1304%
0.0552% – 0.1402%
0.0876% – 0.2187%
0.1251% – 0.3176%
0.1788% – 0.4610%
0.2886% – 0.5134%
0.4658% – 0.5716%
0.5716% – 0.7518%
0.7518% – 1.4444%
1.4444% – 2.7749%
2.7749% – 10.1814%
10.1814% – 19.4452%
19.4452% – 35.4088%
35.4088% – 59.5053%
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.
T29 Non-retail AIRB portfolio exposure by internal rating grade(1)(2)
As at October 31 ($ millions)
2017
2016
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
Government guaranteed
residential mortgages
Total
RWA
($)
930
5,816
9,190
10,229
13,229
17,796
18,701
13,167
13,703
5,608
3,666
2,136
1,454
2,647
220
6,298
79,908
46,871
56,472
44,533
40,379
41,488
36,235
23,045
20,085
7,271
3,758
2,167
761
1,311
159
1,752
406,195
124,790
91,737
–
497,932
124,790
0.01
0.05
0.07
0.11
0.16
0.25
0.35
0.50
0.75
1.44
2.77
10.18
19.45
30.74
58.44
100
0.86
–
0.70
11
33
35
38
43
44
44
42
43
35
37
25
38
38
36
44
34
35
34
1
12
16
23
33
43
52
57
68
77
98
99
191
202
138
359
31
–
25
RWA
($)
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
PD
(%)(5)(8)
LGD
(%)(6)(8)
RW
(%)(7)(8)
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
(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 $91.7 billion ($100.9 billion in 2016).
(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.
50 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
(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 Table T29.
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, 2017,
are shown in Table T30.
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
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S
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F
I
N
A
N
C
I
A
L
C
O
N
D
I
T
I
O
N
T30 Portfolio-level comparison of estimated and actual non-retail percentages
Average PD
Average LGD
Average CCF(2)
Estimated(1)
Actual
0.92
41.59
51.28
0.40
22.18
5.69
(1) Estimated parameters are based on portfolio averages at Q3/16, 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 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.
2 0 1 7 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
The table below summarizes the credit quality distribution of the Bank’s AIRB retail portfolio as at October 31, 2017.
T31 Retail AIRB portfolio exposure by PD range(1)(2)
As at October 31 ($ millions)
2017
2016
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
($)(2)
16,026
80,507
94,081
17,070
8,583
889
1,453
607
RWA
($)
476
4,059
19,638
9,919
8,827
1,086
2,566
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
Exposure
at default
($)(2)
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
0.05
0.09
0.52
1.91
5.56
17.18
36.86
66
28
35
57
75
43
62
79
38
3
5
21
58
103
122
177
–
21
44,356
59,509
52,261
20,851
6,265
1,997
2,312
677
RWA
($)
964
4,417
12,483
10,961
6,028
2,926
3,682
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
–
100.00
–
100.00
219,216
46,571
1.21
188,228
41,461
1.48
(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.
LGD – Loss Given Default.
(4)
(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, 2017 is shown in Table T32. During this period the actual experience was significantly better than the estimated risk
parameters.
T32 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)
0.69
0.46
0.77
2.14
2.21
0.59
0.44
0.32
1.92
1.32
–
18.12
28.95
77.54
58.90
–
10.82
13.95
63.91
47.12
–
–
107
743
8
–
–
92
650
8
(1) Estimates and actual values are recalculated 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.
52 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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Below are the market risk requirements as at October 31, 2017 and 2016:
T33 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 $7,839 million of market risk-weighted assets (2016 – $10,571 million).
T34 Risk-weighted assets movement by key drivers
($ 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
2017
$ 110
300
174
–
43
$ 627
2016
$ 105
209
407
77
48
$ 846
Market risk
2017
2016
$10,571
(2,774)
42
–
$ 7,839
$14,350
(5,018)
1,239
–
$10,571
(1) Movement in risk levels are defined as changes in risk due to position changes and market movements. Foreign exchange movements are imbedded within Movement in risk levels.
(2) Model updates are defined as updates to the model to reflect recent experience, change in model scope.
(3) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes (eg. Basel III).
Market risk-weighted assets decreased by $2.7 billion to $7.8 billion as shown in Table T34 due primarily to a reduction in incremental risk charge
from a reduced exposure in Latin America.
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 applies a combination of the Standardized Approach and the Advanced Measurement
Approach for calculating operational risk capital as per the applicable Basel Standards.
Under the Standardized Approach (TSA), 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.
In addition, the Bank received approval from OSFI to use the Advanced Measurement Approach (AMA) commencing the first quarter of 2017. Under
AMA, regulatory capital measurement more directly reflects the Bank’s operational risk environment through the use of a loss distribution approach
model which uses internal loss events, external loss events, scenario analysis and other adjustments to arrive at a final operational risk regulatory
capital calculation. Since the Bank’s AMA requirements are floored at TSA requirements, there was no impact from adoption of AMA in 2017.
Operational risk-weighted assets increased by $1.9 billion during the year to $40.6 billion primarily due to organic growth in gross income.
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 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.
2 0 1 7 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
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 55).
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, 2017, total assets of consolidated structured entities were $53 billion, compared to $59 billion at the end of 2016. The change was
primarily due to decreased assets in Scotiabank Covered Bond Guarantor Limited Partnership and assets that matured in other structured entities.
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 $30 million in 2017 (October 31, 2016 – $23 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 $29 million in 2017, compared to $22 million in 2016.
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 billion as at
October 31, 2017 (October 31, 2016 – $5.8 billion). The year-over-year decrease was due to normal business operations. As at October 31, 2017,
total commercial paper outstanding for the Canadian-based conduits was $3.1 billion (October 31, 2016 – $4.4 billion) and the Bank held less than
0.01% of the total commercial paper issued by these conduits. Table T35 presents a summary of assets purchased and held by the Bank’s two
Canadian multi-seller conduits as at October 31, 2017 and 2016, 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, 2017. Approximately 83% of the funded assets have final maturities falling within three years, and the
weighted-average repayment period, based on cash flows, approximates 1.4 years.
T35 Assets held by Scotiabank-sponsored Canadian-based multi-seller conduits
2017
2016
Funded
assets(1)
Unfunded
commitments
Total
exposure(2)
Funded
assets(1)
Unfunded
commitments
Total
exposure(2)
$ 2,447
161
519
–
$ 3,127
$
464
649
756
–
$ 2,911
810
1,275
–
$ 3,168
131
1,081
21
$
601
618
194
–
$ 3,769
749
1,275
21
$ 1,869
$ 4,996
$ 4,401
$ 1,413
$ 5,814
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.
54 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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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 $1,827 million as at October 31, 2017, (October 31, 2016 –
$2,326 million). The change was primarily due to structures that matured during the year.
Other unconsolidated structured entities
The Bank sponsors unconsolidated structured entities including mutual funds, 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. For the year ended October 31, 2017,
the Bank earned $2,021 million income from its involvement with the unconsolidated Bank-sponsored structured entities, a majority of which is from
Bank-sponsored mutual funds (for the year ended October 31, 2016 – $1,968 million).
Securitizations
The Bank securitizes fully insured residential mortgage loans, Bank originated and others, through the creation of mortgage backed securities 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 $1,264 million as at October 31,
2017, compared to $1,237 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.
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 (2016 – nil) or Trillium (2016 – $1,242 million). As at October 31, 2017, the
outstanding subordinated notes issued by Hollis of $205 million (2016 – $297 million) and Trillium of $99 million (2016 – $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, 2017-1 and
2017-2 (START) Bank-sponsored structured entities. The START entities issue 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 discrete pools of retail indirect auto loan receivables from the Bank on a
fully serviced basis. The sale of such pools 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, assets of $2,176 million were
securitized through the START program (2016 – $740 million). As at October 31, 2017, the outstanding subordinated notes issued by the START
entities of $178 million (2016 – $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, 2017, these amounted to $36 billion, compared to $35 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, 2017, these commitments amounted to
$186 billion, compared to $174 billion last year. The year-over-year increase is primarily due to an increase in 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 $571 million in 2017, compared to $574 million in the prior year. Detailed information on guarantees and loan commitments is
disclosed in Note 34 to the consolidated financial statements.
2 0 1 7 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
Financial Instruments
Given the nature of the Bank’s main business activities, financial instruments make up a substantial portion of the Bank’s financial position and are
integral to the Bank’s business. Assets that are financial instruments include cash resources, securities, securities purchased under resale agreements,
loans and customers’ liability under acceptances. Financial instrument liabilities include deposits, acceptances, obligations related to securities sold
under repurchase agreements, obligations related to securities sold short, subordinated debentures and capital instrument liabilities. In addition, the
Bank uses derivative financial instruments for both trading and hedging purposes.
Financial instruments are generally carried at fair value, except for non-trading loans and receivables, certain securities and most financial liabilities,
which are carried at amortized cost unless designated as fair value through profit and loss at inception.
Unrealized gains and losses on the following items are recorded in other comprehensive income:
(cid:129) available-for-sale securities, net of related hedges,
(cid:129) derivatives designated as cash flow hedges, and
(cid:129) net investment hedges.
Gains and losses on available-for-sale securities are recorded in the Consolidated Statement of Income when realized. Gains and losses on cash flow
hedges and net investment hedges are recorded in the Consolidated Statement of Income when the hedged item affects income.
All changes in the fair value of derivatives, including embedded derivatives that must be separately accounted for, are recorded in the Consolidated
Statement of Income, other than those designated as cash flow and net investment hedges which flow through other comprehensive income. The
Bank’s accounting policies for derivatives and hedging activities are further described in Note 3 to the consolidated financial statements.
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 58 to 94. 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 78. For trading activities, Table T46 discloses the average
one-day Value at Risk by risk factor. For derivatives, based on the Bank’s maturity profile of derivative instruments, only 17% (2016 – 16%) 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 $1,678 million as at October 31, 2017
(October 31, 2016 – favourable $2,148 million). This difference relates mainly to loan assets, deposit liabilities, subordinated debentures and other
liabilities. The year-over-year change in the fair value over carrying value arose mainly from changes in interest rates since origination. Fair value
estimates are based on market conditions as at October 31, 2017, and may not be reflective of future fair values. Further information on how fair
values are estimated is contained in the section on critical accounting estimates.
Disclosures specific to certain financial instruments designated at fair value through profit and loss can be found in Note 8 to the consolidated
financial statements. These designations were made primarily to significantly reduce accounting mismatches.
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Selected Credit Instruments – Publically Known Risk Items
Mortgage-backed securities
Total mortgage-backed securities held in the Non-trading and Trading portfolios are shown in Table T36.
T36 Mortgage-backed securities
As at October 31
Carrying value ($ millions)
Canadian NHA mortgage-backed securities(1)
Commercial mortgage-backed securities
Other residential mortgage-backed securities
Total
2017
2016
Non-trading
portfolio
Trading
portfolio
Non-trading
portfolio
$ 1,810
–
461
$ 2,271
$ 1,709
1
–
$ 1,710
Trading
portfolio
$ 1,546
57
–
$ 1,591
–
521
$ 2,112
$ 1,603
(1) Canada Mortgage and Housing Corporation provides a guarantee of timely payment to NHA mortgage-backed security investors.
Collateralized debt obligations
Trading portfolio
The Bank held synthetic collateralized debt obligations (CDOs) in its trading portfolio as a result of structuring and managing transactions with clients
and other financial institutions. The remaining CDOs had matured during the fiscal year. As shown in Table T37 below, the Bank does not have any
CDO in its trading portfolios as at October 31, 2017.
T37 Collateralized debt obligations (CDOs)
As at October 31
Outstanding ($ millions)
CDOs – sold protection
CDOs – purchased protection
Other
2017
2016
Notional
Amount
$ –
$ –
Positive/
(negative)
fair value
$ –
$ –
Notional
Amount
$ 142
–
$
Positive/
(negative)
fair value
$ 4
$ –
As at October 31, 2017, 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Effective risk management is fundamental to the success of the Bank,
and is recognized as key in the Bank’s overall approach to strategy
management. Scotiabank has a strong, disciplined risk culture where
managing risk 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 articulates the foundation for
achieving these goals.
Risk
Governance
Risk Appetite
Risk Capacity
Risk Appetite Statement
Risk Appetite Metrics
Roles and Responsibilities
Risk Management Tools
Policies & Limits, Risk Measurement,
Monitoring & Reporting, Forward-Looking Exercises
Risks Identification and Assessment
Principal Risk Type:
Financial
Non-Financial
Credit, Market, Liquidity, Insurance,
Operational, IT & Cybersecurity, Compliance, ML/TF,
Environmental, Reputational, Strategic
Strong Risk Culture
The Bank’s risk management framework is applied on an enterprise-
wide basis and consists of five key elements:
(cid:129) Risk Governance
(cid:129) Risk Appetite
(cid:129) Risk Management Tools
(cid:129) Risk Identification and Assessment
(cid:129) Risk Culture
Risk Management Principles
Risk-taking and risk management activities across the enterprise are guided by the following principles:
Risk and Reward – business and risk decisions are consistent with strategies and risk appetite.
Understand the Risks – all material risks to which the Bank is exposed, including both financial and non-financial, are identified and managed.
Forward Thinking – emerging risks and potential vulnerabilities are proactively identified.
Shared Accountability – every employee is responsible for managing risk.
Customer Focus – understanding our customers and their needs is essential to all business and risk decision-making.
Protect our Brand – all risk taking activities must be in line with the Bank’s risk appetite, Code of Conduct, values and policy principles.
Compensation – performance and compensation structures reinforce the Bank’s values and promote sound risk taking behaviour.
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,
(cid:129) the First Line of Defence (typically comprised of the business lines and most corporate functions) incurs and owns the risks,
(cid:129) the Second Line of Defence (typically comprised of control functions such as Global Risk Management, Global Compliance, Global AML/ATF and
Global Finance) provides independent oversight and objective challenge to the First Line of Defence, as well as monitoring and control of risk, and
(cid:129) the Third Line of Defence (Internal Audit) 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.
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In this risk governance structure, employees in every area of the organization are responsible for risk management.
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 Enterprise Risk Appetite Framework.
The Risk Committee of the Board: assists the Board by providing oversight to the risk management, compliance and anti-money laundering/anti-
terrorist finance functions 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 Enterprise Risk Appetite Framework. The Committee also oversees the
independence of each of these functions, including the effectiveness of the heads of these functions, as well as the functions themselves.
Audit 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 external auditor’s
qualifications, independence and performance, and oversees the Global Finance and Audit 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. The Committee is responsible for the
Board succession plan, and for reviewing the Bank’s corporate social responsibility strategy and reporting.
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): reports to the CEO and is responsible for the overall management of Global Risk Management, Global Compliance and
Global AML/ATF. The CRO and the heads of Global Compliance and Global AML/ATF also have unfettered access to the Risk Committee of the Board
to ensure their independence. 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 sources of capital to meet the performance targets of the business lines and the Bank’s Balanced
Scorecard.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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 reliable and timely 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 and reports on ethical conduct and compliance generally throughout Scotiabank. Global
Compliance provides independent oversight and effective challenge of compliance risk management in the Bank’s business lines and corporate
functions and acts as a consultant and educator on regulatory and internal policies and procedures. It is responsible for conducting ongoing risk-
based, enterprise-wide risk assessment, monitoring and testing and other activities to gain reasonable assurance as to the effectiveness of compliance
controls.
Global AML/ATF: on an enterprise-wide basis, develops standards to be followed in effectively controlling money laundering, terrorist financing, and
sanctions risks. Global AML/ATF is responsible for maintaining the program current with the Bank’s needs, industry practice, and AML/ATF and
sanctions legal and regulatory requirements, as well as providing risk-based independent oversight of the Bank’s compliance with these requirements
and standards.
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, regulators, as well as
other stakeholders. This reporting includes the Bank’s consolidated financial statements and related quarterly and annual results, as well as financial
regulatory filings. 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 Committee of the Board 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.
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.
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 Enterprise Risk Appetite Framework (Enterprise RAF)
articulates the amount and types of risk the Bank is willing to take in
order to meet its strategic objectives. The Enterprise RAF consists of the
identification of the risk capacity, the risk appetite statement, the risk
appetite metrics and roles and responsibilities. Together, the
application of these components helps to ensure the Bank stays within
appropriate risk boundaries, finds an optimal balance between risk and
return, and assists in nurturing a healthy risk culture.
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, control
functions and select business units develop their own risk appetite
frameworks and/or statements, which are aligned with the Bank’s
Enterprise RAF.
Risk Appetite Statement
The Bank’s Risk Appetite Statement can be summarized as follows:
Risk
Appetite
Statement
Risk
Appetite
Metrics
Risk
Capacity
Risk
Appetite
Framework
Roles and
Responsibilities
1. The Bank favours businesses that generate sustainable, consistent and predictable earnings.
2. The Bank expects to take certain risks in order to generate earnings, but sets limits to ensure risk taking activities are in line with the Bank’s strategic
objectives, risk culture, and risk appetite.
3. 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 risk and balance risk with reward.
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4. Capital considerations are part of all material risk decisions.
5. The Bank has low appetite for reputational, legal, regulatory or taxation risk, and no appetite for breaches of the Code of Conduct.
6. All employees of the Bank are responsible for understanding the limits and any other boundaries that apply to their activities.
Risk Appetite Metrics
Risk appetite metrics provide clear risk limits, which are critical in implementing effective risk management. For major risks the key risk appetite metrics
are supported by management level limit structures and controls, as applicable.
Other components of Scotiabank’s risk appetite metrics:
(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 established operating parameters
Risk Management Tools
Effective risk management includes tools that are guided by the Bank’s Enterprise 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 enterprise-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
Policies
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 and 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. Key risk policies are supported by manuals, procedures and guidelines.
Limits
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.
Risk Measurement
Models
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 are 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 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,
(cid:129) calculating internal economic and regulatory capital, and
(cid:129) calculating expected credit risk loss.
Monitoring and Reporting
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 Board of Directors.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Forward-Looking Exercises
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 macroeconomic conditions, credit environment, liquidity demands, and/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 and
Credit Loss Models Committee or other management committees as appropriate. 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 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 stress scenarios with varied severities, scopes and time horizons.
Other Testing
Other tests are conducted as may be required at the enterprise-wide level and within specific functional areas to test the decision making processes of
the Executive Management team and key personnel, by simulating a potential stress scenario. Simulated stress scenarios may include a number of
complexities and disruptions through which Executive Management are engaged to make certain key decisions. Generally, the objectives of the
simulations can include testing (1) the executability of activation protocols, (2) operational readiness, (3) the flexibility of the executive decision making
process, and (4) the process by which actions to be taken are prioritized. The exercises may also be designed to test the applicability and relevance of
available data and the timeliness of reporting for decision making under stressed/crisis conditions.
Risk Identification and Assessment
Effective risk management requires a comprehensive process to identify risks and assess their materiality.
Principal Risk Types
The Bank’s principal risk types are reviewed regularly to ensure they adequately reflect the Bank’s risk profile. The principal risks can be categorized
into two main categories:
Financial Risks:
Credit, Market, Liquidity, Insurance
These are risks that the Bank understands well and takes on in order to generate sustainable and predictable earnings. Financial risks are generally
quantifiable using widely accepted methodologies and are relatively predictable. The Bank has higher risk appetite for financial risks which are
considered to be a fundamental part of doing business; but only when they are well understood, within established limits, and meet the desired risk
and return profile.
Non-Financial Risks:
Operational, IT & Cybersecurity, Compliance, ML& TF, Environmental, Reputational, Strategic
These are risks that are inherent in our business and must be managed to reduce potential losses. In comparison to financial risks, non-financial risks
are less predictable and more difficult to define and measure. If not managed properly, these risks can lead to significant financial losses. The Bank has
low risk appetite for non-financial risks and reduces these risks through internal controls and procedures, and continued investments to enhance these
internal controls and procedures.
Assessment of Risks
On a regular basis, the Bank undergoes a Bank-wide risk assessment that measures the materiality of all risks to the Bank. This process evaluates each
risk and determines the pervasiveness of the risk across multiple business lines, the significance of the risk to a specific business line, the likelihood and
potential impact of the risk and whether the risk may cause unexpected losses in income. The process also reviews other evolving and emerging risks
and includes qualitative considerations. The identified risks are ascribed a rating of how probable and impactful they may be and used as an important
input in the Internal Capital Adequacy Assessment Process (ICAAP) and the determination of Internal Capital.
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, selected top and emerging risks are
presented to Senior Management and the Board of Directors.
Other Considerations
Risk identification and assessment is performed on an ongoing basis through the following:
(cid:129) Transactions – risks, including credit and market exposures, are assessed by the business lines and reviewed by GRM, as applicable.
(cid:129) Monitoring – risks are identified by constantly monitoring and reporting current trends and analysis.
(cid:129) New Products and Services – new products and services are assessed for potential risks through a standardized process.
(cid:129) Strategic Investments – investment transactions are thoroughly reviewed for risks and are approved by the Strategic Transactions and Investment
Committee (STIC) who provides advice & counsel and decisions on effective allocation and prioritization of resources.
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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 culture is influenced by numerous factors including the interdependent
relationship amongst the Bank’s risk governance structure, risk appetite, strategy,
organizational culture, and risk management tools.
The Bank’s risk culture is supported through the following foundational elements:
1. Tone from the Top – Clear and consistent communication from leaders on risk behavior
expectations and the importance of Scotiabank’s values.
2. Accountability – All Scotiabankers are accountable for risk management in accordance
Risk
Management
Tools
with the Three Lines of Defence model.
Risk
Governance
Risk
Culture
Risk Appetite
3. Incentives – Performance and compensation structures encourage desired behaviors and
reinforce the Bank’s risk culture.
4. Effective Challenge – Scotiabankers are encouraged to have a critical attitude –
transparency and open dialogue is promoted.
Other elements that influence and support the Bank’s risk culture:
(cid:129) Code of Conduct: describes the standard of behaviour to which all employees 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.
Organizational
Culture
Strategy
(cid:129) Communication: the Bank actively communicates risk appetite, and how it relates to Scotiabankers, to promote a sound risk culture.
o Reputation is everything,
o Information is key,
o Success depends on you,
o Know your boundaries.
(cid:129) Compensation: programs are structured to discourage behaviours that are not aligned with the Bank’s values and Code of Conduct, and ensure
that such behaviors are not rewarded.
(cid:129) Training: risk culture is continually reinforced by providing effective and informative mandatory and non-mandatory training modules for all
employees on a variety of risk management topics.
(cid:129) Decision-making on risk issues is highly centralized: the flow of information and transactions to senior and executive committees keeps
management well informed of the risks the Bank faces, and ensures that transactions and risks are aligned with the Bank’s risk appetite.
(cid:129) Executive Mandates: all Executives across the Bank have risk management responsibilities within their mandates.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Principal Risk Types
Risk Type
Credit Risk
Market Risk
Liquidity Risk
Key Governing Documentation
Ways that they support Risk Appetite
Credit Risk Policy
Credit Risk Appetite
Residential Mortgage Underwriting
Policy
Quantitative limits, such as: Credit Risk Appetite limits at the all-Bank level and
Business Line level; Exposure to a single counterparty or group of related parties;
Country risk; and Industry concentrations.
Market and Structural Risk
Management Policy
Quantitative limits, such as: Value at Risk (VaR); Stress test results; Debt investment
exposures; and Structural interest rate and foreign exchange exposures.
Liquidity Risk and Collateral
Management Policy
Quantitative limits, such as: Liquidity Coverage Ratio (LCR); Appropriate levels of
high quality liquid assets that can be readily sold or pledged; Limits to control the
maximum net cash outflow over specified short-term horizon; and Diversification
amongst funding source.
Insurance Risk
Insurance Risk Policy
Insurance Risk Management
Framework
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. Quantitative limits, such as Insurance Earnings at Risk metrics are
included in the Bank’s Risk Appetite Statement.
Operational Risk
Information
Technology &
Cybersecurity Risk
Operational Risk Management
Policy and Framework
Internal Control Policy
New Initiative Risk Management
Policy
Third Party Risk Management Policy
IT Risk Management Policy and
Framework
Information Security Policy
Information Security Governance
Framework
Common Security Standards
Operational risk appetite expresses how much residual risk the Bank is willing to
tolerate and is expressed quantitatively by an aggregate loss event limit, a single
event loss limit, and a variety of limits for individual categories of operational
risk.
The Bank has established minimum expectations and requirements for the
systematic identification, measurement, mitigation and monitoring of IT and
Cybersecurity risk, including requirements for the protection of information
throughout its lifecycle.
Compliance Risk
Compliance Policy
Code of Conduct
The Bank has very little appetite for losses due to lack of regulatory compliance.
Compliance risk is expressed by an all-Bank residual compliance risk rating,
which is based on current Compliance Risk & Control Assessment results.
Money
Laundering &
Terrorist Financing
(ML/TF) Risk
AML/ATF and Sanctions Policy
AML/ATF and Sanctions Handbook
The Bank has no appetite for entering into relationships with businesses or
individuals engaged in illegal activities, or with businesses engaged in improper,
quasi-legal, or inappropriate activities.
Reputational Risk
Reputational Risk Policy
Environmental Risk
Environmental Policy
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.
The Bank has policies and procedures in place to ensure that it provides loans to
borrowers that demonstrate an ability and willingness to practice sound
environmental risk management.
Strategic Risk
Annual Strategy Report to the
Board of Directors
Strategy report considers linkages between the Bank’s Enterprise Risk Appetite
Framework with the enterprise strategy, business line strategies and corporate
function strategies.
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Business
Activities
Balance
Sheet
Attributed
Capital(2)
T38 Exposure to risks arising from the activities of the Bank’s businesses
The Bank
Business
Lines
Canadian
Banking
International
Banking
Global Banking
and Markets
Other
(cid:129) Deposits
(cid:129) Accounts services
(cid:129) Credit and lending
(cid:129) Commercial banking
(cid:129) Payments and cash
management
(cid:129) Advisory services
(cid:129) Asset management
(cid:129) Insurance – creditor,
life, home, health,
auto, and travel
(cid:129) Online brokerage
(cid:129) Deposits
(cid:129) Accounts services
(cid:129) Credit and lending
(cid:129) Commercial banking
(cid:129) Payments and cash
management
(cid:129) Advisory services
(cid:129) Asset management
(cid:129) Insurance – creditor,
life, home, health,
auto, and travel
(cid:129) Deposits
(cid:129) 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 $323bn
(cid:129) Average assets $148bn
(cid:129) Average assets $336bn
(cid:129) Average assets(1) $106bn
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(cid:129) Attributed Capital $17.6bn
(cid:129) Proportion of Bank
38%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
47%
0%
9%
44%
Risk-
Weighted
Assets(4)
(cid:129) RWA
$120.3bn
(cid:129) Proportion of Bank 32%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
85%
–%
15%
(cid:129) Attributed Capital $16.0bn
(cid:129) Proportion of Bank
34%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
57%
1%
8%
34%
(cid:129) RWA
$134.0bn
(cid:129) Proportion of Bank 36%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
88%
1%
11%
(cid:129) Attributed Capital $11.2bn
(cid:129) Proportion of Bank
24%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
73%
4%
7%
16%
(cid:129) RWA
(cid:129) Proportion of Bank
$100.2bn
27%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
87%
5%
8%
(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(3)
54%
3%
-2%
45%
(cid:129) RWA
(cid:129) Proportion of Bank
$21.9bn
5%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(5)
37%
7%
–2%
58%
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 a quarterly average basis.
(3)
(4) Risk-weighted assets (RWA) are as at October 31, 2017 as measured for regulatory purposes in accordance with the Basel III all-in approach.
(5)
Includes Attributed Capital for significant investments, goodwill, intangibles and Basel I capital floor adjustments.
Includes Basel I capital floor adjustments.
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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 strategies, financial
performance, and reputation. As part of our risk management approach, we proactively identify, assess, review, monitor and manage a broad range
of top and emerging risks and undertake appropriate risk mitigation strategies. 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, information and cyber security risk
Technology, information and cyber security risks continue to impact financial institutions and other businesses in Canada and around the globe.
Threats are not only increasing in volume but in their sophistication as adversaries use ever evolving technologies and attack methodologies. The
technology environment of the Bank, its customers and the third parties providing services to the Bank, may be subject to attacks, breaches or other
compromises. Incidences like these can result in disruption to operations, misappropriation or unauthorized release of confidential, financial or
personal information, and reputational damage, among other things. The Bank proactively monitors and manages the risks and constantly updates
and refines programs as threats emerge to minimize disruptions and keep systems and information protected. In addition, the Bank has purchased
insurance coverage to help mitigate against certain potential losses associated with cyber incidents.
Technology innovation and disruption
Fast evolving technology innovation continues to impact the financial services industry and its customers. Increasingly, non-traditional new participants
are entering certain segments of the market and challenge the position of traditional financial institutions. New participants may use advanced
technologies and analytical tools to innovate at an accelerating speed which has the potential to impact revenues and costs in certain of the Bank’s
businesses. In response to increased customer demands, needs and expectations, the Bank has embarked on a multi-year digital transformation with
the aspiration to be a digital leader in the financial services industry. To support this strategy the Bank has opened digital factories in Toronto and its
key international markets in Mexico, Peru, Chile and Colombia. These factories contribute to financial innovation through partnerships with smaller
financial technology companies. In addition, the Bank makes material investments in skills training and education through various digital partnerships
with Canadian universities and other organizations.
Canadian consumer indebtedness
Canadian household indebtedness has outpaced growth in disposable income in recent quarters fueled by low interest rates and stable national
employment levels. In such an environment, an upward trend in mortgage credit growth and strong home sales contributed to higher consumer
indebtedness. 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 Ontario, as well as changes on a national basis to tighten origination criteria for
insured mortgages. The Bank actively manages its lending portfolios and stress tests them against various scenarios. For further discussion relating to
our retail portfolio, refer to the Credit Risk Summary section.
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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
Impaired loans
Allowance for credit losses
Acquisition-related purchased loans
Portfolio review
Risk diversification
Risk mitigation
Real estate secured lending
Loans to Canadian condominium developers
European exposures
Financial instruments
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Tables and charts
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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
T60 Gross impaired loans by geographic segment
T61 Provision against impaired loans by geographic segment
T62 Cross-border exposure to select countries
T63 Loans and acceptances by type of borrower
T64 Off-balance sheet credit instruments
T65 Changes in net impaired loans
T66 Provision for credit losses
T67 Provision for credit losses against impaired loans by type of borrower
T68 Impaired loans by type of borrower
T69 Total credit risk exposures by geography
T70 AIRB credit risk exposures by maturity
T71 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
T59 Loans and acceptances by geography
T43 Bank’s exposure distribution by country
Indirect exposures
T36 Mortgage-backed securities
T37 Collateralized debt obligations (CDOs)
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit risk summary
(cid:129) Loans and acceptances (Retail and Non-Retail) remained diversified by region, industry and customer. Regional exposure is spread across our key
markets (Canada 67%, United States 7%, Mexico 5% and Other 21%). Financial Services constitutes 4.6% of overall gross exposures (before
consideration of collateral) and was $24 billion, an increase of $4 billion from October 31, 2016. These exposures are predominately to highly rated
counterparties and are generally collateralized.
(cid:129) The Bank’s overall loan book as of October 31, 2017 increased to $522 billion versus $497 billion as of October 31, 2016, with growth reflected in
Personal, and Business and Government lending. Residential mortgages were $237 billion as of October 31, 2017, with 87% in Canada. The
corporate loan book, which accounts for 35% of the total loan book, is composed of 54% of loans with an investment grade rating as of
October 31, 2017, up from 53% as of October 31, 2016.
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.
GRM 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 GRM 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 GRM are responsible for design
and development, validation and review, and are functionally independent from the business units responsible for originating transactions. Within
GRM, 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) ratings – 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 IG ratings and external agency ratings is shown in T28.
IG ratings 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
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levels, credit units will refer the request – with its recommendation – to a senior credit committee for adjudication. In certain cases, these must be
referred to the Risk Committee of the Board of Directors.
Adjudication
Credit adjudication units within GRM 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 GRM for any signs of deterioration. In addition, the business
line units and GRM conduct a review and risk analysis of each borrower 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 for traditional non-retail products. 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, 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, or 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:
i.
ii.
comparable sales approach
replacement cost approach
iii. income approach
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MANAGEMENT’S DISCUSSION AND ANALYSIS
The appraiser must 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 must
contain a presentation and explanation of the assumptions used in determining value under each of the above mentioned approaches.
Review of every appraisal is conducted by the banking units and GRM 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 or both parties 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 92% of the credit risk. Approximately 29% 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, 2017. No individual exposure to an investment grade bilateral counterparty exceeded $1,230 million and no individual
exposure to a corporate counterparty exceeded $752 million.
Retail
Retail credit exposures arise in the Canadian Banking and International Banking business lines.
Adjudication
The decision-making process for retail loans ensures that credit risks are adequately assessed, properly approved, continually monitored and actively
managed. Generally, credit decisions on consumer loans are processed by proprietary adjudication software and are based on risk ratings, which are
generated using predictive credit scoring models.
The Bank’s credit adjudication and portfolio management methodologies are designed to ensure consistent underwriting and early identification of
problem loans. The Bank’s rigorous credit underwriting and retail risk modeling methodologies are 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 GRM 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 risk rating system under the AIRB approach is subject to regular review and 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 in design and performance review.
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 material portfolios, residential property values are
re-confirmed using third party AVM’s.
70 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
M
A
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A
G
E
M
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C
U
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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.
Credit quality
T39 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
Allowance for credit losses against performing loans
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
2017
Gross
impaired
loans
Allowance
for credit
losses
Net
impaired
loans
Gross
impaired
loans
2016
Allowance
for credit
losses
Net
impaired
loans
$
882
174
$ 1,056
$ 1,221
303
704
565
462
182
$
$
$
645
134
779
461
219
402
245
261
142
2,216
1,269
$
$
$
237
40
277
$ 1,003
228
$ 1,231
760
$ 1,540
$
$
$
84
302
320
201
40
947
301
764
499
381
143
2,088
1,328
656
160
816
648
215
501
237
239
136
$
$
$
347
68
415
892
86
263
262
142
7
760
$ 3,437
$ 1,730
$ 1,707
$ 3,628
$ 1,976
$ 1,652
$
1
132
239
$
372
$ 4,865
$
1
39
73
$
113
$ 2,622
1,446
$
–
93
166
$
27
210
298
$
7
47
102
$
20
163
196
$
259
$
535
$
156
$
379
$ 2,243
$ 5,394
$ 2,948
$ 2,446
1,444
Net impaired loans
2017(1)
2016(1)
0.43%
54%
0.49%
55%
(1)
Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
Impaired loans
Gross impaired loans decreased to $4,865 million as at October 31, 2017 (excluding $62 million related to loans purchased under FDIC guarantee
related to the acquisition of R-G Premier Bank of Puerto Rico), from $5,394 million (excluding $100 million related to R-G Premier Bank of Puerto Rico)
last year.
Impaired loans in Canadian Banking decreased by $175 million, primarily in the retail portfolio.
In International Banking, impaired loans decreased by $191 million due to decreases in the Caribbean and Central America region, and Peru.
Impaired loans in Global Banking and Markets decreased by $163 million, due to decreases in Asia, the United States and Canada.
Net impaired loans, after deducting the allowance for credit losses, were $2,243 million as at October 31, 2017, a decrease of $203 million from a
year ago. Net impaired loans as a percentage of loans and acceptances were 0.43% as at October 31, 2017, a decrease of 6 basis points from 0.49%
a year ago.
Allowance for credit losses
The total allowance for credit losses was down $324 million to $4,068 million as at October 31, 2017 (excluding $259 million related to loans
acquired under FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico), from $4,392 million (excluding $234 million related to
R-G Premier Bank) last year.
Allowances in Canadian Banking decreased by $37 million to $779 million, in line with the decreases in gross impaired loans.
In International Banking, allowances decreased by $246 million to $1,730 million mainly in the Caribbean and Central America region and Peru.
Global Banking and Markets’ allowances decreased by $43 million to $113 million, reflecting the decrease in gross impaired loans.
