2018 Annual Report
Building for
the Future
6.5
6.0
5.5
5.0
Scotiabank is Canada’s International
Bank and a leading financial
services provider in the Americas.
We are dedicated to helping our more than 25 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.
3.5
Earnings per
Share Growth*
Diluted, dollars per share
$7.11
CAGR = 7%
7.0
7.0 -
6.5 -
6.5
6.0 -
6.0
5.5 -
5.5
5.0 -
5.0
Dividend Growth
Dollars per share
3.0
Strong Capital
Position
2.5
$3.28
CET1 Capital Ratio %
10.8
10.3
11.0
11.5
11.1
CAGR = 6%
3.5 -
3.5
6.5
3.0 -
3.0
6.0
2.5 -
2.5
5.5
2.0 -
2.0
5.0
14 15 16 17
17
14
16
15
18
18
14 15 16 17
17
14
15
16
18
18
14
15
16
17
18
Return
on equity:*
14.9%
6.5
6.0
5.5
5.0
VS
14.7%
in 2017
*Adjusted - please refer to page 18
• Diversified by business and
• Strong risk management culture
• Leading levels of technology
geography, providing sustainable
and growing earnings and dividends
• Earnings momentum in personal,
commercial and wealth businesses
• Increased skills and leadership
capabilities in core areas
• Increasing scale and market share
in key markets through strategic
deployment of capital
• Diversified exposure to high
quality growth markets in the
Pacific Alliance
investment supports our digital
banking strategy to strengthen
the customer experience and
improve efficiency
• Strong balance sheet, capital and
liquidity ratios
Contents
1 CEO Message to Shareholders
13 Board of Directors
11 Chairman’s Message to Shareholders
15 Management’s Discussion and Analysis
12 Executive Management Team
139 Consolidated Financial Statements
Proud of
our Progress
CEO Message to Shareholders
Brian J. Porter
President and
Chief Executive Officer
Dear fellow Shareholders,
I wanted to begin this letter – my fifth letter to you, the Bank’s shareholders
– by reiterating that it is my profound honour to serve as Scotiabank’s President
and CEO. I have long believed that banking is a calling. I cannot think of many
careers that are as dynamic and fulfilling.
Earnings
by Geography
(in $ billions)
Drafting my annual Letter to
Shareholders can be challenging,
in large measure because of the
diversity of interests represented
across Scotiabank’s shareholder base.
When it comes to balancing the
competing demands for short-term
results and creating medium-to-long
term value, I am proud of what we
accomplished in 2018. We invested
considerably in our existing businesses
and we also acquired a number of
high-quality assets. These actions will
be additive to the Bank and to you,
our shareholders, for years to come.
I hope that this letter will give you
a clearer sense of the Bank’s strong
financial performance, the strategic
progress that we have made over
the past year, and the basis for our
confidence in the Bank’s future.
This year, I am closing my letter
with a detailed Q&A which
reflects some of the questions
that are often raised by the
stakeholder community.
$0.7
$0.7
$0.6
$8.8*
Total
$4.9
$1.9
n Canada ................................. 56%
n Pacific Alliance. ...................... 21%
n U.S. ......................................... 7%
n Caribbean ................................ 8%
n Other International ................... 8%
*Adjusted - please refer to page 18
May not add due to rounding
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 1
Financial Performance
CEO Message to Shareholders
Against a backdrop of challenging and volatile geopolitical and economic conditions, the Bank delivered another year of
record earnings. After adjusting for acquisition-related costs, net income was $9.1 billion – up 10% compared to last year.
Adjusted operating leverage, which measures the difference between year-over-year revenue growth and expense growth,
remained strong at 3.7%.
Canadian
Banking
confident in our ability to achieve our medium term goals
for this division of 9%-plus net income growth and a
productivity ratio of <51%.
Canadian Banking had another very good year, delivering
earnings of $4.4 billion. Adjusted earnings growth of
8% was strong and supported by mid-single digit
mortgage growth, margin expansion and productivity
improvements. We have a strong Canadian Banking
franchise that will be further strengthened by our
recent Wealth Management acquisitions. As a result, we
are confident that we will meet our medium term goals
for this division of net income growth of 7%-plus and a
productivity ratio (which measures expenses as a
percentage of revenue) of <49%.
International
Banking
International Banking performed exceptionally well in
2018, delivering $2.8 billion* in earnings to equity
holders. We have grown annual net income by more than
$1 billion in the past three years. We are very proud of
the progress we have made internationally, and the
recognition we are earning for our efforts. For example,
Scotiabank was recently named 2018 Bank of the Year in
Latin America and the Caribbean by LatinFinance.
It’s important to note that economic growth in our key
international markets is accelerating – particularly in the
Pacific Alliance countries of Mexico, Peru and Colombia.
Furthermore, there is consensus among economists that
the Pacific Alliance countries have strong
fundamentals and significant economic growth
potential. We’re optimistic about the future and remain
*Adjusted - please refer to page 18
2 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Global Banking
and Markets
Global Banking and Markets (GBM) delivered mixed
results in 2018. Earnings declined 3% from last year as
stronger results in corporate lending and lower provisions
for credit losses were more than offset by reductions in
the capital markets businesses and higher expenses.
We are actively focused on up-tiering our corporate
lending relationships, strengthening our investment
banking franchise and growing our customer business in
Latin America, all of which will better position the division
for future growth.
We see promising opportunities for growth in Latin
America and the United States, where we already have a
strong wholesale presence. The Bank’s strength in the
region allows us to provide all of our corporate and
institutional customers that have a connection to the
Americas with even better banking solutions and
expertise. Latin America and the U.S. are important
markets for the Bank as a whole, and we will continue to
strengthen our presence across the region.
We are the 10th largest foreign banking organization by
assets in the U.S., and have a strong wholesale business.
Our businesses are some of the largest contributors to
the Bank’s earnings outside of Canada, and our presence
there greatly enhances our ability to serve our corporate
and institutional investor clients located anywhere across
our footprint.
Strategic Progress:
Capital Deployment
CEO Message to Shareholders
The past year was productive with regard to capital deployment. In 2018 alone,
the Bank invested roughly $7 billion to acquire unique businesses that come
with high-quality assets, talent and technology. These acquisitions will help
us add new primary customers, grow earnings, achieve greater scale
and increase our presence in key markets. We are confident that the
businesses we acquired and the investments we’re making will benefit our
shareholders, customers and our employees for years to come. At the same
time, we also continued to return meaningful capital to our shareholders.
In 2018, we returned $4.0 billion in dividends compared to $3.7 billion in
2017 and we re-purchased more than 8 million shares for $0.6 billion.
Internationally, our acquisition of BBVA Chile – which is also a technologically-
sophisticated bank – made us the 3rd largest private Bank in the country,
up from 5th largest.
In Canada, our acquisitions of MD Financial Management (MD) and Jarislowsky
Fraser (JF) will play a critically important role in strengthening our wealth and
asset management businesses, generating higher fees and enhancing the
number of primary banking relationships. In particular, we gained more than
110,000 new customers in the MD acquisition, and the JF acquisition added
500 new institutional customers. More information about our acquisition of
these two iconic Canadian firms, and the added scale they bring to the Bank,
can be found on page 235.
In addition to executing against some strategic acquisitions, we also look for
opportunities to divest non-core businesses and geographies. This allows us
to sharpen our strategic focus, improve the risk profile of the Bank, and
enhance the quality of earnings for our shareholders. Over the course of
F2019, we expect to make a number of non-core divestitures as we continue
to manage capital strategically.
Looking forward to 2019, we are laser-focused on execution. We have a
strong track record of integrating businesses that we have acquired and
onboarding new employee groups to the Scotiabank community. We always
put the right people and resources in place to make sure that things get
done right. We are confident that the acquisitions we made this year will
create significant value.
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Acquisition Highlights
BBVA Chile
Acquired: July 2018
500,000
Customers
$29
Billion
in Assets
Doubles market share.
Creates 3rd largest private
bank in Chile.
MD Financial Management
Acquired: October 2018
110,000
Customers
$49
Billion in Assets
Scotiabank and the CMA
entered into a 10-year
collaboration pursuant to
which CMA will exclusively
promote Scotiabank as the
preferred provider of
financial products and
services to physicians and
their families in Canada.
Jarislowsky Fraser
Acquired: May 2018
500+
Institutional
Customers
$40
Billion in Assets
The combination of JF
and Scotiabank’s asset
management business creates
the 3rd largest Canadian
active asset manager.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 3
Building an Even Better Bank
CEO Message to Shareholders
We have a comprehensive series of efforts underway to build an even better bank. Internally, we talk about these efforts in
three broad categories: People, Process and Technology. Let me give you a few examples of the important work we are
doing in each of these categories:
People
We continue to believe that the best
investment we can make is in our own people.
Our efforts here are paying dividends: this year,
the Bank was recognized as one of the “Top 25 World’s
Best Workplaces” – and the only bank globally to make
the list. This is further evidence of our continued progress
in growing our talent pool, enhancing our culture, and
building a competitive platform.
Leadership Strategy
We have made significant progress building and reshaping
our leadership teams, augmenting our talent with industry
and domain experts from outside the Bank. Over the past
year, we have enhanced our internal talent through award
winning leadership and skills development programs and
recruited new leaders externally for key roles in IT, HR,
Analytics, Risk and Digital Banking, as well as customer-
facing positions, where our people deliver a superior
customer experience. Today, we have an increasingly
powerful combination of deep institutional knowledge
and leading-edge capabilities across the Scotiabank
team. Our deliberate effort to create an inclusive and high
performance-oriented bank is yielding results. We are
focused on being forward-looking in our succession planning
to adapt with the ever-changing banking environment and
ensure the Bank has the necessary pipeline and bench of
capable and experienced leaders.
We continue to work with our leaders to create a
performance-orientated and inclusive work environment
that enables all Scotiabankers to reach their full potential.
As an example, we have increased our gender
representation across the Bank and now have a Vice
President+ representation of 39% in Canada and 21% in
our international operations. We have made progress, but
recognize there is still opportunity for improvement, which
is why we have introduced programs and initiatives focused
on driving enhanced inclusion across our global footprint.
We are constantly working to drive awareness about
accessibility, sexual orientation, religion, ethnicity, and
gender representation by increasing our efforts and
investments in inclusion programs.
Investments in Skills and Education
As our Bank continues to grow, we need to support our
workforce in acquiring the skills they need to thrive. We have
always invested in training programs to ensure our employees
have the tools they need to serve our clients, but we need
to ensure those programs are up-to-date and addressing
the skills not only in demand today, but in the future.
We continue to invest in the necessary digital technology
learning, skills libraries and academic partnerships to help
our employees adapt to the digital economy, while
increasingly encouraging our employees’ curiosity about
their own future skills requirements. This year, we announced
that we are investing $250 million over the next 10 years
to ensure we not only maintain our competitive advantage
in key areas but we equip our employees with the
necessary skills to sustain their future, wherever that may
take them. Our immediate efforts will focus on building
the skills in areas that give us a competitive advantage and
support those impacted individuals that require new skills
because of these operational changes.
Employee Experience
The working environment is constantly evolving as our
customers want to be supported in different ways and our
employees look for services and support that are most
relevant to them. We are creating head-offices, branches
and operational centre environments that are enabling
greater flexibility and that also cater for, and encourage
enhanced individual and team performance and engagement.
Our efforts to attract, retain and grow our employees are
directly influenced by the positive experiences we wish our
clients to have. Our benefits, policies and practices are
4 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
regularly reviewed to ensure we allow for the engagement
of a diverse and flexible workforce. We have added a
significant focus to addressing the needs of employees
so they are empowered to deliver the best possible
experience for our clients and customers.
Process
We continue to make good progress in
re-engineering many processes across the
Bank. The following examples are illustrative:
• Our Structural Cost Transformation (SCT) program has
been the bellwether of our new approach to cost and
process re-engineering, and one of the most successful
programs in the Bank since I became CEO. In 2018, we
delivered more than $1 billion of run-rate savings – exceeding
our commitment of $550 million for the year. We recently
expanded the mandate of this team to also focus on
revenue opportunities. The Enterprise Productivity program
– as it is now known – still has considerable potential to
improve costs and enhance revenue across the Bank.
• Through a focused effort, we have made great progress
in deploying Smart Automation across the Bank. Smart
Automation features Robotic Process Automation (RPA),
Machine Learning and Artificial Intelligence to reduce
costs, enhance productivity, and reduce error rates. We now
have more with 100 instances of Smart Automation in
production, and are rapidly expanding this program.
• In procurement, we have reviewed ~50% of our external
spend (involving $4 billion and more than 12,000
contracts) and generated savings of $160 million – 60%
greater than the target we had set at the beginning of
the year. This represents another promising area of the
Bank where we have considerable untapped potential
to achieve greater productivity.
Technology
With regard to technology (which also includes
our efforts in digital, data and analytics), our
significant investments are driving business
value as well as enabling better customer experiences and
more efficient operations.
Teams across the Bank are aligned and working closely
together to learn, test and quickly share best practices.
As a result, we have built strong momentum towards
becoming a leader in technology:
• Our technology investment of $3.3 billion (~11% of
our revenue) for F2018 puts us in-line with our global
peers. This reflects our conscious choice to invest for
the future, and to be well-positioned among
technology leaders.
• We also made the strategic choice to ramp-up our
investment in technology at a faster rate than
non-technology investments: as a result, on average
over the past four years, these investments grew at
12% and 3%, respectively.
• Our work to shift development to the Cloud has helped
us to improve our productivity, increase our velocity and
make us more attractive to top technology talent.
PLATO – our Cloud-based development, deployment
and production platform – has significantly accelerated
our ability to deploy software. Originally developed in
Canada, PLATO is now leveraged by all of our global
teams to increase their speed to production. In Mexico,
we used PLATO to develop a new insurance offering:
it drove a 180% increase in conversion rates of insurance
quotes and doubled the percentage of digital sales from
8% to 16%. By design, our successes in Mexico can
now be applied in Canada, and across our footprint.
PLATO’s early successes are already being recognised by
our key partners – for example, Google Cloud and
Microsoft – who have highlighted PLATO’s strengths at
recent developer conferences.
• We have also greatly enhanced our brand among
technology professionals – an important consideration
for attracting and retaining top talent. Today, we have
more than 8,000 full time and contract technology
professionals that are committed to enabling better
digital customer experiences. For example, we are now
rated as the 5th best tech-employer in Toronto by
Hired.com. This is an encouraging sign of progress and
further evidence of us becoming a leader in technology
within our industry. Internationally, we have attracted
hundreds of talented digital professionals to work in our
Digital Factories in Mexico, Peru, Chile and Colombia.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 5
Scotiabank in the Community
CEO Message to Shareholders
We are proud to be a critical part of the economic
and social fabric of the communities and countries in
which we live and work – these are responsibilities
that we take seriously. Last year, Scotiabankers
contributed 371,000 hours of volunteering and
fundraising time in their respective communities. The Bank
also contributed nearly $80 million globally in donations,
sponsorships and other forms of assistance.
We are fortunate to have a number of longstanding
charitable partners, which provide us with opportunities
to make a positive difference in our communities. As an
example, our relationship with United Way goes back
more than 50 years. Since 1991, Scotiabank employees
have contributed nearly $135 million to United Way.
That money has been used to help people gain access
to the opportunities and resources they need to
improve their lives.
Additionally, through our acquisition of MD Financial,
we entered into a strategic partnership with the Canadian
Medical Association, which will allow the Bank to invest
$115 million over the next 10 years to help advance the
medical profession and health care in Canada. The Bank is
very proud to be working with the CMA to support their
vision for a healthy population in Canada.
We also partner with groups focused on making a difference
throughout all of our international markets. In Latin America,
for example, we are working with Junior Achievement
Americas to boost financial literacy across the Pacific
Alliance region, aiming to reach 50,000 youth. Also, through
our partnership with FCBarcelona and the FCBarcelona
Foundation, we are committed to developing 18 FutbolNet
festivals across six countries over a three year period,
positively impacting more than 18,000 children. In 2018,
over 6,300 kids participated in the FutbolNet Festivals with
40% girls’ participation, which is up by 10% from 2017.
We believe strongly that giving back is the right thing for
the Bank, for our employees, and for our communities –
and society – at large.
Finally, let me extend my sincere thanks to our shareholders
and customers for their trust, and to all Scotiabankers for
their commitment to building an even better Bank. I am
very proud of what we have accomplished over the past
year, and over the past five years, more generally.
As we move into 2019, I am more confident than ever
that the Bank’s best days lie ahead.
Closing Remarks
I want to close with a word about the Bank’s Board of
Directors, and in particular, our Chairman Tom O’Neill.
Over the past five years, Tom has led our Board
exceptionally well, with vigour and resolve. In particular,
the Bank’s leadership team and I have greatly benefitted
from his guidance and steady hand. Tom is scheduled to
retire next April, and I know I speak for all Scotiabankers
when I say he will be missed. Our Board has elected Aaron
Regent to assume the role of Chairman of the Board,
subject to his re-election at our annual meeting of
shareholders on April 9, 2019. Aaron joined our Board in
April 2013 and currently serves as Chair of our Human
Resources Committee. My fellow directors, members of
our management team and I are all confident that the
Board will greatly benefit from Aaron’s leadership.
6 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Questions and Answers
In this year’s letter, I am including some frequently asked questions about the Bank, our investments and our ambitious
plans for the future.
1. How has the Bank grown over the past year and
2. How have you strengthened your Wealth business
what are the plans for future growth?
in 2018?
The Bank delivered strong adjusted EPS growth of 8.7%,
ahead of our medium term objective of 7%+, reflecting
strong earnings growth in Canadian and International
Banking. Our strong financial position enabled us
to continue to grow through selective acquisitions,
organically and increase scale across our footprint.
Strategic Acquisitions: The strategic acquisitions we
completed over the past year will significantly improve
our competitive positioning in key geographies and
businesses. In addition, these acquisitions also provided us
with high-quality assets, talent and technology – a point
we can’t emphasize enough.
Organic Growth: We are also investing heavily in our
existing businesses to build new customer relationships,
grow market share and strengthen franchises in key
markets. Organic growth is a key enabler of achieving
scale across our footprint, and our teams are making very
good progress. As an example, within our International
Banking business, we saw very strong organic growth in
the Pacific Alliance – with double digit loan growth for the
year; we expect that momentum will continue in 2019.
Scale: As the Bank grows, so too do the opportunities to
further leverage our scale. In other words – scale begets
scale. For example, it is unlikely that the BBVA Chile
opportunity would have materialized for us had we not
acquired a 51% controlling interest in Banco Cencosud in
Chile back in 2014, and taken other steps to strengthen
and grow our business there.
Wealth Management is a critically important part of our
business. With our recent acquisitions, we are now the
3rd largest active money manager in Canada. Prior
to these acquisitions, Wealth accounted for ~12% of
our all-Bank earnings. Our strategy for Global Wealth
Management – including leveraging the JF and MD
acquisitions – will put us on-track to generate 15% of the
Bank’s earnings from Wealth over the next five years.
Wealth businesses take considerable time, effort and
investment to grow organically. Our acquisitions of JF
and MD will help to significantly accelerate our Wealth
strategy. Both acquisitions will deepen our presence
across asset classes, improve our business mix and
support our goal of adding 1 million new primary
customers in Canadian Banking over the next
3-5 years.
• In particular, JF – an iconic Canadian brand – improved
our business mix by adding meaningful Assets Under
Management in the Institutional and Ultra High Net
Worth segments. At the same time, we can offer the
Bank’s existing Financial Planning, Private Banking and
Trust Services to JF clients. Additionally, we plan to
leverage JF further, by expanding the Bank’s Wealth
Management offering into our international footprint.
• With the MD acquisition, we became the number one
Private Investment Counsel firm in Canada. MD adds
even more scale to our Wealth Management business,
and provides us with access to one of Canada’s most
affluent client segments. We look forward to deepening
these relationships by delivering Wealth Management
and customized banking solutions.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 7
Questions and Answers
We are making considerable progress against our Wealth
strategy and are already being recognized for our efforts.
Scotia Wealth Management was recently named the
Best Wealth Management Provider in Canada by the
World Finance Wealth Management Awards. We are
confident that our acquisitions in the Wealth space
will complement our existing platform and enable us
to deliver even more customized banking solutions
and expertise to our customers. Over the coming year,
we look forward to deepening our relationships with existing
customers and building strong relationships with new ones.
3. How is Scotiabank’s international footprint
positioning the Bank for growth?
Outside of Canada and the US, our focus is on the
countries that make up the Pacific Alliance. More generally,
we have had a presence in Latin America for decades.
As a result, we know these markets well and have grown our
earnings by more than 70%* in the Pacific Alliance region
over the past four years. Pacific Alliance countries also have
favourable demographics. They have young populations
– with a median age of 29 – and, at present, only 50% of
citizens are believed to hold a bank account, on average. As
a result, we see enormous growth opportunities across the
Pacific Alliance region.
Our international footprint differentiates us from our
competition. It provides the Bank with strong upside
potential, reliable ongoing growth and enhances our
diversification of earnings and risk.
We have pursued a strategic approach to our international
footprint over the past five years. We have chosen to exit
almost a dozen non-core geographies. At the same time,
we have deployed more capital into strategically
important countries and businesses to add scale, enhance
our growth potential and create long term value for
our shareholders.
*Adjusted for acquisition related costs
8 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Pacific Alliance Population
PACs Total
Canada
Population
223MM
37MM
Population
growth
1.0%
0.8%
Median age
29 years old
42 years old
Source: World Bank DataBank 2017; The World Factbook, CIA 2017
4. In what ways is the Bank more efficient today?
Through our Structural Cost Transformation (SCT)
program, we are making the Bank more efficient.
The SCT program delivered more than $1 billion of
run-rate savings in 2018, far more than we had
committed to and more than a year ahead of schedule.
We have deployed a portion of these savings to re-invest
in our businesses, and to further develop our capabilities
in important areas such as technology, digital and
anti-money laundering. We have used the balance of SCT
savings to reduce our productivity ratio – a key measure
of our efficiency. The SCT program is a key factor in
achieving our medium term productivity ratio target of
<50% by 2021. We are confident that our SCT program
will continue to drive more efficiency across the Bank.
One area where we have gained considerable
momentum, and become a leader amongst our peers,
is Smart Automation, which, as noted above, features
Robotic Process Automation (RPA), Machine Learning and
Artificial Intelligence to reduce costs, enhance productivity
and reduce error rates. Among other things, our Smart
Automation program is making us better at fraud
detection and collections – and our operations are more
customer-focused and efficient, with reduced error rates.
We believe there is significant potential for further
productivity improvements in large areas such as
procurement, collections and contact centres. These
efforts will improve the customer experience, reduce costs
and enhance revenue.
5. How are you progressing against your
Digital Strategy?
We have invested aggressively in technology and digital
capabilities to ensure that the Bank is more agile, and
more capable of adapting to a rapidly-changing world.
Our investments in technology are enabling a better
customer experience and more efficient operations.
Digital banking leadership: Two years ago, we
commenced a journey to become a digital leader in
the financial services industry. We set ambitious digital
goals and developed a strategy to achieve those goals.
We are pleased with how our digital strategy is unfolding.
As a result, we are making considerable progress against
our digital goals. In particular, our targets relate to the
proportion of products we sell through digital channels,
the number of customers who regularly use our online
and mobile applications, and the volume of transactions
being conducted in our branches.
Data: We are committed to being a data-centric
organization. For us, that means using data to give our
customers the best experience possible. Data gives us a
better understanding of what our customers care about
and how we can use technology to improve their banking
experience. We know that digital customers are happier
customers: they choose to have more products with us,
they are more likely to recommend our bank to their
family and friends, and they choose to stay with us longer.
As part of being data-centric, we have an unwavering
commitment to our customers’ privacy. We are vigilant
about data privacy and we have extensive protocols in
place to protect data. We are also working with regulators,
governments, and other stakeholders to develop solutions
to keep the system, and our bank, secure. While the
digital world unfolds, questions about data, privacy
and trust will continue to rapidly evolve. For us, trust
is paramount. The trust we have earned from our more
than 25 million customers is one of the most important
assets we have and we will never take it for granted.
F2016
F2017
F2018
F2016
F2017
F2018
F2016
F2017
F2018
We are making good progress
on our key metrics
Digital Retail Sales %
11
15
22
+11%
Goal
>50%
Branch Financial Transactions %
26
23
20
-6%
Goal
<10%
Digital Adoption %
26
29
33
+7%
Goal
>70%
On track to improve all-bank
productivity ratio to <50%
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 9
Questions and Answers
6. What role does the Bank play in the community?
Scotiabank’s brand and culture of giving has been shaped
over our 186-year history. Giving back and doing the right
thing has always been an important part of our DNA –
and that will always be the case.
Philanthropy: Scotiabankers have a long history and
strong culture of supporting the communities that we
operate in. Scotiabankers have long believed that our
financial performance and our role in society are
inextricably linked. Our philanthropic focus continues to
be supporting young people in the community. For example,
our partnership with Junior Achievement Americas
provided financial literacy and life skills courses to more
than 50,000 students across 17 Caribbean, Central and
South American countries. Additionally, more than
400,000 young people benefitted from the Scotiabank
Futbol Club Program in Latin America in 2018. And last year,
in Canada, the Bank reached the important milestone of
supporting nearly 10,000 minor league hockey teams and
one million kids and counting through our commitment to
community hockey. Our historic, 20-year partnership with
Maple Leaf Sports and Entertainment (MLSE) will provide us
with even more opportunities to give back to the communities
in which our customers and employees live and work.
Corporate Social Responsibility: We are conscious of our
economic, environmental and social impact in the countries
in which we operate. We have a number of initiatives
underway that support our CSR priorities. For example,
to support our commitment to the environment, Scotiabank’s
Global Banking and Markets division provided bank
financing totaling approximately $8.0 billion to the
renewable energy sector in 2018, up from $4.7 billion
in 2017. We also implemented an Internal Carbon Price
of $15/tonne CO2 to reinvest back into energy efficiency
measures. Over the past two years, we have been making
investments in our Greater Toronto Area head office
workplaces to make them more environmentally
sustainable by decreasing our real estate footprint as well
as our paper dependency.
Scotiabank was recognized for its success in
environmental, social and governance initiatives
by placing on the 2018 Dow Jones Sustainability
Index North America (DJSI), in the top 20% of
companies globally, and as one of the largest
year-over-year point gainers across the Index itself.
1 0 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Building an Even
Better Bank
Chairman’s Message to Shareholders
Thomas C. O’Neill
Chairman of Scotiabank’s
Board of Directors
Dear fellow Shareholders,
2018 has been a productive year for your Bank. With full support from the Board, over the past year, the senior leadership
team has been making meaningful changes that are positioning the Bank for success over the longer term. In particular,
they have been strengthening core functions, and acquiring new high-quality assets, talent and technology that will
improve our competitive positioning in key geographies and businesses for years to come.
Best in class governance
Your Board takes a principles-based approach to
corporate governance, and in doing so, is committed
to a framework that supports leading practices and
protects the long-term interests of our stakeholders.
This includes shareholders, customers, and the
communities in which we live and work. Our Bank has
long been an early adopter and market leader in robust
corporate governance practices. Our commitment to
good governance is at the heart of the Bank’s strong
risk culture.
Your directors are regional, national and international
business and community leaders who bring world-class
expertise across a variety of disciplines to the table.
We are proud of the gender, age, ethnic and global
diversity reflected on the Board. Fourteen of our sixteen
directors are independent and six of them are women.
We were pleased to welcome Benita Warmbold, who
brings in-depth knowledge of the financial services sector
and expertise from a global investment management firm,
to the Board this past year.
Looking forward
It has been my pleasure to serve as Chairman of the Board
for the past four years and be a part of the transformation
that our Bank has undergone during that time. I will be
retiring this spring, following our annual meeting
of shareholders.
As your Board looks forward to Scotiabank’s 187th year,
we do so with a sense of optimism and excitement about
the future. We are fully supportive of the Bank’s strategy,
predicated on a targeted business model within a clearly
defined global footprint and bench strength to match.
Finally, I want to extend my sincere thanks to Scotiabank’s
President and CEO, Brian Porter, his leadership team and
the 97,000+ Scotiabankers around the world. Thanks also
to you, our shareholders, for your continued commitment
and confidence in our long term strategic vision.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 1 1
Executive
Management
Team
Brian J. Porter
President and Chief Executive Officer
James O’Sullivan
Group Head, Canadian Banking
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
Michael Zerbs
Group Head and
Chief Technology Officer
Dan Rees
Group Head, Operations
Daniel Moore
Chief Risk Officer
Rajagopal (Raj) Viswanathan
Executive Vice President and
Chief Financial Officer
Ian Arellano
Executive Vice President and
General Counsel
Paul Baroni
Executive Vice President and
Chief Auditor
1 2 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Andrew Branion
Executive Vice President and
Group Treasurer
Tracy Bryan
Executive Vice President,
Contact Centres and Operations
John W. Doig
Executive Vice President and
Chief Marketing Officer
Charles Émond
Executive Vice President, Finance
Terry Fryett
Executive Vice President and
Chief Credit Officer
Glen Gowland
Executive Vice President,
Global Wealth Management
Mike Henry
Executive Vice President and
Chief Data Officer
Jake Lawrence
Executive Vice President and Head,
Global Banking and Markets,
United States
Rania Llewellyn
Executive Vice President,
Global Business Payments
James A. Neate
Global Head,
Corporate and Investment Banking
Gillian Riley
Executive Vice President,
Canadian Commercial Banking
Shawn Rose
Executive Vice President and
Chief Digital Officer
Francisco Sardón
Executive Vice President and
Country Head, Chile
Anya M. Schnoor
Executive Vice President, Retail Products
Laurie Stang
Executive Vice President,
Retail Distribution
Maria Theofilaktidis
Executive Vice President,
Chief Compliance Officer and
Head of Enterprise Risk
Phil Thomas
Executive Vice President and
Chief Retail Risk Officer
Miguel Uccelli
Executive Vice President and
Country Head, Peru
Ashley Veasey
Executive Vice President and
Global Chief Information Officer, Business
Technology
Chadwick Westlake
Executive Vice President,
Enterprise Productivity and
Canadian Banking Finance
Enrique Zorrilla Fullaondo
Executive Vice President and
Country Head, Mexico
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.
Chairman of the Americas.
Partner and member of the Board of
Directors of Partners Group Holding AG
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
Corporate director
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
Benita M. Warmbold
Corporate director
Scotiabank director since
October 29, 2018
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 1 3
Total Assets
Revenue
$998
Billion
Loans
$552
Billion
Net
Income
$9.1*
Billion
$29
Billion
Deposits
$677
Billion
Total Taxes
Paid
$3.7
Billion
MD&A Highlights
Medium-Term Financial Objectives
Objective:
2018 Results:
Return on Equity: 14%+
Earnings Per Share Growth: 7%+
Maintain Strong Capital Ratios
Achieve Positive Operating Leverage
14.9%*
8.7%*
11.1%
3.7%*
*Adjusted - please refer to page 18
*Adjusted - please refer to page 18
Common Equity
Tier 1 Capital Ratio %
Average Assets
by Geography %
Earnings by
Business Line %*
11.0
11.5
11.1
17
11
13
59
20
31
49
2016
2017
2018
n Canada
n U.S.
n Pacific Alliance
n Canadian Banking
n Other International
n International Banking
n Global Banking
and Markets
For more information, please refer to page 57
For more information, please refer to page 220
*Adjusted - please refer to pages 19-21
Total Return to
Common Shareholders
n Scotiabank
n S&P/TSX Banks Total Return Index
n S&P/TSX Composite Total Return Index
350
300
250
200
150
100
1 4 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Share price appreciation plus dividends
reinvested, 2008 = 100
08
09
10
11
12
13
14
15
16
17
18
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
209
4
49-50
15
51
180, 234
6, 24-27, 54, 60
180, 228-234 13-14, 22, 38, 42
229 13-14, 22, 38, 42
53
30-33
233-234
233-234
234
MD&A
78, 82, 91
74-77
80-81, 87-90
55-57, 99-100,
116-117
72-74
74-77
78-79
75
55-57
58
59-60
55-57
63-67, 79, 126
63-67
63-67
63-67
65-66
97-100
99
103-105
101-102
96
92-97
92-97
92-97
87-90, 120-126 189-191, 230-232
22, 38, 42
153-158, 191
191
18-19
178, 181
86, 120-121, 123,
124
84-85
84-85, 87
67, 106
71
2 0 1 8 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
Table of Contents
17
18
23
Forward-looking statements
Non-GAAP measures
Financial highlights
Overview of Performance
24
24
24
25
25
Financial results: 2018 vs 2017
Medium-term objectives
Shareholder returns
Economic outlook
Impact of foreign currency translation
Group Financial Performance
26
26
26
28
29
31
32
33
35
37
Basis of presentation
Net income
Net interest income
Non-interest income
Provision for credit losses
Non-interest expenses
Income taxes
Financial results review: 2017 vs 2016
Fourth quarter review
Trending analysis
Business Line Overview
38
40
44
49
52
Overview
Canadian Banking
International Banking
Global Banking and Markets
Other
16 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Group Financial Condition
54
55
67
70
71
Statement of financial position
Capital management
Off-balance sheet arrangements
Financial instruments
Selected credit instruments – publically known
risk items
Risk Management
Risk management framework
72
82
Credit risk
91 Market risk
97
Liquidity risk
106 Other risks
Controls and Accounting Policies
110 Controls and procedures
110 Critical accounting estimates
114 Future accounting developments
116 Regulatory developments
117 Related party transactions
Supplementary Data
119 Geographic information
122 Credit risk
127 Revenues and expenses
129 Selected quarterly information
130 Eleven-year statistical review
MANAGEMENT’S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
From time to time, 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. In addition, representatives of the Bank may include forward-looking statements orally to analysts, investors, the media and others.
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 2018 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, 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,” “foresee,” “forecast,” “anticipate,” “intend,” “estimate,” “plan,” “goal,” “project,” and similar expressions of future or
conditional verbs, such as “will,” “may,” “should,” “would” and “could.”
By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, which give
rise to the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may
not be correct and that our financial performance objectives, vision and strategic goals will not be achieved.
We caution readers not to place undue reliance on these statements as a number of risk factors, many of which are beyond our control and effects
of which can be difficult to predict, could cause our actual results to differ materially from the expectations, targets, estimates or intentions expressed
in such forward-looking statements.
The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic
and market conditions in the countries in which we operate; changes in currency and interest rates; increased funding costs and market volatility due
to market illiquidity and competition for funding; the failure of third parties to comply with their obligations to the Bank and its affiliates; changes in
monetary, fiscal, or economic policy and tax legislation and interpretation; changes in laws and regulations or in supervisory expectations or
requirements, including capital, interest rate and liquidity requirements and guidance, and the effect of such changes on funding costs; changes to
our credit ratings; operational and infrastructure risks; reputational risks; the accuracy and completeness of information the Bank receives on
customers and counterparties; the timely development and introduction of new products and services; our ability to execute our strategic plans,
including the successful completion of acquisitions and dispositions, including obtaining regulatory approvals; critical accounting estimates and the
effect of changes to accounting standards, rules and interpretations on these estimates; global capital markets activity; the Bank’s ability to attract,
develop and retain key executives; the evolution of various types of fraud or other criminal behaviour to which the Bank is exposed; disruptions in or
attacks (including cyber-attacks) on the Bank’s information technology, internet, network access, or other voice or data communications systems or
services; increased competition in the geographic and in business areas in which we operate, including through internet and mobile banking and
non-traditional competitors; exposure related to significant litigation and regulatory matters; the occurrence of natural and unnatural catastrophic
events and claims resulting from such events; 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. The Bank cautions that the preceding list is not exhaustive of all possible risk factors and other factors could also
adversely affect the Bank’s results, for more information, please see the “Risk Management” section of the Bank’s 2018 Annual Report, as may be
updated by quarterly reports.
Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2018 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. 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.
Any forward-looking statements contained in this document represent the views of management only as of the date hereof and are presented for
the purpose of assisting the Bank’s shareholders and analysts in understanding the Bank’s financial position, objectives and priorities, and anticipated
financial performance as at and for the periods ended on the dates presented, 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 27, 2018
2 0 1 8 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 & 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, 2018. The MD&A should be read in conjunction with the Bank’s 2018 Consolidated Financial Statements,
including the Notes. This MD&A is dated November 27, 2018.
Additional information relating to the Bank, including the Bank’s 2018 Annual Report, are available on the Bank’s website at www.scotiabank.com.
As well, the Bank’s 2018 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 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.
Adjusted results and diluted earnings per share
The following tables present reconciliations of GAAP Reported financial results to Non-GAAP Adjusted financial results. The financial results have been
adjusted for the following:
1. Acquisition-related costs – In 2018, the Bank acquired the following: Jarislowsky, Fraser Limited, and MD Financial Management in Canadian
Banking; and BBVA Chile and Citibank consumer and small and medium enterprise operations, Colombia in International Banking. Acquisition-
related costs are defined below.
(cid:129) Day 1 provision for credit losses on acquired performing financial instruments, as required by IFRS 9. The standard does not differentiate between
originated and purchased performing loans and as such, requires the same accounting treatment for both.
(cid:129) Integration costs – These include costs that are incurred on the current year’s acquisitions and related to integrating the acquired operations and
will not form part of continuing operations once integration is complete.
(cid:129) Amortization of acquisition-related intangible assets, excluding software, relating to current and past acquisitions.
2. Restructuring charge incurred in 2016.
18 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
T1 Reconciliation of reported and adjusted results and diluted earnings per share
As at October 31 ($ millions)
Reported Results
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 in subsidiaries (NCI)
Net income attributable to equity holders
Net income attributable to common shareholders
Diluted earnings per share (in dollars)
Adjustments
Acquisition-related costs
Day 1 provision for credit losses on acquired performing financial instruments(1)
Integration costs(2)
Amortization of acquisition-related intangible assets, excluding software(2)
Acquisition-related costs (Pre-tax)
Restructuring charge
Restructuring charge (Pre-tax)(2)
Adjustments (Pre-tax)
Income tax expense
Adjustments (After tax)
Adjustment attributable to NCI
Adjustments (After tax and NCI)
Adjusted Results
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 NCI
Net income attributable to equity holders
Net income attributable to common shareholders
Adjusted diluted earnings per share
Adjusted net income attributable to common shareholders
Dilutive impact of share-based payment options and others
Adjusted net income attributable to common shareholders (diluted)
Weighted average number of basic common shares outstanding (millions)
Dilutive impact of share-based payment options and others (millions)
Adjusted weighted average number of diluted common shares outstanding (millions)
Adjusted diluted earnings per share (in dollars)
Impact of adjustments on diluted earnings per share (in dollars)
(1) Recorded in provision for credit losses.
(2) Recorded in non-interest expenses.
2018
2017
2016
$ 16,191
12,584
$ 15,035
12,120
$ 14,292
12,058
28,775
2,611
15,058
11,106
2,382
8,724
176
8,548
8,361
6.82
404
101
86
591
–
591
171
420
122
298
$
$
$
$
27,155
2,249
14,630
10,276
2,033
8,243
238
8,005
7,876
6.49
–
–
82
82
–
82
22
60
–
60
$
$
$
$
26,350
2,412
14,540
9,398
2,030
7,368
251
7,117
6,987
5.77
–
–
104
104
378
482
128
354
–
354
$
$
$
$
$ 16,191
12,584
$ 15,035
12,120
$ 14,292
12,058
28,775
2,207
14,871
11,697
2,553
9,144
298
8,846
8,659
8,659
72
8,731
1,213
16
1,229
7.11
0.29
$
$
$
$
$
27,155
2,249
14,548
10,358
2,055
8,303
238
8,065
7,936
7,936
59
7,995
1,203
20
1,223
6.54
0.05
$
$
$
$
$
26,350
2,412
14,058
9,880
2,158
7,722
251
7,471
7,341
7,341
83
7,424
1,204
22
1,226
6.05
0.28
$
$
$
$
$
2 0 1 8 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
T2 Reconciliation of reported and adjusted results and diluted earnings per share by business line
Canadian Banking(1)
As at October 31 ($ millions)
Reported Results
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 in subsidiaries (NCI)
Net income attributable to equity holders
Adjustments
Acquisition-related costs
Day 1 provision for credit losses on acquired performing financial instruments(2)
Integration costs(3)
Amortization of acquisition-related intangible assets, excluding software(3)
Acquisition-related costs (Pre-tax)
Income tax expense
Adjustments for Acquisition-related costs (After tax)
Adjustment attributable to NCI
Adjustments for Acquisition-related costs (After tax and NCI)
Adjusted Results
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 NCI
Net income attributable to equity holders
(1) Refer to Business Line Overview on page 38.
(2) Recorded in provision for credit losses.
(3) Recorded in non-interest expenses.
2018
2017
2016
$
7,898
5,452
$
7,363
5,488
$
7,024
5,164
13,350
794
6,654
5,902
1,538
4,364
–
4,364
–
31
40
71
19
52
–
52
7,898
5,452
13,350
794
6,583
5,973
1,557
4,416
–
4,416
$
$
$
$
$
$
$
12,851
913
6,487
5,451
1,387
4,064
–
4,064
–
–
35
35
9
26
–
26
7,363
5,488
12,851
913
6,452
5,486
1,396
4,090
–
4,090
$
$
$
$
$
$
$
12,188
832
6,324
5,032
1,296
3,736
–
3,736
–
–
54
54
15
39
–
39
7,024
5,164
12,188
832
6,270
5,086
1,311
3,775
–
3,775
$
$
$
$
$
$
$
20 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
T2 Reconciliation of reported and adjusted results and diluted earnings per share by business line
International Banking(1)
As at October 31 ($ millions)
Reported Results
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 in subsidiaries (NCI)
Net income attributable to equity holders
Adjustments
Acquisition-related costs
Day 1 provision for credit losses on acquired performing financial instruments(2)
Integration costs(3)
Amortization of acquisition-related intangible assets, excluding software(3)
Acquisition-related costs (Pre-tax)
Income tax expense
Adjustments for Acquisition-related costs (After tax)
Adjustment attributable to NCI
Adjustments for Acquisition-related costs (After tax and NCI)
Adjusted Results
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 NCI
Net income attributable to equity holders
(1) Refer to Business Line Overview on page 38.
(2) Recorded in provision for credit losses.
(3) Recorded in non-interest expenses.
2018
2017
2016
$
7,322
4,111
$
6,726
3,688
$ 6,359
3,482
11,433
1,867
6,111
3,455
706
2,749
176
2,573
404
70
46
520
152
368
122
246
7,322
4,111
11,433
1,463
5,995
3,975
858
3,117
298
2,819
$
$
$
$
$
$
$
10,414
1,294
5,664
3,456
828
2,628
238
2,390
–
–
47
47
13
34
–
34
6,726
3,688
10,414
1,294
5,617
3,503
841
2,662
238
2,424
$
$
$
$
$
$
$
9,841
1,281
5,523
3,037
707
$ 2,330
251
$ 2,079
$
$
–
–
50
50
13
37
–
37
$ 6,359
3,482
9,841
1,281
5,473
3,087
720
$ 2,367
251
$ 2,116
2 0 1 8 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
T2 Reconciliation of reported and adjusted results and diluted earnings per share by business line
Other(1)
As at October 31 ($ millions)
Reported Results
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 in subsidiaries (NCI)
Net income attributable to equity holders
Adjustments
Restructuring charge
Restructuring charge (Pre-tax)(2)
Income tax expense
Adjustments (After tax)
Adjustment attributable to NCI
Adjustments (After tax and NCI)
Adjusted Results
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 NCI
Net income attributable to equity holders
(1) Refer to Business Line Overview on page 38.
(2) Recorded in non-interest expenses.
2018
2017
2016
$ (483)
(53)
$ (390)
(344)
$ (384)
273
(536)
–
60
(596)
(449)
$ (147)
–
(734)
–
319
(1,053)
(786)
$ (267)
–
(111)
50
653
(814)
(545)
$ (269)
–
$ (147)
$ (267)
$ (269)
$
$
–
–
–
–
–
$
$
–
–
–
–
–
$
$
378
100
278
–
278
$ (483)
(53)
$ (390)
(344)
$ (384)
273
(536)
–
60
(596)
(449)
$ (147)
–
$ (147)
(734)
–
319
(1,053)
(786)
$ (267)
–
$ (267)
(111)
50
275
(436)
(445)
9
–
9
$
$
Reconciliation of International Banking’s reported results and constant dollar results
International Banking business segment results are analyzed on a constant dollar basis. Under the constant dollar basis, prior period amounts are
recalculated using current period average foreign currency rates. The following table presents the reconciliation between reported and constant dollar
results for International Banking for prior periods.
For the year ended October 31 ($ millions)
(Taxable equivalent basis)
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 interest in subsidiaries
Net income attributable to equity holders of the Bank
Other measures
Average assets ($ billions)
Average liabilities ($ billions)
2017
Foreign
exchange
$ 100
35
135
18
70
13
34
(2)
36
3
2
$
$
$
$
$
Reported
$
6,726
3,688
10,414
1,294
5,664
828
2,628
238
2,390
148
115
$
$
$
$
$
Constant
dollar
$
6,626
3,653
10,279
1,276
5,594
815
2,594
240
2,354
$
$
$
$
$
2016
Foreign
exchange
$ 168
42
210
24
135
(83)
Constant
dollar
$ 6,191
3,440
9,631
1,257
5,388
790
$ 134
$ 2,196
$
(9)
$ 143
$
260
$ 1,936
Reported
$ 6,359
3,482
9,841
1,281
5,523
707
$ 2,330
$
251
$ 2,079
145
113
$
$
143
109
$
$
4
3
$
$
139
106
The above table is computed on a basis that is different than the table “Impact of foreign currency translation” in Group Financial Performance on
page 25.
Core banking assets
Core banking assets are average earning assets excluding bankers’ acceptances and average trading assets within Global Banking and Markets.
Core banking margin
This ratio represents net interest income divided by average core banking assets.
22 | 2 0 1 8 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 ($)
Diluted earnings per share ($)
Return on equity (%)
Productivity ratio (%)
Operating leverage (%)
Core banking margin (%)(2)
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)(5)
Net impaired loans as a % of loans and acceptances(4)
Provision for credit losses as a % of average net loans and acceptances(6)
Provision for credit losses on impaired loans as a % of average net loans and acceptances(6)
Net write-offs as a % of average net loans and acceptances
Adjusted results(2)
Adjusted net income ($ millions)
Adjusted diluted earnings per share ($)
Adjusted return on equity (%)
Adjusted productivity ratio (%)
Adjusted operating leverage (%)
Adjusted provision for credit losses as a % of average net loans and acceptances(6)
Common share information
Closing share price ($) (TSX)
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends paid per share ($)
Dividend yield (%)(7)
Market capitalization ($ millions) (TSX)
Book value per common share ($)
Market value to book value multiple
Price to earnings multiple (trailing 4 quarters)
Other information
Employees (full-time equivalent)
Branches and offices
2018(1)
2017
2016
16,191
12,584
28,775
2,611
15,058
2,382
8,724
8,361
6.90
6.82
14.5
52.3
3.0
2.46
62,269
100,262
551,834
998,493
676,534
61,044
4,184
516,033
282,219
11.1
12.5
14.3
4.5
400,507
124
3,453
5,154
0.60
0.48
0.43
0.44
9,144
7.11
14.9
51.7
3.7
0.41
15,035
12,120
27,155
2,249
14,630
2,033
8,243
7,876
6.55
6.49
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
0.45
0.50
8,303
6.54
14.7
53.6
(0.2)
0.45
14,292
12,058
26,350
2,412
14,540
2,030
7,368
6,987
5.80
5.77
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
0.50
0.41
7,722
6.05
14.5
53.4
1.0
0.50
70.65
83.28
72.08
1,213
1,229
1,227
3.28
4.2
86,690
49.75
1.4
10.2
97,629
3,095
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) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2) Refer to page 18 for a discussion of Non-GAAP measures.
(3) As at October 31, 2018, credit valuation adjustment (CVA) risk-weighted assets were calculated using scalars of 0.80, 0.83 and 0.86 to compute CET1, Tier 1 and Total Capital ratios, respectively (scalars of 0.72, 0.77, and 0.81 in
2017, scalars 0.64, 0.71, 0.77 in 2016).
(4) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico, prior to 2018.
Includes allowance for credit losses on all financial assets – loans, acceptances, off-balance sheet exposures, debt securities, and deposits with financial institutions.
(5)
(6)
Includes provision for credit losses on certain financial assets – loans, acceptances, and off-balance sheet exposures.
(7) Based on the average of the high and low common share price for the year.
2 0 1 8 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
Overview of Performance
Financial Results: 2018 vs 2017
Net income was $8,724 million, up 6% from $8,243 million last year. Diluted earnings per share (EPS) were $6.82 compared to $6.49, up 5%. Return
on equity was 14.5% compared to 14.6%.
Adjusting for the impact of Acquisition-related costs (refer to Non-GAAP Measures), net income was $9,144 million, up 10% from $8,303 million. Net
income was positively impacted by increases in net interest income and trading revenues, as well as lower provision for credit losses. Partially offsetting
were lower gains on sale of real estate and investment securities, and a higher effective tax rate. Adjusted Diluted EPS were $7.11, up 9%. Adjusted
Return on equity was 14.9% compared to 14.7%.
Net interest income was $16,191 million, an increase of $1,156 million or 8% from strong growth in Canadian Banking and International Banking
including the 2% impact of acquisitions. This was partly offset by the negative impact of foreign currency translation.
The core banking margin was 2.46%, in line with the prior year. Higher margins in Canadian Banking and Global Banking and Markets were offset by
lower margins in International Banking due mainly to acquisitions, and the impact of asset/liability management activities.
Non-interest income was $12,584 million, up $464 million or 4%. The impact of the sale of the HollisWealth business (“Sale of Business”) last year,
net of the benefit from current year acquisitions, reduced non-interest income by 1%. The remaining 5% growth was from higher banking and credit
card fees, trading revenues, income from associated corporations and the benefit from an additional month of income for certain businesses from the
alignment of reporting period with the Bank (“Alignment of reporting period”). This was partly offset by lower gains on the sale of real estate and
investment securities.
Provision for credit losses was $2,611 million, an increase of $362 million from last year. Adjusting for Acquisition-related costs, the provision for
credit losses decreased $42 million, due primarily to lower provisions in Canadian Banking and Global Banking and Markets, offset by higher
provisions in International Banking. The provision for credit losses ratio was 48 basis points, up three basis points from 45 basis points last year.
Adjusting for Acquisition-related costs, the provision for credit losses ratio was 41 basis points, four basis points below last year.
Non-interest expenses were $15,058 million, an increase of $428 million or 3%. Adjusting for Acquisition-related costs, non-interest expenses
increased 2%. The impact of the acquisitions was more than offset by the benefit from the Sale of Business last year. The remaining increase was due
to higher investments in technology and regulatory initiatives and higher business taxes, partly offset by the accounting benefit driven by
remeasurement of an employee benefit liability (“benefits remeasurement”), and the positive impact of foreign currency translation.
The productivity ratio was 52.3% compared to 53.9% last year. Adjusting for Acquisition-related costs, the productivity ratio was 51.7%. The benefits
remeasurement improved the productivity ratio by 0.7%. Operating leverage was positive 3.0% on a reported basis. Adjusting for Acquisition-related
costs, operating leverage was 3.7%. The benefits remeasurement improved the operating leverage by 1.3%.
The provision for income taxes was $2,382 million, an increase of $349 million. The Bank’s overall effective tax rate for the year was 21.5% compared
to 19.8% for 2017. The increase in the effective tax rate was due primarily to higher tax-exempt income from client-driven equity trading activities in
the prior year, partially offset by lower taxes in certain foreign jurisdictions this year.
The Basel III Common Equity Tier 1 ratio was 11.1% as at October 31, 2018, compared to 11.5% last year, and remained well above the regulatory
minimum.
Medium-term financial objectives
Diluted earnings per share growth of 7%+
Return on equity of 14%+
Achieve positive operating leverage
Maintain strong capital ratios
(1) Refer to non-GAAP measures on page 18.