The collective allowance against performing loans is unchanged at $1,562 million and consists of the collective allowance against performing loans in
addition to reserves against unfunded commitments and other off-balance sheet items. The collective allowance against performing loans increased by
$2 million to $1,446 million due to a re-allocation from the reserves against unfunded commitments and other off-balance sheet items.
2 0 1 7 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
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, 2017 was $58 million
(October 31, 2016 – $259 million).
Adjusting for the impact of foreign currency translation, the utilization of incurred and expected losses in the credit mark during the year was
$192 million (for the year ended October 31, 2016 – $244 million). The net benefit to net income attributable to common shareholders from the
credit mark on acquired loans this year was $113 million (for the year ended October 31, 2016 – $123 million).
Portfolio review
Canadian Banking
Gross impaired loans in the retail portfolio decreased by $121 million or 12%. Provision for credit losses in the retail portfolio was $857 million, up
$87 million or 11% from last year driven by growth in relatively higher spread loans.
In the commercial loan portfolio, gross impaired loans decreased by $54 million to $174 million. The provision for credit losses was $56 million, down
$6 million or 10% from last year.
International Banking
In retail, gross impaired loans decreased by $54 million to $2,173 million, with a decrease attributable mainly to the Caribbean and Central America
region. The provision for credit losses in the retail portfolio increased to $1,090 million from $1,007 million last year. Retail provision increases in
Colombia, Chile, Uruguay and Peru were partly offset by decreases in Mexico and the Caribbean and Central America region. In commercial banking,
gross impaired loans were $1,264 million, a decrease of $137 million over the prior year. The provision for credit losses in the commercial portfolio
was $204 million compared with $274 million last year. The decrease was primarily attributable to lower provisions in Colombia, the Caribbean and
Mexico, partially offset by higher provisions primarily in Chile and Central America.
Global Banking and Markets
Gross impaired loans in Global Banking and Markets decreased by $163 million to $372 million, primarily in Asia. The provision for credit losses was
$42 million compared with $249 million last year. The provisions this year were primarily in Asia and Europe.
Risk diversification
The Bank’s exposures to various countries and types of borrowers are well diversified (see T59 and T63). Chart C24 shows loans and acceptances by
geography. Ontario represents the largest Canadian exposure at 33% of the total. Latin America was 11% of the total exposure and the U.S. was
7%.
C25 shows loans and acceptances by type of borrower (see T63). Excluding loans to households, the largest industry exposures were real estate and
construction (4.7%), financial services (4.6% including banks and non-banks), wholesale and retail (4.0%) and energy (3.0%).
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 2017, loan sales totaled $242.1 million, compared to $42 million in 2016. The largest volume of loan sales in 2017
related to loans in the energy industry. As at October 31, 2017, credit derivatives used to mitigate exposures in the portfolios totaled $23 million
(notional amount), compared to $24 million as at October 31, 2016.
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 $15.5 billion as at October 31, 2017
(October 31, 2016 – $15.6 billion), reflecting approximately 3.0% (October 31, 2016 – 3.1%) of the Bank’s total loan portfolio. In addition, the Bank
has related undrawn energy loan commitments amounting to $13.1 billion as at October 31, 2017 (October 31, 2016 – $11.1 billion). The increase in
undrawn loan commitments is primarily driven by the upstream and midstream sub-sectors. Exposure in the upstream sub-sector increase by
$1.9 billion since October 31, 2016. Approximately 64% 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.
72 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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, 2017, these loans
accounted for $340 billion or 65% of the Bank’s total loans and acceptances outstanding
(October 31, 2016 – $322 billion or 65%). Of these, $257 billion or 76% are real estate secured
loans (October 31, 2016 – $242 billion or 75%). The tables below provide more details by
portfolios.
Insured and uninsured residential mortgages and home equity lines of credit
The following table presents amounts of insured and uninsured residential mortgages and home
equity lines of credit (HELOCs), by geographic area.
T40 Insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic
areas
Residential mortgages
Home equity lines of credit
2017
As at October 31
Insured(1)
Uninsured
Total
Insured(1)
Uninsured
Total
($ millions)
Amount % Amount % Amount % Amount % Amount % Amount %
Canada:(2)
Atlantic provinces
Quebec
Ontario
Manitoba &
Saskatchewan
Alberta
British Columbia &
Territories
Canada(3)
International
Total
Canada(3)
International
Total
$
6,671
8,100
3.2
3.9
46,367 22.5
$
5,088
7,843
2.5
3.8
55,166 26.8
$ 11,759
15,943
5.7
7.7
101,533 49.3
$ 1
–
–
5,696
18,902
2.8
9.2
3,698
12,162
1.8
5.9
9,394
4.6
31,064 15.1
15,185
7.4
20,915 10.2
36,100 17.6
1
2
–
–
–
–
–
–
–
$ 1,226
1,009
6.1
5.0
10,416 51.7
$ 1,227
1,009
10,416
816
4.1
3,050 15.1
817
3,052
6.1
5.0
51.7
4.1
15.1
3,631 18.0
3,631
18.0
$100,921 49.0% $104,872
51.0% $205,793
100% $ 4
–% $20,148
100% $20,152
100%
–
–
31,123
100
31,123
–
–
–
–
–
–
–
$100,921 42.6% $135,995
57.4% $236,916
100% $ 4
–% $20,148
100% $20,152
100%
$109,947 56.9% $ 83,356 43.1% $193,303
100% $ 8
0.1% $19,065 99.9% $19,073
100%
–
–
29,585
100
29,585
100
–
–
–
–
–
–
$109,947 49.3% $112,941
50.7% $222,888
100% $ 8
0.1% $19,065 99.9% $19,073
100%
2016
(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 $2,594 (October 31, 2016 – $2,376) of which $1,689 are insured (October 31, 2016 – $1,392).
Amortization period ranges for residential mortgages
The following table presents the distribution of residential mortgages by remaining amortization
periods, and by geographic areas.
T41 Distribution of residential mortgages by remaining amortization periods, and by geographic areas
2017
Residential mortgages by remaining amortization periods
Less than
20 years
20-24
years
25-29
years
30-34
years
33.8% 37.9% 26.9%
69.3% 17.2% 11.1%
1.3%
2.3%
2016
35.2% 36.3% 26.7%
67.7% 19.0% 11.5%
1.7%
1.7%
35 years
and
greater
Total
residential
mortgage
0.1%
0.1%
0.1%
0.1%
100%
100%
100%
100%
As at October 31
Canada
International
Canada
International
Loan to value ratios
The Canadian residential mortgage portfolio is 51% uninsured (October 31, 2016 – 43%). The
average loan-to-value (LTV) ratio of the uninsured portfolio is 51% (October 31, 2016 – 50%).
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 transfers from other financial
institutions, by geographic areas.
C24 Well diversified in Canada and
internationally...
loans and acceptances, October 2017
6%
2%
2%
11%
5%
7%
Canada
United States
Mexico
Latin America
Europe
67%
Caribbean and
Central America
Other
C25 … and in household and business
lending
loans and acceptances, October 2017
29%
45%
6%
20%
Corporate
Financial and government
Personal
Residential mortgages
M
A
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|
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A
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A
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E
M
E
N
T
2 0 1 7 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
T42 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 end October 31, 2017
Residential mortgages
LTV%
Home equity lines of credit(2)
LTV%
69.4%
65.4
63.2
68.7
68.3
62.7
64.0%
70.4%
For the year end October 31, 2016
62.9%
69.1%
57.8%
67.9
62.0
62.8
70.0
61.3
62.7%
n/a
64.5%
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 $949 million as at October 31, 2017 (October 31,
2016 – $956 million). This is a high quality portfolio with well-known developers who have long-term relationships with the Bank.
European exposures
The Bank believes that its European exposures are manageable, are sized appropriately relative to the credit worthiness of the counterparties (86% 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. There were no significant events in the quarter that have materially impacted the Bank’s exposures.
The Bank’s exposure to sovereigns was $8.9 billion as at October 31, 2017 (October 31, 2016 – $7.3 billion), $5.7 billion to banks (October 31, 2016
– $5.2 billion) and $17.6 billion to corporates (October 31, 2016 – $16.6 billion).
In addition to exposures detailed in the table below, the Bank had indirect exposures consisting of securities exposures to non-European entities
whose parent company is domiciled in Europe of $1.3 billion as at October 31, 2017 (October 31, 2016 – $0.6 billion).
The Bank’s current European exposure is distributed as follows:
T43 Bank’s exposure distribution by country:
As at October 31
2017
($ millions)
Greece
Ireland
Italy
Portugal
Spain
Total GIIPS
U.K.
Germany
France
Netherlands
Switzerland
Other
Total Non-GIIPS
Total Europe
As at October 31, 2016
Loans and
loan
equivalents(1)
Deposits
with
financial
institutions
Securities(2)
SFT and
derivatives(3)
Funded
Total
Undrawn
Commitments(4)
$
$
$
$
$
$
214
582
93
–
637
1,526
8,956
1,131
1,036
1,476
783
2,744
16,126
17,652
14,748
$
$
$
$
$
$
–
275
–
–
1
276
1,510
731
52
121
7
144
2,565
2,841
2,519
$
$
$
$
$
$
(1)
10
(9)
–
(2)
(2)
2,343
1,571
2,317
318
154
2,304
9,007
9,005
8,304
$
$
$
$
$
$
–
43
–
1
5
49
1,804
59
87
91
269
359
2,669
2,718
3,554
$
$
$
$
$
$
213
910
84
1
641
1,849
14,613
3,492
3,492
2,006
1,213
5,551
30,367
32,216
29,125
$
$
$
$
$
$
–
1,123
49
–
185
1,357
5,553
1,003
1,561
1,335
943
2,517
12,912
14,269
12,472
Total
213
2,033
133
1
826
3,206
20,166
4,495
5,053
3,341
2,156
8,068
43,279
46,485
41,597
$
$
$
$
$
$
2016
Total
311
771
240
–
771
2,093
15,986
4,878
5,325
3,469
2,300
7,546
39,504
41,597
$
$
$
$
$
(1)
Individual allowances for credit losses are $52. Letters of credit and guarantees are included as funded exposure as they have been issued. Included in loans and loans equivalent are letters of credit and guarantees which total
$3,366 as at October 31, 2017 (October 31, 2016 – $2,890).
(2) Exposures for securities are calculated taking into account derivative positions where the security is the underlying reference asset and short trading positions, with net short positions in brackets.
(3) 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 $2,515 and collateral held against SFT was $12,112.
(4) Undrawn commitments represent an estimate of the contractual amount that may be drawn upon by the obligor and include commitments to issue letters of credit on behalf of other banks in a syndicated bank lending
arrangement.
74 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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
76
76
76
76
76
76
76
76
76
77
77
77
77
77
77
77-78
78-79
79
79
C26 Interest rate gap
T44 Interest rate gap
T45 Structural interest rate sensitivity
T46 Market risk measures
C27 Trading revenue distribution
C28 Daily trading revenue vs. VaR
Market risk linkage to balance sheet
81
T47 Market risk linkage to balance sheet of the Bank
Derivative instruments and structured transactions
Derivatives
Structured transactions
European exposures
Market risk
Financial instruments
81
81
81-82
74
T43 Bank’s exposure distribution by country
52-53
T33 Total market risk capital
56
T36 Mortgage-backed securities
T37 Collateralized debt obligations (CDOs)
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
|
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S
K
M
A
N
A
G
E
M
E
N
T
78
78
78
79
80
80
81
74
53
57
57
2 0 1 7 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
Market risk factors
Interest rate risk
The risk of loss due to changes in the level and/or the volatility of interest rates. This risk affects instruments such as, but not limited to, debt securities,
loans, mortgages, deposits and derivatives.
Interest rate risks are managed through sensitivity, gap, stress testing, annual income and VaR limits and mitigated through portfolio diversification
and hedges using interest rate derivatives and debt securities.
Credit spread risk
The risk of loss due to changes in the market price and volatility of credit, or the creditworthiness of issuers. This risk is mainly concentrated in loan
and debt securities portfolios. Risk is managed through sensitivity, jump-to-default, stress testing and VaR limits and mitigated through hedges using
credit derivatives.
Foreign currency risk
The risk of loss resulting from changes in currency exchange rates and exchange rate volatility. Foreign currency denominated debt and other
securities as well as future cash flows in foreign currencies are exposed to this type of risk. Risk is managed through maximum net trading position,
sensitivity, stress testing and VaR limits and mitigated through hedges using foreign exchange positions or derivatives.
Equity risk
The risk of loss due to changes in prices, volatility or any other equity related risk factor of individual equity or equity linked securities. This risk affects
instruments such as, but not limited to, equities, exchange traded funds, mutual funds, derivatives and other equity linked products. Risk is managed
through sensitivity, stress testing and VaR limits and mitigated through hedges using physical equity and derivatives instruments.
Commodity risk
The risk of loss due to changes in prices or volatility of precious metal, base metal, energy and agriculture products. Both physical commodity and
derivatives positions are exposed to this risk. Risk is managed through aggregate and net trading position, sensitivity, stress testing and VaR limits and
mitigated through hedges using physical commodity and derivative positions.
The following maps risk factors to trading and non-trading activities:
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 and loss against the VaR result to validate the quality
and accuracy of the Bank’s VaR model. The Board reviews VaR and backtesting results quarterly.
76 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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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, in correlation trading there is a market simulation model in CRM 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.
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; and
(cid:129) Impact tests including stress testing that would occur under historical and hypothetical market conditions.
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. re-pricing 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. T44 shows a summary of the interest rate gaps for the Bank’s non-trading positions.
Interest rate risk arising from the Bank’s lending, funding and investment activities is managed in accordance with Board-approved policies and global
limits, which are designed to control the risk to net interest income and economic value of shareholders’ equity. The annual income limit measures the
effect of a specified change in interest rates on the Bank’s annual net interest income over the next twelve months, while the economic value limit
measures the impact of a specified change in interest rates on the present value of the Bank’s net assets. These limits are set according to the
documented risk appetite of the Bank. Board-level limit utilization is reported to both the Asset-Liability Committee and the Board on a regular basis.
Any limit exceptions are reported according to the Limit Monitoring and Compliance Policy of the Bank.
Net interest income and the economic value of equity result from the differences between yields earned on the Bank’s non-trading assets and interest
rate paid on its liabilities. The difference in yields partly reflects mismatch between the maturity and re-pricing characteristics of the assets and
liabilities. This mismatch is inherent in the non-trading operations of the Bank and exposes it to adverse changes in the level of interest rates. The
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
T45 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 2017, an immediate and sustained 100 basis point decrease in
interest rates across all currencies and maturities would decrease after-tax net income by approximately $67 million over the next 12 months. This
interest rate profile is different between Canadian dollar denominated and foreign currencies denominated, with Canadian dollar exposures
benefitting from an interest rate decrease in the next year, assuming no further management action. During fiscal 2017, this measure ranged between
$(85) million and $131 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 $354 million.
During fiscal 2017, this measure ranged between $(847) million and $(268) 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
30
20
10
0
-10
-20
-30
13
14
15
16
17
Foreign currencies gap
Canadian dollar gap
T44 Interest rate gap
Interest rate sensitivity position(1)
As at October 31, 2017 ($ billions)
Canadian dollars
Assets
Liabilities
Gap
Foreign currencies
Assets
Liabilities
Gap
Total
Gap
As at October 31, 2016
Gap
Within
3 months
3 to 12
months
Over
1 year
Non-interest
rate
sensitive
$ 206.2
$ 229.1
$ (22.9)
$ 320.4
$ 298.4
$ 22.0
$
$
(0.9)
(7.9)
$
$
$
$
$
$
$
$
52.2
49.0
3.2
34.9
36.2
(1.3)
1.9
(13.0)
$ 156.4
$ 127.2
$
29.2
$
$
$
$
$
64.0
64.4
(0.4)
28.8
58.1
$
$
$
1.5
11.0
(9.5)
$
79.7
$ 100.0
$
(20.3)
$
$
(29.8)
(37.2)
Total
$ 416.3
$ 416.3
$
–
$ 499.0
$ 499.0
$
$
$
–
–
–
(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.
T45 Structural interest sensitivity
As at October 31 ($ millions)
After-tax impact of
100bp increase in rates
Non-trading risk
100bp decrease in rates
Non-trading risk
Foreign currency risk
2017
2016
Economic
Value of
Shareholders’
Equity
Annual
Income
Economic
Value of
Shareholders’
Equity
Annual
Income
$ (354)
$
64
$ (785)
$ (32)
$
183
$
(67)
$ 650
$ 32
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.
78 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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, 2017, 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 $58 million (October 31, 2016 – $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 and loss
results based on fixed end of day positions and actual reported profit and loss. A VaR at the 99% confidence interval is an indication of a 1%
probability that losses will exceed the VaR if positions remain unchanged during the next business day. Trading positions are however managed
dynamically and, as a result, actual profit/loss backtesting exceptions are uncommon.
In fiscal 2017, the total one-day VaR for trading activities averaged $11.2 million, compared to $12.6 million in 2016.
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T46 Market risk measures
($ 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
Incremental Risk Charge
Comprehensive Risk Measure
2017
2016
Year end
Avg
High
Low Year end
Avg
High
Low
$
$
$
10.1
6.9
8.4
3.2
2.9
1.3
3.3
(10.3)
10.6
34.7
$
$
$
10.8
6.3
8.4
2.2
2.2
1.4
3.6
(8.9)
11.2
28.5
$
$
$
15.1
9.1
12.0
4.8
5.5
2.6
5.1
n/a
14.9
44.5
$
$
$
8.0
4.1
5.3
1.0
0.7
0.6
2.4
n/a
9.1
19.2
$
$
$
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
$ 144.5
$ 271.2
$ 399.8
$ 144.5
$ 391.7
$ 423.4
$ 539.5
$ 277.6
$
–
$
49.2
$
65.2
$
–
$
70.2
$ 107.6
$ 227.3
$
62.8
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 2017, the total one-day Stressed VaR for trading activities averaged $28.5 million
compared to $27.6 million in 2016.
In fiscal 2017, the average IRC decreased to $271.2 million from $423.4 million in 2016, primarily driven by reduced emerging market exposure. The
CRM reduced to zero in Q3, following the maturity of the legacy correlation trading portfolio.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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 2017 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 $7.0 million per day, compared to $6.5 million in 2016. Revenue was positive
on 99% of trading days during the year, an increase from 98% in 2016. During the year, the largest single day trading loss was $0.4 million which
occurred on August 3, 2017, and was smaller than the total VaR of $11.0 million on the same day.
C27 Trading revenue distribution
Year ended October 31, 2017
C28 Daily trading revenue vs. VaR
$ millions, November 1, 2016 to October 31, 2017
35
30
25
20
15
10
5
0
# of days
Gain
Loss
-0.3 1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16
17
18 20 22
26
30
$ millions
Trading revenue
VaR, 99%, 1 day holding period
35
30
25
20
15
10
5
0
-5
-10
-15
-20
80 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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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.
T47 Market risk linkage to Consolidated Statement of Financial Position of the Bank
As at October 31, 2017
($ 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
Market Risk Measure
Consolidated
Statement of
Financial
Position
Trading Risk
Non-trading
risk
Not subject to
market risk
$
5,717 $
5,717 $
98,464
13
35,364
69,269
504,369
202,077
98,464
–
30,648
–
–
–
–
–
13
4,716
69,269
504,369
–
$
–
–
–
–
–
–
202,077
$ 915,273 $ 134,829 $ 578,367
$ 202,077
Primary risk sensitivity of
non-trading risk
n/a
n/a
Interest rate
Interest rate, FX, equity
Interest rate, FX, equity
Interest rate, FX
n/a
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)
$ 625,367 $
4,663
30,766
34,200
6,819
2,201
149,632
– $ 593,174
4,663
–
–
30,766
3,655
30,545
–
6,819
2,201
–
–
–
$
Interest rate, FX, equity
32,193
Interest rate, equity
–
n/a
–
Interest rate, FX, equity
–
–
n/a
– Interest rate, credit spread, equity
n/a
149,632
Total liabilities
$ 853,648 $
68,130 $ 603,693
$ 181,825
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, 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
$
8,442 $
8,442 $
108,561
221
41,657
72,919
480,164
184,302
108,561
–
36,401
–
–
–
–
–
221
5,256
72,919
480,164
–
$
–
–
–
–
–
–
184,302
$ 896,266 $ 153,404 $ 558,560
$ 184,302
$ 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
–
–
–
$
31,063
–
–
–
–
–
147,969
$ 838,445 $
69,955 $ 589,458
$ 179,032
Primary risk sensitivity of
non-trading risk
n/a
n/a
Interest rate
Interest rate, FX, equity
Interest rate, FX, equity
Interest rate, FX
n/a
Interest rate, FX, equity
Interest rate, equity
n/a
Interest rate, FX, equity
n/a
Interest rate, credit spread, equity
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
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2017, unencumbered liquid assets were $180 billion (October 31, 2016 – $183 billion). Securities including NHA
mortgage-backed securities, comprised 67% of liquid assets (October 31, 2016 – 74%). Other unencumbered liquid assets, comprising cash and
deposits with central banks, deposits with financial institutions, precious metals and call and short loans, were 33% (October 31, 2016 – 26%). The
decrease in liquid assets was mainly attributable to a decrease in unencumbered liquid securities, precious metals and deposits with financial
institutions, which was partially offset by an increase in deposits with central banks.
The carrying values outlined in the liquid asset table are consistent with the carrying values in the Bank’s Statement of Financial Position as at
October 31, 2017. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the stress scenarios.
82 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
The Bank’s liquid asset pool is summarized in the following table:
T48 Liquid asset pool
As at October 31, 2017
($ 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
$
49,754
9,909
5,717
41,791
47,388
56,444
33,327
1,405
$
–
–
–
9,836
54,286
59,590
–
–
$
$
49,754
9,909
5,717
$
–
–
–
$ 7,306
108
123
51,627
101,674
116,034
33,327
1,405
24,505
75,362
79,363
2,360
–
–
–
–
–
–
42,448
9,801
5,594
27,122
26,312
36,671
30,967
1,405
$ –
–
–
–
–
–
–
–
Total
$ 245,735
$ 123,712
$ 369,447
$ 181,590
$ 7,537
$ 180,320
$ –
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
$ –
(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:
T49 Total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries
M
A
N
A
G
E
M
E
N
T
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S
D
I
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C
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As at October 31
($ millions)
Bank of Nova Scotia (Parent)
Bank domestic subsidiaries
Bank foreign subsidiaries
Total
2017
2016
$ 131,838
13,753
34,729
$ 135,335
13,871
33,311
$ 180,320
$ 182,517
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
(81%) 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.
2 0 1 7 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
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 are also pledged under repurchase agreements. A summary of encumbered and unencumbered
assets is presented below:
T50 Asset encumbrance
As at October 31, 2017
($ 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, 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
Bank-owned
assets
Securities received as
collateral from securities
financing and derivative
transactions
$
49,754
9,909
5,717
41,791
47,388
56,444
2,311
33,327
1,405
486,949
151,329
28,949
$
–
–
–
9,836
54,286
59,590
4,645
–
–
–
(85,691)
–
Encumbered assets
Unencumbered assets
Total assets
$
49,754
9,909
5,717
$
51,627
101,674
116,034
6,956
33,327
1,405
486,949
65,638
28,949
Pledged as
collateral
–
–
–
24,505
75,362
79,363
2,916
2,360
–
6,072
4,212
–
$
Other(1)
7,306
108
123
–
–
–
–
–
–
54,746
–
–
Available as
collateral(2)
Other(3)
$
42,448
9,801
5,594
27,122
26,312
36,671
–
30,967
1,405
12,721
–
–
$
–
–
–
–
–
–
4,040
–
–
413,410
61,426
28,949
$ 915,273
$ 42,666
$ 957,939
$ 194,790
$ 62,283
$ 193,041
$ 507,825
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
(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, 2017, total encumbered assets of the Bank were $257 billion (October 31, 2016 – $248 billion). Of the remaining $701 billion
(October 31, 2016 – $678 billion) of unencumbered assets, $193 billion (October 31, 2016 – $194 billion) are considered readily available in the
normal course of business to secure funding or meet collateral needs as detailed above.
In some over-the-counter derivative contracts, the Bank would be required to post additional collateral or receive less 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 $53 million or $161 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.
Liquidity coverage ratio
The Liquidity Coverage Ratio measure (LCR) is based on a 30 day liquidity stress scenario, with assumptions defined in the OSFI Liquidity Adequacy
Requirements (LAR) Guideline. The LCR is calculated as the ratio of high quality liquid assets (HQLA) to net cash outflows. The Bank is subject to a
regulatory minimum LCR of 100%.
84 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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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, 2017, based on the average daily position in the quarter
(October 31, 2016 – based on month-end LCR calculations for August, September and October).
T51 Bank’s average LCR
For the quarter ended October 31, 2017 ($ millions)(1)
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(4)
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, 2016 ($ millions)
Total HQLA
Total net cash outflows
Liquidity coverage ratio (%)
Total
unweighted
value
(Average)(2)
Total
weighted
value
(Average)(3)
*
$ 127,444
$ 167,418
78,922
88,496
161,682
54,947
86,727
20,008
*
182,203
24,467
5,058
152,678
2,779
436,988
11,390
2,540
8,850
78,135
13,338
44,789
20,008
30,152
38,530
14,611
5,058
18,861
1,181
7,055
*
$ 166,443
$ 142,364
20,335
26,216
$
25,351
13,125
26,216
$ 188,915
$
64,692
Total
adjusted
value(5)
$ 127,444
$ 101,751
125%
Total
adjusted
value(5)
$ 136,401
$ 107,822
127%
*
*
*
*
*
*
Disclosure is not required under regulatory guideline.
*
(1) Based on the average daily positions of the 63 business days in the quarter.
(2) Unweighted values represent outstanding balances maturing or callable within the next 30 days.
(3) Weighted values represent balances calculated after the application of HQLA haircuts or inflow and outflow rates, as prescribed by the OSFI LAR guidelines.
(4) 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.
(5) 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 Bank’s average LCR for the quarter ended
October 31, 2017 was in line with the quarter ended October 31, 2016.
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.
2 0 1 7 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
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 $269 billion as at October 31, 2017
(October 31, 2016 – $266 billion). The increase since October 31, 2016, was primarily due to internal capital generation and the issuance of NVCC
subordinated additional Tier 1 Capital Securities, net of redemptions of preferred shares and subordinated debentures. 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 $140 billion (October 31, 2016 – $141 billion). Longer term
wholesale debt issuances include medium-term notes, deposit notes, mortgage securitization, asset-backed securities and covered bonds.
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 each
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 may be generated through the Bank’s Canadian Debt and Equity Shelf, 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, retail credit card receivables through the Trillium Credit
Card Trust II Shelf and retail indirect auto loan receivables through the Securitized Term Auto Receivables Trust Program. While the Bank includes
CMHC securitization programs in its view of wholesale debt issuance, this source of funding does not entail the run-off risk that can be experienced in
funding raised from capital markets.
Outside of Canada, short-term wholesale debt may be 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 the Securitized Term Auto Receivables Trust program and the securitization of retail credit card receivables
through the Trillium Credit Card Trust II program. 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.
86 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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The table below provides the remaining contractual maturities of funding raised through wholesale funding. In the Consolidated Statement of
Financial Position, these liabilities are primarily included in Business & Government Deposits.
T52 Wholesale funding(1)
As at October 31, 2017
($ millions)
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
Deposits from banks(2)
Bearer deposit notes,
commercial paper and
certificate of deposits
Asset-backed commercial
paper(3)
Medium term notes and
deposit notes(4)
Asset-backed securities
Covered bonds
Mortgage securitization(5)
Subordinated debentures(6)
Total wholesale funding
$
2,740
$
471
$
405
$
264
$
110
$
3,990
$
205
$
153
$
–
$
4,348
7,699
12,227
22,351
12,740
7,557
62,574
5,685
1,885
24
–
2,821
–
–
4,233
3,621
1
–
569
–
981
8,480
–
–
666
–
–
5,469
1,162
13
556
–
–
7,099
–
6,378
215
686
310
–
23,972
1,378
3,520
2,101
–
13,024
822
6,378
2,158
–
495
–
32,927
1,975
14,719
10,522
181
12
–
10,453
351
1,410
4,943
7,022
68,766
7,099
80,376
4,526
26,027
19,724
7,203
sources
$ 15,169
$ 21,122
$ 32,883
$ 20,204
$ 15,256
$ 104,634
$ 28,272
$ 60,972
$ 24,191
$ 218,069
Of Which:
Unsecured funding
Secured funding
$ 10,463
4,706
$ 16,319
4,803
$ 31,236
1,647
$ 18,474
1,730
$ 14,045
1,211
$
90,537
14,097
$ 18,914
9,358
$ 33,755
27,217
$ 17,487
6,704
$ 160,693
57,376
As at October 31, 2016
($ millions)
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
Deposits from banks(2)
Bearer deposit notes,
commercial paper and
certificate of deposits
Asset-backed commercial
paper(3)
Medium term notes and
deposit notes(4)
Asset-backed securities
Covered bonds
Mortgage securitization(5)
Subordinated debentures(6)
Total wholesale funding
$
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
sources
$ 18,612
$ 32,297
$ 35,450
$ 12,987
$ 12,605
$ 111,951
$ 31,922
$ 60,335
$ 21,923
$ 226,131
Of Which:
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
(1) Wholesale funding sources exclude repo transactions and bankers acceptances, which are disclosed in the 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)
(5) 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.
(6) Although subordinated debentures are a component of regulatory capital, they are included in this table in accordance with EDTF recommended disclosures.
Includes Structured notes issued to insititutional investors.
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 $180 billion as at October 31, 2017 (October 31, 2016 – $183 billion) were well in excess of wholesale funding
sources that mature in the next twelve months.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2017, 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 $444 million in 2017 (2016 – $428 million). The increase primarily reflects higher contractual rents, partially offset by
favourable forex impact.
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T53 Contractual maturities
($ 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, 2017
$ 51,646 $
5,484
894 $
395 $
175 $
159 $
396 $
514 $
290 $
5,106
3,275
2,740
2,224
5,272
14,816
17,776
10,911 $
41,771
65,380
98,464
through profit or loss
–
–
–
–
–
13
–
–
–
13
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(5)
73,346
3,544
3,094
739
28,840
3,072
3,980
21,788
–
10,875
–
16,966
4,558
5,645
779
25,032
4,065
2,309
18,658
–
2,399
–
3,732
2,084
4,495
1,052
28,778
9,542
3,124
16,112
–
254
–
1,087
1,418
2,170
1,193
29,291
15,700
3,322
10,269
–
22
–
188
1,274
2,131
123
27,197
13,083
3,217
10,897
–
10
–
–
4,303
6,506
5,847
74,303
42,460
10,899
20,944
–
–
–
–
8,375
18,098
8,923
209,229
129,448
20,601
59,180
–
–
–
–
9,808
7,054
109
28,667
18,017
5,293
5,357
–
–
–
–
–
1,311
–
53,032
1,529(1)
50,586
5,244(2)
(4,327)
–
33,535
95,319
35,364
50,504
18,765
504,369
236,916
103,331
168,449
(4,327)
13,560
33,535
$ 56,154 $ 48,037 $ 49,107 $ 30,938 $ 26,373 $ 44,735 $
7,058
49,096
7,247
40,790
8,500
40,607
7,840
23,098
7,862
18,511
13,223
31,512
73,099 $ 16,037 $ 280,887 $ 625,367
200,030
13,741
425,337
59,358
134,166
146,721
393
15,644
–
10,875
336
2,810
85,636
–
1,419
–
3
2,399
167
3,348
8,452
–
1,076
–
5
254
97
1,786
1,524
–
440
–
118
22
148
1,258
229
–
824
–
133
10
1,057
1,347
2
–
187
–
543
–
3,354
3,056
–
–
1,369
–
2,882
–
9,229
11,534
–
–
3,223
–
979
–
9,935
9,061
–
5,935
4,314
–
–
–
6,443
–
–
–
30,462
61,625
4,663
13,560
30,766
34,200
95,843
5,935
43,314
61,625
$
30 $
60 $
88 $
87 $
84 $
311 $
656 $
593 $
4,661
–
19
5,913
–
37
12,862
–
54
18,293
–
53
17,254
–
53
24,091
–
207
97,773
–
517
4,819
–
–
– $
–
36,344
1
1,909
185,666
36,344
941
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.
(1)
(2)
(3)
(4)
(5) The Bank relies on outsourcing arrangements for certain support and/or business functions, including, but not limited to, computer operations and cheque and bill payment processing. Outsourcing partners include, among others,
IBM Canada and Symcor Inc.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
($ millions)
Assets
Cash and deposits with financial
institutions and precious metals
Trading assets
Financial instruments designated at fair
value through 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, 2016
$ 37,703
8,579
$
1,071
7,984
$
320
2,485
$
237
2,754
$
1,198
2,762
$
932
4,683
$
537
17,149
$
38
20,109
$
12,750
42,056
$
54,786
108,561
–
–
–
–
205
–
16
–
–
221
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
6,944
48,122
$ 59,091
8,892
50,199
$ 55,977
9,131
46,846
$ 24,792
7,392
17,400
$ 22,794
6,501
16,293
$ 50,504
15,206
35,298
$
75,096
16,317
58,779
$ 13,125
549
12,576
$ 255,432
128,370
127,062
$ 611,877
199,302
412,575
–
9,899
80
1,711
87,130
–
568
–
$
$
28
5,081
–
17
4
1,816
200
2,237
7,050
–
819
–
60
5,170
–
35
–
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
–
$
88
12,498
–
50
$
85
15,381
–
49
$
83
20,870
–
49
$
291
15,723
–
197
$
631
93,842
–
114
$
1,038
–
4,544
10,473
304
–
9,039
19,866
–
–
2,432
–
–
–
5,387
–
–
–
31,912
57,821
1,459
11,978
23,312
42,387
97,083
7,633
42,716
57,821
$
–
–
35,297
1
$
1,802
174,245
35,297
512
–
7,633
4,094
–
536
5,680
–
–
(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.
90 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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Other Risks
Operational Risk
Operational risk is the risk of loss, resulting from people, inadequate or failed processes and systems, or from external events.
Operational risk includes legal risk but excludes strategic risk and reputational 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.
Operational risk is inherent in all our activities, including the practices and controls used to manage other risks. Failure to manage
operational risk can result in direct or indirect financial loss, but also in regulatory sanctions and reputational impact.
Governance and organization
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 Self-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.
(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.
(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 is used to adjust capital calculations produced
using the Bank’s AMA capital model and due to its forward-looking nature, it also assists with identifying new trends and emerging risks.
(cid:129) The Bank’s New Initiatives 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.
(cid:129) The Bank’s centralized operational loss event database, which captures key information on operational losses and near-misses.
(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 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) 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.
Operational risk capital
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). In 2016, OSFI approved our application to use the Advanced Measurement Approach
(AMA) for operational risk, subject to a capital floor. In 2017, we formally began utilizing AMA to report regulatory capital.
Information Technology (IT) & Cybersecurity Risk
IT risk refers to the likelihood of failures or deficiencies related to the IT environment that may result in loss or other negative impact to
the Bank. IT risk is the business risk associated with the use, ownership, operation, involvement, influence and adoption of IT within an
enterprise. Cybersecurity risk is a sub-discipline of IT risk, and refers to the protection of information assets by addressing threats to
information processed, stored, and transported by internetworked information systems. IT & Cybersecurity risk consists of information
technology related events (e.g., cybersecurity incidents, outages) that could potentially have an adverse impact on our business. Such
events could result in business interruption, service disruptions, theft of intellectual property and confidential information, additional
regulatory scrutiny, litigation and reputational damage.
The Board of Directors approves the IT Risk Management Policy and the Information Security Policy to ensure the Bank’s IT environment continues to
be reliable, secure, resilient and robust in supporting its business strategies and objectives. The Bank has established an IT Risk Management
Framework and Information Security Governance Framework to provide the structure for the effective implementation of those policies in the IT
environment.