Shareholder Returns
In fiscal 2018, the total shareholder return on the Bank’s shares was negative 11.6%, compared
to the total return of the S&P/TSX Composite Index of negative 3.4%.
The total compound annual shareholder return on the Bank’s shares over the past five years was
6.6%, and 10.4% over the past 10 years. This exceeded the total annual return of the S&P/TSX
Composite Index, which was 5.5% over the past five years and 7.6% over the last 10 years.
Dividends were raised twice during the year – a three cent increase effective the second quarter
and a further three cent increase effective the fourth quarter. As a result, dividends per share
totaled $3.28 for the year, up 8% from $3.05 in 2017. The dividend payout ratio of 47.7% for
the year was in line with the Bank’s target payout range of 40-50%.
2018 Results
Reported
Adjusted(1)
9%
14.9%
Positive 3.7%
CET1 capital ratio of 11.1% CET1 capital ratio of 11.1%
5%
14.5%
Positive 3.0%
C1 Closing common share price
as at October 31
$90
80
70
60
50
40
08
10
12
14
16
18
24 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
T4 Shareholder returns
For the years ended October 31
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)(1)
Increase (decrease) in share price (%)
Total annual shareholder return (%)(2)
2018
70.65
3.28
4.2
(15.2)
(11.6)
2017
83.28
3.05
4.0
15.5
20.3
2016
72.08
2.88
4.7
17.2
22.5
(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.
C2 Return to common shareholders
Share price appreciation plus dividends
reinvested, 2008=100
350
300
250
200
150
100
08
10
12
14
16
18
Scotiabank
S&P/TSX Banks Total Return Index
S&P/TSX Composite Total Return Index
Economic Outlook
Global growth remains strong but trade policy risks are on the rise. The global economy remains sufficiently robust to deal with reasonably small trade
tensions such as the tariffs on steel and aluminum, but a deepening of trade tensions between the United States and China could have significant
economic impacts. A rational approach to trade policy is expected to prevail and prevent an escalation of trade tensions.
The Canadian economy remains in good shape with growth expected to accelerate modestly to 2.2% in 2019 from the 2.1% forecast for 2018. The
sources of Canadian growth appear to be evolving toward a more sustainable mix with a lighter emphasis on household consumption and real estate,
and a greater contribution from investment and trade that could help increase productivity. Canadian interest rates will likely continue to rise, with the
Bank of Canada rate expected to reach 2.75% by end 2019.
Over the last year, the U.S. economy has experienced a combination of moderate growth, modest inflation, and gradually rising interest rates. The
U.S. economy has been in a favourable period of benign data and policy that have allowed the current eight-and-a-half-year run of uninterrupted
growth to become the second longest U.S. expansion in history as of June 2018. The current policy mix in the U.S. clouds expectations beyond 2019.
Against this background, the Federal Reserve will continue to normalize its policy settings, with rates likely rising to 3.25% by end 2019.
A key challenge facing emerging markets this year is the transition to a more hawkish stance on the part of the Federal Reserve, amplified in some
countries by tensions with the United States. The countries of the Pacific Alliance have been generally insulated from these movements. Growth
prospects are improving in many of these countries as economic activity is expected to improve relative to last year. This is most true in Peru, where
the rise in commodity prices over the past year and a new government is leading to large increases in growth rates relative to 2017. In Colombia, an
increase in oil prices over the past year is providing a positive impulse to business investment, which will be further strengthened as confidence in the
new government takes hold. Strengthening business activity will add to already solid household spending. In Chile, GDP growth is expected to
moderate somewhat from the strong levels witnessed in 2018 but should still exceed 3%. In Mexico, the economy remains moderately strong, as
activity continues to benefit from robust growth in the U.S. and the rest of the world. The political transition is key to Mexican prospects.
Impact of Foreign Currency Translation
The impact of foreign currency translation on net income is shown in the table below.
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
O
V
E
R
V
I
E
W
O
F
P
E
R
F
O
R
M
A
N
C
E
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.
2018
2017
2016
Average
exchange rate
% Change
Average
exchange rate
% Change
Average
exchange rate
% Change
0.777
14.802
2.538
2,272
492.892
1.6%
1.3%
1.0%
0.3%
(1.4)%
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%
2018
vs. 2017
2017
vs. 2016
2016
vs. 2015
$ (101)
(21)
85
17
$ (112)
(65)
99
18
$
(20)
$
(60)
$ (0.02)
$ (0.05)
$
(4)
(46)
(12)
42
$
(4)
(14)
(12)
(30)
$
(51)
182
86
(34)
$ 183
$ 0.15
$
14
44
65
60
$
(20)
$
(60)
$ 183
2 0 1 8 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
GROUP FINANCIAL PERFORMANCE
Basis of Presentation
The Bank adopted International Financial Reporting Standard (IFRS) 9, Financial Instruments effective November 1, 2017. IFRS 9 includes an
accounting policy choice to defer the adoption of IFRS 9 hedge accounting and to continue to apply the requirements of IAS 39 hedge accounting.
The Bank has exercised this accounting policy choice. The Bank recorded a charge to its opening November 1, 2017 total equity of $610 million, to
reflect the impact of the new requirements of impairment and classification and measurement of financial instruments at the adoption date and did
not restate comparative periods, as permitted by the standard. Accordingly, the current year 2018 results are based on IFRS 9, while the prior years’
results are based on International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement and therefore, these amounts
and related ratios are not comparable. The main impact of impairment under IFRS 9 is on provision for credit losses, and the impact of classification
and measurement is on non-interest income. The provision for credit losses on performing loans is stages 1 and 2 under IFRS 9, while provision for
credit losses on impaired loans is stage 3. For detailed description of the changes, refer to Notes 3 and 4 in the consolidated financial statements.
Net Income
Net income was $8,724 million, up 6% compared to $8,243 million last year reflecting good revenue growth, prudent expense management and the
benefits from acquisitions. Adjusting for the impact of Acquisition-related costs, net income was $9,144 million, up 10% from $8,303 million.
Net Interest Income
Net interest income was $16,191 million, an increase of $1,156 million or 8% from strong growth in core banking assets and the impact of
acquisitions. This was partly offset by the negative impact of foreign currency translation.
Net interest income in Canadian Banking was up $535 million or 7% driven by strong asset and deposit growth and expansion in margin. Net interest
income increased $596 million or 9% in International Banking due primarily to strong asset growth and the 3% contribution from acquisitions. Net
interest income in Global Banking and Markets rose $118 million or 9% driven by higher deposit volumes and higher lending volumes in the U.S.
Core banking assets increased $44 billion to $652 billion. The increase was driven by strong retail and commercial loan growth in International
Banking due mainly to acquisitions, growth in residential mortgages, business loans and personal loans in Canadian Banking, as well as higher
treasury assets.
The core banking margin was unchanged at 2.46%. Higher margins in Canadian Banking and Global Banking and Markets were offset by lower
margins in International Banking due partly to acquisitions and higher volumes of lower margin treasury assets.
Outlook
Net interest income is expected to increase in 2019 driven by growth in core banking assets, the full year impact of the acquisitions made in 2018 and
higher net interest margins driven primarily by rising interest rates in Canada.
T6 Net interest income and core banking margin(1)
($ billions, except percentage amounts)
Total average assets and net interest income
Less: trading related businesses in Global Banking and
2018
Average
balance
Interest
Average
rate
Average
balance
2017
Interest
Average
rate
Average
balance
2016
Interest
Average
rate
$ 945.7
$ 16.2
$ 912.6
$ 15.0
$ 913.8
$ 14.3
Markets(1)
234.6
0.1
249.2
–
259.4
–
Banking margin on average total assets
$ 711.1
$ 16.1
2.26% $ 663.4
$ 15.0
2.26% $ 654.4
$ 14.3
2.18%
Less: non-earning assets and customers’ liability under
acceptances
58.7
–
54.6
–
56.6
–
Core banking assets and margin
$ 652.4
$ 16.1
2.46% $ 608.8
$ 15.0
2.46% $ 597.8
$ 14.3
2.38%
(1) Most net interest income from Capital Markets trading assets is recorded in trading revenues in non-interest income.
26 | 2 0 1 8 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
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S
D
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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
2018
Average
balance
Interest
Average
rate
Average
balance
2017
Interest
Average
rate
Average
balance
2016
Interest
Average
rate
$
54.2
101.6
$
94.4
79.8
244.2
92.1
15.1
177.0
(5.0)
$ 523.4
$ 853.4
16.3
76.0
0.9
0.2
0.4
1.6
8.3
6.0
2.8
7.9
1.59% $
0.17%
53.2
107.2
$
0.47%
2.01%
3.39%
6.55%
18.45%
4.45%
97.0
74.8
228.3
87.4
13.5
165.0
(4.5)
0.5
0.1
0.3
1.3
7.4
5.3
2.5
6.5
0.98% $
0.13%
67.8
107.2
$
0.29%
1.68%
3.23%
6.08%
18.73%
3.94%
99.8
67.8
218.6
84.4
12.4
161.4
(4.6)
0.4
0.2
0.1
1.1
7.4
5.0
2.3
5.5
$ 25.0
$ 28.1
4.77% $ 489.7
3.29% $ 821.9
$ 21.7
$ 23.9
4.43% $ 472.2
2.91% $ 814.8
$ 20.2
$ 22.0
12.3
78.4
11.4
87.6
0.58%
0.16%
0.16%
1.57%
3.37%
5.98%
18.37%
3.41%
4.28%
2.70%
$ 945.7
$ 28.1
2.97% $ 912.6
$ 23.9
2.62% $ 913.8
$ 22.0
2.41%
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 loans
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
$ 213.9
399.8
42.2
$ 655.9
$
3.3
6.5
0.7
1.52% $ 203.8
374.7
1.64%
42.1
1.77%
$ 10.5
1.61% $ 620.6
$
$
96.0
5.7
60.1
0.3
0.2
0.9
0.25%
3.71%
1.46%
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
$ 817.7
$ 11.9
1.45% $ 788.5
$
Other liabilities including acceptances
Equity(2)
Total liabilities and equity
Net interest income
63.9
64.1
$ 945.7
$ 11.9
$ 16.2
65.3
58.8
1.26% $ 912.6
$
8.9
$ 15.0
(1) Average of daily balances.
(2)
Includes non-controlling interest of $1.9 (2017 – $1.6; 2016 – $1.5).
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%
1.01%
1.03%
1.08%
0.19%
3.10%
1.04%
0.98%
0.84%
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 27
C3 Sources of non-interest income
21%
9%
14%
9%
14%
Underwriting and
other advisory fees
Non-trading foreign
exchange fees
Trading revenues
Other non-interest
income
11%
5%
4%
6%
7%
Card revenues
Deposit and
payment services
and other banking
fees
Credit fees
Mutual funds
Brokerage Fees
Investment
management and
trust
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-Interest Income
T8 Non-interest income
For the fiscal years ($ millions)
Banking
Card revenues
Deposit and payment services
Deposit services
Other payment services
Credit fees
Commitment and other credit fees
Acceptance fees
Other
Banking fee related expenses
Total banking
Wealth management
Mutual funds
Brokerage fees(1)
Investment management and trust(1)
Investment management and custody
Personal and corporate trust
2018
2017
2016
2018
versus
2017
$ 1,656
$ 1,514
$ 1,359
9%
1,027
339
1,366
840
351
1,191
466
989
335
949
330
1,324
1,279
846
307
1,153
472
870
284
1,154
436
$ 4,679
$ 4,463
$ 4,228
678
608
559
$ 4,001
$ 3,855
$ 3,669
$ 1,714
895
$ 1,639
1,047
$ 1,624
1,034
551
181
732
453
179
632
443
181
624
4
1
3
(1)
14
3
(1)
5%
12
4%
5%
(15)
22
1
16
Total wealth management
$ 3,341
$ 3,318
$ 3,282
1%
Underwriting and other advisory
Non-trading foreign exchange
Trading revenues(1)
Net gain on investment securities
Net income from investments in associated
corporations
Insurance underwriting income, net of claims
Other fees and commissions(1)
Other(1)
514
622
1,420
146
559
686
841
454
598
557
986
380
407
626
903
490
594
540
1,228
534
414
603
732
462
(14)
12
44
(62)
37
10
(7)
(7)
Total non-interest income
$12,584
$12,120
$12,058
4%
(1) Prior year amounts have been reclassified to conform with current period presentation.
Non-interest income was up $464 million or 4% to $12,584 million. The impact of the Sale of Business last year, net of the benefit from current year
acquisitions, reduced non-interest income by 1%. The remaining 5% growth was primarily from higher banking, trading revenues, income from
associated corporations and the benefit from Alignment of reporting period. This was partly offset by lower gains on investment securities and real
estate.
Banking revenues, net of related expenses, grew $146 million or 4% to $4,001 million largely from strong growth in card revenues both in Canadian
Banking and International Banking. Fees from deposit and payment services grew $42 million and Credit fees also increased $38 million, mainly in
Canadian Banking. Banking fee related expenses increased $70 million or 12%, due mainly to credit card expenses driven by higher volumes.
Wealth management revenues increased $23 million or 1% due to higher fees from mutual funds and investment management and trust businesses,
in part from the acquisitions of Jarislowsky Fraser and MD Financial. Largely offsetting were lower brokerage fees resulting from the impact of the Sale
of Business in the prior year.
Underwriting and Other advisory fees declined $84 million or 14% mostly due to lower new issuance activity in the fixed income and equities
businesses.
Trading revenues were up $434 million or 44%, due primarily to higher revenues in equities, partly offset by lower revenues in fixed income and
commodities businesses.
Insurance underwriting income was up $60 million or 10%, due mainly to the Alignment of reporting period and higher premiums from strong
business growth in the Canadian market.
Other income was down $36 million or 7%, due primarily to lower gain on sale of real estate and the impact of the gain on Sale of Business in the
previous year.
Outlook
Non-interest income in 2019 is expected to increase due to higher wealth management fees from the 2018 acquisitions, credit card revenues and
banking fees. The growth is expected to be partly offset by lower gains on sale of investment securities and real estate.
28 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
M
A
N
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G
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M
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T
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D
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C
U
S
S
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N
A
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D
A
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L
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S
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R
O
U
P
F
I
N
A
N
C
I
A
L
P
E
R
F
O
R
M
A
N
C
E
T9 Trading revenues
For the fiscal years ($ millions)
By trading products:
Interest rate and credit
Equities
Commodities
Foreign exchange
Other
Total trading revenues
% of total revenues
Provision for Credit Losses
2018
2017
2016
$
272
441
231
295
181
$ 474
(125)
295
250
92
$
559
(20)
376
262
51
$ 1,420
$ 986
$ 1,228
4.9%
3.6%
4.7%
Provision for credit losses for 2018 is calculated in accordance with IFRS 9, while the provision for credit losses for 2017 was calculated in accordance
with IAS 39.
The provision for credit losses was $2,611 million, compared to $2,249 million in 2017. Adjusting for Acquisition-related costs, the provision for credit
losses decreased $42 million or 2%.
The provision for credit losses on impaired financial assets increased $106 million relating primarily to retail portfolios in International Banking, mainly
in Latin America driven in part by credit mark benefit in the prior year. This was partially offset by lower provisions in Canadian Banking and Global
Banking and Markets. Provision for performing loans decreased $148 million due primarily to reversal of the previously recorded provision for the
hurricanes in the Caribbean that are no longer required and improvement in credit quality. The provision for credit losses ratio was 48 basis points, an
increase of three basis points. Adjusting for Acquisition-related costs, the provision for credit losses ratio was 41 basis points.
Outlook
The quality of the Bank’s credit portfolio is expected to remain strong given its broad global diversification. Provision for credit losses is expected to be
higher in 2019 in line with organic growth and the impact of acquisitions. As well, certain improvements in credit quality experienced in 2018 are
expected to remain stable and not result in additional recoveries in 2019. Overall, the provision for credit losses ratio in 2019 is expected to be within
the Bank’s risk appetite.
T10 Provision for credit losses by business line
For the fiscal years ($ millions)
Canadian Banking
Retail
Commercial
Total
International Banking
Retail
Commercial
Total
Global Banking and Markets
Other
Provision for credit losses on loans, acceptances and off-balance sheet exposures
International Banking
Global Banking and Markets
Provision for credit losses on debt securities and deposits with banks
Total provision for credit losses
2018
Performing
(Stage 1 and 2)
Impaired
(Stage 3)
Total
$ (13)
21
8
304
(24)
280
(23)
–
$ 265
$ (10)
$
$
1
(9)
$
759
27
786
$
746
48
794
1,363
193
1,556
1,667
169
1,836
(28)
(51)
–
$ 2,314
–
$ 2,579
$
$
$
41
–
41
$
$
$
31
1
32
$ 256
$ 2,355
$ 2,611
2 0 1 8 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
T10A Provisions against impaired loans by business line
For the fiscal years ($ millions)
Canadian Banking
Retail
Commercial
International Banking
Caribbean and Central America
Latin America
Mexico
Peru
Chile
Colombia
Other Latin America
Total Latin America
Global Banking and Markets
Canada
U.S.
Asia and Europe
Total
2018(1)
2017
2016
$
$
$
759
27
786
321
239
349
275
358
55
$
$
$
857
56
913
215
193
329
145
337
75
$
$
$
770
62
832
250
224
317
112
320
58
1,276
1,079
1,031
$ 1,597
$ 1,294
$ 1,281
$
$
(1)
(6)
(21)
(28)
$
(6)
(15)
63
$
43
113
93
$
42
$
249
$ 2,355
$ 2,249
$ 2,362
(1) The amounts for 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
T11 Provision for credit losses as a percentage of average net loans and acceptances(1)(2)(3)
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
2018
2017
2016
0.26%
0.10
0.24
0.32%
0.13
0.29
0.29%
0.15
0.28
2.84
0.27
1.51
(0.06)
0.43
0.05
2.09
0.37
1.21
0.05
0.45
0.00
2.08
0.52
1.26
0.30
0.49
0.01
0.48%
0.45%
0.50%
(1) The amounts for 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2)
(3) 2018 includes Day 1 acquisition-related impact in International Banking.
Includes provision for credit losses on certain financial assets – loans, acceptances, and off-balance sheet exposures.
T12 Net write-offs(1) as a percentage of average loans and acceptances(2)(3)
For the fiscal years (%)
Canadian Banking
Retail
Commercial
International Banking
Retail
Commercial
Global Banking and Markets
Total
2018
2017
2016
0.27%
0.09
0.24
2.35
0.23
1.25
0.03
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
0.44%
0.50%
0.41%
(1) Write-offs net of recoveries.
(2) The amounts for 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(3) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acqusition of R-G Premier Bank of Puerto Rico, prior to 2018.
30 | 2 0 1 8 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)
2018
2017
2016
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
Other
$
4,454
1,624
192
1,185
$
4,220
1,599
209
1,347
$
4,071
1,538
243
1,173
$
7,455
$
7,375
$
7,025
477
98
437
$
1,012
$
$
1,565
2,577
354
494
848
447
581
881
419
45
464
1,805
$
$
$
$
$
$
444
93
432
969
1,467
2,436
340
421
761
437
581
775
383
40
423
1,842
$
$
$
$
$
$
$
$
$
428
89
431
948
1,290
2,238
325
359
684
442
617
693
356
47
403
2,438
$
$
$
$
$
$
$
$
$
2018
versus
2017
6%
2
(8)
(12)
1%
7
5
1
4%
7%
6%
4
17
11%
2%
–%
14%
9
13
10%
(2)%
Total non-interest expenses
$ 15,058
$ 14,630
$ 14,540
3%
Productivity ratio
52.3%
53.9%
55.2%
Non-interest expenses
$ millions
C4
16000
14000
12000
10000
8000
6000
4000
2000
16
17
18
Salaries & employee benefits
Premises & technology
Depreciation and amortization
Communications & advertising
Professional & taxes
Other
Direct and indirect taxes
$ millions
16
17
18
Provision for income taxes
Total other taxes
C5
4000
3500
3000
2500
2000
1500
1000
500
M
A
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A
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M
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N
T
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A
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A
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2 0 1 8 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
Non-interest expenses were $15,058 million, an increase of $428 million or 3%. Adjusting for Acquisition-related costs, non-interest expenses
increased 2%. The impact of the acquisitions was more than offset by the benefit from the Sale of Business last year.
The remaining increase was due mainly to increased investments in technology, regulatory initiatives and higher business taxes. This was partly offset
by the positive impact of foreign currency translation, the impact of the benefits remeasurement and lower share-based payment expenses.
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, was approximately $3.3 billion, an increase of 9% compared to 2017. This increase reflects the Bank’s continued
investment in its digital transformation and technology modernization efforts. The Bank achieved additional savings of approximately $300 million in
2018 arising from cost-reduction initiatives specifically relating to the 2016 restructuring charge, achieving the $750 million 2019 savings commitment
more than one year early. The Bank’s strategy to reduce structural costs will continue to focus on productivity gains to meet the Bank’s commitments
and thoughtful ongoing technology and regulatory investments.
The productivity ratio was 52.3% compared to 53.9% last year. Adjusting for Acquisition-related costs, the productivity ratio was 51.7%. The benefits
remeasurement improved the productivity ratio by 0.7%.
Operating leverage was positive 3.0% on a reported basis. Adjusting for Acquisition-related costs, operating leverage was 3.7%. The benefits
remeasurement improved the operating leverage by 1.3%.
Outlook
Non-interest expenses are expected to rise in 2019, due mainly to the impact of acquisitions made in 2018, business growth, and continuing
technology and regulatory investments. This growth will be partly offset by further savings from efficiency initiatives.
Income Taxes
The provision for income taxes was $2,382 million, an increase of $349 million. The effective tax rate increased to 21.5% compared to 19.8% due
primarily to higher tax-exempt income from client-driven equity trading activities in the prior year partially offset by lower taxes in certain foreign
jurisdictions this year.
Outlook
The Bank’s consolidated effective tax rate is expected to be in the range of 21% to 25% in 2019.
32 | 2 0 1 8 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: 2017 vs. 2016
In order to identify key business trends between 2017 and 2016, commentary and the related financial results are below.
Net income
The Bank had net income of $8,243 million in 2017, up 12% from $7,368 million in 2016. Diluted earnings per share were $6.49 compared to
$5.77 in 2016. Return on equity was 14.6% in 2017 compared to 13.8% in 2016.
Adjusting for the impact of the restructuring charge in 2016 of $278 million after tax ($378 million pre-tax), or $0.23 per share(1), net income and
diluted earnings per share increased 8%. Return on equity was 14.6% compared to 14.3% in 2016 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. The gain on sale of HollisWealth
in 2017, a wealth management business, was lower than the gain on sale of a non-core lease financing business (“gain on sale of businesses”) in
2016 in Canadian Banking.
Net interest income
Net interest income increased $743 million or 5% to $15,035 million in 2017, 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
Non-interest income increased $62 million or 1% to $12,120 million in 2017. 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
Provision for credit losses was $2,249 million, down $163 million from 2016, due primarily to lower provisions related to energy exposures and the
impact of the increase in the collective allowance against performing loans of $50 million in 2016. 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
Non-interest expenses were $14,630 million in 2017 compared to $14,540 million. Adjusting for the impact of the restructuring charge in 2016,
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.
Income taxes
The provision for income taxes was $2,033 million in line with 2016. The Bank’s effective tax rate for the year was 19.8% compared to 21.6%,
due primarily to higher tax-exempt dividends related to client-driven equity trading activities and lower taxes in certain foreign jurisdictions in
2017.
M
A
N
A
G
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M
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T
’
S
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A
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S
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T14 Financial Results Review
For the year ended October 31, 2017 ($ 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
$
7,363
5,488
$ 12,851
913
6,487
1,387
$
6,726
3,688
$ 10,414
1,294
5,664
828
$ 1,336
3,288
$ 4,624
42
2,160
604
$
$
(390)
(344)
(734)
–
319
(786)
$ 15,035
12,120
$ 27,155
2,249
14,630
2,033
$
4,064
$
2,628
$ 1,818
$ (267)
$
8,243
Net income attributable to non-controlling interests
–
238
–
–
238
Net income attributable to equity holders of the Bank
$
4,064
$
2,390
$ 1,818
$
(267)
$
8,005
(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, 2017 – $562 to arrive at the amounts reported in Consolidated Statement of income, and differences in the actual amount of costs incurred and charged to the operating
segments.
(1)
Refer to Non-GAAP Measures.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended October 31, 2016 ($ 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 – $299 to arrive at the amounts reported in Consolidated Statement of income, and differences in the actual amount of costs incurred and charged to the operating
segments.
34 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
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Fourth Quarter Review
T15 Fourth quarter financial results
($ millions)
Reported results
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
For the three months ended
October 31
2018(1)
July 31
2018(1)
October 31
2017
$ 4,220
3,228
$ 7,448
590
4,064
523
$ 4,085
3,096
$ 7,181
943
3,770
529
$ 2,271
$ 1,939
$ 3,831
2,981
$ 6,812
536
3,668
538
$ 2,070
$
92
$
(44)
$
55
$ 2,179
65
$ 2,114
$ 1,983
27
$ 1,956
$ 2,015
29
$ 1,986
(1) The amounts for year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
T15A Fourth quarter financial results
($ millions)
Adjusted results
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
For the three months ended
October 31
2018(1)
July 31
2018(1)
October 31
2017
$ 4,220
3,228
$ 7,448
590
3,962
551
$ 4,085
3,096
$ 7,181
539
3,721
662
$ 2,345
$ 2,259
$
101
$
69
$ 2,244
65
$ 2,179
$ 2,190
27
$ 2,163
$ 3,831
2,981
$ 6,812
536
3,649
543
$ 2,084
$
55
$ 2,029
29
$ 2,000
(1) The amounts for year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
Transactions impacting results
Acquisition-related costs:
During the fourth quarter, the Bank completed the acquisition of MD Financial. Acquisition-related costs for MD Financial and previous acquisitions of
$74 million ($102 million pre-tax), were incurred.
In the third quarter, the Bank completed the acquisitions of Jarislowsky Fraser, BBVA Chile, and the retail operations of Citibank Colombia.
Acquisition-related costs of $320 million ($453 million pre-tax) were recorded in the period. These mainly related to the Day 1 provision for credit
losses on acquired performing financial instruments as required under IFRS 9 (refer to Non-GAAP Measures for further details).
Net income
Q4 2018 vs Q4 2017
Net income was $2,271 million, an increase of $201 million or 10%. Adjusting for Acquisition-related costs, net income was higher by $261 million or
13%. Asset growth and an improved net interest margin, as well as higher non-interest income and the impact of acquisitions were partly offset by a
higher provision for credit losses and increased non-interest expenses.
Q4 2018 vs Q3 2018
Net income was $2,271 million, an increase of $332 million or 17%. Adjusting for Acquisition-related costs, net income was higher by $86 million or
4%. The increase was due primarily to the impact of acquisitions.
Net interest income
Q4 2018 vs Q4 2017
Net interest income was $4,220 million, an increase of $389 million or 10%. Acquisitions contributed to 6% of the increase. The remaining increase
was from broad-based lending growth across retail, commercial and corporate segments across our three business lines.
The core banking margin improved three basis points to 2.47%. The change in business mix from the impact of International Banking acquisitions and
higher margins in Canadian Banking was partly offset by lower margin in Global Banking and Markets and a lower contribution from asset/liability
management activities.
2 0 1 8 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
Q4 2018 vs Q3 2018
Net interest income was $4,220 million, an increase of $135 million or 3%. This increase was due primarily to the impact of acquisitions, partially
offset by lower contributions from asset/liability management activities, as well as Global Banking and Markets.
The core banking margin of 2.47% was up one basis point. The positive change in asset mix driven by acquisitions and lower volumes of treasury
assets were partially offset by lower margins in Global Banking and Markets and Canadian Banking.
Non-interest income
Q4 2018 vs Q4 2017
Non-interest income grew $247 million or 8% to $3,228 million. The impact of acquisitions, net of the gain on sale of HollisWealth (“Sale of
Business”) last year, contributed 2% to the growth. The remaining growth was due mainly to higher banking and credit card fees, trading revenues
and income from associated corporations including the alignment of the reporting period with the Bank (“Alignment of reporting period”). Partly
offsetting were lower gains on the sale of real estate and investment securities.
Q4 2018 vs Q3 2018
Non-interest income increased $132 million or 4%. Acquisitions accounted for approximately 3% of the growth. The remaining growth was primarily
due to higher banking and credit card fees, trading revenues and income from associated corporations mostly from the Alignment of reporting period.
These were partly offset by lower securities gains, wealth management fees, and the negative impact of foreign currency translation.
Provision for credit losses
Q4 2018 vs Q4 2017
The provision for credit losses was $590 million, an increase of $54 million or 10%, due to higher retail provision in line with acquisition driven
growth, partly offset by a decrease in commercial provision.
Provision on impaired financial assets (including loans and debt securities) was $637 million, up $101 million due primarily to higher retail provisions in
International Banking. Higher provision relating to Barbados debt restructuring was offset by recoveries in International Banking and Global Banking
and Markets. The provision for credit losses ratio on impaired loans remained unchanged at 42 basis points. Reduction in provision for performing
loans of $47 million was due primarily to reversal of the provision previously recorded for the hurricanes in the Caribbean that is no longer required,
and improvement in credit quality. The provision for credit losses ratio decreased three basis points to 39 basis points.
Q4 2018 vs Q3 2018
The provision for credit losses was $590 million, a decrease of $353 million. Adjusting for Acquisition-related costs, the provision for credit losses
increased $51 million or 9%, due to higher retail provision in line with acquisition driven growth, partly offset by decrease in commercial provision.
Provision on impaired financial assets (including loans and debt securities) was up $637 million, an increase of $78 million or 14%, due primarily to
higher retail provision in International Banking, which included the full quarter impact of acquisitions. Higher provision relating to Barbados debt
restructuring was offset by recoveries in International Banking and Global Banking and Markets. The provision for credit losses ratio on impaired loans
was 42 basis points, an increase of one basis point. Reduction in provision for performing loans of $27 million was due primarily to reversal of the
provision previously recorded for the hurricanes in the Caribbean that is no longer required, and improvement in credit quality. The provision for credit
losses ratio decreased one basis point to 39 basis points.
Non-interest expenses
Q4 2018 vs Q4 2017
Non-interest expenses were $4,064 million, up $396 million or 11%. Adjusting for Acquisition-related costs, non-interest expenses were up
$311 million or 9%, of which 6% related to the impact of acquisitions. The remaining 3% increase was due primarily to increased investments in
technology and regulatory initiatives, other business growth-related expenses, and the negative impact of foreign currency translation. Partly
offsetting were the impact of further savings from cost-reduction initiatives.
The productivity ratio was 54.6% compared to 53.8%. Adjusting for Acquisition-related costs, the productivity ratio was 53.2% compared to 53.6%.
Q4 2018 vs Q3 2018
Non-interest expenses were up $294 million or 8%. Adjusting for Acquisition-related costs, non-interest expenses were up $240 million or 7%, of
which 5% related to the impact of acquisitions. The remaining 2% increase was due largely to higher advertising and business development and other
expenses supporting the business, partly offset by the positive impact of foreign currency translation.
The productivity ratio was 54.6% compared to 52.5%. Adjusting for Acquisition-related costs, the productivity ratio was 53.2% compared to 51.8%.
Income taxes
Q4 2018 vs Q4 2017
The effective tax rate was 18.7%, or 19.0% adjusting for Acquisition-related costs, this quarter, down from 20.6% due primarily to lower taxes in
certain foreign jurisdictions in 2018. The prior year benefitted from higher tax-exempt dividends related to client-driven equity trading activities.
Q4 2018 vs Q3 2018
The effective tax rate decreased to 18.7%, or 19.0% adjusting for Acquisition-related costs, from 21.5%, due primarily to lower taxes in certain
foreign jurisdictions.
36 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
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Trending Analysis
T16 Quarterly financial highlights
($ millions)
Reported results
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income tax expense
Net income
Basic earnings per share ($)
Diluted earnings per share ($)
Core banking margin (%)(2)
Effective tax rate (%)
Adjusted results
Adjusted net income
Adjusted diluted earnings per share
October 31
2018(1)
July 31
2018(1)
April 30
2018(1)
January 31
2018(1)
October 31
2017
July 31
2017
April 30
2017
January 31
2017
For the three months ended
$ 4,220
3,228
$ 7,448
590
4,064
523
$ 4,085
3,096
$ 7,181
943
3,770
529
$ 3,950
3,108
$ 7,058
534
3,726
621
$ 3,936
3,152
$ 7,088
544
3,498
709
$ 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
$ 2,271
$ 1,939
$ 2,177
$ 2,337
$ 2,070
$ 2,103
$ 2,061
$ 2,009
1.72
1.71
2.47
18.7
1.60
1.55
2.46
21.5
1.70
1.70
2.47
22.2
1.88
1.86
2.46
23.3
1.66
1.64
2.44
20.6
1.68
1.66
2.46
20.6
1.63
1.62
2.54
13.9
1.58
1.57
2.40
23.5
$ 2,345
1.77
$
$ 2,259
1.76
$
$ 2,190
1.71
$
$ 2,350
1.87
$
$ 2,084
1.65
$
$ 2,117
1.68
$
$ 2,075
1.63
$
$ 2,027
1.58
$
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2) Refer to page 18 for a discussion of non-GAAP measures.
Net income
The Bank recorded strong net income over the past eight quarters. The current quarter’s earnings were reduced by Acquisition-related costs of $74
million ($102 million pre-tax). The prior quarter’s earnings were reduced by Acquisition-related costs $320 million ($453 million pre-tax).
The first quarter of 2018 included an accounting benefit of $150 million ($203 million pre-tax) driven by remeasurement of an employee benefit
liability from certain plan modifications.
Net interest income
Net interest income increased over the period, driven by steady growth in retail and commercial loans in both Canadian and International Banking.
Net interest margin has remained relatively stable over the period. The margin was 2.47% this quarter, up one basis point from the prior quarter. The
second quarter of 2017 was higher than other periods due primarily to business mix changes and Central Bank rate changes in International Banking,
as well as higher contributions from asset/liability management activities.
Non-interest income
Non-interest income was higher in the current quarter due primarily to the impact of acquisitions, higher banking and credit card fees, trading
revenues and income from associated corporations mostly from the Alignment of reporting period in Thailand. The second quarter of 2018 included
an additional month of income from Chile and the Canadian insurance business from the Alignment of reporting period with the Bank. Net gain on
investment securities declined this quarter compared to last quarter. Gains on sale of real estate continued at a lower level this quarter compared to
2017. The Sale of Business in the fourth quarter of 2017 resulted in a gain that quarter and also contributed to lower wealth management fees.
Provision for credit losses
Provision for credit losses for 2018 is calculated in accordance with IFRS 9, while the provision for credit losses for 2017 was calculated in accordance
with IAS 39. Prior period amounts have not been restated and therefore, the provision for credit losses and related ratios are not directly comparable.
Provision for credit losses has remained stable over the period. Asset quality has remained strong despite increased lending activity.
The provision for credit losses was $590 million this quarter, of which $637 million related to provision on impaired financial assets. In the prior
quarter, Acquisition-related costs of $404 million (refer Non-GAAP Measures) were recognized in the provision for credit losses.
Non-interest expenses
Non-interest expenses increased this quarter due to the current year’s acquisitions, as well as the impact of Acquisition-related costs. Non-interest
expenses have generally trended upwards over the period, mostly to support business growth and the Bank’s investments in acquisitions, strategic
initiatives and in technology, partly offset by structural cost-reduction initiatives. There have also been increases in performance-based compensation.
The first quarter of 2018 included a benefits remeasurement of $203 million, reducing that quarter’s expenses.
Income taxes
The effective tax rate was 18.7% this quarter and averaged 20.5% over the period, with a range of 13.9% to 23.5%. 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 jurisdictions, as well as the variability of tax-exempt dividend income.
2 0 1 8 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
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.
(cid:129) International Banking business segment results are analyzed on a constant dollar basis. Under constant dollar basis, prior period amounts are
recalculated using current period average foreign currency rates eliminating the impact of foreign currency translation. The Bank believes that
reporting in constant dollar is useful for readers in assessing ongoing business performance.
Below are the results of the Bank’s three business operating segments for 2018.
CANADIAN BANKING
Canadian Banking reported net income attributable to equity holders of $4,364 million in 2018, up 7% from last year. Adjusting for Acquisition-
related costs, net income was $4,416 million, up 8%. This reflects the contributions from acquisitions in the current year, partly offset by last year’s
gain on sale of HollisWealth (“Sale of Business”) as well as lower gains on sale of real estate.
Solid growth in assets and deposits, along with improving margin driven primarily from the Bank of Canada interest rate increase, higher non-interest
income and lower provision for credit losses contributed to strong growth in 2018. This was partly offset by higher non-interest expenses. Return on
equity was 22.7%, compared with 22.8% last year. Adjusting for Acquisition-related costs, the return on equity was 23.0%.
INTERNATIONAL BANKING
International Banking reported net income attributable to equity holders of $2,573 million, up $183 million or 8% from last year. Adjusting for
Acquisition-related costs, net income attributable to equity holders increased by $395 million or 16% to $2,819 million. Strong results in Latin
America, including benefits from acquisitions, and Asia, complemented solid earnings in the Caribbean. The impact of the acquisitions and the benefit
of one additional month of earnings, from the Alignment of the reporting period in Chile and Thailand, contributed 3% to the adjusted earnings
growth. The remaining increase was driven by strong loan growth in Latin America, higher non-interest income, and lower taxes. This was partly
offset by higher provision for credit losses and non-interest expenses, a lower net interest margin and the negative impact of foreign currency
translation. Return on equity was 14.4% compared to 14.7% last year. Adjusting for Acquisition-related costs, the return on equity was 15.8%.
GLOBAL BANKING AND MARKETS
Global Banking and Markets reported net income attributable to equity holders of $1,758 million, a decrease of $60 million or 3% from last year.
Lower income from capital markets businesses and higher expenses were partly offset by stronger results in corporate lending, as well as lower
provision for credit losses. Return on equity was 16.0%, in line with the prior year.
38 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES
Management uses a number of key metrics to monitor business line performance:
(cid:129) Net income
(cid:129) Return on equity
(cid:129) Productivity ratio
(cid:129) Provision for credit losses ratio
T17 Financial performance
For the year ended October 31, 2018 ($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
$
7,898
5,452
13,350
794
6,654
1,538
International
Banking
Global Banking
and Markets
$
7,322
4,111
11,433
1,867
6,111
706
$ 1,454
3,074
4,528
(50)
2,233
587
Other(1)
$ (483)
(53)
(536)
–
60
(449)
Total
$ 16,191
12,584
28,775
2,611
15,058
2,382
$
4,364
$
2,749
$ 1,758
$ (147)
$
8,724
–
4,364
22.7%
342
254
$
$
$
176
2,573
14.4%
168
131
$
$
$
–
–
$ 1,758
$ (147)
16.0%
321
265
$
$
–%
$ 115
$ 232
$
$
$
176
8,548
14.5%
946
882
(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, 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.
For the year ended October 31, 2017 ($millions)
Net interest income(2)
Non-interest income(2)
Total revenue(2)
Provision for credit losses
Non-interest expenses
Provision for income taxes(2)
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Return on equity(%)(3)
Total average assets ($ billions)
Total average liabilities ($ billions)
Canadian
Banking
$
7,363
5,488
12,851
913
6,487
1,387
International
Banking
Global Banking
and Markets
$
6,726
3,688
10,414
1,294
5,664
828
$ 1,336
3,288
4,624
42
2,160
604
Other(1)
$ (390)
(344)
(734)
–
319
(786)
Total
$ 15,035
12,120
27,155
2,249
14,630
2,033
$
4,064
$
2,628
$ 1,818
$ (267)
$
8,243
–
4,064
22.8%
323
244
$
$
$
238
2,390
14.7%
148
115
$
$
$
–
–
$ 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, and differences in the actual amount of costs incurred and charged
to the operating segments.
M
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S
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|
B
U
S
I
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S
S
L
I
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E
O
V
E
R
V
I
E
W
(2) Taxable equivalent basis. Refer to Glossary.
(3) Refer to Glossary.
For the year ended October 31, 2016 ($millions)
Net interest income(2)
Non-interest income(2)
Total revenue(2)
Provision for credit losses
Non-interest expenses
Provision for income taxes(2)
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Return on equity(%)(3)
Total average assets ($ billions)
Total average liabilities ($ billions)
Canadian
Banking
$
7,024
5,164
12,188
832
6,324
1,296
$
3,736
–
3,736
22.0%
309
232
$
$
$
International
Banking
Global Banking
and Markets
$ 6,359
3,482
9,841
1,281
5,523
707
$ 2,330
251
$ 2,079
12.8%
143
109
$
$
$ 1,293
3,139
4,432
249
2,040
572
Other(1)
$ (384)
273
(111)
50
653
(545)
Total
$ 14,292
12,058
26,350
2,412
14,540
2,030
$ 1,571
$ (269)
$
7,368
–
–
$ 1,571
$ (269)
12.6%
351
270
$
$
–%
$ 111
$ 247
$
$
$
251
7,117
13.8%
914
858
(1) The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched
maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes, 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.
2 0 1 8 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
Canadian Banking
2018 Achievements
(cid:129) Customer Focus - Deliver an excellent customer experience across our businesses and channels.
(cid:129) Achieved the highest customer satisfaction among mid-sized banks at Tangerine, for the seventh straight year in the 2018 J.D. Power
(cid:129)
Canadian Retail Banking Customer Satisfaction Study.
Expanded our strategic partnership with Maple Leaf Sports and Entertainment (MLSE), including the renaming of one of North
America’s top-ranked sports and entertainment venues to the Scotiabank Arena; further strengthening our relationship as the official
sponsor of the Toronto Maple Leafs, leveraging Tangerine to become the exclusive bank of the Toronto Raptors, and forming a key
philanthropic partnership with the MLSE Foundation.
(cid:129) Continued to see customer satisfaction measures, as determined by the Net Promoter Score (NPS), improve across all major channels –
(cid:129)
(cid:129)
branches, contact centre, and digital – driven by investments and enhancements across all of our key customer journeys.
Solid customer growth and progressed toward achieving our goal of adding one million new primary customers over the medium term.
Introduced new branch advisor role specializing in investment advice and expanded mobile sales force, which has built strong
momentum and focus throughout the year.
(cid:129) Structural Cost Transformation - Reduce structural costs to build the capacity to invest in our businesses and technology.
(cid:129)
Exceeded the 2018 structural cost reduction target and progressed well towards our productivity ratio goal of <49% over the medium
term.
(cid:129) Digital Transformation - Leverage digital as the foundation of all our activities to improve our operations, enhance the client experience, and
drive digital adoption.
(cid:129) Mobile has surpassed Online Banking, becoming our leading channel for financial transactions.
(cid:129)
iTrade ranked highest amongst Big five banks in the Globe and Mail annual ranking of online brokerage, as a result of our enhanced
online brokerage client experience across onboarding and servicing.
(cid:129) Business Mix Alignment - Optimize our business mix by growing higher margin assets, building core deposits, and earning higher fee
income.
(cid:129) Acquired Jarislowsky Fraser and MD Financial – increasing our institutional and private client focus, and positioning us as the largest
(cid:129)
private investment counselor in Canada.
Earned five Thomas Reuters Lipper Fund Awards for Dynamic Funds and ScotiaFunds offerings, recognizing strong and consistent risk-
adjusted performance relative to peers.
Launched four strategic ETF offerings to help better serve our diverse client base.
(cid:129)
(cid:129) Momentum Visa Infinite ranked #1 cashback credit card, Scene Student Visa ranked #1 student credit card, and Gold American Express
(cid:129)
ranked #2 for both the travel and rewards credit card categories by MoneySense magazine.
Launched Scotia Passport Visa Infinite, a premium travel credit card that offers no currency conversion fees – a first amongst major
financial institutions.
(cid:129) Leadership and Employee Engagement - Grow and diversify talent and engage employees through a performance-oriented culture.
(cid:129) Ranked one of the world’s top 25 workplaces by Great Place to Work, a Fortune partner.
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 955 branches and
more than 3,644 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, mortgages 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.
2019 Priorities
(cid:129) Customer focus: Deliver a leading customer experience and deepen relationships with customers across our businesses and channels.
(cid:129) Productivity: Reduce structural costs while driving tangible revenue initiatives in order to build the capacity to invest in our businesses and
technology.
(cid:129) Digital transformation: Leverage digital as the foundation of all our activities to improve our operations, enhance the client experience, and drive
digital adoption.
(cid:129) Business mix alignment: Optimize our business mix by growing higher margin assets, building core deposits, and expanding fee based income.
(cid:129) Leadership and employee engagement: Grow and diversify talent and engage employees through a performance-oriented culture.
40 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
T18 Canadian Banking financial performance
($ millions)
Reported results
Net interest income(2)
Non-interest income(2)(3)
Total revenue(2)
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
Key ratios and other financial data
Return on equity(4)
Productivity(2)
Net interest margin(5)
Provision for credit losses - performing (Stages 1 and 2)
Provision for credit losses - impaired (Stage 3)
Provision for credit losses as a percentage of average net loans and acceptances
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances
Net write-offs as a percentage of average net loans and acceptances
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets
Total assets
Deposits
Total liabilities
Other ($ billions)
Assets under administration
Assets under management
$
$
$
$
$
2018(1)
2017
2016
7,898
5,452
13,350
794
6,654
1,538
4,364
–
4,364
$
$
$
7,363
5,488
12,851
913
6,487
1,387
4,064
–
4,064
$
$
$
7,024
5,164
12,188
832
6,324
1,296
3,736
–
3,736
22.7%
49.8%
2.44%
8
786
0.24%
0.24%
0.24%
22.8%
50.5%
2.40%
n/a
n/a
0.29%
0.29%
0.32%
22.0%
51.9%
2.38%
n/a
n/a
0.28%
0.28%
0.24%
$ 334,103
341,825
240,855
253,591
$ 315,916
322,712
233,260
243,748
$ 302,648
309,232
224,006
232,498
$
$
355
225
$
$
315
155
$
$
318
145
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(1) The amounts for the year ended October 31, 2018, have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2) Taxable equivalent basis (TEB).
(3) Includes net income from investments in associated corporations of $93 (2017 – $66; 2016 – $78).
(4) Refer to Glossary.
(5) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
T18A Adjusted Canadian Banking financial performance(1)
($ millions)
Adjusted results
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 in subsidiaries (NCI)
Net income attributable to equity holders
(1) Refer to Non-GAAP Measures for the reconciliation of Reported and Adjusted results.
2018
2017
2016
$
7,898
5,452
$
7,363
5,488
$
7,024
5,164
13,350
794
6,583
5,973
1,557
4,416
–
4,416
$
$
12,851
913
6,452
5,486
1,396
4,090
–
4,090
$
$
12,188
832
6,270
5,086
1,311
3,775
–
3,775
$
$
2 0 1 8 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
Financial Performance
Net income
Canadian Banking reported net income attributable to equity holders of $4,364 million in 2018,
an increase of $300 million or 7%. Adjusting for Acquisition-related costs, net income was
$4,416 million, an increase of $326 million or 8%. Lower gains on sale of real estate and impact
from last year’s gains on Sale of Business were partially offset by the current year acquisitions and
the Alignment of reporting period, which combined reduced net income growth by 4%.
Strong growth in assets and continued momentum in deposits, along with margin expansion,
focus on cost management and lower provisions for credit losses contributed to solid growth in
2018. Return on equity was 22.7%, in line with prior year.
Average assets and liabilities
Average assets grew $19 billion or 6% to $342 billion. The growth included $10 billion or 5% in
residential mortgages, $6 billion or 14% in business loans and acceptances, and $3 billion or 4%
in personal loans.
Average liabilities increased $10 billion or 4%, including growth of $2 billion or 2% in retail
chequing and savings deposits. As well, there was growth of $4 billion or 5% in non-personal
deposits.
Assets under management (AUM) and assets under administration (AUA)
AUM of $225 billion increased $70 billion or 45% primarily due to the impact of acquisitions.
AUA of $355 billion increased $40 billion or 12% primarily due to the impact of acquisitions.
Revenues
Net interest income increased $535 million or 7% to $7,898 million. The increase was driven by a
four basis point increase in the margin to 2.44%, strong growth in assets and continued
momentum in deposits. The increase in margin was driven by retail deposits and the impact of
interest rate increases by the Bank of Canada.
Non-interest income decreased $36 million or 1%. The impact of last year’s Sale of Business
offset by the contributions from current year acquisitions reduced non-interest income by 4%.
Lower gains on sale of real estate were only partly offset by the benefit of the Alignment of
reporting period, which reduced non-interest income by a further 3%. 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 $7,748 million, up $400 million or 5%. Net
interest income grew $340 million or 6%, primarily driven by an improvement in the margin and
solid growth in residential mortgages and continued momentum in deposit growth. Non-interest
income increased $60 million or 3%, primarily due to growth in credit card revenues, insurance
revenues and the benefit of the Alignment of reporting period, which was partly offset by lower
gains on sale of real estate.
Commercial Banking
Total commercial banking revenues increased $183 million or 8% to $2,358 million. Net interest
income rose $183 million or 11% due mainly to growth in loans, business operating accounts
and GICs, and an improvement in the margin. Non-interest income remained flat due to higher
card and acceptance fees, offset by lower securities gains.
Wealth Management
Total wealth management revenues were $3,244 million, a decrease of $84 million or 3%
primarily due to the impact of the Sale of Business. Net interest income rose $13 million or 3%
mainly due to growth in deposits and loans and improvements in margin. Non-interest income
was down $97 million or 3%, due to the gain on Sale of Business and lower revenue as a result.
This is offset by the impact of acquisitions of Jarislowsky Fraser and MD Financial, higher fee
based brokerage and higher mutual funds revenues.
Non-interest expenses
Non-interest expenses were $6,654 million, up $167 million or 3%. Adjusting for Acquisition-
related costs, non-interest expenses were up 2%. The impact of the last year’s Sale of Business
offset by the current year acquisitions, increased non-interest expenses by a further 3%. This
increase was due primarily to higher investments in technology and regulatory initiatives, partly
offset by benefits realized from cost-reduction initiatives. Operating leverage was a positive 1.3%
or 1.9% adjusting for Acquisition-related costs.
C6
Total revenue
24%
58%
18%
Retail & Small Business Banking
Commercial Banking
Wealth Management
Total revenue by sub-segment
$ millions
C7
12000
10000
8000
6000
4000
2000
16
17
18
Wealth Management
Commercial Banking
Retail & Small Business Banking
Average loans and acceptances
$ billions
16
17
18
Commercial loans/acceptances
Retail loans (except mortgages)
Residential mortgages
Canadian wealth management asset
growth
$ billions, as at October 31
225
200
175
150
125
100
75
50
25
16
17
18
Assets under administration (left scale)
Assets under management (right scale)
C8
350
300
250
200
150
100
50
C9
350
300
250
200
150
100
50
42 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Provision for credit losses
Provision for credit losses for 2018 is calculated in accordance with IFRS 9, while the provision for credit losses for 2017 was calculated in accordance
with IAS 39.
Provision for credit losses was $794 million, compared to $913 million. The provision for credit losses ratio improved to 24 basis points, a decrease of
five basis points.
Provision for income taxes
The effective tax rate increased to 26.1%, compared to 25.4% primarily from lower gains on sale of real estate.
Outlook
Canadian Banking’s growth in 2019 is expected to 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 banking products. Deposits are also expected to grow across retail chequing and savings, and
business banking. Margins are expected to strengthen during 2019. Non-interest revenues are expected to grow underpinned by our wealth
acquisitions. Integrating MD Financial and Jarislowsky Fraser and driving operational improvements are key priorities for 2019.
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2 0 1 8 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
International Banking
2018 Achievements
(cid:129) Customer Focus
(cid:129) Continued solid primary customer growth in retail and commercial. Retail customer growth maintains its steady trend towards our
target of adding one million new primary customers.