Protecting data and systems against an ever-changing array of digital threats remains a top risk priority for the Bank. The past year highlighted a large
number of high-profile data breaches involving organizations of all sizes from multiple industries. As cyber-crimes are becoming more widespread,
costly and time consuming to resolve, businesses are faced with an increased possibility of legal exposure, reputation damage, operational interruption
and financial impact. The Bank continues to strengthen its cyber security program and is expanding its capabilities to defend against potential threats
and minimize the impact of cyber security attacks. The Bank also regularly tests preparedness to respond to events outside of the Bank’s direct control
such as simulations of cyberattacks, and continually reviews and enhances its capabilities and infrastructure.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Compliance Risk
Compliance Risk is the risk that a business activity may not be conducted in conformity with applicable Regulations, internal policies and
procedures and ethical standards expected by regulators, customers, investors, employees and other stakeholders. “Regulations” means
all Governmental Acts, laws, rules, regulations, regulatory guidelines and industry or self-regulatory organizational codes of conduct,
rules and by-laws.
The Bank conducts business in many jurisdictions around the world and provides a wide variety of financial products and services through its various
lines of business and operations. It is subject to, and must comply with, many and changing Regulations by governmental agencies, supervisory
authorities and self-regulatory organizations in all the jurisdictions in which the Bank operates. The regulatory bar is constantly rising with Regulations
being more vigorously enforced and new Regulations being enacted. The bar of public expectations is also constantly rising. Regulators and customers
expect the Bank and its employees will operate its business in compliance with applicable laws and will refrain from unethical practices.
Compliance risk is managed on an enterprise-wide basis throughout the Bank via the operation of the Scotiabank Compliance Program (“the
Program”) which includes the appointment of a Chief Compliance and Regulatory Officer (CCRO) who serves as the Chief Compliance Officer for the
Bank and is responsible for overseeing Compliance Risk Management within the Bank. The CCRO is responsible for assessing the adequacy of,
adherence to and effectiveness of the Program, as well as for the development and application of written compliance policies and procedures that are
kept up to date and approved by senior management, assessing and documenting compliance risks, developing and maintaining a written compliance
training program, which in each case is performed either directly or indirectly by other departments within the Bank in coordination with Global
Compliance. This program and these ancillary activities are subject to Internal Audit’s periodic review to assess the effectiveness of the Program.
The Board-approved Scotiabank Compliance Policy describes the general policies and principles applicable to compliance risk management within
Scotiabank and encompasses the Bank’s Regulatory Compliance Management framework as contemplated by OSFI Guideline E-13. The Compliance
Policy is an integral part of the enterprise-wide policies and procedures that collectively articulate the Bank’s governance and control structure. Other
more specifically focused compliance risk management policies and procedures may be developed within the framework established by the
Compliance Policy where necessary or appropriate.
Money Laundering & Terrorist Financing Risk
Money Laundering & Terrorist Financing (ML/TF) risk is the susceptibility of Scotiabank to be used by individuals or organizations to
launder the proceeds of crime, finance terrorism, or violate economic sanctions. It also includes the risk that Scotiabank does not conform
to applicable Anti-Money Laundering (“AML”) / Anti-Terrorist Financing (“ATF”) or sanctions legislation, or does not apply adequate
controls reasonably designed to deter and detect ML/TF and sanctions violations or to file any required regulatory reports.
Money laundering, terrorist financing, and sanctions risks are managed throughout the Bank via the operation of the Bank’s AML/ATF and Sanctions
program (“the Program”) which includes the appointment of a Chief Anti-Money Laundering Officer responsible for the Program, development and
application of written compliance policies and procedures that are kept up to date and approved by senior management, assessing and documenting
the risk of money laundering, terrorist-financing or sanctions violations, developing and maintaining a written ongoing compliance training program,
and regular review of the effectiveness of the Program conducted by Internal Audit. The Chief Anti-Money Laundering Officer has unfettered access
to, and direct communication with, Executive Management of the Bank and its Board.
In providing financial services to its customers, the Bank conducts Customer Due Diligence sufficient to form a reasonable belief that it knows the true
identity of its customers, including in the case of an entity customer its material beneficial owners. The Bank will not maintain anonymous accounts,
nor will it maintain accounts for shell banks. Consistent with a risk-based approach, the Bank assesses the risks of its customers and, where
appropriate, conducts enhanced due diligence on those who are considered higher risk. The Bank also conducts ongoing risk-based monitoring of its
customers to detect and report suspicious transactions, and conducts customer and transaction screening against terrorist, sanctions, and other
designated watch-lists. All employees are provided with mandatory AML/ATF training on an annual basis.
The Bank’s business units conduct an annual self-assessment of their ML/TF risks, as well as self-assessments of their control measures designed to
manage such risks. The process is overseen by the Bank’s Global AML/ATF Unit and the results shared with the Bank’s Senior Management and its
Board.
Reputational Risk
Reputational risk is the risk that negative publicity regarding Scotiabank’s conduct, business practices or associations, whether true or
not, will adversely affect its revenues, operations or customer base, or require costly litigation or other defensive measures.
Negative publicity about an institution’s business practices may involve any aspect of its operations, but usually relates to questions of business ethics
and integrity, or quality of products and services. Negative publicity and attendant reputational risk frequently arise as a by-product of some other
kind of risk management control failure.
Reputational risk is managed and controlled throughout the Bank by codes of conduct, governance practices and risk management programs, policies,
procedures and training. Many relevant checks and balances are outlined in greater detail under other risk management sections, particularly
Operational Risk, where reference is made to the Bank’s well-established compliance program. All directors, officers and employees have a
responsibility to conduct their activities in accordance with the Scotiabank’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 the 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.
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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.
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.
The Bank’s Environmental Policy plays a prominent role in guiding the reduction of the Bank’s environmental footprint. 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, a variety of reduction measures are in place for energy, paper and waste 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.
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, implementing the recommendations of the Task Force on
Climate-related Financial Disclosure, 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 focused products and services, including: an EcoEnergy Financing program designed to support personal
and small business customers who wish to install small-scale renewable energy projects; and an auto loan product for hybrid, electric and clean diesel
vehicles. As well, Scotiabank has the Commodities Derivatives group, which assists corporate clients by providing liquidity and hedge solutions in the
carbon market.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Strategic Risk
Strategic risk is the risk that the enterprise, business lines or corporate functions will make strategic choices that are ineffective or
insufficiently resilient to changes in the business environment, or poorly execute such strategies.
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 update on the Strategic Agenda 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.
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CONTROLS AND ACCOUNTING POLICIES
Controls and Procedures
Management’s responsibility for financial information contained in this annual report is described on page 126.
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, 2017, 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 of October 31, 2017.
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, 2017.
Critical Accounting Estimates
The Bank’s accounting policies are integral to understanding and interpreting the financial results reported in this annual report. Note 3 to the
Consolidated Financial Statements, 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 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 lower in 2017 than in 2016 across all business lines.
For loans that have not been individually assessed as impaired, the Bank pools them into groups to assess on a collective basis. Collective allowances
are calculated for performing loans and impaired loans.
Retail loans represented by residential mortgages, credit card loans and most personal loans are considered by the Bank to be homogenous groups of
loans that are not considered individually significant and are assessed on a collective basis. Mortgages are collectively assessed for impairment, taking
into account number of days past due, historical loss experience and incorporating both qualitative and quantitative factors including the current
business and economic environment and the realizable value of the collateral to determine the appropriate value of the collective impairment
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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. This methodology employs statistical analysis of historical data and experience of delinquency and default
to estimate the amount of loans that will be eventually written off as a result of events not identifiable on an individual loan basis.
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
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
$70 million (2016 – $71 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, 2017, was $3,355 million, a decrease of $143 million from a year earlier. Of the
collective allowance amount, $625 million is attributable to business and government performing loans (2016 – $662 million), with the remainder
allocated to personal lending and credit cards of $2,303 million (2016 – $2,258 million) and residential mortgages of $427 million (2016 –
$578 million). These amounts for personal lending and credit cards, and for residential mortgages include allowances for both performing and
impaired loans.
Fair value of financial instruments
All financial instruments are measured at fair value on initial recognition. Subsequent measurement of a financial instrument depends on its
classification. Non-trading loans and receivables, certain securities and most financial liabilities are carried at amortized cost unless classified or
designated as fair value through profit and loss or available-for-sale at inception. All other financial instruments, including those designated as fair
value through profit and loss at inception, are carried at fair value.
Fair value of a financial asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants in the principal, or in its absence, the most advantageous market to which the Bank has access at the measurement date.
The best evidence of fair value for a financial instrument is the quoted price in an active market. Quoted market prices represent a Level 1 valuation.
Quoted prices are not always available for over-the-counter transactions, as well as transactions in inactive or illiquid markets. In these instances,
internal models that maximize the use of observable inputs are used to estimate fair value. The chosen valuation technique incorporates all the factors
that market participants would take into account in pricing a transaction. When all significant inputs are observable, the valuation is classified as
Level 2. Financial instruments traded in a less active market have been valued using indicative market prices, present value of cash flows or other
valuation techniques. Fair value estimates normally do not consider forced or liquidation sales. Where financial instruments trade in inactive markets or
when using models where observable parameters do not exist, greater management judgement is required for valuation purposes such as multiple of
the underlying earnings, pricing by third party providers, discount rates, volatilities and correlations. 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 $94 million as at October 31, 2017, (2016 –
$119 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, 2017, a funding valuation adjustment (FVA) of $80 million pre-tax (2016 – $92 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,
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(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.
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:
T54 Fair value hierarchy of financial instruments carried at fair value
Fair value hierarchy
As at October 31, 2017
Level 1
Level 2
Level 3
Trading
assets
(incl. precious
metals)
62%
38%
–%
100%
Assets
Available-
for-sale
securities
58%
40%
2%
100%
Liabilities
Obligations
related to
securities
sold short
90%
10%
–%
100%
Derivatives
2%
97%
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 objective evidence of impairment. A significant decline in fair value is evaluated against the original cost of the asset at initial
recognition; whereas for prolong, the decline is evaluated against the continuous period in which the fair value of the asset has been lower than its
original cost at initial recognition. 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 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 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 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.
As at October 31, 2017, the gross unrealized gains on available-for-sale securities recorded in accumulated other comprehensive income were
$381 million (2016 – $740 million), and the gross unrealized losses were $422 million (2016 – $285 million). Net unrealized losses were therefore
$41 million (2016 – gains of $455 million) before hedge amounts. The net unrealized losses after hedge amounts were $48 million (2016 – gains of
$26 million).
At October 31, 2017, the unrealized loss recorded in accumulated other comprehensive income relating to securities in an unrealized loss position for
more than 12 months was $263 million (2016 – $206 million). This unrealized loss was comprised of $132 million (2016 – $11 million) in debt
securities, $87 million (2016 – $160 million) related to preferred shares and $44 million (2016 – $35 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 a number of employee benefit plans, including pension and other benefit plans for eligible employees in Canada, and
internationally. The pension plans include both defined benefit plans, which are generally based on years of service and average earnings at retirement
as well as defined contribution plans. 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. Prior to 2016 the
discount rate used to determine 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 the same as the rate used to determine the defined benefit
obligation. If the assumed discount rates were 1% lower, the benefit expense for 2017 would have been $119 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 $513 million in its principal
pension plans and a deficit of $1,392 million in its principal other benefit plans, which are typically unfunded, as at October 31, 2017, 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 except for other long-term employee benefits where they are recognized in the Consolidated Statement of Income.
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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
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 $417 million as at October 31,
2017 (2016 – $484 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 $82 million (2016 – $55 million). The amount related to unrecognized
tax losses was $9 million, which will expire as follows: $4 million in 2021 and beyond and $5 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. In August 2017, the Bank received a reassessment of
$185 million for tax and interest for the 2012 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 2017 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 Bank’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 2017, 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.
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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.
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, 2017, 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, 2017, and no impairment was determined to exist.
Provisions
The Bank recognizes 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.
Significant judgement is required in determining whether a present obligation exists and in estimating the probability, timing, and amount of any
future outflows.
Off-balance sheet credit risks
The provisions for off-balance sheet credit risks relate 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 Bank’s 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 management’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. 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.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Governance and project management
The adoption of IFRS 9 is a significant initiative for the Bank, involving substantial finance, risk management and technology resources. The project
was managed through a strong governance structure across risk management, finance, technology, and the business units. The Bank’s existing system
of internal controls will be refined and revised where required to meet all the requirements of IFRS 9. The Bank has applied many components of its
existing governance framework to ensure that appropriate validations and controls will be in place over new key processes and significant areas of
judgment. Adoption of IFRS 9 in 2018 has resulted in revisions to accounting policies and procedures, changes and amendments to internal control
documents, applicable credit risk manuals, development of new risk models and associated methodologies and new processes within risk
management. Periodic reporting on the progress against plan and results of parallel run was provided to Bank senior management throughout Fiscal
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
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
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 with no recycling to income 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, 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.
Hedge Accounting
IFRS 9 also incorporates new hedge accounting rules that intend to align hedge accounting with risk management practices. IFRS 9 includes an
accounting policy choice to defer the adoption of IFRS 9 hedge accounting and to continue with IAS 39 hedge accounting. The Bank has decided to
exercise this accounting policy choice. However, the Bank will implement the revised hedge accounting disclosures that are required by the IFRS 9
related amendments to IFRS 7 “Financial Instruments: Disclosures” in its fiscal 2018 Annual Report.
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 reflect 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 leveraged the existing regulatory capital models and processes for most of the Bank’s loan portfolios that use the existing
Advanced Internal Ratings Based (AIRB) credit models for regulatory capital purposes. For other portfolios that use the Standardized approach to
compute regulatory capital, the Bank developed 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. For
those assets with a remaining maturity of less than 12 months, a PD is used that corresponds to remaining maturity. This Stage 1 approach 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 subsequent to 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 estimated life 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.
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 compares the risk of default occurring over the expected life of the financial asset at the reporting date to the
corresponding 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
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information at the reporting date about past events, current conditions and forecasts of future economic conditions.
The Bank will use three scenarios that will be probability weighted to determine ECL, leveraging its existing Enterprise Wide Stress Test modeling
framework.
Experienced credit judgment
The Bank’s ECL allowance methodology, in line with OSFI guidelines, requires the Bank to use its experienced credit judgement to incorporate the
estimated impact of factors not captured in the modelled ECL results, in all reporting periods.
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. For certain revolving
credit facilities that do not have a fixed maturity, the expected life 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 has modified its definition of impaired financial instruments (Stage 3) for certain categories of financial instruments to make it consistent
with the definitions used in the calculation of regulatory capital. 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, with the exception of credit cards receivables that are treated as defaulted when 180 days past due. The
policy on the write-off of loans remains 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
Certain allowances for credit losses currently ascribed to impaired loans will be ascribed against Stage 1 and Stage 2 exposures.
Transition impact
The Bank will record an adjustment to its opening November 1, 2017 retained earnings and AOCI, to reflect the application of the new requirements
of Impairment and Classification and Measurement at the adoption date and will not restate comparative periods.
The Bank estimates the IFRS 9 transition amount will reduce shareholders’ equity by approximately $600 million after-tax and the Common Equity
Tier 1 capital ratio by approximately 15 basis points as at November 1, 2017. The estimated impact relates primarily to the implementation of the ECL
requirements. The Bank continues to revise, refine and validate the impairment models and related process controls leading up to the January 31,
2018 reporting.
Effective November 1, 2018
Revenue from contracts with customers
On May 28, 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, which replaces the previous revenue standard IAS 18 Revenue,
and the related Interpretations on revenue recognition. The standard is a control-based model as compared to the existing revenue standard which is
primarily focused on risks and rewards and provides a single principle based framework to be applied to all contracts with customers that are in scope
of the standard. 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 introduces a new five step model to
recognize revenue as performance obligations in a contract are satisfied. 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 revenue.
On April 12, 2016, the IASB issued amendments to 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
licensing revenues should be recognized at a point in time or over a specific period. The amendments also provide additional practical expedients that
can be used on transition to the standard.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank will adopt the standard and its amendments as of November 1, 2018 and plans to use the modified retrospective approach. Under this
approach, the Bank will recognize the cumulative effect of initially applying the standard as an adjustment to the opening balances of retained
earnings as of November 1, 2018, without restating comparative periods. Additional disclosures will be required in order to explain any significant
changes between reported results and results had the previous revenue standard been applied.
The standard does not apply to revenue associated with financial instruments, and therefore, will not impact the majority of the Bank’s revenue,
including interest income, interest expense, trading revenue and securities gains which are covered under IFRS 9 Financial Instruments. The
implementation of the standard is being led by the Finance Department in coordination with the business segments. The areas of focus for the Bank’s
assessment of impact are fees and commission revenues from wealth management and banking services in Canadian and International Banking. The
Bank has been working to identify and review the customer contracts within the scope of the new standard. While the assessment is not complete,
the timing of the Bank’s revenue recognition of fees and commissions within the scope of this standard is not expected to materially change. The
classification of certain contract costs (whether presented gross or offset against non-interest income) continues to be evaluated and the final
interpretation may impact the presentation of certain contract costs. The Bank is also evaluating the additional disclosures that may be relevant and
required.
Effective November 1, 2019
Financial instruments: Prepayment features with negative compensation
On October 12, 2017, the IASB issued an amendment to IFRS 9 Financial Instruments. The amendment allows certain pre-payable financial assets with
so-called negative compensation prepayment option to be measured at amortized cost or fair value through other comprehensive income, if the
prepayment amount substantially represents unpaid principal and interest and reasonable compensation. Reasonable compensation may be positive or
negative. Prior to this amendment financial assets with this negative compensation feature would have failed the solely payments of principal and
interest test and be mandatorily measured at fair value through profit or loss. The amendment will be effective for annual periods beginning on or
after January 1, 2019, with early adoption permitted. Based on preliminary assessments, the amendment is not expected to impact the Bank.
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.
The Bank is currently assessing the impact of this new standard.
Effective November 1, 2021
Insurance contracts
On May 18, 2017, the IASB issued IFRS 17 Insurance Contracts, which provides a comprehensive principle-based framework for the measurement and
presentation of all insurance contracts. The new standard will replace IFRS 4 Insurance Contracts and requires insurance contracts to be measured
using current fulfillment cash flows and for revenue to be recognized as the service is provided over the coverage period. The standard is effective for
the Bank on November 1, 2021. The Bank will assess the impact of adopting this new standard.
Regulatory Developments
The Bank continues to monitor and respond to global regulatory developments relating to a broad spectrum of topics, including Basel III capital and
liquidity requirements, over-the-counter derivatives reform, consumer protection measures and cybersecurity, in order to ensure that control and
business units are responsive on a timely basis and business impacts, if any, are minimized.
Bank Recapitalization Regime – Proposed Bail-in Regulations
On June 22, 2016, legislation came into force amending the Bank Act (Canada) (the “Bank Act”) and the Canada Deposit Insurance Corporation Act
(Canada) (the “CDIC Act”) and certain other federal statutes pertaining to banks to create a bail-in regime for Canada’s domestically systemically
important banks (D-SIBs), which include the Bank. On June 17, 2017, the Government of Canada published in draft for public comment regulations
under the CDIC Act and the Bank Act providing the final details of the conversion, issuance and compensation regimes for bail-in instruments issued
by domestic systemically important banks, including the Bank (collectively, the “Bail-In Regulations”). Pursuant to the CDIC Act, in circumstances
where OSFI has determined that the Bank has ceased, or is about to cease, to be viable, the Governor in Council may, upon a recommendation of the
Minister of Finance that he or she is of the opinion that it is in the public interest to do so, grant an order directing CDIC to convert all or a portion of
certain shares and liabilities of the Bank into common shares of the Bank (a “Bail-In Conversion”).
The Bail-In Regulations prescribe the types of shares and liabilities that will be subject to a Bail-In Conversion. In general, any senior debt with an initial
or amended term to maturity (including certain explicit or embedded options) greater than 400 days, that is unsecured or partially secured and has
been assigned a CUSIP or ISIN or similar identification number would be subject to a Bail-In Conversion. Shares, other than common shares, and
subordinated debt would also be subject to a Bail-In Conversion, unless they are non-viability contingent capital. The Bail-In Regulations become
effective 180 days after the regulations are registered. These changes are not expected to have a material impact on the Bank’s cost of long-term
unsecured funding.
In conjunction with the pre-publication of the Bail-In Regulations, OSFI issued draft guidelines on Total Loss Absorbing Capacity (TLAC), which will
apply to Canada’s D-SIBs as part of the Federal Government’s bail-in regime. The standards are intended to address the sufficiency of a systemically
important bank’s loss absorbing capacity in supporting its recapitalization in the event of its failure. TLAC is defined as the aggregate of Tier 1 capital,
Tier 2 capital, and other TLAC instruments, which allow conversion in whole or in part into common shares under the CDIC Act and
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meet all of the eligibility criteria under the guideline. The minimum TLAC requirements are proposed to be effective November 2021. The Bank does
not anticipate any challenges in meeting the proposed TLAC requirements.
Over-The-Counter Derivatives Reform
Capital requirements for derivatives dealers are currently being considered by international regulators, while margin requirements for non-centrally
cleared derivatives have already been adopted in a number of jurisdictions, including Canada, Europe, the United States, Hong Kong and Singapore.
In March 2015, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) 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 became effective on
September 1, 2016 with compliance to be phased in over the next ensuing years in accordance with the BCBS Framework. These margin rules will,
once fully implemented, require the exchange of variation margin and initial margin, both of which are designed to secure the performance of
non-centrally cleared derivatives transactions between covered entities. The Bank became subject to variation margin rules beginning March 1, 2017,
while initial margin rules will become effective no earlier than September 1, 2018 and no later than September 1, 2019. In February 2017, various
regulatory authorities including the Board of Governors of the Federal Reserve System, the CFTC, the European Supervisory Authorities and OSFI
issued guidance concerning the implementation of their variation margin rules, affirming the importance of timely effectiveness while recognizing the
operational challenges of achieving market-wide participation, especially with respect to smaller counterparty relationships. On April 4, 2017, the CSA
published proposed National Instrument 93-101: Derivatives: Business Conduct Rules. The proposed rules impose a business conduct standard on
derivatives dealers and derivatives advisers when transacting in OTC derivatives with derivatives parties. The Bank is continuing with its efforts to meet
all obligations imposed by the variation margin rules in accordance with the guidance received from OSFI and other relevant supervisory authorities,
while a project has been initiated to prepare for the upcoming implementation of the initial margin rules.
Automatic Exchange of Information – Organisation for Economic Co-operation and Development (OECD)
Under the initiative of the OECD, many countries have committed to automatic exchange of information relating to accounts held by tax residents of
signatory countries, using a Common Reporting Standard (CRS). Canada’s automatic exchange of financial account information arrangements with
jurisdictions, other than the U.S., has been implemented in accordance with the CRS and the implementation of the CRS legislation in Canada was
effective July 1, 2017. The Bank meets all obligations imposed under the CRS, in accordance with local law, in Canada and all applicable jurisdictions
in which it operates.
United Kingdom and European Regulatory Reform
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. A formal notice of the UK Government’s intention to withdraw was provided to the European Council on March 29, 2017,
triggering a two-year negotiation period during which the terms of the UK’s exit will be determined. Until those negotiations are concluded or the
negotiation period expires, the UK will remain an EU Member State, subject to all EU legislation. There are a number of uncertainties in connection
with the future of the UK and its relationship with the European Union. Until the terms and timing of the UK’s exit from the European Union are
clearer, it is difficult to determine the potential longer term impact on the Bank. The UK’s exit from the European Union may result in significant
changes in law, which 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.
The Markets in Financial Instruments Directive II/Regulation (MiFID II/MiFIR) becomes effective January 2018 and will have a significant technological
and procedural impact on certain of our businesses operating in the European Union, as well as certain businesses operating outside of the EU but
which are subject to MiFID II/MIFIR. The new requirements contained within MiFIDII/MIFIR will result in changes to pre- and post-trade transparency,
market structure, transaction reporting, algorithmic trading, research and business conduct rules. Unlike the current MiFID regime, which applies
primarily to equities, MiFID II/MiFIR will also extend to fixed income and “equity-like” products.
Cybersecurity and privacy developments in Europe and the U.S.
The E.U. General Data Protection Regulation (“GDPR”) will apply from May 25, 2018. The GDPR replaces the current E.U. Data Protection Directive
and is designed to harmonize data privacy laws across Europe. The GDPR changes data governance and protection requirements as well as disclosure
requirements in respect of data breaches. The GDPR applies to organizations based outside of the European Union if they collect or process data of
E.U. residents. The Bank continues to assess the impact of the GDPR and is taking steps to align privacy and data protection practices to comply with
the new requirements.
The New York Department of Financial Services (NY DFS) cybersecurity requirements took effect on March 1, 2017. Entities subject to NY DFS
requirements must maintain a cybersecurity program designed to protect the confidentiality, integrity and availability of its information systems.
Subject to various phase-in dates over the next couple of years, each covered entity must meet various compliance requirements, including:
conducting periodic risk assessments; implementing policies and procedures; and monitoring and testing, among others. The Bank of Nova Scotia,
New York Agency, is subject to NY DFS requirements. By February 15, 2018, and annually thereafter, applicable entities must certify compliance with
the requirements. The Bank is in compliance with existing NY DFS cybersecurity requirements and expects to comply with additional NYS DFS
requirements by the applicable compliance dates.
Basel Committee on Banking Supervision
In March 2017, the Basel Committee on Banking Supervision (BCBS) issued the Pillar 3 disclosure requirements – consolidated and enhanced
framework which builds on the revisions to the Pillar 3 disclosure published by the Committee in January 2015.
In March 2017, the BCBS also released its standard on the interim approach and transitional arrangements for the regulatory treatment of accounting
provisions. In the standard, the BCBS clarified that it will retain its current treatment of provisions under both Standardized Approach and Advanced
Internal Ratings Based frameworks during an interim period. Further, the BCBS allows local jurisdictions the option to choose whether to apply a
transitional arrangement for the impact of IFRS 9 on regulatory capital. OSFI has not publicly issued its final guidance for the Canadian banks which
will take effect from January 1, 2018. The Bank will assess the impact once OSFI’s guidance is issued.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
In April 2017, OSFI issued a guideline indicating that all domestic systemically important banks are expected to implement the Revised Pillar 3
disclosure requirements for the reporting period ending October 31, 2018. We are awaiting OSFI’s guideline on the implementation of the Pillar 3
disclosure requirements – consolidated and enhanced framework.
Regulatory developments relating to liquidity
The Net Stable Funding Ratio (NSFR) is expected to become a minimum standard in OSFI’s liquidity framework. The NSFR is aimed at reducing
structural funding risk by requiring banks to fund their activities with sufficiently stable sources of funding. OSFI has extended the implementation
timeline of the NSFR to January 2019.
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.
T55 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.
2017
$ 17
25
3
$ 45
2016
$ 20
24
3
$ 47
Directors can use some or all of their director fees earned to buy common shares of the Bank at market rates through the Director’s 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.
T56 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
2017
$ 6
$ 8
2016
$ 6
$11
The Bank’s committed credit exposure to companies controlled by directors totaled $145.2 million as at October 31, 2017 (October 31, 2016 –
$99.5 million) while actual utilized accounts were $11.5 million (October 31, 2016 – $3.9 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as
related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions
and are as follows:
T57 Transactions with associates and joint ventures
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
Scotiabank principal pension plan
2017
$ (46)
703
217
$ 114
2016
$ (45)
788
338
99
$
The Bank manages assets of $3.0 billion (October 31, 2016 – $1.9 billion) which is a portion of the Scotiabank principal pension plan assets and
earned $3.7 million (October 31, 2016 – $3.9 million) in fees.
Oversight and governance
The oversight responsibilities of the Audit Committee (AC) with respect to related party transactions include reviewing policies and practices for
identifying transactions with related parties that may materially affect the Bank, and reviewing the procedures for ensuring compliance with the Bank
Act for related party transactions. The Bank Act requirements encompass a broader definition of related party transactions than is set out in IFRS. The
Bank has various procedures in place to ensure that related party information is identified and reported to the AC on a semi-annual basis. The AC is
provided with detailed reports that reflect the Bank’s compliance with its established procedures.
The Bank’s Internal Audit department carries out audit procedures as necessary to provide the AC with reasonable assurance that the Bank’s policies
and procedures to identify, authorize and report related party transactions are appropriately designed and operating effectively.
104 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
SUPPLEMENTARY DATA
Geographic Information
T58 Net income by geographic segment
2017
2016
2015
Canada U.S. Mexico
Peru Chile Colombia
Other
Inter-
national
Total Canada U.S. Mexico
Peru Chile Colombia
Other
Inter-
national
Total Canada U.S. Mexico
Peru Chile Colombia
Other
Inter-
national
Total
For the fiscal years
($ millions)
Net interest
income
$7,440 $460 $1,380 $1,287 $817
$710
$2,999 $15,093 $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
Non-interest
income
6,924
830
536
635 409
455
2,502
12,291
6,893 871
554
600 325
419
2,409
12,071
6,272 882
561
601 231
372
2,163
11,082
Provision for
credit losses
906
(14)
193
329 145
337
353
2,249
876 112
225
315 113
320
401
2,362
728
6
260
266 108
246
268
1,882
Non-interest
expenses
7,650
606
1,123
762 630
620
3,069
14,460
7,339 633 1,121
740 605
550
3,036
14,024
6,936 507 1,160
744 431
541
2,745
13,064
Income tax
expense
1,066
147
125
225
77
71
506
2,217
1,235 155
69
201
45
89
497
2,291
1,038 267
27
195
24
84
401
2,036
Total
$4,742 $551 $ 475 $ 606 $374
$137
$1,573 $ 8,458 $4,465 $450 $ 363 $ 575 $325
$134
$1,425 $ 7,737 $4,028 $574 $ 360 $ 473 $222
$178
$1,380 $ 7,215
Corporate
adjustments
Net Income
(215)
$ 8,243
(369)
$ 7,368
(2)
$ 7,213
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 7 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
T59 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
2017
2016
2015
2017
2015
Percentage mix
$
22.7
29.0
173.6
17.1
51.9
55.6
349.9
$
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
36.9
24.2
18.4
22.8
9.4
6.6
10.0
31.4
12.6
60.6
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
4.3%
5.5
33.3
3.3
9.9
10.7
67.0
7.1
4.6
3.5
4.4
1.8
1.3%
1.9
6.0
2.4
5.4%
6.0
31.9
3.5
10.5
9.4
66.7
6.4
3.9
3.6
3.5
1.8
1.4%
2.0
6.7
4.0
11.6
14.1
$ 522.2
$ 496.7
$ 473.1
100.0%
100.0%
Total allowance for loan losses(2)
(4.3)
(4.6)
(4.2)
Total loans and acceptances net of allowance for loan losses
$ 517.9
$ 492.1
$ 468.9
(1) Prior periods have been restated to reflect the current period presentation.
(2) Total allowance includes a collective allowance on performing loans of $1,446 million in 2017 and $1,444 million in 2016. The increase reflects a $2 million reallocation from reserves against unfunded commitments and other
off-balance sheet items.
106 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
T60 Gross impaired loans by geographic segment
As at October 31 ($ 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.
T61 Provision against impaired loans by geographic segment
For the fiscal years ($ millions)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Total
T62 Cross-border exposure to select countries(1)
2017(1)
2016(1)
$ 1,049
140
303
704
565
462
1,642
$ 1,258
210
301
764
499
381
1,981
$ 4,865
$ 5,394
2017
$ 906
(14)
193
329
145
337
353
$2,249
2016
$ 876
112
224
317
112
320
401
$2,362
2015(1)
$ 1,189
11
271
603
405
356
1,823
$ 4,658
2015
$ 727
6
260
265
108
247
269
$1,882
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
Loans
Trade
Interbank
deposits
Government
and other
securities
Investment in
subsidiaries
and affiliates
Other
$
1,683
2,185
149
901
1,250
275
477
1,052
$ 1,186
57
6
58
72
–
35
180
$
596
–
516
–
124
–
179
118
$
99
–
–
–
–
–
4,317
–
$
747
–
2,789
–
–
303
–
–
$
7,972
$ 1,594
$ 1,533
$ 4,416
$
3,839
$
3,075
2,945
3,540
2,264
1,308
115
$
959
187
1,022
73
226
12
$
628
–
–
–
–
–
$
191
141
15
199
10
–
$
3,452
3,544
223
4,518
1,431
551
$
$
$
$
2017
Total
4,367
2,254
3,461
968
1,465
582
5,014
1,371
$
2016
Total
5,205
1,893
3,249
1,564
1,736
1,108
1,756
1,673
56
12
1
9
19
4
6
21
128
$ 19,482
$ 18,184
40
84
517
26
7
–
$
8,345
6,901
5,317
7,080
2,982
678
$
6,314
6,464
5,198
6,760
2,940
632
$ 13,247
$ 2,479
$
628
$
556
$ 13,719
$
674
$ 31,303
$ 28,308
$
$
3,907
1,272
579
1,151
18
1,508
$
99
184
32
55
1
115
$
8,435
$
486
$
35
–
–
16
–
1
52
$
$
–
–
–
–
–
–
–
$ 4,972
$ 2,179
$
288
1,084
659
–
766
406
$
3,203
$ 20,761
$
$
$
–
–
–
–
–
–
–
$
4,329
2,540
1,270
1,222
785
2,030
$
4,495
2,767
1,460
1,113
743
2,183
$ 12,176
$ 12,761
802
$ 62,961
$ 19,655
$ 1,387
$ 59,253
As at October 31, 2017
$ 29,654
$ 4,559
$ 2,213
As at October 31, 2016
$ 30,589
$ 4,150
$ 1,293
(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, Taiwan 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 7 S C O T I A B A N K A N N U A L R E P O R T | 107
As at
October 31
($ millions)
Asia
China
India
Thailand
South Korea
Hong Kong
Malaysia
Japan
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)
Total
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit Risk
T63 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 $3.5 in financing products, $2.2 in services and $2.3 in wealth management (2016 – $3.2, $2.4, and $2.0 respectively).
(3)
Includes central banks, regional and local governments, and supra-national agencies.
T64 Off-balance sheet credit instruments
As at October 31 ($ 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.
2017
Balance
% of total
2016
2015
$ 236.9
103.3
$ 340.2
45.3% $ 222.9
99.5
19.8
$ 217.5
91.5
65.1% $ 322.4
$ 309.0
$
20.5
3.8
21.1
24.6
15.5
8.2
13.0
10.2
3.5
4.9
2.6
8.1
5.6
9.6
1.1
6.3
1.7
17.0
4.7
3.9% $
0.7
4.0
4.7
3.0
1.6
2.5
2.0
0.7
0.9
0.5
1.6
1.1
1.8
0.2
1.2
0.3
3.3
0.9
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
$
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
$ 182.0
$ 522.2
(4.3)
$ 517.9
34.9% $ 174.3
$ 164.1
100.0% $ 496.7
$ 473.1
(4.6)
(4.2)
$ 492.1
$ 468.9
2017
2016
2015
$ 185.7
35.5
42.0
$ 174.2
34.5
40.0
$ 166.4
30.9
42.8
$ 263.2
$ 248.7
$ 240.1
108 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
T65 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.
T66 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
2017
2016
2015
$
5,394
$ 4,658
$ 4,200
4,297
(42)
(1,427)
(50)
2,778
(170)
(1,478)
(1,024)
(501)
(3,173)
(134)
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
$
4,865
$ 5,394
$ 4,658
$
2,948
2,249
(3,173)
$ 2,573
2,362
(2,579)
$ 2,198
1,916
(2,228)
70
252
303
55
680
(82)
20
305
217
40
582
10
35
260
82
52
429
258
$
2,622
$ 2,948
$ 2,573
$
2,446
(529)
326
$ 2,085
736
(375)
$ 2,002
458
(375)
$
2,243
$ 2,446
$ 2,085
2017
2016
2015
$ 3,057
(128)
(680)
2,249
–
$ 3,072
(110)
(600)
2,362
50
$ 2,435
(68)
(485)
1,882
60
$ 2,249
$ 2,412
$ 1,942
2 0 1 7 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
T67 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
T68 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
2017
2016
2015
$
61
1,886
$
100
1,677
$
118
1,526
$ 1,947
$ 1,777
$ 1,644
10
1
63
62
(8)
20
8
14
14
2
46
12
7
(1)
(1)
18
3
31
1
302
$
(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
$
$ 2,249
$ 2,362
$ 1,882
2017(1)
Allowance
for credit
losses
$
326
1,583
$ 1,909
20
2
132
115
77
73
7
30
7
5
27
61
26
5
3
35
8
74
6
713
$
$ 2,622
Gross
$ 1,445
1,610
$ 3,055
31
2
242
257
265
181
20
55
41
11
107
280
52
7
4
95
22
123
15
$ 1,810
$ 4,865
Net
$ 1,119
27
$ 1,146
11
–
110
142
188
108
13
25
34
6
80
219
26
2
1
60
14
49
9
$ 1,097
$ 2,243
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
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
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
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
110 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
T69 Total credit risk exposures by geography(1)(2)
As at October 31 ($ millions)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Europe
Caribbean and Central America
Latin America (other)
Other
Total
As at October 31, 2016
2017
Non-Retail
$
Drawn
95,801
88,623
17,389
15,873
12,004
4,782
25,216
18,554
7,489
23,551
Undrawn
exposures(3)
Other
Retail
Total
$ 37,900
31,008
1,152
1,551
754
150
6,586
1,554
542
3,696
$
40,926
37,755
2,535
3,415
1,756
337
11,228
1,299
299
2,823
$ 327,597
–
9,452
7,894
12,676
5,590
–
17,951
705
–
$ 502,224
157,386
30,528
28,733
27,190
10,859
43,030
39,358
9,035
30,070
2016
Total
$ 468,923
143,808
26,873
28,328
23,510
10,943
41,525
41,168
8,908
30,929
$ 309,282
$ 84,893
$ 102,373
$ 381,865
$ 878,413
$ 824,915
$ 290,566
$ 76,745
$ 102,061
$ 355,543
$ 824,915
(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.
T70 AIRB credit risk exposures by maturity(1)(2)
Residual maturity as at October 31 ($ millions)
Non-retail
Less than 1 year
One to 5 years
Over 5 years
Total non-retail
Retail
Less than 1 year
One to 5 years
Over 5 years
Revolving credits(4)
Total retail
Total
As at October 31, 2016
2017
Drawn
Undrawn
exposures(3)
Other
$ 134,454
105,995
9,596
$ 250,045
$ 34,389
178,940
16,299
38,582
$ 268,210
$ 23,128
54,653
1,561
$ 79,342
$ 16,656
–
–
27,445
$ 44,101
$ 55,542
31,439
12,060
$ 99,041
$
$
–
–
–
–
–
$ 518,255
$ 123,443
$ 487,326
$ 107,470
$ 99,041
$ 98,946
Total
$ 213,124
192,087
23,217
$ 428,428
$ 51,045
178,940
16,299
66,027
$ 312,311
$ 740,739
$ 693,742
2016
Total
$ 195,369
188,751
18,880
$ 403,000
$ 44,215
167,999
20,243
58,285
$ 290,742
$ 693,742
(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.
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 7 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
T71 Total credit risk exposures and risk-weighted assets
AIRB
Standardized(1)
Total
2017
2016
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
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
$ 132,648
75,962
40,892
$ 66,098
29,324
12,224
$ 50,614
5,252
3,298
$ 48,524
5,149
3,207
$ 183,262
81,214
44,190
$ 114,622
34,473
15,431
$ 175,784
73,711
39,943
$ 117,178
34,499
16,356
249,502
107,646
59,164
56,880
308,666
164,526
289,438
168,033
19,734
2,560
9,098
31,392
97,663
820
977
99,460
250,045
79,342
50,967
4,070
383
1,594
6,047
3,524
101
26
3,651
73,692
29,808
13,844
2,489
96
34
2,619
6,134
203
–
6,337
59,237
5,551
3,332
2,045
94
29
2,168
1,141
198
–
1,339
51,710
5,441
3,236
22,223
2,656
9,132
34,011
103,797
1,023
977
105,797
309,282
84,893
54,299
6,115
477
1,623
8,215
4,665
299
26
4,990
125,402
35,249
17,080
26,022
1,982
13,175
41,179
88,760
1,052
497
90,309
290,566
76,745
53,615
6,567
368
2,567
9,502
5,161
119
12
5,292
128,906
34,986
18,935
$ 380,354
$ 117,344
$ 68,120
$ 60,387
$ 448,474
$ 177,731
$ 420,926
$ 182,827
$ 200,618
$ 15,011
$ 34,002
$ 15,013
$ 234,620
$ 30,024
$ 220,917
$ 25,028
200,618
15,011
34,002
15,013
234,620
30,024
220,917
25,028
20,281
15,356
35,637
16,939
27,445
44,384
30,372
1,300
31,672
268,210
44,101
3,351
917
4,268
9,676
3,291
12,967
14,014
311
14,325
42,052
4,519
–
–
–
–
–
–
–
–
–
–
–
–
35,552
–
35,552
69,554
–
26,304
–
26,304
41,317
–
20,281
15,356
35,637
16,939
27,445
44,384
65,924
1,300
67,224
337,764
44,101
3,351
917
4,268
9,676
3,291
12,967
40,318
311
40,629
83,369
4,519
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
$ 312,311
$ 46,571
$ 69,554
$ 41,317
$ 381,865
$ 87,888
$ 355,543
$ 81,212
23,591
24,483
–
2,529
7,147
–
–
–
–
–
–
2,988
23,591
24,483
–
2,529
7,147
2,988
25,025
23,421
–
2,613
6,599
4,165
$ 740,739
$ 173,591
$ 137,674
$ 104,692
$ 878,413
$ 278,283
$ 824,915
$ 277,416
1,281
–
1,188
–
–
50,631
–
25,201
1,281
50,631
1,188
25,201
2,042
49,829
2,042
24,659
factor
$ 742,020
$ 174,779
$ 188,305
$ 129,893
$ 930,325
$ 304,672
$ 876,786
$ 304,117
Add-on for 6% scaling factor(5)
–
10,487
–
–
–
10,487
–
10,705
Total credit risk
$ 742,020
$ 185,266
$ 188,305
$ 129,893
$ 930,325
$ 315,159
$ 876,786
$ 314,822
(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, 2017, CVA risk-weighted assets were calculated using scalars of 0.72, 0.77, and 0.81 for the CET1, Tier 1 and Total capital ratios, respectively (scalars of 0.64, 0.71, and 0.77 in 2016).
(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) Basel Committee imposed a scaling factor (6%) on risk-weighted assets for Internal Ratings-Based credit risk portfolios.
112 | 2 0 1 7 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
T72 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:
2017 versus 2016
Increase (decrease) due to change in:
2016 versus 2015
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
$ 785
29
$ 756
$ (85)
–
(5)
109
326
315
125
766
$ 1,152
1,165
$
(13)
$ 1,937
1,194
$
743
$ 1,859
515
$ 1,344
$
213
(28)
129
85
(327)
207
873
753
$
128
(28)
124
194
(1)
522
998
$
(14)
(7)
–
407
147
701
625
1,519
1,473
$ 13
157
$(144)
$ 116
(6)
(4)
(79)
(311)
44
253
(14)
$ 1,872
672
$ 1,200
$
102
(13)
(4)
328
(164)
745
878
1,459
$ 785
$ 1,152
$ 1,937
$ 1,859
$ 13
$ 1,872
$ 106
(101)
(7)
(2)
6
(12)
37
$
156
937
82
$
262
836
75
1,175
1,173
13
6
(29)
19
(6)
8
$
174
151
47
372
22
62
59
$ (95)
359
79
343
(64)
(17)
(105)
$
79
510
126
715
(42)
45
(46)
Total interest-bearing liabilities
$ 29
$ 1,165
$ 1,194
$
515
$ 157
$
672
T73 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 $1,758 of Canadian taxes (2016 – $1,742; 2015 – $1,849) and $1,490 of foreign taxes (2016 – $1,401; 2015 – $1,004).
(2) Total income and other taxes as a percentage of net income before income and other taxes.
2017
2016
2015
2017
versus
2016
$
2,033
$ 2,030
$ 1,853
–%
380
423
412
347
403
363
329
361
310
1,215
1,113
1,000
$
3,248
$ 3,143
$ 2,853
$ 10,276
$ 9,398
$ 9,066
19.8
28.3
21.6
29.9
20.4
28.3
10
5
13
9
3%
9%
(1.8)
(1.6)
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 113
2017
2016
2015
$ 151.7
107.0
$ 163.5
106.4
$ 155.9
100.2
258.7
148.3
63.2
269.9
139.2
63.7
256.1
130.7
67.1
$ 470.2
$ 472.8
$ 453.9
$
51.8
134.0
20.9
$
47.9
125.1
19.7
$
43.0
117.7
18.3
$ 206.7
$ 192.7
$ 179.0
2017
2016
2015
$ 472.8
(33.6)
31.0
$ 453.9
4.3
14.6
$ 427.5
14.3
12.1
$ 470.2
$ 472.8
$ 453.9
2017
2016
2015
$ 192.7
3.6
10.4
$ 179.0
6.6
7.1
$ 164.8
8.2
6.0
$ 206.7
$ 192.7
$ 179.0
2017
$ 28.5
0.8
–
0.4
$ 29.7
$
2016
26.1
0.7
–
0.4
$
2015
25.5
0.9
–
0.4
$
27.2
$
26.8
MANAGEMENT’S DISCUSSION AND ANALYSIS
T74 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
T75 Changes in 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 $(33.5) (2016 – nil; 2015 – nil).
As at October 31 ($ billions)
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 $(4.3) (2016 – nil; 2015 – nil).
T76 Fees paid to the shareholders’ auditors
For the fiscal years ($ millions)
Audit services
Audit-related services
Tax services outside of the audit scope
Other non-audit services
Total
114 | 2 0 1 7 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
T77 Selected quarterly information
As at and for the quarter ended
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2017
2016
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 ($)(1)
Return on equity (%)
Productivity ratio (%)
Core banking margin (%)(1)
Financial position information ($ billions)
Cash and deposits with financial institutions
Trading assets
Loans
Total assets
Deposits
Common equity
Preferred shares and other equity instruments
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)(2)
Liquidity coverage ratio (LCR)(%)
Credit quality
Net impaired loans ($ millions)(3)
Allowance for credit losses ($ millions)
Net impaired loans as a % of loans and acceptances(3)
Provision for credit losses as a % of average net loans and acceptances
(annualized)
Common share information
Closing share price ($) (TSX)
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends paid per share ($)
Dividend yield (%)(4)
Market capitalization ($ billions) (TSX)
Book value per common share ($)
Market value to book value multiple
Price to earnings multiple (trailing 4 quarters)
3,831
2,981
6,812
536
3,668
538
2,070
1,986
1.66
1.64
1.65
14.5
53.8
2.44
59.7
98.5
504.4
915.3
625.4
55.5
4.6
470.2
206.7
11.5
13.1
14.9
4.7
376.4
125
2,243
4,327
0.43
3,833
3,061
6,894
573
3,672
546
2,103
2,016
1.68
1.66
1.68
14.8
53.3
2.46
57.8
105.1
498.6
906.3
618.1
53.4
3.0
481.1
201.3
11.3
12.6
14.8
4.4
365.4
125
2,273
4,290
0.44
3,728
2,853
6,581
587
3,601
332
2,061
1,965
1.63
1.62
1.63
14.9
54.7
2.54
50.9
111.8
496.3
921.6
628.2
55.1
3.0
494.2
205.0
11.3
12.5
14.7
4.4
374.9
126
2,510
4,591
0.49
3,643
3,225
6,868
553
3,689
617
2,009
1,909
1.58
1.57
1.58
14.3
53.7
2.40
48.4
106.5
477.4
887.0
604.7
53.0
3.2
469.6
194.0
11.3
12.6
14.8
4.5
359.6
132
2,416
4,508
0.49
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
0.42
0.45
0.49
0.45
0.45
0.47
0.64
0.45
83.28
77.67
75.88
77.76
72.08
66.33
65.80
57.39
1,198
1,215
1,199
0.79
4.0
99.9
46.24
1.8
12.7
1,200
1,219
1,198
0.76
4.0
93.1
44.54
1.7
12.0
1,206
1,223
1,202
0.76
3.9
91.2
45.86
1.7
12.0
1,209
1,229
1,208
0.74
4.0
94.0
43.87
1.8
13.1
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) Refer to page 14 for a discussion of non-GAAP measures.
(2) Credit valuation adjustment (CVA) risk-weighted assets were calculated using scalars of 0.72, 0.77 and 0.81 to compute CET1, Tier 1 and Total capital ratios, respectively in 2017.
(3) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(4) Based on the average of the high and low common share price for the period.
2 0 1 7 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
Eleven-Year Statistical Review
T78 Consolidated Statement of Financial Position
IFRS
As at October 31 ($ millions)
2017
2016
2015
2014
2013
2012
2011
Assets
Cash and deposits with financial institutions
Precious metals
Trading assets
Securities
Loans
Other
$
59,663
5,717
$
46,344
8,442
$
73,927
10,550
$
56,730
7,286
$
53,338
8,880
$
47,337
12,387
$
38,723
9,249
78,652
17,312
2,500
98,464
87,287
19,421
1,853
108,561
78,380
18,341
2,419
99,140
95,363
14,508
3,377
113,248
84,196
11,225
1,068
96,489
74,639
12,857
100
87,596
62,192
13,607
–
75,799
Financial instruments designated at fair value through
profit or loss
13
221
320
111
106
197
375
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
95,319
35,364
69,269
236,916
103,331
168,449
508,696
4,327
504,369
13,560
2,381
4,586
12,106
1,713
12,749
47,095
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
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
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
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
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
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
$ 915,273
$ 896,266
$ 856,497
$ 805,666
$ 743,644
$ 668,225
$ 594,423
$ 200,030
384,988
40,349
$ 199,302
372,303
40,272
$ 190,044
375,144
35,731
$ 175,163
342,367
36,487
$ 171,048
313,820
33,019
$ 138,051
293,460
34,178
$ 133,025
262,833
25,376
625,367
611,877
600,919
554,017
517,887
465,689
421,234
Financial instruments designated at fair value through
profit or loss
4,663
1,459
1,486
465
174
157
101
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 and other equity instruments
Total equity attributable to equity holders of the Bank
Non-controlling interests
Non-controlling interests in subsidiaries
Capital instrument equity holders
Total equity
13,560
30,766
34,200
95,843
5,935
–
43,314
223,618
853,648
15,644
38,117
1,577
116
55,454
4,579
60,033
1,592
–
61,625
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
$ 915,273
$ 896,266
$ 856,497
$ 805,666
$ 743,644
$ 668,225
$ 594,423
116 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
T79 Consolidated Statement of Income
For the year ended October 31 ($ millions)
2017
2016
2015
2014
2013
2012
2011
IFRS
Revenue
Interest income
Loans
Securities
Securities purchased under resale agreements and securities
$ 21,719
1,403
$ 20,419
1,237
$ 18,912
922
$ 18,176
921
$ 17,359
1,000
$ 15,606
1,045
$ 14,373
986
borrowed
Deposits with financial institutions
283
522
158
394
161
292
180
263
190
279
221
287
221
275
23,927
22,208
20,287
19,540
18,828
17,159
15,855
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 and other equity instrument
holders
Common shareholders
Earnings per common share (in dollars)
Basic
Diluted
Dividends per common share (in dollars)
7,878
226
–
788
8,892
15,035
12,120
27,155
2,249
14,630
10,276
2,033
8,243
238
238
–
$
$
6,793
232
–
891
7,916
14,292
12,058
26,350
2,412
14,540
9,398
2,030
7,368
251
251
–
$
$
6,070
187
–
938
7,195
13,092
10,957
24,049
1,942
13,041
9,066
1,853
7,213
199
199
–
$
$
6,173
204
–
858
7,235
12,305
11,299
23,604
1,703
12,601
9,300
2,002
7,298
227
227
–
$
$
6,397
339
–
742
7,478
11,350
9,949
21,299
1,288
11,664
8,347
1,737
6,610
231
231
–
$
$
6,117
381
–
691
7,189
9,970
9,676
19,646
1,252
10,436
7,958
1,568
6,390
196
196
–
$
$
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
$
$
$
8,005
$
7,117
$
7,014
$
7,071
$
6,379
$
6,194
$
5,181
129
7,876
6.55
6.49
3.05
$
$
$
$
130
6,987
5.80
5.77
2.88
$
$
$
$
117
6,897
5.70
5.67
2.72
$
$
$
$
155
6,916
5.69
5.66
2.56
$
$
$
$
217
6,162
5.15
5.11
2.39
$
$
$
$
220
5,974
5.27
5.18
2.19
$
$
$
$
216
4,965
4.63
4.53
2.05
$
$
$
$
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 7 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
T80A Consolidated Balance Sheet – CGAAP
As at October 31 ($ millions)
Assets
Cash resources
Securities
Trading
Available-for-sale
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
118 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
CGAAP
2010
2009
2008
2007
$
46,027
$
43,278
$
37,318
$
29,195
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
284,224
266,302
288,680
227,147
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
$ 526,657
$ 496,516
$ 507,625
$ 411,510
$ 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
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
3,975
3,710
2,860
1,635
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
$ 526,657
$ 496,516
$ 507,625
$ 411,510
T81A 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
$ 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
16,891
18,935
22,316
21,035
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
14,266
12,713
11,246
12,220
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
$
$
$
$
$
$
2 0 1 7 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
T82 Consolidated Statement of Changes in Equity
For the year ended October 31 ($ millions)
2017
2016
2015
2014
2013
2012
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(2)
Dividends: Preferred(3)
Purchase of shares for cancellation and premium on
Common
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(7)
Balance at beginning of year
Share-based payments
Other
Balance at end of year
Total common equity
Preferred shares and other equity instruments
Balance at beginning of year
Net income attributable to preferred shareholders and other
equity instrument holders of the Bank(2)
Preferred and other equity instrument dividends(3)
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
2011
5,750
2,586
–
8,336
$
$
21,932
(6,248)
15,684
–
4,965
–
(2,200)
$ 15,513
313
(182)
$ 15,644
$ 15,141
391
(19)
$ 15,513
$ 15,231
104
(194)
$ 15,141
$ 14,516
771
(56)
$ 15,231
$ 13,139
1,377
–
$ 14,516
$
8,336
4,803
–
$ 13,139
34,752
–
34,752
–
7,876
–
(3,668)
31,316
–
31,316
–
6,987
–
(3,468)
28,609
–
28,609
–
6,897
–
(3,289)
25,315
(247)
25,068
–
6,916
–
(3,110)
21,978
(203)
21,775
–
6,162
–
(2,858)
18,421
(144)
18,277
–
5,974
–
(2,493)
(827)
(16)
$ 38,117
(61)
(22)
$ 34,752
(761)
(140)(4)
$ 31,316
(264)
(1)
$ 28,609
–
(11)
$ 25,068
–
17
$ 21,775
–
(28)
$ 18,421
2,240
–
2,240
–
(663)
1,577
$
152
8
(44)
$
116
$ 55,454
3,594
129
(129)
1,560
(575)
4,579
$
1,570
–
1,570
238
(133)
(83)
$
1,592
$ 61,625
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
949
–
949
(5)(5)
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
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
(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
(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
(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) Relates to the adoption of new financial instruments accounting standards under CGAAP.
(2) Under CGAAP, net income attributable to preferred shareholders was included in retained earnings.
(3) Under IFRS, preferred dividends are recorded as a reduction to preferred shareholders’ equity. Under CGAAP, dividends are a reduction to retained earnings.
(4)
(5) 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.
(6) Relates to the adoption of the new accounting standard for impairment and classification of financial instruments under CGAAP.
(7) Under CGAAP, amounts represent Contributed Surplus.
Includes retrospective adjustments primarily related to foreign currency translation on Allowance for Credit Losses with respect to periods prior to 2013 ($152).
T83 Consolidated Statement of Comprehensive Income
IFRS
For the year ended October 31 ($ millions)
2017
2016
2015
2014
2013
2012
2011
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
Net change in unrealized gains (losses) on available-for-sale
(losses)
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(1)
Other comprehensive income from investments in associates
Other comprehensive income (loss)
Comprehensive income
Comprehensive income attributable to:
Common shareholders of the Bank
Preferred shareholders and other equity instrument holders
of the Bank
Non-controlling interests in subsidiaries
Capital instrument equity holders
$ 8,243
$ 7,368
$ 7,213
$ 7,298
$ 6,610
$ 6,390
$ 5,330
(1,259)
(55)
(28)
56
592
(21)
6
(709)
$ 7,534
396
(172)
258
31
(716)
1,855
(480)
55
(9)
(1)
(16)
(10)
(229)
$ 7,139
15
1
1,436
$ 8,649
889
(38)
(6)
60
(320)
N/A
(2)
583
$ 7,881
346
110
93
20
563
N/A
–
1,132
$ 7,742
149
151
116
25
(747)
N/A
–
(306)
$ 6,084
(697)
(169)
105
–
–
N/A
–
(761)
$ 4,569
$ 7,213
$ 6,772
$ 8,408
$ 7,477
$ 7,298
$ 5,694
$ 4,199
129
192
–
$ 7,534
130
237
–
$ 7,139
117
124
–
$ 8,649
155
249
–
$ 7,881
217
227
–
$ 7,742
220
170
–
$ 6,084
216
96
58
$ 4,569
(1) 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.
120 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
CGAAP
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(6)
(799)
$ (3,800)
–
–
–
$
–
$ 21,062
2,860
–
–
850
–
3,710
$
502
–
502
114
(36)
(26)
$
554
$ 25,326
2008
2007
$
$
3,566
266
(3)
3,829
$
$
3,425
184
(43)
3,566
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
15,843
–
15,843
(61)(1)
4,045
(51)
(1,720)
(586)
(10)
$ 17,460
(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
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
$ 4,339
$ 3,661
$ 3,259
$ 4,163
(591)
278
62
–
–
N/A
–
(251)
$ 4,088
(1,736)
894
43
–
–
N/A
–
(799)
$ 2,862
2,368
(1,588)
(519)
–
–
N/A
–
261
$ 3,520
(2,228)
(67)
76
–
–
N/A
–
(2,219)
$ 1,944
$ 3,787
$ 2,562
$ 3,294
$ 1,775
201
100
–
$ 4,088
186
114
–
$ 2,862
107
119
–
$ 3,520
51
118
–
$ 1,944
2 0 1 7 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
T84 Other statistics
For the year ended October 31
2017
2016
2015
6.55
6.49
14.6
53.9
0.90
2.46
N/A
11.5
13.1
14.9
4.7
5.80
5.77
13.8
55.2
0.81
2.38
N/A
11.0
12.4
14.6
4.5
5.70
5.67
14.6
54.2
0.84
2.39
N/A
10.3
11.5
13.4
4.2
IFRS
2014
5.69
5.66
16.1
53.4
0.92
2.39
N/A
10.8
12.2
13.9
N/A
2013
2012
2011
5.15
5.11
16.6
54.8
0.88
2.31
N/A
9.1
11.1
13.5
N/A
5.27
5.18
19.9
53.1
0.97
2.31
N/A
N/A
13.6
16.7
N/A
4.63
4.53
20.3
54.8
0.91
2.32
N/A
N/A
12.2
13.9
N/A
83.28
72.08
61.49
69.02
63.39
54.25
52.53
1,199
3.05
4.0
12.7
46.24
1,208
2.88
4.7
12.4
43.59
1,203
2.72
4.4
10.8
40.80
1,217
2.56
3.8
12.1
36.96
1,209
2.39
4.1
12.3
33.23
1,184
2.19
4.2
10.3
28.99
1,089
2.05
3.7
11.3
24.20
912,619
913,844
860,607
795,641
748,901
659,538
586,101
3,003
88,645
3,113
88,901
3,177
89,214
3,288
86,932
3,330
86,690
3,123
81,497
2,926
75,362
Operating performance
Basic earnings per share ($)
Diluted earnings per share ($)
Return on equity (%)
Productivity ratio (%)
Return on assets (%)
Core banking margin (%)(1)
Net interest margin on total average
assets (%)
Capital measures(2)
Common Equity Tier 1 (CET1) capital
ratio (%)
Tier 1 capital ratio (%)
Total capital ratio (%)
Leverage ratio (%)
Common share information
Closing share price ($)(TSX)
Number of shares outstanding
(millions)
Dividends paid per share ($)
Dividend yield (%)(3)
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
8,140
8,144
8,191
8,732
8,471
7,341
6,260
(1) Refer to page 14 for a discussion of non-GAAP measures.
(2) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules as an all-in basis. Comparative amounts for periods 2012-2008 were determined in accordance with Basel II rules. Amounts
prior to 2008 were determined in accordance with Basel I rules and have not been restated.
(3) Based on the average of the high and low common share price for the year.
122 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
CGAAP
2010
2009
2008
2007
3.91
3.91
18.3
52.8
0.84
N/A
1.67
N/A
11.8
13.8
N/A
3.32
3.31
16.7
54.8
0.71
N/A
1.62
N/A
10.7
12.9
N/A
3.07
3.05
16.7
61.4
0.72
N/A
1.66
N/A
9.3
11.1
N/A
4.04
4.01
22.0
56.0
1.03
N/A
1.76
N/A
9.3
10.5
N/A
54.67
45.25
40.19
53.48
1,043
1.96
3.9
14.0
22.68
1,025
1.96
5.4
13.6
20.55
992
1.92
4.3
13.1
18.94
984
1.74
3.4
13.2
17.45
515,991
513,149
455,539
403,475
2,784
70,772
2,686
67,802
2,672
69,049
2,331
58,113
5,978
5,778
5,609
5,283
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
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A
N
A
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I
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|
S
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P
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D
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A
2 0 1 7 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
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, 2017, 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 28, 2017
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, 2017, 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,
2017, 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, 2017 and October 31,
2016, 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, 2017, and notes, comprising a summary of significant accounting policies and other explanatory information, and our report dated
November 28, 2017 expressed an unmodified (unqualified) opinion on those consolidated financial statements.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 28, 2017
124 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
126 Management’s Responsibility for Financial Information
127
128
129
130
131
132
133
Independent Auditors’ Report of Registered Public Accounting Firm
Consolidated Statement of Financial Position
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the 2017 Consolidated Financial Statements
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 125
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 Group Head and 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 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 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 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, 2017 and October 31, 2016 and its consolidated financial performance and its consolidated cash flows for each of the years in the three-
year period ended October 31, 2017 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 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 28, 2017
126 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
C
O
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S
O
L
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D
A
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F
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A
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S
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A
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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, 2017 and October 31, 2016, 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, 2017, 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
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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, 2017 and October 31, 2016 and its consolidated financial performance and its consolidated cash flows for each of the years
in the three-year period ended October 31, 2017 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, 2017, 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 28, 2017
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 28, 2017
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 127
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 and other equity instruments
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.
128 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
Note
2017
2016
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)
$ 59,663
5,717
$ 46,344
8,442
78,652
17,312
2,500
98,464
13
95,319
35,364
69,269
236,916
103,331
168,449
508,696
4,327
504,369
13,560
2,381
4,586
12,106
1,713
12,749
47,095
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
$ 915,273
$ 896,266
$ 200,030
384,988
40,349
625,367
4,663
$ 199,302
372,303
40,272
611,877
1,459
13,560
30,766
34,200
95,843
5,935
43,314
223,618
853,648
15,644
38,117
1,577
116
55,454
4,579
60,033
1,592
61,625
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
$ 915,273
$ 896,266
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
2017
2016
2015
$ 21,719
1,403
283
522
23,927
$ 20,419
1,237
158
394
22,208
$ 18,912
922
161
292
20,287
7,878
226
788
8,892
6,793
232
891
7,916
6,070
187
938
7,195
15,035
14,292
13,092
31
31
32
11(e)
16
12(d)
26
3,855
3,318
598
557
1,259
380
407
626
1,120
12,120
27,155
2,249
24,906
7,375
2,436
761
437
581
775
423
1,842
14,630
10,276
2,033
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
14,540
13,041
9,398
2,030
9,066
1,853
$ 8,243
$ 7,368
$ 7,213
Net income attributable to non-controlling interests in subsidiaries
30(b)
238
251
199
Net income attributable to equity holders of the Bank
Preferred shareholders and other equity instrument holders
Common shareholders
Earnings per common share (in dollars)
Basic
Diluted
Dividends paid per common share (in dollars)
The accompanying notes are an integral part of these consolidated financial statements.
$ 8,005
129
$ 7,876
$ 7,117
130
$ 6,987
$ 7,014
117
$ 6,897
$
33
33
23(a)
6.55
6.49
3.05
$
5.80
5.77
2.88
$
5.70
5.67
2.72
2 0 1 7 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
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(2)
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 and other equity instrument holders
Common shareholders
Includes amounts related to qualifying hedges.
(1)
(2) Amount for 2016 includes reclassification of $22 pre-tax to goodwill for acquisition-related cash flow hedges.
The accompanying notes are an integral part of these consolidated financial statements.
2017
2016
2015
$ 8,243
$ 7,368
$ 7,213
(1,564)
404
(8)
107
(1,259)
(217)
143
(61)
42
(55)
1,722
(1,761)
454
(465)
(28)
56
805
213
592
(28)
(7)
(21)
6
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
(709)
(229)
1,436
$ 7,534
$ 7,139
$ 8,649
192
237
124
$ 7,342
129
$ 7,213
$ 6,902
130
$ 6,772
$ 8,525
117
$ 8,408
130 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
Consolidated Statement of Changes in Equity
($ millions)
Balance as at November 1, 2016
Net income
Other comprehensive income (loss)
Total comprehensive income
Shares and other equity instruments issued
Shares repurchased/redeemed
Common dividends paid
Preferred dividends paid
Distributions to non-controlling interests
Share-based payments
Other
Accumulated other
comprehensive income (loss)
Common
shares
(Note 23)
$ 15,513
–
–
$
–
313
(182)
–
–
–
–
–
Retained
earnings(1)
$ 34,752
7,876
–
$ 7,876
–
(827)
(3,668)
–
–
–
(16)
Foreign
currency
translation
$ 3,055
–
(1,194)
$ (1,194)
–
–
–
–
–
–
–
Available-
for-sale
securities
$
14
–
(60)
$ (60)
–
–
–
–
–
–
–
Cash flow
hedges
$ 264
–
(29)
$ (29)
–
–
–
–
–
–
–
Other(2)
$(1,093)
–
620
$
620
–
–
–
–
–
–
–
Other
reserves(3)
$ 152
–
–
$
–
(44)
–
–
–
–
8
–
Total
common
equity
$ 52,657
7,876
(663)
$ 7,213
269
(1,009)
(3,668)
–
–
8
(16)
Preferred
shares and
other equity
instruments
(Note 23)
$ 3,594
129
–
$
129
1,560
(575)
–
(129)
–
–
–
Balance as at October 31, 2017
$ 15,644
$ 38,117
$ 1,861
$ (46)
$ 235
$ (473)
$ 116
$ 55,454
$ 4,579
Balance as at November 1, 2015
Net income
Other comprehensive income (loss)
Total comprehensive income
Shares issued
Shares repurchased/redeemed
Common dividends paid
Preferred dividends paid
Distributions to non-controlling interests
Share-based payments
Other
$ 15,141
–
–
$
–
391
(19)
–
–
–
–
–
$ 31,316
6,987
–
$ 6,987
–
(61)
(3,468)
–
–
–
(22)
$ 2,633
–
422
$
422
–
–
–
–
–
–
–
$ 194
–
(180)
$ (180)
–
–
–
–
–
–
–
Balance as at October 31, 2016
$ 15,513
$ 34,752
$ 3,055
$
14
$
7
–
257
$ 257
–
–
–
–
–
–
–
$ 264
$ (379)
–
(714)
$ (714)
–
–
–
–
–
–
–
$ 173
–
–
$
–
(28)
–
–
–
–
7
–
$ 49,085
6,987
(215)
$ 6,772
363
(80)
(3,468)
–
–
7
(22)
$ 2,934
130
–
$
130
1,350
(690)
–
(130)
–
–
–
$(1,093)
$ 152
$ 52,657
$ 3,594
Balance as at November 1, 2014
Net income
Other comprehensive income (loss)
Total comprehensive income
Shares issued
Shares repurchased/redeemed
Common dividends paid
Preferred dividends paid
Distributions to non-controlling interests
Share-based payments
Other
$ 15,231
–
$ 28,609
6,897
$
700
–
$ 664
–
$ (48)
–
$ (367)
–
$ 176
–
$ 44,965
6,897
$ 2,934
117
$
–
–
104
(194)
–
–
–
–
–
–
1,933
(470)
$ 6,897
–
$ 1,933
–
$ (470)
–
$
(761)
(3,289)
–
–
–
(140)(5)
–
–
–
–
–
–
–
–
–
–
–
–
$
(7)
(7)
–
–
–
–
–
–
(5)(6)
$
–
–
(17)
1,511
$ 8,408
87
$
–
–
–
–
14
–
(955)
(3,289)
–
–
14
(145)
–
117
–
–
–
(117)
–
–
–
55
55
–
–
–
–
–
–
–
7
Total attributable
to equity
holders
Non-controlling
interests in
subsidiaries
(Note 30(b))
$ 56,251
8,005
(663)
$ 7,342
1,829
(1,584)
(3,668)
(129)
–
8
(16)
$ 60,033
$ 52,019
7,117
(215)
$ 6,902
1,713
(770)
(3,468)
(130)
–
7
(22)
$ 56,251
$ 47,899
7,014
1,511
$ 8,525
87
(955)
(3,289)
(117)
–
14
(145)
$ 1,570
238
(46)
$
192
–
–
–
–
(133)
–
(37)(4)
Total
$ 57,821
8,243
(709)
$ 7,534
1,829
(1,584)
(3,668)
(129)
(133)
8
(53)
$ 1,592
$ 61,625
$ 1,460
251
(14)
$
237
–
–
–
–
(116)
–
(11)(4)
$ 53,479
7,368
(229)
$ 7,139
1,713
(770)
(3,468)
(130)
(116)
7
(33)
$ 1,570
$ 57,821
$ 1,312
199
$
(75)
124
–
–
–
–
(86)
–
110(4)
$ 49,211
7,213
1,436
$ 8,649
87
(955)
(3,289)
(117)
(86)
14
(35)
Balance as at October 31, 2015
$ 15,141
$ 31,316
$ 2,633
$ 194
$
$ (379)
$ 173
$ 49,085
$ 2,934
$ 52,019
$ 1,460
$ 53,479
Includes undistributed retained earnings of $61 (2016 – $63; 2015 – $61) related to a foreign associated corporation, which is subject to local regulatory restriction.
(1)
(2)
Includes Share from associates, Employee benefits and Own credit risk.
(3) Represents amounts on account of share-based payments (refer to Note 25).
(4)
(5)
(6) Represents retrospective adjustments 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 in 2015.
Includes changes to non-controlling interests arising from business combinations and other.
Includes retrospective adjustments primarily related to foreign currency translation on Allowance for Credit Losses with respect to periods prior to 2013 ($152).
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATEDFINANCIALSTATEMENTS
2
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CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Cash Flows
Sources (uses) of cash flows for the year ended October 31 ($ 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
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(1)
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 and other equity instruments issued
Redemption of preferred shares
Common shares purchased for cancellation
Cash dividends paid
Distributions to non-controlling interests
Other, net(1)
Net cash from/(used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year(2)
Cash and cash equivalents at end of year(2)
(1) Certain comparative amounts have been restated to conform with current period presentation.
(2) 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.