(cid:129) Customer Pulse, our proprietary customer experience system, implemented across all channels in Pacific Alliance countries and more
recently in Jamaica, Trinidad & Tobago and Dominican Republic. Improved customer satisfaction scores across all channels in all
countries.
(cid:129) Recognized for the second year in a row as the Latin American Bank of the Year by Retail Banker International.
(cid:129) Leadership
(cid:129)
Significant progress in women in leadership, achieving targets for women in Director pool and strong results at the Vice President level.
(cid:129) Continued to strengthen our leadership team. Notable hires include new Country Head in Colombia and the new Global Head of
Consumer Analytics.
(cid:129) Structural Cost Transformation
(cid:129)
Exceeded the 2018 structural cost reduction target and progressed well towards our adjusted productivity ratio goal of <51% by 2020
to 2022.
(cid:129) Delivered positive operating leverage.
(cid:129) Digital Transformation
(cid:129)
Fully operationalized our digital factories in Mexico, Peru, Chile and Colombia, rolling out innovative digital and mobile products,
services and applications that meet the needs of our customers.
(cid:129) Achieved good progress on digital targets, with solid uplift in digital sales, digital adoption and transaction migration.
(cid:129) Continued attracting top digital talent with innovation expertise to the Bank.
(cid:129) Business Mix Alignment
(cid:129) Acquired attractive assets with high strategic value in Chile and Colombia to grow our franchise and strengthen our long-term
competitive position.
(cid:129) Strong Risk Culture
(cid:129) Continued to strengthen risk management and collections capabilities across our footprint.
Business Profile
International Banking has a strong and diverse franchise with more than 15 million Retail, Corporate and Commercial customers. We have almost
58,000 employees and our customers are served by a network of more than 1,800 branches as well as business support and customer contact centres.
International Banking continues to be an attractive growth opportunity for the Bank with a geographical footprint focused on the Pacific Alliance
countries of Mexico, Colombia, Peru and Chile. The Pacific Alliance countries have a combined GDP that is more than double the size of Canada’s, a
young population, rising middle class, growing economies and a sound banking environment.
Our franchise is supported by a solid, mature and profitable business in the Caribbean and Central America that we plan to continue to make
successful by optimizing operations, prudently reducing costs while delivering increased customer profitability.
Strategy
International Banking continues to execute its strategy that is aligned with the all-Bank strategic priorities of: customer focus, leadership, structural
cost transformation, digital transformation, business mix alignment and strong risk culture. Underpinning this strategy is focus on growth in the Pacific
Alliance and optimizing operations in Central America and the Caribbean.
2019 Priorities
To build on our success and capitalize on opportunities in our markets, we are focused on executing the following strategic initiatives:
(cid:129) Customer focus: Leverage our investments in our new customer experience system to keep strengthening our service oriented culture.
(cid:129) Leadership: Continue attracting and developing exceptional and diverse leadership talent to keep pace with the changing needs of an increasingly
competitive global market.
(cid:129) Structural cost transformation: Prudently continue to deliver cost reductions.
(cid:129) Digital transformation: Continue accelerating our digital transformation to gain scale and deliver business impact.
(cid:129) Business mix alignment: Continue achieving profitable growth by increasing core deposits, growing our insurance revenues and integrating
strategic acquisitions into our operations.
(cid:129) Strong risk culture: Improving our risk management practices by strengthening our leadership team and continued investment in technology.
44 | 2 0 1 8 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)
Reported results
Net interest income(2)
Non-interest income(2)(3)(4)(5)
Total revenue(2)
Provision for credit losses(6)
Non-interest expenses
Income tax expense(2)
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Key ratios and other financial data
Return on equity(7)
Productivity(2)
Net interest margin(8)
Provision for credit losses – performing (Stages 1 and 2)
Provision for credit losses – impaired (Stage 3)
Provision for credit losses as a percentage of average net loans and acceptances(9)
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances
Net write-offs as a percentage of average net loans and acceptances
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets(10)
Total assets
Deposits
Total liabilities
Other ($ billions)
Assets under administration
Assets under management
2018(1)
2017
2016
$
$
$
$
$
7,322
4,111
11,433
1,867
6,111
706
2,749
176
2,573
14.4%
53.5%
4.65%
270
1,597
1.51%
1.28%
1.25%
$
$
$
6,726
3,688
10,414
1,294
5,664
828
2,628
238
2,390
$
$
$
6,359
3,482
9,841
1,281
5,523
707
2,330
251
2,079
14.7%
54.4%
4.79%
n/a
n/a
1.21%
1.21%
1.31%
12.8%
56.1%
4.71%
n/a
n/a
1.26%
1.26%
1.06%
$ 157,513
167,694
103,629
130,789
$ 140,471
147,537
95,232
114,694
$ 135,167
142,582
87,508
109,302
$
$
89
58
$
$
88
53
$
$
86
47
Includes net income from investments in associated corporations of $643 (2017 – $482; 2016 – $473).
Includes BBVA Chile third quarter 2018 before tax earnings of $21. BBVA Chile fourth quarter earnings have been reflected in all P&L lines.
Includes one additional month of earnings relating to Thanachart Bank of $30 (after tax and NCI $22), and Chile of $36 (after tax and NCI $26) for the year ended October 31, 2018.
Includes Day 1 provision for credit losses on acquired performing loans of $404 for the year ended October 31, 2018 (October 31, 2017 – nil).
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2) Taxable equivalent basis.
(3)
(4)
(5)
(6)
(7) Refer to Glossary.
(8) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
(9) Provision for credit losses as a percentage of average net loans and acceptances adjusted for Day 1 PCL was 1.18% in 2018.
(10) Includes bankers’ acceptances.
T19A Adjusted International Banking financial performance(1)
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($ millions)
Adjusted results
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 (NCI)
Net income attributable to equity holders
(1) Refer to Non-GAAP measures for reconciliation of Reported and Adjusted results.
2018
2017
2016
$
7,322
4,111
$
6,726
3,688
$ 6,359
3,482
11,433
1,463
5,995
3,975
858
3,117
298
2,819
$
$
10,414
1,294
5,617
3,503
841
2,662
238
2,424
$
$
9,841
1,281
5,473
3,087
720
$ 2,367
251
$ 2,116
2 0 1 8 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
Financial Performance
Net income
Net income attributable to equity holders was $2,573 million, an increase of $183 million or 8%.
Adjusting for Acquisition-related costs, net income was $2,819 million up $395 million or 16%.
Strong results in Latin America, including benefits from acquisitions, and Asia, complemented
solid earnings in Caribbean. The impact of the acquisitions and the benefit of one additional
month of earnings, from the Alignment of the reporting period in Chile and Thailand,
contributed 3% to the adjusted earnings growth. The remaining increase was driven by strong
loan growth in Latin America, higher non-interest income, and lower taxes. This was partly offset
by higher provision for credit losses and non-interest expenses, a lower net interest margin, and
the negative impact of foreign currency translation.
Financial Performance on Constant Dollar Basis
The discussion below on the results of operations is on a constant dollar basis that excludes the
impact of foreign currency translation, and is a non-GAAP financial measure (refer to Non-GAAP
Measures). The Bank believes that reporting in constant dollars is useful for readers in assessing
ongoing business performance. Ratios are on a reported basis.
T20 International Banking financial performance on constant dollar basis
($ millions)
Net interest income(2)
Non-interest income(2)(3)
Total revenue(2)
Provision for credit losses
Non-interest expenses
Income tax expense(2)
$
2018(1)
7,322
4,111
11,433
1,867
6,111
706
$
2017
6,626
3,653
10,279
1,276
5,594
815
$
2016
6,191
3,440
9,631
1,257
5,388
790
Net income on constant dollar basis
$
2,749
$
2,594
$
2,196
C10 Total revenue
5.0%
26.2%
68.8%
Caribbean and Central America
Latin America
Asia
C11 Total revenue by region
$ millions
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
16
17
18
Asia
Caribbean and Central America
Latin America
Net income attributable to non-controlling interests in
subsidiaries on a constant dollar basis
Net income attributable to equity holders of the Bank on a
176
240
260
$ billions
C12 Average loans and acceptances
140
120
100
80
60
40
20
16
17
18
Residential mortgages
Retail loans (except mortgages)
Business loans/acceptances
C13 Average earning assets(1) by region
$ billions
160
140
120
100
80
60
40
20
16
17
18
Asia
Caribbean and Central America
Latin America
(1) Average earning assets excluding bankers acceptances
constant dollar basis
$
2,573
$
2,354
$
1,936
Selected Consolidated Statement of Financial Position data
(average balances)
Total assets
Total liabilities
167,694
130,789
145,400
113,267
138,548
106,306
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer
to Notes 3 and 4 in the consolidated financial statements).
(2) Taxable equivalent basis.
(3)
Includes net income from investments in associated corporations of $643 (2017 – $511; 2016 – $498).
46 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Net income
Net income attributable to equity holders was $2,573 million, an increase of $219 million or 9%. Adjusting for Acquisition-related costs, net income
was $2,819 million, up $432 million or 18%. Strong results in Latin America, including the impact of acquisitions, and Asia, complemented solid
earnings in Caribbean. The impact of the acquisitions and the benefit of one additional month of earnings, from the Alignment of the reporting
period in Chile and Thailand contributed 3% to the adjusted earnings growth. The remaining increase was driven by strong loan growth in Latin
America, higher non-interest income, and lower taxes. This was partly offset by higher provision for credit losses and non-interest expenses, and a
lower net interest margin.
Average assets and liabilities
Average assets of $168 billion increased $22 billion or 15% driven by strong retail and commercial loan growth, primarily in Latin America, partly due
to acquisitions. Commercial loan growth was 16% and retail loan growth was 15%. Average liabilities increased $18 billion or 15% to $131 billion
due to strong deposit growth in Pacific Alliance, partly due to acquisitions. Commercial and retail deposits increased 11% and 9% respectively.
Revenues
Total revenues of $11,433 million increased $1,154 million or 11%. Net interest income was $7,322 million, up 10% driven by strong retail and
commercial loan growth, including a 3% impact of acquisitions, partly offset by a lower net interest margin. The net interest margin decreased
14 basis points to 4.65% due primarily to the impact of acquisitions and deposit rates. Non-interest income increased $458 million or 13% to
$4,111 million. Five percent of the increase is related to the impact of acquisitions and the benefit of Alignment of reporting period. The remaining
increase was due primarily to higher banking, wealth management and credit card fees, an increased contribution from associated corporations, and
higher trading revenues.
Latin America
Total revenues of $7,861 million increased 14% from last year. Net interest income increased $670 million or 14%, driven by strong asset growth,
including a 4% impact of acquisitions, partly offset by a lower net interest margin. The net interest margin decreased 19 basis points to 4.66% due
mainly to the impact of acquisitions. Non-interest income increased $287 million or 13%. The impact of acquisitions and the benefit of Alignment of
reporting period increased non-interest income by 6%. The remaining 7% increase was due primarily to higher banking, wealth management, credit
card fees and trading revenues.
Caribbean and Central America
Total revenues were $2,996 million, up 2% over last year. Net interest income was up $26 million or 1%. Non-interest income was up $44 million or
5% as a result of good growth in banking, wealth management and insurance revenues.
Asia
Total revenues were $576 million, up 28% versus last year, driven by higher contributions from Thanachart Bank, partly due to the benefit of
Alignment of reporting period, and Bank of Xi’an.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-interest expenses
Non-interest expenses increased $517 million or 9% to $6,111 million. Adjusting for Acquisition-related costs, non-interest expenses were up 8%.
Three percent of the increase related to acquisitions. The remaining increase was due primarily to business volume growth, inflation, higher
technology costs, partly offset by benefits from cost-reduction initiatives. Operating leverage was a positive 1.9%, or 3.1% adjusting for Acquisition-
related costs.
Provision for credit losses
The provision for credit losses was $1,867 million compared to $1,276 million. Adjusting for the Day 1 provision on acquired performing loans of
$404 million, the provision for credit losses increased $187 million due primarily to higher retail provision driven by higher volumes, including
acquisitions, and the benefit of the credit mark last year, offset by lower commercial provision. The adjusted provision for credit losses ratio was
118 basis points, a decrease of three basis points.
Provision for income taxes
The effective tax rate was 20.4% compared to 24.0% due mainly to higher tax benefits in Mexico and lower taxes in certain foreign jurisdictions.
Outlook
In 2019, International Banking will continue to leverage its diversified footprint – with particular emphasis on the Pacific Alliance – and focus on
successfully integrating recent acquisitions in Chile, Peru, Colombia and Dominican Republic.
Growth prospects are improving in many of the Pacific Alliance countries, as economic activity generally is expected to improve relative to last year.
This is most true in Peru, where the rise in commodity prices over the past year and a new government are leading to large increases in growth rate
relative to 2017. In Colombia, an increase in oil prices over the past year is providing a strong impulse to business investment, which is expected to be
further strengthened as confidence in the new government takes hold. Strengthening business activity will add to already solid household spending. In
Chile, GDP growth is expected to moderate somewhat from the strong levels witnessed in 2018 but should still exceed 3%. In Mexico, the economy
remains moderately strong, as activity continues to benefit from robust growth in the US and the rest of the world. The political transition is key to
Mexican prospects.
Margins and credit quality in International Banking are expected to remain stable with the level in the fourth quarter 2018. Expense management and
delivery of positive operating leverage remain key business priorities.
48 | 2 0 1 8 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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Global Banking and Markets
2018 Achievements
In 2018, Scotiabank GBM continued to build its franchise as a leading wholesale bank in Canada, the United States and the Pacific Alliance, with a
focused presence in Europe and Asia. In particular, Scotiabank GBM made significant progress on its key priorities:
(cid:129) Enhance Customer Focus
(cid:129) Strengthened collaborative efforts across the platform to bring the entire Bank’s capabilities to serve clients’ holistic needs.
(cid:129) Become Leaders in our Markets
(cid:129) Deepened the Bank’s presence in the United States. This key global financial market is an important bridge for trade and investment
flows between Canada and the Pacific Alliance.
(cid:129) Built out capabilities to provide a more comprehensive and competitive offering across the Pacific Alliance, connected to international
markets.
(cid:129) Focus on Leadership and Talent
(cid:129) Invested in people and strengthened our leadership team with key hires in Investment Banking and Global Capital Markets.
(cid:129) Proudly recognized with the 2018 Excellence in Innovation Award by Women in Capital Markets. This award honours companies who
have approached gender diversity with an innovative lens and taken bold steps to improve diversity and inclusion.
(cid:129) Consistently fostered a workplace culture where people perform at their best, develop to their potential and act in line with the Bank’s
values of respect, integrity, passion and accountability.
(cid:129) Optimize Effectiveness
(cid:129) Deployed industry-leading technologies and agile processes to modernize legacy platforms and create digital solutions that improve
automation, drive operational efficiency and provide an excellent customer experience.
(cid:129) Continued to invest in Anti-Money Laundering and Anti-Terrorist Financing capabilities for the protection of our clients and our business.
(cid:129) Invested in analytics and artificial intelligence to speed up our processes, increase our accuracy and add new intelligence to deliver results
for our clients quickly and more efficiently.
(cid:129) Became one of 72 global banks to offer clients the ability to track the status of wire transfer payments in real time using the SWIFT
Global Payments Innovation (GPI) initiative.
Deal Highlights
(cid:129) Acted as Financial Advisor to a consortium of investors led by BC Partners and including Ontario Teachers’ Pension Plan on the C$5.125 billion
recapitalization of GFL Environmental, the largest private LBO for a Canadian company.
(cid:129) Acted as Mandated Lead Arranger and Bookrunner of AUD $4 billion loan facilities to support the AUD $9.3 billion (US $6.7 billion)
acquisition of a 51% equity interest in WestConnex from the New South Wales Government by Sydney Transport Partners (STP) consortium,
formed by clients Transurban, CPPIB, Australian Super and ADIA.
(cid:129) Financial advisor to, and Joint Bookrunner for, Royal Dutch Shell on its US $3.3 billion sale of shares in Canadian Natural Resources.
(cid:129) Administrative Agent and Joint Bookrunner on a US $2.25 billion term loan facility for AT&T.
(cid:129) Joint Bookrunner on a US $2 billion debt issuance by Petroleos Mexicanos of January 2029 Notes.
(cid:129) Joint Bookrunner for a 2-Tranche US $1.6 billion-equivalent CLP Euroclearable bond transaction by the Republic of Chile.
(cid:129) Acted as exclusive M&A Financial Advisor and provided acquisition financing commitment to Actis on its US $1.3 billion acquisition of
Intergen Mexico. Acted as Joint Global Coordinator and Bookrunner for new entity, Cometa Energia, S.A. de C.V., on US $860 million senior
secured notes.
(cid:129) Acted as Financial Advisor to Brookfield Infrastructure on the sale of its 27.8% interest in Transelec to China Southern Power Grid for US
$1.3 billion.
(cid:129) Bookrunner for C$250 million Thames Water’s inaugural Maple issuance (Europe).
(cid:129) Joint Lead Manager on the C$1 billion World Bank Sustainable Development Bond to raise awareness for the significant and long-lasting
benefits of investing in the health and nutrition of women, adolescents and children.
(cid:129) Lead left Bookrunner on a Brookfield Renewable Partner’s inaugural C$300 million Green Bond due 2029.
(cid:129) Provided an enhanced share disposition strategy and acted as the sole equity derivative provider for Metro’s C$232 million disposition of third
party shares.
Business Profile
Global Banking and Markets (GBM) conducts Scotiabank’s wholesale banking business with corporate, government and institutional investor clients.
GBM is a full-service wholesale bank in priority markets of Canada, the United States and Latin America. GBM also offers a range of products and
services in select markets in Europe and Asia-Pacific.
GBM provides clients with: corporate lending; transaction banking (including trade finance and cash management); investment banking (including
corporate finance and mergers & acquisitions); fixed income and equity underwriting, sales, trading and research; prime services (prime brokerage and
securities lending); foreign exchange sales and trading; commodities derivatives sales and trading; and collateral management.
Strategy
Scotiabank Global Banking and Markets (GBM) will build its franchise as a leading wholesale bank throughout its global footprint by providing
corporate clients with lending services, transaction banking, investment banking advice and access to capital markets.
2019 Priorities
(cid:129) Strategic Approach to Lending: Scotiabank GBM is focused on up-tiering corporate relationships and increasing our lending penetration where
we have greater opportunities to win ancillary business.
(cid:129) Strengthening Investment Banking: Scotiabank GBM will continue its multi-year buildout to expand regional expertise for investment banking
and equity capital markets to focus on local and cross-border M&A and advisory deals.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 49
MANAGEMENT’S DISCUSSION AND ANALYSIS
(cid:129) Deeper penetration of Pacific Alliance: Scotiabank GBM will meaningfully invest in the Pacific Alliance countries to become a true market leader
in local and cross border banking and capital markets capabilities.
T21 Global Banking and Markets financial performance
($ millions)
Net interest income(2)
Non-interest income(2)
Total revenue(2)
Provision for credit losses
Non-interest expenses
Income tax expense(2)
Net income
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
Key ratios and other financial data
Return on equity(3)
Productivity(2)
Net interest margin(4)(5)
Provision for credit losses – performing (Stages 1 and 2)
Provision for credit losses – impaired (Stage 3)
Provision for credit losses as a percentage of average net loans and acceptances
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances
Net write-offs as a percentage of average net loans and acceptances
Selected Consolidated Statement of Financial Position data (average balances)
Trading assets
Loans and acceptances
Earning assets
Total assets
Deposits
Total liabilities
$
$
$
$
$
$
2018(1)
1,454
3,074
4,528
(50)
2,233
587
1,758
–
1,758
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
$
$
$
16.0%
49.3%
1.83%
(22)
(28)
(0.06)%
(0.03)%
0.03%
16.0%
46.7%
1.75%
n/a
n/a
0.05%
0.05%
0.11%
12.6%
46.0%
1.67%
n/a
n/a
0.30%
0.30%
0.21%
98,130
81,838
282,997
320,850
86,260
264,983
$ 103,861
79,937
291,870
335,599
77,158
267,377
$ 103,316
81,662
298,664
350,627
77,261
269,755
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2) Taxable equivalent basis.
(3) Refer to Glossary.
(4) Business Banking only.
(5) Net interest income (TEB) as % of average earning assets excluding bankers’ acceptances.
50 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Financial Performance
Net income
Global Banking and Markets reported net income attributable to equity holders of
$1,758 million, a decrease of $60 million or 3%. Lower revenue in fixed income, equities, and
commodities businesses, as well as higher non-interest expenses, were partly offset by
significantly lower provision for credit losses and higher lending and deposit revenues.
Average assets and liabilities
Average assets decreased by $15 billion or 5% to $321 billion this year. Adjusting for the impact
of foreign currency translation, assets decreased by $14 billion or 4%, mainly due to decreases in
trading securities, deposits with banks and securities purchased under resale agreements.
Average liabilities decreased by $2 billion or 1% to $265 billion this year due to decline in
securities sold under repurchase agreements and derivative-related liabilities, partly offset by
higher deposits.
Net interest income
Net interest income increased by 9% to $1,454 million, mainly driven by higher deposit volumes
and higher lending volumes in the U.S. and Canada. The net interest margin was 1.83%, an
increase of eight basis points.
Non-interest income
Non-interest income of $3,074 million decreased by $214 million or 7% mainly due to lower
trading revenues in fixed income and commodities, as well as lower underwriting fees. This was
partly offset by stronger equity trading revenues and higher advisory fees.
Non-interest expense
Non-interest expenses increased by $73 million or 3% to $2,233 million. This was due primarily
to higher regulatory and technology investments offset by lower performance-related
compensation. Operating leverage was negative 5.5%.
Provision for credit losses
Provision for credit losses for 2018 is calculated in accordance with IFRS 9, while the provision for
credit losses for 2017 was calculated in accordance with IAS 39.
The provision for credit losses decreased $92 million mainly due to impaired loan provision
reversals in the U.S. and Europe and lower provisions required on performing loans primarily due
to improvements in credit quality. The provision for credit losses ratio was negative six basis
points, a decrease of 11 basis points.
Provision for income taxes
The effective tax rate was 25.0%, in line with the prior year.
Outlook
By executing its client-focused strategy, leveraging the Bank’s unique footprint, and having
strong alignment across its global operations, Global Banking and Markets is expected to grow
in line with the Bank’s overall growth profile over the medium to longer term. Global Banking
and Markets expects to deliver continued strong growth in deposits, improved corporate lending
and investment banking results to absorb required regulatory and technology investments.
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C14 Total revenue
56%
44%
Business Banking
Capital Markets
C15 Business banking revenue
$ millions
2500
2000
1500
1000
500
16
17
18
Investment Banking
Metals
Lending
C16 Capital markets revenue
by business line
$ millions
2500
2000
1500
1000
500
16
17
18
Global Equities
Fixed Income & Commodities
C17 Composition of average
earning assets
$ billions
400
350
300
250
200
150
100
50
16
17
18
Other
Securities purchased under resale agreement
Trading assets
Corporate loans and acceptances
C18 Trading day losses
14
12
10
8
6
4
2
17
18
2 0 1 8 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
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
T22 Other financial performance
($ millions)
Net interest income(2)
Non-interest income(2)(3)
Total revenue(2)
Provision for (recovery of) credit losses
Non-interest expenses
Income tax expense(2)
Net income (loss)
Net income (loss) attributable to equity holders
2018(1)
2017
2016
$ (483)
(53)
$ (390)
(344)
$ (384)
273
(536)
–
60
(449)
(734)
–
319
(786)
(111)
50
653
(545)
$ (147)
$ (267)
$ (269)
$ (147)
$ (267)
$ (269)
(1) The amounts for year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2)
(3)
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 $(177) in 2018; (2017 – $(141); 2016 – $(137)).
Net income
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 $112 million in 2018,
compared to $562 million in 2017.
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 $147 million in 2018 compared to $267 million in 2017. This was primarily due to
the benefits remeasurement of $150 million ($203 million pre-tax).
Revenues
Revenues increased by $198 million mainly due to lower taxable equivalent basis offsets (eliminated in tax expenses), partly offset by lower net gain on
investment securities.
Non-interest expenses
Non-interest expenses were $60 million, compared to $319 million in 2017. Lower expenses were mainly due to the benefits remeasurement in the
current year of $203 million.
52 | 2 0 1 8 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: 2017 vs. 2016
Canadian Banking
Canadian Banking’s net income attributable to equity holders was $4,064 million in 2017, an increase of $328 million or 9%. The 2017 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. Strong
performance from retail and small business banking, commercial banking and wealth management, as well as the impact of the sale of real
estate contributed to the growth. Return on equity was 22.8% up from 22.0% in 2016.
International Banking
Net income attributable to equity holders was $2,390 million, an increase of $311 million or 15%. 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%, versus 12.8% in
2016.
Global Banking and Markets
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 2016. 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% versus 12.6% in 2016.
Other
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 $9 million in 2016.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL CONDITION
T23 Condensed statement of financial position
As at October 31 ($ billions)
Assets
Cash, deposits with financial institutions and precious metals
Trading assets
Securities purchased under resale agreements and securities
borrowed
Investment securities
Loans
Other
Total assets
Liabilities
Deposits
Obligations related to securities sold under repurchase
agreements and securities lent
Other liabilities
Subordinated debentures
Total liabilities
Equity
Common equity
Preferred shares and other equity instruments
Non-controlling interests in subsidiaries
Total equity
Total liabilities and shareholders’ equity
Statement of Financial Position
2018
2017
2016
$ 65.5
100.3
$ 65.4
98.5
$ 54.8
108.6
104.0
78.4
551.8
98.5
95.3
69.3
504.4
82.4
92.1
72.9
480.2
87.7
$ 998.5
$915.3
$896.3
C19 Loan portfolio
loans & acceptances, $ billions,
as at October 31
675
600
525
450
375
300
225
150
75
16
17
18
Business & government
Credit cards
Personal loans
Residential mortgages
$ 676.5
$625.4
$611.9
$ billions, as at October 31
C20 Deposits
101.3
147.3
5.7
95.8
126.5
5.9
97.1
121.8
7.6
$ 930.8
$853.6
$838.4
61.0
4.2
2.5
$ 67.7
$ 998.5
55.5
4.6
1.6
$ 61.7
$915.3
52.7
3.6
1.6
$ 57.9
$896.3
700
600
500
400
300
200
100
16
17
18
Banks
Business & government
Personal
Assets
The Bank’s total assets as at October 31, 2018 were $998 billion, up $83 billion or 9% from October 31, 2017. This growth was primarily related to
the impact of acquisitions, as well as strong organic growth in loans, and increases in investment securities, trading securities, and securities purchased
under resale agreements and securities borrowed.
Trading securities increased by $7 billion and securities purchased under resale agreements and securities borrowed increased by $9 billion.
Investment securities increased $9 billion from October 31, 2017 due primarily to higher holdings of U.S. government debt. As at October 31, 2018,
the net unrealized loss on debt securities measured at fair value through other comprehensive income of $286 million decreased to a net unrealized
loss of $204 million, after the impact of qualifying hedges.
Loans increased $47 billion from October 31, 2017. Residential mortgages increased $16 billion due to the acquisition of BBVA Chile and growth in
Canada and Latin America. Personal loans and credit cards were up $9 billion due to the impact of acquisitions and growth in Canada and Latin
America. Business and government loans increased $23 billion due to growth in Canada and Latin America and the acquisition of BBVA Chile.
Goodwill and other intangibles were up $6 billion, due primarily to the acquisitions.
Other assets increased $5 billion due mainly to the acquisition of MD Financial Management.
54 | 2 0 1 8 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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Liabilities
Total liabilities were $931 billion as at October 31, 2018, up $77 billion or 9% from October 31, 2017.
Total deposits increased $51 billion. Personal deposits grew by $15 billion due primarily to growth in Canada and Latin America and the acquisition of
BBVA Chile. Business and government deposits grew by $37 billion due mainly to growth in Canada and Latin America and the acquisition of BBVA
Chile.
Obligations related to securities sold under repurchase agreements and securities lent increased by $5 billion. Other liabilities increased $9 billion due
mainly to the impact of acquisitions.
Equity
Total shareholders’ equity increased $6,055 million from October 31, 2017. This increase was driven mainly by current year earnings of $8,724 million,
the issuance of common shares of $2,708 million mainly for the acquisitions and an increase in non-controlling interests in subsidiaries of
$1,091 million. Partly offsetting were dividends paid of $4,172 million, a reduction in other comprehensive income of $804 million, due mainly to a
decrease in unrealized foreign currency translation gains on the Bank’s investments in its foreign operations, the cumulative effect of adopting IFRS 9
of $610 million, the repurchase and cancellation of approximately 8 million common shares for $632 million, and the net redemption of preferred
shares of $395 million.
Outlook
A strong global economy is expected to support assets and deposits growth across all business lines in 2019. In Canada, increased business investment
should lead to expansion in commercial lending with mortgage growth being more moderate. Internationally, continued economic strength in the
Pacific Alliance countries should aid in further increases in assets and personal deposits.
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 financial 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 drive behaviour to work to 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, 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 2018, the scalars for CVA risk-weighted
assets of 0.80, 0.83 and 0.86 were used to compute the CET1, Tier 1 and Total capital ratios, respectively (October 31, 2017 – scalars of 0.72, 0.77
and 0.81, respectively). The CVA capital requirements will be fully phased in effective November 1, 2018.
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, an additional Domestic Stability Buffer of 1.5% was implemented in 2018 as a Pillar 2 requirement as noted below.
2 0 1 8 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
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 capital developments during the year
Basel II standardized regulatory capital floor
Since the introduction of Basel II in 2008, OSFI has prescribed a minimum Basel I 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 noted in prior quarters, OSFI replaced the Basel I regulatory capital floor with a capital floor based on the Basel II standardized approach for credit
risk, effective the second quarter of 2018. Revised capital floor requirements also include risk-weighted assets for market risk and CVA. Under this
new Basel II regulatory capital floor requirement, the Bank does not have a capital floor add-on as at October 31, 2018.
Domestic Stability Buffer
In June 2018, in order to provide increased transparency to the market, OSFI clarified its additional requirement for its Domestic Stability Buffer,
currently held by Domestic Systemically Important Banks (D-SIBs) as a Pillar 2 buffer requirement. The Domestic Stability Buffer is not a Pillar 1 buffer.
Breaches will not result in banks being subject to automatic constraints on capital distributions. If a D-SIB breaches the buffer (i.e. dips into the buffer
when it has not been released), OSFI will require a remediation plan. Supervisory interventions pursuant to OSFI’s Guide to Intervention would occur in
cases where a remediation plan is not produced or executed in a timely manner satisfactory to OSFI.
As noted above, OSFI’s minimum Pillar 1 capital ratio requirements, including the D-SIB 1% surcharge, are 8.0%, 9.5% and 11.5% for Common
Equity Tier 1, Tier 1 and Total capital ratios, respectively. The Domestic Stability Buffer will range between 0 and 2.5% of a bank’s total risk-weighted
assets (RWA). OSFI will undertake a review of the buffer on a semi-annual basis, in June and December, and any changes to the buffer will be made
public, along with supporting rationale. In exceptional circumstances, OSFI may make and announce adjustments to the buffer in-between scheduled
review dates. The next review will occur in December 2018. OSFI’s Domestic Stability Buffer is presently set at 1.5% of total risk-weighted assets.
Total Loss Absorbing Capacity (TLAC)
In April 2018, OSFI issued its guideline 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 to
support its recapitalization in the event of its failure. Effective November 1, 2021, D-SIBs will be required to maintain a minimum risk-based TLAC ratio
and a minimum TLAC leverage ratio. TLAC is defined as the aggregate of Tier 1 capital, Tier 2 capital, and other TLAC instruments that are subject to
conversion in whole or in part into common shares under the CDIC Act and meet all of the eligibility criteria under the guidelines. The Bank’s
minimum TLAC ratio requirements consist of 21.5% of risk-weighted assets (plus Domestic Stability Buffer requirement) and 6.75% of leverage ratio
exposures. OSFI may subsequently vary the minimum TLAC requirements for individual D-SIBs or groups of D-SIBs. Where a D-SIB falls below the
minimum TLAC requirements, OSFI may take any measures deemed appropriate, including measures set out in the Bank Act. The Bank does not
anticipate any challenges in meeting its TLAC requirements.
OSFI also revised its Capital Adequacy Requirements (CAR) guideline to implement the amendments to Basel III finalized by the BCBS in October 2016
in respect of holdings of Other TLAC instruments issued by global systemically important banks (G-SIBs) that qualify towards their TLAC requirements
and instruments ranking pari passu with those instruments. The BCBS regulatory capital treatment in respect of holdings of Other TLAC aims to
reduce a significant source of contagion in the banking system. OSFI has determined that it is appropriate to extend the Basel III treatment to holdings
of Other TLAC instruments issued by Canadian D-SIBs. The regulatory adjustments relating to holdings of Other TLAC instruments apply from
November 1, 2018.
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.
56 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
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 deployment
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 Common Equity Tier 1
(CET1) ratio as at October 31, 2018 was 11.1%. The CET1 ratio reduced by approximately 40 basis points in 2018 due primarily to the impact of
acquisitions that closed during the year, share buybacks and the Bank’s adoption of IFRS 9, partly offset by strong internal capital generation and the
benefit from moving to the Basel II regulatory capital floor.
The Bank’s Basel III Tier 1 and Total capital ratios were 12.5% and 14.3%, respectively, as at October 31, 2018, down from 2017 due primarily to the
same factors described above impacting the CET1 ratio. In addition, the Leverage ratio declined by approximately 20 basis points in 2018 due primarily
to the Bank’s acquisitions and organic asset growth.
The Bank’s capital ratios continue to be well in excess of OSFI’s minimum capital ratio requirements for 2018 (including the 1% D-SIB surcharge and
Domestic Stability Buffer requirements) of 9.5%, 11.0% and 13.0% for CET1, Tier 1 and Total Capital, respectively. The Bank was well above the OSFI
prescribed minimum Leverage ratio as at October 31, 2018.
Outlook
Looking to 2019, the Bank’s capital position is forecast to improve from strong internal capital generation and divestitures of certain non-core
businesses, in support of the Bank’s growth initiatives that enhance shareholder returns.
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2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 57
MANAGEMENT’S DISCUSSION AND ANALYSIS
T24 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)
Allowance for credit losses eligible for inclusion in Tier 2 and excess allowance (re: IRB approach)(6)
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 capital floor adjustments(7)
CET1 risk-weighted assets(7)(8)
Capital ratios(9)
Common Equity Tier 1
Tier 1
Total
Leverage:
Leverage exposures
Leverage ratio
Basel III All-in
2018
2017
2016
$
60,727
1,628
(16,428)
$
$
55,454
636
(11,505)
52,657
597
(11,589)
(863)
(335)
(286)
(271)
(417)
(545)
(435)
(484)
(757)
44,443
43,352
39,989
2,624
1,560
1,400
160
3,019
1,560
1,400
142
3,594
–
1,400
83
50,187
49,473
45,066
5,698
1,380
99
–
7,177
5,935
602
103
–
6,640
7,633
528
103
–
8,264
57,364
56,113
53,330
347.1
8.4
45.0
–
315.2
7.8
40.6
12.8
$
400.5
$
376.4
$
314.8
10.6
38.6
–
364.0
11.1%
12.5%
14.3%
11.5%
13.1%
14.9%
11.0%
12.4%
14.6%
$ 1,119,099
$ 1,052,891
$ 1,010,987
4.5%
4.7%
4.5%
(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.
(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) Collective allowances for 2017 and 2016.
(7) 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. OSFI
replaced the Basel I regulatory capital floor with a capital floor based on the Basel II standardized approach for credit risk, effective April 30, 2018. Revised capital floor requirements also include risk-weighted assets for market risk
and CVA. Under this new Basel II regulatory capital floor requirement, the Bank does not have a capital floor add-on as at October 31, 2018 (Basel I floor add-on: October 31, 2017 - $12.8 billion, October 31, 2016 - nil).
(8) As at October 31, 2018, CVA risk-weighted assets were calculated using scalars of 0.80, 0.83, and 0.86 to compute CET1, Tier 1 and Total capital ratios, respectively, (scalars of 0.72, 0.77, and 0.81 in 2017).
(9) OSFI designated the Bank as a domestic systemically important bank (D-SIB), increasing its minimum capital ratio requirements by 1% for the identified D-SIBs. This 1% surcharge was applicable to all minimum capital ratio
requirements for CET1, Tier 1 and Total Capital, by January 1, 2016, in line with the requirements for global systemically important banks.
58 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
T25 Changes in regulatory capital(1)
For the fiscal years ($ 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)
– IFRS 9 impact(3)
– 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
Allowance for credit losses eligible for inclusion in Tier 2 and Excess Allowance under AIRB(4)
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.
(3) Represents the full transitional impact on retained earnings from the Bank’s adoption of IFRS 9 (Financial Instruments) on November 1, 2017.
(4) Collective allowances for 2017 and 2016.
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Basel III All-in
2018
2017
2016
$ 56,113
$ 53,330
$ 48,230
8,361
(3,985)
2,708
(632)
(25)
(228)
992
(4,923)
(1,177)
82
(564)
(306)
(359)
(30)
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)
$
1,091
$
3,363
$
3,024
300
(695)
18
1,560
(575)
59
1,350
(690)
16
$
(377)
$
1,044
$
676
–
(232)
778
(9)
537
–
(1,500)
74
(198)
$ (1,624)
1,251
$
2,783
$
$
2,502
(1,035)
42
(109)
$
$
1,400
5,100
$ 57,364
$ 56,113
$ 53,330
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 59
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 24), 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 $44.4 billion as at October 31, 2018, an increase of $1.1 billion
from the prior year primarily due to:
(cid:129) $4.4 billion growth from internal capital generation;
(cid:129) $2.7 billion from common share issuances in connection with the acquisition of Jarislowsky
C21 CET1 capital
%, as at October 31
14
12
10
8
6
4
2
16
17
18
C22 Dividend growth
dollars per share
4
3
2
1
Fraser and MD Financial Management; and,
08
10
12
14
16
18
(cid:129) $1.0 billion from higher regulatory capital arising from non-controlling interests, mainly the
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
16
17
18
acquisition of BBVA Chile.
Partly offset by:
(cid:129) $4.9 billion from higher regulatory capital deductions for goodwill and intangibles, primarily
from the acquisitions which closed during the year;
(cid:129) $0.6 billion from changes in other regulatory capital deductions;
(cid:129) $0.6 billion decrease from the adoption of IFRS 9;
(cid:129) $0.6 billion from common share buybacks net of common shares issuances under the Bank’s
employee share purchase and stock option plans; and,
(cid:129) $0.2 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 were also impacted by the above changes and the planned
redemptions of non-NVCC preferred shares for $695 million, partly offset by the $300 million
issuance of NVCC preferred shares. The Total capital ratio also benefited from increases in
allowance for credit losses, primarily from adoption of IFRS 9.
Dividends
The strong earnings and capital position allowed the Bank to increase its dividends twice in 2018.
The annual dividend in 2018 was $3.28, compared to $3.05 in 2017, an increase of 8%. The
dividend payout ratio was 47.7% in line with the Bank’s Board approved target dividend payout
ratio of 40-50%.
T26 Selected capital management activity
For the fiscal years ($ millions)
Dividends
Common
Preferred and other equity instruments
Common shares issued(1)
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
2018
2017
2016
$ 3,985
187
2,708
$ 3,668
129
313
$ 3,468
130
391
632
300
695
–
232
1,009
1,560
575
–
1,500
80
1,350
690
2,502
1,035
(1) Represents primarily cash received for stock options exercised during the year, common shares issued in connection with acquisitions, and 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).
Common shares issued
On May 1, 2018, the Bank issued 11,133,141 common shares at a price of $78.86 per common share in connection with the acquisition of
Jarislowsky Fraser. As a result of the issuance, the Bank recorded an increase to equity – common shares of $878 million. Refer to Note 24 in the
consolidated financial statements for additional details.
On June 8, 2018, the Bank completed its public offering of 22,655,000 common shares, at a price of $76.15 per common share. As a result of the
public offering, the Bank recorded an increase to equity – common shares of $1,696 million, net of transaction costs of $29 million. The Bank used
the proceeds from the public offering to partially fund the acquisition of MD Financial Management.
60 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Normal Course Issuer Bid
On May 29, 2018, the Bank announced that OSFI and the Toronto Stock Exchange (TSX) approved a normal course issuer bid (the “2018 NCIB”)
pursuant to which it may repurchase for cancellation up to 24 million of the Bank’s common shares. Purchases under the 2018 NCIB will terminate
upon earlier of: (i) the Bank purchasing the maximum number of common shares under the 2018 NCIB, (ii) the Bank providing a notice of termination,
or (iii) June 3, 2019. On a quarterly basis, the Bank will notify OSFI prior to making purchases. Under the 2018 NCIB, the Bank has cumulatively
repurchased and cancelled approximately 5.98 million common shares at an average price of $75.85 per share.
On May 30, 2017, the Bank announced that OSFI and 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. The 2017 NCIB terminated on June 1, 2018. Under the 2017 NCIB, the
Bank cumulatively repurchased and cancelled approximately 6.25 million common shares at an average price of $76.41 per share.
During the year ended October 31, 2018, the Bank repurchased and cancelled approximately 8.23 million common shares (2017 – approximately
14 million) at a volume weighted average price of $76.77 per share (2017 – $72.09) for a total amount of $632 million (2017 – $1,009 million).
Approximately 2 million of the common shares purchased were pursuant to a private agreement with an arm’s length third party seller and at a
discount to the prevailing market price of the Bank’s common shares on the TSX at the time of the purchases.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Share data and other capital instruments
The Bank’s common and preferred share data, as well as other capital instruments, are shown in T27. Further details, including exchangeability
features, are discussed in Note 21 and Note 24 of the consolidated financial statements.
T27 Shares and other instruments
As at October 31, 2018
Common shares(2)
Preferred shares
Preferred shares Series 18(3)
Preferred shares Series 19(3)
Preferred shares Series 20(4)
Preferred shares Series 21(4)
Preferred shares Series 22(5)(6)
Preferred shares Series 23(5)(7)
Preferred shares Series 30(5)(8)
Preferred shares Series 31(5)(9)
Preferred shares Series 32(5)(10)
Preferred shares Series 33(5)(11)
Preferred shares Series 34(5)(12)(13)
Preferred shares Series 36(5)(12)(14)
Preferred shares Series 38(5)(12)(15)
Preferred shares Series 40(5)(12)(16)
Additional Tier 1 securities
Amount
($ millions)
Dividends
declared per
share(1)
Number
outstanding
(000s)
Conversion
features
$
18,234
$
3.28
1,227,028
n/a
–
–
–
–
234
66
154
111
279
130
350
500
500
300
0.418750
0.374547
0.902500
0.691967
0.957500
0.736967
0.455000
0.516968
0.515752
0.601968
1.375000
1.375000
1.212500
–
–
–
–
–
9,377
2,623
6,143
4,457
11,162
5,184
14,000
20,000
20,000
12,000
Amount
($ millions)
Distribution(17)
Yield (%)
–
–
–
–
Series 23
Series 22
Series 31
Series 30
Series 33
Series 32
Series 35
Series 37
Series 39
Series 41
Number
outstanding
(000s)
750
650
1,250
Interest
Rate (%)
2.58
3.37
4.50
Number
outstanding
(000s)
14,140
Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust(18a,c,d)
Scotiabank Tier 1 Securities – Series 2009-1 issued by Scotiabank Tier 1 Trust(18b,c,d)
Subordinated additional Tier 1 capital securities (NVCC)
$
US$
750
650
1,250
28.25
39.01
23.25
US$
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)(19)
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)
Dividends declared as at August 28, 2018.
Dividends on common shares are paid quarterly, if and when declared. As at November 16, 2018, the number of outstanding common shares and options was 1,227,059 thousand and 14,108 thousand, respectively.
On April 26, 2018, the Bank redeemed all outstanding Non-cumulative Preferred shares Series 18 and Series 19 and paid a dividend of $0.209375 and $0.181788, respectively, per share.
On October 26, 2018, the Bank redeemed all outstanding Non-cumulative Preferred shares Series 20 and Series 21 and paid a dividend of $0.225625 and $0.187403, respectively, per share.
These shares are entitled to non-cumulative preferential cash dividends payable quarterly. These preferred shares have conversion features. Refer to Note 24 of the consolidated financial statements in the Bank’s 2018 Annual
Report for further details.
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 24 of the consolidated financial statements in the
Bank’s 2018 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.
(16) On October 12, 2018, the Bank issued 12 million Non-cumulative 5-Year Rate Reset Preferred Shares Series 40 (NVCC) for $300 million. The initial dividend, if declared, will be payable on January 29, 2019. Subsequent to the
initial five-year fixed rate period ending on January 26, 2024, 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 2.43%,
multiplied by $25.00
Per face amount of $1,000 or US$1,000, as applicable.
(17)
(18)(a) On September 28, 2006, Scotiabank Capital Trust issued 750,000 Scotiabank Trust Securities – Series 2006-1 (Scotia BaTS II Series 2006-1). The holders of Scotia BaTS II Series 2006-1 are entitled to receive non-cumulative
fixed cash distributions payable semi-annually in an amount of $28.25 per security. With regulatory approval, these securities may be redeemed in whole upon the occurrence of certain tax or regulatory capital changes, or in
whole or in part on December 30, 2011 and on any distribution date thereafter at the option of Scotiabank Capital Trust. The holder has the right at any time to exchange their security into Non-cumulative Preferred Shares Series
S of the Bank. The Series S shares will be entitled to cash dividends payable semi-annually in an amount of $0.4875 per $25.00 share [refer to Note 24 – Restrictions on dividend payments in the Bank’s 2018 Annual Report].
Under the circumstances outlined in 18(c) below, the Scotia BaTS II Series 2006-1 would be automatically exchanged without the consent of the holder, into Non-cumulative Preferred Shares Series T of the Bank. The Series T
shares will be entitled to non-cumulative cash dividends payable semi-annually in an amount of $0.625 per $25.00 share. If there is an automatic exchange of the Scotia BaTS II Series 2006-1 into Preferred Shares Series T of the
Bank, then the Bank would become the sole beneficiary of the Trust.
(18)(b) On May 7, 2009, Scotiabank Tier 1 Trust issued 650,000 Scotiabank Tier 1 Securities Series 2009-1 (Scotia BaTS III Series 2009-1). Interest is payable semi-annually in an amount of $39.01 per Scotia BaTS III Series 2009-1 on
the last day of June and December until June 30, 2019. After June 30, 2019 and on every fifth anniversary thereafter until June 30, 2104, the interest rate on the Scotia BaTS III Series 2009-1 will be reset at an interest rate per
annum equal to the then prevailing 5-year Government of Canada Yield plus 7.05%. On or after June 30, 2014, the Trust may, at its option redeem the Scotia BaTS III Series 2009-1, in whole or in part, subject to regulatory
approval. Under the circumstances outlined in 18(c) below, the Scotia BaTS III Series 2009-1, including accrued and unpaid interest thereon, would be exchanged automatically without the consent of the holder, into newly
issued Non-cumulative Preferred Shares Series R of the Bank. In addition, in certain circumstances, holders of Scotia BaTS III Series 2009-1 may be required to invest interest paid on the Scotia BaTS III Series 2009-1 in a series of
newly-issued preferred shares of the Bank with non-cumulative dividends (each such series is referred to as Bank Deferral Preferred Shares). If there is an automatic exchange of the Scotia BaTS III Series 2009-1 into Preferred
Shares Series R of the Bank, then the Bank would become the sole beneficiary of the Trust.
(18)(c) The Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 may be automatically exchanged, without the consent of the holder, into Non-cumulative Preferred Shares of the Bank in the following circumstances:
(i) proceedings are commenced for the winding-up of the Bank; (ii) the Superintendent takes control of the Bank or its assets; (iii) the Bank has a Tier 1 Capital ratio of less than 5% or a Total Capital ratio of less than 8%; or
(iv) the Superintendent has directed the Bank to increase its capital or provide additional liquidity and the Bank elects such automatic exchange or the Bank fails to comply with such direction.
(18)(d) No cash distributions will be payable on the Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 in the event that the regular dividend is not declared on the Bank’s preferred shares and, if no preferred shares are
outstanding, the Bank’s common shares. In such a circumstance the net distributable funds of the Trust will be payable to the Bank as the holder of the residual interest in the Trust. Should the Trust fail to pay the semi-annual
distributions on the Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 in full, the Bank will not declare dividends, of any kind on any of its preferred or common shares for a specified period of time [refer to Note 24 –
Restrictions on dividend payments].
Included are 3,900 stock options with tandem stock appreciation rights (Tandem SAR) features.
(19)
62 | 2 0 1 8 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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Credit ratings
Credit ratings are one of the factors that impact the Bank’s access to capital markets and the terms on which it can conduct derivatives, hedging
transactions and borrow funds. The credit ratings and outlook that the rating agencies assign to the Bank are based on their own views and
methodologies.
The Bank continues to have strong credit ratings(1) and its deposits and legacy senior debt are rated AA by DBRS, Aa2 by Moody’s, AA- by Fitch and
A+ by Standard and Poor’s (S&P). All four credit rating agencies have a stable outlook on the Bank.
The rating agencies took various actions around the finalization and implementation of Canada’s bail-in regime in 2018. On April 19, 2018, DBRS
changed the Bank’s trend to Stable from Negative (on the Long Term Issuer Ratings, Senior Debt Ratings, and Deposits Ratings) and assigned AA (low)
provisional rating to the new Bail-inable Senior Debt to be issued after September 23, 2018, following the finalization of Canada’s impending bail-in
regime. On July 16, 2018, Moody’s upgraded the Bank’s long-term ratings by two-notches to Aa2 from A1 and changed the trend to Stable from
Negative (on the Bank’s Long-Term Issuer Ratings, Senior Debt Ratings and Deposit Ratings), following the finalization of Canada’s impending bail-in
regime. On September 24, 2018, Moody’s aligned the Bank’s Issuer Rating with the A2 provisional rating of bail-inable debt to be issued after
September 23, 2018. Canadian banking peers’ ratings were aligned in a similar manner. The Bank’s Legacy Senior Debt Rating and Deposit Rating
both remain unchanged at Aa2.
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 $400.5 billion, $400.7 billion and
$400.9 billion, respectively at year end, representing increases from 2017 of approximately $24.1 billion, $24.3 billion and $24.5 billion, respectively.
Increases to CET1, Tier 1 and Total Capital RWA during the year are primarily due to organic growth and the Bank’s acquisitions which closed during
the year, partly offset by the elimination of the RWA add-on from the Basel I capital floor and the impacts from foreign currency translation.
CET1 Credit risk-weighted assets
As shown in Table T28, CET1 credit risk-weighted assets increased by approximately $31.9 billion to $347.1 billion due primarily to the following
components:
(cid:129) Higher volumes increased RWA by $13.4 billion;
(cid:129) Book quality changes, including parameter recalibrations, decreased RWA by $0.5 billion;
(cid:129) Model updates decreased RWA by $1.0 billion;
(cid:129) Acquisitions increased RWA by $21.2 billion; and,
(cid:129) The impact of foreign exchange translation decreased RWA by $1.2 billion.
T28 Flow statement for Basel III All-in credit risk-weighted assets ($ 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)
2018
2017
Credit risk
$ 315,159
13,351
(488)
(1,037)
332
21,195
(1,249)
(167)
$ 347,096
173
347,269
173
$ 347,442
Of which
counterparty
credit risk
$ 16,494
(2,525)
(109)
–
332
2,998
353
–
$ 17,543
173
17,716
173
$ 17,889
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
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, 2018, risk-weighted assets were calculated using scalars of 0.80, 0.83, and 0.86 to compute CET1, Tier 1, and Total capital ratios, respectively, (scalars were 0.72, 0.77, and 0.81 in 2017).
(1)
Refers to the long term deposit rating and legacy senior debt rating. Senior debt post September 23, 2018 issued under the “bail-in” regime will be notched down by Moody’s(A2), S&P(A-) and DBRS(AA(low)) relative to the legacy
senior debt. The Bank has not issued such bail-inable senior debt as of November 26, 2018.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
T29 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
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.