132 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
2017
2016
2015
$
8,243
$
7,368
$
7,213
(15,035)
761
2,249
8
(380)
(62)
(407)
2,033
–
8,377
(4,631)
(32,589)
27,516
7,533
849
(391)
(1,997)
1,600
23,649
(8,730)
(2,012)
16,584
(14,006)
(64,560)
66,179
229
3
(385)
(12,540)
–
(1,500)
313
1,560
(575)
(1,009)
(3,797)
(133)
2,209
(2,932)
(142)
970
6,855
7,825
$
(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)
2,293
873
21,099
(7,787)
(1,471)
4,536
28,447
(94,441)
65,069
(1,050)
(348)
(431)
(2,754)
2,465
(1,035)
391
1,350
(690)
(80)
(3,598)
(116)
(320)
(1,633)
(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
7,286
1,147
19,145
(7,262)
(1,985)
16,426
(8,448)
(44,684)
41,649
(701)
(282)
(1,053)
(13,519)
1,248
(18)
101
–
–
(955)
(3,406)
(86)
800
(2,316)
305
896
5,828
6,724
$
NOTES TO THE 2017 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page Note
134
134
135
148
150
150
156
157
158
1
2
3
4
5
6
7
8
9
Reporting entity
Basis of preparation
Page Note
177 19
Deposits
177 20
Subordinated debentures
Significant accounting policies
178 21
Other liabilities
Future accounting developments
178 22
Provisions
Cash and deposits with financial institutions
179 23
Common and preferred shares and other equity
instruments
Fair value of financial instruments
Trading assets
Financial instruments designated at fair value
through profit or loss
182 24
Capital management
183 25
Share-based payments
186 26
Corporate income taxes
Derivative financial instruments
188 27
Employee benefits
162
10
Offsetting financial assets and financial
liabilities
193 28
Operating segments
195 29
Related party transactions
164
167
170
171
174
174
175
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
176 18
Other assets
196 30
Principal subsidiaries and non-controlling
interests in subsidiaries
197 31
Non-interest income
197 32
Trading revenues
198 33
Earnings per share
198 34
Guarantees, commitments and pledged assets
200 35
Financial instruments – risk management
208 36
Business combinations and divestitures
208 37
Event after the Consolidated Statement of
Financial Position date
2 0 1 7 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
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, 2017 have been approved by the Board of Directors for issue on November 28,
2017.
Certain comparative amounts have been restated to conform with the basis of presentation in the current year.
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, other comprehensive income 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 and intangible assets, the fair value of all identifiable assets and liabilities
as a result of business combinations, impairment of investment securities, impairment of non-financial assets, derecognition of financial assets and
liabilities and provisions. 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.
134 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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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 equity holders 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).
2 0 1 7 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
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.
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 other
comprehensive income in the Consolidated Statement of Comprehensive Income. On disposal or partial disposal of a foreign operation, 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.
136 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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.
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.
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Derecognition of financial assets and liabilities
Derecognition of financial assets
The derecognition criteria are applied to the transfer of part of an asset, rather than the asset as a whole, only if such part comprises specifically
identified cash flows from the asset, a fully proportionate share of the cash flows from the asset, or a fully proportionate share of specifically identified
cash flows from the asset.
A financial asset is derecognized when the contractual rights to the cash flows from the asset has expired; or the Bank transfers the contractual rights
to receive the cash flows from the financial asset; or has assumed an obligation to pay those cash flows to an independent third-party; and the Bank
has transferred substantially all the risks and rewards of ownership of that asset to an independent third-party. Management determines whether
substantially all the risk and rewards of ownership have been transferred by quantitatively comparing the variability in cash flows before and after the
transfer. If the variability in cash flows remains significantly similar subsequent to the transfer, the Bank has retained substantially all of the risks and
rewards of ownership.
Where substantially all the risks and rewards of ownership of the financial asset are neither retained nor transferred, the Bank derecognizes the
transferred asset only if it has lost control over that asset. Control over the asset is represented by the practical ability to sell the transferred asset. If
the Bank retains control over the asset, it will continue to recognize the asset to the extent of its continuing involvement. At times such continuing
involvement may be in the form of investment in senior or subordinated tranches of notes issued by non-consolidated structured entities.
On derecognition of a financial asset, the difference between the carrying amount and the sum of (i) the consideration received (including any new
asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in other comprehensive income is
recognized in the Consolidated Statement of Income.
Transfers of financial assets that do not qualify for derecognition are reported as secured financings in the Consolidated Statement of Financial
Position.
Derecognition of financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged, canceled or expires. If an existing financial liability is replaced
by another from the same counterparty on substantially different terms, or the terms of the existing liability are substantially modified, such an
exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability 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
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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
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. For cash collateral advanced
or received, the Bank presents these transactions as securities sold under repurchase agreement or securities purchased under reverse repurchase
agreement, respectively. Interest on cash collateral advanced or received is presented in interest income – securities purchased under resale
agreements and securities borrowed or interest expense – other, respectively. 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.
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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.
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.
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Reversals of impairment losses on held-to-maturity investment securities are included in net gain on investment securities within non-interest income
in the Consolidated Statement of Income, to a maximum of the amortized cost of the investment before the original impairment charge.
Loans
Loans include loans and advances originated or purchased by the Bank which are not classified as held-for-trading, held-to-maturity or designated at
fair value. Debt securities, which are not trading securities or have not been designated as available-for-sale securities and that are not quoted in an
active market, are also classified as loans.
Loans originated by the Bank are recognized when cash is advanced to a borrower. Loans purchased are recognized when cash consideration is paid
by the Bank. Loans are measured at amortized cost using the effective interest method, less any impairment losses. Loans are stated net of allowance
for credit losses.
Purchased loans
All purchased loans are initially measured at fair value on the date of acquisition. In arriving at the fair value, the Bank considers interest rate mark
adjustments and credit mark adjustments. As a result of recording all purchased loans at fair value, no allowances for credit losses are recorded in the
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.
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Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the
resultant present value with the loan’s current carrying amount. This results in interest income being recognized using the original effective interest
rate.
Collective impairment allowance
For loans that have not been individually assessed as being impaired, the Bank pools them into groups to assess them on a collective basis. Collective
allowances are calculated for impaired loans and performing loans. Allowances related to performing loans estimate probable incurred losses that are
inherent in the portfolio but have not yet been specifically identified as impaired.
Internal risk rating parameters are used in the calculation of the collective impairment allowance. For non-retail loan portfolios, internal risk rating
parameters form the basis for calculating the quantitative portion of the collective allowance for performing loans:
Š Probability of Default rates (PD) which are based upon the internal risk rating for each borrower;
Š Loss Given Default rates (LGD); and
Š Exposure at Default factors (EAD).
Funded exposures are multiplied by the borrower’s PD and by the relevant LGD parameter.
Committed but undrawn exposures are multiplied by the borrower’s PD, by the relevant LGD parameter, and by the relevant EAD parameter. A model
stress component is also applied to recognize uncertainty in the credit risk parameters and the fact that current actual loss rates may differ from the
long-term averages included in the model.
Retail loans
Retail loans represented by residential mortgages, credit cards and other personal loans are considered by the Bank to be homogeneous groups of
loans that are not considered individually significant. All homogeneous groups of loans are assessed for impairment on a collective basis.
Mortgages are collectively assessed for impairment, taking into account number of days past due, historical loss experience and incorporating both
quantitative and qualitative factors including the current business and economic environment and the realizable value of collateral to determine the
appropriate level of the collective impairment allowance.
A roll rate methodology is used to determine impairment losses on a collective basis for credit cards and other personal loans because individual loan
assessment is impracticable. Under this methodology, loans with similar credit characteristics are grouped into ranges according to the number of days
past due and statistical analysis is used to estimate the likelihood that loans in each range will progress through the various stages of delinquency and
ultimately prove irrecoverable. This methodology employs statistical analyses of historical data and experience of delinquency and default to estimate
the amount of loans that will eventually be written off as a result of the events not identifiable on an individual loan basis. When the portfolio size is
small or when information is insufficient or not reliable enough to adopt a roll rate methodology, the Bank adopts a basic formulaic approach based
on historical loss rate experience.
Performing loans
Over and above the individually assessed and retail roll rate allowances, loans that were subject to individual assessment for which no evidence of
impairment existed, are grouped together according to their credit risk characteristics for the purpose of reassessing them on a collective basis. This
reflects impairment losses that the Bank has incurred as a result of events that have occurred but where the individual loss has not been identified.
The collective impairment allowance for such loans is determined after taking into account:
Š historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product);
Š the estimated period between impairment occurring and the loss being identified and evidenced by the establishment of an appropriate allowance
against the individual loan; and
Š management’s experienced judgment as to whether current economic and credit conditions are such that the actual level of inherent losses at the
reporting date is likely to be greater or less than that suggested by historical experience. As soon as information becomes available which identifies
losses on individual loans within the group, those loans are removed from the group and assessed on an individual basis for impairment.
Provision for credit losses on off-balance sheet positions
A provision is set up for the Bank’s off-balance sheet positions and recorded in other liabilities on the Consolidated Statement of Financial Position.
The process to determine the provision for off-balance sheet positions is similar to the methodology used for loans. Any change in the provision is
recorded in the Consolidated Statement of Income as provision for credit losses.
Write-off of loans
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, write-off is generally after receipt of any proceeds from the realization of security. In circumstances where the net
realizable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss related to loans decreases in a subsequent period, and the decrease can be related objectively to an event
occurring after the impairment was recognized, the excess is written back by reducing the loan impairment allowance account accordingly. The write-
back is recognized in the provision for credit losses in the Consolidated Statement of Income.
Restructured loans
Restructured loans include loans where the Bank has renegotiated the original terms of a loan by granting a concession to the borrower (concessions).
These concessions include interest rate adjustments, deferral or extension of principal or interest payments and forgiveness of a portion of principal or
interest. Once the terms of the loan have been renegotiated and agreed upon with the borrower the loan is considered a restructured loan. The
investment in the loan is reduced as of the date of the restructuring to the amount of the net expected cash flows receivable under the modified
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terms, discounted at the original effective interest rate inherent in the loan. The loan is no longer considered past due and the reduction in the
carrying value of the loan is recognized as a charge for loan impairment in the Consolidated Statement of Income in the period in which the loan
is restructured. In other cases, restructuring may be considered substantial enough to result in recognition of a new loan.
Customer’s liability under acceptances
The Bank’s potential liability under acceptances is reported as a liability in the Consolidated Statement of Financial Position. The Bank has equivalent
claims against its customers in the event of a call on these commitments, which are reported as an asset. Fees earned are reported in fee and
commission revenues – banking fees in the Consolidated Statement of Income.
Hedge accounting
The Bank formally documents all hedging relationships and its risk management objective and strategy for undertaking these hedge transactions at
inception. The hedge documentation includes identification of the asset, liability, firm commitment or highly probable forecasted transaction being
hedged, the nature of the risk being hedged, the hedging instrument used and the method used to assess the effectiveness of the hedge. The Bank
also formally assesses, both at each hedge’s inception and on an ongoing basis, whether the hedging instruments are highly effective in offsetting
changes in fair value or cash flows of hedged items. Hedge ineffectiveness is measured and recorded in non-interest income – other in the
Consolidated Statement of Income.
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.
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Non-financial assets acquired in exchange for loans as part of an orderly realization are recorded as assets held-for-sale or assets held-for-use. If the
acquired asset does not meet the requirement to be considered held-for-sale, the asset is considered held-for-use, measured initially at cost which
equals the carrying value of the loan and accounted for in the same manner as a similar asset acquired in the normal course of business.
Business combinations and goodwill
The Bank follows the acquisition method of accounting for the acquisition of subsidiaries. The Bank considers the date on which control is obtained
and it legally transfers the consideration for the acquired assets and assumed liabilities of the subsidiary to be the date of acquisition. The cost of an
acquisition is measured at the fair value of the consideration paid. The fair value of the consideration transferred by the Bank in a business
combination is calculated as the sum of the acquisition date fair value of the assets transferred by the Bank, the liabilities incurred by the Bank to
former owners of the acquiree, and the equity interests, including any options, issued by the Bank. The Bank recognizes the acquisition date fair
values of any previously held investment in the subsidiary and contingent consideration as part of the consideration transferred in exchange for the
acquisition. A gain or loss on any previously held investments of an acquiree is recognized in non-interest income – other in the Consolidated
Statement of Income.
In general, all identifiable assets acquired (including intangible assets) and liabilities assumed (including any contingent liabilities) are measured at the
acquisition date fair value. The Bank records identifiable intangible assets irrespective of whether the assets have been recognized by the acquiree
before the business combination. Non-controlling interests, if any, are recognized at their proportionate share of the fair value of identifiable assets
and liabilities, unless otherwise indicated. Where the Bank has an obligation to purchase a non-controlling interest for cash or another financial asset,
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
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Income under operating expenses – depreciation and amortization. As intangible assets are considered to be non-financial assets, the impairment
model for non-financial assets is applied. Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually and
when circumstances indicate that the carrying value may be impaired.
Impairment of non-financial assets
The carrying amount of the Bank’s non-financial assets, other than goodwill and indefinite life intangible assets and deferred tax assets which are
separately addressed, is reviewed at each reporting date to determine whether there is any indication of impairment. For the purpose of impairment
testing, non-financial assets that cannot be tested individually are grouped together into the smallest group of assets that generate cash inflows from
continuing use that are largely independent from the cash inflows of other assets or groups of assets.
If any indication of impairment exists then the asset’s recoverable amount is estimated. The recoverable amount of an asset or CGU is the greater of
its value in use and its fair value less costs of disposal. The Bank’s corporate assets do not generate separate cash inflows. If there is an indication that
a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.
An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses of continuing
operations are recognized in the Consolidated Statement of Income in those expense categories consistent with the nature of the impaired asset.
Impairment losses recognized in prior periods are reassessed at each reporting date for any indication that the loss had decreased or no longer exists.
An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed
only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized. Such reversal is recognized in the Consolidated Statement of Income.
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.
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Sale and lease-back
Where the Bank enters into a sale leaseback transaction for a non-financial asset at fair market value that results in the Bank retaining an operating
lease (where the buyer/lessor retains substantially all risks and rewards of ownership), any gains and losses are recognized immediately in net income.
Where the sale leaseback transaction results in a finance lease, any gain on sale is deferred and recognized in net income over the remaining term of
the lease.
Leasehold improvements
Leasehold improvements are investments made to customize buildings and offices occupied under operating lease contracts to make them suitable for
their intended purpose. The present value of estimated reinstatement costs to bring a leased property into its original condition at the end of the
lease, if required, is capitalized as part of the total leasehold improvements costs. At the same time, a corresponding liability is recognized to reflect
the obligation incurred. Reinstatement costs are recognized in net income through depreciation of the capitalized leasehold improvements over their
estimated useful life.
Provisions
A provision, including for restructuring, is recognized if, as a result of a past event, the Bank has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
The amount recognized as a provision is the Bank’s best estimate of the consideration required to settle the present obligation, taking into account
the risks and uncertainties surrounding the obligation. If the effect of the time value of money is considered material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where
appropriate, the risks specific to the liability. The increase in the provision due to the passage of time is recorded as interest expense – other in the
Consolidated Statement of Income.
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 and internationally. 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 set by reference to the yields 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 define benefit obligation at the beginning of the period. Beginning in 2016, separate discount rates are
used to determine the annual benefit expense in Canada and the US. These rates are determined with reference to the yields on high quality
corporate bonds with durations that match the various components of the annual 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 at the beginning of the period.
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.
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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.
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.
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Share-based payments
Share-based payments awarded to employees are recognized as compensation expense in the Consolidated Statement of Income over the vesting
period based on the number of awards expected to vest including the impact of expected forfeitures. For awards that are delivered in tranches, each
tranche is considered a separate award and accounted for separately.
Stock appreciation rights and other awards that must be settled for cash are classified as liabilities. Liability-classified awards are re-measured to fair
value at each reporting date while they remain outstanding, with any changes in fair value recognized in compensation expense in the period. The
liability is expensed over the vesting period which incorporates the re-measurement of the fair value and a revised forfeiture rate that anticipates units
expected to vest.
Employee stock options with tandem stock appreciation rights give the employee the right to exercise for shares or settle in cash. These options are
classified as liabilities and are re-measured to fair value at each reporting date while they remain outstanding. If an option is exercised, thereby
cancelling the tandem stock appreciation right, both the exercise price proceeds together with the accrued liability and associated taxes are credited to
equity – common shares in the Consolidated Statement of Financial Position.
Plain vanilla options and other awards that must be settled for shares are classified as equity awards. Equity-classified awards are expensed based on
the grant date fair value with a corresponding increase to equity – other reserves in the Consolidated Statement of Financial Position. If an option is
exercised, both the exercise price proceeds together with the amount recorded in other reserves is credited to equity – common shares in the
Consolidated Statement of Financial Position.
For tandem stock appreciation rights, stock appreciation rights and plain vanilla options, the Bank estimates fair value using an option pricing model.
The option pricing model requires inputs such as the exercise price of the option, the current share price, the risk free interest rate, expected
dividends, expected volatility (calculated using an equal weighting of implied and historical volatility) and specific employee exercise behaviour
patterns based on statistical data. For other awards, fair value is the quoted market price of the Bank’s common shares at the reporting date.
Where derivatives are used to economically hedge share-based payment expense, related mark-to-market gains and losses are included in non-interest
expenses – salaries and employee benefits in the Consolidated Statement of Income.
A voluntary renouncement of a tandem stock appreciation right where an employee retains the corresponding option for shares with no change in
the overall fair value of the award, results in a reclassification of the accrued liability and associated tax to equity – other reserves in the Consolidated
Statement of Financial Position. This reclassification is measured at the fair value of the renounced awards as of the renouncement date. Subsequent
to the voluntary renouncement, these awards are accounted for as plain vanilla options, based on the fair value as of the renouncement date.
Customer loyalty programs
The Bank operates loyalty points programs, which allow customers to accumulate points when they use the Bank’s products and services. The points
can then be redeemed for free or discounted products or services, subject to certain conditions.
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 and other equity instruments are recognized as a liability and 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
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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. On occurrence of contingencies as specified in the Non-Viability Contingent Capital (NVCC) Instruments, the number of additional
common shares associated with the NVCC subordinated debentures, NVCC subordinated additional Tier 1 capital securities and NVCC preferred
shares is based on an automatic conversion formula as set out in the respective prospectus supplements.
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.
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 (e.g. securities) 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 profit or loss.
Equity instruments are measured at fair value through profit or loss. However, the Bank may, at initial recognition of a non-trading equity instrument,
irrevocably elect to designate the instrument as fair value through OCI, with no subsequent recycling to profit and loss, while recognizing dividend
income in profit and loss. This designation is also available to non-trading equity instrument holdings on date of transition.
In addition, the Bank may, at initial recognition, irrevocably elect to designate a financial asset as fair value through profit or loss, if doing so
eliminates or significantly reduces an accounting mismatch which would otherwise arise. This designation is also available to existing financial assets
on date of transition.
On transition date, the Bank is permitted to make a one-time irrevocable reassessment to fair value through profit and loss its financial assets and
liabilities.
Hedging
IFRS 9 also incorporates new hedge accounting rules that intend to align hedge accounting with risk management practices. IFRS 9 includes an
accounting policy choice to defer the adoption of IFRS 9 hedge accounting and to continue with IAS 39 hedge accounting. The Bank has decided to
exercise this accounting policy choice. However, the Bank will implement the revised hedge accounting disclosures that are required by the IFRS 9
related amendments to IFRS 7 “Financial Instruments: Disclosures” in the 2018 Annual Report.
Impairment
The standard introduces a new single model for the measurement of impairment losses on all financial assets 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 financial assets since initial recognition. Under Stage
1, 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
Stage 2, where there has been a significant increase in credit risk since initial recognition but the financial instruments are not considered credit
impaired, an amount equal to the default probability weighted lifetime ECL will be recorded.
Under the Stage 3, where there is objective evidence of impairment at the reporting date these financial instruments will be classified as credit
impaired and an amount equal to the lifetime ECL will be recorded for the financial assets.
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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 ECL.
The Bank has also modified its definition of impaired financial instruments (Stage 3) for certain categories of financial instruments to make it
consistent with the definitions used in the calculation of regulatory capital. As well, certain allowances for credit losses currently ascribed to impaired
loans will be ascribed against Stage 1 and Stage 2 exposures.
Transition impact
The Bank will record an adjustment to its opening November 1, 2017 retained earnings and AOCI, to reflect the application of the new requirements
of Impairment and Classification and Measurement at the adoption date and will not restate comparative periods.
The Bank estimates the IFRS 9 transition amount will reduce shareholders’ equity by approximately $600 million after-tax and the Common Equity
Tier 1 capital ratio by approximately 15 basis points as at November 1, 2017. The estimated impact relates primarily to the implementation of the ECL
requirements in the Bank. The Bank continues to revise, refine and validate the impairment models and related process controls leading up to the
January 31, 2018 reporting.
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.
C
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Effective November 1, 2018
Revenue from contracts with customers
On May 28, 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, which replaces the previous revenue standard IAS 18 Revenue,
and the related Interpretations on revenue recognition. The standard is a control-based model as compared to the existing revenue standard which is
primarily focused on risks and rewards and provides a single principle based framework to be applied to all contracts with customers that are in scope
of the standard. 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 introduces a new five step model to
recognize revenue as performance obligations in a contract are satisfied. 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 revenue.
On April 12, 2016, the IASB issued amendments to 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
licensing revenues should be recognized at a point in time or over a specific period. The amendments also provide additional practical expedients that
can be used on transition to the standard.
The Bank will adopt the standard and its amendments as of November 1, 2018 and plans to use the modified retrospective approach. Under this
approach, the Bank will recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained
earnings as of November 1, 2018, without restating comparative periods. Additional disclosures will be required in order to explain any significant
changes between reported results and results had the previous revenue standard been applied.
The standard does not apply to revenue associated with financial instruments, and therefore, will not impact the majority of the Bank’s revenue,
including interest income, interest expense, trading revenue and securities gains which are covered under IFRS 9 Financial Instruments. The
implementation of the standard is being led by the Finance Department in coordination with the business segments. The areas of focus for the Bank’s
assessment of impact are fees and commission revenues from wealth management and banking services in Canadian and International Banking. The
Bank has been working to identify and review the customer contracts within the scope of the new standard. While the assessment is not complete,
the timing of the Bank’s revenue recognition of fees and commissions within the scope of this standard is not expected to materially change. The
classification of certain contract costs (whether presented gross or offset against non-interest income) continues to be evaluated and the final
interpretation may impact the presentation of certain contract costs. The Bank is also evaluating the additional disclosures that may be relevant and
required.
Effective November 1, 2019
Financial instruments: Prepayment features with negative compensation
On October 12, 2017, the IASB issued an amendment to IFRS 9 Financial Instruments. The amendment allows certain pre-payable financial assets with
so-called negative compensation prepayment option to be measured at amortized cost or fair value through other comprehensive income, if the
prepayment amount substantially represents unpaid principal and interest and reasonable compensation. Reasonable compensation may be positive or
negative. Prior to this amendment financial assets with this negative compensation feature would have failed the solely payments of principal and
interest test and be mandatorily measured at fair value through profit or loss. The amendment will be effective for annual periods beginning on or
after January 1, 2019, with early adoption permitted. Based on preliminary assessments, the amendment is not expected to impact the Bank.
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.
2 0 1 7 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
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.
The Bank is currently assessing the impact of this new standard.
Effective November 1, 2021
Insurance Contracts
On May 18, 2017, the IASB issued IFRS 17 Insurance Contracts, which provides a comprehensive principle-based framework for the measurement and
presentation of all insurance contracts. The new standard will replace IFRS 4 Insurance Contracts and requires insurance contracts to be measured
using current fulfillment cash flows and for revenue to be recognized as the service is provided over the coverage period. The standard is effective for
the Bank on November 1, 2021. The Bank will assess the impact of adopting this new standard.
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
2017
2016
$ 7,825
$ 6,855
51,838
39,489
$ 59,663
$ 46,344
The Bank is required to maintain balances with central banks, other regulatory authorities and certain counterparties and these amounted to
$7,282 million (2016 – $7,616 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 155.
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
150 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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F
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N
A
N
C
I
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S
T
A
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M
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N
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S
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:
Š Canadian fixed rate residential mortgages are fair valued by discounting the expected future contractual cash flows, taking into account expected
prepayments and using management’s best estimate of average market interest rates currently offered for mortgages with similar remaining terms
(Level 3).
Š For fixed rate business and government loans, fair value is determined by discounting the expected future contractual cash flows of these loans at
interest rates estimated by using the appropriate currency swap curves for the remaining term, adjusted for a credit mark of the expected losses in
the portfolio (Level 3).
Š For all other fixed rate loans, fair value is determined by discounting the expected future contractual cash flows of these loans at interest rates
estimated by using the appropriate currency swap curves for the remaining term (Level 3).
Š For all floating rate loans fair value is assumed to equal book value.
The fair value of loans is not adjusted for the value of any credit protection the Bank has purchased to mitigate credit risk.
Deposits
The fair values of deposits payable on demand or after notice or floating rate deposits payable on a fixed date is assumed to equal book value.
The estimated fair values of Canadian personal fixed rate deposits payable on a fixed date are fair valued by discounting the expected future
contractual cash outflows, using management’s best estimate of average market interest rates currently offered for deposits with similar remaining
terms (Level 2).
Deposits under the Canada Mortgage Bond (CMB) program are fair valued by discounting expected future contractual cash flows using market
observable inputs (Level 2).
For all other fixed rate deposits, fair value is determined by discounting the expected future contractual cash flows of these deposits at interest rates
estimated by using the appropriate currency swap curves for the remaining term (Level 2).
For structured deposit notes containing embedded features that are bifurcated from the deposit notes, the fair value of the embedded derivatives is
determined using option pricing models with inputs similar to other interest rate or equity derivative contracts (Level 2). The fair value of certain
embedded derivatives is determined using net asset values (Level 3).
2 0 1 7 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
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
Total
fair
value
2017
Total
carrying
value
Favourable/
(Unfavourable)
Total
fair
value
2016
Total
carrying
value
Favourable/
(Unfavourable)
$
59,663
98,464
$
59,663
98,464
$
13
13
95,319
35,364
50,504
18,716
507,276
13,560
9,314
95,319
35,364
50,504
18,765
504,369
13,560
9,314
–
–
–
–
–
–
(49)
2,907
–
–
$ 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
–
–
625,964
625,367
(597)
613,858
611,877
(1,981)
4,663
13,560
30,766
34,200
95,843
6,105
27,531
4,663
13,560
30,766
34,200
95,843
5,935
27,118
–
–
–
–
–
(170)
(413)
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)
Changes in interest rates, credit spreads and liquidity costs are the main cause of changes in the fair value of the Bank’s financial instruments resulting
in a favourable or unfavourable variance compared to carrying value. For the Bank’s financial instruments carried at cost or amortized cost, the
carrying value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes. For
available-for-sale investment securities, derivatives and financial instruments held for trading purposes or designated as fair value through profit and
loss, the carrying value is adjusted regularly to reflect the fair value.
152 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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
2017
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
–
–
–
–
–
–
22
–
–
–
22
$
5,717
$
17,312
10,343
7,325
6,894
6,829
7,986
345
38,930
2,500
–
–
10,830
–
10,182
4,724
75
1,424
36,814
1,853
$ 104,181
$ 65,902
–
$
13
$
16
–
–
–
113
53
–
544
710
36
–
–
–
–
36
–
–
–
267
–
7
–
–
274
12,093
4,823
6,672
19,803
4,387
1,415
1,311
11,464
934
9,901
6,703
745
276
1,411
50,504
$ 31,434
$
9,778
21,500
2,335
175
1,576
35,364
$
(7) $
4,663
–
17
321
–
321
659
–
–
30,766
19,870
$
$
$
$
11,090
17,649
3,233
179
2,049
$
34,200
$
–
3
327
–
312
642
$
8,442
$
19,421
–
9,608
–
1,783
9,844
648
133
–
49,879
205
2,157
2,558
176
8,473
3,852
751
199
18,166
15,653
21,642
1,546
148
1,891
$
$
$
$
$
$
$
$
$
$
40,880
$
118
(36) $
1,163
1,459
3,442
14,299
21,640
1,886
1,475
2,091
$
41,391
$
–
–
187
–
167
–
–
354
–
–
–
–
–
–
31
1,186
5
–
$
8,442
19,421
10,830
9,608
10,182
6,507
9,950
3,258
36,952
1,853
1,222
$ 117,003
–
$
221
–
–
–
355
81
–
473
909
54
–
64
–
–
$
$
$
$
13,621
3,492
10,077
15,531
4,678
1,027
2,083
50,509
15,707
21,659
1,931
148
2,212
41,657
1,127
1,459
23,312
14,486
21,643
2,380
1,475
2,403
$
42,387
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
short
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
$
–
–
10,343
–
6,894
5,680
44
180
38,760
2,500
$
5,717
$
17,312
–
7,325
–
1,149
7,920
165
170
–
$ 64,401
$ 39,758
$
13
$
–
9,677
593
6,305
10,944
750
539
590
2,416
4,230
367
8,746
3,584
876
177
$ 29,398
$ 20,396
$
$
$
$
–
4
615
–
133
752
–
–
$
9,742
21,496
1,720
175
1,443
$ 34,576
$
$
(7) $
4,663
27,796
2,970
–
3
502
–
268
773
10,823
17,646
2,724
179
1,781
$ 33,153
$
$
$
$
$
$
4,240
–
$ 14,476
–
$
–
286,621
$
18,716
286,621
$
4,972
–
$
17,595
–
$
–
276,462
$
22,567
276,462
–
–
–
266,995
6,105
13,363
–
–
–
266,995
6,105
13,363
–
–
–
271,170
7,804
11,303
–
–
–
271,170
7,804
11,303
(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 $18,765 (2016 – $22,410).
(4) These amounts represent embedded derivatives bifurcated from structured deposit notes.
(5) Represents the fair value of financial assets and liabilities where the carrying amount is not a reasonable approximation of fair value.
(6) Excludes floating rate instruments as carrying value approximates fair value.
(7) Excludes embedded derivatives bifurcated from structured deposit notes.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 153
CONSOLIDATED FINANCIAL STATEMENTS
Level 3 instrument fair value changes
Financial instruments categorized as Level 3 as at October 31, 2017, in the fair value hierarchy comprise certain illiquid government bonds, highly-
structured corporate bonds, illiquid investments in private equity securities, and complex derivatives.
The following table summarizes the changes in Level 3 instruments carried at fair value for the year ended October 31, 2017.
All positive balances represent assets and negative balances represent liabilities. Consequently, positive amounts indicate purchases of assets or
settlements of liabilities and negative amounts indicate sales of assets or issuances of liabilities.
As at October 31, 2017
($ millions)
Trading assets(4)
Corporate and other debt
Income funds
Equity securities
Investment securities
Other foreign governments’ debt
Corporate and other debt
Equity securities
Derivative financial instruments – assets
Interest rate contracts
Equity contracts
Derivative financial instruments –
liabilities
Interest rate contracts
Equity contracts
Deposits(7)
Total
Fair value
November 1
2016
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
2017
$
$
31
1,186
5
1,222
355
81
473
909
54
64
(187)
(167)
(236)
(1,163)
(9)
(6)
(5)
(20)
6
3
(33)
(24)
(33)
108
(67)
2
10
6
$
–
–
–
–
(8)
(8)
54
38
–
–
–
–
–
–
$
–
–
–
–
–
13
109
122
36
9
(45)
(6)
(6)
–
$
$
–
(1,180)
–
(1,180)
(240)
(33)
(59)
(332)
(21)
(46)
32
38
3
1,157
–
–
–
–
–
(3)
–
(3)
–
(135)
–
126
(9)
–
$ 22
–
–
22
113
53
544
710
36
–
(267)
(7)
(238)
–
Change in
unrealized
gains/(losses)
recorded in
income for
instruments
still held(3)
$
(9)
–
–
(9)
n/a
n/a
n/a
n/a
(36)
–
(68)(6)
(8)(5)
(112)
–
$
732
$ (28)
$
38
$
116
$ (352)
$ (12)
$ 494
$ (121)
(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) 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.
(6) Certain unrealized losses on interest rate derivative contracts are largely offset by mark-to-market changes on embedded derivatives on certain deposit notes in the Consolidated
Statement of Income.
(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, 2016.
($ millions)
Trading assets(2)
Investment securities
Derivative financial instruments
Deposits(3)
As at October 31, 2016
Fair value
November 1
2015
Gains/(losses)
recorded in
income(1)
Gains/(losses)
recorded
in OCI
$ 1,315
1,740
(125)
(1,192)
$ (22)
195
(85)
29
$
–
(217)
–
–
Purchases/
Issuances
Sales/
Settlements
$
–
706
(139)
–
$
(71)
(1,515)
147
–
Transfers
into/out of
Level 3
$ –
–
(34)
–
Fair value
October 31
2016
$ 1,222
909
(236)
(1,163)
(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.
154 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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, 2017:
A net amount of derivative assets of $135 million and derivative liabilities of $126 million was transferred out of Level 3 into Level 2 for equity
derivatives. Transfers were primarily as a result of assessment and consideration of volatility as an insignificant input for certain equity derivative
contracts.
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 $196 million was transferred into Level 3 from Level 2 primarily for equity derivatives.
All transfers were as a result of new information being obtained regarding the observability of inputs used in the valuation.
Level 3 sensitivity analysis
The table below sets out information about significant unobservable inputs used in measuring financial instruments categorized as Level 3 in the fair
value hierarchy.
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Valuation technique
Significant
unobservable inputs
Range of estimates for
unobservable inputs(1)
Changes in fair value
from reasonably
possible alternatives
($ millions)
Derivative financial instruments
Interest rate contracts
Option pricing
Interest rate
Equity contracts
Option pricing
Equity volatility
4% - 95%
(1) The range of estimates represents the actual lowest and highest level inputs used to fair value financial instruments within each financial statement category.
model
Single stock correlation
(77)% - 97%
(6)/6
model
volatility
9% - 212%
(35)/35
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.
2 0 1 7 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
7
Trading Assets
(a) Trading securities
An analysis of the carrying value of trading securities is as follows:
As at October 31, 2017 ($ millions)
Remaining term to maturity
Within three
months
Three to
twelve
months
One to
five years
Five to ten
years
Over ten
years
No specific
maturity
Carrying
value
Trading securities:
Canadian federal government 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
$
950
1,230
113
1,172
–
530
$ 3,995
$ 2,368
372
249
1,006
$ 3,995
$ 1,696
1,127
980
819
–
1,134
$ 5,756
$ 3,064
1,771
235
686
$ 5,756
$
4,283
1,536
3,301
2,716
–
4,702
$ 16,538
$
5,130
6,807
488
4,113
$ 16,538
$ 1,333
1,269
2,214
1,132
–
1,088
$ 7,036
$ 3,068
2,777
1
1,190
$ 7,036
$ 2,081
2,163
286
990
–
532
$ 6,052
$ 4,524
526
1
1,001
$ 6,052
$
–
–
–
–
39,275
–
$ 39,275
$
8,619
12,016
997
17,643
$ 39,275
$ 10,343
7,325
6,894
6,829
39,275
7,986
$ 78,652
$ 26,773
24,269
1,971
25,639
$ 78,652
As at October 31, 2016 ($ millions)
Remaining term to maturity
Within three
months
Three to
twelve
months
One to
five years
Five to ten
years
Over ten
years
No specific
maturity
Carrying
value
Trading securities:
Canadian federal government 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
$
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
(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
2017
2016
$ 10,654
3,824
1,605
376
853
$ 17,312
$ 11,235
4,163
2,555
340
1,128
$ 19,421
(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 $7,390 (2016 – $7,098), while the remaining relates to short-term precious metals trading
and lending activities.
(4) These loans are primarily related to short-term precious metals trading and lending activities.
156 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
8
Financial Instruments Designated at Fair Value Through Profit or Loss
In accordance with its risk management strategy, the Bank has elected to designate certain investments, loans and deposit note liabilities at fair value
through profit or loss to reduce an accounting mismatch between fair value changes in these instruments and fair value changes in related derivatives,
and where a hybrid instrument contains one or more embedded derivatives that are not closely related to the host contract. Changes in fair value
arising from changes in the Bank’s own credit risk are recognized in other comprehensive income, without subsequent reclassification to net income.
The cumulative fair value adjustment due to own credit risk is determined at a point in time by comparing the present value of expected future cash
flows over the term of these liabilities discounted at the Bank’s effective funding rate, and the present value of expected future cash flows discounted
under a benchmark rate. The change in fair value attributable to change in credit risk is determined by the change in the cumulative fair value
adjustment due to own credit risk.
The following table presents the fair value of financial assets and liabilities designated at fair value through profit or loss and their changes in fair
value.
October 31 ($ millions)
Investment securities(2)
Loans(3)
Deposit note liabilities(4)
Fair value
As at
$
2017
13
–
4,663
$
2016
16
205
1,459
Change in fair value
Cumulative change in FV(1)
For the year ended
$
2017
–
(205)
103
$
2016
(1)
(9)
245
2017
2016
$ 11
(197)
(91)
$ 11
8
15
(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.