T30 Non-retail AIRB portfolio exposure by internal rating grade(1)
As at October 31 ($ millions)
2018
2017
Grade
IG Code
($)(3)
Exposure
at default
RWA
($)(4)
PD
(%)(5)(8)
LGD
(%)(6)(8)
RW
(%)(7)(8)
Exposure
at default
($)(3)
RWA
($)(4)
PD
(%)(5)(8)
LGD
(%)(6)(8)
RW
(%)(7)(8)
Investment grade(2)
Non-Investment grade
Watch list
Default(9)
99-98
95
90
87
85
83
80
77
75
73
70
65
60
40
30
21
86,767
57,856
60,751
47,545
44,191
42,802
39,614
26,883
19,138
7,520
2,817
1,143
1,104
576
141
1,178
869
6,121
8,834
11,711
15,716
18,982
22,490
15,253
13,455
5,623
2,190
1,888
1,517
1,164
236
3,043
Total
Government guaranteed residential
mortgages
Total
440,026
129,092
82,192
–
522,218
129,092
0.01
0.05
0.07
0.10
0.16
0.24
0.36
0.49
0.75
1.44
2.78
10.18
19.48
30.84
59.16
100
0.61
–
0.51
(1) Excludes securitization exposures.
(2) Excludes government guaranteed residential mortgages of $82.2 billion ($91.7 billion in 2017).
(3) After credit risk mitigation.
(4) RWA prior to 6% scaling factor.
(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.
12
32
34
40
44
44
46
42
42
35
31
41
28
38
42
42
34
23
32
1
11
15
25
36
44
57
57
70
75
78
165
137
202
167
258
29
–
25
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
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
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
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 (e.g. S&P, Moody’s, DBRS, etc.) of borrowers, if available, to compute regulatory capital for credit risk. For
the Bank’s Corporate, Bank and Sovereign 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.
(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.
64 | 2 0 1 8 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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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, including any input floor requirements, 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 T30.
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 in order to 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, 2018,
are shown in Table T31. During this period the actual experience was materially more favourable than the estimates as reflected within the risk
parameters.
T31 Portfolio-level comparison of estimated and actual non-retail percentages
Average PD
Average LGD
Average CCF(2)
Estimated(1)
Actual
0.89
40.76
48.92
0.27
31.16
10.64
(1) Estimated parameters are based on portfolio averages at Q3/17, 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, subject to parameter input floors as required by OSFI:
(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 8 S C O T I A B A N K A N N U A L R E P O R T | 65
MANAGEMENT’S DISCUSSION AND ANALYSIS
The table below summarizes the credit quality distribution of the Bank’s AIRB retail portfolio as at October 31, 2018.
T32 Retail AIRB portfolio exposure by PD range(1)
As at October 31 ($ millions)
2018
2017
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
($)(1)
RWA
($)(2)
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
Exposure
at default
($)(1)
RWA
($)(2)
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
12,155
89,544
107,036
20,578
7,211
1,370
1,591
588
317
4,605
21,654
11,970
7,701
1,819
2,728
0.05
0.09
0.52
2.04
6.01
14.68
36.84
–
100.00
240,073
50,794
1.19
74
29
33
58
69
52
58
82
37
3
5
20
58
107
133
171
–
21
16,026
80,507
94,081
17,070
8,583
889
1,453
607
476
4,059
19,638
9,919
8,827
1,086
2,566
0.05
0.09
0.52
1.91
5.56
17.18
36.86
–
100.00
219,216
46,571
1.21
66
28
35
57
75
43
62
79
38
3
5
21
58
103
122
177
–
21
(1) After credit risk mitigation.
(2) RWA prior to 6% scaling factor.
(3) PD – Probability of Default.
(4)
LGD – Loss Given Default.
(5) RW – Risk Weight.
(6) Exposure at default used as basis for estimated weightings.
(7) Gross defaulted exposures, before any related allowances.
All AIRB models and parameters are monitored on a quarterly basis and independently validated annually by the Global Risk Management group.
These models are tested to ensure rank ordering and back testing of parameters is appropriate. Comparison of estimated and actual loss parameters
for the period ended July 31, 2018 is shown in Table T33. During this period the actual experience was materially more favourable than the estimates
as reflected within the risk parameters.
T33 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)
0.70
0.51
0.39
2.00
1.90
0.47
0.30
0.26
1.64
1.14
–
18.23
28.87
79.69
60.77
–
11.78
17.25
70.04
49.38
–
–
91
681
7
–
–
83
593
7
(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.
66 | 2 0 1 8 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, 2018 and 2017:
T34 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) Equates to $8,357 million of market risk-weighted assets (2017 – $7,839 million).
T35 Risk-weighted assets movement by key drivers
($ millions)
RWA as at beginning of the year
Movement in risk levels(1)
Model updates(2)
Methodology and policy(3)
Acquisitions and disposals
RWA as at end of the year
2018
$ 124
419
95
–
31
$ 669
2017
$ 110
300
174
–
43
$ 627
Market risk
2018
2017
$ 7,839
(554)
(1,963)
–
3,035
$ 10,571
(2,774)
42
–
–
$ 8,357
$
7,839
(1) Movement in risk levels are defined as changes in risk due to position changes and market movements. Foreign exchange movements are embedded 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 increased by $0.5 billion to $8.4 billion, as shown in Table T36, due primarily to the acquisitions which closed during the
year, partly offset by model updates and movements in risk levels.
Operational risk
Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to external events, human error, or the inadequacy or
failure of processes, procedures, systems or controls. The Bank 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, the AMA model continued to have no impact on operational
risk-weighted assets in 2018.
Operational risk-weighted assets increased by $4.4 billion during the year to $45.0 billion primarily due to the acquisitions which closed during the
year and 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 mainly based on the Bank’s regulatory capital model using the Advanced Measurement Approach, and
calibrated to a higher 99.95% confidence interval.
(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 8 S C O T I A B A N K A N N U A L R E P O R T | 67
MANAGEMENT’S DISCUSSION AND ANALYSIS
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’s arrangements with structured entities include:
(cid:129) 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.
(cid:129) Structured entities that the Bank sponsors and actively manages (see discussion on other unconsolidated structured entities on page 69).
All structured entities are subject to a rigorous review and approval process in order that all significant risks are properly identified and addressed. The
Bank consolidates all structured entities that it controls. 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, 2018, total assets of consolidated structured entities were $48 billion, compared to $53 billion at the end of 2017. The change was
primarily due to the winding up of Scotia Covered Bond Trust during the year. More details of the Bank’s consolidated structured entities are provided
in Note 15(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 $28 million in 2018 (October 31, 2017 – $30 million) from certain structured entities in which it had a significant
interest at the end of the year but did not consolidate. More information with respect to the Bank’s involvement with these unconsolidated structured
entities, including details of liquidity facilities and maximum loss exposure by category is provided below and in Note 15(b) to the consolidated
financial statements.
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 $26 million in 2018, compared to $29 million in 2017.
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 $4 billion as at
October 31, 2018 (October 31, 2017 – $5 billion). The year-over-year decrease was due to normal business operations. As at October 31, 2018, total
commercial paper outstanding for the Canadian-based conduits was $3.2 billion (October 31, 2017 – $3.1 billion) and the Bank held 0.1% of the
total commercial paper issued by these conduits. Table T36 presents a summary of assets purchased and held by the Bank’s two Canadian multi-seller
conduits as at October 31, 2018 and 2017, 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, 2018. Approximately 72% of the funded assets have final maturities falling within three years, and the
weighted-average repayment period, based on cash flows, approximates 1.2 years.
T36 Assets held by Bank-sponsored Canadian-based multi-seller conduits
2018
2017
Funded
assets(1)
Unfunded
commitments
Total
exposure(2)
Funded
assets(1)
Unfunded
commitments
Total
exposure(2)
$ 2,375
469
372
$ 3,216
$ 361
312
154
$ 2,736
781
526
$ 2,447
161
519
$
464
649
756
$ 2,911
810
1,275
$ 827
$ 4,043
$ 3,127
$ 1,869
$ 4,996
As at October 31 ($ millions)
Auto loans/leases
Trade receivables
Canadian residential mortgages
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.
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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 $2,032 million as at October 31, 2018, (October 31, 2017 –
$1,827 million). The change was primarily due to new structures entered into 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, 2018,
the Bank earned $2,121 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, 2017 – $2,021 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 $1,101 million as at October 31,
2018, compared to $1,264 million last year. The transferred mortgages sold to CHT and/or third party investors continue to be recognized on balance
sheet along with the proceeds from sale treated as secured borrowings. More details have been provided in Note 14 in 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 Halifax Receivables Trust (Halifax) (formerly Hollis Receivables
Term Trust II), and personal and small business credit card receivables, securitized through Trillium Credit Card Trust II (Trillium). Halifax 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 Bank’s 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 Halifax (2017 – nil) and $1,678 million of
receivables were securitized through Trillium (2017 – nil). As at October 31, 2018, the outstanding subordinated notes issued by Halifax of $205
million (2017 – $205 million) and Trillium of $134 million (2017 – $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,
2017-2, 2018-1 and 2018-2 (START) Bank-sponsored structured entities. The START entities issue multiple series of Class A notes to third-party
investors and may issue Class A and/or 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 Bank’s Consolidated Statement of Financial Position. Recourse of the note holders is limited to the
receivables. During the year, assets of $1,874 million were securitized through the START program (2017 – $2,176 million). As at October 31, 2018,
the outstanding Class A and subordinated notes issued by the START entities that are held by the Bank of $447 million (2017 – $178 million) 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, 2018, these amounted to $35 billion, compared to $36 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.
(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, 2018, these commitments amounted to
$197 billion, compared to $186 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 $572 million in 2018, compared to $571 million in the prior year. Detailed information on guarantees and loan commitments is
disclosed in Note 36 in the consolidated financial statements.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 69
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 (OCI):
(cid:129) debt instruments measured at fair value through OCI,
(cid:129) equity instruments measured at fair value through OCI,
(cid:129) derivatives designated as cash flow hedges, and
(cid:129) net investment hedges.
Gains and losses on derecognition of debt instruments at FVOCI and impairment provisions are reclassified from OCI to the Consolidated Statement of
Income under non-interest income. Gains and losses on derecognition of equity instruments designated at FVOCI are not reclassified from OCI to the
consolidated statement of income. 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.
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 related to loans are recorded in the provision for credit losses in the Consolidated Statement of Income. Interest
income and expense, as well as gains and losses, on trading securities and trading loans are recorded in non-interest income – trading revenues.
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 72 to 109. In addition,
Note 37 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 94. For trading activities, Table T46 discloses the average
one-day Value at Risk by risk factor. For derivatives, based on the maturity profile of the notional amount of the Bank’s derivative financial
instruments, only 18% (2017 – 17%) had a term to maturity greater than five years.
Note 10 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 7 to the consolidated financial statements along with a description of how these
amounts were determined.
The fair value of the Bank’s financial instruments was favourable when compared to their carrying value by $2.8 billion as at October 31, 2018
(October 31, 2017 – favourable $1.7 billion). This difference relates mainly to loan assets, deposit liabilities, subordinated debentures and other
liabilities. These changes are primarily driven by movements in interest rates and by volume changes. Fair value estimates are based on market
conditions as at October 31, 2018, and may not be reflective of future fair values. Further information on how fair values are estimated is contained in
the section on critical accounting estimates.
Disclosures specific to certain financial instruments designated at fair value through profit and loss can be found in Note 9 to the consolidated
financial statements. These designations were made primarily to significantly reduce accounting mismatches.
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Selected Credit Instruments – Publically Known Risk Items
Mortgage-backed securities
Total mortgage-backed securities held in the Non-trading and Trading portfolios are shown in Table T37.
T37 Mortgage-backed securities
As at October 31
Carrying value ($ millions)
Canadian NHA mortgage-backed securities(1)
Commercial mortgage-backed securities
Other residential mortgage-backed securities
Total
2018
2017
Non-trading
portfolio
Trading
portfolio
Non-trading
portfolio
$ 2,254
–
504
$ 2,758
$ 1,791
15
–
$ 1,806
Trading
portfolio
$ 1,709
1
–
$ 1,810
–
461
$ 2,271
$ 1,710
(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 does not have any collateralized debt obligations in its trading portfolios as at October 31, 2018 and October 31, 2017.
Other
As at October 31, 2018, 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.
2 0 1 8 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
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.
This Framework is subject to constant evaluation to ensure that it meets
the challenges and requirements of the global markets in which the
Bank operates, including regulatory standards and industry best
practices. The risk management programs of the Bank’s subsidiaries
align in all material respects to the Bank’s risk management framework,
although the actual execution of their programs may be different.
Risk
Governance
Risk Appetite
Risk Capacity
Risk Appetite Statement
Risk Appetite Metrics
Risk Management Tools
Policies, Frameworks & Limits, Risk Measurement,
Monitoring & Reporting, Forward-Looking Exercises
Risk Identification and Assessment
Principal Risk Types:
Financial
Non-Financial
Credit, Market, Liquidity, Insurance,
Operational, IT & Cybersecurity, Data 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, frameworks, and limits.
The Risk Committee of the Board: assists the Board in fulfilling its responsibilities for identifying and monitoring key financial and non-financial risks.
The Committee 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 control functions, including the effectiveness of the heads of these functions, as well as the functions themselves.
Audit and Conduct Review Committee of the Board: assists the Board by providing oversight on the effectiveness of the Bank’s system of internal
controls. The Committee oversees the integrity of the Bank’s consolidated financial statements and related quarterly results. This Committee assists
the Board in fulfilling its oversight responsibilities for setting standards of conduct and ethical behaviour, and the oversight of conduct review and
conduct risk. The Committee also oversees the Bank’s compliance with legal and regulatory requirements, 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.
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 Chief Risk Officer and Chief Financial Officer, 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.
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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 regulatory compliance throughout Scotiabank. Global
Compliance develops policy and provides independent oversight and effective challenge of compliance risk management in the Bank’s business lines
and corporate functions. It acts as a consultant and educator on regulatory compliance, internal policies and procedures and is responsible for
conducting ongoing risk-based enterprise-wide assessments, monitoring, testing and other activities to gain reasonable assurance as to the adequacy
of, adherence to, and effectiveness of the Bank’s Compliance Risk Management Program.
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 Scotiabank needs, industry practice, and AML/ATF and
sanctions legal and regulatory requirements, as well as providing risk-based independent oversight of Scotiabank’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 Audit and Conduct Review 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 internal controls, risk management, operational governance processes and to provide
consulting 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, monitoring and reporting 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 (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 risk capacity, risk
appetite statement, 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 supports a strong 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, sub-business
lines, control functions and key subsidiaries 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
(cid:129) The Bank favours businesses that generate sustainable, consistent and predictable earnings.
(cid:129) 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.
(cid:129) 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.
(cid:129) Capital considerations are part of all material risk decisions.
(cid:129) The Bank has low appetite for reputational, legal, regulatory or taxation risk, and no appetite for breaches of the Code of Conduct.
(cid:129) 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. Certain risk appetite metrics are supported
by management level limit structures and controls, as applicable.
74 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
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 operating parameters
Risk Management Tools
Effective risk management includes tools that are guided by the Bank’s risk appetite framework and integrated with the Bank’s
strategies and business planning processes.
Scotiabank’s risk management framework is supported by a variety of risk management tools that are used together to manage 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, Frameworks & Limits
Policies and Frameworks
The Bank develops and implements its key risk policies and frameworks in consultation with the Board. Such policies 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 and framework 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 and frameworks to ensure alignment
with the Bank, subject to the local regulatory requirements of each subsidiary.
Policies and frameworks 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 and frameworks, 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 and frameworks 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 regulatory capital on an enterprise basis are OSFI approved. All in-scope 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:
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(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
(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 reporting aggregates 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.
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 market conditions, credit environment, liquidity demands, or other risk factors. Enterprise-wide
stress testing is also integrated with both the strategic and financial planning processes, as well as financial 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 enterprise-wide stress scenarios with differing severities, and time
horizons.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Other Testing
Other tests are conducted as 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 annually to determine that 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 are directly associated with the Bank’s primary business and revenue generating activities. The Bank understands these risks well
and takes them on in order to generate sustainable, consistent and predictable earnings. Financial risks are generally quantifiable 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 (i.e. Core) Risks:
Operational, IT & Cybersecurity, Data Compliance, ML& TF, Environmental, Reputational, Strategic
These are risks that are not directly associated with the Bank’s primary business and revenue generating activities, but nevertheless are inherent in our
business and can have significant negative strategic, business, financial and/or reputational consequences if not managed properly. In comparison to
financial risks, Core risks are less predictable and more difficult to define and measure. The Bank has low risk appetite for Core risks and mitigates
these risks through robust internal controls and processes.
Assessment of Risks
On an annual basis, the Bank undergoes a Bank-wide risk assessment that identifies the material risks faced by the Bank for the Internal Capital
Adequacy Assessment Process (ICAAP) and the determination of internal capital. This process evaluates the risks 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 and therefore would be mitigated by internal capital. The process also reviews other evolving and
emerging risks and includes qualitative considerations such as strategic, economic and environmental risk factors. The identified risks are ascribed a
rating of how probable and impactful they may be and are used as an important input in the ICAAP process 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, a listing and a brief discussion of selected
top and emerging risks is 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:
(cid:129) Tone from the Top – Clear and consistent communication from leaders on risk behavior
expectations and the importance of Scotiabank’s values.
(cid:129) Accountability – All Scotiabankers are accountable for risk management in accordance
Risk
Management
Tools
with the Three Lines of Defence model.
(cid:129) Incentives – Performance and compensation structures encourage desired behaviors and
reinforce the Bank’s risk culture.
(cid:129) 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 minimum standards of behaviour to which all directors,
officers, and employees must adhere and attest to on an annual basis.
(cid:129) Values: Integrity – Act With Honour; Respect – Value Every Voice; Accountability – Make
It Happen; Passion – Be Your Best.
Risk
Governance
Risk
Culture
Risk Appetite
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
Key Governing Documentation
Ways that they support Risk Appetite
(cid:129) Credit Risk Policy
(cid:129) Credit Risk Appetite
(cid:129) 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 Risk
(cid:129) 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
(cid:129) Liquidity Risk and Collateral
Management Policy
Quantitative limits, such as: Liquidity Coverage Ratio (LCR); Minimum amounts of
high quality liquid assets that can be readily sold or pledged to provide contingent
liquidity; Limits to control the maximum net cash outflow over a specified horizon;
and minimize concentration through diversification of funding source.
Insurance Risk
(cid:129) Insurance Risk Policy
(cid:129) 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
(cid:129) Operational Risk Management
Policy and Framework
(cid:129) Internal Control Policy
(cid:129) New Initiative Risk Management
Policy
(cid:129) Global Third Party Risk
Management Policy
(cid:129) Financial Crisis Management
Planning policies & framework
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.
Information
Technology &
Cybersecurity
Risk
(cid:129) IT Risk Management Policy and
Framework
(cid:129) Information Security Policy and
Governance Framework
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.
Data Risk
(cid:129) Data Management Policy
(cid:129) Data Governance Framework
The Bank has established appropriate minimum expectations to implement data
management and governance through data quality business rules and dimensions
in support of the Bank’s risk appetite enabling the Bank to measure the level of
data quality on its critical data elements.
Compliance Risk
(cid:129) Compliance Policy
(cid:129) Code of Conduct
Compliance Risk appetite is based on the moderate all-Bank Residual Compliance
Risk Rating obtained through the annual Compliance Risk & Control Assessment.
Money
Laundering &
Terrorist
Financing (ML/
TF) Risk
(cid:129) AML/ATF and Sanctions Policy
(cid:129) 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
(cid:129) Reputational Risk Policy
Environmental Risk
(cid:129) 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
(cid:129) 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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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
Business
Activities
Balance
Sheet
Attributed
Capital(2)
(cid:129) Deposits
(cid:129) Accounts services
(cid:129) Credit and lending
(cid:129) Commercial banking
(cid:129) Payments and cash
management
(cid:129) Advisory services
(cid:129) Asset management
(cid:129) Insurance – creditor,
life, home, health,
auto, and travel
(cid:129) Online brokerage
(cid:129) Deposits
(cid:129) Accounts services
(cid:129) Credit and lending
(cid:129) Commercial banking
(cid:129) Payments and cash
management
(cid:129) Advisory services
(cid:129) Asset management
(cid:129) Insurance – creditor,
life, home, health,
auto, and travel
(cid:129) Deposits
(cid:129) Accounts services
(cid:129) Corporate lending
(cid:129) Equity and debt
underwriting
(cid:129) M&A advisory services
(cid:129) Capital markets
products & services
(cid:129) Foreign exchange
(cid:129) Precious metals
(cid:129) Payment and cash
management
(cid:129) Group treasury
(cid:129) Other control
functions
(cid:129) Average assets $342bn
(cid:129) Average assets $168bn
(cid:129) Average assets $321bn
(cid:129) Average assets(1) $115bn
(cid:129) Attributed Capital $21bn
(cid:129) Proportion of Bank
39%
comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
46%
-%
8%
46%
(cid:129) Attributed Capital $19bn
(cid:129) Proportion of Bank 37%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
60%
1%
7%
32%
(cid:129) Attributed Capital $11bn
(cid:129) Proportion of Bank 20%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
70%
4%
7%
19%
(cid:129) RWA
$129.5bn
(cid:129) Proportion of Bank 32%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
85%
-%
15%
Risk-
Weighted
Assets(4)
(cid:129) RWA
$165.5bn
(cid:129) Proportion of Bank 41%
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
89%
1%
10%
(cid:129) RWA
(cid:129) Proportion of Bank
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
$96.3bn
24%
85%
6%
9%
(cid:129) Attributed Capital
(cid:129) Proportion of Bank
Comprised of:
$2bn
4%
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
(cid:129) Other(3)
56%
5%
-3%
42%
(cid:129) RWA
(cid:129) Proportion of Bank
Comprised of:
(cid:129) Credit risk
(cid:129) Market risk
(cid:129) Operational risk
$9.2bn
3%
93%
14%
-7%
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, 2018 as measured for regulatory purposes in accordance with the Basel III approach.
Includes Attributed Capital for significant investments, goodwill, intangibles and leverage capital.
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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. Regulators have also evidenced an increase focus on conduct risk. This focus could lead to more
regulatory or other enforcement actions including for practices which may historically have been considered acceptable.
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.
Third party service providers
As the Bank continues to expand its ecosystem of third party information technology (IT) service and cloud providers and FinTec partners, the
traditional boundaries of where the Bank is able to assert control becomes blurred. There is growing dependency on the effectiveness of the control
environment in place at IT vendors to limit the impacts of vendor availability and security incidents on the Bank’s operations, intellectual property, and
reputation. Additionally, third party service providers other than IT vendors, as well as service providers to those third parties (i.e. fourth party vendors)
can also fall victim to systems, data and privacy breaches if their control environments fail to operate effectively. Any such breaches could impact the
Bank if the Bank’s data is shared with such vendors in the course of their provision of services to the Bank. The Bank continues to enhance the
resources, capabilities and accountabilities of third party risk management areas within the first and second line of defence areas.
80 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Canadian household indebtedness
Canadian household indebtedness has been stable in recent quarters due to slowdown in new lending volumes mainly for new mortgages, as housing
market adapts to tighter qualifying criteria as well as increasing interest rates. These market factors could cause a change in debt service ratios, largely
driven by an increasing interest rate environment. The Bank actively manages its lending portfolios and performs stress tests considering these
sensitivities, while continuing to enhance risk management capabilities through investments in technology and analytics.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit Risk
Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to
the Bank. Credit risk arises in the Bank’s direct lending operations, and in its funding, investment and trading activities where
counterparties have repayment or other obligations to the Bank.
Page
Tables and charts
Page
83
83
83
83
84
84
84
84
85
85
85
85
85
86
86
86
87
87
87
87
88
90
90
70
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 37 – 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
T37 Mortgage-backed securities
23
30
30
121
121
121
122
122
123
123
124
124
125
125
126
228
89
89
120
90
71
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
Portfolio review
Risk diversification
Risk mitigation
Real estate secured lending
Loans to Canadian condominium developers
European exposures
Financial instruments
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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 64%, United States 7%, Chile 8%, Mexico 5% and Other 16%). Financial Services constitutes 5% of overall gross exposures
(before consideration of collateral) and was $29 billion, an increase of $5 billion from October 31, 2017. These exposures are predominately to
highly rated counterparties and are generally collateralized.
(cid:129) The Bank’s overall loan book as of October 31, 2018 increased to $573 billion versus $522 billion as of October 31, 2017, with growth reflected in
Personal, and Business and Government lending. Residential mortgages were $253 billion as of October 31, 2018, with 84% in Canada. The
corporate loan book, which accounts for 36% of the total loan book, is composed of 54% of loans with an investment grade rating as of
October 31, 2018, unchanged from October 31, 2017.
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 limits annually
and Credit Risk Policy limits 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 accuracy and
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 lending decisions, 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 T29.
2 0 1 8 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
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 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
84 | 2 0 1 8 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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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
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 91% of the credit risk. Approximately 24% 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, 2018. No individual exposure to an investment grade bilateral counterparty exceeded $1,877 million and no individual
exposure to a corporate counterparty exceeded $516 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
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
IFRS 9
2018
IAS 39
2017
Gross
impaired
loans
Allowance
for credit
losses
Net
impaired
loans
Gross
impaired
loans
Allowance
for credit
losses
Net
impaired
loans
$
$
840
158
998
$ 1,389
359
581
753
619
148
2,460
$
$
$
276
104
380
$
$
564
54
618
$
882
174
$ 1,056
326
$ 1,063
$ 1,221
164
317
158
159
98
896
195
264
595
460
50
303
704
565
462
182
$
$
$
645
134(2)
779
461
219
402
245
261
142
$
$
$
237
40
277
760
84
302
320
201
40
947
1,564
2,216
1,269
$ 3,849
$ 1,222
$ 2,627
$ 3,437
$ 1,730
$ 1,707
$
1
80
202
$
283
$ 5,130
$
$
1
25
49
75
$
–
55
153
$
1
132
239
$
1
39
73
$
–
93
166
$
208
$
372
$
113
$
259
$ 1,677
$ 3,453
$ 4,865
$ 2,622
$ 2,243
Allowance for credit losses against performing loans
3,388
1,446
Impaired loan metrics
As at October 31 ($ millions)
Net impaired loans as a % of loans and acceptances
Allowance against impaired loans as a % of gross impaired loans
Net impaired loans
2018
2017(1)
0.60%
33%
0.43%
54%
Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico, prior to 2018.
(1)
(2) A portion of the existing allowance for credit losses on impaired loans as at October 31, 2017 was reclassified to performing loans with the adoption of IFRS 9 effective November 1, 2017, to conform with current period
presentation.
Impaired loans
Gross impaired loans increased to $5,130 million as at October 31, 2018, from $4,865 million last year (excluding $62 million related to loans
purchased under FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico), due primarily to purchased credit-impaired loans
resulting from acquisitions.
Impaired loans in Canadian Banking decreased by $58 million, primarily in the retail portfolio.
In International Banking, impaired loans increased by $412 million, due primarily to purchased credit-impaired loans resulting from acquisitions and
increases in the Caribbean and Central America region, Mexico, Colombia partially offset by decreases in Peru and Other Latin America.
Impaired loans in Global Banking and Markets decreased by $89 million, due primarily to resolutions during the year.
86 | 2 0 1 8 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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Net impaired loans, after deducting the allowance for credit losses, were $3,453 million as at October 31, 2018, an increase of $1,210 million from a
year ago. Net impaired loans as a percentage of loans and acceptances were 0.60% as at October 31, 2018, an increase of 17 basis points from
0.43% a year ago.
Allowance for credit losses
The total allowance for credit losses was up $997 million to $5,065 million as at October 31, 2018 from $4,068 million last year (excluding
$259 million related to loans acquired under FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico), due primarily to the
impact of the implementation of IFRS 9 and impact of Day 1 provision for credit losses on acquired performing loans.
Allowance for credit losses on impaired loans in Canadian Banking decreased by $399 million to $380 million, due primarily to the impact of the
implementation of IFRS 9.
In International Banking, allowance for credit losses on impaired loans decreased by $508 million to $1,222 million, due primarily to the impact of the
implementation of IFRS 9.
Global Banking and Markets’ allowances for Impaired Loans decreased by $38 million to $75 million, due mainly to resolutions during the year.
Allowance for credit losses on performing loans have increased to $3,388 million compared to $1,446 million as at Oct 31, 2017 due primarily to the
impact of the implementation of IFRS 9 and impact of Day 1 provision for credit losses on acquired performing loans.
Portfolio review
Canadian Banking
Gross impaired loans in the retail portfolio decreased by $42 million or 5%. Total provision for credit losses in the retail portfolio was $746 million,
down $111 million or 15% from last year.
In the commercial loan portfolio, gross impaired loans decreased by $16 million to $158 million. The provision for credit losses was $48 million, down
$8 million or 14% from last year.
International Banking
In retail, gross impaired loans decreased by $147 million to $2,026 million, with a decrease attributable mainly due to the impact of the
implementation of IFRS 9, which was partially offset by increases due to acquisitions. The total provision for credit losses in the retail portfolio
increased to $1,667 million from $1,090 million last year, primarily due to one-time provisions related to acquisitions and the impact of acquisition
related benefits in the prior year.
In commercial banking, gross impaired loans were $1,823 million, an increase of $559 million over the prior year, due primarily to the impact of the
implementation of IFRS 9, and purchased credit-impaired loans resulting from acquisitions. The total provision for credit losses in the commercial
portfolio was $200 million compared with $204 million last year, down $4 million or 2%.
Global Banking and Markets
Gross impaired loans in Global Banking and Markets decreased by $89 million to $283 million, due primarily to resolutions during the year partially
offset by the impact of the implementation of IFRS 9. The total provision for credit losses was a net reversal of $50 million compared with $42 million
last year.
Risk diversification
The Bank’s exposure 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 32% of the total. Latin America was 20% of the total exposure and the U.S. was
7%.
Chart C25 shows loans and acceptances by type of borrower (see T63). Excluding loans to households, the largest industry exposures were real estate
and construction (5.1%), financial services (5.1% including banks and non-banks), wholesale and retail (4.4%), and energy (2.6%).
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 2018, loan sales totaled $25 million, compared to $242 million in 2017. The largest volume of loan sales in 2018
related to loans in the metals industry. As at October 31, 2018, credit derivatives used to mitigate exposures in the portfolios totaled $13 million
(notional amount), compared to $23 million as at October 31, 2017.
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.
Climate Change Risks
In February 2018, Scotiabank announced its support of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD).
This particular disclosure relates to the Bank’s non-retail loan book. Additional disclosures relating to the non-retail loan book as well as other aspects
of the Bank’s operations will be included in the 2018 Corporate Social Responsibility Report.
Governance
Board Oversight
Climate Change risk and related disclosure is reviewed and discussed at several committees within the Board, including the Risk Committee and Audit
and Conduct Review Committee, as well as by the full Board of Directors.
The Risk Committee, however, retains primary oversight responsibility for climate change related risks and opportunities with respect to the Bank’s
loan portfolio. As part of this responsibility, in 2018 the Risk Committee reviewed a Future of Energy report as part of its industry analyses and review
of climate change risks. The Risk Committee advises the Board on key and emerging risks and related policies (e.g., Environmental Policy and Credit
Risk Appetite) and reviews the Bank’s management of key risks such as climate change. Reporting on such risks and opportunities is provided to
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 87
MANAGEMENT’S DISCUSSION AND ANALYSIS
the Risk Committee via the Emerging Risks section of the quarterly Enterprise Risk Management Report (when appropriate), as well as review and
approval of industry reports and individual credit submissions. Any significant climate-related natural disasters affecting the Bank’s loan book would
also be discussed at Risk Committee.
The Corporate Governance Committee is also engaged, as it acts in an advisory capacity to the Board through a continuing assessment of the Bank’s
approach to corporate governance and makes policy recommendations. Amongst its responsibilities, this Committee reviews the Bank’s corporate
social responsibility strategy and reporting. This includes climate change, as one of the Bank’s corporate social responsibility priorities.
Management’s Role
The Bank’s existing Environmental Policy and Credit Risk Policy are the two main policy tools for identifying and managing climate related risks
associated with the Bank’s non-retail lending portfolio. These risks are identified, assessed and managed through the Bank’s credit risk and
environmental risk due diligence and adjudication processes. In 2018, the Bank continued its work on enhancing its climate change due diligence as
part of the overall environmental risk due diligence process.
Specific and emerging risks and issues are raised to the relevant levels of management and/or risk committees for discussion or resolution and when
deemed appropriate are reported quarterly in the Emerging Risk section of the Enterprise Risk Management Report to the Risk Committee of the
Board.
The day-to-day responsibility for managing and reporting on climate change risk rests within Global Risk Management and its dedicated
Environmental and Social Risk (ESR) team. The ESR team has responsibility for the integration of climate change considerations into individual credit
applications and industry reviews, through the development and implementation of climate-related risk policies, procedures, tools and the provision of
training to banking officers and credit adjudicators. The team also assists with the review of transactions to ensure climate-related risks are
appropriately identified, considered and mitigated.
Strategy
Full integration of climate change considerations into Bank-wide processes will be a multi-year journey, with some aspects taking longer than others.
In 2018, work began to develop a deeper understanding of climate-related risks by enhancing the Bank’s due diligence processes and integrating
climate risk considerations into its industry reviews. With respect to the former, enhanced due diligence processes will lead to application of a climate
change risk-rating on individual accounts, followed by application of climate change scenario analyses.
Risk Management
The Bank considers environmental risk (including climate-related risks) as a principal risk type. Climate-related risk refers to the possibility that climate
change issues associated with Scotiabank or its customers could give rise to credit, reputational, operational or legal risk, and ultimately affect Bank
performance.
For over a decade, the Bank has utilized and refined a comprehensive environmental risk due diligence process. It is using its existing expertise in
environmental risk management to build strong climate change risk due diligence processes that are repeatable, systematic and specific. The Bank is
working to build the processes and the controls to generate meaningful and practical outcomes, and develop metrics that will allow the Bank to
identify, manage and report climate change related risks.
During 2018 the Bank undertook a significant amount of work related to climate risk in the loan book. Highlights include:
a) The existing environmental risk framework and tools were expanded to better identify climate related risks (both physical and transition risks) for
non-retail lending.
b) A module on climate change risk was incorporated into the mandatory environmental risk training course for all non-retail banking officers and
credit adjudicators.
c) Policies and procedures for non-retail lending have been updated to include climate related due diligence questions. When relevant, climate
change risks are to be addressed in all new and annual review credit applications.
d) A detailed climate change risks and opportunities section was added to industry reviews for 28 economic sectors.
e) Work has been initiated to use global positioning systems to better understand and assess the climate-related physical risks that may be incurred
by the Bank’s clients based upon their geographic location.
Metrics and Targets
Enhanced due diligence standards will allow the Bank to identify meaningful risk metrics. To that end, the Bank has engaged with a number of its
non-retail clients to better understand their climate related risks; how they are being identified, mitigated, and reported; and the types of data that
will be available.
The Bank is also working with its Canadian peers to develop common industry standards for risk metrics, which will facilitate future disclosures.
Once these risk metrics have been implemented, opportunities will exist to set meaningful targets.
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, 2018, these loans accounted for $366 billion or 64% of the Bank’s total loans and acceptances outstanding (October 31, 2017 –
$340 billion or 65%). Of these, $274 billion or 75% are real estate secured loans (October 31, 2017 – $257 billion or 76%). The tables below provide
more details by portfolios.
88 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Insured and uninsured residential mortgages and home equity lines of credit
The following table presents amounts of insured and uninsured residential mortgages and home
equity lines of credit (HELOCs), by geographic area.
C24 Well diversified in Canada and
internationally...
loans and acceptances, October 2018
5%
2%
2%
T40 Insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic areas
Residential mortgages
Home equity lines of credit
2018
As at October 31
Insured(1)
Uninsured
Total
Insured(1)
Uninsured
Total
($ 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
$
6,060
7,658
2.8
3.6
41,351 19.4
$
5,309
8,223
2.5
3.9
65,660 30.8
$ 11,369
15,881
5.3
7.5
107,011 50.2
$ –
–
–
5,473
18,117
2.6
8.5
3,992
12,638
1.9
5.9
9,465
4.5
30,755 14.4
13,526
6.4
25,076 11.7
38,602 18.1
1
1
–
–
–
–
–
–
–
$ 1,175
984
5.6
4.7
11,086 53.0
$ 1,175
984
5.6
4.7
11,086 53.0
795
3.8
3,020 14.4
796
3.8
3,021 14.4
3,866 18.5
3,866 18.5
$ 92,185 43.3% $120,898
56.7% $213,083
100% $ 2
–% $20,926
100% $20,928
100%
–
–
40,274
100
40,274
100
–
–
–
–
–
–
$ 92,185 36.4% $161,172
63.6% $253,357
100% $ 2
–% $20,926
100% $20,928
100%
$100,921 49.0% $104,872
51.0% $205,793
100% $ 4
–% $20,148
100% $20,152
100%
44%
–
–
31,123
100
31,123
–
–
–
–
–
–
–
$100,921 42.6% $135,995
57.4% $236,916
100% $ 4
–% $20,148
100% $20,152
100%
2017
15%
5%
7%
Canada
United States
Mexico
Latin America
Europe
64%
Caribbean and
Central America
Other
C25 … and in household and business
lending
loans and acceptances, October 2018
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(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 $2,899 (October 31, 2017 – $2,594) of which $2,029 are insured (October 31, 2017 – $1,689).
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
Residential mortgages by remaining amortization periods
2018
Less than
20 years
20-24
years
25-29
years
30-34
years
33.9% 38.0% 27.1%
65.1% 18.9% 13.2%
0.9%
2.7%
2017
33.8% 37.9% 26.9%
69.3% 17.2% 11.1%
1.3%
2.3%
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 57% uninsured (October 31, 2017 – 51%). The
average loan-to-value (LTV) ratio of the uninsured portfolio is 54% (October 31, 2017 – 51%).
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.
30%
6%
20%
Corporate
Financial and government
Personal
Residential mortgages
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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 ended October 31, 2018
Residential mortgages
LTV%
Home equity lines of credit(2)
LTV%
69.4%
65.4
63.4
68.6
67.3
61.6
63.8%
68.9%
For the year ended October 31, 2017
64.0%
70.4%
57.3%
67.5
61.4
61.0
70.5
59.9
62.0%
n/a
62.7%
n/a
(1) The province represents the location of the property in Canada.
(2)
Includes only home equity lines of credit (HELOC) under Scotia Total Equity Plan. LTV is calculated based on the sum of residential mortgages and the authorized limit for related HELOCs, divided by the value of the related
residential property, and presented on a weighted average basis for newly originated mortgages and HELOCs.
Potential impact on residential mortgages and real estate home equity lines of credit in the event of an economic downturn
The Bank stresses its mortgage book to determine the impact of a variety of combinations of home price declines, unemployment increases and rising
interest rates. It benchmarks the scenarios against experience in various historical downturns to confirm that they are sufficiently robust tests of the
portfolio. In stress, there are moderate increases in credit losses and negative impacts on capital ratios but within a level the Bank considers
manageable. In practice, the portfolio is robust to such scenarios due to the low LTV of the book, the high proportion of insured exposures and the
diversified composition of the portfolio.
Loans to Canadian condominium developers
With respect to loans to Canadian condominium developers, the Bank had loans outstanding of $1,192 million as at October 31, 2018 (October 31,
2017 – $949 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 (89% of
the exposures are to investment grade counterparties based on a combination of internal and external ratings), and are modest relative to the capital
levels of the Bank. The Bank’s European exposures are certified at amortized cost or fair value using observable inputs, with negligible amounts valued
using models with unobservable inputs (Level 3). There were no significant events in the quarter that have materially impacted the Bank’s exposures.
The Bank’s exposure to sovereigns was $8.5 billion as at October 31, 2018 (October 31, 2017– $8.9 billion), $5.8 billion to banks (October 31, 2017 –
$5.7 billion) and $15.8 billion to corporates (October 31, 2017– $17.6 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 $0.7 billion as at (October 31, 2017 – $1.3 billion).
The Bank’s current European exposure is distributed as follows:
T43 Bank’s exposure distribution by country
As at October 31
2018
Loans and
loan
equivalents(1)
Deposits
with
financial
institutions
Securities(2)
SFT and
derivatives(3)
Funded
Total
Undrawn
Commitments(4)
($ millions)
Greece
Ireland
Italy
Portugal
Spain
Total GIIPS
U.K.
Germany
France
Netherlands
Switzerland
Other
Total Non-GIIPS
Total Europe
As at October 31, 2017
$
$
$
146
1,003
31
–
944
2,124
7,633
1,475
1,136
855
535
1,926
$ 13,560
$ 15,684
$ 17,652
$
$
–
482
–
–
7
489
$ 4,317
651
289
181
14
255
$ 5,707
$ 6,196
$ 2,841
$
–
19
(2)
–
553
$
570
$ 1,150
1,115
1,411
(142)
85
2,175
$ 5,794
$ 6,364
$ 9,005
$
$
–
5
1
2
50
58
$ 1,293
21
49
95
87
236
$
146
1,509
30
2
1,554
$
3,241
$ 14,393
3,262
2,885
989
721
4,592
$
$
$
–
1,103
118
–
147
1,368
5,610
1,023
1,314
1,536
771
3,396
2017
Total
213
2,033
133
1
826
$
$
Total
146
2,612
148
2
1,701
$
4,609
$
3,206
$ 20,003
4,285
4,199
2,525
1,492
7,988
$ 20,166
4,495
5,053
3,341
2,156
8,068
$ 1,781
$ 26,842
$ 13,650
$ 40,492
$ 43,279
$ 1,839
$ 30,083
$ 15,018
$ 45,101
$ 46,485
$ 2,718
$ 32,216
$ 14,269
$ 46,485
(1)
Individual allowances for credit losses are $28. 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
$3,867 as at October 31, 2018 (October 31, 2017 – $3,366).
(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 $1,899 and collateral held against SFT was $9,989.
(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.
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Market Risk
Market risk is the risk of loss from changes in market prices and rates (including interest rates, credit spreads, equity prices, foreign exchange rates and
commodity prices), the correlations between them, and their levels of volatility. Below is an index of market risk disclosures:
Index of all market risk disclosures
Index
Market risk factors
Interest rate risk
Credit spread risk
Foreign currency risk
Equity risk
Commodity risk
Market risk governance
Risk measurement summary
Value at risk
Incremental risk charge
Stress testing
Sensitivity analysis
Gap analysis
Validation of market risk models
Non-trading market risk
Interest rate risk
Foreign currency risk
Investment portfolio risks
Trading market risk
Market risk linkage to Consolidated Statement of
Financial Position
Derivative instruments and structured transactions
Derivatives
Structured transactions
European exposures
Market risk
Financial instruments
Page
Tables and charts
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T44 Interest rate gap
T45 Structural interest sensitivity
T46 Market risk measures
C26 Trading revenue distribution
C27 Daily trading revenue vs. VaR
T47 Market risk linkage to Consolidated Statement of Financial
Position of the Bank
T43 Bank’s exposure distribution by country
66-67
T34 Total market risk capital
70
T37 Mortgage-backed securities
94
94
95
95
95
96
90
67
71
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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
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
Overview
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, 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.
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Incremental Risk Charge (IRC)
Basel market risk capital requirements includes IRC which captures 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. IRC is
calculated at the 99.9th percentile with a one year liquidity horizon. The Board reviews IRC 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. These calculations are based on a
constant balance sheet and make no assumptions for management actions that may mitigate the risks. 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 monthly 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
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 protecting and enhancing net
interest income within established risk tolerances.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 93
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 2018, an immediate and sustained 100 basis point increase in
interest rates across all currencies and maturities would decrease after-tax net interest income by approximately $105 million over the next 12 months,
assuming no further management actions. During fiscal 2018, this measure ranged between $53 million and $105 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 $870 million.
During fiscal 2018, this measure ranged between $827 million and $1097 million. The directional sensitivity of these two key metrics is largely
determined by the difference in time horizons (annual income captures the impact over the next twelve months only, whereas economic value
considers the potential impact of interest rate changes on the present value of all future cash flows). The annual income and economic value results
are compared to the authorized Board limits. There were no limit breaches in the reporting period.
T44 Interest rate gap
Interest rate sensitivity position(1)
As at October 31, 2018 ($ billions)
Canadian dollars
Assets
Liabilities
Gap
Foreign currencies
Assets
Liabilities
Gap
Total
Gap
As at October 31, 2017
Gap
Within
3 months
3 to 12
months
Over
1 year
Non-interest
rate
sensitive
$ 221.1
$ 264.0
$ (42.9)
$ 337.9
$ 332.4
$
5.5
$ 50.3
$ 59.3
$ (9.0)
$ 42.1
$ 43.0
$ (0.9)
$ (37.4)
$ (9.9)
$
(0.9)
$
1.9
$ 165.1
$ 107.0
$
58.1
$
$
$
$
$
87.6
69.4
18.2
76.3
28.8
$
$
$
$
$
$
$
$
9.3
15.5
(6.2)
85.1
107.9
(22.8)
(29.0)
(29.8)
Total
$445.8
$445.8
$
–
$552.7
$552.7
$
$
$
–
–
–
(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.
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
2018
2017
Economic
Value of
Shareholders’
Equity
Economic
Value of
Shareholders’
Equity
Annual
Income
Annual
Income
$ (870)
$ (105)
$ (354)
$
64
$
797
$
101
$ 183
$ (67)
Foreign currency risk
Foreign currency risk in the Bank’s unhedged funding and investment activities arises primarily from the Bank’s net investments in foreign operations
as well as foreign currency earnings in its domestic and remitting foreign branch operations.
The Bank’s foreign currency exposure to its net investments in foreign operations is controlled by a Board-approved limit. This limit considers factors
such as potential volatility to shareholders’ equity as well as the potential impact on capital ratios from foreign exchange fluctuations. On a quarterly
basis, the Asset-Liability Committee reviews the Bank’s foreign currency net investment exposures and determines the appropriate hedging strategies.
These may include funding the investments in the same currency or using other financial instruments, including derivatives.
Foreign currency translation gains and losses from net investments in foreign operations, net of related hedging activities and tax effects, are recorded
in accumulated other comprehensive income within shareholders’ equity. However, the Bank’s regulatory capital ratios are not materially affected by
these foreign exchange fluctuations because the risk-weighted assets of the foreign operations tend to move in a similar direction.
The Bank is also subject to foreign currency translation risk on the earnings of its domestic and remitting foreign branch operations. The Bank
forecasts foreign currency revenues and expenses, which are primarily denominated in U.S. dollars, over a number of future fiscal quarters. The Asset-
Liability Committee also assesses economic data trends and forecasts to determine if some or all of the estimated future foreign currency revenues
and expenses should be hedged. Hedging instruments normally include foreign currency spot and forward contracts, as well as foreign currency
options and swaps. Certain of these economic hedges may not qualify for hedge accounting resulting in a potential for a mismatch in the timing of
the recognition of economic hedge gains/losses and the underlying foreign earnings translation gains/losses. In accordance with IFRS, foreign currency
translation gains and losses relating to monetary and non-monetary items are recorded directly in earnings.
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As at October 31, 2018, 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 $65 million (October 31, 2017 – $58 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 2018, the total one-day VaR for trading activities averaged $12.9 million, compared to $11.2 million in 2017.
T46 Market risk measures
($ 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
2018
2017
Year end
Avg
High
Low Year end
Avg
High
Low
$
$
$
$
$
11.0
6.2
7.7
5.8
2.8
1.7
3.6
11.6 $
7.8
9.5
3.0
3.3
1.6
3.4
17.8 $
12.2
17.2
15.5
5.8
2.1
4.2
(11.7)
(10.0)
n/a
$
10.1
6.9
8.4
3.2
2.9
1.3
3.3
$
10.8 $
6.3
8.4
2.2
2.2
1.4
3.6
15.1 $
9.1
12.0
4.8
5.5
2.6
5.1
(10.2)
(9.0)
n/a
6.9
4.8
4.3
1.2
1.1
1.0
2.6
n/a
8.6
8.0
4.1
5.3
1.0
0.7
0.6
2.4
n/a
9.1
13.2
44.6
$
$
12.9 $
18.4 $
11.2 $
14.9 $
42.7 $
59.0 $
26.3
28.5 $
44.5 $
19.2
$
$
10.6
34.7
$
$
77.9
$ 173.4 $ 474.7 $
60.0
$ 144.5
$ 271.2 $ 399.8 $ 144.5
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 2018, the total one-day Stressed VaR for trading activities averaged $42.7 million
compared to $28.5 million in 2017.
In fiscal 2018, the average IRC decreased to $173.4 million from $271.2 million in 2017, primarily driven by reduced emerging market exposure.
Description of trading revenue components and graphical comparison of VaR to daily P&L
Chart C26 shows the distribution of daily trading revenue for fiscal 2018 and Chart C27 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 $5.9 million per day, compared to $6.0 million in 2017. Revenue was positive
on 99.6% of trading days during the year, an increase from 99% in 2017. During the year, the largest single day trading loss was $3.2 million which
occurred on December 15, 2017, and was smaller than the total VaR of $13.8 million on the same day.
C26 Trading revenue distribution
Year ended October 31, 2018
C27 Daily trading revenue vs. VaR
$ millions, November 1, 2017 to October 31, 2018
45
40
35
30
25
20
15
10
5
0
# of days
Gain
Loss
-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
40
30
20
10
0
-10
-20
-30
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 95
MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2018
($ 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
$
3,191 $
3,191 $
100,262
12
37,558
78,396
551,834
227,240
99,650
–
33,937
–
–
–
–
612
12
3,621
78,396
551,834
–
$
–
–
–
–
–
–
227,240
$ 998,493 $ 136,778 $ 634,475
$ 227,240
Primary risk sensitivity of
non-trading risk
n/a
Interest rate, FX
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)
$ 676,534 $
8,188
32,087
37,967
5,019
1,727
169,291
– $ 641,791
8,188
–
–
32,087
5,667
32,300
–
5,019
1,727
–
–
–
$
Interest rate, FX, equity
34,743
Interest rate, equity
–
n/a
–
Interest rate, FX, equity
–
–
n/a
– Interest rate, credit spread, equity
n/a
169,291
Total liabilities
$ 930,813 $
69,406 $ 657,373
$ 204,034
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, 2017(1)
($ 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(2)
Total assets
Deposits
Financial instruments designated at fair value through profit or loss
Obligations related to securities sold short
Derivative financial instruments
Trading liabilities(3)
Retirement and other benefit liabilities
Liabilities not subject to market risk(4)
Total liabilities
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
$ 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
–
–
–
$
32,193
–
–
–
–
–
149,632
$ 853,648 $
68,130 $ 603,693
$ 181,825
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) Amounts have not been restated in accordance with IFRS 9; prior period amounts are prepared in accordance with IAS 39 (refer to Notes 3 and 4 in the consolidated financial statements).
(2)
(3) Gold and silver certificates and bullion included in other liabilities.
(4)
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.
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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
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 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, 2018, unencumbered liquid assets were $202 billion (October 31, 2017 – $180 billion). Securities including NHA
mortgage-backed securities, comprised 71% of liquid assets (October 31, 2017 – 67%). Other unencumbered liquid assets, comprising cash and
deposits with central banks, deposits with financial institutions, precious metals and call and short loans, were 29% (October 31, 2017 – 33%). The
increase in liquid assets was mainly attributable to an increase in unencumbered foreign government obligations, deposits with financial institutions
and NHA mortgage-backed securities, which was partially offset by a decrease in cash and deposits with central banks and precious metals.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
The carrying values outlined in the liquid asset table are consistent with the carrying values in the Bank’s Consolidated Statement of Financial Position
as at October 31, 2018. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the stress
scenarios.
The Bank’s liquid asset pool is summarized in the following table:
T48 Liquid asset pool
As at October 31, 2018
($ 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
$
48,352
13,917
3,191
45,260
60,553
54,786
34,636
1,047
$
–
–
–
11,050
63,816
66,704
–
–
$
$
48,352
13,917
3,191
$
–
–
–
$ 7,906
73
70
56,310
124,369
121,490
34,636
1,047
29,464
68,531
92,280
2,605
–
–
–
–
–
–
40,446
13,844
3,121
26,846
55,838
29,210
32,031
1,047
$ –
–
–
–
–
–
–
–
Total
$ 261,742
$ 141,570
$ 403,312
$ 192,880
$ 8,049
$ 202,383
$ –
As at October 31, 2017(3)
($ 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
$ –
(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 Consolidated Statement of Financial Position.
(3) Amounts have not been restated in accordance with IFRS 9; prior period amounts are prepared in accordance with IAS 39 (refer to Notes 3 and 4 in the consolidated financial statements).
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
As at October 31
($ millions)
The Bank of Nova Scotia (Parent)
Bank domestic subsidiaries
Bank foreign subsidiaries
Total
2018
2017
$ 152,728
15,344
34,311
$ 131,838
13,753
34,729
$ 202,383
$ 180,320
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
(83%) 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.
98 | 2 0 1 8 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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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, 2018
($ 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, 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
Encumbered assets
Unencumbered assets
Bank-owned
assets
Securities received as
collateral from securities
financing and derivative
transactions
Total assets
Pledged as
collateral
$
48,352
13,917
3,191
45,260
60,553
54,786
3,283
34,636
1,047
530,485
163,209
39,774
$
–
–
–
$
11,050
63,816
66,704
5,400
–
–
–
(92,624)
–
48,352
13,917
3,191
56,310
124,369
121,490
8,683
34,636
1,047
530,485
70,585
39,774
$
–
–
–
29,464
68,531
92,280
4,978
2,605
–
8,430
2,619
–
$
Other(1)
7,906
73
70
–
–
–
–
–
–
59,460
–
–
Available as
collateral(2)
Other(3)
$
40,446
13,844
3,121
26,846
55,838
29,210
–
32,031
1,047
12,864
–
–
$
–
–
–
–
–
–
3,705
–
–
449,731
67,966
39,774
$ 998,493
$ 54,346
$ 1,052,839
$ 208,907
$ 67,509
$ 215,247
$ 561,176
Encumbered assets
Unencumbered assets
Bank-owned
assets
Securities received as
collateral from securities
financing and derivative
transactions
Total assets
Pledged as
collateral
$
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)
–
49,754
9,909
5,717
51,627
101,674
116,034
6,956
33,327
1,405
486,949
65,638
28,949
$
–
–
–
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
(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, 2018, total encumbered assets of the Bank were $276 billion (October 31, 2017 – $257 billion). Of the remaining $776 billion
(October 31, 2017 – $701 billion) of unencumbered assets, $215 billion (October 31, 2017 – $193 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. As at October 31, 2018, the potential adverse impact on derivatives collateral that would result from a one-notch or
two-notch downgrade of the Bank’s rating below its lowest current rating was $50 million or $306 million, respectively.
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%.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 99
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
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, 2018, based on the average daily position in the quarter.
T51 Bank’s average LCR
For the quarter ended October 31, 2018 ($ 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, 2017 ($ millions)
Total HQLA
Total net cash outflows
Liquidity coverage ratio (%)
Total
unweighted
value
(Average)(2)
Total
weighted
value
(Average)(3)
*
$ 144,349
$ 173,809
76,795
97,014
179,528
56,756
96,549
26,223
*
198,215
26,346
3,605
168,264
1,231
454,996
12,191
2,490
9,701
87,967
13,596
48,148
26,223
35,239
42,822
18,481
3,605
20,736
1,186
7,678
*
$ 187,083
$ 130,332
24,564
25,404
$
29,206
15,738
25,404
$ 180,300
$
70,348
Total
adjusted
value(5)
$ 144,349
$ 116,735
124%
Total
adjusted
value(5)
$ 127,444
$ 101,751
125%
*
*
*
*
*
*
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. The Bank’s average LCR for the quarter ended October 31, 2018 was in line with the
quarter ended October 31, 2017.
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.
100 | 2 0 1 8 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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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 issuances.
Capital and personal deposits are key components of the Bank’s core funding and these amounted to $289 billion as at October 31, 2018
(October 31, 2017 – $269 billion). The increase since October 31, 2017, was primarily due to deposit growth, internal capital generation and common
and preferred share issuance, net of common share repurchases and 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 $157 billion (October 31, 2017 – $146 billion).
Longer term wholesale debt issuances include senior notes, mortgage securitizations, 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 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 Halifax Receivables Trust (previously Hollis Receivables Term Trust II) program, retail credit card
receivables through the Trillium Credit Card Trust II program 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, the United Kingdom, 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.
On September 23, 2018, the Bank Recapitalization (Bail-in) Conversion Regulations and the Bank Recapitalization (Bail-in) Issuance Regulations came
into force. In general, any issuance of senior debt with an initial or amended term to maturity (including 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 is subject, in whole or in part,
to conversion into the Bank’s common shares. Please refer to the “Regulatory Developments” section.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 101
MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2018
($ 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
short-term certificate of
deposits
Asset-backed commercial
paper(3)
Senior notes(4)(5)
Bail-inable notes(5)
Asset-backed securities
Covered bonds
Mortgage securitization(6)
Subordinated debentures(7)
Total wholesale funding
sources
Of Which:
$
1,720
$
196
$
211
$
212
$
116
$
2,455
$
29
$
145
$
32
$
2,661
8,807
14,201
21,517
15,961
2,088
180
–
6
–
–
–
4,697
2,714
–
15
2,910
765
–
165
4,070
–
47
1,491
316
–
–
6,214
–
500
–
567
–
7,580
–
5,168
–
–
1,975
508
–
68,066
5,487
666
56
74,275
6,950
18,346
–
568
6,376
2,156
–
–
15,179
–
2,714
4,312
2,388
–
–
36,765
–
1,944
16,779
12,966
237
–
14,298
–
304
1,772
4,646
7,539
6,950
84,588
–
5,530
29,239
22,156
7,776
$ 12,801
$ 25,498
$ 27,817
$ 23,454
$ 15,347
$ 104,917
$ 30,109
$ 69,502
$ 28,647
$ 233,175
Unsecured funding
Secured funding
$ 10,707
2,094
$ 17,111
8,387
$ 25,798
2,019
$ 22,387
1,067
$ 12,864
2,483
$
88,867
16,050
$ 20,695
9,414
$ 37,813
31,689
$ 21,925
6,722
$ 169,300
63,875
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
short-term certificate of
deposits
Asset-backed commercial
paper(3)
Senior notes(4)(5)
Asset-backed securities
Covered bonds
Mortgage securitization(6)
Subordinated debentures(7)
Total wholesale funding
sources
Of Which:
$
2,740
$
471
$
405
$
264
$
110
$
3,990
$
205
$
153
$
–
$
4,348
7,699
12,227
22,351
12,740
1,885
24
–
2,821
–
–
4,233
3,621
1
–
569
–
981
8,480
–
–
666
–
–
5,469
1,162
13
556
–
7,557
–
6,378
215
686
310
–
62,574
5,685
495
12
68,766
7,099
23,972
1,378
3,520
2,101
–
–
13,024
822
6,378
2,158
–
–
32,927
1,975
14,719
10,522
181
–
10,453
351
1,410
4,943
7,022
7,099
80,376
4,526
26,027
19,724
7,203
$ 15,169
$ 21,122
$ 32,883
$ 20,204
$ 15,256
$ 104,634
$ 28,272
$ 60,972
$ 24,191
$ 218,069
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
(1) Wholesale funding sources exclude repo transactions and bankers acceptances, which are disclosed in the T56 Contractual maturities. Amounts are based on remaining term to maturity.
(2) Only includes commercial bank deposits raised by Group Treasury.
(3) Wholesale funding sources also exclude asset-backed commercial paper issued by certain ABCP conduits that are not consolidated for financial reporting purposes.
(4) Not subject to bail-in.
(5)
(6) 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.
(7) 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 institutional 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 $202 billion as at October 31, 2018 (October 31, 2017 – $180 billion) were well in excess of wholesale funding
sources that mature in the next twelve months.
102 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
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, 2018, 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 $477 million in 2018 (2017 – $444 million). The increase primarily reflects higher contractual rents, the impact of branch
and office sale/leasebacks and acquisitions of BBVA Chile and Citibank Colombia.
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2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 103
MANAGEMENT’S DISCUSSION AND ANALYSIS
T53 Contractual maturities
($ 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, 2018
$ 54,254 $
4,792
920 $
284 $
101 $
117 $
326 $
726 $
5,311
3,326
5,463
2,309
7,934
12,765
223
18,130
$
8,509 $
40,232
65,460
100,262
through profit or loss
–
–
–
–
12
–
–
–
–
12
Securities purchased under resale agreement and
securities borrowed
Derivative financial instruments
Investment securities – FVOCI
Investment securities – amortized cost
Investment securities – FVTPL
Loans
Residential mortgages
Personal loans
Credit cards
Business and government
Allowance for credit losses
Customers’ liabilities under acceptances
Other assets
Total 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
Total liabilities and equity
Off-Balance sheet commitments
Operating leases
Credit commitments(3)
Financial guarantees(4)
Outsourcing obligations(5)
74,522
3,178
3,925
452
–
40,463
11,496
4,204
–
24,763
–
13,829
–
195,415
21,223
5,517
6,436
1,429
–
27,581
4,697
2,701
–
20,183
–
2,082
–
70,499
5,743
2,024
5,852
1,160
–
28,920
8,774
3,528
–
16,618
–
338
–
47,647
673
2,327
3,284
1,501
–
27,246
12,014
3,431
–
11,801
–
50
–
40,645
337
1,446
3,243
1,500
–
28,064
12,781
3,558
–
11,725
–
30
–
37,058
549
6,447
13,139
4,302
–
93,191
53,629
11,712
–
27,850
–
–
–
125,888
539
6,071
15,206
9,465
–
214,017
126,934
23,338
–
63,745
–
–
–
258,789
432
10,548
4,758
934
–
34,985
21,366
5,468
–
8,151
–
–
–
70,010
–
–
1,305
–
505
57,367
1,666(1)
38,079
16,485
6,202(2)
(5,065)
–
44,624
152,542
104,018
37,558
57,148
20,743
505
551,834
253,357
96,019
16,485
191,038
(5,065)
16,329
44,624
998,493
$ 56,965 $53,331 $ 48,661 $ 39,716 $ 32,753 $ 45,262 $
8,797
48,168
9,415
43,916
12,536
36,125
9,563
30,153
10,241
22,512
13,472
31,790
78,295 $18,313
11,953
261
18,052
66,342
$303,238 $ 676,534
214,545
461,989
138,307
164,931
22
13,838
910
2,520
96,157
–
2,720
–
173,132
77
2,082
972
4,288
3,466
–
592
–
64,808
360
338
870
1,613
1,634
–
1,302
–
54,778
410
50
305
2,716
–
–
422
–
43,619
523
30
1,013
1,583
–
–
757
–
36,659
3,090
–
3,896
6,773
–
–
1,784
–
60,805
1,646
–
8,685
7,699
–
–
6,167
–
102,492
1,969
–
7,388
10,775
–
5,698
5,978
–
50,121
91
–
8,048
–
–
–
33,022
67,680
412,079
8,188
16,338
32,087
37,967
101,257
5,698
52,744
67,680
998,493
$
36 $
72 $
106 $
104 $
102 $
378 $
818 $
4,232
–
18
5,588
–
36
13,438
–
52
15,182
–
52
22,619
–
52
23,906
–
207
105,988
–
311
880
6,486
–
–
$
– $
–
36,423
1
2,496
197,439
36,423
729
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.
104 | 2 0 1 8 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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($ 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 loans
Credit cards
Business and government
Allowance for credit losses
Customers’ liabilities under acceptances
Other assets
Total 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
Total liabilities and 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
–
177,568
16,966
4,558
5,645
779
25,032
4,065
2,309
–
18,658
–
2,399
–
61,379
3,732
2,084
4,495
1,052
28,778
9,542
3,124
–
16,112
–
254
–
44,065
1,087
1,418
2,170
1,193
29,291
15,700
3,322
–
10,269
–
22
–
38,096
188
1,274
2,131
123
27,197
13,083
3,217
–
10,897
–
10
–
33,306
–
4,303
6,506
5,847
74,303
42,460
10,899
–
20,944
–
–
–
96,640
–
8,375
18,098
8,923
209,229
129,448
20,601
–
59,180
–
–
–
259,955
–
9,808
7,054
109
28,667
18,017
5,293
–
5,357
–
–
–
63,704
–
–
1,311
–
53,032
1,529(1)
36,482
14,104
5,244(2)
(4,327)
–
33,535
140,560
95,319
35,364
50,504
18,765
504,369
236,916
89,227
14,104
168,449
(4,327)
13,560
33,535
915,273
$
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
–
157,230
3
2,399
167
3,348
8,452
–
1,076
–
63,482
5
254
97
1,786
1,524
–
440
–
53,213
118
22
148
1,258
229
–
824
–
33,537
133
10
1,057
1,347
2
–
187
–
29,109
543
–
3,354
3,056
–
–
1,369
–
53,057
2,882
–
9,229
11,534
–
–
3,223
–
99,967
979
–
9,935
9,061
–
5,935
4,314
–
46,261
$
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
–
–
–
–
6,443
–
–
–
30,462
61,625
379,417
4,663
13,560
30,766
34,200
95,843
5,935
43,314
61,625
915,273
– $
–
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.
2 0 1 8 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
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 businesses 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 at a particular point in time
and can help to monitor potential shifts in risk conditions or new emerging risks 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, which 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 work to ensure employees are aware of relevant risks and are 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 the 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.
IT and Cyber Security risks continue to evolve across the financial industry. The increasing use of online delivery channels and mobile devices to
perform financial transactions leave the bank vulnerable to operational disruptions due to multiple factors such as: human errors, frauds, infrastructure
failures, issues with our business partners, among others. Those events may increase costs or may negatively impact the Bank’s operational
environment, our customers and other third parties. Regulatory oversight of IT and Cyber Security risk management practices has also been increased.
The Board of Directors approves the IT Risk Management and Information Security polices, which along with the respective frameworks are focused
on safeguarding the Bank’s and its customers information, ensuring the Bank’s IT environment is reliable, secure, resilient and robust in supporting our
business objectives.
Significant efforts are directed on risk management activities including the Cyber Security program in line with the industry standards and best
practices. The Bank is expanding its capabilities to defend against potential threats and minimize the impact to the business, including the regular
testing activities to continuously reinforce the Bank’s resilience to events caused by factors out of the Bank’s control. The dependency on third parties
and the potential risks they bring to the continuity of our business activities is a key area of focus. The Bank has a governance framework to mitigate
those risks.
The Bank continuously monitors the metrics and Key Risk Indicators, which are regularly reported to the Board of Directors, its Risk Committee and
other internal committees who oversee the performance of the associated risk thresholds. Material issues are escalated to the executive management
committees to ensure appropriate remediation. Information security awareness campaigns are conducted periodically, including annual mandatory
training sessions on information security and operational risk to all our employees, reinforcing our risk culture.
106 | 2 0 1 8 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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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 Officer (CCO) for the Bank and is responsible for overseeing Compliance Risk
Management within the Bank. The CCO 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 active 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, Global Tax, Corporate Secretary, Global Communications, Global AML/ATF, Global Compliance and Global Risk Management
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 a 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,
new products and services and sales practice issues.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 107
MANAGEMENT’S DISCUSSION AND ANALYSIS
The 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 Reputational Risk Committee also holds regular quarterly meetings to review
activities in the quarter, review metrics and discuss any emerging trends or themes.
The Reputational Risk 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 risk assessment where applicable, and commentary on the potential impact of climate
change (including physical or transition risk 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 continue operations 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
through their risk committees. Typical committee members include the Chief Executive Officer, Chief Financial Officer and Chief Risk Officer. Second
line of defense oversight is provided by Global Risk Management – Insurance Risk. The insurance subsidiaries have their own boards of directors, as
well as independent appointed actuaries who provide actuarial 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.
108 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
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.
Data Risk
Data risk is the risk, whether direct or indirect, to data that is used to support the Bank’s ability to make informed decisions and develop
accurate reporting and analytics for the Bank, including the Board, senior management and regulators, or for customer facing and/or
marketing purposes. Risks to which the Bank is exposed include data management, data taxonomy, metadata, breaches or data that is
incomplete, inaccurate, invalid, untimely and/or inaccessible.
Data is considered one of the Bank’s most strategic assets and the volume, value and type of data found within the Bank has exponentially increased
in recent years. Enhanced rigor towards data management is a concentrated focus for the Bank with the increase in regulatory demands. The Data
Executive Committee approves the Data Management Policy and Governance Framework. The goals of the policy and framework are to ensure
oversight and management of critical Bank-wide data, and to provide governance, oversight, control structure and accountabilities to enable greater
enterprise coordination and consistency.
The Data Office oversees and standardizes data management and data governance practices in establishing reliable, reusable and scalable data and is
responsible for enterprise-wide management of data risk. Since data is produced and consumed by different business lines and geographies across the
Bank, an effective, collaborative and holistic approach to data risk management is required to minimize reputational, regulatory and financial risk.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
CONTROLS AND ACCOUNTING POLICIES
Controls and Procedures
Management’s responsibility for financial information contained in this annual report is described on page 140.
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 Executive Vice President and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
As of October 31, 2018, the Bank’s management, with the participation of the President and Chief Executive Officer and the Executive Vice President
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, 2018.
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. The Bank adopted IFRS 9, Financial Instruments effective November 1, 2017 and as a result,
has updated and modified certain internal controls over financial reporting. Refer to Note 3 of the consolidated financial statements for further
information on changes to accounting policies and Note 4 regarding the transition impact on adoption of IFRS 9.
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
Effective in 2018, the allowance for credit losses, using an expected credit loss approach as required under IFRS 9, is estimated using complex models
and incorporates inputs, assumptions and techniques that involve a high degree of management judgment. Under IFRS 9 expected credit loss
methodology, an allowance is recorded for expected credit losses on financial assets regardless of whether there has been an actual loss event. The
Bank recognizes an allowance at an amount equal to 12 month expected credit losses, if the credit risk at the reporting date has not increased
significantly since initial recognition (Stage 1). When a financial asset experiences a significant increase in credit risk subsequent to origination but is
not considered to be in default, it is included in Stage 2 and subject to lifetime expected credit losses. Financial assets that are in default are included
in Stage 3. Similar to Stage 2, the allowance for credit losses for Stage 3 financial assets captures the lifetime expected credit losses.
The main drivers in allowance for credit loss changes that are subject to significant judgment include the following:
(cid:129) Determination of point-in-time parameters such as probability of default (PD), loss given default (LGD) and exposure at default (EAD).
(cid:129) Forecast of macroeconomic variables for multiple scenarios and probability weighting of the scenarios.
(cid:129) Assessment of significant increase in credit risk.
Measurement of expected credit losses
The probability of default (PD), exposure at default (EAD), and loss given default (LGD) inputs used to estimate expected credit losses are modelled
based on macroeconomic variables that are most closely related with credit losses in the relevant portfolio.
Details of these statistical parameters/inputs are as follows:
(cid:129) PD – The probability of default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time
over the remaining estimated life, if the facility has not been previously derecognized and is still in the portfolio.
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(cid:129) EAD – The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after
the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed
facilities, and accrued interest from missed payments.
(cid:129) LGD – The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference
between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral. It is
usually expressed as a percentage of the EAD.
Forward-looking macroeconomic scenarios
The Bank uses a broad range of forward-looking economic information as inputs to its models of expected credit losses and the related allowance.
These include real GDP, unemployment rates, central-bank interest rates, and house-price indices. The allowance is determined using three
probability-weighted, forward-looking scenarios. The Bank considers both internal and external sources of information and data in order to create
unbiased projections and forecasts. The Bank prepares the scenarios using forecasts generated by Scotiabank Economics (SE). The forecasts are
generated using both internally and externally developed models whose outputs are modified by SE as necessary to formulate a ‘base case’ view of
the most probable future direction of economic developments; SE also develops a representative range of other alternative possible forecast scenarios.
More specifically, the process involves the development of two additional economic scenarios to which relative probabilities are assigned. The
development of the baseline and alternative scenarios is overseen by a governance committee that consists of internal stakeholders from across the
bank. The final baseline and alternative scenarios reflect significant review and oversight, and may incorporate some judgment both in the
determination of the scenarios’ forecasts and the probability weights that are assigned to them. Qualitative adjustments or overlays may also be made
as temporary adjustments using expert credit judgment in circumstances where, in the Bank’s view, the existing regulatory guidance, inputs,
assumptions, and/or modelling techniques do not capture all relevant risk factors. The use of management overlays may require significant judgment
that may impact the amount of allowance recognized.
Significant Increase in credit risk (SIR)
The assessment of SIR since origination of a financial asset considers borrower-specific quantitative and qualitative information without consideration of
collateral, and the impact of forward-looking information. Quantitative models may not always be able to capture all reasonable and supportable
information that may indicate a significant increase in credit risk. Qualitative factors may be assessed to supplement the gap. Examples of situations include
changes in adjudication criteria for a particular group of borrowers; changes in portfolio composition and natural disaster events impacting certain portfolios.
For retail exposures, a significant increase in credit risk cannot be assessed using forward looking information at an individual account level. Therefore,
the assessment must be done at the segment level. Segment migration thresholds exist for each PD model by product which considers the
proportionate change in PD as well as the absolute change in PD. The thresholds used for PD migration are reviewed and assessed at least annually,
unless there is a significant change in credit risk management practices in which case the review is brought forward.
For Non-retail exposures the Bank uses an internal risk rating scale (IG codes) for its non-retail exposures. All non-retail exposures have an IG code
assigned that reflects the probability of default of the borrower. Both borrower specific and non-borrower specific (i.e. macroeconomic) forward
looking information is considered and reflected in the IG rating. Significant increase in credit risk is evaluated based on the migration of the exposures
among IG codes.
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. The contractual cash flow characteristics of a financial instrument and the business model under which it is held determines such
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 fair value through other comprehensive income at inception.
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. Unadjusted quoted market prices for identical
instruments 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.
2 0 1 8 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
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 $138 million as at October 31, 2018, (2017 –
$94 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, 2018, a funding valuation adjustment (FVA) of $57 million pre-tax (2017 – $80 million) was recorded relating to uncollateralized
derivative instruments.
The Bank discloses the classification of all financial instruments carried at fair value in a hierarchy based on the determination of fair value. The
valuation hierarchy is as follows:
(cid:129) Level 1 – fair value is based on unadjusted quoted prices in active markets for identical instruments,
(cid:129) Level 2 – fair value is based on models using significant market-observable inputs other than quoted prices for the instruments, or
(cid:129) Level 3 – fair value is based on models using significant inputs that are not based on observable market data.
The Bank’s assets and liabilities which are carried at fair value as classified by the valuation hierarchy are reflected in Note 7. 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, 2018
Level 1
Level 2
Level 3
Assets
Liabilities
Trading
assets
(incl. precious
metals)
63%
37%
–%
100%
Investment
securities
Derivatives
65%
34%
1%
100%
3%
97%
–%
100%
Obligations
related to
securities
sold short
77%
23%
–%
100%
Derivatives
3%
97%
–%
100%
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 average earnings at retirement), 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 include post-retirement health care, dental care and life insurance, along with other long-term employee benefits such as long-term disability
benefits.
The employee benefit expenses 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 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. 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 is the same as the rate used to determine the
defined benefit obligation. If the assumed discount rates were 1% lower, the benefit expense for 2018 would have been $135 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 $231 million (2017 –
$513 million) in its principal pension plans and a deficit of $1,134 million (2017 – $1,392 million) in its principal other benefit plans, which are
typically unfunded, as at October 31, 2018, as disclosed in Note 28 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.
Note 28 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 $338 million as at October 31,
2018 (2017 – $417 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 $14 million (2017 – $82 million). The amount related to unrecognized
tax losses was $7 million, which will expire as follows: $1 million in 2020 and $6 million in 2023.
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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. In June 2018, the Bank received a
reassessment of $211 million for tax and interest in respect of the same circumstances for the 2013 taxation year. 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 27 of the 2018 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 2018, there were no change in control events that caused the Bank to change its control conclusion of its multi-seller conduits or other
structured entities.
As described in Note 15 to the consolidated financial statements and in the discussion of off-balance sheet arrangements, the Bank does not control
the two Canadian-based multi-seller conduits that it sponsors and they are not required to be consolidated on the Bank’s Consolidated Statement of
Financial Position. The Bank controls its U.S.-based multi-seller conduit and consolidates it on the Bank’s Consolidated Statement of Financial Position.
Goodwill
For the purpose of impairment testing, goodwill acquired in a business combination is, on the acquisition date, allocated to each of the Bank’s group
of cash-generating units (CGU) that are expected to benefit from the particular acquisition.
Goodwill is not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired.
Goodwill is reviewed at each reporting date to determine whether there is any indication of impairment. Each CGU to which goodwill is allocated for
impairment testing purposes reflects the lowest level at which goodwill is monitored for internal management purposes.
The Bank determines the carrying value of the CGU using a regulatory capital approach based on credit, market, and operational risks, and leverage,
consistent with the Bank’s capital attribution for business line performance measurement. An impairment loss is recognized if the carrying amount of
a CGU exceeds its recoverable amount. The recoverable amount is the greater of fair value less costs of disposal and value in use. If either fair value
less costs of disposal or value in use exceeds the carrying amount, there is no need to determine the other. The recoverable amount for the CGU has
been determined using the fair value less costs of disposal method. In arriving at such value an appropriate valuation model is used which considers
various factors including normalized net income, price earnings multiples and control premium. These calculations are corroborated by valuation
multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. An impairment loss, in respect of goodwill, is not
reversed.
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, 2018, and no impairment was determined to exist.
Additionally, there were no impairment indicators noted as of October 31, 2018.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2018, and no impairment was determined to exist.
Additionally, there were no impairment indicators noted as of October 31, 2018.
Derecognition of financial assets
Financial assets are derecognized when the contractual rights to the cash flows from the asset have expired, which occurs with repayment by the
borrower or upon substantial modification of the asset terms. Assets are also derecognized when 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 has to apply judgement in determining whether a modification of the terms of the financial asset is considered to be substantial. For
loans, this includes the nature of the modification and the extent of changes to terms including interest rate, authorized amount, term or type of
underlying collateral.
Management also has to apply judgement in determining, based on specific facts and circumstances, whether the Bank has retained or transferred
substantially all the risks and rewards of ownership of the financial asset. 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. If the Bank retains
control over the asset, it will continue to recognize the asset to the extent of its continuing involvement.
The majority of assets transferred under repurchase agreements, securities lending agreements, securitizations of fully insured Canadian residential
mortgages, and securitizations of personal lines of credit, credit cards and auto loans do not qualify for derecognition. The Bank continues to record
the transferred assets on the Consolidated Statement of Financial Position as secured financings. Further information on derecognition of financial
assets can be found in Note 14 of the consolidated financial statements.
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.
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, 2018
Revenue from contracts with customers
The IASB issued IFRS 15 Revenue from Contracts with Customers (IFRS 15), 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 governing revenue recognition to be applied to contracts
with customers. The Bank must also determine whether its performance obligation is to provide the service itself (i.e. the Bank acts as a principal) or to
arrange another party to provide the service (i.e. the Bank acts as an agent).
The Bank has assessed the scope of the new guidance to be limited to fees and commission revenues from wealth management and banking services
in Canadian and International Banking and underwriting and advisory fees in Global Banking and Markets.
114 | 2 0 1 8 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 Bank will adopt the standard and its amendments as of November 1, 2018 using 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. As of November 1, 2018, the opening balance of retained earnings is expected to decrease
by approximately $60 million (net of tax). The decrease in retained earnings relates to certain costs no longer eligible for deferral under the new
standard and the re-measurement of certain liabilities at fulfilment cost.
The presentation of certain costs will also change prospectively from non-interest expenses to non-interest income where amounts are deemed to be
part of consideration payable to customers or the Bank is deemed to be acting as an agent. This presentation change will not have a material impact
to the Bank.
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, relating to prepayment features with negative compensation.
The amendment will be effective prospectively for annual periods beginning on or after January 1, 2019, which will be effective November 1, 2019 for
the Bank. Based on preliminary assessments, the amendment is not expected to have a material impact to 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. 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 in the process of assessing existing contractual relationships to identify the existing population of leases that would be recorded
on the balance sheet under the new standard. The Bank continues to evaluate the potential impact to the existing IT systems and processes and next
steps include performing an initial quantification of the existing obligations and reviewing the additional disclosures required by the new standard.
During 2019, the Bank will also complete its assessment of various practical expedients and formulate its accounting policies under IFRS 16.
IFRIC 23 Uncertainty over income tax treatments
On June 7, 2017, the IASB issued IFRIC 23 that is effective for the Bank beginning November 1, 2019. The interpretation clarifies application of
recognition and measurement requirements in IAS 12 income taxes when there is uncertainty over income tax treatments. The Bank is currently
assessing the impact of the interpretation.
Employee Benefits
On February 7, 2018, the IASB issued narrow-scope amendments to pension accounting that are effective for the Bank beginning November 1, 2019.
The amendments relate to when a plan amendment, curtailment or settlement has occurred. In such instances, the Bank is required to use updated
assumptions to determine current service cost and net interest for the remainder of the reporting period after the change to the plan. For the Bank,
the narrow scope amendments are to be applied prospectively to plan amendments, curtailments and settlements occurring after November 1, 2019.
Effective November 1, 2020
Conceptual Framework
On March 29, 2018, the IASB issued the revised Conceptual Framework for Financial Reporting (Framework) that is effective for the Bank beginning
November 1, 2020. The Framework itself is not a standard, and does not override existing standards. It is used by the IASB in developing accounting
standards. The Bank is currently assessing the impact of the revisions.
Definition of business
On October 22, 2018, the IASB issued a narrow-scope amendment to IFRS 3 Business Combination. The amendments will help companies determine
whether an acquisition is of a business or a group of assets. Distinguishing between a business and a group of assets is important because an acquirer
recognizes goodwill only when acquiring a business. The amendments apply to transactions for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after January 1, 2020. Earlier adoption is permitted. The Bank is currently assessing the impact.
Definition of material
On October 31, 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors, clarifying the definition of material. Under the new definition, information is material if omitting, misstating or
obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis
of those financial statements, which provide financial information about a specific reporting entity. The explanations accompanying the definition
have also been improved. The amendments are effective prospectively for annual periods beginning on or after January 1, 2020. Earlier adoption is
permitted. The Bank is currently assessing the impact.
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. On November 14, 2018, the
IASB tentatively decided to defer the effective date, by one year, to annual periods on or after January 1, 2022. The Bank will continue to track the
IASB Board’s meeting agenda items on issues and discussions related to the standard, further updates will be provided in Q1 2019.
2 0 1 8 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
The IFRS 17 project structure and governance has been established along with a Project Management Office to assist the Executive Steering and
Project Operations Committees. The committees comprise of representatives from Global Finance, Global Insurance Actuarial Services, Information
Technology and the Insurance Business Operations. The Bank is currently in the Evaluation and Design Solution phase of the project, with
Implementation planned for Fiscal 2019 through 2022.
Regulatory Developments
The Bank continues to monitor and respond to global regulatory developments relating to a broad spectrum of topics, including 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 (Bail-in) Regime and Total Loss Absorbing Capacity (TLAC)
On September 23, 2018, the regulations under the Canada Deposit Insurance Corporation Act (Canada) (the “CDIC Act”) and the Bank Act (Canada)
(collectively, the “Bail-In Regulations”) providing the details of conversion, issuance and compensation regimes for bail-in instruments issued by
domestic systemically important banks, including the Bank, came into force. Pursuant to the CDIC Act, in circumstances where the Superintendent of
Financial Institutions 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. For a description of the Canadian bank resolution
powers and the consequent risk factors attaching to certain liabilities of the Bank, reference is made to the Annual Information Form.
On April 18, 2018, OSFI issued 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. On August 21, 2018, OSFI provided notification requiring systemically important banks to
maintain a minimum of 21.5% plus the domestic stability buffer of TLAC eligible instruments relative to their RWAs and 6.75% relative to their
leverage exposures. We are expected to comply with the minimum TLAC requirements by November 1, 2021 and to begin disclosing our TLAC ratios
in the first quarter of 2019. The Bank does not anticipate any challenges in meeting these TLAC requirements.
United Kingdom and European Regulatory Reform
The U.K. is in negotiations to exit the E.U. and the two-year negotiation period triggered by U.K.’s formal notice of intention to withdraw from the
E.U. ends on March 29, 2019. Political agreement has been reached on a transition period, which would extend until December 31, 2020 (and
possibly longer), providing additional time in which to ensure readiness, however that is dependent on an overall withdrawal agreement being
concluded and ratified. If the transitional period is ratified then all E.U. legislation will continue to apply in the U.K. for its duration. There remains a
possibility that the U.K. will leave the E.U. on March 29, 2019 without having a withdrawal agreement in place (a so-called “hard” Brexit).
The U.K.’s exit from the E.U. may result in significant changes in law(s), which may impact the Bank’s business, financial condition and/or 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 U.K. and elsewhere in Europe and is developing and revising its contingency plans accordingly.
Cybersecurity and privacy developments
On November 1, 2018, changes to Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA) went into effect . The changes
require domestic and foreign organizations, such as the Bank, subject to PIPEDA to: (a) notify individuals impacted by privacy breaches; (b) report
privacy breaches to the Office of the Privacy Commissioner of Canada and others in certain circumstances; and (c) keep certain records of privacy
breaches. The impact to the Bank is not expected to be significant.
Regulatory Initiatives Impacting Financial Services in Canada
The federal government plans to introduce this year a comprehensive consumer protection framework into the Bank Act which will afford additional
protections to consumers and will also enhance the mandate and powers of the Financial Consumer Agency of Canada (FCAC), which is the
consumer protection regulator for federally regulated entities Federal regulatory agencies continue to focus on sales practices at Canadian banks. In
addition, the FCAC’s new Supervisory Framework came into effect on October 1, 2018. The Framework outlines the principles and processes that
underpin how the FCAC fulfills its supervision mandate, to promote, monitor and enforce market conduct obligations.
Provincial consumer protection initiatives are also being monitored to assess their possible implications from a financial services perspective. The
federal government introduced legislative amendments in the 2018 Budget Implementation Act which are designed to provide greater flexibility for
financial institutions to undertake and leverage broader financial technology activities and investments. Specifically, banks will be afforded greater
flexibility in regard to referrals/networking, identification, authentication and verification services, permitted investments, and the ability to engage in
certain financial technology activities without ministerial consent.
The relevant amendments to the Bank Act itself were given royal assent on June 21, 2018, although the pursuant regulations are not yet drafted, and
are likely to be subject to a series of consultations before their final publication.
Basel Committee on Banking Supervision – Finalized Basel III reforms
In December 2017, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision
(BCBS), announced that they have agreed on an output floor of 72.5% and have finalized the remaining Basel III reforms.
The final Basel III reform package includes: a revised standardized approach for credit risk; revisions to the internal ratings-based approach for credit
risk; revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modelled approach and the introduction of
a revised standardized approach; a revised standardized approach for operational risk, which will replace the existing standardized approaches and the
advanced measurement approaches; revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important
banks (G-SIBs), which will take the form of a Tier 1 capital buffer set at 50% of a G-SIB’s risk-weighted capital buffer; and an aggregate output floor,
which will ensure that banks’ risk-weighted assets (RWAs) generated by internal models are no lower than 72.5% of RWAs as calculated by the Basel
III framework’s standardized approaches. Banks will also be required to disclose their RWAs based on these standardized approaches. Implementation
of the new Basel III standards will be required in 2022. This includes the Fundamental Review of the Trading Book (FRTB) rules, which represents a
delay from 2020. There is a phase-in period for the 72.5% output floor from January 1, 2022 until January 2027.
116 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
In July 2018, OSFI issued a discussion paper seeking views from interested stakeholders on its proposed policy direction and its timelines for
implementation of the final Basel III reforms in Canada. OSFI supports the changes proposed within the final Basel III reforms and intends to
implement them domestically, while also considering the adjustments required to recognize the unique characteristics of the Canadian market,
improving risk sensitivity and providing the right incentives, while promoting the safety and soundness of deposit taking institutions in consideration
of level playing field and competitiveness issues. As part of these adjustments, OSFI is considering eliminating the BCBS’ transitional provisions for the
output floor, setting the output floor at 72.5% commencing the first quarter of 2022. Responses to the questions raised within the discussion paper
were due to OSFI by October 19, 2018. The Bank will continue to monitor and prepare for developments impacting regulatory capital requirements.
Regulatory Capital Pillar 3 Disclosure Requirements
In February 2018, the Basel Committee on Banking Supervision (BCBS) issued an update to its Pillar 3 disclosure requirements framework, as the third
phase of the Committee’s disclosure project, which builds on the first and second phases, published by the Committee in January 2015 and
March 2017, respectively. The third phase is primarily to address changes in disclosure requirements from the Basel III reforms finalized in December
2017, as well as other disclosure requirements related to asset encumbrance, capital distribution constraints, and the scope of disclosure requirements
across resolution groups.
The Bank’s supplementary regulatory capital disclosures as at October 31, 2018 meet OSFI’s April 2017 disclosure guideline for the Committee’s first
phase of the revised Pillar 3 disclosure requirements. OSFI’s disclosure guidelines for the implementation of the second and third phases of the
Committee disclosure project are awaited.
In May 2018, OSFI issued its disclosure guidelines on Total Loss Absorbing Capacity (TLAC) Disclosure Requirements and Capital Disclosure
Requirements (formerly the advisory entitled Public Capital Disclosure Requirements related to Basel III Pillar 3). Together, these guidelines are a key
element of a TLAC regime designed to ensure Canada’s largest banks maintain a minimum capacity to absorb losses and enhance stability within the
financial sector. These disclosure guidelines are effective for quarterly reporting commencing the first quarter of 2019.
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 targeted
implementation timeline of the NSFR to January 2020.
Benchmark rate reform
In 2014, the Financial Stability Board and Financial Stability Oversight Council wrote a paper ‘Reforming Major Interest Rate Benchmarks’
recommending the reform or replacement of major interest rate reference rates, particularly interbank offered rates such as LIBOR, EURIBOR and
TIBOR. In July 2017, the Financial Conduct Authority in the UK announced it would no longer compel panel banks to make submissions to LIBOR
beyond the end of 2021, setting a broad timeline for transition to replacement rates. Europe and Japan have taken steps to either reform or replace
EURIBOR and TIBOR, respectively.
The impact is expected to be broad-ranging, affecting derivatives, floating-rate notes, loans, securitizations and mortgages. Firms are working with
trade associations and working groups to develop contract language and transition methodology to minimize the financial impact of the change. The
Bank is actively participating in industry consultations, raising awareness internally across business lines and working on detailed impact analysis and
exposure reports
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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.
2018
$ 18
27
4
$ 49
2017
$ 17
25
3
$ 45
Directors can use some or all of their director fees earned to buy common shares of the Bank at market rates through the 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 26 – 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
2018
$ 13
6
$
2017
$ 6
$ 8
The Bank’s committed credit exposure to companies controlled by directors totaled $132.4 million as at October 31, 2018 (October 31, 2017 –
$145.2 million) while actual utilized accounts were $23.9 million (October 31, 2017 – $11.5 million).
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as
related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions
and are as follows:
T57 Transactions with associates and joint ventures
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
2018
$ (64)
702
151
$ 123
2017
$ (46)
703
217
$ 114
Scotiabank principal pension plan
The Bank manages assets of $3.8 billion (October 31, 2017 – $3.0 billion) which is a portion of the Scotiabank principal pension plan assets and
earned $5.0 million (October 31, 2017 – $3.7 million) in fees.
Oversight and governance
The oversight responsibilities of the Audit and Conduct Review Committee (ACRC) with respect to related party transactions include reviewing policies
and practices for identifying transactions with related parties that may materially affect the Bank, and reviewing the procedures for ensuring
compliance with the Bank Act for related party transactions. The Bank Act requirements encompass a broader definition of related party transactions
than is set out in IFRS. The Bank has various procedures in place to ensure that related party information is identified and reported to the ACRC on a
semi-annual basis. The ACRC is provided with detailed reports that reflect the Bank’s compliance with its established procedures.
The Bank’s Internal Audit department carries out audit procedures as necessary to provide the ACRC with reasonable assurance that the Bank’s
policies and procedures to identify, authorize and report related party transactions are appropriately designed and operating effectively.
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SUPPLEMENTARY DATA
Geographic Information
T58 Net income by geographic segment
2018(1)
2017(2)
2016(2)
For the fiscal years
($ millions)
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
Net interest income
$7,823 $691 $1,561 $1,378 $1,117
$839
$2,825 $16,234 $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
Non-interest income
7,040 843
613
662
565
484
2,612
12,819
6,924
830
536
635 409
455
2,502
12,291
6,893
871
554
600 325
419
2,409
12,071
Provision for credit
losses
802
(34)
239
Non-interest expenses
7,591 701 1,196
Income tax expense
1,596 220
76
351
770
235
498
837
51
Subtotal
4,874 647
663
684
296
511
723
39
50
244
2,611
906
(14)
193
329 145
3,148
14,966
7,650
451
2,668
1,066
606
147
1,123
762 630
125
225
77
337
620
71
353
2,249
876
112
225
315 113
3,069
14,460
7,339
633 1,121
740 605
506
2,217
1,235
155
69
201
45
320
550
89
401
2,362
3,036
14,024
497
2,291
1,594
8,808
4,742
551
475
606 374
137
1,573
8,458
4,465
450
363
575 325
134
1,425
7,737
Net income attributable
to non-controlling
interests in
subsidiaries
–
–
17
12
28
16
103
176
–
–
12
11
53
60
102
238
–
–
9
12
38
93
99
251
Total
$4,874 $647 $ 646 $ 672 $ 268
$ 34
$1,491 $ 8,632 $4,742 $551 $ 463 $ 595 $321
$ 77
$1,471 $ 8,220 $4,465 $450 $ 354 $ 563 $287
$ 41
$1,326 $ 7,486
Corporate adjustments
Net income attributable
to equity holders of
the Bank
(84)
$ 8,548
(215)
$ 8,005
(369)
$ 7,117
(1) Amounts presented are on a reported basis. Adjusting for the impact of Acquisition-related costs, net income attributable to equity holders of the Bank in 2018 for Canada was $4,926, Chile was $439, and Colombia was $97.
Refer to Acquisition-related costs in Non-GAAP measures.
(2) Amounts presented are on a reported basis. Adjusting for the impact of Acquisition-related costs, net income attributable to equity holders of the Bank was $8,065 in 2017, and it was $7,471 in 2016. Refer to Acquisition-related
costs in Non-GAAP measures.
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2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 119
MANAGEMENT’S DISCUSSION AND ANALYSIS
T59 Loans and acceptances by geography (1)
As at October 31 ($ 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
Total allowance for loan losses
Total loans and acceptances net of allowance for loan losses
IFRS 9
IAS 39
2018
2017
2016
$
21.9
29.3
185.7
17.3
52.8
60.5
367.5
$
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
41.8
27.5
20.1
43.8
11.6
8.8
9.4
31.1
11.6
60.9
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
$ 573.2
$ 522.2
$ 496.7
(5.1)
(4.3)
(4.6)
$ 568.1
$ 517.9
$ 492.1
(1) The amounts for the year 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Note 3 and 4 in the consolidated financial statements).
120 | 2 0 1 8 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
$
2018
999
80
359
581
753
619
1,739
2017(1)
$ 1,049
140
303
704
565
462
1,642
$ 5,130
$ 4,865
2016(1)
$ 1,258
210
301
764
499
381
1,981
$ 5,394
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico, for periods prior to 2018.
T61 Provision against impaired loans by geographic segment(1)
For the fiscal years ($ millions)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Total
2018
2017
2016
$
785
(6)
239
349
275
358
355
$
906
(14)
193
329
145
337
353
$
876
112
224
317
112
320
401
$ 2,355
$ 2,249
$ 2,362
(1) The amounts for the year 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Note 3 and 4 in the consolidated financial statements).
T62 Cross–border exposure to select countries(1)
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
$
1,478
1,489
101
650
1,684
179
512
1,629
$ 1,947
163
17
37
86
1
34
154
$
333
–
527
–
9
–
178
150
$
87
–
–
–
–
–
4,888
–
$
828
–
2,991
–
–
321
–
–
$
41
20
4
38
34
–
13
20
$
2018
Total
4,714
1,672
3,640
725
1,813
501
5,625
1,953
$
2017
Total
4,367
2,254
3,461
968
1,465
582
5,014
1,371
$
7,722
$ 2,439
$ 1,197
$ 4,975
$
4,140
$ 170
$ 20,643
$ 19,482
$
3,374
2,483
5,513
2,425
1,310
134
$ 1,106
355
1,143
93
171
11
$ 1,921
–
–
–
–
–
$ 15,239
$ 2,879
$ 1,921
Caribbean and Central America
Panama
Costa Rica
El Salvador
Dominican Republic
Jamaica
Others(4)
$
$
4,364
1,793
391
1,132
58
1,493
$
109
130
29
22
18
65
Total
$
9,231
$
373
$
58
–
–
28
–
–
86
$
$
$
$
155
578
14
143
–
–
890
–
–
–
–
–
–
–
$
5,161
3,942
390
4,928
1,561
532
$ 248
175
536
22
8
–
$ 11,965
7,533
7,596
7,611
3,050
677
$
8,345
6,901
5,317
7,080
2,982
678
$ 16,514
$ 989
$ 38,432
$ 31,303
$
$
319
1,034
693
–
879
425
$
3,350
$
–
14
–
–
–
–
14
$
4,850
2,971
1,113
1,182
955
1,983
$
4,329
2,540
1,270
1,222
785
2,030
$ 13,054
$ 12,176
As at October 31, 2018
$ 32,192
$ 5,691
$ 3,204
As at October 31, 2017
$ 29,654
$ 4,559
$ 2,213
$ 5,865
$ 4,972
$ 24,004
$1,173
$ 72,129
$ 20,761
$ 802
$ 62,961
(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 8 S C O T I A B A N K A N N U A L R E P O R T | 121
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
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit Risk
T63 Loans and acceptances by type of borrower(1)
As at October 31 ($ billions)
Residential mortgages
Personal loans
Credit cards
Personal
Financial services
Non-bank
Bank(2)
Wholesale and retail
Real estate and construction
Energy(3)
Transportation
Automotive
Agriculture
Hospitality and leisure
Mining
Metals
Utilities
Health care
Technology and media
Chemicals(3)
Food and beverage
Forest products
Other(4)
Sovereign(5)
Business and government
Total allowance for loan losses
Total loans and acceptances net of allowance for loan losses
2018
2017
2016
$ 253.4
96.0
16.5
$ 236.9
89.2
14.1
$ 222.9
19.4
80.1
$ 365.9
$ 340.2
$ 322.4
$
24.6
4.5
25.1
29.2
14.8
9.3
14.7
11.5
4.0
5.5
3.0
9.7
5.4
12.3
1.9
7.9
1.9
16.9
5.1
$
20.5
3.8
21.1
24.6
14.5
8.2
13.0
10.2
3.5
4.9
2.6
8.1
5.6
9.6
2.1
6.3
1.7
17.0
4.7
$
16.1
3.7
22.1
22.6
14.5
9.0
11.5
8.8
3.5
5.4
2.5
7.8
5.2
11.8
2.7
4.9
2.5
14.7
5.0
$ 207.3
$ 182.0
$ 174.3
$ 573.2
$ 522.2
$ 496.7
(5.1)
(4.3)
(4.6)
$ 568.1
$ 517.9
$ 492.1
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Note 3 and 4 in the consolidated financial statements).
(2) Deposit taking institutions and securities firms.
(3) Prior periods have been restated to conform to the current presentation.
(4) Other related to $2.3 in financing products, $2.6 in services and $2.7 in wealth management (2017 – $3.5, $2.2, and $2.3 respectively).
(5)
Includes central banks, regional and local governments, and supra-national agencies.
T64 Off-balance sheet credit instruments
As at October 31 ($ 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.
2018
2017
2016
$ 197.4
35.4
53.7
$ 185.7
35.5
42.0
$ 174.2
34.5
40.0
$ 286.5
$ 263.2
$ 248.7
122 | 2 0 1 8 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
Acquisition-related
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(2)
Balance at beginning of year
Provision for credit losses
Write-offs
Recoveries
Residential mortgages
Personal loans
Credit cards
Business and government
Foreign exchange and other
Balance at end of year
Net impaired loans
Balance at beginning of year
Net change in gross impaired loans
Net change in allowance for credit losses on impaired loans
Balance at end of year
M
A
N
A
G
E
M
E
N
T
’
S
D
I
S
C
U
S
S
I
O
N
A
N
D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
T
A
R
Y
D
A
T
A
2018
2017
2016
$ 5,070
$
5,394
$
4,658
3,871
233
(168)
(722)
(72)
3,142
(219)
(1,441)
(1,104)
(276)
(3,040)
(42)
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
$ 5,130
$
4,865
$
5,394
$ 1,756
2,355
(3,040)
$
2,948
2,249
(3,173)
$
2,573
2,362
(2,579)
96
275
250
68
689
(83)
70
252
303
55
680
(82)
20
305
217
40
582
10
$ 1,677
$
2,622
$
2,948
$ 3,314
60
79
$
2,446
(529)
326
$
2,085
736
(375)
$ 3,453
$
2,243
$
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, prior to 2018.
(2) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Note 3 and 4 in the consolidated financial statements).
T66 Provision for credit losses(1)
For the fiscal years ($ millions)
New provisions
Reversals
Recoveries
Provision for credit losses on impaired loans (Stage 3)
Provision for credit losses – performing (Stage 1 and 2)
Total Provision for credit losses
2018
$ 3,267
(223)
(689)
2,355
256
$ 2,611
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Note 3 and 4 in the consolidated financial statements).
For the fiscal years ($ millions)
New provisions
Reversals
Recoveries
Net provisions for credit losses on impaired loans
Collective provision (reversals) on performing loans
Total Provision for credit losses
2017
2016
$ 3,057
(128)
(680)
2,249
–
$ 3,072
(110)
(600)
2,362
50
$ 2,249
$ 2,412
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Note 3 and 4 in the consolidated financial statements).
2 0 1 8 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
T67 Provision for credit losses against impaired loans by type of borrower
For the fiscal years ($ millions)
Residential mortgages
Personal loans
Credit cards
Personal
Financial services
Non-bank
Bank
Wholesale and retail
Real estate and construction
Energy
Transportation
Automotive
Agriculture
Hospitality and leisure
Mining
Metals
Utilities
Health care
Technology and media
Chemicals
Food and beverage
Forest products
Other
Sovereign
Business and government
Provision for credit losses on impaired loans
T68 Impaired loans by type of borrower
As at October 31 ($ millions)
Residential mortgages
Personal loans
Credit cards
Personal
Financial services
Non-bank
Bank
Wholesale and retail
Real estate and construction
Energy
Transportation
Automotive
Agriculture
Hospitality and leisure
Mining
Metals
Utilities
Health care
Technology and media
Chemicals
Food and beverage
Forest products
Other
Sovereign
Business and government
Total
$
2018
91
1,198
833
2,122
$
2017
61
1,152
734
1,947
$
2016
100
1,075
602
1,777
1
–
92
48
(33)
8
9
15
(5)
(1)
(7)
20
12
7
1
17
5
(6)
50
10
1
63
62
(8)
20
8
14
14
2
46
12
7
(1)
(1)
18
3
31
1
233
302
(1)
2
61
34
290
45
28
14
25
6
11
20
9
14
(7)
6
1
23
4
585
$ 2,355
$ 2,249
$ 2,362
2018
Allowance
for credit
losses
$
360
644
–
$ 1,004
13
2
168
112
30
60
16
50
1
5
17
22
19
5
3
50
7
78
15
673
$
$ 1,677
Gross
$ 1,797
1,069
–
$ 2,866
19
2
390
469
135
233
50
150
37
25
48
51
76
21
10
99
27
159
263
$ 2,264
$ 5,130
Net
$ 1,437
425
–
$ 1,862
6
–
222
357
105
173
34
100
36
20
31
29
57
16
7
49
20
81
248
$ 1,591
$ 3,453
Gross
$ 1,445
1,067
543
$ 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
2017(1)
Allowance
for credit
losses
$
326
1,040
543
$ 1,909
20
2
132
115
77
73
7
30
7
5
27
61
26
5
3
35
8
74
6
713
$
$ 2,622
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
(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
124 | 2 0 1 8 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
T69 Total credit risk exposures by geography(1)(2)
As at October 31 ($ millions)
Drawn
Undrawn
exposures(3)
Non-Retail
2018
Other
$ 101,207
102,265
23,140
18,714
15,686
5,233
25,357
17,712
9,532
22,647
$ 41,691
33,103
1,038
1,339
1,506
486
7,041
1,676
909
3,514
$
37,748
42,771
5,066
2,611
2,992
434
10,215
910
227
2,258
Retail
Total
$ 341,157
–
23,908
10,630
8,311
7,496
–
18,004
700
–
$ 521,803
178,139
53,152
33,294
28,495
13,649
42,613
38,302
11,368
28,419
2017
Total
$ 502,224
157,386
27,190
30,528
28,733
10,859
43,030
39,358
9,035
30,070
Canada
U.S.