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
Deposit Note Liabilities
Difference
between
carrying value
and
contractual
maturity
amount
$ (91)
$ 15
Changes in fair value
for the period
attributable to
changes in own
credit risk recorded
in other
comprehensive
income
$ (28)
$ (23)
Cumulative changes
in fair value
attributable to
changes in own
credit risk(1)
$ (36)
$
(8)
Contractual
maturity
amount(1)
Carrying
Value
$ 4,572
$ 4,663
$ 1,474
$ 1,459
As at October 31, 2017
As at October 31, 2016
(1) The cumulative change in fair value is measured from the instruments’ date of initial recognition.
2 0 1 7 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
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
2017
2016
Trading
Hedging
Total
Trading
Hedging
Total
$
161,590
5,474
2,894
169,958
208
441,607
34,190
38,099
514,104
$
$
–
–
–
–
–
18,609
–
–
18,609
161,590
5,474
2,894
169,958
208
460,216
34,190
38,099
532,713
$
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
329,853
2,236,148
–
–
2,566,001
$ 3,250,063
–
106,979
–
–
106,979
$ 125,588
329,853
2,343,127
–
–
2,672,980
$ 3,375,651
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
$
$
$
32,452
16
481
32,949
427,112
321,567
39,100
39,547
827,326
–
–
–
–
–
860,275
33,287
–
45,938
79,225
64,444
26,737
34,715
125,896
$
$
$
–
–
–
–
21,623
63,300
–
–
84,923
–
–
–
–
–
84,923
–
–
–
–
796
–
–
796
$
$
$
32,452
16
481
32,949
448,735
384,867
39,100
39,547
912,249
–
–
–
–
–
945,198
33,287
–
45,938
79,225
65,240
26,737
34,715
126,692
$
$
$
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
2,863
10,855
6,762
20,480
$
225,601
$ 4,335,939
–
–
–
–
$
796
$ 211,307
2,863
10,855
6,762
20,480
$
226,397
$ 4,547,246
–
11,148
357
11,505
$
215,040
$ 3,705,514
–
–
–
–
$
679
$ 189,295
–
11,148
357
11,505
$
215,719
$ 3,894,809
(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.
158 | 2 0 1 7 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) 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, 2017 ($ 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, 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
Within one year
One to five years
Over five years
Total
$
$
62,152
282,062
971,003
10,690
5,809
1,331,716
$
98,731
47,999
1,172,422
17,036
23,800
1,359,988
4,810
401,461
96,767
36,291
37,309
576,638
73,983
18,249
50,253
142,485
27,474
47,210
185,747
2,825
2,719
265,975
26,514
15,272
37,021
78,807
707
–
659,918
11,938
11,384
683,947
168
64
102,353
–
–
102,585
893
4,071
141
5,105
$
161,590
330,061
2,803,343
39,664
40,993
3,375,651
32,452
448,735
384,867
39,116
40,028
945,198
101,390
37,592
87,415
226,397
$ 2,050,839
$ 1,704,770
$ 791,637
$ 4,547,246
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
Total
$ 1,678,790
$ 1,589,625
$ 626,394
$ 3,894,809
(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, 2017. 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
2 0 1 7 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
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.
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 70 of
the 2017 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.
2017
2016
As at October 31 ($ millions)
Notional amount
Credit risk
amount
(CRA)(1)
Credit
equivalent
amount
(CEA)(1)
CET1
Risk
Weighted
Assets(2)
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)
$
$
161,590
330,061
2,803,343
39,664
40,993
3,375,651
$
–
20
250
5
–
275
$
65
30
5,459
105
15
5,674
32,452
448,735
384,867
39,116
40,028
945,198
101,390
37,592
87,415
226,397
–
–
2,370
4,023
523
–
6,916
45
12
9
66
–
56
6,311
7,297
515
83
14,262
5,123
1,421
10,953
17,497
Notional amount
$
112,196
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
Credit risk
amount
(CRA)(1)
$
–
9
2,703
6
–
2,718
–
2,057
2,596
322
–
4,975
871
32
1,109
2,012
Credit
equivalent
amount
(CEA) (1)
CET1
Risk
Weighted
Assets(2)
$
$
–
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
–
20
1,341
57
3
1,421
–
1,765
1,898
113
12
3,788
1,575
174
807
2,556
–
2,988
–
–
–
4,165
Total derivatives
$ 4,547,246
$ 7,257
$ 37,433
$ 10,753
$ 3,894,809
$ 9,705
$ 33,408
$ 12,096
Amount settled through
central counterparties(3)
Exchange-traded
Over-the-counter
282,132
2,693,460
$ 2,975,592
$
–
–
–
10,385
1,334
$ 11,719
$
208
27
235
228,538
2,109,672
$ 2,338,210
$
–
–
–
5,521
2,174
$ 7,695
$
110
43
153
(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 $28,107 (2016 –
$31,952) for CRA, and $51,623 (2016 – $51,072) for CEA.
(2) As per OSFI guideline, effective 2014, Credit Valuation Adjustment (CVA) to CET1 RWA for derivatives was phased-in. In 2017, the CVA was 0.72 (2016 – 0.64).
(3) Amounts are included under total derivatives above. Amounts include exposures settled directly through central counterparties and exposures settled through clearing members of
central counterparties.
160 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Fair value
(d)
The following table summarizes the fair value of derivatives segregated by type and segregated between trading and those derivatives designated in
hedging relationships.
As at October 31 ($ millions)
2017
2017
2016
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
$
35
9,809
75
9,919
$
2
11,484
101
11,587
$
27
8,895
53
8,975
$
1
10,330
75
10,406
$
63
14,153
65
14,281
$
3
13,814
82
13,899
5,786
10,589
678
17,053
2,010
109
1,689
3,808
$ 30,780
5,907
10,134
618
16,659
3,129
429
2,228
5,786
$ 34,032
5,973
10,945
730
17,648
2,274
175
1,576
4,025
$ 30,648
5,223
8,774
681
14,678
3,233
179
2,049
5,461
$ 30,545
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
$
803
$
684
$
1,426
$
587
634
3,218
3,852
61
4,716
$
$
$
215
2,756
2,971
–
3,655
$
$
$
333
3,471
3,804
26
5,256
$
$
$
241
3,346
3,587
–
4,174
$
$
$
$ 35,364
$ 34,200
$ 41,657
$ 42,387
28,107
7,257
$
28,107
6,093
$
31,952
9,705
$
31,952
$ 10,435
(1) The average fair value of trading derivatives’ market valuation for the year ended October 31, 2016 was: favourable $38,623 and unfavourable $42,651. Average fair value
amounts are based on the latest 13 month-end balances.
(2) Master netting agreement amounts are based on the capital adequacy criteria of the Basel Committee on Banking Supervision (BCBS) and OSFI. These criteria allow netting where
there are legally enforceable contracts which enable net settlement in the event of a default, bankruptcy, liquidation or similar circumstances.
(e) Hedging activities
The Bank’s hedging activities that qualify for hedge accounting consist of fair value hedges, cash flow hedges, and net investment hedges.
Ineffectiveness of hedge relationships
Due to the ineffective portion of designated hedges, the Bank recorded the following amounts in non-interest income – other:
For the year ended October 31 ($ 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:
2017
2016
$
$
$
574
(588)
(14)
$
11
(51)
$ (40)
24
$
11
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
2017
2016
Favourable
Unfavourable
Favourable
Unfavourable
$
$
687
3,746
283
4,716
$
$
751
2,749
155
3,655
$
$
1,622
3,568
66
5,256
$
$
643
3,291
240
4,174
(1) As at October 31, 2017, the fair value of non-derivative instruments designated as net investment hedges and fair value hedges was $6,183 (2016 – $6,905). These non-derivative
hedging instruments are presented as deposits – financial institutions on the Consolidated Statement of Financial Position.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 161
CONSOLIDATED FINANCIAL STATEMENTS
Cash flow hedges
The period when cash flows of designated hedged items are expected to occur and impact the Consolidated Statement of Income are as follows:
As at October 31, 2017 ($ millions)
Cash inflows from assets
Cash outflows from liabilities
Net cash flows
As at October 31, 2016 ($ millions)
Cash inflows from assets
Cash outflows from liabilities
Net cash flows
Within
one year
Within one
to five years
More than
five years
$
11,235
(31,542)
$ 19,866
(26,863)
$ 4,178
(4,746)
$ (20,307)
$ (6,997)
$
(568)
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
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, 2017 ($ 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)
$
49,512
$ (14,148)
$
35,364
$ (22,400)
$ (5,915)
$
7,049
Types of financial assets
Derivative financial instruments(4)
Securities purchased under resale agreements
and securities borrowed
106,721
(11,402)
95,319
(11,649)
(75,675)
7,995
Total
$ 156,233
$ (25,550)
$ 130,683
$ (34,049)
$ (81,590)
$ 15,044
As at October 31, 2017 ($ 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
$
48,348
$ (14,148)
$
34,200
$ (22,400)
$
(4,700)
$
7,100
repurchase agreements and securities lent
107,245
(11,402)
95,843
(11,649)
(72,311)
11,883
Total
$ 155,593
$ (25,550)
$ 130,043
$ (34,049)
$ (77,011)
$ 18,983
(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 2017, the cash collateral received against the positive market values of derivative financial instruments of $793 and the cash collateral pledged towards the negative mark
to market of derivative financial instruments of $1,112 are recorded within other liabilities and other assets, respectively.
162 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
As at October 31, 2016 ($ 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)
$
63,329
$ (21,672)
$
41,657
$ (25,115)
$
(7,184)
$
9,358
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.
(4) 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
mark to market of derivative financial instruments of $875 are recorded within other liabilities and other assets, respectively.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 163
CONSOLIDATED FINANCIAL STATEMENTS
11 Investment Securities
Investment securities includes held-to-maturity securities and available-for-sale securities.
(a) An analysis of the carrying value of investment securities is as follows:
As at October 31, 2017 ($ 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 assets
Total investment securities
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
$
Within
three
months
8
0.9
99
0.6
106
1.0
7,810
0.6
1,082
0.6
–
–
9,105
65
1,290
–
167
1,522
$
Three to
twelve
months
291
1.1
737
1.5
1,260
1.5
5,283
2.8
1,541
0.8
–
–
9,112
860
–
683
821
Remaining term to maturity
One to
five years
Five to
ten years
Over ten
years
No specific
maturity
Carrying
value
$
9,780
1.1
3,698
1.7
2,374
1.0
5,313
4.1
2,784
1.6
–
–
23,949
4,854
2,703
1,914
5,300
$
905
2.7
284
2.4
2,704
1.6
1,259
5.7
210
2.5
–
–
5,362
–
–
102
–
102
$ 1,109
3.2
5
2.9
228
1.5
138
6.2
185
2.5
–
–
1,665
–
–
6
–
6
$
–
–
–
–
–
–
–
–
–
–
311
1,000
1,311
–
–
–
–
–
$ 12,093
1.4
4,823
1.7
6,672
1.3
19,803
2.5
5,802
1.2
311
1,000
50,504
5,779
3,993
2,705
6,288
18,765
2,364
14,771
$ 10,627
$ 11,476
$ 38,720
$ 5,464
$ 1,671
$ 1,311
$ 69,269
$
76
1,961
420
8,170
$
1,165
4,178
579
5,554
$ 15,500
19,344
1,568
2,308
$ 1,276
3,023
285
880
$ 1,130
419
–
122
$
539
372
9
391
$ 19,686
29,297
2,861
17,425
Total investment securities
$ 10,627
$ 11,476
$ 38,720
$ 5,464
$ 1,671
$ 1,311
$ 69,269
(1) Represents the weighted-average yield of fixed income securities.
164 | 2 0 1 7 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
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 assets
Total investment securities
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
Total investment securities
Remaining term to maturity
Within
three
months
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
$ 6,669
$ 9,893
$ 48,035
$ 4,305
$ 1,934
$ 2,083
$ 72,919
$
8
1,485
878
4,298
$
430
5,146
264
4,053
$ 6,669
$ 9,893
$ 16,588
26,959
1,496
2,992
$ 48,035
$ 1,239
2,086
247
733
$ 4,305
$ 1,192
514
77
151
$ 1,934
$
721
930
12
420
$ 2,083
$ 20,178
37,120
2,974
12,647
$ 72,919
(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, 2017 ($ 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, 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
Cost
$ 12,069
4,839
6,761
19,788
5,792
397
899
$ 50,545
Cost
$ 13,347
3,469
10,050
15,490
5,650
414
1,634
$ 50,054
Gross
unrealized
gains
Gross
unrealized
losses
$ 119
13
1
49
34
1
164
$ 381
Gross
unrealized
gains
$ 280
33
53
62
59
10
243
$ 740
$
95
29
90
34
24
87
63
$ 422
Gross
unrealized
losses
$
6
10
26
21
4
160
58
$ 285
Fair value
$ 12,093
4,823
6,672
19,803
5,802
311
1,000
$ 50,504
Fair value
$ 13,621
3,492
10,077
15,531
5,705
264
1,819
$ 50,509
The net unrealized loss on available-for-sale securities of $41 million (2016 – gain of $455 million) increases to a net unrealized loss of $48 million
(2016 – gain of $26 million) after the impact of qualifying hedges is taken into account. The net unrealized loss on available-for-sale securities is
recorded in Accumulated Other Comprehensive Income.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 165
CONSOLIDATED FINANCIAL STATEMENTS
(c) An analysis of the fair value and carrying value of held-to-maturity securities is as follows:
As at October 31 ($ 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
$
2017
5,748
3,991
2,690
6,287
$
2016
6,207
4,672
2,901
8,787
$
2017
5,779
3,993
2,705
6,288
$
2016
6,171
4,616
2,898
8,725
$ 18,716
$ 22,567
$ 18,765
$ 22,410
As at October 31, 2017 ($ 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
$
4,457 $
2,547
4,653
11,082
2,440
–
140
4,414
2,525
4,624
11,058
2,418
–
121
$
43
22
29
24
22
–
19
$ 1,944 $ 1,892
230
1,820
409
320
293
158
237
1,881
419
322
380
202
$
52
7
61
10
2
87
44
$
6,401 $
2,784
6,534
11,501
2,762
380
342
6,306
2,755
6,444
11,467
2,738
293
279
$
95
29
90
34
24
87
63
Total available-for-sale securities
$ 25,319 $ 25,160
$ 159
$ 5,385 $ 5,122
$ 263
$ 30,704 $ 30,282
$ 422
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
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
8,910 $
1,861
798
2,212
2,799
875
6
280
8,831
$
$
6
9
26
13
2
–
23
79
$ 1,104 $ 1,104
192
–
567
407
222
105
$ 2,803 $ 2,597
193
–
575
409
382
140
$
–
1
–
8
2
160
35
$ 206
$
2,971 $
1,000
2,238
3,387
1,286
388
443
2,965
990
2,212
3,366
1,282
228
385
$ 11,713 $ 11,428
$
6
10
26
21
4
160
58
$ 285
As at October 31, 2017, the cost of 631 (2016 – 474) available-for-sale securities exceeded their fair value by $422 million (2016 – $285 million). This
unrealized loss is recorded in accumulated other comprehensive income as part of unrealized gains (losses) on available-for- sale securities. Of the 631
(2016 – 474) available-for-sale securities, 142 (2016 – 140) have been in an unrealized loss position continuously for more than a year, amounting to
an unrealized loss of $263 million (2016 – $206 million).
Investment securities are considered to be impaired only if objective evidence indicates one or more loss events have occurred and have affected the
estimated future cash flows after considering available collateral.
Collateral is not generally obtained directly from the issuers of debt securities. However, certain debt securities may be collateralized by specifically
identified assets that would be obtainable in the event of default.
Investment securities are evaluated for impairment at the end of each reporting date, or more frequently, if events or changes in circumstances
indicate the existence of objective evidence of impairment.
(e) Net gain on sale of investment securities
An analysis of net gain on sale of investment securities is as follows:
For the year ended October 31 ($ millions)
Net realized gains
Impairment losses(1)
Net gain on sale of investment securities
2017
2016
2015
$ 399
19
$ 380
$ 570
36
$ 534
$ 646
7
$ 639
(1)
Impairment losses (gains) are comprised of $14 from equity securities (2016 – $36; 2015 – $8) and $5 from other debt securities (2016 – nil; 2015 – $(1)).
166 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
12 Loans, Impaired Loans and Allowance for Credit Losses
(a)
Loans and acceptances outstanding by geography(1)
As at October 31 ($ 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
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
2017
2016
$ 205,793
77,790
52,935
$ 193,303
74,698
48,653
336,518
316,654
1,228
35,702
36,930
6,911
3,584
13,635
24,130
7,302
5,331
10,109
22,742
2,735
5,092
10,617
18,444
1,999
3,591
3,838
9,428
12,176
6,715
41,613
60,504
508,696
13,560
522,256
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
12,855
6,827
42,675
62,357
484,790
11,978
496,768
(4,327)
(4,626)
$ 517,929
$ 492,142
(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 $100,452 (2016 – $103,503), in Mexican pesos $18,857 (2016 – $15,954), Chilean pesos $17,824 (2016 – $15,214), and
in other foreign currencies $44,176 (2016 – $44,870).
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 167
CONSOLIDATED FINANCIAL STATEMENTS
(b) Loan maturities
As at October 31, 2017
($ 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
$ 45,462 $ 171,908 $ 9,098 $ 8,919 $ 1,529 $ 236,916 $ 56,862 $ 178,044 $ 2,010 $ 236,916
103,331
168,449
43,737
119,515
103,331
168,449
31,500
80,124
15,952
77,724
50,586
5,244
58,508
47,162
1,086
1,772
4,478
4,597
815
760
Total
$ 139,138 $ 283,532 $ 18,173 $ 10,494 $ 57,359 $ 508,696 $ 220,114 $ 283,714 $ 4,868 $ 508,696
Allowance for credit losses
–
–
–
–
(4,327)
(4,327)
–
–
(4,327)
(4,327)
Total loans net of allowance
for credit losses
$ 139,138 $ 283,532 $ 18,173 $ 10,494 $ 53,032 $ 504,369 $ 220,114 $ 283,714 $
541 $ 504,369
As at October 31, 2016
Remaining term to maturity
Rate sensitivity
($ millions)
Residential mortgages
Personal and credit cards
Business and government
Total loans
Allowance for credit losses
Total loans net of allowance
Within
one year
One to
five years
Five to
ten years
Over
ten years
No specific
maturity
Total
Floating
Fixed rate
Non-rate
sensitive
Total
$ 41,127 $ 160,713 $ 9,745 $ 9,520 $ 1,783 $ 222,888 $ 55,543 $ 165,189 $ 2,156 $ 222,888
99,502
162,400
40,163
111,384
99,502
162,400
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
$ 125,285 $ 271,864 $ 20,843 $ 11,008 $ 55,790 $ 484,790 $ 207,090 $ 271,811 $ 5,889 $ 484,790
(4,626)
(4,626)
(4,626)
(4,626)
–
–
–
–
–
–
for credit losses
$ 125,285 $ 271,864 $ 20,843 $ 11,008 $ 51,164 $ 480,164 $ 207,090 $ 271,811 $ 1,263 $ 480,164
(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
2016
Allowance
for credit
losses
$
458(3)
1,596 (3)
894 (4)
$ 2,948
Net
$ 1,150
26
1,270
$ 2,446
Gross
impaired
loans(1)
$ 1,445
1,610
1,810
$ 4,865
$ 1,049
140
303
704
565
462
1,642
$ 4,865
2017
Allowance
for credit
losses
$
326(3)
1,583(3)
713(4)
$ 2,622
Net
$ 1,119
27
1,097
$ 2,243
Gross
impaired
loans(1)
$ 1,608
1,622
2,164
$ 5,394
$ 1,258
210
301
764
499
381
1,981
$ 5,394
Interest income recognized on impaired loans during the year ended October 31, 2017 was $23 (2016 – $18).
(1)
(2) Excludes loans acquired under FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico. For loans where the guarantee has expired, the total amount of loans
considered impaired is $59 (2016 – $94).
(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, 2017 and 2016, the Bank would have recorded additional interest income of $363 million and $367 million,
respectively, on impaired loans, if these impaired loans were classified as performing loans.
168 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
(d) Allowance for credit losses
($ 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, 2017
Balance at
beginning
of year
$
894
3,498
4,392
234
Write-offs(1)
Recoveries
$
(501)
(2,658)
(3,159)
(14)
$
55
571
626
54
Provision
for credit
losses
$
304
1,952
2,256
(7)
Other, including
foreign currency
adjustment(3)
$ (39)
(8)
(47)
(8)
Balance at
end of
year
$
713
3,355
4,068
259
$ 4,626
$ (3,173)
$ 680
$ 2,249
$ (55)
$ 4,327
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
–
$ 4,197
$ (2,588)
$ 600
$ 2,412
$
Other, including
foreign currency
adjustment(3)
$ (20)
20
–
5
5
Balance at
end of
year
$
894
3,498
4,392
234
$ 4,626
C
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S
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D
A
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M
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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)
2017
2016
$ 2,622
1,446
4,068
259
$ 2,948
1,444
4,392
234
$ 4,327
$ 4,626
(1) For the wholesale portfolios, impaired loans restructured during the year amounted to $260 (2016 – $111). Write-offs of impaired loans restructured during the year were $12
(2016 – nil). Non-impaired loans restructured during the year amounted to $104 (2016 – $55).
(2) This represents the gross amount of allowance for credit losses as the receivable from FDIC is separately recorded in other assets.
(3)
(4) The allowance for performing loans is attributable to business and government loans $625 (2016 – $662) with the remainder allocated to personal and credit card loans $720
Includes rebalancing of reserves between off-balance sheet and on-balance sheet credit exposures.
(2016 – $662) and residential mortgages $101 (2016 – $120).
(e)
Loans acquired under FDIC guarantee
As at October 31, 2017 ($ millions)
R-G Premier Bank
Net carrying value
Allowance for credit losses
As at October 31, 2016 ($ millions)
R-G Premier Bank
Net carrying value
Allowance for credit losses
Non-single
family home
loans
Single
family home
loans
412
(138)
$ 274
1,508
(121)
$1,387
$1,661
Non-single
family home
loans
Single
family home
loans
488
(157)
$ 331
1,728
(77)
$1,651
$1,982
Total
1,920
(259)
Total
2,216
(234)
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.
A net receivable of $106 million (2016 – $116 million) from the FDIC is included in Other assets in the Consolidated Statement of Financial Position.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 169
CONSOLIDATED FINANCIAL STATEMENTS
Loans past due but not impaired(1)
(f)
A loan is considered past due when a counterparty has not made a payment by the contractual due date. The following table presents the carrying
value of loans that are contractually past due but not classified as impaired because they are either less than 90 days past due or fully secured and
collection efforts are reasonably expected to result in repayment, or restoring it to a current status in accordance with the Bank’s policy.
As at October 31 ($ millions)
Residential mortgages
Personal and credit cards
Business and government
Total
2017(2)(3)
2016(2)(3)
31 – 60
days
$ 1,035
724
215
$ 1,974
61 – 90
days
$ 446
423
55
$ 924
91 days
and
greater
$ 122
75
187
$ 384
Total
$ 1,603
1,222
457
$ 3,282
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
(1) Loans past due 30 days or less are not presented in this analysis as they are not administratively considered past due.
(2) Excludes loans acquired under the FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(3) These loans would be considered in the determination of an appropriate level of collective allowances despite not being individually classified as impaired.
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
2017(1)
2016(1)
$ 18,178
2,293
$ 17,570
3,102
19,278
19,836
(1) The fair value of the transferred assets is $20,580 (2016 – $20,776) and the fair value of the associated liabilities is $19,863 (2016 – $20,493), for a net position of $717 (2016 –
$283).
(2) These include cash held in trust and trust permitted investment assets acquired as part of principal reinvestment account that the Bank is required to maintain in order to participate
in the programs.
Securitization of personal lines of credit, credit cards and auto loans
The Bank securitizes a portion of its unsecured personal lines of credit, credit card and auto loan receivables through consolidated structured entities.
These receivables continue to be recognized on the Consolidated Statement of Financial Position as personal and credit cards loans. For further details,
refer to Note 14.
Securities sold under repurchase agreements and securities lent
The Bank enters into transactions, such as repurchase agreements and securities lending agreements, where the Bank transfers assets under
agreements to repurchase them on a future date and retains all the substantial risks and rewards associated with the assets. The transferred assets
remain on the Consolidated Statement of Financial Position.
The following table provides the carrying amount of the transferred assets and the associated liabilities:
As at October 31 ($ millions)
Carrying value of assets associated with:
Repurchase agreements(2)
Securities lending agreements
Total
Carrying value of associated liabilities(3)
2017(1)
2016(1)
$ 86,789
40,535
127,324
$
87,402
38,668
126,070
$ 95,843
$
97,033
(1) The fair value of transferred assets is $127,324 (2016 – $126,070) and the fair value of the associated liabilities is $95,843 (2016 – $97,033), for a net position of $31,481 (2016 –
$29,037).
(2) Does not include over-collateralization of assets pledged.
(3) Liabilities for securities lending arrangements only include amounts related to cash collateral received. In most cases, securities are received as collateral.
170 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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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, give the Bank the obligation to absorb losses that could potentially be significant to the conduit, which in conjunction with power
to direct the conduit’s activities, result in the Bank consolidating the U.S. multi-seller conduit.
The conduit’s assets are primarily included in business and government loans on the Bank’s Consolidated Statement of Financial Position.
There are contractual restrictions on the ability of the Bank’s consolidated U.S. multi-seller conduit to transfer funds to the Bank. The Bank is restricted
from accessing the conduit’s assets under the relevant arrangements. The Bank has no rights to the assets owned by the conduit. In the normal course
of business, the assets of the conduit can only be used to settle the obligations of the conduit.
Bank funding vehicles
The Bank uses funding vehicles to facilitate cost-efficient financing of its own operations, including the issuance of covered bonds and notes. These
vehicles include Scotia Covered Bond Trust, Scotiabank Covered Bond Guarantor Limited Partnership, Hollis Receivables Term Trust II, Trillium Credit
Card Trust II and Securitized Term Auto Receivables Trust 2016-1, 2017-1, and 2017-2.
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 issued debt to investors that is guaranteed by Scotia Covered Bond Trust (the “Trust”).
Under the program, the Trust purchased CMHC insured residential mortgages from the Bank, which it acquired with funding provided by the Bank.
All of the Bank’s outstanding covered bonds issued under this program have matured in March 2017. As at October 31, 2016, $6.0 billion covered
bonds were outstanding and included in Deposits – Business and government on the Consolidated Statement of Financial Position and $4.8 billion
assets pledged in relation to these covered bonds were insured residential mortgages denominated in Canadian dollars.
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, 2017, $25.7 billion (2016 – $23.9 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, 2017, assets pledged in relation to these covered bonds were uninsured residential mortgages denominated in
Canadian dollars of $27.8 billion (2016 – $25.7 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, 2017, $1 billion notes (2016 – $1.5 billion) were outstanding and included in Deposits –
Business and government on the Consolidated Statement of Financial Position. As at October 31, 2017, assets pledged in relation to these notes were
$1.3 billion (2016 – $1.8 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.
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, 2017, US $0.9 billion ($1.2 billion Canadian dollars) (2016 – US $0.9 billion, $1.2 billion
2 0 1 7 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
Canadian dollars) Class A notes were outstanding and included in Deposits – Business and government on the Consolidated Statement of Financial
Position. As at October 31, 2017 assets pledged in relation to these notes were credit card receivables, denominated in Canadian dollars, of
$1.3 billion (2016 – $1.3 billion).
Auto loan receivables securitization trusts
The Bank securitizes a portion of its Canadian auto loan receivables (receivables) through Securitized Term Auto Receivables Trust 2016-1, 2017-1 and
2017-2 (START). Each Trust is 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 discrete pools 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, 2017, the following Class A notes were outstanding and included in Deposits – Business and
government on the Consolidated Statement of Financial Position: US $0.3 billion ($0.4 billion Canadian dollars) (2016 – US $0.5 billion, $0.7 billion
Canadian dollars) for 2016-1, US $0.5 billion ($0.7 billion Canadian dollars) for 2017-1 and US $0.8 billion ($1.0 billion Canadian dollars) for 2017-2.
As at October 31, 2017, assets pledged in relation to these notes were Canadian auto loan receivables denominated in Canadian dollars of
$0.4 billion (2016 – $0.7 billion) for 2016-1, $0.8 billion for 2017-1 and $1.1 billion for 2017-2.
Other
Assets of other consolidated structured entities are comprised of securities, deposits with banks and other assets to meet the Bank’s and customer
needs.
(b) Unconsolidated structured entities
The following table provides information about other structured entities in which the Bank has a significant interest but does not control and
therefore does not consolidate. A significant interest is generally considered to exist where the Bank is exposed to 10% or more of the unconsolidated
structured entities’ maximum exposure to loss.
($ millions)
As at October 31, 2017
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles
Total assets (on structured entity’s financial statements)
$
3,127
$ 3,991
$ 1,520
Other
$
–
Total
$
8,638
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
Derivative financial instruments
–
–
–
–
–
6
6
5
1,091
731
1,827
–
–
–
–
15
40
55
1,465
–
1,465
3,127
$ 1,827
$
55
$
–
–
–
–
–
–
–
–
5
1,106
771
1,882
1,465
6
1,471
$
5,009
As at October 31, 2016
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles
Other
Total
4,401
$ 7,653
$ 1,520
$ 68
$ 13,642
$
$
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
Bank’s maximum exposure to loss
$
4,401
$ 2,326
$
62
$ 20
$
6,809
(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, 2017, the Bank has recorded
$1.8 billion (2016 – $2.4 billion), primarily its interest in the structured entities, on its Consolidated Statement of Financial Position.
172 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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
$1.9 billion (2016 – $1.4 billion) based on future asset purchases by these conduits.
Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns, which results in the Bank not
consolidating the two Canadian conduits.
Structured finance entities
The Bank has interests in structured entities used to assist corporate clients in accessing cost-efficient financing through their securitization structures.
The Bank may act as an administrator, an investor or a combination of both in these types of structures.
Capital funding vehicles
These entities are designed to pass the Bank’s credit risk to the holders of the securities. Therefore the Bank does not have exposure or rights to
variable returns from these entities.
Other
Other includes investments in managed funds, collateralized debt obligation entities, and other structured entities. The Bank’s maximum exposure to
loss is limited to its net investment in these funds.
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
c) Other unconsolidated Bank-sponsored entities
The Bank sponsors unconsolidated structured entities including mutual funds, in which it has insignificant or no interest at the reporting date. The
Bank is a sponsor when it is significantly involved in the design and formation at inception of the structured entities, and the Bank’s name is used by
the structured entities to create an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also considers other
factors, such as its continuing involvement and obligations to determine if, in substance, the Bank is a sponsor. The Bank considers mutual funds and
managed companies as sponsored entities.
The following table provides information on revenue from unconsolidated Bank-sponsored entities.
As at October 31 ($ millions)
Revenue
(1)
Includes mutual funds, other funds and trusts.
2017
Scotia
Managed
Companies
2016
Scotia
Managed
Companies
Total
Total
Funds(1)
$ 5
$ 2,021
$ 1,960
$ 8
$ 1,968
Funds(1)
$ 2,016
The Bank earned revenue of $2,021 million (2016 – $1,968 million) from its involvement with the unconsolidated Bank-sponsored structured entities
including mutual funds, for the year ended October 31, 2017, which was comprised of interest income of $1 million (2016 – $2 million), non-interest
income – banking of $134 million (2016 – $134 million) and non-interest income – wealth management of $1,886 million (2016 – $1,832 million),
including mutual fund, brokerage and investment management and trust fees.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 173
CONSOLIDATED FINANCIAL STATEMENTS
15 Property and Equipment
($ millions)
Cost
Balance as at October 31, 2015
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2016
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2017
Accumulated depreciation
Balance as at October 31, 2015
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2016
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2017
Net book value
Balance as at October 31, 2016
Balance as at October 31, 2017
Land &
Building
Equipment
Technology
Assets
Leasehold
Improvements
Total
$ 1,983
156
256
(286)
(38)
$ 2,071
169
(224)
(294)
$ 1,592
18
209
(83)
(8)
$ 1,728
147
(52)
69
$ 1,947
42
14
(19)
(1)
$ 1,983
161
(41)
(15)
$ 1,722
$ 1,892
$ 2,088
$
$
754
99
(69)
(18)
766
47
(58)
(69)
$ 1,372
104
(103)
(11)
$ 1,362
91
(37)
34
$ 1,606
66
(18)
(1)
$ 1,653
131
(40)
(25)
$ 1,305
26
98
(61)
(11)
$ 1,357
126
(28)
(45)
$ 1,410
$
809
56
(18)
(9)
838
71
(17)
(16)
$ 6,827
242
577
(449)
(58)
$ 7,139
603
(345)
(285)
$ 7,112
$ 4,541
325
(208)
(39)
$ 4,619
340
(152)
(76)
$
686
$ 1,450
$ 1,719
$
876
4,731
$ 1,305
$ 1,036
$
$
366
442
$
$
330
369
$
$
519
534
$ 2,520(1)
$ 2,381(1)
(1)
Includes $16 (2016 – $20) of investment property.
16 Investments in Associates
The Bank had significant investments in the following associates:
As at October 31 ($ 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
2017
2016
Carrying
value
Thailand
Banking
49.0%
September 30, 2017
$ 2,789
$ 2,612
Canada
China
Curacao
Venezuela
Financial Services
Banking
Banking
Banking
20.0%
19.9%
48.1%
26.6%
September 30, 2017
September 30, 2017
September 30, 2017
September 30, 2017
542
711
284
35
532
654
280
26
(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) 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, 2017 these reserves amounted to $61 (2016 – $63).
(4) As at October 31, 2017, the Bank’s total net investment in Banco del Caribe, along with monetary assets, comprising of cash and dividend receivable was translated at the
DICOM exchange rate of 1 USD to 3,345 VEF (2016 – 1 USD to 660 VEF).
174 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
Summarized financial information of the Bank’s significant associates are as follows.
($ 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
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 the twelve months ended and as at September 30, 2017(1)
Revenue
$ 1,718
1,040
915
343
104
Net
income
$ 508
334
411
80
(29)
Total assets
Total liabilities
$ 38,050
6,233
41,170
5,501
644
$ 32,902
5,235
37,821
4,896
510
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
Goodwill
The changes in the carrying amounts of goodwill by cash-generating unit (CGU) are as follows:
($ millions)
Balance as at October 31, 2015
Acquisitions
Foreign currency adjustments and other
Balance as at October 31, 2016
Acquisitions
Dispositions
Foreign currency adjustments and other
Balance as at October 31, 2017
Canadian
Banking
$ 3,361
49
(7)
3,403
–
(36)
18
Global
Banking and
Markets
$ 258
–
7
265
–
–
(10)
Caribbean
and
Central
America
$ 1,005
241
9
Latin
America
$ 2,391
–
70
Total
$ 7,015
290
79
2,461
1,255
7,384
–
–
(61)
–
–
(52)
–
(36)
(105)
$ 3,385
$ 255
$ 2,400
$ 1,203
$ 7,243
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 11 to 12.5 times (2016 – 10 to 13 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, 2017 and July 31, 2016 and no impairment was determined to exist.
2 0 1 7 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
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, 2015
Acquisitions
Additions
Foreign currency adjustments and other
Balance as at October 31, 2016
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2017
Accumulated amortization
Balance as at October 31, 2015
Amortization
Foreign currency adjustments and other
Balance as at October 31, 2016
Amortization
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2017
Net book value
As at October 31, 2016
As at October 31, 2017
Finite life
Indefinite life
Computer
software
Other
intangibles
Fund management
contracts(1)
Other
intangibles
Total
$ 2,193
$ 1,510
$ 2,325
$ 68
$ 6,096
–
584
(40)
$ 2,737
584
(3)
(40)
61
31
29
$ 1,631
5
(56)
(17)
$ 3,278
$ 1,563
$
778
255
(24)
$ 1,009
339
(2)
(25)
$
$
884
104
7
995
82
(18)
(9)
$ 1,321
$ 1,050
–
–
–
$ 2,325
–
–
–
$ 2,325
$
$
$
–
–
–
–
–
–
–
–
–
–
–
$ 68
–
–
–
$ 68
$
$
$
–
–
–
–
–
–
–
–
$ 1,728(2)
$ 1,957(2)
$
$
636
513
$ 2,325
$ 2,325
$ 68
$ 68
61
615
(11)
$ 6,761
589
(59)
(57)
$ 7,234
$ 1,662
359
(17)
$ 2,004
421
(20)
(34)
$ 2,371
$ 4,757
$ 4,863
(1) Fund management contracts are attributable to HollisWealth Inc. (formerly DundeeWealth Inc.).