Chile
Mexico
Peru
Colombia
Other International
Europe
Caribbean and Central America
Latin America (other)
Other
Total
As at October 31, 2017
$ 341,493
$ 92,303
$ 105,232
$ 410,206
$ 949,234
$ 878,413
$ 309,282
$ 84,893
$ 102,373
$ 381,865
$ 878,413
(1) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure. Includes all credit risk portfolios and excludes 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, 2017
2018
Drawn
Undrawn
exposures(3)
Other
$ 145,558
119,182
9,228
$ 273,968
$
31,406
188,922
15,259
39,917
$
$
$
25,264
59,726
1,809
86,799
19,535
–
–
28,550
$ 275,504
$
48,085
$ 549,472
$ 134,884
$ 518,255
$ 123,443
$ 64,808
29,892
6,581
$101,281
$
$
–
–
–
–
–
$101,281
$ 99,041
Total
$ 235,630
208,800
17,618
$ 462,048
$
50,941
188,922
15,259
68,467
$ 323,589
$ 785,637
$ 740,739
2017
Total
$ 213,124
192,087
23,217
$ 428,428
$
51,045
178,940
16,299
66,027
$ 312,311
$ 740,739
(1) Remaining term to maturity of the credit exposure. Includes all credit risk portfolios and excludes equity securities and other assets.
(2) Exposure at default, before credit risk mitigation.
(3) Off-balance sheet lending instruments, such as letters of credit, letters of guarantee, securitization, derivatives and repo-style transactions after collateral.
(4) Credit cards and lines of credit with unspecified maturity.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 125
MANAGEMENT’S DISCUSSION AND ANALYSIS
T71 Total credit risk exposures and risk-weighted assets
AIRB
Standardized(1)
Total
2018
2017
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(5)
Total credit risk, before scaling
$ 145,000
83,885
43,440
$
70,750
31,103
10,590
272,325
112,443
$
59,018
5,313
3,501
67,832
$
56,897
5,273
3,430
65,600
$
204,018
89,198
46,941
$ 127,647
36,376
14,020
$ 183,262
81,214
44,190
$ 114,622
34,473
15,431
340,157
178,043
308,666
164,526
22,680
2,146
9,846
34,672
106,288
768
1,806
108,862
273,968
86,799
55,092
3,648
287
1,112
5,047
3,524
95
94
3,713
77,922
31,485
11,796
3,208
160
143
3,511
5,299
31
6
5,336
67,525
5,504
3,650
2,715
159
80
2,954
1,424
16
2
1,442
61,036
5,448
3,512
25,888
2,306
9,989
38,183
111,587
799
1,812
114,198
341,493
92,303
58,742
6,363
446
1,192
8,001
4,948
111
96
5,155
138,958
36,933
15,308
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
$ 415,859
$ 121,203
$
76,679
$
69,996
$
492,538
$ 191,199
$ 448,474
$ 177,731
$ 205,944
$
17,259
$
44,517
$
18,592
$
250,461
$
35,851
$ 234,620
$ 30,024
205,944
17,259
44,517
18,592
250,461
35,851
234,620
30,024
21,047
17,864
38,911
17,337
28,550
45,887
31,176
1,671
32,847
275,504
48,085
3,639
1,081
4,720
9,993
3,470
13,463
14,876
476
15,352
45,767
5,027
–
–
–
–
–
–
–
–
–
–
–
–
42,100
–
42,100
86,617
–
30,826
–
30,826
49,418
–
21,047
17,864
38,911
17,337
28,550
45,887
73,276
1,671
74,947
362,121
48,085
3,639
1,081
4,720
9,993
3,470
13,463
45,702
476
46,178
95,185
5,027
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
$ 323,589
$
50,794
$
86,617
$
49,418
$
410,206
$ 100,212
$ 381,865
$ 87,888
23,346
22,843
–
2,287
7,594
3,537
–
301
–
–
301
1,079
23,346
23,144
–
2,287
7,895
4,616
23,591
24,483
–
2,529
7,147
2,988
$ 785,637
$ 185,415
$ 163,597
$ 120,794
$
949,234
$ 306,209
$ 878,413
$ 278,283
1,754
–
1,619
–
–
60,124
–
28,258
1,754
60,124
1,619
28,258
1,281
50,631
1,188
25,201
factor
$ 787,391
$ 187,034
$ 223,721
$ 149,052
$ 1,011,112
$ 336,086
$ 930,325
$ 304,672
Add-on for 6% scaling factor(6)
–
11,010
–
–
–
11,010
–
10,487
Total credit risk
$ 787,391
$ 198,044
$ 223,721
$ 149,052
$ 1,011,112
$ 347,096
$ 930,325
$ 315,159
(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, 2018, CVA risk-weighted assets were calculated using scalars of 0.80, 0.83, and 0.86 for the CET1, Tier 1 and Total capital ratios, respectively (scalars of 0.72, 0.77, and 0.81 in 2017).
(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) Exposures at Default for Other Assets exclude amounts related to central counterparties.
(6) Basel Committee imposed a scaling factor (6%) on risk-weighted assets for Internal Ratings-Based credit risk portfolios.
126 | 2 0 1 8 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
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
Increase (decrease) due to change in:
2018 versus 2017
Increase (decrease) due to change in:
2017 versus 2016
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
$ 1,645
408
$ 1,237
$ 2,495
2,576
$
(81)
$ 4,140
2,984
$ 1,156
$
10
(7)
(8)
85
513
281
300
471
$
327
34
171
256
411
432
(42)
906
1,565
1,707
$
337
27
163
341
924
713
258
1,377
3,272
$ 785
29
$ 756
$ (85)
–
(5)
109
326
149
166
125
766
$ 1,152
1,165
$
(13)
$
213
(28)
129
85
(327)
122
85
873
753
$ 1,937
1,194
$
743
$
128
(28)
124
194
(1)
271
251
998
1,519
$ 1,645
$ 2,495
$ 4,140
$ 785
$ 1,152
$ 1,937
$
131
316
1
448
(13)
(43)
16
$
471
1,517
230
2,218
43
30
285
$
602
1,833
231
2,666
30
(13)
301
$ 106
(101)
(7)
(2)
6
(12)
37
$
156
937
82
$
262
836
75
1,175
1,173
13
6
(29)
19
(6)
8
Total interest-bearing liabilities
$
408
$ 2,576
$ 2,984
$
29
$ 1,165
$ 1,194
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
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 $2,218 of Canadian taxes (2017 – $1,758; 2016 – $1,742) and $1,455 of foreign taxes (2017 – $1,490; 2016 – $1,401).
(2) Total income and other taxes as a percentage of net income before income and other taxes.
2018
2017
2016
2018
versus
2017
$
2,382
$
2,033
$ 2,030
17%
390
464
437
380
423
412
347
403
363
1,291
1,215
1,113
$
3,673
$
3,248
$ 3,143
$ 11,106
$ 10,276
$ 9,398
21.5
29.6
19.8
28.3
21.6
29.9
3
10
6
6
13%
8%
1.7
1.3
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 127
2018
2017
2016
$ 146.5
113.9
$ 151.7
107.0
$ 163.5
106.4
260.4
187.5
68.1
258.7
148.3
63.2
269.9
139.2
63.7
$ 516.0
$ 470.2
$ 472.8
$
54.7
173.0
54.5
$
51.8
134.0
20.9
$
47.9
125.1
19.7
$ 282.2
$ 206.7
$ 192.7
2018
2017
2016
$ 470.2
51.5
(5.7)
$ 472.8
(33.6)
31.0
$ 453.9
4.3
14.6
$ 516.0
$ 470.2
$ 472.8
2018
2017
2016
$ 206.7
74.4
1.1
$ 192.7
3.6
10.4
$ 179.0
6.6
7.1
$ 282.2
$ 206.7
$ 192.7
2018
28.9
0.8
–
0.4
30.1
$
$
$
2017
28.5
0.8
–
0.4
$
2016
26.1
0.7
–
0.4
$
29.7
$
27.2
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 $49.2 (2017 – $(33.5); 2016 – nil).
As at October 31 ($ 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 $76.0 (2017 – $(4.3); 2016 – nil).
T76 Fees paid to the shareholders’ auditors
For the fiscal years ($ millions)
Audit services
Audit-related services
Tax services outside of the audit scope
Other non-audit services
Total
128 | 2 0 1 8 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
2018(1)
2017
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 ($)
Diluted earnings per share ($)
Return on equity (%)
Productivity ratio (%)
Core banking margin (%)(2)
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)(3)
Liquidity coverage ratio (LCR) (%)
Credit quality
Net impaired loans ($ millions)(4)
Allowance for credit losses ($ millions)(5)
Net impaired loans as a % of loans and acceptances(4)
Provision for credit losses as a % of average net loans and acceptances
(annualized)(6)
Provision for credit losses on impaired loans as a % of average net loans and
acceptances (annualized)(6)
Net write-offs as a % of average net loans and acceptances (annualized)
Adjusted results(2)
Adjusted net income ($ millions)
Adjusted diluted earnings per share ($)
Adjusted return on equity (%)
Adjusted productivity ratio (%)
Adjusted provision for credit losses ratio as a % of average net loans and
acceptances(6)
Common share information
Closing share price ($) (TSX)
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends paid per share ($)
Dividend yield (%)(7)
Market capitalization ($ billions) (TSX)
Book value per common share ($)
Market value to book value multiple
Price to earnings multiple (trailing 4 quarters)
4,220
3,228
7,448
590
4,064
523
2,271
2,114
1.72
1.71
13.8
54.6
2.47
62.3
100.3
551.8
998.5
676.5
61.0
4.2
516.0
282.2
11.1
12.5
14.3
4.5
400.5
124
3,453
5,154
0.60
0.39
0.42
0.45
2,345
1.77
14.1
53.2
4,085
3,096
7,181
943
3,770
529
1,939
1,956
1.60
1.55
13.1
52.5
2.46
51.9
92.9
548.6
946.7
654.2
60.8
4.2
483.2
254.8
11.4
12.8
14.5
4.9
411.4
125
3,707
5,418
0.65
0.69
0.41
0.39
2,259
1.76
14.5
51.8
3,950
3,108
7,058
534
3,726
621
2,177
2,042
1.70
1.70
14.9
52.8
2.47
61.8
99.7
517.9
926.3
640.6
57.3
4.2
471.8
213.1
12.0
13.5
15.3
4.8
375.9
127
3,381
5,017
0.63
0.42
0.46
0.45
2,190
1.71
15.0
52.5
3,936
3,152
7,088
544
3,498
709
2,337
2,249
1.88
1.86
16.2
49.3
2.46
57.4
105.7
503.2
923.2
635.8
55.1
4.6
470.9
210.8
11.2
12.7
14.6
4.6
382.2
128
3,288
4,923
0.63
0.42
0.43
0.46
2,350
1.87
16.3
49.1
3,831
2,981
6,812
536
3,668
538
2,070
1,986
1.66
1.64
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
0.42
0.42
0.44
2,084
1.65
14.6
53.6
3,833
3,061
6,894
573
3,672
546
2,103
2,016
1.68
1.66
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
0.45
0.45
0.54
2,117
1.68
14.8
53.0
3,728
2,853
6,581
587
3,601
332
2,061
1,965
1.63
1.62
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
0.49
0.49
0.53
2,075
1.63
15.0
54.4
3,643
3,225
6,868
553
3,689
617
2,009
1,909
1.58
1.57
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
0.45
0.45
0.49
2,027
1.58
14.5
53.3
0.39
0.40
0.42
0.42
0.42
0.45
0.49
0.45
70.65
77.09
78.92
81.72
83.28
77.67
75.88
77.76
1,230
1,246
1,227
0.85
4.6
86.7
49.75
1.4
10.2
1,223
1,240
1,232
0.82
4.2
95.0
49.32
1.6
11.3
1,198
1,203
1,199
0.82
4.2
94.6
47.77
1.7
11.4
1,199
1,215
1,198
0.79
3.8
97.9
45.98
1.8
11.9
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) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2) Refer to page 18 for a discussion of non-GAAP measures.
(3) Credit valuation adjustment (CVA) risk-weighted assets were calculated using scalars of 0.80, 0.83 and 0.86 to compute CET1, Tier 1 and Total capital ratios, respectively in 2018 (0.72, 0.77 and 0.81 in 2017).
(4) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico, for periods prior to 2018.
(5)
(6)
(7) Based on the average of the high and low common share price for the period.
Includes allowance for credit losses on all financial assets – loans, acceptances, off-balance sheet exposures, debt securities, and deposits with financial institutions.
Includes provision for credit losses on certain financial assets – loans, acceptances and off-balance sheet exposures.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 129
MANAGEMENT’S DISCUSSION AND ANALYSIS
Eleven-Year Statistical Review
T78 Consolidated Statement of Financial Position
As at October 31 ($ millions)
2018(1)
2017
2016
2015
2014
2013
2012
2011
IFRS
Assets
Cash and deposits with financial institutions
Precious metals
Trading assets
Securities
Loans
Other
Financial instruments designated at fair value
through profit or loss
Securities purchased under resale agreements and
securities borrowed
Derivative financial instruments
Investment securities
Loans
Residential mortgages
Personal loans
Credit cards
Personal and credit cards
Business and government
Allowance for credit losses
Other
Customers’ liability under acceptances, net of
allowance
Property and equipment
Investments in associates
Goodwill and other intangible assets
Deferred tax assets
Other assets
Liabilities
Deposits
Personal
Business and government
Financial institutions
Financial instruments designated at fair value
through profit or loss
Other
Acceptances
Obligations related to securities sold short
Derivative financial instruments
Obligations related to securities sold under
repurchase agreements and securities lent
Subordinated debentures
Capital instruments
Other liabilities
Equity
Common equity
Common shares
Retained earnings
Accumulated other comprehensive income (loss)
Other reserves
Total common equity
Preferred shares 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
$
62,269
3,191
$
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
85,474
14,334
454
100,262
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
12
13
221
320
111
106
197
375
104,018
37,558
78,396
253,357
96,019
16,485
–
191,038
556,899
5,065
551,834
16,329
2,684
4,850
17,719
1,938
17,433
60,953
95,319
35,364
69,269
236,916
89,227
14,104
–
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
86,110
13,392
–
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
$ 998,493
$ 915,273
$ 896,266
$ 856,497
$ 805,666
$ 743,644
$ 668,225
$ 594,423
$ 214,545
422,002
39,987
$ 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
676,534
625,367
611,877
600,919
554,017
517,887
465,689
421,234
8,188
4,663
1,459
1,486
465
174
157
101
16,338
32,087
37,967
101,257
5,698
–
52,744
246,091
930,813
18,234
41,414
992
404
61,044
4,184
13,560
30,766
34,200
95,843
5,935
–
43,314
11,978
23,312
42,387
97,083
7,633
–
42,716
10,296
20,212
45,270
77,015
6,182
–
41,638
9,876
27,050
36,438
88,953
4,871
–
34,785
10,556
24,977
29,267
77,508
5,841
–
32,047
8,932
18,622
35,323
56,968
10,143
–
32,726
8,172
15,450
40,236
38,216
6,923
2,003
29,848
223,618
853,648
225,109
838,445
200,613
803,018
201,973
756,455
180,196
698,257
162,714
628,560
140,848
562,183
15,644
38,117
1,577
116
55,454
4,579
15,513
34,752
2,240
152
52,657
3,594
15,141
31,316
2,455
173
49,085
2,934
15,231
28,609
949
176
44,965
2,934
14,516
25,068
388
193
40,165
4,084
13,139
21,775
(745)
166
34,335
4,384
8,336
18,421
(497)
96
26,356
4,384
65,228
60,033
56,251
52,019
47,899
44,249
38,719
30,740
2,452
–
67,680
1,592
–
61,625
1,570
–
57,821
1,460
–
53,479
1,312
–
49,211
1,138
–
45,387
946
–
626
874
39,665
32,240
$ 998,493
$ 915,273
$ 896,266
$ 856,497
$ 805,666
$ 743,644
$ 668,225
$ 594,423
(1) The amounts for year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
130 | 2 0 1 8 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)
2018
2017
2016
2015
2014
2013
2012
2011
IFRS
Revenue
Interest income(1)
Loans
Securities
Securities purchased under resale
$ 24,991
1,771
$ 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
agreements and securities borrowed
Deposits with financial institutions
446
859
283
522
158
394
161
292
180
263
190
279
221
287
221
275
28,067
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(1)
Total revenue
Provision for credit losses(1)
Non-interest expenses
Income before taxes
Income tax expense
Net income
10,544
214
–
1,118
11,876
16,191
12,584
28,775
2,611
15,058
11,106
2,382
7,878
226
–
788
8,892
15,035
12,120
27,155
2,249
14,630
10,276
2,033
6,793
232
–
891
7,916
14,292
12,058
26,350
2,412
14,540
9,398
2,030
6,070
187
–
938
7,195
13,092
10,957
24,049
1,942
13,041
9,066
1,853
6,173
204
–
858
7,235
12,305
11,299
23,604
1,703
12,601
9,300
2,002
6,397
339
–
742
7,478
11,350
9,949
21,299
1,288
11,664
8,347
1,737
6,117
381
–
691
7,189
9,970
9,676
19,646
1,252
10,436
7,958
1,568
5,589
369
138
745
6,841
9,014
8,296
17,310
1,076
9,481
6,753
1,423
$
8,724
$
8,243
$
7,368
$
7,213
$
7,298
$
6,610
$
6,390
$
5,330
Net income attributable to non-controlling
interests
Non-controlling interests in subsidiaries
Capital instrument equity holders
$
176
176
–
$
238
238
–
$
251
251
–
$
199
199
–
$
227
227
–
$
231
231
–
$
196
196
–
$
149
91
58
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)
$
8,548
$
8,005
$
7,117
$
7,014
$
7,071
$
6,379
$
6,194
$
5,181
187
8,361
6.90
6.82
3.28
$
$
$
$
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
$
$
$
$
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
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
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A
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 131
MANAGEMENT’S DISCUSSION AND ANALYSIS
T78A 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
132 | 2 0 1 8 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
$
46,027
$
43,278
$
37,318
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
284,224
266,302
288,680
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
$ 526,657
$ 496,516
$ 507,625
$ 128,850
210,687
22,113
$ 123,762
203,594
23,063
$ 118,919
200,566
27,095
361,650
350,419
346,580
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
130,358
114,327
134,049
5,939
500
5,944
500
4,352
500
3,975
3,710
2,860
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
$ 526,657
$ 496,516
$ 507,625
T79A 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
$ 12,171
4,227
201
292
$ 13,973
4,090
390
482
$ 15,832
4,615
786
1,083
16,891
18,935
22,316
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
14,266
12,713
11,246
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
$
$
$
$
$
$
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 133
MANAGEMENT’S DISCUSSION AND ANALYSIS
T80 Consolidated Statement of Changes in Equity
For the year ended October 31 ($ millions)
2018
2017
2016
2015
2014
2013
2012
2011
IFRS
Common shares
Balance at beginning of year
Issued
Purchased for cancellation
Balance at end of year
Retained earnings
Balance at beginning of year
IFRS adjustment
Restated balances
Net income attributable to common shareholders of the Bank(2)
Dividends: Preferred(3)
Common
Purchase of shares for cancellation and premium on redemption
Other
Balance at end of year
Accumulated other comprehensive income (loss)
Balance at beginning of year
IFRS adjustment
Restated balances
Cumulative effect of adopting new accounting policies
Other comprehensive income (loss)
Other
Balance at end of year
Other reserves(7)
Balance at beginning of year
Share-based payments(8)
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
$ 15,644
2,708
(118)
$ 18,234
38,117
(564)(1)
37,553
8,361
–
(3,985)
(514)
(1)
$ 41,414
$ 15,513 $ 15,141 $ 15,231 $ 14,516 $ 13,139
1,377
–
$ 15,644 $ 15,513 $ 15,141 $ 15,231 $ 14,516
313
(182)
104
(194)
771
(56)
391
(19)
34,752
–
34,752
7,876
–
(3,668)
(827)
(16)
21,978
(203)
21,775
6,162
–
(2,858)
–
(11)
$ 38,117 $ 34,752 $ 31,316 $ 28,609 $ 25,068
28,609
–
28,609
6,897
–
(3,289)
(761)
(140)(4)
25,315
(247)
25,068
6,916
–
(3,110)
(264)
(1)
31,316
–
31,316
6,987
–
(3,468)
(61)
(22)
$
8,336 $
4,803
–
$ 13,139 $
5,750
2,586
–
8,336
18,421
(144)
18,277
5,974
–
(2,493)
–
17
21,932
(6,248)
15,684
4,965
–
(2,200)
–
(28)
$ 21,775 $ 18,421
1,577
51(1)
1,628
–
(693)
57
992
$
2,240
–
2,240
–
(663)
–
1,577 $
2,455
–
2,455
–
(215)
–
2,240 $
949
–
949
(5)(5)
1,511
–
2,455 $
$
545
(157)
388
–
561
–
949 $
(31)
(714)
(745)
–
1,133
–
388
$
(497)
32
(465)
–
(280)
–
(745) $
(4,051)
4,320
269
–
(766)
–
(497)
116
6
282
$
404
$ 61,044
4,579
187
(187)
300
(695)
4,184
1,592
(97)(1)
$
1,495
176
(199)
980
2,452
$
$ 67,680
152
8
(44)
116 $
166
36
(9)
$
193
$ 55,454 $ 52,657 $ 49,085 $ 44,965 $ 40,165
176
14
(17)
173 $
173
7
(28)
152 $
193
30
(47)
176 $
96
38
32
166 $
25
46
25
$
96
$ 34,335 $ 26,356
3,594
2,934
2,934
4,084
129
(129)
1,560
(575)
4,579 $
130
(130)
1,350
(690)
3,594 $
117
(117)
–
–
2,934 $
155
(155)
–
(1,150)
2,934 $
$
4,384
217
(217)
–
(300)
4,084
$
4,384
3,975
220
(220)
–
–
4,384 $
216
(216)
409
–
4,384
1,570
–
1,570
238
(133)
(83)
1,592 $
1,743
(797)
946
231
(80)
41
1,138
$
$ 61,625 $ 57,821 $ 53,479 $ 49,211 $ 45,387
1,312
–
1,312
199
(86)
35
1,460 $
1,155
(17)
1,138
227
(76)
23
1,312 $
1,460
–
1,460
251
(116)
(25)
1,570 $
1,500
(891)
609
196
(44)
185
946 $
579
936
1,515
149
(181)
17
1,500
$
$ 39,665 $ 32,240
Includes retrospective adjustments primarily related to foreign currency translation on Allowance for Credit Losses with respect to periods prior to 2013 ($152).
(1) Refer to Note 4 in the consolidated financial statements.
(2) Under CGAAP, net income attributable to preferred shareholders was included in retained earnings.
(3) Under IFRS, preferred dividends are recorded as a reduction to preferred shareholders’ equity. Under CGAAP, dividends are a reduction to retained earnings.
(4)
(5) To reflect the adoption of the own credit risk provisions of IFRS 9 pertaining to financial liabilities designated at fair value through profit or loss.
(6) Relates to the adoption of the new accounting standard for impairment and classification of financial instruments under CGAAP.
(7) Under CGAAP, amounts represent Contributed Surplus.
(8) Represents amounts on account of share-based payments (refer to Note 26 in the consolidated financial statements).
T81 Consolidated Statement of Comprehensive Income
For the year ended October 31 ($ millions)
Net income
Other comprehensive income (loss), net of income taxes:
Items that will be reclassified subsequently to net income
Net change in unrealized foreign currency translation gains (losses)
Net change in unrealized gains (losses) on available-for-sale securities
(debt and equity)(1)
Net change in fair value due to change in debt instruments measured at
fair value through other comprehensive income(1)
Net change in gains (losses) on derivative instruments designated as cash
flow hedges
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
Net change in fair value due to change in equity instruments designated
at fair value through other comprehensive income(1)
Net change in fair value due to change in own credit risk on financial
liabilities designated under the fair value option(2)
Other comprehensive income (loss) 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
IFRS
2018
$ 8,724
2017
$ 8,243
2016
$ 7,368
2015
$ 7,213
2014
$ 7,298
2013
$ 6,610
2012
2011
$ 6,390
$ 5,330
(606)
(1,259)
n/a
(252)
(361)
66
318
60
(55)
n/a
(28)
56
592
n/a
396
(172)
n/a
258
31
(716)
n/a
1,855
(480)
n/a
55
(9)
(1)
n/a
889
(38)
n/a
(6)
60
(320)
n/a
346
110
n/a
93
20
563
n/a
149
151
n/a
116
25
(747)
n/a
(697)
(169)
n/a
105
–
–
n/a
(22)
(7)
(804)
$ 7,920
(21)
6
(709)
$ 7,534
(16)
(10)
(229)
$ 7,139
$ 7,668
187
65
–
$ 7,920
$ 7,213
129
192
–
$ 7,534
$ 6,772
130
237
–
$ 7,139
15
1
1,436
$ 8,649
$ 8,408
117
124
–
$ 8,649
n/a
(2)
583
$ 7,881
$ 7,477
155
249
–
$ 7,881
n/a
–
1,132
$ 7,742
$ 7,298
217
227
–
$ 7,742
n/a
–
(306)
$ 6,084
n/a
–
(761)
$ 4,569
$ 5,694
220
170
–
$ 6,084
$ 4,199
216
96
58
$ 4,569
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2)
In accordance with the transition requirements for the own credit risk provisions of IFRS 9, prior year comparatives have not been restated for the adoption of this standard in 2015.
134 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
CGAAP
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
3,566
266
(3)
3,829
$
$
17,460
–
17,460
3,140
(107)
(1,896)
(37)
(11)
$ 18,549
(3,857)
–
(3,857)
–
261
–
$ (3,596)
–
–
–
$
–
$ 18,782
1,635
–
–
1,225
–
2,860
$
n/a
–
n/a
n/a
n/a
n/a
$
502
$ 22,144
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
2010
$ 4,339
CGAAP
2009
$ 3,661
(591)
(1,736)
278
n/a
62
–
–
n/a
n/a
–
(251)
$ 4,088
$ 3,787
201
100
–
$ 4,088
894
n/a
43
–
–
n/a
n/a
–
(799)
$ 2,862
$ 2,562
186
114
–
$ 2,862
2008
$ 3,259
2,368
(1,588)
n/a
(519)
–
–
n/a
n/a
–
261
$ 3,520
$ 3,294
107
119
–
$ 3,520
M
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E
M
E
N
T
’
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D
I
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C
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S
S
I
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N
A
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D
A
N
A
L
Y
S
I
S
|
S
U
P
P
L
E
M
E
N
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A
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MANAGEMENT’S DISCUSSION AND ANALYSIS
T82 Other statistics
For the year ended October 31
2018(1)
2017
2016
2015
2014
2013
2012
2011
IFRS
Operating performance
Basic earnings per share ($)
Diluted earnings per share ($)
Return on equity (%)
Productivity ratio (%)
Return on assets (%)
Core banking margin (%)(2)
Net interest margin on total average
assets (%)
Capital measures(3)
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 (%)(4)
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
6.90
6.82
14.5
52.3
0.92
2.46
n/a
11.1
12.5
14.3
4.5
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
5.69
5.66
16.1
53.4
0.92
2.39
n/a
10.8
12.2
13.9
n/a
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
70.65
83.28
72.08
61.49
69.02
63.39
54.25
52.53
1,227
3.28
4.2
10.2
49.75
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
945,683
912,619
913,844
860,607
795,641
748,901
659,538
586,101
3,095
97,629
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
machines
9,029
8,140
8,144
8,191
8,732
8,471
7,341
6,260
(1) The amounts for 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(2) Refer to page 18 for a discussion of non-GAAP measures.
(3) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules as an all-in basis. Comparative amounts for periods 2012-2008 were determined in accordance with Basel II rules.
(4) Based on the average of the high and low common share price for the year.
136 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
2010
3.91
3.91
18.3
52.8
0.84
n/a
1.67
n/a
11.8
13.8
n/a
CGAAP
2009
3.32
3.31
16.7
54.8
0.71
n/a
1.62
n/a
10.7
12.9
n/a
2008
3.07
3.05
16.7
61.4
0.72
n/a
1.66
n/a
9.3
11.1
n/a
54.67
45.25
40.19
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
515,991
513,149
455,539
2,784
70,772
2,686
67,802
2,672
69,049
5,978
5,778
5,609
M
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2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 137
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, 2018, 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
Raj Viswanathan
Executive Vice President and Chief Financial Officer
Toronto, Canada
November 27, 2018
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 (the “Bank”) internal control over financial reporting as of October 31, 2018, based on the criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of October 31, 2018, based on the criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Report on the Consolidated Financial Statements
We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Bank, which comprise the consolidated statements of
financial position as at October 31, 2018 and October 31, 2017, 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, 2018, and the related notes, comprising a summary of significant
accounting policies and other explanatory information (collectively referred to as the “consolidated financial statements”), and our report dated
November 27, 2018 expressed an unmodified (unqualified) opinion on those consolidated financial statements.
Basis for Opinion
The Bank’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’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bank in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB and in accordance
with the ethical requirements that are relevant to our audit of the financial statements in Canada.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control
over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
Chartered Professional Accountants, Licensed Public Accountants
November 27, 2018
138 | 2 0 1 8 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
140 Management’s Responsibility for Financial Information
141 Independent Auditors’ Report of Registered Public Accounting Firm
142 Consolidated Statement of Financial Position
143 Consolidated Statement of Income
144 Consolidated Statement of Comprehensive Income
145 Consolidated Statement of Changes in Equity
146 Consolidated Statement of Cash Flows
147 Notes to the 2018 Consolidated Financial Statements
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 139
CONSOLIDATED FINANCIAL STATEMENTS
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 Executive Vice President 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 and Conduct Review Committee
of the Board of Directors. In addition, the Bank’s compliance function maintains policies, procedures and programs directed at ensuring compliance
with regulatory requirements, including conflict of interest rules.
The Office of the Superintendent of Financial Institutions Canada, which is mandated to protect the rights and interests of the depositors and
creditors of the Bank, examines and enquires into the business and affairs of the Bank, as deemed necessary, to determine whether the provisions of
the Bank Act are being complied with, and that the Bank is in a sound financial condition.
The Audit and Conduct Review Committee, composed entirely of outside directors, reviews the consolidated financial statements with both
management and the independent auditors before such statements are approved by the Board of Directors and submitted to the shareholders of
the Bank.
The Audit and Conduct Review Committee reviews and reports its findings to the Board of Directors on all related party transactions that may have
a material impact on the Bank.
KPMG LLP, the independent auditors appointed by the shareholders of the Bank, have audited the consolidated financial position of the Bank as at
October 31, 2018 and October 31, 2017 and its consolidated financial performance and its consolidated cash flows for each of the years in the three-
year period ended October 31, 2018 prepared in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board in accordance with Canadian Generally Accepted Auditing Standards and the standards of the Public Company
Accounting Oversight Board (United States) and the effectiveness of internal control over financial reporting and have expressed their opinions upon
completion of such audits in the following report to the shareholders. The Shareholders’ Auditors have full and free access to, and meet periodically
with, the Audit and Conduct Review Committee to discuss their audits, including any findings as to the integrity of the Bank’s accounting, financial
reporting and related matters.
Brian J. Porter
President and Chief Executive Officer
Raj Viswanathan
Executive Vice President and Chief Financial Officer
Toronto, Canada
November 27, 2018
140 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
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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 (the “Bank”), which comprise the consolidated
statements of financial position as at October 31, 2018 and October 31, 2017, 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, 2018, and the related notes, comprising a summary
of significant accounting policies and other explanatory information (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Bank as at
October 31, 2018 and October 31, 2017, and its consolidated financial performance and its consolidated cash flows for each of the years in the three-
year period ended October 31, 2018 in accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board.
Change in Accounting Principle
Without qualifying our opinion on the consolidated financial statements, we draw attention to Note 4 to the consolidated financial statements, which
indicates that the Bank has changed its method of accounting for financial instruments in 2018 due to the adoption of International Financial
Reporting Standard 9 Financial Instruments.
Report on Internal Control Over Financial Reporting
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Bank’s internal
control over financial reporting as of October 31, 2018, 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 27, 2018 expressed an unqualified
(unmodified) opinion on the effectiveness of the Bank’s internal control over financial reporting.
Basis for Opinion
A – 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.
B – 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)
(“PCAOB”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement, whether due to error or fraud. Those standards also require that we comply with ethical
requirements, including independence. We are required to be independent with respect to the Bank in accordance with the ethical requirements that
are relevant to our audit of the consolidated financial statements in Canada, the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB. We are a public accounting firm registered with the PCAOB.
An audit includes performing procedures to assess the risks of material misstatements of the consolidated financial statements, whether due to
error or fraud, and performing procedures to respond to those risks. Such procedures included obtaining and examining, on a test basis, audit
evidence regarding the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the Bank’s preparation and fair presentation of the consolidated financial statements in order to
design audit procedures that are appropriate in the circumstances.
An audit also includes evaluating the appropriateness of accounting policies and principles 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 reasonable basis for our audit opinion.
Chartered Professional Accountants, Licensed Public Accountants
We have served as the Bank’s auditor since 2006 and as joint auditor for the prior 14 years.
November 27, 2018
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 141
CONSOLIDATED FINANCIAL STATEMENTS
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 loans
Credit cards
Business and government
Allowance for credit losses
Other
Customers’ liability under acceptances, net of allowance
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
Note
2018(1)
2017
6
8(a)
8(b)
9
10
12
13
13
13
13
13(e)
16
17
18
27(c)
19
20
20
20
9
10
21
22
24(a)
24(b)
31(b)
$ 62,269
3,191
$ 59,663
5,717
85,474
14,334
454
100,262
12
104,018
37,558
78,396
253,357
96,019
16,485
191,038
556,899
5,065
551,834
16,329
2,684
4,850
17,719
1,938
17,433
60,953
78,652
17,312
2,500
98,464
13
95,319
35,364
69,269
236,916
89,227
14,104
168,449
508,696
4,327
504,369
13,560
2,381
4,586
12,106
1,713
12,749
47,095
$ 998,493
$ 915,273
$ 214,545
422,002
39,987
676,534
8,188
$ 200,030
384,988
40,349
625,367
4,663
16,338
32,087
37,967
101,257
5,698
52,744
246,091
930,813
18,234
41,414
992
404
61,044
4,184
65,228
2,452
67,680
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
$ 998,493
$ 915,273
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4).
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.
142 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Consolidated Statement of Income
For the year ended October 31 ($ millions)
Revenue
Interest income(1)(2)
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(1)
Banking
Wealth management
Underwriting and other advisory
Non-trading foreign exchange
Trading revenues(3)
Net gain on sale of investment securities
Net income from investments in associated corporations
Insurance underwriting income, net of claims
Other fees and commissions(3)
Other(3)
Total revenue
Provision for credit losses(1)
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
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I
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A
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D
F
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A
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S
Note
2018
2017
2016
32
32
33
33
34
12(g)
17
13(e)
27
$ 24,991
1,771
446
859
28,067
$ 21,719
1,403
283
522
23,927
$ 20,419
1,237
158
394
22,208
10,544
214
1,118
11,876
16,191
4,001
3,341
514
622
1,420
146
559
686
841
454
12,584
28,775
2,611
26,164
7,455
2,577
848
447
581
881
464
1,805
15,058
11,106
2,382
7,878
226
788
8,892
6,793
232
891
7,916
15,035
14,292
3,855
3,318
598
557
986
380
407
626
903
490
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
1,228
534
414
603
732
462
12,058
26,350
2,412
23,938
7,025
2,238
684
442
617
693
403
2,438
14,540
9,398
2,030
$ 8,724
$ 8,243
$ 7,368
Net income attributable to non-controlling interests in subsidiaries
31(b)
176
238
251
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)
$ 8,548
187
$ 8,361
$ 8,005
129
$ 7,876
$ 7,117
130
$ 6,987
$
35
35
24(a)
6.90
6.82
3.28
$
6.55
6.49
3.05
$
5.80
5.77
2.88
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Notes 3 and 4).
(2)
Interest income on financial assets measured at amortized cost and FVOCI is calculated using the effective interest method. Includes interest income of $27,854 for the year ended
October 31, 2018 from these financial assets.
(3) Prior year amounts have been reclassified to conform with current period presentation.
The accompanying notes are an integral part of these consolidated financial statements.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 143
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
For the year ended October 31 ($ 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 (debt and equity)(1):
Net unrealized gains (losses) on available-for-sale securities
Reclassification of net (gains) losses to net income(2)
Income tax expense (benefit):
Net unrealized gains (losses) on available-for-sale securities
Reclassification of net (gains) losses to net income
Net change in fair value due to change in debt instruments measured at fair value through other
comprehensive income(1):
Net gains (losses) in fair value
Reclassification of net (gains) losses to net income
Income tax expense (benefit):
Net gains (losses) in fair value
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(3)
Income tax expense (benefit):
Net gains (losses) on derivative instruments designated as cash flow hedges
Reclassification of net (gains) losses to net income
Other comprehensive income (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 equity instruments designated at fair value through other
comprehensive income(1):
Net gains (losses) in fair value
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
2018
2017
2016
$ 8,724
$ 8,243
$ 7,368
(406)
(281)
(7)
(74)
(606)
n/a
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(605)
281
(145)
73
(252)
(1,564)
404
(8)
107
(1,259)
(217)
143
(61)
42
(55)
n/a
n/a
n/a
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(1,181)
695
1,722
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(307)
182
(361)
66
444
126
318
75
15
60
(30)
(8)
(22)
(7)
454
(465)
(28)
56
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213
592
n/a
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(28)
(7)
(21)
6
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(300)
(3)
(79)
396
308
(549)
82
(151)
(172)
n/a
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n/a
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(7)
357
9
83
258
31
(972)
(256)
(716)
n/a
n/a
n/a
(23)
(7)
(16)
(10)
(804)
$ 7,920
(709)
$ 7,534
(229)
$ 7,139
65
192
237
$ 7,855
187
$ 7,668
$ 7,342
129
$ 7,213
$ 6,902
130
$ 6,772
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4).
(2)
(3) Amount for 2016 includes reclassification of $22 pre-tax to goodwill for acquisition-related cash flow hedges.
Includes amounts related to qualifying hedges.
The accompanying notes are an integral part of these consolidated financial statements.
144 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
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2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 145
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Cash Flows
Sources (uses) of cash flows for the year ended October 31 ($ millions)
Cash flows from operating activities
Net income
Adjustment for:
Net interest income
Depreciation and amortization
Provision 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 securities sold under repurchase agreements and securities lent
Net derivative financial instruments
Other, net
Dividends received
Interest received
Interest paid
Income tax paid
Net cash from/(used in) operating activities
Cash flows from investing activities
Interest-bearing deposits with financial institutions
Purchase of investment securities
Proceeds from sale and maturity of investment securities
Acquisition/sale of subsidiaries, associated corporations or business units, net of cash acquired
Property and equipment, net of disposals
Other, net
Net cash from/(used in) investing activities
Cash flows from financing activities
Proceeds from issue of subordinated debentures
Redemption/repayment of subordinated debentures
Proceeds from common shares issued
Proceeds from preferred shares and other equity instruments issued
Redemption of preferred shares
Common shares purchased for cancellation
Cash dividends and distributions paid
Distributions to non-controlling interests
Other, net
Net cash from/(used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year(2)
Cash and cash equivalents at end of year(2)
2018(1)
2017
2016
$
8,724
$
8,243
$
7,368
(16,191)
848
2,611
6
(146)
–
(559)
2,382
–
111
(7,721)
(31,848)
40,338
239
4,387
440
(188)
332
27,384
(11,400)
(1,938)
17,811
(704)
(91,896)
84,336
(3,862)
(416)
(1,183)
(13,725)
–
(233)
1,830
300
(695)
(632)
(4,172)
(199)
931
(2,870)
(44)
1,172
7,825
8,997
$
(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
$
(1) The amounts for year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Notes 3 and 4).
(2) Represents cash and non-interest bearing deposits with financial institutions (refer to Note 6).
The accompanying notes are an integral part of these consolidated financial statements.
146 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
NOTES TO THE 2018 CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Reporting entity
Basis of preparation
Page Note
204 20
Deposits
204 21
Subordinated debentures
Significant accounting policies
205 22
Other liabilities
Transition to IFRS 9
205 23
Provisions
Future accounting developments
205 24
Common shares, preferred shares and other
equity instruments
Cash and deposits with financial institutions
Fair value of financial instruments
Trading assets
Financial instruments designated at fair value
through profit or loss
209 25
Capital management
209 26
Share-based payments
212 27
Corporate income taxes
214 28
Employee benefits
Derivative financial instruments
219 29
Operating segments
Page Note
148
148
149
165
168
169
169
176
177
178
185
186
189
197
198
201
201
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Offsetting financial assets and financial
liabilities
Investment securities
Loans, impaired loans and allowance for credit
losses
Derecognition of financial assets
Structured entities
Property and equipment
Investments in associates
202 18
Goodwill and other intangible assets
203 19
Other assets
221 30
Related party transactions
223 31
Principal subsidiaries and non-controlling
interests in subsidiaries
224 32
Interest income and expense
225 33
Non-interest income
225 34
Trading revenues
225 35
Earnings per share
226 36
Guarantees, commitments and pledged assets
228 37
Financial instruments – risk management
235 38
Business combinations
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 147
CONSOLIDATED FINANCIAL STATEMENTS
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, 2018 have been approved by the Board of Directors for issue on November 27,
2018.
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:
(cid:129) Financial assets and liabilities measured at fair value through profit or loss
(cid:129) Financial assets and liabilities designated at fair value through profit or loss
(cid:129) Derivative financial instruments
(cid:129) Available-for-sale investment securities (applicable prior to November 1, 2017)
(cid:129) Equity instruments designated at fair value through other comprehensive income (effective November 1, 2017)
(cid:129) Debt instruments measured at fair value through other comprehensive income (effective November 1, 2017)
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 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.
148 | 2 0 1 8 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
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S
Significant estimates, assumptions and judgments have been made in the following areas and are discussed as noted in the consolidated financial
statements:
Allowance for credit losses
Fair value of financial instruments
Corporate income taxes
Employee benefits
Goodwill and intangible assets
Fair value of all identifiable assets and liabilities as a result of business combinations
Impairment of investment securities
Impairment of non-financial assets
Structured entities
De facto control of other entities
Derecognition of financial assets and liabilities
Provisions
3
Significant Accounting Policies
Note 3
Note 13(d)
Note 3
Note 7
Note 3
Note 27
Note 3
Note 28
Note 3
Note 18
Note 3
Note 38
Note 3
Note 12
Note 3
Note 16
Note 3
Note 15
Note 3
Note 31
Note 3
Note 14
Note 3
Note 23
The significant accounting policies used in the preparation of these consolidated financial statements, including any additional accounting
requirements of OSFI, as set out below, have been applied consistently to all periods presented in these consolidated financial statements, with the
exception of the adoption of IFRS 9 (refer Note 4).
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:
(cid:129) power over the investee;
(cid:129)
(cid:129)
exposure, or rights, to variable returns from involvement with the investee; and
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:
(cid:129) by virtue of an agreement, over more than half of the voting rights;
(cid:129)
(cid:129)
to govern the financial and operating policies of the entity under a statute or an agreement;
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
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).
(cid:129)
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.
2 0 1 8 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
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
Recognition and initial measurement
The Bank, on the date of origination or purchase, recognizes loans, debt and equity securities, deposits and subordinated debentures at the fair value
of consideration paid. 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.
The initial measurement of a financial asset or liability is at fair value plus transaction costs that are directly attributable to its purchase or issuance. For
instruments measured at fair value through profit or loss, transaction costs are recognized immediately in profit or loss.
Classification and measurement, derecognition, and impairment of financial instruments effective November 1, 2017
Classification and measurement
Classification and measurement of financial assets
Financial assets are classified into one of the following measurement categories:
(cid:129) Amortized cost;
(cid:129)
(cid:129)
(cid:129)
(cid:129) Designated at FVTPL
Fair value through other comprehensive income (FVOCI);
Fair value through profit or loss (FVTPL);
Elected at fair value through other comprehensive income (Equities only); or
150 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
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Financial assets include both debt and equity instruments.
Debt instruments
Debt instruments, including loans and debt securities, are classified into one of the following measurement categories:
(cid:129) Amortized cost;
(cid:129)
(cid:129)
(cid:129) Designated at FVTPL
Fair value through other comprehensive income (FVOCI);
Fair value through profit or loss (FVTPL); or
Classification of debt instruments is determined based on:
(i) The business model under which the asset is held; and
(ii) The contractual cash flow characteristics of the instrument.
Business model assessment
Business model assessment involves determining how financial assets are managed in order to generate cash flows. The Bank’s business model
assessment is based on the following categories:
(cid:129) Held to collect: The objective of the business model is to hold assets and collect contractual cash flows. Any sales of the asset are incidental
to the objective of the model.
(cid:129) Held to collect and for sale: Both collecting contractual cash flows and sales are integral to achieving the objectives of the business model.
(cid:129) Other business model: The business model is neither held-to-collect nor held-to-collect and for sale.
The Bank assesses business model at a portfolio level reflective of how groups of assets are managed together to achieve a particular business
objective. For the assessment of a business model, the Bank takes into consideration the following factors:
(cid:129) How the performance of assets in a portfolio is evaluated and reported to group heads and other key decision makers within the Bank’s
business lines;
(cid:129) How compensation is determined for the Bank’s business lines’ management that manages the assets;
(cid:129) Whether the assets are held for trading purposes i.e., assets that the Bank acquires or incurs principally for the purpose of selling or
repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking;
The risks that affect the performance of assets held within a business model and how those risks are managed; and
The frequency and volume of sales in prior periods and expectations about future sales activity.
(cid:129)
(cid:129)
Contractual cash flow characteristics assessment
The contractual cash flow characteristics assessment involves assessing the contractual features of an instrument to determine if they give rise to cash
flows that are consistent with a basic lending arrangement. Contractual cash flows are consistent with a basic lending arrangement if they represent
cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).
Principal is defined as the fair value of the instrument at initial recognition. Principal may change over the life of the instrument due to repayments or
amortization of premium/discount.
Interest is defined as the consideration for the time value of money and the credit risk associated with the principal amount outstanding and for other
basic lending risks and costs (liquidity risk and administrative costs), and a profit margin.
If the Bank identifies any contractual features that could significantly modify the cash flows of the instrument such that they are no longer consistent
with a basic lending arrangement, the related financial asset is classified and measured at FVTPL.
Debt instruments measured at amortized cost
Debt instruments are measured at amortized cost if they are held within a business model whose objective is to hold for collection of contractual cash
flows where those cash flows represent solely payments of principal and interest. After initial measurement, debt instruments in this category are
carried at amortized cost. Interest income on these instruments is recognized in interest income using the effective interest rate method. The effective
interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial asset to the gross carrying
amount of a financial asset. 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.
Impairment on debt instruments measured at amortized cost is calculated using the expected credit loss approach. Loans and debt securities measured
at amortized cost are presented net of the allowance for credit losses (ACL) in the statement of financial position.
Debt instruments measured at FVOCI
Debt instruments are measured at FVOCI if they are held within a business model whose objective is to hold for collection of contractual cash flows
and for selling financial assets, where the assets’ cash flows represent payments that are solely payments of principal and interest. Subsequent to
initial recognition, unrealized gains and losses on debt instruments measured at FVOCI are recorded in other comprehensive income (OCI), unless the
instrument is designated in a fair value hedge relationship. When designated in a fair value hedge relationship, any changes in fair value due to
changes in the hedged risk are recognized in Non-interest income in the Consolidated Statement of Income. Upon derecognition, realized gains and
losses are reclassified from OCI and recorded in Non-interest income in the Consolidated Statement of Income on an average cost basis. Foreign
exchange gains and losses that relate to the amortized cost of the debt instrument are recognized in the Consolidated Statement of Income.
Premiums, discounts and related transaction costs are amortized over the expected life of the instrument to Interest income in the Consolidated
Statement of Income using the effective interest rate method.
Impairment on debt instruments measured at FVOCI is calculated using the expected credit loss approach. The ACL on debt instruments measured at
FVOCI does not reduce the carrying amount of the asset in the Consolidated Statement of Financial Position, which remains at its fair value. Instead,
an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI with a corresponding charge to
Provision for credit losses in the Consolidated Statement of Income. The accumulated allowance recognised in OCI is recycled to the Consolidated
Statement of Income upon derecognition of the debt instrument.
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CONSOLIDATED FINANCIAL STATEMENTS
Debt instruments measured at FVTPL
Debt instruments are measured at FVTPL if assets:
i) Are held for trading purposes;
ii) Are held as part of a portfolio managed on a fair value basis; or
iii) Whose cash flows do not represent payments that are solely payments of principal and interest.
These instruments 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. Realized and unrealized gains and losses are recognized as part of Non-interest
income in the Consolidated Statement of Income.
Debt instruments designated at FVTPL
Financial assets classified in this category are those that have been designated by the Bank upon initial recognition, and once designated, the
designation is irrevocable. The FVTPL designation is available only for those financial assets for which a reliable estimate of fair value can be obtained.
Financial assets are designated at FVTPL if doing so eliminates or significantly reduces an accounting mismatch which would otherwise arise.
Financial assets designated at FVTPL are recorded in the Consolidated Statement of Financial Position at fair value. Changes in fair value are
recognized in Non-interest income in the Consolidated Statement of Income.
Equity instruments
Equity instruments are classified into one of the following measurement categories:
(cid:129)
(cid:129)
Fair value through profit or loss (FVTPL); or
Elected at fair value through other comprehensive income (FVOCI).
Equity instruments measured at FVTPL
Equity instruments are measured at FVTPL, unless an election is made to designate them at FVOCI upon purchase, with transaction costs recognized
immediately in the Consolidated Statement of Income as part of Non-interest income. Subsequent to initial recognition the changes in fair value are
recognized as part of Non-interest income in the Consolidated Statement of Income.
Equity instruments measured at FVOCI
At initial recognition, there is an irrevocable option for the Bank to classify non-trading equity instruments at FVOCI. This election is used for certain
equity investments for strategic or longer term investment purposes. This election is made on an instrument-by-instrument basis and is not available to
equity instruments that are held for trading purposes.
Gains and losses on these instruments including when derecognized/sold are recorded in OCI and are not subsequently reclassified to the
Consolidated Statement of Income. As such, there is no specific impairment requirement. Dividends received are recorded in Interest income in the
Consolidated Statement of Income. Any transaction costs incurred upon purchase of the security are added to the cost basis of the security and are
not reclassified to the Consolidated Statement of Income on sale of the security.
Classification and measurement of financial liabilities
Financial liabilities are classified into one of the following measurement categories:
Fair value through profit or loss (FVTPL);
(cid:129)
(cid:129) Amortized cost; or
(cid:129) Designated at FVTPL.
Financial liabilities measured at FVTPL
Financial liabilities measured at FVTPL are held principally for the purpose of repurchasing in the near term, or form part of a portfolio of identified
financial instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit-taking. Financial
liabilities are recognized on a trade date basis and are accounted for at fair value, with changes in fair value and any gains or losses recognized in the
Consolidated Statement of Income as part of the non-interest income. Transaction costs are expensed as incurred.
Financial liabilities measured at amortized cost
Deposits, subordinated notes and debentures are accounted for at amortized cost. Interest on deposits, calculated using the effective interest rate
method, is recognized as interest expense. Interest on subordinated notes and debentures, including capitalized transaction costs, is recognized using
the effective interest rate method as interest expense.
Financial liabilities designated at FVTPL
Financial liabilities classified in this category are those that have been designated by the Bank upon initial recognition, and once designated, the
designation is irrevocable. The FVTPL designation is available only for those financial liabilities for which a reliable estimate of fair value can be
obtained.
Financial liabilities are designated at FVTPL when one of the following criteria is met:
The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or
(cid:129)
(cid:129) A group of financial liabilities are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk
management strategy; or
The financial liability contains one or more embedded derivatives which significantly modify the cash flows otherwise required.
(cid:129)
Financial liabilities designated at FVTPL are recorded in the Consolidated Statement of Financial Position at fair value. Any changes in fair value are
recognized in Non-interest income in the Consolidated Statement of Income, except for changes in fair value arising from changes in the Bank’s own
credit risk which are recognized in the OCI. Changes in fair value due to changes in the Bank’s own credit risk are not subsequently reclassified to
Consolidated Statement of Income upon derecognition/extinguishment of the liabilities.
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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. Unadjusted quoted market prices for identical
instruments 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; or 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.
Impairment
Scope
The Bank applies a three-stage approach to measure allowance for credit losses, using an expected credit loss approach as required under IFRS 9, for
the following categories of financial instruments that are not measured at fair value through profit or loss:
(cid:129) Amortized cost financial assets;
(cid:129) Debt securities classified as at FVOCI;
(cid:129) Off-balance sheet loan commitments; and
(cid:129)
Financial guarantee contracts.
Expected credit loss impairment model
The Bank’s allowance for credit losses calculations are outputs of models with a number of underlying assumptions regarding the choice of variable
inputs and their interdependencies. The expected credit loss impairment model reflects 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. The
allowance for credit losses reflects an unbiased, probability-weighted outcome which considers multiple scenarios based on reasonable and
supportable forecasts.
This impairment model measures credit loss allowances using a three-stage approach based on the extent of credit deterioration since origination:
(cid:129)
Stage 1 – Where there has not been a significant increase in credit risk (SIR) since initial recognition of a financial instrument, an amount
equal to 12 months expected credit loss is recorded. The expected credit loss is computed using a probability of default occurring over the
next 12 months. For those instruments with a remaining maturity of less than 12 months, a probability of default corresponding to
remaining term to maturity is used.
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CONSOLIDATED FINANCIAL STATEMENTS
(cid:129)
(cid:129)
Stage 2 – When a financial instrument experiences a SIR subsequent to origination but is not considered to be in default, it is included in
Stage 2. This requires the computation of expected credit loss based on the probability of default over the remaining estimated life of the
financial instrument.
Stage 3 – Financial instruments that are considered to be in default are included in this stage. Similar to Stage 2, the allowance for credit
losses captures the lifetime expected credit losses.
Measurement of expected credit loss
The probability of default (PD), exposure at default (EAD), and loss given default (LGD) inputs used to estimate expected credit losses are modelled
based on macroeconomic variables that are most closely related with credit losses in the relevant portfolio.
Details of these statistical parameters/inputs are as follows:
(cid:129)
(cid:129)
(cid:129)
PD – The probability of default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain
time over the remaining estimated life, if the facility has not been previously derecognized and is still in the portfolio.
EAD – The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure
after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns
on committed facilities, and accrued interest from missed payments.
LGD – The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference
between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral. It
is usually expressed as a percentage of the EAD.
Forward-looking information
The estimation of expected credit losses for each stage and the assessment of significant increases in credit risk consider information about past events
and current conditions as well as reasonable and supportable forecasts of future events and economic conditions. The estimation and application of
forward-looking information may require significant judgment.
Macroeconomic factors
In its models, the Bank relies on a broad range of forward-looking economic information as inputs, such as: GDP growth, unemployment rates,
central-bank interest rates, and house-price indices. The inputs and models used for calculating expected credit losses may not always capture all
characteristics of the market at the date of the financial statements. To reflect this, qualitative adjustments or overlays may be made as temporary
adjustments using expert credit judgment.
Multiple forward-looking scenarios
The Bank determines its allowance for credit losses using three probability-weighted forward-looking scenarios. The Bank considers both internal and
external sources of information and data in order to achieve an unbiased projections and forecasts. The Bank prepares the scenarios using forecasts
generated by Scotiabank Economics (SE). The forecasts are created using internal and external models which are modified by SE as necessary to
formulate a ‘base case’ view of the most probable future direction of relevant economic variables as well as a representative range of other possible
forecast scenarios. The process involves the development of two additional economic scenarios and consideration of the relative probabilities of each
outcome.
The ‘base case’ represents the most likely outcome and is aligned with information used by the Bank for other purposes such as strategic planning and
budgeting. The other scenarios represent more optimistic and more pessimistic outcomes. The Bank has identified and documented key drivers of
credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between
macroeconomic variables, credit risk, and credit losses.
Assessment of significant increase in credit risk (SIR)
At each reporting date, the Bank assesses whether there has been a significant increase in credit risk for exposures since initial recognition by
comparing the risk of default occurring over the remaining expected life from the reporting date and the date of initial recognition. The assessment
considers borrower-specific quantitative and qualitative information without consideration of collateral, and the impact of forward-looking
macroeconomic factors.
The common assessments for SIR on retail and non-retail portfolios include macroeconomic outlook, management judgement, and delinquency and
monitoring. Forward-looking macroeconomic factors are a key component of the macroeconomic outlook. The importance and relevance of each
specific macroeconomic factor depends on the type of product, characteristics of the financial instruments and the borrower and the geographical
region. Quantitative models may not always be able to capture all reasonable and supportable information that may indicate a significant increase in
credit risk. Qualitative factors may be assessed to supplement the gap. Examples of situations include changes in adjudication criteria for a particular
group of borrowers; changes in portfolio composition; and natural disasters impacting certain portfolios. With regards to delinquency and monitoring,
there is a rebuttable presumption that the credit risk of the financial instrument has increased since initial recognition when contractual payments are
more than 30 days overdue.
Retail portfolio – For retail exposures, a significant increase in credit risk cannot be assessed using forward looking information at an individual
account level. Therefore, the assessment must be done at the segment level. Segment migration thresholds exist for each PD model by product which
considers the proportionate change in PD as well as the absolute change in PD. The thresholds used for PD migration are reviewed and assessed at
least annually, unless there is a significant change in credit risk management practices in which case the review is brought forward.
Non-retail portfolio – The Bank uses a risk rating scale (IG codes) for its non-retail exposures. All non-retail exposures have an IG code assigned that
reflects the probability of default of the borrower. Both borrower specific and non-borrower specific (i.e. macroeconomic) forward looking
information is considered and reflected in the IG rating. Significant increase in credit risk is evaluated based on the migration of the exposures among
IG codes.
Expected life
When measuring expected credit loss, the Bank considers the maximum contractual period over which the Bank is exposed to credit risk. All
contractual terms are considered when determining the expected life, including prepayment, and extension and rollover options. For certain revolving
credit facilities, such as credit cards, the expected life is estimated based on the period over which the Bank is exposed to credit risk and how the
credit losses are mitigated by management actions.
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Presentation of allowance for credit losses in the Statement of Financial Position
Financial assets measured at amortized cost: as a deduction from the gross carrying amount of the financial assets;
(cid:129)
(cid:129) Debt instruments measured at fair value through other comprehensive income: no allowance is recognized in the Statement of Financial
Position because the carrying value of these assets is their fair value. However, the allowance determined is presented in the accumulated
other comprehensive income;
(cid:129) Off-balance sheet credit risks include undrawn lending commitments, letters of credit and letters of guarantee: as a provision in other
liabilities.
Modified financial assets
If the terms of a financial asset are modified or an existing financial asset is replaced with a new one, an assessment is made to determine if the
existing financial asset should be derecognized. Where a modification does not result in derecognition, the date of origination continues to be used to
determine SIR. Where a modification results in derecognition, the new financial asset is recognized at its fair value on the modification date. The
modification date is also the date of origination for this new asset.
The Bank may modify the contractual terms of loans for either commercial or credit reasons. The terms of a loan in good standing may be modified
for commercial reasons to provide competitive pricing to borrowers. Loans are also modified for credit reasons where the contractual terms are
modified to grant a concession to a borrower that may be experiencing financial difficulty.
For all financial assets modifications of the contractual terms may result in derecognition of the original asset when the changes to the terms of the
loans are considered substantial. These terms include interest rate, authorized amount, term, or type of underlying collateral. The original loan is
derecognized and the new loan is recognized at its fair value. The difference between the carrying value of the derecognized asset and the fair value
of the new asset is recognized in the Income Statement.
For all loans, performing and credit-impaired, where the modification of terms did not result in the derecognition of the loan, the gross carrying
amount of the modified loan is recalculated based on the present value of the modified cash flows discounted at the original effective interest rate
and any gain or loss from the modification is recorded in the provision for credit losses line in the income statement.
Definition of default
The Bank considers a financial instrument to be in default as a result of one or more loss events that occurred after the date of initial recognition of
the instrument and the loss event has a negative impact on the estimated future cash flows of the instrument that can be reliably estimated. This
includes events that indicate:
significant financial difficulty of the borrower;
(cid:129)
(cid:129) default or delinquency in interest or principal payments;
(cid:129) high probability of the borrower entering a phase of bankruptcy or a financial reorganization;
(cid:129) measurable decrease in the estimated future cash flows from the loan or the underlying assets that back the loan.
The Bank considers that default has occurred and classifies the financial asset as impaired when it is more than 90 days past due, with the exception
of credit card receivables that are treated as defaulted when 180 days past due, unless reasonable and supportable information demonstrates that a
more lagging default criterion is appropriate.
Write-off policy
The Bank writes off an impaired financial asset (and the related impairment allowance), either partially or in full, when there is no realistic prospect of
recovery. Where financial assets 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. Credit card receivables 180 days past due are written-off. In subsequent periods, any recoveries of amounts previously written off are credited
to the provision for credit losses in the Consolidated Statement of Income.
Purchased loans
All purchased loans are initially measured at fair value on the date of acquisition. As a result no allowance for credit losses would be recorded in the
Consolidated Statement of Financial Position on the date of acquisition. Purchased loans may fit into either of the two categories: Performing loans or
Purchased Credit Impaired (PCI) loans.
Purchased performing loans follow the same accounting as originated performing loans and are reflected in Stage 1 on the date of the acquisition.
They will be subject to a 12-month allowance for credit losses which is recorded as a provision for credit losses in the Consolidated Statement of
Income. The fair value adjustment set up for these loans on the date of acquisition is amortized into interest income over the life of these loans.
PCI loans are reflected in Stage 3 and are always subject to lifetime allowance for credit losses. Any changes in the expected cash flows since the date
of acquisition are recorded as a charge/recovery in the provision for credit losses in the Consolidated Statement of Income at the end of all reporting
periods subsequent to the date of acquisition.
Classification and measurement, derecognition, and impairment of financial instruments effective prior to November 1, 2017
Trading assets and liabilities
Trading assets and liabilities are measured at fair value in the Consolidated Statement of Financial Position, with transaction costs recognized
immediately in the Consolidated Statement of Income as part of non-interest income – trading revenues. Gains and losses realized on disposal and
unrealized gains and losses due to fair value changes on trading assets and liabilities, other than certain derivatives, are recognized as part of
non-interest income – trading revenues in the Consolidated Statement of Income. Trading assets and liabilities are not reclassified subsequent to their
initial recognition.
Investment securities
Investment securities are comprised of available-for-sale and held-to-maturity securities.
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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:
(cid:129)
(cid:129)
(cid:129)
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;
Sales or reclassifications after the Bank has collected substantially all of the asset’s original principal; or
Sales or reclassifications attributable to non-recurring isolated events beyond the Bank’s control that could not have been reasonably
anticipated.
Impairment of investment securities
Investment securities are evaluated for impairment at the end of each reporting period, or more frequently if events or changes in circumstances
indicate the existence of objective evidence of impairment.
In the case of equity instruments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its original cost
is objective evidence of impairment. In the case of debt instruments classified as available-for-sale and held-to-maturity investment securities,
impairment is assessed based on the same criteria as impairment of loans.
When a decline in value of available-for-sale debt or equity instrument is due to impairment, the carrying value of the security continues to reflect fair
value. Losses arising from impairment are reclassified from accumulated other comprehensive income and included in net gain on investment
securities within non-interest income in the Consolidated Statement of Income.
The losses arising from impairment of held-to-maturity investment securities are recognized in net gain on investment securities within non-interest
income in the Consolidated Statement of Income.
Reversals of impairment losses on available-for-sale debt instruments resulting from increases in fair value related to events occurring after the date of
impairment are included in net gain on investment securities within non-interest income in the Consolidated Statement of Income, to a maximum of
the original impairment charge. Reversals of impairment on available-for-sale equity instruments are not recognized in the Consolidated Statement of
Income; increases in fair value of such instruments after impairment are recognized in accumulated other comprehensive income.
Reversals of impairment losses on held-to-maturity investment securities are included in net gain on investment securities within non-interest income
in the Consolidated Statement of Income, to a maximum of the amortized cost of the investment before the original impairment charge.
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:
(cid:129)
(cid:129)
(cid:129)
The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or
liabilities on a different basis; or
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
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.
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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.
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; or 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.
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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
significant financial difficulty of the borrower;
a default or delinquency in interest or principal payments;
a high probability of the borrower entering a phase of bankruptcy or a financial reorganization;
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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
the customer’s ability to generate sufficient cash flow to service debt obligations;
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;
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
the realizable value of security (or other credit mitigants) and likelihood of successful repossession.
Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the
resultant present value with the loan’s current carrying amount. This results in interest income being recognized using the original effective interest rate.
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CONSOLIDATED FINANCIAL STATEMENTS
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:
(cid:129)
(cid:129)
(cid:129)
Probability of Default rates (PD) which are based upon the internal risk rating for each borrower;
Loss Given Default rates (LGD); and
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:
(cid:129) historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product);
(cid:129) 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
(cid:129) management’s experienced judgment as to whether current economic and credit conditions are such that the actual level of inherent losses at the
reporting date is likely to be greater or less than that suggested by historical experience. As soon as information becomes available which identifies
losses on individual loans within the group, those loans are removed from the group and assessed on an individual basis for impairment.
Provision for credit losses on off-balance sheet positions
A provision is set up for the Bank’s off-balance sheet positions and recorded in other liabilities on the Consolidated Statement of Financial Position.
The process to determine the provision for off-balance sheet positions is similar to the methodology used for loans. Any change in the provision is
recorded in the Consolidated Statement of Income as provision for credit losses.
Write-off of loans
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, write-off is generally after receipt of any proceeds from the realization of security. In circumstances where the net
realizable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss related to loans decreases in a subsequent period, and the decrease can be related objectively to an event
occurring after the impairment was recognized, the excess is written back by reducing the loan impairment allowance account accordingly. The write-
back is recognized in the provision for credit losses in the Consolidated Statement of Income.
Restructured loans
Restructured loans include loans where the Bank has renegotiated the original terms of a loan by granting a concession to the borrower (concessions).
These concessions include interest rate adjustments, deferral or extension of principal or interest payments and forgiveness of a portion of principal or
interest. Once the terms of the loan have been renegotiated and agreed upon with the borrower the loan is considered a restructured loan. The
investment in the loan is reduced as of the date of the restructuring to the amount of the net expected cash flows receivable under the modified
terms, discounted at the original effective interest rate inherent in the loan. The loan is no longer considered past due and the reduction in the
carrying value of the loan is recognized as a charge for loan impairment in the Consolidated Statement of Income in the period in which the loan
is restructured. In other cases, restructuring may be considered substantial enough to result in recognition of a new loan.
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
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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.
Securities purchased and sold under resale agreements
Securities purchased under resale agreements (reverse repurchase agreements) involve the Bank to purchase securities from a counterparty with an
agreement entered to resell the securities at a fixed price at a future date. Since the Bank is reselling the securities at a fixed price at a future date, the
risks and rewards have not been transferred to the Bank. The Bank has the right to liquidate the securities purchased in the event of counterparty
default.
Whereas, securities sold under agreements to repurchase (repurchase agreements) involve the Bank to sell securities to a counterparty with an
agreement entered simultaneously to purchase the securities back at a fixed price at a future date. Since the Bank is purchasing the securities back at
a fixed price at a future date, the risks and rewards have not been transferred from the Bank. The counterparty has the right to use the collateral
pledged by the Bank in the event of default.
These agreements are treated as collateralized financing arrangements and are initially recognized 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 interest income and interest expense are recorded on an accrual basis using the effective interest rate method in interest income on 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 liabilities or host contracts are treated as separate derivatives when the following conditions are met:
(cid:129) their economic characteristics and risks are not closely related to those of the host contract;
(cid:129) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and
(cid:129) the combined contract is not held for trading or designated at fair value through profit or loss.
Where an embedded derivative is separable from the host contract but the fair value, as at the acquisition or reporting date, cannot be reliably
measured separately, the entire combined contract is measured at fair value. All embedded derivatives are presented on a combined basis with the
host contracts although they are separated for measurement purposes when conditions requiring separation are met. Subsequent changes in fair
value of embedded derivatives are recognized in non-interest income in the Consolidated Statement of Income.
All derivatives, including embedded derivatives that must be separately accounted for, are recorded at fair value in the Consolidated Statement of
Financial Position. The determination of the fair value of derivatives includes consideration of credit risk, estimated funding costs and ongoing direct
costs over the life of the instruments. Inception gains or losses on derivatives are only recognized where the valuation is dependent only on observable
market data, otherwise, they are deferred and amortized over the life of the related contract, or until the valuation inputs become observable.
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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.
Hedge accounting
The Bank has elected to continue to apply the hedge accounting requirements of IAS 39. However, the Bank has implemented the additional hedge
accounting disclosures that are required by the IFRS 9 related amendments to IFRS 7 “Financial Instruments: Disclosures”.
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 the 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. For hedges that are discontinued, the hedged item is no longer adjusted for changes in fair value.
The cumulative fair value adjustment of the hedged item is amortized to non-interest income over its remaining term to maturity or written off to
non-interest income directly if the hedged item ceases to exist. The Bank utilizes fair value hedges primarily to convert fixed rate financial instruments
to floating rate financial instruments. Hedged items include debt securities, loans, deposit liabilities and subordinated debentures. Hedging
instruments include single-currency interest rate swaps and cross-currency interest rate swaps.
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. For hedges that are discontinued, the cumulative unrealized gain or loss
recognized in other comprehensive income is reclassified to non-interest income and/or salaries and employee benefits as the variability in the cash
flows of hedged item affects income. However, if the hedged item is derecognized or the forecasted transaction is no longer expected to occur, the
unrealized gain or loss is reclassified immediately to non-interest income and/or salaries and employee benefits. 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 and expenses.
Hedged items include 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, foreign currency forwards and foreign currency assets or liabilities.
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.
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Non-current non-financial assets classified as held-for-sale are measured at the lower of their carrying amount and fair value (less costs to sell) and are
presented within other assets in the Consolidated Statement of Financial Position. Any subsequent write-down to fair value less costs to sell is
recognized in the Consolidated Statement of Income, in non-interest income. Any subsequent increase in the fair value less costs to sell, to the extent
this does not exceed the cumulative write-down, is also recognized in non-interest income, together with any realized gains or losses on disposal.
Non-financial assets acquired in exchange for loans as part of an orderly realization are recorded as assets held-for-sale or assets held-for-use. If the
acquired asset does not meet the requirement to be considered held-for-sale, the asset is considered held-for-use, measured initially at cost which
equals the carrying value of the loan and accounted for in the same manner as a similar asset acquired in the normal course of business.
Business combinations and goodwill
The Bank follows the acquisition method of accounting for the acquisition of subsidiaries. The Bank considers the date on which control is obtained
and it legally transfers the consideration for the acquired assets and assumed liabilities of the subsidiary to be the date of acquisition. The cost of an
acquisition is measured at the fair value of the consideration paid. The fair value of the consideration transferred by the Bank in a business
combination is calculated as the sum of the acquisition date fair value of the assets transferred by the Bank, the liabilities incurred by the Bank to
former owners of the acquiree, and the equity interests, including any options, issued by the Bank. The Bank recognizes the acquisition date fair
values of any previously held investment in the subsidiary and contingent consideration as part of the consideration transferred in exchange for the
acquisition. A gain or loss on any previously held investments of an acquiree is recognized in non-interest income – other in the Consolidated
Statement of Income.
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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:
(cid:129) 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.
(cid:129) Indemnification assets are measured on the same basis as the item to which the indemnification relates.
(cid:129) Contingent consideration classified as a liability is measured at fair value, with any change recognized in the Consolidated Statement of Income.
(cid:129) 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.
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Intangible assets that have finite useful lives are initially measured at cost and are amortized on a straight-line basis over their useful lives as follows:
computer software – 5 to 10 years; and other intangible assets – 5 to 20 years. Amortization expense is included in the Consolidated Statement of
Income under operating expenses – depreciation and amortization. As intangible assets are considered to be non-financial assets, the impairment
model for non-financial assets is applied. Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually and
when circumstances indicate that the carrying value may be impaired.
Impairment of non-financial assets
The carrying amount of the Bank’s non-financial assets, other than goodwill and indefinite life intangible assets and deferred tax assets which are
separately addressed, is reviewed at each reporting date to determine whether there is any indication of impairment. For the purpose of impairment
testing, non-financial assets that cannot be tested individually are grouped together into the smallest group of assets that generate cash inflows from
continuing use that are largely independent from the cash inflows of other assets or groups of assets.
If any indication of impairment exists then the asset’s recoverable amount is estimated. The recoverable amount of an asset or CGU is the greater of
its value in use and its fair value less costs of disposal. The Bank’s corporate assets do not generate separate cash inflows. If there is an indication that
a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.
An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses of continuing
operations are recognized in the Consolidated Statement of Income in those expense categories consistent with the nature of the impaired asset.
Impairment losses recognized in prior periods are reassessed at each reporting date for any indication that the loss had decreased or no longer exists.
An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed
only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized. Such reversal is recognized in the Consolidated Statement of Income.
Significant judgment is applied in determining the non-financial asset’s recoverable amount and assessing whether certain events or circumstances
constitute objective evidence of impairment.
Corporate income taxes
The Bank follows the balance sheet liability method for corporate income taxes. Under this method, deferred tax assets and liabilities represent the
cumulative amount of tax applicable to temporary differences which are the differences between the carrying amount of the assets and liabilities, and
their values for tax purposes. Deferred tax assets are recognized only to the extent it is probable that sufficient taxable profits will be available against
which the benefit of these deferred tax assets can be utilized.
Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where the Bank has both the legal
right and the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.
The Bank maintains provisions for uncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit, dispute,
or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the Bank’s best estimate of
the amount expected to be paid based on an assessment of all relevant factors, which are reviewed at the end of each reporting period.
Income tax is recognized in the Consolidated Statement of Income except where it relates to items recognized in other comprehensive income or
directly in equity, in which case income tax is recognized in the same line as the related item.
Leases
Bank as a lessor
Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title,
are classified as finance leases and presented within loans in the Consolidated Statement of Financial Position. When assets held are subject to a
finance lease, the leased assets are derecognized and a receivable is recognized which is equal to the present value of the minimum lease payments,
discounted at the interest rate implicit in the lease. Initial direct costs incurred in negotiating and arranging a finance lease are incorporated into the
receivable through the discount rate applied to the lease. Finance lease income is recognized over the lease term based on a pattern reflecting a
constant periodic rate of return on the net investment in the finance lease. Finance lease income is included in the Consolidated Statement of Income
under interest income from loans.
Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating
leases. The leased assets are included within property and equipment on the Bank’s Consolidated Statement of Financial Position. Rental income is
recognized on a straight-line basis over the period of the lease in non-interest income – other in the Consolidated Statement of Income. Initial direct
costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized as an expense on
a straight-line basis over the lease term.
Bank as a lessee
Assets held under finance leases are initially recognized as property and equipment in the Consolidated Statement of Financial Position at an amount
equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments. The corresponding finance lease obligation is
included in other liabilities in the Consolidated Statement of Financial Position. The discount rate used in calculating the present value of the minimum
lease payments is the interest rate implicit in the lease. Contingent rentals are recognized as expense in the periods in which they are incurred.
Operating lease rentals payable are recognized as an expense on a straight-line basis over the lease term, which commences when the lessee controls
the physical use of the asset. Lease incentives are treated as a reduction of rental expense and are also recognized over the lease term on a straight-
line basis. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.
Sale and lease-back
Where the Bank enters into a sale leaseback transaction for a non-financial asset at fair market value that results in the Bank retaining an operating
lease (where the buyer/lessor retains substantially all risks and rewards of ownership), any gains and losses are recognized immediately in net income.
Where the sale leaseback transaction results in a finance lease, any gain on sale is deferred and recognized in net income over the remaining term of
the lease.
162 | 2 0 1 8 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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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 average earnings at retirement), 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 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. 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 is the 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.
The current service cost, net interest expense (income), past service cost, and administrative expense are recognized in net income. Net interest
expense (income) 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 return on plan assets in excess of the interest income
on the fair value of 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.
2 0 1 8 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
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 non-interest income – trading
revenues.
The carrying amount of interest-bearing financial instruments, measured at amortized cost or classified as FVOCI, 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, and are recognized at the end of the performance period in
which the target is met.
Fees arising from negotiating or participating in the negotiation of a transaction for a third-party, such as the arrangement of the acquisition of shares
or other securities or the purchase or sale of businesses, are recognized on completion of the underlying transaction. Fees or components of fees that
are linked to a certain performance are recognized after fulfilling the corresponding criteria.
Fee and commission expenses
Fee and commission expenses relate to transaction and service fees which are expensed as the services are received.
Dividend income
Dividend income on equity securities is recognized in Interest income when the Bank’s right to receive payment is established.
Share-based payments
Share-based payments awarded to employees are recognized as compensation expense in the Consolidated Statement of Income over the vesting
period based on the number of awards expected to vest including the impact of expected forfeitures. For awards that are delivered in tranches, each
tranche is considered a separate award and accounted for separately.
Stock appreciation rights and other awards that must be settled for cash are classified as liabilities. Liability-classified awards are re-measured to fair
value at each reporting date while they remain outstanding, with any changes in fair value recognized in compensation expense in the period. The
liability is expensed over the vesting period which incorporates the re-measurement of the fair value and a revised forfeiture rate that anticipates units
expected to vest.
Employee stock options with tandem stock appreciation rights give the employee the right to exercise for shares or settle in cash. These options are
classified as liabilities and are re-measured to fair value at each reporting date while they remain outstanding. If an option is exercised, thereby
cancelling the tandem stock appreciation right, both the exercise price proceeds together with the accrued liability and associated taxes are credited to
equity – common shares in the Consolidated Statement of Financial Position.
Plain vanilla options and other awards that must be settled for shares are classified as equity awards. Equity-classified awards are expensed based on
the grant date fair value with a corresponding increase to equity – other reserves in the Consolidated Statement of Financial Position. If an option is
exercised, both the exercise price proceeds together with the amount recorded in other reserves is credited to equity – common shares in the
Consolidated Statement of Financial Position.
164 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
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.
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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
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
Transition to IFRS 9
(a) Reconciliation of IAS 39 to IFRS 9
The following table provides the impact from the transition to IFRS 9 on the Consolidated Statement of Financial Position at transition date,
November 1, 2017. The impact consists of reclassification and remeasurement.
Reclassification:
These adjustments reflect the movement of balances between categories on the Consolidated Statement of Financial Position with no impact to
shareholders’ equity. There is no change to the carrying value of the balances as a result of the reclassification.
2 0 1 8 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
Remeasurement:
These adjustments, which include expected credit loss, result in a change to the carrying value of the item on the Statement of Financial Position with
an impact to shareholders’ equity net of tax.
As at November 1, 2017 ($ millions)
Note
IAS 39
IAS 39
Measurement
basis
Carrying
amount
Reclassification
Remeasurement
IFRS 9
IFRS 9
Carrying
amount
Measurement
basis
Assets
Cash and deposits with
financial institutions
Precious metals
Trading Assets
Debt securities
Equity securities
Loans
Other
Financial assets designated
at FVTPL
Debt securities
Securities purchased under
resale agreements and
securities borrowed
Derivative financial
instruments
Investment securities
Debt securities
Debt securities
Equity securities
Equity securities
Loans
Residential mortgages
Personal loans
Credit cards
Business and government
Allowance for credit loss
Other
Customers’ liability under
acceptances
Property and equipment
Investment in associates
Goodwill and other
intangible assets
Deferred tax assets
Other assets
IFRS 9
Cash and deposits with
financial institutions*
Precious metals
Trading assets
Debt securities
Equity securities
Loans
Other
Financial assets
designated at FVTPL
Debt securities
Securities purchased
under resale agreements
and securities borrowed*
Derivative financial
instruments
Investment securities
Debt securities*
Debt securities
Equity securities
Equity securities
Loans
Residential mortgages
Personal loans
Credit cards
Business and
government
Amortized
cost
FVTPL
$
59,663
5,717
$
1
3
FVTPL
FVTPL
FVTPL
FVTPL
39,333
39,319
17,312
2,500
98,464
FVTPL
(Designated)
13
Amortized
cost
95,319
3
FVTPL
35,364
–
–
76
–
660
–
736
–
–
(2)
$
(3) $
–
59,660
5,717
Amortized
cost
FVTPL
FVTPL
FVTPL
FVTPL
FVTPL
39,409
39,319
17,973
2,500
99,201
FVTPL
(Designated)
13
95,319
Amortized
cost
35,362
FVTPL
–
–
1
–
1
–
–
–
Amortized
cost
FVOCI
FVOCI
FVOCI
Loans &
receivables
Loans &
receivables
Loans &
receivables
Loans &
receivables
Loans &
receivables
Amortized
cost
1,5,8
1
2
2
3,4
4
4
3
5
5
5
1,6
5
18,765
49,193
1,311
–
69,269
4,205
(4,281)
(301)
301
(76)
118
–
–
–
118
23,088
44,912
1,010
301
69,311
236,916
(33)
(134)
236,749
2
–
–
89,229
14,104
167,826
(132)
507,908
Amortized
cost
FVOCI
FVOCI
FVTPL
Amortized
cost
Amortized
cost
Amortized
cost
Amortized
cost
Amortized
89,227
14,104
168,449
508,696
(4,327)
13,560
2,381
4,586
12,106
1,713
12,749
47,095
–
–
(623)
(656)
–
–
–
–
–
–
–
–
2
(593)
(4,920)
cost Allowance for credit loss
Amortized
cost
Other
Customer’s liability
under acceptances*
Property and equipment
Investment in associates
Goodwill and other
intangible assets
Deferred tax assets
Other assets
(16)
–
(184)
–
50
(2)
(152)
13,544
2,381
4,402
12,106
1,763
12,747
46,943
$ (761) $ 914,514
Total assets
$ 915,273
$
166 | 2 0 1 8 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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As at November 1, 2017 ($ millions)
Note
IAS 39
IAS 39
Measurement
basis
Carrying
amount
Reclassification
Remeasurement
IFRS 9
IFRS 9
Carrying
amount
Measurement
basis
IFRS 9
Liabilities
Deposits
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
Total liabilities
Equity
Common equity
Common shares
Retained earnings
Accumulated other
comprehensive income
Other reserves
Total common equity
Preferred shares
Total equity attributable to
equity holders to the Bank
Non-controlling interests in
subsidiaries
3
7
1,2
1,2
Amortized
cost
$ 625,367
$
FVTPL
4,663
Amortized
cost
Amortized
cost
13,560
30,766
–
–
–
–
FVTPL
34,200
(2)
Amortized
cost
Amortized
cost
95,843
5,935
43,314
853,648
15,644
38,117
1,577
116
55,454
4,579
60,033
1,592
61,625
–
–
4
2
–
49
(49)
–
–
–
–
–
–
2
$
–
$ 625,367
Amortized
cost
–
–
–
–
–
–
(151)
(151)
–
(613)
100
–
(513)
–
4,663
FVTPL
13,560
30,766
Amortized
cost
Amortized
cost
34,198
FVTPL
Amortized
cost
Amortized
cost
95,843
5,935
43,167
853,499
15,644
37,553
1,628
116
54,941
4,579
(513)
59,520
(97)
(610)
1,495
61,015
$ (761) $ 914,514
Deposits
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
Common equity
Common shares
Retained earnings
Accumulated other
comprehensive income
Other reserves
Total common equity
Preferred shares
Total equity attributable
to equity holders to the
Bank
Non-controlling
interests in subsidiaries
Total liabilities and equity
$ 915,273
$
Net of applicable allowance for credit losses.
*
(1) AFS Debt instruments of $4,281 measured at fair value through other comprehensive income (FVOCI) were reclassified to amortized cost in the amount of $4,205 and $76 to fair
value through profit or loss (FVTPL). The reclassifications were due to the business model being “held-to-collect” and the cash flows that did not represent payments that are solely
payments of principal and interest (SPPI). The reclassification of debt instruments to amortized cost resulted in remeasurement of $118 with an offset to other comprehensive
income (AOCI) and deferred tax assets. The reclassification of AOCI to retained earnings related to FVTPL classification.
(2) AFS Equity instruments of $301 previously fair valued through OCI are now classified as FVTPL, which resulted in reclassification of AOCI to retained earnings.
(3) Certain precious metal loans of $627 and the related derivatives that failed the SPPI test were classified to FVTPL, and $33 of residential mortgages were reclassified to trading to
reflect the business model.
(4) Adjustments to certain balances against allowance for credit losses.
(5) Expected credit loss on financial assets and the Bank’s share of associated corporations.
(6) The increase in deferred tax assets relates to the impact of the IFRS 9 related adjustments to retained earnings.
(7) The decrease in remeasurement of $151 is comprised of a reduction in deferred tax liabilities of $129, a net decrease of $22 which includes allowance for credit losses related to
undrawn commitments, letters of credit and letters of guarantee.
(8) Debt securities managed under a business model of held-to-collect were reclassifed from available-for-sale to amortized cost. As of October 31, 2018, the fair value of these
securities was $3,951. For the year ended October 31, 2018, $67 of losses would have been recognized in other comprehensive income if the securities had not been reclassified.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 167
CONSOLIDATED FINANCIAL STATEMENTS
(b) Reconciliation of impairment allowance balance from IAS 39 to IFRS 9
The following table reconciles the closing impairment allowance for financial assets in accordance with IAS 39 and provisions for loan commitments
and financial guarantee contracts in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets as at October 31, 2017 to the
opening impairment allowance under IFRS 9 as at November 1, 2017.
($ millions)
Loans and acceptances(1)
Investment securities (Debt) at amortized cost
Investment securities (Debt) at FVOCI(2)
Deposits with financial institutions
Off-balance sheet credit risks(3)
Total
Impairment allowance
under IAS 39
as at October 31, 2017
Remeasurement
Impairment allowance
under IFRS 9
as at November 1, 2017
$ 4,327
–
–
–
120
$ 4,447
$ 611
1
13
3
(36)
$ 592
$ 4,938
1
13
3
84
$ 5,039
(1) The remeasurement impact of $611 is comprised of loans $593, acceptances $16 and accrued interest of $2.
(2) The allowance for credit losses of $13 is recorded in accumulated other comprehensive income. These debt securities remain at fair value on the balance sheet.
(3) Off-balance sheet credit risks include credit risks such as undrawn lending commitments, letters of credit and letters of guarantee.
5
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 of 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, 2018
Revenue from contracts with customers
The IASB issued IFRS 15 Revenue from Contracts with Customers (IFRS 15), 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 governing revenue recognition to be applied to contracts
with customers. The Bank must also determine whether its performance obligation is to provide the service itself (i.e. the Bank acts as a principal) or to
arrange another party to provide the service (i.e. the Bank acts as an agent).
The Bank has assessed the scope of the new guidance to be limited to fees and commission revenues from wealth management and banking services
in Canadian and International Banking and underwriting and advisory fees in Global Banking and Markets.
The Bank will adopt the standard and its amendments as of November 1, 2018 using 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. As of November 1, 2018, the opening balance of retained earnings is expected to decrease
by approximately $60 million (net of tax). The decrease in retained earnings relates to certain costs no longer eligible for deferral under the new
standard and the re-measurement of certain liabilities at fulfilment cost.
The presentation of certain costs will also change prospectively from non-interest expenses to non-interest income where amounts are deemed to be
part of consideration payable to customers or the Bank is deemed to be acting as an agent. This presentation change will not have a material impact
on the Bank’s consolidated financial statements.
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. 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.
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The Bank is currently in the process of assessing existing contractual relationships to identify the existing population of leases that would be recorded
on the balance sheet under the new standard. The Bank continues to evaluate the potential impact to the existing IT systems and processes and next
steps include performing an initial quantification of the existing obligations and reviewing the additional disclosures required by the new standard.
During 2019, the Bank will also complete its assessment of various practical expedients and formulate its accounting policies under IFRS 16.
IFRIC 23 Uncertainty over income tax treatments
On June 7, 2017, the IASB issued IFRIC 23 that is effective for the Bank beginning November 1, 2019. The interpretation clarifies the accounting for
uncertainties over income taxes. The interpretation clarifies application of recognition and measurement requirements in IAS 12 income taxes when
there is uncertainty over income tax treatments. The Bank is currently assessing the impact of the interpretation.
Employee Benefits
On February 7, 2018, the IASB issued narrow-scope amendments to pension accounting that is effective for the Bank beginning November 1, 2019.
The amendments relate to when a plan amendment, curtailment or settlement has occurred. In such instances, the Bank is required to use updated
assumptions to determine current service cost and net interest for the remainder of the reporting period after the change to the plan. For the Bank,
the narrow scope amendments are to be applied prospectively to plan amendments, curtailments and settlements occurring after November 1, 2019.
Effective November 1, 2020
Conceptual Framework
On March 29, 2018, the IASB issued the revised Conceptual Framework for Financial Reporting (Framework) that is effective for the Bank beginning
November 1, 2020. The Framework itself is not a standard, and does not override existing standards. It is used by the IASB in developing accounting
standards. The Bank is currently assessing the impact of the revisions.
Definition of business
On October 22, 2018, the IASB issued a narrow-scope amendment to IFRS 3 Business Combination. The amendments will help companies determine
whether an acquisition is of a business or a group of assets. Distinguishing between a business and a group of assets is important because an acquirer
recognizes goodwill only when acquiring a business. The amendments apply to transactions for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after January 1, 2020. Earlier adoption is permitted. The Bank is currently assessing the impact.
Definition of material
On October 31, 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors, clarifying the definition of material. Under the new definition, information is material if omitting, misstating or
obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis
of those financial statements, which provide financial information about a specific reporting entity. The explanations accompanying the definition
have also been improved. The amendments are effective prospectively for annual periods beginning on or after January 1, 2020. Earlier adoption is
permitted. The Bank is currently assessing the impact.
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. On November 14, 2018, the
IASB tentatively decided to defer the effective date, by one year, to annual periods on or after January 1, 2022. The Bank will continue to track the
IASB Board’s meeting agenda items on issues and discussions related to the standard, further updates will be provided in Q1 2019.
The IFRS 17 project structure and governance has been established along with a Project Management Office to assist the Executive Steering and
Project Operations Committees. The committees comprise of representatives from Global Finance, Global Insurance Actuarial Services, Information
Technology and the Insurance Business Operations. The Bank is currently in the Evaluation and Design Solution phase of the project, with
Implementation planned for Fiscal 2019 through 2022.
Cash and Deposits with Financial Institutions
6
As at October 31 ($ millions)
Cash and non-interest-bearing deposits with financial institutions
Interest-bearing deposits with financial institutions
Total
(1) Net of impairment allowances of $3.
2018
2017
$ 8,997
53,272
$ 7,825
51,838
$ 62,269(1)
$ 59,663
The Bank is required to maintain balances with central banks, other regulatory authorities and certain counterparties and these amounted to
$8,886 million (2017 – $7,282 million).
7
Fair Value of Financial Instruments
Determination of fair value
The calculation of fair value is based on market conditions at a specific point in time and therefore may not be reflective of future fair values. The Bank
has controls and processes in place to ensure that the valuation of financial instruments is appropriately determined.
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CONSOLIDATED FINANCIAL STATEMENTS
The best evidence of fair value for a financial instrument is the quoted price in an active market. Unadjusted quoted market prices for identical
instruments 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 175.
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 unadjusted quoted prices in active markets, where available
(Level 1). 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 unadjusted quoted prices from independent market data providers or third-party broker quotes
(Level 1). Where prices are not available consistently, the last available data is used and verified with a yield-based valuation approach (Level 2). In
some instances, interpolated yields of similar bonds are used to price securities (Level 2). The Bank uses pricing models with observable inputs from
market sources such as credit spread, interest rate curves, and recovery rates (Level 2). These inputs are verified through an IPV process on a monthly
basis.
For certain securities where there is no active market, no consensus market pricing and no indicative or executable independent third-party quotes,
the Bank uses pricing by third-party providers or internal pricing models and cannot readily observe the market inputs used to price such instruments
(Level 3).
Mortgage-backed securities
The fair value of residential mortgage-backed securities is primarily determined using third-party broker quotes and independent market data
providers, where the market is more active (Level 2). Where the market is inactive, an internal price-based model is used (Level 3).
Equity securities
The fair value of equity securities is based on unadjusted quoted prices in active markets, where available (Level 1). 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
The fair value of income funds is based on observable unadjusted quoted prices where available (Level 1). 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.
Derivatives
Fair values of exchange-traded derivatives are based on unadjusted quoted market prices (Level 1). 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
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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:
(cid:129) 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).
(cid:129) 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).
(cid:129) 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).
(cid:129) 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 notes containing embedded features that are bifurcated from the Plain Vanilla notes, the fair value of the embedded derivatives is
determined using option pricing models with inputs similar to other interest rate or equity derivative contracts (Level 2). The fair value of certain
embedded derivatives is determined using net asset values (Level 3).
Subordinated debentures and other liabilities
The fair values of subordinated debentures, including debentures issued by subsidiaries which are included in other liabilities, are determined by
reference to quoted market prices where available or market prices for debt with similar terms and risks (Level 2). The fair values of other liabilities is
determined by the discounted contractual cash flow method with appropriate currency swap curves for the remaining term (Level 2).
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CONSOLIDATED FINANCIAL STATEMENTS
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 – other
Investment securities – amortized cost
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
2018
2017
$
Total
fair
value
62,269
100,262
12
104,018
37,558
57,653
20,316
553,758
16,329
10,913
674,535
8,188
16,338
32,087
37,967
101,257
5,627
35,432
$
Total
carrying
value
62,269
100,262
12
104,018
37,558
57,653
20,743
551,834
16,329
10,913
676,534
8,188
16,338
32,087
37,967
101,257
5,698
34,805
$
Total
fair
value
59,663
98,464
13
95,319
35,364
50,504
18,716
507,276
13,560
9,314
625,964
4,663
13,560
30,766
34,200
95,843
6,105
27,531
$
Total
carrying
value
59,663
98,464
13
95,319
35,364
50,504
18,765
504,369
13,560
9,314
625,367
4,663
13,560
30,766
34,200
95,843
5,935
27,118
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
FVOCI investment securities, derivatives and financial instruments measured at FVTPL or designated as fair value through profit or loss, the carrying
value is adjusted regularly to reflect the fair value.
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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
2018(1)
2017
Instruments carried at fair value on a
recurring basis:
Assets:
Precious metals(2)
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(4)
Financial assets designated at fair
value through profit or loss
Investment securities(5)
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(8)
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(9):
Assets:
Investment securities – amortized cost
Loans(10)
Liabilities:
Deposits(10)(11)
Subordinated debentures
Other liabilities
6,373
366
18,472
10,457
732
–(7)
838
$ 37,238
$
$
$
$
–
5
797
–
92
894
–
–
24,563
–
–
1,057
–
34
1,091
$
7,392(7)
–
–
–
–
$
–
–
13,003
–
7,164
4,610
3
29
39,513
454
$ 64,776
$
3,175
$ 16
$
3,191
$
14,334
–
14,334
–
–
–
10,159
–
1,833
8,984
–
158
–
$ 38,643
–
–
–
–
18(3)
–
–
–
$ 34
13,003
10,159
7,164
6,443
9,005
29
39,671
454
$ 103,453
10,343
–
6,894
5,680
44
180
38,760
2,500
$ 64,401
$
12
$
–
$
–
$
12
$
13
$
–
$
5,717
$
17,312
–
7,325
–
1,149
7,920
165
170
–
$ 39,758
2,416
4,230
367
8,746
3,584
876
177
$ 20,396
$
9,742
21,496
1,720
175
1,443
$ 34,576
$
$
$
$
$
$
(7) $
4,663
2,970
–
–
–
–
–
–
22
–
–
–
22
$
5,717
17,312
10,343
7,325
6,894
6,829
7,986
345
38,930
2,500
$ 104,181
–
$
13
–
–
–
113
53
–
544
710
36
–
–
–
–
36
–
–
–
267
–
7
–
–
274
12,093
4,823
6,672
19,803
4,387
1,415
1,311
50,504
9,778
21,500
2,335
175
1,576
35,364
(7)
4,663
30,766
11,090
17,649
3,233
179
2,049
34,200
$
$
$
$
$
8,891
4,352
19,141
19,990
2,563
906
1,810
57,653
9,039
22,202
2,361
349
3,607
37,558
(401)
8,188
9,677
593
6,305
10,944
750
539
590
$ 29,398
$
$
$
–
4
615
–
133
752
–
–
32,087
27,796
2,518
3,986
669
9,485
1,818
906
263
$ 19,645
$
8,927
22,197
1,556
349
3,515
$ 36,544
–
–
–
48(6)
13(3)
–
709
$770
$112
–
8
–
–
$120
$
(401)
$
8,188
7,524
11,012
20,537
1,884
70
3,294
$ 36,797
–
–
–
74
–
5
–
–
$ 79
$
$
$
$
$
11,086
20,537
2,946
70
3,328
37,967
–
3
502
–
268
773
10,823
17,646
2,724
179
1,781
$ 33,153
$
$
$
$ 12,815
313,490
$109(6)
–
$
20,316
313,490
4,240
–
$ 14,476
–
$
–
286,621
$
18,716
286,621
293,898
5,627
20,383
–
–
–
293,898
5,627
20,383
–
–
–
266,995
6,105
13,363
–
–
–
266,995
6,105
13,363
IFRS 9 adoption resulted in reclassification of $17 million of corporate and other debt to trading assets in Level 3 from available-for-sale debt securities (refer to Note 4).
(1) The amounts for October 31, 2018 have been prepared in accordance with IFRS 9, prior periods have not been restated (refer to Notes 3 and 4).
(2) The fair value of precious metals is determined based on quoted market prices and forward spot prices, where applicable.
(3)
(4) Represents energy related assets for the year ended October 31, 2018 (October 31, 2017 – represents base metal positions).
(5) Excludes debt investment securities measured at amortized cost of $20,743 (held-to-maturity as at October 31, 2017 – $18,765).
(6)
(7)
(8) These amounts represent embedded derivatives bifurcated from structured notes.
(9) Represents the fair value of financial assets and liabilities where the carrying amount is not a reasonable approximation of fair value.
(10) Excludes floating rate instruments as carrying value approximates fair value.
(11) Excludes embedded derivatives bifurcated from structured notes.
IFRS 9 adoption resulted in reclassification of $104 million of other foreign governments’ debt in Level 3 to debt securities measured at amortized cost (refer to Note 4).
IFRS 9 adoption resulted in reclassification of $539 million of mortgage backed securities in Level 1 to debt securities measured at amortized cost (refer to Note 4).
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Level 3 instrument fair value changes
Financial instruments categorized as Level 3 as at October 31, 2018, in the fair value hierarchy comprise certain precious metals, illiquid government
bonds, highly-structured corporate bonds, illiquid investments in private equity securities, and complex derivatives.
The following table summarizes the changes in Level 3 instruments carried at fair value for the year ended October 31, 2018.
All positive balances represent assets and negative balances represent liabilities. Consequently, positive amounts indicate purchases of assets or
settlements of liabilities and negative amounts indicate sales of assets or issuances of liabilities.
As at October 31, 2018(1)
($ millions)
Precious metals
Trading assets
Loans
Corporate and other debt
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
Foreign exchange and gold contracts
Equity contracts
Fair value
November 1
2017
Gains/(losses)
recorded in
income
Gains/(losses)
recorded in
OCI
Purchases/
Issuances
Sales/
Settlements
Transfers
into/out of
Level 3
Fair value
October 31
2018
$
–
–
–
39
39
9
36
544
589
36
–
(267)
–
(7)
(238)
$
–
–
$
–
(10)
(10)
–
–
16
16
67
(2)
(108)
–
–
(43)
–
–
–
–
–
–
(5)
18
13
–
–
–
–
–
–
$
$
5
5
–
–
–
61
–
218(3)
279
31
4
(24)
(6)
(5)
–
(8)
(8)
(2)
(16)
(18)
(22)
(18)
(67)
(107)
(22)
–
22
–
–
–
$
19
19
2
5
7
–
–
(20)
(20)
–
6
303
6
7
322
$
16
16
–
18
18
48
13
709
770
112
8
(74)
–
(5)
41
Total
$ 390
$ (37)
$ 13
$ 284
$ (133)
$ 328
$ 845
Change in
unrealized
gains/(losses)
recorded in
income for
instruments
still held(2)
$
–
–
–
–
–
n/a
n/a
14
14
58
(2)(4)
(26)(5)
–
–
30
$ 44
(1) The amounts for November 1, 2017 and October 31, 2018 have been prepared in accordance with IFRS 9, prior period amounts have not been restated (refer to Notes 3 and 4).
(2) 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.
Includes amount related to BBVA Chile acquisition of $45 million.
(3)
(4) Certain unrealized gains and losses on derivative assets and liabilities are largely offset by mark-to-market changes on other instruments included in trading revenues in the
Consolidated Statement of Income, since these instruments act as an economic hedge to certain derivative assets and liabilities.
(5) Certain unrealized losses on interest rate derivative contracts are largely offset by mark-to-market changes on embedded derivatives on certain deposit liabilities in the Consolidated
Statement of Income.
The following table summarizes the changes in Level 3 instruments carried at fair value for the year ended October 31, 2017.
($ millions)
Trading assets
Investment securities(2)
Derivative financial instruments
Deposits(3)
As at October 31, 2017
Fair value
November 1
2016
Gains/(losses)
recorded in
income(1)
Gains/(losses)
recorded
in OCI
$ 1,222
909
(236)
(1,163)
$ (20)
(24)
10
6
$
–
38
–
–
Purchases/
Issuances
Sales/
Settlements
$
–
122
(6)
–
$ (1,180)
(332)
3
1,157
Transfers
into/out of
Level 3
Fair value
October 31
2017
$ –
(3)
(9)
–
$
22
710
(238)
–
(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)
(3) These amounts represent embedded derivatives bifurcated from certain deposit liabilities.
Investment securities include financial assets designated as available-for-sale.
174 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Significant 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.
Derivative liabilities of $316 million were transferred out of Level 3 into Level 2 for the year ended October 31, 2018. All transfers were as a result of
new information being obtained regarding the observability of inputs used in the valuation.