(2) Computer software comprises of purchased software of $500 (2016 – $377), internally generated software of $981 (2016 – $948), and in process software not subject to
amortization of $476 (2016 – $403).
Impairment testing of intangible assets
Indefinite life intangible assets are not amortized and are assessed for impairment annually or more frequently if events or changes in circumstances
indicate that the asset may be impaired. Impairment is assessed by comparing the carrying value of the indefinite life intangible asset to its recoverable
amount. The recoverable amount of the fund management contracts is based on a value in use approach using the multi-period excess earnings
method. This approach uses cash flow projections from management-approved financial budgets which include key assumptions related to market
appreciation, net sales of funds, and operating margins taking into consideration past experience and market expectations. The forecast cash flows
cover a 5-year period, with a terminal growth rate of 4.5% (2016 – 4.5%) applied thereafter. These cash flows have been discounted at a rate of
10% (2016 – 10%). Management believes that reasonable negative changes in any one key assumption used to determine the recoverable amount
would not result in an impairment.
Indefinite life intangible assets were assessed for annual impairment as at July 31, 2017 and July 31, 2016 and no impairment was determined to
exist.
18 Other Assets
As at October 31 ($ 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
$
2017
2,176
1,674
327
3,041
256
913
106
4,256
$
2016
1,986
1,939
422
4,604
184
796
116
2,823
$ 12,749
$ 12,870
176 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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)
2017
2016
Payable on demand(1)
$
Interest-
bearing
8,514
81,132
5,066
Non-interest
bearing
$
6,541
23,805
1,706
Payable after
Payable on a
notice(2)
fixed date(3)
Total
$ 119,111
32,850
2,162
$ 65,864
247,201
31,415
$ 200,030
384,988
40,349
$ 94,712
$ 32,052
$ 154,123(4)
$ 344,480
$ 625,367
$ 76,776
10,403
–
8
2,467
375
46
4,637
$ 94,712
$ 17,742
171
–
4,167
555
2,020
388
7,009
$ 121,441
5,773
277
5,949
3,734
72
3,062
13,815
$ 229,528
41,723
11,764
9,295
8,460
9,107
4,091
30,512
$ 445,487
58,070
12,041
19,419
15,216
11,574
7,587
55,973
$ 32,052
$ 154,123
$ 344,480
$ 625,367
$
611,877
$
$
$
199,302
372,303
40,272
611,877
434,884
54,997
15,256
16,264
15,547
10,801
7,272
56,856
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
(1) 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 $216,018 (2016 – $217,850), deposits denominated in Mexican pesos amount to $17,156 (2016 – $14,464) and deposits
Includes $141 (2016 – $135) of non-interest bearing deposits.
denominated in other foreign currencies amount to $81,283 (2016 – $76,777).
The following table presents the maturity schedule for term deposits in Canada greater than $100,000(1).
($ millions)
As at October 31, 2017
As at October 31, 2016
Within three
months
$
$
33,678
40,211
Three to six
months
Six to
twelve months
$
$
26,579
24,077
$
$
31,190
23,690
$
$
One to
five years
94,563
99,905
Over
five years
16,073
12,451
$
$
Total
$
$
202,083
200,334
(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
August 2022
October 2024
Interest
rate (%)
2.898
3.036
June 2025
December 2025(3) 3.367
8.90
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 August 3, 2017.
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. Redeemed 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.
2017
Carrying
value(2)
2016
Carrying
value(2)
$
–
$ 1,500
1,756
260
737
1,613
1,219
113
110
1,798
262
759
1,677
1,271
118
116
127
$ 5,935
132
$ 7,633
(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 $5.00 (subject to, in each case, adjustments in certain events as set out in the respective prospectus supplements),
and (ii) the current market price of the Bank’s common shares at the time of the trigger event (10-day weighted average), where applicable converted from CAD to USD.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 177
CONSOLIDATED FINANCIAL STATEMENTS
21 Other Liabilities
As at October 31 ($ 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, 2015
Provisions made during the year
Provisions utilized / released during the year
Balance as at October 31, 2016
Provisions made during the year
Provisions utilized / released during the year
Balance as at October 31, 2017
2017
2016
$
2,172
5,867
408
697
6,819
7,129
796
333
808
12,954
5,331
$
2,033
5,427
587
611
8,430
6,708
528
536
1,613
10,950
5,293
$ 43,314
$ 42,716
Off-balance sheet
credit risks
Restructuring
$ 112
26
–
$ 138
–
(18)
$ 120
$
49
378
(150)
$ 277
–
(174)
$ 103
Other
154
85
(118)
121
27
(38)
110
$
$
$
Total
315
489
(268)
536
27
(230)
333
$
$
$
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, 2017, $103 million of
the restructuring provision remains and is expected to be utilized in line with the approved plans, during 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.
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.
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.
178 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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23 Common shares, preferred shares and other equity instruments
a) Common shares
Authorized:
An unlimited number of common shares without nominal or par value.
Issued and fully paid:
2017
2016
As at October 31 ($ millions)
Number of shares
Amount
Number of shares
Amount
Outstanding at beginning of year
Issued under Shareholder Dividend and Share Purchase Plan(1)
Issued in relation to share-based payments, net (Note 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
1,207,893,604
–
5,338,111
–
(14,000,000)
1,199,231,715(2)
$ 15,513
–
313
–
(182)
$ 15,644
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) Effective November 29, 2016, the Bank discontinued the issuance of shares from Treasury for the Dividend and Share Purchase options of the Plan. Purchases of Common Shares
under the Plan were made by Computershare Trust Company of Canada, as agent under the Plan (the “Agent”), at the average market price in the secondary market in accordance
with the provisions of the plan. As at October 31, 2017, there were 7,786,784 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
2017, the number of such shares bought and sold was 15,856,738 (2016 – 13,912,150).
(2)
Dividend
The dividends paid on common shares in fiscal 2017 and 2016 were $3,668 million ($3.05 per share) and $3,468 million ($2.88 per share),
respectively. The Board of Directors approved a quarterly dividend of 79 cents per common share at its meeting on November 27, 2017. This quarterly
dividend applies to shareholders of record as of January 2, 2018, and is payable January 29, 2018.
Normal Course Issuer Bid
During the year ended October 31, 2017, under normal course issuer bids, the Bank repurchased and cancelled approximately 14 million common
shares (2016 – 1.5 million) at an average price of $72.09 per share (2016 – $52.34) for a total amount of approximately $1,009 million
(2016 – $80 million).
On May 30, 2017, the Bank announced that OSFI and the TSX approved a NCIB pursuant to which it may repurchase for cancellation up to 24 million
of the Bank’s common shares. Purchases under this NCIB may commence on June 2, 2017 and will terminate upon the earlier of: (i) the Bank
purchasing the maximum number of common shares under the NCIB, (ii) the Bank providing a notice of termination, or (iii) June 1, 2018. On a
quarterly basis, the Bank will notify OSFI prior to making purchases.
On May 31, 2016, the Bank announced that OSFI and the Toronto Stock Exchange (TSX) approved a normal course issuer bid pursuant to which it
may repurchase for cancellation up to 12 million of the Bank’s common shares. On January 4, 2017 and March 17, 2017 the TSX approved
amendments to the NCIB to allow the Bank to purchase common shares under the NCIB, including by private agreement or under a specific share
repurchase program, respectively. The bid ended on June 1, 2017.
Non-viability Contingent Capital
The maximum number of common shares issuable on conversion of NVCC subordinated debentures, NVCC subordinated additional tier 1 capital
securities and NVCC preferred shares as at October 31, 2017 would be 1,757 million common shares (2016 – 1,373 million common shares) based on
the floor price and excluding the impact of any accrued and unpaid interest and any declared but unpaid dividends (refer to Note 20 – Subordinated
debentures and Note 23 (b) – Preferred shares and Other Equity Instruments for further details).
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 179
CONSOLIDATED FINANCIAL STATEMENTS
b)
Preferred shares and other equity instruments
Preferred shares
Authorized:
An unlimited number of preferred shares without nominal or par value.
Issued and fully paid:
2017
2016
As at October 31 ($ millions)
Preferred shares:(a)
Number
of shares
Amount
Series 16(b)
Series 17(c)
Series 18(d)(e)
Series 19(d)(e)
Series 20(d)(f)
Series 21(d)(f)
Series 22(d)(g)
Series 23(d)(g)
Series 30(d)(h)
Series 31(d)(h)
Series 32(d)(i)
Series 33(d)(i)
Series 34(d)(j)(m)
Series 36(d)(k)(m)
Series 38(d)(l)(m)
–
–
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
–
–
187
158
201
149
234
66
154
111
279
130
350
500
500
Dividends
declared
per share
0.328125
0.700000
0.837500
0.642626
0.902500
0.554501
0.957500
0.600126
0.455000
0.380126
0.515752
0.465159
1.375000
1.375000
1.351175
Conversion
feature
Number
of shares
Amount
–
–
Series 19
Series 18
Series 21
Series 20
Series 23
Series 22
Series 31
Series 30
Series 33
Series 32
Series 35
Series 37
Series 39
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
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
–
Conversion
feature
–
–
Series 19
Series 18
Series 21
Series 20
Series 23
Series 22
Series 31
Series 30
Series 33
Series 32
Series 35
Series 37
–
Total preferred shares
120,745,767
$ 3,019
143,745,767
$ 3,594
Terms of preferred shares
Preferred shares(a):
Series 16(b)
Series 17(c)
Series 18(d)(e)
Series 19(d)(e)
Series 20(d)(f)
Series 21(d)(f)
Series 22(d)(g)
Series 23(d)(g)
Series 30(d)(h)
Series 31(d)(h)
Series 32(d)(i)
Series 33(d)(i)
Series 34(d)(j)(m)
Series 36(d)(k)(m)
Series 38(d)(l)(m)
Issue date
Issue
price
Initial
dividend
Initial dividend
payment date
Rate
reset
spread
Redemption date
Redemption
price
October 12, 2007
January 31, 2008
March 25, 2008
March 27, 2008
April 26, 2013
25.00
25.00
25.00
0.391950
0.337530
0.431500
January 29, 2008
April 28, 2008
July 29, 2008
–
–
2.05%
January 27, 2017
April 26, 2017
April 26, 2018
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
2.05%
April 26, 2013 to
April 26, 2018
1.70% October 26, 2018
1.70% October 26, 2013 to
October 26, 2018
January 26, 2019
1.88%
1.88% January 26, 2014 to
January 26, 2019
April 26, 2020
April 26, 2015 to
April 26, 2020
February 2, 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
25.00
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 all series 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 such 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
180 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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and 33) and the Non-cumulative 5-Year Rate Reset Preferred Shares NVCC (Series 35, 37 and 39) are payable, at a rate equal to the sum of the
three month Government of Canada Treasury 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 January 27, 2017, the Bank redeemed all outstanding Non-cumulative Preferred shares Series 16 and paid a dividend of $0.328125 per share.
(c) On April 26, 2017, the Bank redeemed all outstanding Non-cumulative Preferred shares Series 17 and paid a dividend of $0.350000 per share.
(d) 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.
(e) Holders of Series 18 Non-cumulative 5-Year Rate Reset Preferred Shares will have the option to convert shares into an equal number of Series 19
non-cumulative floating rate preferred shares on April 26, 2018 and on April 26 every five years thereafter. With regulatory approval, the
Series 18 preferred shares may be redeemed by the Bank on April 26, 2018 and every five years thereafter, respectively, at $25.00 per share,
together with declared and unpaid dividends. With regulatory approval, the Series 19 Non-cumulative Preferred Shares may be redeemed by the
Bank at (i) $25.00 together with all declared and unpaid dividends to the date fixed for redemption in the case of redemptions on April 26, 2018
and on April 26 every five years thereafter, or (ii) $25.50 together with all declared and unpaid dividends to the date fixed for redemption on any
other date on or after April 26, 2013.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
(k) 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.
(l) 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 was paid on January 27, 2017 at $0.4418 per share of Preferred Shares Series 38.
(m) These preferred shares contain NVCC provisions necessary for the shares to qualify as Tier 1 regulatory capital under Basel III.
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CONSOLIDATED FINANCIAL STATEMENTS
Under NVCC provisions, NVCC preferred shares Series 34, 35, 36, 37, 38 and 39, if outstanding, 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, NVCC preferred shares Series 34, 35, 36, 37, 38 and 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. The conversion price is based on the greater of: (i) a floor price of $5.00 or (subject 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).
Other equity instruments
Other equity instruments of $1,560 million (US$1.25 billion) include USD-denominated perpetual fixed to floating rate non-cumulative subordinated
additional Tier 1 capital securities (NVCC) issued by the Bank on October 12, 2017.
The terms of the notes are described below:
Š The price per note is USD $1,000, with interest paid semi-annually in arrears at 4.65% per annum, for the initial five years. Thereafter, the interest
will reset quarterly and accrue at a rate per annum equal to three-month LIBOR plus 2.648%.
Š While interest is payable on a semi-annual basis for the initial five year period, and quarterly thereafter, the Bank may, at its discretion, with notice,
cancel the payments. If the Bank does not pay the interest in full to the note holders, the Bank will not declare dividends on its common or
preferred shares or redeem, purchase or otherwise retire such shares until the month commencing after the Bank resumes full interest payments on
the notes.
Š The notes are redeemable at par 5 years after issuance solely at the option of the Bank, or following a regulatory or tax event, as described in the
offering documents. All redemptions are subject to regulatory consent.
Š The notes are the Bank’s direct unsecured obligations, ranking subordinate to all of the Bank’s subordinated indebtedness.
Š NVCC provisions require the conversion of these 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, outstanding
NVCC subordinated additional Tier 1 capital securities, would be converted into common shares pursuant to an automatic conversion formula
defined as 125% of the par value plus accrued and unpaid interest divided by the conversion price. The conversion price is based on the greater of:
(i) the U.S. dollar equivalent of $5.00 (subject to adjustments in certain events as set out in their respective prospectus supplements), and (ii) the U.S.
dollar equivalent of the current market price of the Bank’s common shares at the time of the trigger event (10-day weighted average). The U.S.
dollar equivalents of the floor price and the current market price are based on the mid-day CAD/USD exchange rate on the day prior to the trigger
event.
The notes have been determined to be compound instruments that have both equity and liability features. At inception, the fair value of the liability
component is initially measured with any residual amount assigned to the equity component. On the date of issuance, the Bank has assigned an
insignificant value to the liability component of the notes and, as a result, the proceeds received upon issuance of the notes have been presented as
equity. The Bank will continue to monitor events that could impact the value of the liability component.
Restrictions on dividend payments
c)
Under the Bank Act, the Bank is prohibited from declaring any dividends on its common or preferred shares when the Bank is, or would be placed by
such a declaration, in contravention of the capital adequacy, liquidity or any other regulatory directives issued under the Bank Act. In addition,
common share dividends cannot be paid unless all dividends to which preferred shareholders are then entitled have been paid or sufficient funds have
been set aside to do so.
In the event that applicable cash distributions on any of the Scotiabank Trust Securities are not paid on a regular distribution date, the Bank has
undertaken not to declare dividends of any kind on its preferred or common shares. Similarly, should the Bank fail to declare regular dividends on any
of its directly issued outstanding preferred or common shares, cash distributions will also not be made on any of the Scotiabank Trust Securities.
In the event that distributions on the Bank’s subordinated additional Tier 1 capital securities (NVCC) are not paid in full, the Bank has undertaken not
to declare dividends on its common or preferred shares until the month commencing after such distributions have been made in full.
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. Institutions are expected to maintain a material operating buffer above the 3%
minimum.
182 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
The Bank’s regulatory capital ratios were as follows:
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)(2)
Tier 1 risk-weighted assets(1)(2)
Total risk-weighted assets(1)(2)
Leverage exposures
Capital ratios
Common Equity Tier 1 Capital ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
2017
2016
All-in
Transitional
All-in
Transitional
$
$
$
43,352
49,473
56,113
$
$
$
46,051
50,623
57,222
$
$
$
39,989
45,066
53,330
$
$
$
45,816
47,668
55,824
$
376,379
$
376,379
376,379
$
$ 1,052,891
$ 387,292
$ 387,292
$ 387,292
$1,053,928
$
364,048
$
364,504
364,894
$
$ 1,010,987
$
368,215
$
368,215
368,215
$
$ 1,013,346
11.5%
13.1%
14.9%
4.7%
11.9%
13.1%
14.8%
4.8%
11.0%
12.4%
14.6%
4.5%
12.4%
12.9%
15.2%
4.7%
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(1)
In accordance with OSFI’s requirements, scalars for CVA risk-weighted assets of 0.72, 0.77 and 0.81 (0.64, 0.71 and 0.77 in 2016) were used to compute the CET1 capital ratio,
Tier 1 capital ratio and Total capital ratio, respectively.
(2) Since the introduction of Basel II in 2008, OSFI has prescribed a minimum capital floor for institutions that use the advanced internal ratings-based approach for credit risk. The
Basel I capital floor add-on is determined by comparing a capital requirement calculated by reference to Basel I against the Basel III calculation, as specified by OSFI. A shortfall in the
Basel III capital requirement as compared with the Basel I floor is added to RWA. As at October 31, 2017, CET1, Tier 1 and Total Capital RWA include Basel I floor adjustments of
$12.8 billion, $12.6 billion and $12.4 billion, respectively (2016 - nil).
The Bank substantially exceeded the OSFI capital targets as at October 31, 2017. OSFI has also prescribed an authorized leverage ratio and the Bank
was above the regulatory minimum as at October 31, 2017.
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
104.6 million common shares have been issued as a result of the exercise of options and 15.4 million common shares are committed under
outstanding options, leaving 9.0 million common shares available for issuance as options. Outstanding options expire on dates ranging from
December 11, 2017 to December 1, 2026.
The cost of these options is recognized on a graded vesting basis except where the employee is eligible to retire prior to a tranche’s vesting date, in
which case the cost is recognized between the grant date and the date the employee is eligible to retire.
The stock option plans include:
Š Tandem stock appreciation rights
Employee stock options granted between December 2, 2005 to November 1, 2009 have Tandem SARs, which provide the employee the choice to
either exercise the stock option for shares, or to exercise the Tandem SARs and thereby receive the intrinsic value of the stock option in cash. As at
October 31, 2017, 5,900 Tandem SARs were outstanding (2016 – 57,800).
The share-based payment liability recognized for vested Tandem SARs as at October 31, 2017 was nil (2016 – $2 million). The corresponding
intrinsic value of this liability as at October 31, 2017 was nil (2016 – $2 million).
In 2017, an expense of $0.4 million (2016 – $0.4 million expense) 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 $0.3 million (2016 –
$0.6 million gains).
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, 2017 was $177 million (2016 – $161 million).
In 2017, an expense of $7 million (2016 – $7 million) was recorded in salaries and employee benefits in the Consolidated Statement of Income. As
at October 31, 2017, future unrecognized compensation cost for non-vested stock options was $4 million (2016 – $4 million) which is to be
recognized over a weighted-average period of 1.90 years (2016 – 1.80 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.
2 0 1 7 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
During fiscal 2017, 60,840 SARs were granted (2016 – 77,298) and as at October 31, 2017, 1,275,608 SARs were outstanding (2016 – 1,541,368),
of which 1,229,330 SARs were vested (2016 – 1,478,854).
The share-based payment liability recognized for vested SARs as at October 31, 2017 was $31 million (2016 – $25 million). The corresponding
intrinsic value of this liability as at October 31, 2017 was $28 million (2016 – $25 million).
In 2017, a benefit of $2 million (2016 – benefit of $2 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 $20 million (2016 – $18 million
gains).
Determination of fair values
The share-based payment liability and corresponding expense for SARs and options with Tandem SAR features were quantified using the Black-
Scholes option pricing model with the following assumptions and resulting fair value per award:
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
2017
2016
1.38% - 1.59%
3.61%
15.3% - 23.38%
0.00 - 4.53 years
0.56% - 0.81%
3.92%
16.28% - 30.40%
0.00 - 4.48 years
$
25.72
$
17.69
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 2017 and 2016 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
2017 Grant
2016 Grant
1.27%
3.81%
17.24%
6.67 years
1.20%
4.49%
20.10%
6.65 years
$
6.51
$
5.27
The risk-free rate is based on Canadian treasury bond rates interpolated for the maturity equal to the expected life until exercise of the options.
Expected dividend yield is based on historical dividend payout. Expected price volatility is determined based on the historical volatility for
compensation. For accounting purposes, an average of the market consensus implied volatility for traded options on our common shares and the
historical volatility is used.
Details of the Bank’s Employee Stock Option Plan are as follows(1):
As at October 31
Outstanding at beginning of year
Granted
Exercised as options
Exercised as Tandem SARs
Forfeited
Expired
Outstanding at end of year(2)
Exercisable at end of year(2)
Available for grant
As at October 31, 2017
Range of exercise prices
$33.89 to $47.75
$49.93 to $55.21
$55.63 to $60.67
$63.98 to $74.14
2017
2016
Number of stock
options (000’s)
Weighted average
exercise price
Number of stock
options (000’s)
Weighted average
exercise price
19,852
1,141
(5,338)
(33)
(67)
–
15,555
10,980
9,156
$ 54.55
74.14
50.25
52.59
65.97
–
$ 57.42
$ 53.44
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
Options Outstanding
Options Exercisable
Number of stock
options (000’s)
Weighted
average remaining
contractual life (years)
Weighted average
exercise price
Number of stock
options (000’s)
Weighted average
exercise price
2,337
2,285
5,585
5,348
15,555
1.78
3.75
5.04
6.85
4.98
$ 43.28
$ 50.43
$ 56.74
$ 67.31
$ 57.42
2,337
2,285
4,357
2,001
10,980
$ 43.28
$ 50.43
$ 55.63
$ 63.98
$ 53.44
(1) Excludes SARs.
(2)
Includes options of 5,900 Tandem SARs (2016 – 57,800) and 156,520 options originally issued under HollisWealth plans (2016 – 257,170).
184 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
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(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 2017, the Bank’s contributions totalled $54 million (2016 – $49 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, 2017, an aggregate of 18 million common shares were held under the employee share ownership plans (2016 – 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 2017, an aggregate expense of $203 million (2016 – $237 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 $160 million (2016 –
$121 million gains).
As at October 31, 2017, the share-based payment liability recognized for vested awards under these plans was $946 million (2016 –$849 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, 2017, there were 755,472 units (2016 –
703,168) awarded and outstanding of which 684,017 units were vested (2016 – 703,168).
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, 2017,
there were 299,867 units outstanding (2016 – 348,197).
Restricted Share Unit Plan (RSU)
Under the RSU Plan, selected employees receive an award of restricted share units which, for the majority of grants, vest at the end of three years.
There are certain grants that provide for a graduated vesting schedule. Upon vesting all RSU units are paid in cash to the employee. The share-based
payment expense is recognized evenly over the vesting period except where the employee is eligible to retire prior to the vesting date in which case,
the expense is recognized between the grant date and the date the employee is eligible to retire. As at October 31, 2017, there were 2,197,100 units
(2016 – 2,214,543) awarded and outstanding of which 1,497,340 were vested (2016 –1,537,076).
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, 2017, there were 8,250,143 units (2016 – 8,588,753) outstanding subject to performance criteria, of which 6,718,738
units were vested (2016 – 7,035,242).
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, 2017, there were 1,587,037 units outstanding (2016 – 1,802,540).
2 0 1 7 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
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
2017
2016
2015
$ 533
424
24
903
(29)
$
467
386
4
935
(19)
$
528
459
23
897
2
1,855
1,773
1,909
33
16
129
141
70
46
(16)
(20)
(20)
178
$2,033
257
$ 2,030
(56)
$ 1,853
$
82
198
280
$
(158)
(168)
(326)
$
(496)
(8)
(504)
275
(1)
1
5
280
$2,313
$ 191
(2)
(11)
$ 178
(322)
(10)
1
5
(326)
$ 1,704
(464)
(43)
1
2
(504)
$ 1,349
$
$
372
(4)
(111)
257
$
$
118
(2)
(172)
(56)
(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 Canadian 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
2017
2016
2015
Percent
of pre-tax
income
Percent
of pre-tax
income
Amount
Percent
of pre-tax
income
Amount
Amount
$ 2,715
26.4% $ 2,485
26.4% $ 2,386
26.3%
(286)
(407)
(2)
13
$ 2,033
(2.8)
(3.9)
–
0.1
(234)
(220)
(4)
3
19.8% $ 2,030
(2.5)
(2.3)
–
–
(233)
(281)
(2)
(17)
21.6% $ 1,853
(2.6)
(3.1)
–
(0.2)
20.4%
186 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
(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)
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Statement of Income
Statement of Financial Position
For the year ended
As at
2017
2016
2017
2016
$
62
45
(25)
(124)
(19)
(6)
(17)
(169)
$
57
3
(14)
18
99
18
139
57
$ (253)
$ 377
$
(21)
(32)
(9)
111
(53)
(427)
$
5
7
25
19
(129)
193
$ (431)
$ 178
$ 120
$ 257
$ 417
793
219
405
133
720
169
640
$3,496
$ 133
138
136
126
1,094
853
$2,480
$1,016
$
484
852
224
289
101
937
162
511
$ 3,560
$
122
75
146
221
1,043
543
$ 2,150
$ 1,410
(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 $1,016 (2016
– $1,410) are represented by deferred tax assets of $1,713 (2016 – $2,021), and deferred tax liabilities of $697 (2016 – $611) on the Consolidated Statement of Financial Position.
The major changes to net deferred taxes were as follows:
For the year ended October 31 ($ 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
2017
2016
$ 1,410
(178)
(198)
–
(18)
$ 1,016
$ 1,435
(257)
168
71
(7)
$ 1,410
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 $82 million (October 31, 2016 – $55 million). The amount related to unrecognized losses is $9 million,
which will expire as follows: $4 million in 2021 and beyond and $5 million have no fixed expiry date.
Included in the net deferred tax asset are tax benefits of $92 million (2016 – $73 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.
The amount of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures for which deferred
tax liabilities have not been recognized at October 31, 2017 is $27 billion (2016 – $24 billion).
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. In August 2017, the Bank received a reassessment of
$185 million for tax and interest for the 2012 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.
2 0 1 7 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
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 statutes.
Scotiabank Pension Plan (Canada)
The most significant pension plan is the Scotiabank Pension Plan (SPP) in Canada, a defined benefit pension plan, which includes 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 managers. 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, 2016. 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, Trinidad & Tobago, Colombia 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 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 at the beginning of the period. Beginning in 2016, separate
discount rates are used to determine the annual benefit expense in Canada and the US. These rates are determined with reference to the yields on
high quality corporate bonds with durations that match the various components of the annual 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 at the beginning of
the period. 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.
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.
188 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
a) Relative size of plan obligations and assets
For the year ended October 31, 2017
Percentage of total benefit obligations
Percentage of total plan assets
Percentage of total benefit expense(1)
For the year ended October 31, 2016
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
74% 11%
76%
6%
80% 16%
15%
18%
4%
63%
18%
51%
37%
82%
49%
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%
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(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 2017, and the two prior years.
Contributions to the principal plans for the year ended October 31 ($ millions)
2017
2016
2015
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)
$ 286
185
51
35
$ 557
$ 187
77
45
31
$ 340
$ 236
60
42
29
$ 367
(1) Based on preliminary estimates, the Bank expects to make contributions of $290 to the SPP, $35 to all other defined benefit pension plans, $58 to other benefit plans and $39 to all
other defined contribution plans for the year ending October 31, 2018.
c) Funded and unfunded plans
The excess (deficit) of the fair value of assets over the benefit obligation at the end of the year includes the following amounts for plans that are
wholly unfunded and plans that are wholly or partly funded.
As at October 31 ($ millions)
2017
2016
2015
2017
2016
2015
Benefit obligation
Benefit obligation of plans that are wholly unfunded
Benefit obligation of plans that are wholly or partly funded
$ 418
8,424
$
408
8,731
$
373
7,740
$ 1,324
334
$ 1,310
372
$ 1,231
408
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
$8,424
8,329
$ 8,731
7,770
$ 7,740
7,615
$
334
266
$ (95)
418
$ (513)
(39)
$
(961)
408
$ (1,369)
(60)
$
$
(125)
373
(498)
(41)
$
(68)
1,324
$(1,392)
–
$
$
372
284
(88)
1,310
$
$
408
307
(101)
1,231
$ (1,398)
–
$ (1,332)
–
Net asset (liability) at end of year
$ (552)
$ (1,429)
$
(539)
$(1,392)
$ (1,398)
$ (1,332)
2 0 1 7 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
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
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
Pension plans
Other benefit plans
2017
2016
2015
2017
2016
2015
$ 9,139
330
297
24
(724)
(46)
–
–
(157)
(21)
$ 8,842
$ 8,113
284
314
24
(593)
1,119
(16)
–
–
(106)
$ 9,139
$ 7,947
304
350
23
(498)
152
(241)
–
(48)
124
$ 8,113
$ 1,682
39
72
–
(76)
(36)
4
1
–
(28)
$ 1,658
$ 1,639
39
77
–
(71)
95
(77)
9
–
(29)
$ 1,682
$ 1,619
43
84
–
(73)
(52)
3
–
(2)
17
$ 1,639
7,770
273
7,615
310
7,323
343
700
471
24
(724)
(13)
–
(157)
(15)
$ 8,329
275
264
24
(593)
(12)
–
–
(113)
$ 7,770
55
296
23
(498)
(12)
–
(39)
124
$ 7,615
284
19
1
51
–
(76)
–
–
(1)
(12)
266
307
22
5
45
–
(71)
–
2
–
(26)
284
$
341
23
(12)
42
–
(73)
–
–
–
(14)
307
$
$
Funded status
Excess (deficit) of fair value of assets over benefit obligation at end of
year
Effect of asset limitation and minimum funding requirement(1)
Net asset (liability) at end of year
Recorded in:
Other assets in the Bank’s Consolidated Statement of Financial Position
Other liabilities in the Bank’s Consolidated Statement of Financial
Position
Net asset (liability) at end of year
Annual benefit expense
Current service cost
Net interest expense (income)
Administrative expenses
Past service costs
Amount of settlement (gain) loss recognized
Remeasurement of other long-term benefits
Benefit expense (income) recorded in the Consolidated Statement of
Income
Defined contribution benefit expense
Remeasurements
(Return) on plan assets in excess of interest income on fair value of
assets
Actuarial loss (gain) on benefit obligation
Change in the asset limitation
Remeasurements recorded in OCI
Total benefit cost
(513)
(39)
$ (552)
(1,369)
(60)
$ (1,429)
256
184
(808)
$ (552)
(1,613)
$ (1,429)
330
29
11
–
–
–
370
35
$
$
284
9
13
(16)
–
–
$
$
290
31
(700)
(46)
(25)
$ (771)
(275)
1,119
18
862
$
$ (366)
$ 1,183
Additional details on actual return on assets and actuarial (gains) and
losses
Actual return on assets (net of administrative expenses)
Actuarial (gains) and losses from changes in demographic assumptions
Actuarial (gains) and losses from changes in financial assumptions
Actuarial (gains) and losses from changes in experience
$
Additional details on fair value of pension plan assets invested
In Scotiabank securities (stock, bonds)
In property occupied by Scotiabank
Change in asset ceiling/onerous liability
Asset ceiling /onerous liability at end of prior year
Interest expense
Remeasurements
Foreign exchange
Asset ceiling /onerous liability at end of year
$
960
(6)
(71)
31
457
4
60
5
(25)
(1)
39
$
573
9
1,116
(6)
410
5
41
5
18
(4)
60
$
(498)
(41)
(539)
183
(722)
(539)
304
15
10
(241)
(9)
–
79
29
(55)
152
(49)
48
156
386
91
22
39
404
5
77
8
(49)
5
41
$
$
$
$
$
$
$
$
(1,392)
–
$ (1,392)
(1,398)
–
$ (1,398)
(1,332)
–
$ (1,332)
1
–
–
(1,393)
$ (1,392)
(1,398)
$ (1,398)
(1,332)
$ (1,332)
39
53
–
4
–
(3)
93
–
1
(35)
–
(34)
59
20
–
(13)
(23)
4
–
–
–
–
–
–
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)
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
(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.
190 | 2 0 1 7 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, 2017 is 15.3 years (2016 – 15.3 years, 2015 – 15.3 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
2017
2016
2015
2017
2016
2015
58% 60% 58% 29% 33% 35%
42% 40% 42% 71% 67% 65%
100% 100% 100% 100% 100% 100%
27% 29% 30% 55% 57% 58%
73% 71% 70% 45% 43% 42%
100% 100% 100% 100% 100% 100%
48% 33% 39% 35% 38% 37%
52% 67% 61% 65% 62% 63%
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
2017
2016
2015
2017
2016
2015
3.90% 3.86% 4.64% 4.86% 4.74% 5.33%
3.60% 3.60% 4.40% 3.53% 3.42% 4.27%
2.76% 2.72% 2.75% 4.07% 4.09% 4.41%
3.86% 4.64% 4.46% 4.74% 5.33% 5.24%
3.33% 4.03% 4.46% 4.42% 4.91% 5.24%
4.01% 4.83% 4.46% 5.09% 5.62% 5.24%
3.64% 4.31% 4.46% 4.94% 5.56% 5.24%
3.60% 4.40% 4.20% 3.42% 4.27% 4.12%
3.00% 3.70% 4.20% 2.98% 3.67% 4.12%
3.70% 4.60% 4.20% 3.75% 4.54% 4.12%
3.30% 4.00% 4.20% 3.56% 4.44% 4.12%
2.72% 2.75% 2.77% 4.09% 4.41% 4.51%
n/a
n/a
n/a
23.2
24.4
24.2
25.3
21.3
23.8
21.7
24.0
22.7
24.4
24.3
25.9
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
5.99% 6.12% 6.29%
4.93% 4.93% 4.97%
2030
2030
2030
23.2
24.4
24.2
25.3
21.3
23.8
21.7
24.0
22.7
24.4
24.3
25.9
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
(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 7 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
g) Sensitivity analysis
The sensitivity analysis presented 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, 2017 ($ 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
$ 1,529
94
n/a
n/a
162
3
5
$ 106
9
n/a
n/a
9
–
–
$ 257
1
153
(122)
24
3
5
$ 13
–
16
(12)
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 managers – 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, with the exception of
certain programs in Canada and Mexico.
The tables below shows the weighted-average actual and target asset allocations for the Bank’s principal plans at October 31, by asset category.
Asset category %
Cash and cash equivalents
Equity investments
Quoted in an active market
Non quoted
Fixed income investments
Quoted in an active market
Non quoted
Property
Quoted in an active market
Non quoted
Other
Quoted in an active market
Non quoted
Total
Target asset allocation at October 31, 2017
Asset category %
Cash and cash equivalents
Equity investments
Fixed income investments
Property
Other
Total
192 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
Pension plans
Other benefit plans
Actual
2017
Actual
2016
Actual
2015
Actual
2017
Actual
2016
Actual
2015
2%
2%
2%
1%
2%
2%
43%
16%
59%
5%
26%
31%
–%
–%
–%
44%
16%
60%
4%
27%
31%
–%
–%
–%
44%
19%
63%
5%
25%
30%
–%
–%
–%
46%
–%
46%
32%
21%
53%
–%
–%
–%
45%
–%
45%
29%
24%
53%
–%
–%
–%
45%
–%
45%
28%
25%
53%
–%
–%
–%
–%
8%
8%
–%
–%
–%
100% 100% 100% 100% 100% 100%
–%
5%
5%
1%
6%
7%
–%
–%
–%
–%
–%
–%
Pension plans
Other benefit plans
–%
59%
32%
1%
8%
100%
2%
45%
53%
–%
–%
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
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, 2017
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
7,363
5,488
12,851
913
412
6,075
1,387
International
Banking
Global Banking
and Markets
Other(1)
Total
$
6,726
3,688
10,414
1,294
283
5,381
828
$ 1,336
3,288
$ (390)
(344)
$ 15,035
12,120
4,624
42
55
2,105
604
(734)
–
11
308
(786)
27,155
2,249
761
13,869
2,033
$
4,064
$
2,628
$ 1,818
$ (267)
$
8,243
–
4,064
323
244
238
2,390
148
115
–
1,818
336
267
–
(267)
106
228
238
8,005
913
854
(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, 2017 amounting to $562 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 – $482 and Other – $(141).
For the year ended October 31, 2016
Taxable equivalent basis ($ 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
7,024
5,164
12,188
832
340
5,984
1,296
International
Banking
Global Banking
and Markets
Other(1)
Total
$ 6,359
3,482
$ 1,293
3,139
$ (384)
273
$ 14,292
12,058
9,841
1,281
265
5,258
707
4,432
249
68
1,972
572
(111)
50
11
642
(545)
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 – $(137).
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 193
CONSOLIDATED FINANCIAL STATEMENTS
For the year ended October 31, 2015
Taxable equivalent basis ($ 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
$ 5,706
3,137
Global Banking
and Markets
$ 1,071
2,953
8,843
1,128
242
4,853
568
4,024
67
57
1,789
558
Other(1)
$ (100)
35
Total
$ 13,092
10,957
(65)
60
13
73
(475)
24,049
1,942
584
12,457
1,853
$ 3,344
$ 2,052
$ 1,553
$ 264
$
7,213
–
3,344
300
218
199
1,853
128
94
–
1,553
342
240
–
264
91
257
199
7,014
861
809
(1)
(2)
(3)
Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income and
non-interest income and provision for income taxes for the year ended October 31, 2015 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 – $(137).
Geographical segmentation
The following table summarizes the Bank’s financial results by geographic region. Revenues and expenses which have not been allocated back to
specific operating business lines are reflected in corporate adjustments.
For the year ended October 31, 2017 ($ 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
7,440
6,924
14,364
906
7,650
1,066
United
States
$ 460
830
1,290
(14)
606
147
Mexico
Peru
$ 1,380
536
$ 1,287
635
$
1,916
193
1,123
125
1,922
329
762
225
Chile
817
409
1,226
145
630
77
Colombia
$
710
455
1,165
337
620
71
Other
International
$ 2,999
2,502
5,501
353
3,069
506
$
4,742
$ 551
$
475
$
606
$
374
$
137
$ 1,573
$
539
$ 111
$
28
$
24
$
23
$
11
$
162
Includes net income from investments in associated corporations for Canada – $66; Peru – $6 and Other International – $476.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
Total
$ 15,093
12,291
27,384
2,249
14,460
2,217
8,458
(215)
8,243
238
8,005
898
15
913
$
$
$
$
$
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
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
$
7,022 $
6,893
479 $ 1,224 $ 1,231
600
554
871
$
13,915
876
7,339
1,235
1,350
112
633
155
1,778
225
1,121
69
1,831
315
740
201
Chile
763
325
1,088
113
605
45
$
674
419
1,093
320
550
89
Colombia
Other
International
Total
$ 2,950
2,409
$ 14,343
12,071
5,359
401
3,036
497
$
4,465 $
450 $
363 $
575
$
325
$
134
$ 1,425
$
529 $
126 $
27 $
23
$
20
$
10
$
165
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 – $468.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
194 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
For the year ended October 31, 2015 ($ millions)
Canada
United
States
Mexico
Peru
Chile
Colombia
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
$
6,458 $
6,272
472 $ 1,246 $ 1,077
601
561
882
$ 554
231
$
12,730
728
6,936
1,038
1,354
6
507
267
1,807
260
1,160
27
1,678
266
744
195
785
108
431
24
677
372
1,049
246
541
84
Other
International
Total
$ 2,631
2,163
$ 13,115
11,082
4,794
268
2,745
401
24,197
1,882
13,064
2,036
$
4,028 $
574 $
360 $
473
$ 222
$
178
$ 1,380
$
7,215
$
502 $
125 $
26 $
21
$
17
$
10
$
148
(2)
$
7,213
199
7,014
849
12
861
$
$
$
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
Includes net income from investments in associated corporations for Canada – $66; Peru – $4 and Other International – $472.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
29 Related Party Transactions
Compensation of key management personnel of the Bank
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank,
directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and
Chief Executive Officer and Group Heads.
For the year ended October 31 ($ 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.
2017
2016
$
$
17
25
3
45
$
$
20
24
3
47
Directors can use some or all of their director fees earned to buy common shares of the Bank at market rates through the Director’s 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
As at October 31 ($ millions)
Loans
Deposits
2017
2016
$
$
6
8
$
6
$ 11
The Bank’s committed credit exposure to companies controlled by directors totaled $145.2 million as at October 31, 2017 (2016 – $99.5 million),
while actual utilized amounts were $11.5 million (2016 – $3.9 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as
related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions
and were recorded as follows:
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
$
2017
(46)
703
217
114
$
2016
(45)
788
338
99
$
2015
(27)
747
187
84
Scotiabank principal pension plan
The Bank manages assets of $3.0 billion (2016 – $1.9 billion) which is a portion of the Scotiabank principal pension plan assets and earned
$3.7 million (2016 – $3.9 million) in fees.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 195
CONSOLIDATED FINANCIAL STATEMENTS
30 Principal Subsidiaries and Non-Controlling Interests in Subsidiaries
(a) Principal subsidiaries(1)
The following table presents the major operating subsidiaries the Bank owns, directly or indirectly. All of these subsidiaries are included in the Bank’s
consolidated financial statements.
As at October 31 ($ millions)
Canadian
1832 Asset Management L.P.
1985275 Ontario Inc. (previously HollisWealth Inc.)(3)
ADS Canadian Bank (previously Hollis Canadian Bank)
BNS Investments Inc.
Montreal Trust Company of Canada
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.
BNS International (Panama) S.A.
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.(4)
Scotiabanc Inc.
Scotia Capital (USA) Inc.(4)(5)
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
Scotiabank (Belize) Ltd.
Scotiabank Trinidad and Tobago Limited (50.9%)
Scotiabank (Panama) S.A.
Scotiabank Uruguay S.A.
Scotiabank de Puerto Rico
Scotiabank El Salvador, S.A. (99.4%)
Scotiabank Europe plc
Scotiabank Peru S.A.A. (98.05%)
Principal office
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Montreal, Quebec
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
Montevideo, Uruguay
San Juan, Puerto Rico
San Salvador, El Salvador
London, United Kingdom
Lima, Peru
Carrying value of shares
2017
2016(2)
$ 2,006
3,604
399
13,551
$ 1,707
3,427
387
13,277
574
716
239
1,024
567
189
615
34
3,488
185
649
504
167
926
32
3,489
1,160
303
18,223
1,194
316
18,022
3,544
3,325
3,204
3,056
642
641
223
1,710
227
1,634
496
1,395
659
2,400
4,518
491
1,361
651
2,539
3,953
(1) The Bank (or immediate parent of an entity) owns 100% of the outstanding voting shares of each subsidiary unless otherwise noted.
(2) Prior period amounts have been restated to conform with current period presentation.
(3) Effective November 1, 2017, the name was changed to 1985275 Ontario Inc.
(4) The carrying value of this subsidiary is included with that of its parent, BNS Investments Inc.
(5) The carrying value of this subsidiary is included with that of its parent, Scotia Holdings (US) Inc.
196 | 2 0 1 7 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:
Banco Colpatria Multibanca Colpatria S.A.(1)
Scotia Group Jamaica Limited
Scotiabank Trinidad and Tobago Limited
Cencosud Administradora de Tarjetas S.A.
Other
Total
As at and for the year ended October 31
2017
2016
Non-controlling
interest %
Non-controlling
interests in
subsidiaries
Dividends
paid to
non-controlling
interest
Non-controlling
interests in
subsidiaries
Dividends
paid to
non-controlling
interest
49.0%
28.2%
49.1%
49.0%
0.1% -
49.0%(2)
$
445
300
354
131
362
$
38
17
56
14
8
$
471
311
359
139
290
$
25
17
54
10
10
$ 1,592
$ 133
$ 1,570
$ 116
(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:
As at and for the year ended October 31, 2017
As at and for the year ended October 31, 2016
Total
comprehensive
income
Revenue
Total assets
Total
liabilities
Revenue
Total
comprehensive
income
Total assets
Total
liabilities
$ 2,224
$ 362
$ 24,038
$ 20,702
$ 2,048
$ 426
$ 22,976
$ 19,849
($ millions)
Total
31 Non-Interest Income
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
Wealth management
Mutual funds
Brokerage fees
Investment management and trust
Total wealth management
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
2017
2016
2015
$ 1,514
1,324
1,153
472
4,463
608
$ 1,359
1,279
1,154
436
4,228
559
$ 1,089
1,235
1,053
406
3,783
423
$ 3,855
$ 3,669
$ 3,360
$ 1,639
1,021
658
$ 3,318
$ 1,624
1,010
648
$ 3,282
$ 1,619
1,006
644
$ 3,269
$
2017
575
47
295
250
92
$
2016
613
101
376
262
51
$
2015
400
177
345
201
62
$ 1,259
$ 1,403
$ 1,185
2 0 1 7 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
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)
2017
2016
2015
$ 7,876
1,203
$ 6,987
1,204
$ 6,897
1,210
$
6.55
$
5.80
$
5.70
$ 7,876
59
$ 6,987
83
$ 6,897
86
$ 7,935
$ 7,070
$ 6,983
1,203
20
1,223
1,204
22
1,226
1,210
22
1,232
$
6.49
$
5.77
$
5.67
(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
2017
2016
Maximum potential
amount of future
payments(1)
Maximum potential
amount of future
payments(1)
$ 35,523
4,996
5,398
587
$ 34,520
5,814
4,129
597
(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, 2017,
$4 million (2016 – $19 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.
(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, 2017, $274 million (2016 – $333 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,
198 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
the Bank has not made any significant payments under these indemnities. As at October 31, 2017, $2 million (2016 – $3 million) was included in
other liabilities in the Consolidated Statement of Financial Position with respect to indemnifications.
(b) Other indirect commitments
In the normal course of business, various other indirect commitments are outstanding which are not reflected on the Consolidated Statement of
Financial Position. These may include:
Š Commercial letters of credit which require the Bank to honour drafts presented by a third-party when specific activities are completed;
Š Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financings for specific amounts
and maturities, subject to specific conditions;
Š Securities lending transactions under which the Bank, acting as principal or agent, agrees to lend securities to a borrower. The borrower must fully
collateralize the security loan at all times. The market value of the collateral is monitored relative to the amounts due under the agreements, and
where necessary, additional collateral is obtained; and
Š Security purchase commitments which require the Bank to fund future investments.
These financial instruments are subject to normal credit standards, financial controls and monitoring procedures.
The table below provides a detailed breakdown of the Bank’s other indirect commitments expressed in terms of the contractual amounts of the
related commitment or contract which are not reflected on the Consolidated Statement of Financial Position.
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
As at October 31 ($ millions)
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
2017
$
821
$
2016
777
57,321
128,345
40,535
614
69,865
104,380
38,668
538
$ 227,636
$ 214,228
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
2017
$ 349
967
593
$1,909
$
2016
344
922
536
$ 1,802
Building rent expense, included in premises and technology expense in the Consolidated Statement of Income, was $444 million (2016 –$428 million).
(d) Assets pledged and repurchase agreements
In the ordinary course of business, securities and other assets are pledged against liabilities. As well, securities are sold under repurchase agreements.
The carrying value of pledged assets and details of related activities are shown below.
As at October 31 ($ 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)
2017
2016
$
25
2,653
1,195
2,181
8,126
115,987
27,806
4,801
20,471
643
$
25
3,080
1,400
2,128
10,505
107,901
30,491
3,919
20,672
1,031
$ 183,888
86,789
$ 181,152
87,402
$ 270,677
$ 268,554
(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.
2 0 1 7 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
(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, 2016:
(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).
(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.
200 | 2 0 1 7 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)
Category
By counterparty type
Non-retail
AIRB portfolio
Corporate
Bank
Sovereign
Standardized portfolio
Corporate
Bank
Sovereign
Total non-retail
Retail
AIRB portfolio
Real estate secured
Qualifying revolving
Other retail
Standardized portfolio
Real estate secured
Other retail
Total retail
Total
By geography(4)
Canada
United States
Mexico
Peru
Chile
Colombia
Other International
Europe
Caribbean
Latin America (other)
All other
Total
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
2017
Exposure at default(1)
2016
Drawn(2)
Undrawn
commitments
Other
exposures(3)
Total
Total
$ 134,006
19,734
189,400
343,140
50,614
2,489
6,134
59,237
$ 402,377
127,804
16,939
30,372
$ 175,115
34,002
35,552
69,554
$ 244,669
$ 647,046
$ 379,297
88,623
26,841
23,767
24,680
10,372
25,216
36,505
8,194
23,551
$
$
$
75,962
2,560
820
79,342
5,252
96
203
5,551
84,893
15,356
27,445
1,300
44,101
$
75,223
18,609
5,209
99,041
3,298
34
–
3,332
$ 102,373
–
–
–
–
$
–
–
–
44,101
$
$ 128,994
–
–
–
–
$
$ 102,373
$
82,001
31,008
1,152
1,551
754
150
6,586
1,554
542
3,696
$
40,926
37,755
2,535
3,415
1,756
337
11,228
1,299
299
2,823
$ 285,191
40,903
195,429
521,523
59,164
2,619
6,337
68,120
$ 589,643
143,160
44,384
31,672
$ 219,216
34,002
35,552
69,554
$ 288,770
$ 878,413
$ 502,224
157,386
30,528
28,733
27,190
10,859
43,030
39,358
9,035
30,070
$ 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
$ 647,046
$ 128,994
$ 102,373
$ 878,413
$ 824,915
(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 nil first loss protection (2016 – $20),
derivatives and repo-style transactions (reverse repurchase agreements, repurchase agreements, securities lending and securities borrowing), net of related collateral. Not applicable
for retail exposures.
(4) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 201
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Financial Position asset categories cross-referenced to credit risk exposures
The table below provides mapping of on-balance sheet asset categories that are included in the various Basel III exposure categories as presented in
the credit risk exposure summary table of these consolidated financial statements. In addition, it also provides other exposures which are subject to
market risk and/or other assets which are not subject to market and credit risk with a reconciliation to the Consolidated Statement of Financial
Position. The credit risk exposures on certain assets such as cash, precious metals, investment securities (equities) and other assets are not included on
the credit risk exposure summary table. Also excluded from the credit risk exposures are certain trading assets and all assets of the Bank’s insurance
subsidiaries.
Credit Risk Exposures
Other Exposures
Drawn
Other Exposures
Market Risk Exposures
As at October 31, 2017 ($ 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)
$ 57,104 $
–
–
9,087
–
13
–
–
67,255
95,692
–
158,510
(649)
13,560
–
–
–
1,805
–
–
–
–
–
–
–
–
–
$
$
–
–
–
–
–
–
–
–
–
$
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
95,319
–
–
–
35,364
–
–
–
1,281
141,066
100,181
2,878
–
–
–
–
–
545
–
2,038
7,032
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
$
–
5,717
$
2,559 $
–
59,663
5,717
–
9,087
–
–
–
30,648
–
–
–
–
–
–
–
–
–
–
78,652
8,225
2,500
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
733
158
1,112
29
(3,678)
–
2,381
4,586
12,106
12,112
78,652
17,312
2,500
13
95,319
35,364
69,269
236,916
103,331
168,449
(4,327)
13,560
2,381
4,586
12,106
14,462
Total
$402,377 $ 244,670
$ 9,070
$ 95,319
$ 35,364
$ 1,281
$ 39,735
$ 95,094
$ 32,098 $ 915,273
Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks.
Includes $91.7 billion in mortgages guaranteed by Canada Mortgage Housing Corporation including 90% of privately insured mortgages.
(1)
(2)
(3) Amounts for AIRB exposures are reported gross of allowances and amounts for standardized exposures are reported net of allowances.
Credit Risk Exposures
Other Exposures
Drawn
Other Exposures
Market Risk Exposures
As at October 31, 2016 ($ 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
$
– $
–
–
–
–
–
–
–
832
–
2,418
7,161
–
–
–
–
–
–
$
– $
–
–
8,442
$
2,343 $
–
46,344
8,442
$
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
11,485
–
87,287
7,936
1,853
–
205
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.
202 | 2 0 1 7 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, 2017, and October 31, 2016, 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, 2016.
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% – 0.0448%
0.0448% – 0.1304%
0.0552% – 0.1402%
0.0876% – 0.2187%
0.1251% – 0.3176%
0.1788% – 0.4610%
0.2886% – 0.5134%
0.4658% – 0.5716%
0.5716% – 0.7518%
0.7518% – 1.4444%
1.4444% – 2.7749%
2.7749% – 10.1814%
10.1814% – 19.4452%
19.4452% – 35.4088%
35.4088% – 59.5053%
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
2017
Exposure at Default(1)
Undrawn
commitments
Other
exposures(2)
$
3,062
7,538
14,774
11,989
12,691
11,218
9,150
3,893
2,381
913
776
161
200
200
–
396
$
$ 16,735
18,654
22,481
11,379
8,247
7,904
2,923
2,355
6,578
1,011
329
61
127
76
–
181
Total
91,159
53,618
61,508
44,533
40,478
41,600
36,235
23,058
20,418
7,271
3,758
2,167
761
1,311
159
1,752
$
2016
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
IG Code
99 – 98
95
90
87
85
83
80
77
75
73
70
65
60
40
30
27 – 21
$
Drawn
71,362
27,426
24,253
21,165
19,540
22,478
24,162
16,810
11,459
5,347
2,653
1,945
434
1,035
159
1,175
Total
Government guaranteed residential mortgages(3)
Total
$ 251,403
91,737
$ 343,140
$ 79,342
–
$ 79,342
$ 99,041
–
$ 99,041
$ 429,786
91,737
$ 521,523
$ 404,625
100,869
$ 505,494
(1) After credit risk mitigation.
(2)
Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, securitizations, excluding nil first loss protection (2016 – $20), 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 7 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
Non-retail standardized portfolio
Non-retail standardized portfolio as at October 31, 2017 comprised of drawn, undrawn and other exposures to corporate, bank and sovereign
counterparties amounted to $68 billion (October 31, 2016 – $66 billion). Exposures to most Corporate/Commercial counterparties mainly in the
Caribbean and Latin American region are to non-investment grade counterparties based on the Bank’s internal grading systems.
(iii) Credit quality of retail exposures
The Bank’s retail portfolios consist of a number of relatively small loans to a large number of borrowers. The portfolios are distributed across Canada
and a wide range of countries. As such, the portfolios inherently have a high degree of diversification. In addition, as of October 31, 2017, 49% of
the Canadian banking residential mortgage portfolio is insured and the average loan-to-value ratio of the uninsured portion of the portfolio is 51%.
Retail AIRB portfolio
The data in the table below provides a distribution of the retail AIRB exposure within each PD range by asset class:
As at October 31 ($ millions)
Category of (PD) grades
Exceptionally Low
Very Low
Low
Medium Low
Medium
High
Extremely High
Default
Total
2017
Exposure at default(1)
Real estate secured
PD range
Mortgages
0.0000% – 0.0499% $
0.0500% – 0.1999%
0.2000% – 0.9999%
1.0000% – 2.9999%
3.0000% – 9.9999%
10.0000% – 19.9999%
20.0000% – 99.9999%
100%
3,600
35,433
61,924
5,517
398
200
262
189
$
HELOC
–
29,297
4,771
974
298
178
62
57
Qualifying
revolving
$ 11,844
8,609
11,659
5,836
5,493
–
783
160
$
Other retail
582
7,168
15,727
4,743
2,394
511
346
201
$
Total
16,026
80,507
94,081
17,070
8,583
889
1,453
607
$
2016
Total
44,356
59,509
52,261
20,851
6,265
1,997
2,312
677
$ 107,523
$ 35,637
$ 44,384
$ 31,672
$ 219,216
$ 188,228
(1) After credit risk mitigation.
Retail standardized portfolio
The retail standardized portfolio of $70 billion as at October 31, 2017 (2016 – $65 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, $34 billion
(2016 – $31 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, 2017, the approximate market value of collateral accepted that may be sold or repledged by the Bank was $115 billion (2016 –
$99 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, 2017 was $412 million (2016 – $404 million) mainly
comprised of real estate and was classified as either held for sale or held for use as appropriate.
204 | 2 0 1 7 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
Liquidity risk
(b)
Liquidity risk is the risk that the Bank is unable to meet its financial obligations in a timely manner at reasonable prices. The Bank’s liquidity risk is
subject to extensive risk management controls and is managed within the framework of policies and limits approved by the Board. The Board receives
reports on risk exposures and performance against approved limits. The Asset-Liability Committee (ALCO) provides senior management oversight of
liquidity risk.
The key elements of the Bank’s liquidity risk management framework include:
(cid:129)
liquidity risk measurement and management limits, including limits on maximum net cash outflow by currency over specified short-term
horizons;
(cid:129) prudent diversification of its wholesale funding activities by using a number of different funding programs to access the global financial
markets and manage its maturity profile, as appropriate;
large holdings of liquid assets to support its operations, which can generally be sold or pledged to meet the Bank’s obligations;
liquidity stress testing, including Bank-specific, global-systemic, and combination systemic/specific scenarios; and
liquidity contingency planning.
(cid:129)
(cid:129)
(cid:129)
The Bank’s foreign operations have liquidity management frameworks that are similar to the Bank’s framework. Local deposits are managed from a
liquidity risk perspective based on the local management frameworks and regulatory requirements.
(i) Commitments to extend credit
In the normal course of business, the Bank enters into commitments to extend credit in the form of loans or other financings for specific amounts and
maturities, subject to specific conditions. These commitments, which are not reflected on the Consolidated Statement of Financial Position, are subject
to normal credit standards, financial controls and monitoring procedures.
(ii) Derivative instruments
The Bank is subject to liquidity risk relating to its use of derivatives to meet customer needs, generate revenues from trading activities, manage market
and credit risks arising from its lending, funding and investment activities, and lower its cost of capital. The maturity profile of the notional amounts of
the Bank’s derivative instruments is summarized in 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 and loss results. To complement VaR, the Bank also uses stress testing to examine the impact that
abnormally large swings in market factors and periods of prolonged inactivity might have on trading portfolios. The stress testing program is designed
to identify key risks and ensure that the Bank’s capital can absorb potential losses from abnormal events. The Bank subjects its trading portfolios to a
series of stress tests on a daily, weekly and monthly basis.
In trading portfolios, sensitivity analysis is used to measure the effect of changes in risk factors, including prices and volatility, on financial products
and portfolios. In non-trading portfolios, sensitivity analysis assesses the effect of changes in interest rates on current earnings and on the economic
value of shareholders’ equity. Simulation modeling under various scenarios is particularly important for managing risk in the deposit, lending and
investment products the Bank offers to its retail customers. Gap analysis is used to assess the interest rate sensitivity of the Bank’s retail, wholesale
banking and international operations. Under gap analysis, interest rate-sensitive assets, liabilities and derivative instruments are assigned to defined
time periods, on the earlier of contractual repricing or maturity dates on the basis of expected repricing dates.
(i) Non-trading interest rate risk
Interest rate risk, inclusive of credit spread risk, is the risk of loss due to the following: changes in the level, slope and curvature of the yield curve; the
volatility of interest rates; mortgage prepayment rates; changes in the market price of credit; and the creditworthiness of a particular issuer. The Bank
actively manages its interest rate exposures with the objective of enhancing net interest income within established risk tolerances. Interest rate risk
arising from the Bank’s funding and investment activities is managed in accordance with Board-approved policies and global limits, which are
designed to control the risk to net interest income and economic value of shareholders’ equity. The income limit measures the effect of a specified
shift in interest rates on the Bank’s annual net income over the next twelve months, while the economic value limit measures the impact of a specified
change in interest rates on the present value of the Bank’s net assets. Interest rate exposures in individual currencies are also controlled by gap limits.
2 0 1 7 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
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
$
35,652
–
–
$
14,901
–
16,231
$
655
–
8,164
$
415
–
15,284
$
5
–
12,785
$
Non-rate
sensitive
8,035
5,717
46,000
Total
$
59,663
5,717
98,464
–
–
–
13
–
–
13
As at October 31, 2017 ($ 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
23,319
–
26,508
–
49,409
16,500
223,268
–
$
85,479
$ 320,309
$ 104,680
$ 306,657
–
74
67,035
–
102
–
3
478
25,278
113
4,620
613
Total liabilities and equity
$ 171,891
$ 337,762
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
$ (86,412)
–
$ (86,412)
132,008
$
45,596
$
$
$
(17,453)
(1,923)
(19,376)
(27,135)
(46,511)
As at October 31, 2016 ($ millions)
4,895
12,704
61,310
–
87,728
–
33,280
174,401
–
–
5,949
16,933
–
17,696
836(1)
1,949 (2)
82,459
95,319
69,269
504,369
82,459
$ 223,393
$ 35,672
$ 162,692
$ 915,273
70,530
$ 100,204
$ 11,062
$
32,234
$ 625,367
255
3,426
979
–
4,663
1,328
12,541
9,900
6,445
30,766
1,755
241
1,048
388
–
3,750
3,090
2,017
–
1,831
4,263
–
1,775
–
77,951
58,607
95,843
5,935
91,074
61,625
75,545
$ 125,028
$ 28,035
$ 177,012
$ 915,273
12,183
(11,273)
$
98,365
4,626
$
7,637
9,140
910
1,024
1,934
$ 102,991
(58,014)
$ 16,777
(32,925)
$
44,977
$ (16,148)
$
$
$
(14,320)
(570)
(14,890)
(14,958)
(29,848)
$
$
$
$
$
$
$
$
$
–
–
–
–
–
–
Total interest rate sensitivity gap
$
48,478
$
(56,382)
$
(12,954)
$
67,538
$
(9,441)
$
(37,239)
$
(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)
2017
2016
100 bp increase
100 bp decrease
Net income
Economic value of equity
Canadian
dollar
Other
currencies
$(53)
$ 53
$ 117
$(120)
Total
$ 64
$(67)
Canadian
dollar
$(119)
$ (85)
Other
currencies
$(235)
$ 268
Total
$ (354)
$ 183
Net
income
$ (32)
32
$
Economic value
of equity
$(785)
$ 650
206 | 2 0 1 7 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 the 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, 2017, 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 $58 million (October 31, 2016 – $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, 2017 would increase (decrease) the unrealized
foreign currency translation losses in the accumulated other comprehensive income in equity by approximately $345 million (2016 – $366 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 and loss reporting, as well as VaR and
limit compliance reporting to business unit management and executive management for evaluation and action as appropriate. VaR is calculated daily
using a 99% confidence level, and a one-day holding period. This means that, once in every 100 days, the trading positions are expected to lose more
than the VaR estimate. The Bank calculates general market risk VaR using historical simulation based on 300 days of market data. For debt specific risk
VaR, the Bank uses historical resampling. The table below shows the Bank’s VaR by risk factor:
For the year ended October 31, 2017
($ millions)
As at October 31, 2017
Average
High
Credit spread plus interest rate
Credit spread
Interest rate
Equities
Foreign exchange
Commodities
Debt specific
Diversification effect
All-Bank VaR
All-Bank stressed VaR
$ 10.1
6.9
8.4
3.2
2.9
1.3
3.3
(10.3)
$ 10.6
$ 34.7
$ 10.8
6.3
8.4
2.2
2.2
1.4
3.6
(8.9)
$ 11.2
$ 28.5
$ 15.1
9.1
12.0
4.8
5.5
2.6
5.1
n/a
$ 14.9
$ 44.5
Low
8.0
4.1
5.3
1.0
0.7
0.6
2.4
n/a
9.1
$
$
$ 19.2
As at October 31, 2016
$ 10.6
8.0
8.5
2.0
2.1
2.0
4.2
(7.6)
$ 13.2
$ 21.2
2 0 1 7 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
Below are the market risk capital requirements as at October 31, 2017.
($ millions)
All-Bank VaR
All-Bank stressed VaR
Incremental risk charge
Comprehensive risk measure
Standardized approach
Total market risk capital
$ 110
300
174
–
43
$ 627(1)
(1) Equates to $7,839 of risk-weighted assets (2016 – $10,571).
(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
Divestitures
HollisWealth
On August 4, 2017, the Bank sold HollisWealth, its independent wealth advisory business. The net assets and gain on sale were not material to the
Bank.
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.
Proposed Divestiture
Bank of Nova Scotia Berhad, Malaysia (BNS Berhad)
On May 26, 2017, the Bank reached an agreement to sell its wholly owned subsidiary, BNS Berhad. The transaction is subject to applicable regulatory
approvals. The net assets and gain on sale are not material to the Bank.
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 the Citigroup Panama and Citigroup Costa Rica
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 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.
37 Event after the Consolidated Statement of Financial Position date
On November 27, 2017 the Bank submitted a binding offer to Banco Bilbao Vizcaya Argentaria, S.A.’s (BBVA) to acquire its 68.19% ownership in
BBVA Chile, which BBVA is willing to accept if the minority partner does not exercise its Right of First Refusal under the shareholders agreement
between BBVA and the minority partner. BBVA owns 68.19% of BBVA Chile and the minority partner owns 31.62% of BBVA Chile. The Bank has
offered to acquire BBVA’s interests in BBVA Chile, and its interests in certain subsidiaries, for approximately US$2.2 billion (approximately
CAD$2.9 billion). If the transaction is completed, the Bank’s Common Equity Tier 1 capital ratio will be impacted by approximately 100 basis points.
Pursuant to the mandatory tender offer for all the shares of BBVA Chile required under Chilean law or the minority partner’s tag along rights under
the shareholders agreement of BBVA Chile, the minority partner has the right to sell its shares of BBVA Chile on the same basis to the Bank. The
Bank’s Common Equity Tier 1 capital ratio would be impacted by approximately 135 basis points, if the Bank acquires 100% of BBVA Chile.
208 | 2 0 1 7 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 186th Annual Meeting of
Holders of Common Shares, to be held on April 10, 2018, 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 13, 2018.
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 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 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.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 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 2018
Record and payment dates for common and preferred shares, subject
to approval by the Board of Directors.
RECORD DATE
January 2
April 3
July 3
October 2
PAYMENT DATE
January 29
April 26
July 27
October 29
Valuation day price
For Canadian income tax purposes, The Bank of Nova Scotia’s common
stock was quoted at $31.13 per share on Valuation Day, December 22,
1971. This is equivalent to $2.594 after adjusting for the two-for-one
stock split in 1976, the three-for-one stock split in 1984, and the
two-for-one stock split in 1998. The stock dividend in 2004 did not
affect the Valuation Day amount. The stock received as part of the
2004 stock dividend is not included in the pre-1972 pool.
Duplicated communication
Some registered holders of The Bank of Nova Scotia shares might
receive more than one copy of shareholder mailings, such as this
Annual Report. Every effort is made to avoid duplication; however, if
you are registered with different names and/or addresses, multiple
mailings may result. If you receive, but do not require, more than one
mailing for the same ownership, please contact the transfer agent to
combine the accounts.
Credit ratings
SENIOR LONG-TERM DEBT/DEPOSITS
AA
DBRS
AA -
Fitch
Moody’s
A1
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(1)
DBRS
Fitch
Moody’s
Standard & Poor’s A -
AA(low)
A+
Baa1
NON-CUMULATIVE PREFERRED SHARES(1)
Pfd-2(high)
DBRS
Moody’s
Baa3(hyb)
Standard & Poor’s BBB/P-2*
(1) Excluding instruments with Non-Viability Contingent Capital Features
*Canadian scale
Credit ratings are one of the factors that impact 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.
On May 10, 2017, Moody’s downgraded the long-term ratings of all
Canadian banks, citing concerns around expanding levels of private
sector debt, which could increase the likelihood of weaker asset quality
in the future. Moody’s downgraded the Bank’s long-term ratings by
one notch to A1 from Aa3, while affirming the Bank’s short-term
deposit rating of P-1.
The Bank continues to have strong credit ratings and is rated AA by
DBRS, A1 by Moody’s, AA- by Fitch and A+ by Standard and Poor’s
(S&P). 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 7 S C O T I A B A N K A N N U A L R E P O R T | 209
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 and other equity instruments, 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 institutions.
Tier 1 includes CET1 and additional Tier 1 capital which consists
primarily of qualifying non-cumulative preferred shares, non-cumulative
subordinated additional Tier 1 capital securities 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.
210 | 2 0 1 7 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 a 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.
Structured Credit Instruments: A wide range of financial products
which includes Collateralized Debt Obligations, Collateralized Loan
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
the 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.
Exposure Sub-types
Drawn: Outstanding amounts for loans, leases, acceptances, deposits
with banks and available-for-sale debt securities.
Undrawn: Unutilized portion of authorized committed credit lines.
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.
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.
Basel I Regulatory Capital Floor: Since the introduction of Basel II in
2008, OSFI has prescribed a minimum capital floor requirement for
institutions that use the AIRB approach for credit risk. The regulatory
capital floor add-on is determined by comparing a capital requirement
calculated by reference to Basel I against the Basel III calculation, as
prescribed by OSFI. A shortfall in the Basel III capital requirement as
compared with the Basel I capital floor requirement is added to RWAs.
2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T | 211
Additional information
CORPORATE HEADQUARTERS
FOR FURTHER INFORMATION
Scotiabank
Scotia Plaza
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 866-6161
E-mail: email@scotiabank.com
Customer Service Centre
1-800-4-SCOTIA
Finance Department
Scotiabank
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 866-4790
Fax: (647) 777-1184
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 and Corporate Affairs
Scotiabank
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 866-6161
Fax: (416) 866-4988
E-mail: corporate.communications@scotiabank.com
Shareholder Services
Transfer Agent and Registrar Main Agent
Computershare Trust Company of Canada
100 University Avenue, 8th Floor, Toronto, Ontario
Canada M5J 2Y1
Tel: 1-877-982-8767
Fax: 1-888-453-0330
E-mail: service@computershare.com
Co-transfer Agent (U.S.A.)
Computershare Trust Company N.A.
250 Royall Street, Canton, MA 02021, U.S.A.
Tel: 1-800-962-4284
212 | 2 0 1 7 S C O T I A B A N K A N N U A L R E P O R T
CORPORATE SOCIAL RESPONSIBILITY AT SCOTIABANK
OUR BELIEF
We believe every customer has the right to become better off. Through our CSR commitments we
aim to create value for both society and Scotiabank, building a better future.
FINANCIAL
KNOWLEDGE
ACCESS TO
FINANCE
DIVERSITY
AND
INCLUSION
INVESTING
IN YOUNG
PEOPLE
RESPONSIBLE
FINANCING
CLIMATE
CHANGE
MAINTAINING
TRUST
660,000
Canadian students
participated in
Talk With Your Kids
About Money day in 2017
More than
$5
BILLION
in microlending
globally in 2017
33%
women in
leadership
positions (VP+)
globally in 2017,
nearly 40% in Canada
$80
MILLION
in donations
globally in 2017
to support the
communities we
operate in
$4.7 BILLION in
calculated authorized
exposure to the
renewable energy
sector globally in 2017
Greenhouse gas
reduction target:
10% GLOBALLY
BY 2021
based on 2016 levels
We received
feedback from over
2 MILLION
customers in 2017
from “The Pulse”
– our customer
experience
management
system
OUR PRIORITIES
OUR ABILITY
WE HAVE
THE REACH
24
MILLION
CUSTOMERS
around the globe
WE HAVE
FINANCIAL EXPERTISE
88,000+
EMPLOYEES
in nearly
50 COUNTRIES
WE HAVE
THE RESOURCES
$915
BILLION
IN ASSETS
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 24 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.
SCOTIABANK.COM
® Registered trademark of The Bank of Nova Scotia.
™ Trademark of The Bank of Nova Scotia.
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