The following significant transfers were made among Levels 2 and 3 for the year ended October 31, 2017:
A net amount of derivative assets of $135 million and derivative liabilities of $126 million were transferred out of Level 3 into Level 2 for equity derivatives.
Transfers were primarily as a result of assessment and consideration of volatility as an insignificant input for certain equity derivative contracts.
Level 3 sensitivity analysis
The table below sets out information about significant unobservable inputs used in measuring financial instruments categorized as Level 3 in the fair
value hierarchy.
Valuation technique
Significant
unobservable inputs
Range of estimates for
unobservable inputs(1)
Derivative financial instruments
Interest rate contracts
Option pricing
Interest rate
7% - 93%
model
volatility
Equity contracts
Option pricing
Equity volatility
2% - 124%
model
Single stock correlation
(70)% - 97%
Changes in fair value
from reasonably
possible alternatives
($ millions)
–
(9)/9
(1) The range of estimates represents the actual lowest and highest level inputs used to fair value financial instruments within each financial statement category.
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 8 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
8
Trading Assets
(a) Trading securities
An analysis of the carrying value of trading securities is as follows:
As at October 31, 2018 ($ 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
$ 1,500
859
514
1,353
–
595
$ 4,821
$ 2,711
620
322
1,168
$ 4,821
$ 4,040
876
1,574
1,042
–
1,650
$ 9,182
$ 5,222
2,414
119
1,427
$ 9,182
$ 4,781
2,122
3,348
2,452
–
4,888
$ 17,591
$ 5,901
7,105
538
4,047
$ 17,591
$
863
3,425
1,602
1,155
–
1,203
$ 8,248
$ 4,798
2,377
21
1,052
$ 8,248
$ 1,819
2,877
126
441
–
585
$ 5,848
$ 4,972
523
4
349
$ 5,848
$
–
–
–
–
39,700
84
$ 39,784
$ 9,730
16,695
405
12,954
$ 39,784
$ 13,003
10,159
7,164
6,443
39,700
9,005
$ 85,474
$ 33,334
29,734
1,409
20,997
$ 85,474
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
(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
2018
2017
$ 9,080
3,066
1,077
280
831
$ 14,334
$ 10,654
3,824
1,605
376
853
$ 17,312
(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 $6,071 (2017 – $7,390), while the remaining relates to short-term precious metals trading
and lending activities.
(4) These loans are primarily related to short-term precious metals trading and lending activities.
176 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
9
Financial Instruments Designated at Fair Value Through Profit or Loss
In accordance with its risk management strategy, the Bank has elected to designate certain investments, loans and senior note liabilities at fair value
through profit or loss to reduce an accounting mismatch between fair value changes in these instruments and fair value changes in related derivatives,
and where a hybrid financial liability contains one or more embedded derivatives that are not closely related to the host contract. Changes in fair value
of financial liabilities arising from the Bank’s own credit risk are recognized in other comprehensive income, without subsequent reclassification to net
income.
The cumulative fair value adjustment due to own credit risk is determined at a point in time by comparing the present value of expected future cash
flows over the term of these liabilities discounted at the Bank’s effective funding rate, and the present value of expected future cash flows discounted
under a benchmark rate. The change in fair value attributable to change in credit risk is determined by the change in the cumulative fair value
adjustment due to own credit risk.
The following table presents the fair value of financial assets and liabilities designated at fair value through profit or loss and their changes in fair
value.
October 31 ($ millions)
Assets
Investment securities(2)
Loans(3)
Liabilities
Senior note liabilities(4)
Fair value
As at
Change in fair value
Cumulative change in FV(1)
For the year ended
2018
2017
2018
2017
2018
2017
$
12
–
$
13
–
$
–
–
$
–
(205)
$
–
–
$ 11
(197)
8,188
4,663
869
103
778
(91)
(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
Senior Note Liabilities
Difference
between
carrying value
and
contractual
maturity
amount
Changes in fair value
for the period
attributable to
changes in own
credit risk recorded
in other
comprehensive
income
Contractual
maturity
amount(1)
Carrying
Value
As at October 31, 2018
As at October 31, 2017
$ 8,966
$ 8,188
$ 4,572
$ 4,663
$778
$ (91)
$(30)
$(28)
(1) The cumulative change in fair value is measured from the instruments’ date of initial recognition.
Cumulative changes
in fair value
attributable to
changes in own
credit risk(1)
$(66)
$(36)
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 177
CONSOLIDATED FINANCIAL STATEMENTS
10 Derivative Financial Instruments
(a) Notional amounts(1)
The following table provides the aggregate notional amounts of derivative financial instruments outstanding by type and segregated between those
used by the Bank in its dealer capacity (Trading) and those derivatives designated in hedging relationships. The notional amounts of these contracts
represent the derivatives volume outstanding and do not represent the potential gain or loss associated with the market risk or credit risk of such
instruments. Credit derivatives within other derivative contracts are comprised primarily of purchased and sold credit default swap transactions. To a
lesser extent, this category also includes total return swaps referenced to loans and debt securities. Other derivative contracts – other includes precious
metals other than gold, and other commodities including energy and base metal derivatives.
As at October 31 ($ 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
2018
2017
Trading
Hedging
Total
Trading
Hedging
Total
$
127,595
3,402
–
130,997
11,407
403,061
29,617
34,655
478,740
$
$
–
–
–
–
–
30,480
–
–
30,480
127,595
3,402
–
130,997
11,407
433,541
29,617
34,655
509,220
$
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
319,026
3,028,670
–
–
3,347,696
$ 3,957,433
–
136,188
–
–
136,188
$ 166,668
319,026
3,164,858
–
–
3,483,884
$ 4,124,101
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
$
$
$
7,476
48
36
7,560
412,229
340,614
42,497
41,768
837,108
27,886
–
–
–
27,886
872,554
43,323
–
55,076
98,399
79,226
18,902
45,174
143,302
$
$
$
–
–
–
–
26,433
57,380
–
–
83,813
–
–
–
–
–
83,813
–
–
–
–
756
–
–
756
$
$
$
7,476
48
36
7,560
438,662
397,994
42,497
41,768
920,921
27,886
–
–
–
27,886
956,367
43,323
–
55,076
98,399
79,982
18,902
45,174
144,058
$
$
$
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
–
10,964
326
11,290
$
252,991
$ 5,082,978
–
–
–
–
$
756
$ 251,237
–
10,964
326
11,290
$
253,747
$ 5,334,215
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
(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.
178 | 2 0 1 8 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, 2018 ($ 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, 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
Within one year
One to five years
Over five years
Total
$
$
72,068
227,761
1,316,741
6,644
4,211
1,627,425
$
55,519
92,717
1,448,580
22,985
24,718
1,644,519
3,005
438,760
90,987
39,505
39,395
611,652
84,333
13,056
70,292
167,681
4,100
26,241
195,484
2,851
2,199
230,875
34,890
13,798
29,958
78,646
8
9,955
833,078
3,390
5,726
852,157
371
1,547
111,523
189
210
113,840
4,082
3,012
326
7,420
$
127,595
330,433
3,598,399
33,019
34,655
4,124,101
7,476
466,548
397,994
42,545
41,804
956,367
123,305
29,866
100,576
253,747
$ 2,406,758
$ 1,954,040
$ 973,417
$ 5,334,215
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
Total
$ 2,050,839
$ 1,704,770
$ 791,637
$ 4,547,246
(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, 2018. To control credit risk associated
with derivatives, the Bank uses the same credit risk management activities and procedures that are used in the lending business in assessing and
adjudicating potential credit exposure. The Bank applies limits to each counterparty, measures exposure as the current positive fair value plus potential
future exposure, and uses credit mitigation techniques, such as netting and collateralization.
2 0 1 8 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
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 85 of
the 2018 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.
As at October 31 ($ millions)
Notional amount
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)
$ 127,595
330,433
3,598,399
33,019
34,655
4,124,101
7,476
466,548
397,994
42,545
41,804
956,367
123,305
29,866
100,576
253,747
–
2018
2017
Credit risk
amount
(CRA)(1)
$
–
36
96
36
–
168
–
2,571
4,297
712
–
7,580
455
239
1,182
1,876
–
Credit
equivalent
amount
(CEA)(1)
$
93
157
4,436
138
2
4,826
85
5,440
8,232
240
20
14,017
4,927
420
8,052
13,399
–
CET1
Risk
Weighted
Assets(2)
$
–
82
1,125
63
1
1,271
–
2,006
2,604
76
5
4,691
1,505
119
830
2,454
4,616
Credit risk
amount
(CRA)(1)
Credit
equivalent
amount
(CEA)(1)
CET1
Risk
Weighted
Assets(2)
$
$
–
20
250
5
–
275
$
65
30
5,459
105
15
5,674
–
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
–
–
20
1,341
57
3
1,421
–
1,765
1,898
113
12
3,788
1,575
174
807
2,556
2,988
Notional amount
$
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
–
Total derivatives
$5,334,215
$9,624
$32,242
$13,032
$ 4,547,246
$ 7,257
$ 37,433
$ 10,753
Amount settled through
central counterparties(3)
Exchange-traded
Over-the-counter
236,956
3,523,060
$3,760,016
$
–
–
–
7,300
781
$ 8,081
$
153
16
169
282,132
2,693,460
$ 2,975,592
$
–
–
–
10,385
1,334
$ 11,719
$
208
27
235
(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 $27,934 (2017 –
$28,107) for CRA, and $63,831 (2017 – $51,623) for CEA.
(2) As per OSFI guideline, effective 2014, Credit Valuation Adjustment (CVA) to CET1 RWA for derivatives was phased-in. In 2018, the CVA was 0.80 (2017 – 0.72).
(3) Amounts are included under total derivatives above. Amounts include exposures settled directly through central counterparties and exposures settled through clearing members of
central counterparties.
180 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Fair value
(d)
The following table summarizes the fair value of derivatives segregated by type and segregated between trading and those derivatives designated in
hedging relationships.
As at October 31 ($ millions)
2018
2018
2017
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
$
83
8,193
84
8,360
$
17
10,130
107
10,254
$
57
8,158
104
8,319
$
–
8,956
128
9,084
$
27
8,895
53
8,975
$
1
10,330
75
10,406
5,213
10,660
765
16,638
2,451
299
2,829
5,579
$ 30,577
5,232
8,570
691
14,493
3,380
128
2,765
6,273
$ 31,020
6,611
11,864
826
19,301
2,361
349
3,607
6,317
$ 33,937
5,800
10,292
831
16,923
2,895
70
3,328
6,293
$ 32,300
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
$
720
$
2,002
$
803
$
684
331
2,570
2,901
–
3,621
$
$
$
310
3,304
3,614
51
5,667
$
$
$
634
3,218
3,852
61
4,716
$
$
$
215
2,756
2,971
–
3,655
$
$
$
$ 37,558
$ 37,967
$ 35,364
$ 34,200
27,934
9,624
$
27,934
$ 10,033
28,107
7,257
$
28,107
6,093
$
(1) The average fair value of trading derivatives’ market valuation for the year ended October 31, 2017 was: favourable $30,780 and unfavourable $34,032. 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 manages interest rate risk, foreign currency risk and equity risk through hedge accounting transactions.
Interest rate risk
Single-currency interest rate swaps are used to hedge interest rate risk exposure. In fair value hedges of interest rate risk, the interest rate exposure
from fixed rate assets and liabilities is converted from a fixed to floating exposure. In cash flow hedges of interest rate risk, the interest rate exposure
from floating rate assets and liabilities is converted from floating to fixed. The Bank generally hedges interest rate risk only to the extent of benchmark
interest rates. The total interest cash flows usually comprise a spread in addition to the benchmark rate.
Foreign currency risk
In fair value hedges, cross-currency interest rate swaps and single-currency interest rate swaps are used to manage foreign currency exposure in
conjunction with interest rate exposure. Cross-currency interest rate swaps or a combination of cross-currency and single-currency interest rate swaps
are mainly used to convert a foreign currency fixed rate exposure to a functional currency floating rate exposure The Bank generally hedges interest
rate risk only to the extent of benchmark interest rates. The total interest cash flows usually comprise a spread in addition to the benchmark rate.
In cash flow hedges, cross-currency interest rate swaps, single-currency interest rate swaps, foreign currency forwards and foreign currency assets or
liabilities are used to manage foreign currency exposure, or a combined foreign currency and interest rate exposure. Cross-currency interest rate swaps
are used to offset the foreign currency exposure by exchanging the interest cash flows in one currency for interest cash flows in another currency.
Single-currency interest rate swaps may be used in conjunction with cross-currency interest rate swaps to convert the foreign currency exposure or
resulting functional currency exposure from floating to fixed. Foreign currency forwards and foreign currency denominated assets and liabilities are
used to offset the exposure arising from highly probable future cash flows and purchase considerations for business acquisitions denominated in a
foreign currency. In hedges of both foreign currency and interest rate exposure, the interest rate risk is generally hedged only to the extent of the
benchmark interest rate. The total interest cash flows usually comprise a spread in addition to the benchmark rate.
In net investment hedges, the Bank designates foreign currency liabilities and foreign currency forwards as hedging instruments to manage foreign
currency exposure. The designated non-derivative liabilities are denominated in the functional currency of the net investment, such that the foreign
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 181
CONSOLIDATED FINANCIAL STATEMENTS
exchange translation impact from the net investment will be offset by the foreign exchange impact from the designated liabilities. The foreign
currency forward contracts are structured to sell the functional currency of the net investment in return for the Bank’s functional currency.
Equity risk
Equity risk is created by the Bank’s share-based compensation plans awarded to employees. In cash flow hedges, total return swaps are mainly used to
offset the equity exposure by exchanging interest payments for payments based on the returns on the underlying shares.
For all of the risks identified above, the economic relationship and hedge ratio are determined using a qualitative and quantitative assessment. This
assessment incorporates comparison of critical terms of the hedged and hedging item, and regression analysis. For regression analysis, a hedging
relationship is considered highly effective when all of the following criteria are met: correlation between the variables in the regression is at least 0.8
or greater; slope of the regression is within a 0.8-1.25 range; and confidence level of the slope is at least 95%.The main sources of hedge
ineffectiveness include the following:
(cid:129) The use of different discount curves to value the hedged item and the hedging derivative in fair value hedges, in order to reflect the reduced credit
risk of collateralized derivatives;
(cid:129) Differences in the underlying reference interest rate tenor and reset/settlement frequency between the hedging instruments and the hedged item.
The Bank has elected to continue to apply the hedge accounting requirements of IAS 39. However, the Bank has implemented the additional hedge
accounting disclosures that are required by the IFRS 9 related amendments to IFRS 7 “Financial Instruments: Disclosures”. The following tables present
current fiscal year information in accordance with these new disclosure requirements. Prior year comparatives have not been restated and are
presented in accordance with the prior IFRS 7 disclosure requirements at the end of this section.
The following table summarizes the notional amounts of derivatives and carrying amounts of cash and deposit liabilities designated as hedging
instruments.
As at October 31, 2018 ($ millions)
Within one year
One to five years
Over five years
maturity
Total
Notional amounts(1)
Remaining term to maturity
No specific
Fair value hedges
Interest rate risk – swaps
Foreign currency/interest rate risk – swaps
Cash flow hedges
Interest rate risk – swaps
Foreign currency/interest rate risk – swaps
Foreign currency risk
Swaps
Foreign currency forwards
Cash
Equity risk – total return swaps
Net investment hedges
Foreign currency risk
Foreign currency forwards
Deposit liabilities – carrying amount
Total
$ 16,006
–
$
78,236
689
$ 11,270
–
$
12,257
5,539
20,983
8,999
–
298
21,908
19,193
63,697
–
–
458
9,713
2,489
8,465
–
–
–
–
–
–
–
–
–
92
–
$ 105,512
689
43,878
27,221
93,145
8,999
92
756
17,434
–
$ 81,516
–
–
$ 184,181
–
–
$ 31,937
–
6,077
$ 6,169
17,434
6,077
$ 303,803
(1) Notional amounts relating to derivatives that are hedging multiple risks in both assets and liabilities are included in more than one category.
182 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
The following table shows the average rate or price of significant hedging instruments.
As at October 31, 2018
Fair value hedges
Interest rate risk – swaps
Foreign currency/interest rate risk – swaps
CAD-USD
CAD-EUR
Cash flow hedges
Interest rate risk – swaps
Foreign currency/ interest rate risk – swaps
CAD-USD
Foreign currency risk
Swaps
CAD-USD
CAD-EUR
CAD-GBP
Foreign currency forwards
CAD-USD
Equity price risk – total return swaps
Net investment hedges
Foreign currency risk – foreign currency forwards
CAD-USD
CAD-MXN
CAD-PEN
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
Average rate or price(1)
Fixed interest rate
FX rate
Price
2.04%
n/a
2.22% 1.29
3.02% 1.33
2.37%
n/a
1.75% 1.27
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1.30
1.48
1.74
1.30
n/a
1.29
15.77
2.59
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
$ 73.87
n/a
n/a
n/a
(1) The average rate or price is calculated in aggregate for all of the Bank’s hedge relationships, including hedges of assets and liabilities. The majority of the Bank’s hedges have a
remaining term of maturity of less than 5 years.
For fair value hedges, the following table contains information related to items designated as hedging instruments, hedged items and ineffectiveness.
Carrying amount of
the hedging
instruments(1)
Assets
Liabilities
$ 448
$
(1,454)
7
(31)
Hedge Ineffectiveness(2)
Gains/(losses) on
hedging instrument
used to calculate
hedge
ineffectiveness
Gains/(losses) on
hedged item
used to calculate
hedge
ineffectiveness
Accumulated amount of fair
value hedge adjustment gains/
(losses) on the hedged item(4)
Ineffectiveness
recorded in
non-interest
income – other
Carrying
amount of
the hedged
item(3)
Active
hedges
Discontinued
hedges
$
(475)
360
260
(1,037)
$ 469
(367)
(265)
1,043
$
(58)
–
5
(4)
(1)
58
(1)
(5)
4
–
(6)
(7)
(5)
6
–
(1)
–
–
(1)
$
16,286
23,763
(58,026)
$ (149)
(246)
1,065
$
63
(149)
186
(3,923)
37
40
814
(466)
–
6
3
–
–
–
–
For the year ended
October 31, 2018 ($ millions)
Fair value hedges
Interest rate risk – swaps
Investment securities
Loans
Deposit liabilities
Subordinated
debentures
Foreign currency/interest
rate risk – swaps
Investment securities
Deposit liabilities
Subordinated
debentures
Total
$ 455
$ (1,485)
$ (475)
$ 468
$ (7)
$ (21,552)
$ 716
$ 140
(1) Comprises unrealized gains/losses and are recorded within derivative financial instruments in assets and liabilities, respectively in the Consolidated Statement of Financial Position.
(2)
(3) This represents the carrying value on the Consolidated Statement of Financial Position and comprises amortized cost before allowance for credit losses, plus fair value hedge
Includes ineffectiveness related to hedges discontinued during the year ended October 31, 2018.
adjustment, except for investment securities which are carried at fair value.
(4) This represents the accumulated fair value hedge adjustment and is a component of the carrying amount of the hedged item.
2 0 1 8 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
For cash flow hedges and net investment hedges, the following table contains information related to items designated as hedging instruments,
hedged items and ineffectiveness.
Carrying amount of the
hedging instruments(1)
For the year ended October 31, 2018 ($ millions)
Assets
Liabilities
Gains/(losses) on
hedging instrument
used to calculate
hedge ineffectiveness
Hedge Ineffectiveness(2)
Gains/(losses) on
hypothetical
derivative used to
calculate hedge
ineffectiveness(3)
Ineffectiveness
recorded in non-interest
income – other(4)
Cash flow hedges
Interest rate risk – swaps
Foreign currency/interest rate risk – swaps
Foreign currency risk
Swaps
Foreign currency forwards
Cash
Equity risk – total return swaps
Net investment hedges
Foreign currency risk
Foreign currency forwards
Deposit liabilities
$
961
101
$
1,773
143
92
–
3,070
188
–
188
(1,350)
(955)
(1,516)
(14)
–
(51)
(3,886)
(296)
(6,077)
(6,373)
$
(339)
(530)
(563)
332
1
(92)
$
(341)
(549)
(562)
332
1
(92)
(1,191)
(1,211)
(160)
(121)
(281)
(160)
(121)
(281)
$
2
(6)
(6)
–
–
–
(10)
–
–
–
Total
$ 3,258
$ (10,259)
$ (1,472)
$ (1,492)
$ (10)
(1) Comprises unrealized gains/losses for derivative instruments and are recorded within derivative financial instruments in assets and liabilities, respectively in the Consolidated
Statement of Financial Position.
Includes ineffectiveness related to hedges discontinued during the year ended October 31, 2018.
(2)
(3) For cash flow hedges, hypothetical derivatives having critical terms which match those of the underlying hedged item are used to assess hedge ineffectiveness.
(4) For cash flow hedges, ineffectiveness is only recognized in the Consolidated Statement of Income when the life-to-date cumulative change in the hedging instrument exceeds the
cumulative change in the hypothetical derivative.
For cash flow hedges and net investment hedges, the following table contains information regarding the impacts on the Consolidated Statement of
Other Comprehensive Income on a pre-tax basis.
Amount
reclassified to
net income for
hedges of
forecasted
transactions
that are no
longer
expected to
occur(1)
Net gains
(losses)
included in
non-financial
asset/liability
as a result of a
hedged
forecasted
transaction
Amount
reclassified
to net
income as
the hedged
item affects
net income(1)
AOCI as at
November 1,
2017
Net gains/
(losses)
recognized
in OCI
Balance in cash flow hedge
reserve/unrealized foreign
currency translation account
as at October 31, 2018
Active hedges
Discountinued
hedges
AOCI as at
October 31,
2018
$
104
$ (341)
$
83
$
–
$
–
$
(154)
$
(262)
$ 108
(151)
321
46
320
(524)
(224)
(92)
(1,181)
225
464
39
811
–
–
(22)
–
(22)
–
(94)
–
(94)
(450)
445
(7)
(166)
(352)
433
(7)
(188)
(98)
12
–
22
–
$ (22)
–
(3,251)
(3,199)
$ (94)
$ (3,417)
$ (3,387)
(52)
$ (30)
Net investment hedges
Foreign currency risk
(2,970)
(281)
Total
$ (2,650)
$(1,462)
$ 811
(1) Amounts reclassified from the cash flow hedge reserve to net income are recorded in non-interest income-other.
Comparative year information under prior IFRS 7 disclosure requirements
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
184 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
2017
$ 574
(588)
$ (14)
$
24
For the year ended
October 31, 2018 ($ millions)
Cash flow hedges
Interest rate risk
Foreign currency/interest
rate risk
Foreign currency risk
Equity risk
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
Hedging instruments
Market valuation is disclosed by the type of relationship:
As at October 31 ($ millions)
Derivatives designated in fair value hedging relationships(1)
Derivatives designated in cash flow hedging relationships
Derivatives designated in net investment hedging relationships(1)
Total derivatives designated in hedging relationships
2017
Favourable
Unfavourable
$
687
3,746
283
$
751
2,749
155
$
4,716
$
3,655
(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 – $6,905). These non-derivative
hedging instruments are presented as deposits – financial institutions on the Consolidated Statement of Financial Position.
Cash flow hedges
The period when cash flows of designated hedged items are expected to occur and impact the Consolidated Statement of Income are as follows:
As at October 31, 2017 ($ millions)
Cash inflows from assets
Cash outflows from liabilities
Net cash flows
Within
one year
Within one
to five years
$ 11,235
(31,542)
$ 19,866
(26,863)
More than
five years
$ 4,178
(4,746)
$ (20,307)
$
(6,997)
$
(568)
Income related to interest cash flows is recognized using the effective interest method over the life of the underlying instrument. Foreign currency
gains and losses related to future cash flows of on-balance sheet monetary items are recognized as incurred. Forecasted revenue is recognized over
the period to which it relates.
11 Offsetting Financial Assets and Financial Liabilities
The Bank is eligible to present certain financial assets and financial liabilities as listed in the table below on a net basis on the Consolidated Statement
of Financial Position pursuant to criteria described in Note 3 – Significant accounting policies.
The following tables provide information on the impact of offsetting on the Bank’s Consolidated Statement of Financial Position, as well as the
financial impact of netting for instruments that are subject to enforceable master netting arrangements or similar agreements, but do not qualify for
offsetting in the Consolidated Statement of Financial Position, as well as available cash and financial instrument collateral.
As at October 31, 2018 ($ 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)
$ 37,887(4)
$
(329)(4)
$ 37,558
$(24,568)
$ (4,085)
$ 8,905
116,375
$154,262
(12,357)
104,018
(6,849)
(91,347)
5,822
$(12,686)
$141,576
$(31,417)
$(95,432)
$14,727
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
$ 38,296(4)
$
(329)(4)
$ 37,967
$(24,568)
$ (5,051)
$ 8,348
113,614
$151,910
(12,357)
101,257
(6,849)
(88,154)
6,254
$(12,686)
$139,224
$(31,417)
$(93,205)
$14,602
Types of financial assets
Derivative financial instruments
Securities purchased under resale agreements
and securities borrowed
Total
As at October 31, 2018 ($ millions)
Types of financial liabilities
Derivative financial instruments
Obligations related to securities sold under
repurchase agreements and securities lent
Total
(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) During 2018, the Bank adopted the settlement-to-market (STM) model for derivatives cleared through a clearing organization. Under this model, the legal characterization of
variation margin is considered to be settled at the end of each day. As such, the balances in the Gross amounts of recognized financial assets/liabilities and the Gross amounts offset
in the consolidated statement of financial position decreased by approximately $18 billion each.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 185
CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2017 ($ 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)
$
49,512
$ (14,148)
$
35,364
$ (22,400)
$
(5,915)
$
7,049
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 $1,112 are recorded within other liabilities and other assets, respectively.
12 Investment Securities
The following table presents the carrying amounts of the Bank’s investment securities per measurement category.
As at October 31, 2018 ($ millions)
Debt investment securities measured at FVOCI
Debt investment securities measured at amortized cost
Equity investment securities designated as at FVOCI
Equity investment securities measured at FVTPL
Available-for-sale investment securities
Held-to-maturity investment securities
Total investment securities
2018(1)
2017
$ 55,843
20,743
1,305
505
n/a
n/a
78,396
$
n/a
n/a
n/a
n/a
50,504
18,765
69,269
(1) The amounts for year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4).
(a) Debt investment securities measured at fair value through other comprehensive income (FVOCI)
As at October 31, 2018 ($ 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
Total debt securities measured at FVOCI
186 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
$
Cost
8,903
4,403
19,298
20,022
3,503
Gross
unrealized
gains
Gross
unrealized
losses
$
38
3
6
49
6
$
50
54
163
81
40
$
Fair value
8,891
4,352
19,141
19,990
3,469
$ 56,129
$ 102
$ 388
$ 55,843
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) Debt investment securities measured at amortized cost
As at October 31, 2018 ($ 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 debt investment securities measured at amortized cost
(1) Balances are net of impairment allowances of $(1).
$
Fair Value
6,530
4,321
3,086
6,379
$
Carrying
value(1)
6,681
4,462
3,131
6,469
$ 20,316
$ 20,743
Equity investment securities designated at fair value through other comprehensive income (FVOCI)
(c)
The Bank has designated certain instruments shown in the following table as equity securities FVOCI as these investments are expected to be held for
the long-term for strategic purposes, effective November 1, 2017. In prior years, these instruments were classified as available-for-sale and measured
at fair value with changes to carrying value recognized in other comprehensive income.
As at October 31, 2018 ($ millions)
Preferred equity instruments
Common shares
Total equity investment securities designated at FVOCI
(d) Available-for-sale investment securities
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
Gross
unrealized
gains
$
–
126
$ 126
Gross
unrealized
losses
$ 54
38
$ 92
Cost
$
334
937
$ 1,271
Fair value
$
280
1,025
$ 1,305
Cost
$ 12,069
4,839
6,761
19,788
5,792
397
899
$ 50,545
Gross
unrealized
gains
Gross
unrealized
losses
$ 119
13
1
49
34
1
164
$ 381
$
95
29
90
34
24
87
63
$ 422
Fair value
$ 12,093
4,823
6,672
19,803
5,802
311
1,000
$ 50,504
The net unrealized loss on available-for-sale securities of $41 million increases to a net unrealized loss of $48 million after the impact of qualifying
hedges is taken into account. The net unrealized loss on available-for-sale securities is recorded in Accumulated Other Comprehensive Income.
(e) Held-to-maturity investment securities
An analysis of the fair value and carrying value of held-to-maturity securities is presented below:
As at October 31, 2017 ($ 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
$
Fair value
5,748
3,991
2,690
6,287
$
Carrying
value
5,779
3,993
2,705
6,288
$ 18,716
$ 18,765
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 187
$
–
–
–
–
–
–
–
–
–
–
–
280
1,025
1,305
1,305
–
–
–
–
–
$
8,891
1.9
4,352
1.8
19,141
2.4
19,990
2.3
3,469
1.9
55,843
280
1,025
1,305
57,148
6,681
4,462
3,131
6,469
20,743
CONSOLIDATED FINANCIAL STATEMENTS
(f) An analysis of the carrying value of investment securities is as follows:
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
As at October 31, 2018 ($ millions)
Fair value through other comprehensive income
Debt instruments
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) %
Equity instruments
Preferred equity instruments
Common shares
1,439
0.6
1,092
1.7
322
1.8
6,884
1.3
718
1.5
$
407
1.5
1,107
1.8
3,517
2.0
6,379
1.7
872
1.8
10,455
12,282
–
–
–
–
$
5,878
2.0
2,084
1.8
13,485
2.4
5,349
3.7
1,553
2.0
28,349
–
–
$
105
2.6
64
3.2
1,654
3.1
1,053
3.8
141
2.6
3,017
–
–
$ 1,062
3.5
5
2.9
163
3.2
325
4.3
185
2.6
1,740
–
–
Total FVOCI
10,455
12,282
28,349
3,017
1,740
Amortized cost
Canadian federal and provincial government
issued or guaranteed debt
U.S. treasury and other U.S. agency debt
Other foreign government debt
Corporate debt
Fair value through profit or loss
Equity instruments
692
197
354
637
1,880
868
5,121
988
1,193
1,113
4,162
3,266
966
4,414
13,767
–
–
–
–
–
502
246
748
–
–
11
116
59
186
–
505
505
Total investment securities
$ 12,335
$ 16,444
$ 42,116
$ 3,765
$ 1,926
$ 1,810
$ 78,396
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
$
2,918
1,797
640
6,980
$
1,828
8,384
541
5,691
$ 11,478
26,137
892
3,609
$
357
2,053
282
1,073
$ 1,102
354
–
470
$
967
366
15
462
$ 18,650
39,091
2,370
18,285
Total investment securities
$ 12,335
$ 16,444
$ 42,116
$ 3,765
$ 1,926
$ 1,810
$ 78,396
(1) Represents the weighted-average yield of fixed income securities.
188 | 2 0 1 8 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, 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
Total investment securities
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
$
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
$ 10,627
$
76
1,961
420
8,170
$ 10,627
$
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
2,364
$ 11,476
$
1,165
4,178
579
5,554
$ 11,476
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
14,771
$ 38,720
$ 15,500
19,344
1,568
2,308
$ 38,720
$
905
2.7
284
2.4
2,704
1.6
1,259
5.7
210
2.5
–
–
5,362
–
–
102
–
102
$ 5,464
$ 1,276
3,023
285
880
$ 5,464
$ 1,109
3.2
5
2.9
228
1.5
138
6.2
185
2.5
–
–
1,665
–
–
6
–
6
$ 1,671
$ 1,130
419
–
122
$ 1,671
$
–
–
–
–
–
–
–
–
–
–
311
1,000
1,311
–
–
–
–
–
$ 1,311
$
539
372
9
391
$ 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
$ 69,269
$ 19,686
29,297
2,861
17,425
$ 69,269
(1) Represents the weighted-average yield of fixed income securities.
(g) Net gain on sale of investment securities
The following table presents the net gain on sale of investment securities:
For the year ended October 31 ($ millions)
Net realized gains
Debt investment securities measured at fair value through other comprehensive income (FVOCI)
Total net realized gains on investment securities
Impairment losses
Net gain on sale of investment securities
2018(1)
2017
2016
$ n/a
146
146
–
$ 146
$ 399
n/a
$ 570
n/a
399
19(2)
570
36(2)
$ 380
$ 534
(1) The amounts for year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4).
(2)
Impairment losses are comprised of (2017 – $14; 2016 – $36) from equity securities and (2017 –$5; 2016 – nil) from other debt securities.
13 Loans, Impaired Loans and Allowance for Credit Losses
(a)
Loans at amortized cost
As at October 31 ($ millions)
Residential mortgages
Personal loans
Credit cards
Business and government
Total
IFRS 9
2018(1)
Allowance
for credit
losses
$
678
2,109
1,213
1,065
Gross
loans
$ 253,357
96,019
16,485
191,038
Net carrying
amount
$ 252,679
93,910
15,272
189,973
Gross
loans
$ 236,916
89,227
14,104
168,449
IAS 39
2017
Allowance
for credit
losses
$
551
1,502
802
1,472
Net
carrying
amount
$ 236,365
87,725
13,302
166,977
$ 556,899
$ 5,065
$ 551,834
$ 508,696
$ 4,327
$ 504,369
(1) The amounts for year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Notes 3 and 4)
2 0 1 8 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
(b) Loans and acceptances outstanding by geography(1)
As at October 31 ($ millions)
Canada:
Residential mortgages
Personal loans
Credit cards
Business and government
United States:
Personal loans
Business and government
Mexico:
Residential mortgages
Personal loans
Credit cards
Business and government
Chile:
Residential mortgages
Personal loans
Credit cards
Business and government
Peru:
Residential mortgages
Personal loans
Credit cards
Business and government
Colombia:
Residential mortgages
Personal loans
Credit cards
Business and government
Other International:
Residential mortgages
Personal loans
Credit cards
Business and government
Total loans
Acceptances(2)
Total loans and acceptances(3)
Allowance for credit losses(4)
Total loans and acceptances net of allowances for loan losses
2018
2017
$ 213,083
72,935
7,361
57,918
$ 205,793
64,295
13,495
52,935
351,297
336,518
1,193
40,613
41,806
7,651
3,298
674
15,399
27,022
15,313
6,023
2,592
19,876
43,804
2,947
3,888
1,575
11,707
20,117
2,189
3,138
2,255
3,996
11,578
12,174
5,544
2,028
41,529
61,275
556,899
16,329
573,228
1,228
35,702
36,930
6,911
3,064
520
13,635
24,130
7,302
3,587
1,744
10,109
22,742
2,735
3,682
1,410
10,617
18,444
1,999
1,845
1,746
3,838
9,428
12,176
4,471
2,244
41,613
60,504
508,696
13,560
522,256
(5,073)
(4,327)
$ 568,155
$ 517,929
(1) Geographic segmentation is based on the location of the property for residential mortgages; otherwise, the residence of the borrower.
(2) 1.6% of borrowers reside outside Canada.
(3) Loans and acceptances denominated in US dollars were $107,944 (2017 – $100,452), in Chilean pesos $37,515 (2017 – $17,824), Mexican pesos $21,561 (2017 – $18,857), and
in other foreign currencies $49,223 (2017 – $44,176).
(4) Allowance for credit losses for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amount have not been restated (refer to Notes 2, 3, 4).
190 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
(c)
Loan maturities
As at October 31, 2018
($ millions)
Residential mortgages
Personal loans
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
$ 49,762 $ 180,563 $ 10,326 $ 11,040 $ 1,666 $ 253,357 $ 59,351 $ 191,802 $ 2,204 $ 253,357
96,019
16,485
191,038
37,003
5,334
138,510
96,019
16,485
191,038
58,007
11,151
50,606
38,079
16,485
6,202
35,050
–
91,595
17,422
–
85,090
4,775
–
7,378
1,009
–
1,922
693
–
773
Total
$ 152,274 $ 307,208 $ 22,479 $ 12,506 $ 62,432 $ 556,899 $ 240,198 $ 311,566 $ 5,135 $ 556,899
Allowance for credit losses
–
–
–
–
(5,065)
(5,065)
–
–
(5,065)
(5,065)
Total loans net of allowance
for credit losses
$ 152,274 $ 307,208 $ 22,479 $ 12,506 $ 57,367 $ 551,834 $ 240,198 $ 311,566 $
70 $ 551,834
As at October 31, 2017
Remaining term to maturity
Rate sensitivity
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
($ millions)
Residential mortgages
Personal loans
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
$ 45,462 $ 171,908 $ 9,098 $ 8,919 $ 1,529 $ 236,916 $ 56,862 $ 178,044 $ 2,010 $ 236,916
89,227
14,104
168,449
39,004
4,733
119,515
89,227
14,104
168,449
36,482
14,104
5,244
49,137
9,371
47,162
15,952
–
77,724
31,500
–
80,124
4,478
–
4,597
1,086
–
1,772
815
–
760
$ 139,138 $ 283,532 $ 18,173 $ 10,494 $ 57,359 $ 508,696 $ 220,114 $ 283,714 $ 4,868 $ 508,696
(4,327)
(4,327)
(4,327)
(4,327)
–
–
–
–
–
–
for credit losses
$ 139,138 $ 283,532 $ 18,173 $ 10,494 $ 53,032 $ 504,369 $ 220,114 $ 283,714 $
541 $ 504,369
(d)
Impaired loans(1)(2)
As at October 31 ($ millions)
Residential mortgages
Personal loans
Credit cards
Business and government
Total
By geography:
Canada
United States
Mexico
Peru
Chile
Colombia
Other International
Total
IAS 39
2017(3)
Allowance
for credit
losses
$
326(5)
1,040(5)
543(5)
713(6)
$ 2,622(7)
Net
$ 1,119
27
–
1,097
$ 2,243
IFRS 9
2018(4)
Gross
impaired
loans(1)
Allowance
for credit
losses
$1,797
1,069
–
2,264
$5,130
$ 999
80
359
581
753
619
1,739
$5,130
$ 360(5)
644(5)
–(5)
673(6)
$1,677
381
25
164
317
158
159
473
1,677
Net
$1,437
425
–
1,591
$3,453
618
55
195
264
595
460
1,266
3,453
Gross
impaired
loans(1)
$ 1,445
1,067
543
1,810
$ 4,865
$ 1,049
140
303
704
565
462
1,642
$ 4,865
Interest income recognized on impaired loans during the year ended October 31, 2018 was $49 (2017 – $23).
(1)
(2) Additional interest income of approximately $370 million would have been recorded if the above loans had not been classified as impaired (2017 – $363 million).
(3) Excludes loans acquired under the Federal Deposit Insurance Corporation (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 for 2017.
(4) Amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated (refer to Notes 2, 3 and 4).
(5) Allowance for credit losses for residential mortgages, personal loans and credit card loans is assessed on a collective basis.
(6) Allowance for credit losses for business and government loans is individually assessed.
(7) A portion of the existing allowance for credit losses on impaired loans as at October 31, 2017, was reclassified against performing loans with the adoption of IFRS 9 effective
November 1, 2017, to conform with current period presentation.
2 0 1 8 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
(e) Allowance for credit losses
Key inputs and assumptions
The Bank’s allowance calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs.
Some of the key drivers include the following:
(cid:129) Changes in risk ratings of the borrower or instrument reflecting changes in their credit quality;
(cid:129) Changes in the volumes of transactions;
(cid:129) Changes in the forward-looking macroeconomic environment reflected in the variables used in the models such as GDP growth,
unemployment rates, commodity prices, and house price indices, which are most closely related with credit losses in the relevant portfolio;
(cid:129) Changes in macroeconomic scenarios and the probability weights assigned to each scenario; and
(cid:129) Borrower migration between the three stages which can result from changes to any of the above inputs and assumptions.
(i) Key macroeconomic variables
(i)(a) The following table shows certain key macroeconomic variables used in modelling the allowance for credit losses for Stages 1 and 2. For the base
case, optimistic and pessimistic scenarios, the projections are provided for the next 12 months and for the remaining forecast period, which represents
a medium-term view.
Canada
Real GDP growth, y/y % change
Unemployment rate, average %
Bank of Canada overnight rate target, average %
HPI – Housing Price Index, y/y % change
CPI – Consumer Price Index, y/y % change
USDCAD exchange rate, average
US
Real GDP growth, y/y % change
Unemployment rate, average %
Mexico
Real GDP growth, y/y % change
Unemployment rate, average %
Chile
Real GDP growth, y/y % change
Unemployment rate, average %
Peru
Real GDP growth, y/y % change
Unemployment rate, average %
Colombia
Real GDP growth, y/y % change
Unemployment rate, average %
Caribbean
Real GDP growth, y/y % change
Global
WTI oil price, average USD/bbl
Copper price, average USD/lb
Base Case Scenario
Alternative Scenario – Optimistic
Alternative Scenario – Pessimistic
Next
12 Months
Remaining
Forecast Period
Next
12 Months
Remaining
Forecast Period
Next
12 Months
Remaining
Forecast Period
2.2
5.9
2.13
5.1
2.7
1.24
2.7
4.0
2.0
3.7
3.9
6.2
3.9
6.3
3.3
9.1
4.0
1.7
5.9
2.87
3.7
2.1
1.24
1.7
4.1
2.3
4.2
3.5
6.4
3.7
6.1
3.2
8.8
4.1
2.6
5.7
2.25
5.4
2.7
1.24
3.3
3.7
2.7
3.5
5.0
5.8
4.8
5.7
4.0
8.7
5.2
2.1
5.0
3.66
4.1
2.6
1.20
2.4
3.2
3.2
3.4
4.8
4.5
4.7
4.5
4.2
7.4
5.4
1.7
6.2
1.98
4.9
2.7
1.25
1.9
4.3
1.3
4.0
2.7
6.7
3.1
6.8
3.0
9.3
2.8
71
2.91
67
3.11
75
2.98
84
3.44
67
2.84
1.2
6.8
2.10
3.3
1.5
1.27
1.0
5.0
1.4
4.9
2.3
8.3
2.5
7.7
2.2
10.0
2.9
54
2.84
(i)(b) The table below provides a comparison between the reported Allowance for Credit Losses (ACL) for financial assets in Stage 1 and Stage 2, and
the ACL under the base, optimistic and pessimistic scenarios for such assets.
ACL (Stage 1 and Stage 2)
3,475
3,467
3,345
3,618
Reported under IFRS 9
Base case scenario
Optimistic scenario
Pessimistic scenario
192 | 2 0 1 8 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
(i)(c) The following table illustrates the impact of staging on the Bank’s ACL by comparing the allowance if all performing financial assets were in
Stage 1 or if all such assets were in Stage 2 to the actual ACL recorded on these assets.
Financial assets
Financial assets
(ii) Allowance for credit losses on loans
($ millions)
Residential mortgages
Personal loans
Credit cards
Business and government
Stage 1 and 2 ACL
under IFRS 9
ACL – All performing
loans in Stage 1
Impact of staging
3,475
3,022
(453)
Stage 1 and 2 ACL
under IFRS 9
ACL – All performing
loans in Stage 2
Impact of staging
3,475
5,361
1,886
Balance as at
November 1,
2017
$
717
1,879
1,163
1,261
Provision for
credit losses
$
104
1,411
898
166
IFRS 9
Net write-offs
$
(123)
(1,166)
(854)
(208)
Other, including
foreign currency
adjustment
$
(20)
(15)
6
(72)
Balance as at
October 31,
2018
$
678
2,109
1,213
1,147
$ 5,020
$ 2,579
$ (2,351)
$ (101)
$ 5,147
Presented as:
Allowance for credit losses on loans
Allowance for credit losses on acceptances
Allowance for credit losses on off-balance sheet
exposures
Allowance for credit losses on loans
$ 4,920
16
84
As at October 31, 2018 ($ millions)
Residential mortgages
Personal loans
Credit cards
Business and government
Total(1)
$ 5,065
8
74
IFRS 9
Stage 1
Stage 2
Stage 3
$
112
578
401
132
$
206
887
812
260
$ 360
644
–
673
$
Total
678
2,109
1,213
1,065
$ 1,223
$ 2,165
$1,677
$ 5,065
(1) Excludes, allowance for credit losses for other financial assets including acceptances, investment securities, deposits with banks and off-balance sheet credit risks which amounted
to $89.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 193
CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes to the allowance for credit losses on loans.
As at October 31, 2018 ($ millions)
Residential mortgages
Balance at beginning of the year
Provision for credit losses
Remeasurement(1)
Newly originated or purchased financial assets
Derecognition of financial assets and maturities
Changes in models and methodologies
Transfer to (from):
Stage 1
Stage 2
Stage 3
Gross write-offs
Recoveries
Foreign exchange and other movements
Balance at end of year(2)
Personal loans
Balance at beginning of the year
Provision for credit losses
Remeasurement(1)
Newly originated or purchased financial assets
Derecognition of financial assets and maturities
Changes in models and methodologies
Transfer to (from):
Stage 1
Stage 2
Stage 3
Gross write-offs
Recoveries
Foreign exchange and other movements
Balance at end of year(2)
Credit cards
Balance at beginning of the year
Provision for credit losses
Remeasurement(1)
Newly originated or purchased financial assets
Derecognition of financial assets and maturities
Changes in models and methodologies
Transfer to (from):
Stage 1
Stage 2
Stage 3
Gross write-offs
Recoveries
Foreign exchange and other movements
Balance at end of year(2)
Business and government
Balance at beginning of the year
Provision for credit losses
Remeasurement(1)
Newly originated or purchased financial assets
Derecognition of financial assets and maturities
Changes in models and methodologies
Transfer to (from):
Stage 1
Stage 2
Stage 3
Gross write-offs
Recoveries
Foreign exchange and other movements
Balance at end of period including off-balance sheet exposures(2)
Less: Allowance for credits losses on off-balance sheet exposures(2)(3)
Balance at end of year(2)
IFRS 9
Stage 1
Stage 2
Stage 3
Total
$ 103
$ 214
$
400
$
717
(131)
88
(2)
–
–
77
(18)
–
–
–
(5)
5
–
(7)
–
–
(65)
106
(39)
–
–
(8)
$ 112
$ 206
$ 477
$ 802
(670)
615
(82)
–
–
453
(189)
(4)
–
–
(22)
629
–
(96)
–
–
(442)
284
(286)
–
–
(4)
$ 578
$ 887
$ 364
$ 799
(276)
329
(91)
–
–
259
(162)
(1)
–
–
(21)
448
–
(105)
–
–
(259)
162
(239)
–
–
6
$ 401
$ 812
$ 178
$ 307
(93)
322
(108)
3
–
63
(187)
(2)
–
–
(3)
6
–
(164)
14
–
(58)
218
(30)
–
–
(2)
$ 173
41
$ 132
$ 291
31
$ 260
151
–
–
–
–
(12)
(88)
39
(219)
96
(7)
360
25
88
(9)
–
–
–
–
–
(219)
96
(20)
678
$
600
$ 1,879
1,015
–
–
–
–
(11)
(95)
290
(1,441)
275
11
974
615
(178)
–
–
–
–
–
(1,441)
275
(15)
644
$ 2,109
–
$ 1,163
593
–
–
–
–
–
–
240
(1,104)
250
21
765
329
(196)
–
–
–
–
–
(1,104)
250
6
–
$ 1,213
760
$ 1,245
264
–
(68)
–
–
(5)
(31)
32
(276)
68
(69)
675
2
673
177
322
(340)
17
–
–
–
–
(276)
68
(74)
$ 1,139
74
$ 1,065
$
$
$
$
$
$
$
$
(1)
Includes credit risk changes as a result of significant increases in credit risk, changes in credit risk that did not result in a transfer between stages, changes in model inputs and
assumptions and changes due to drawdowns of undrawn commitments.
194 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
(2)
Interest income on impaired loans for residential mortgages, personal loans, credit cards, and business and government loans totaled $370.
(3) Allowance for credit losses on off-balance sheet exposures is recorded in other liabilities in the Consolidated Statement of Financial Position.
(4) Allowance for credit losses on acceptances are recorded against the financial asset in the Consolidated Statement of Financial Position.
(5) There are no accumulated credit losses on purchased or originated credit impaired loans.
(6) During the year ended October 31, 2018, the contractual terms of certain financial assets were modified where the modification did not result in derecognition. The amortized cost
of such loans that were modified in Stage 3 before the modification was $185.
The following table presents the allowance for credit losses under IAS 39 as at October 31, 2017.
($ millions)
Individual
Collective
Total before loans acquired under FDIC guarantee
Loans acquired under FDIC guarantee(1)
Represented by:
Allowance against impaired loans
Allowance against performing loans(2)
Total before loans acquired under FDIC guarantee
Loans acquired under FDIC guarantee(1)
IAS 39
As at and for the year ended October 31, 2017
Balance at
beginning
of year
$
894
3,498
4,392
234
Write-offs
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
Balance at
end of
year
$ (39)
(8)
$
713
3,355
(47)
(8)
4,068
259
$ 4,626
$ (3,173)
$ 680
$ 2,249
$ (55)
$ 4,327
$ 2,622
1,446
4,068
259
$ 4,327
(1) This represents the gross amount of allowance for credit losses as the receivable from FDIC is separately recorded in other assets.
(2) The allowance against performing loans is attributable to business and government loans $625 with the remainder allocated to personal and credit card loans $720 and residential
mortgages $101.
(f) Carrying value of exposures by risk rating
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Residential mortgages
Category of PD grades ($ millions)
Very low
Low
Medium
High
Very high
Loans not graded(1)
Default
Total
Allowance for credit losses
Carrying value
Stage 1
$ 146,461
58,154
11,689
1,615
25
23,139
–
241,083
112
As at October 31, 2018
$
Stage 2
307
378
972
3,515
1,779
3,526
–
10,477
206
Stage 3(2)
Total
$
–
–
–
–
–
–
1,797
1,797
360
$ 146,768
58,532
12,661
5,130
1,804
26,665
1,797
253,357
678
$ 240,971
$ 10,271
$ 1,437
$ 252,679
(1) Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
(2) Stage 3 includes purchased or originated credit impaired loans.
Personal loans
Category of PD grades ($ millions)
Very low
Low
Medium
High
Very high
Loans not graded(1)
Default
Total
Allowance for credit losses
Carrying value
Stage 1
$ 30,660
26,039
8,315
6,686
58
15,452
–
87,210
578
As at October 31, 2018
$
Stage 2
66
151
402
3,647
1,362
2,112
–
7,740
887
Stage 3(2)
Total
$
–
–
–
–
–
–
1,069
1,069
644
$ 30,726
26,190
8,717
10,333
1,420
17,564
1,069
96,019
2,109
$ 86,632
$ 6,853
$
425
$ 93,910
(1) Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
(2) Stage 3 includes purchased or originated credit impaired loans.
2 0 1 8 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
Credit cards
Category of PD grades ($ millions)
Very low
Low
Medium
High
Very high
Loans not graded(1)
Default
Total
Allowance for credit losses
Carrying value
As at October 31, 2018
$
$
Stage 1
1,418
2,436
3,358
2,929
37
2,905
–
13,083
401
$
Stage 2
5
14
71
1,455
697
1,159
–
3,401
812
$ 12,682
$ 2,589
$
Stage 3(2)
–
–
–
–
–
–
–
–
–
–
$
Total
1,423
2,450
3,429
4,384
734
4,064
–
16,484
1,213
$ 15,271
(1) Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
(2) Stage 3 includes purchased or originated credit impaired loans.
Undrawn loan commitments – Retail
Category of PD grades ($ millions)
Very low
Low
Medium
High
Very high
Loans not graded(1)
Default
Total
Allowance for credit losses
Carrying value
As at October 31, 2018
$
$
Stage 1
72,321
16,531
6,029
2,631
26
14,774
–
112,312
–
$
Stage 2
–
2
79
670
367
3,364
–
4,482
–
$ 112,312
$ 4,482
$
Stage 3(2)
–
–
–
–
–
–
–
–
–
–
$
Total
72,321
16,533
6,108
3,301
393
18,138
–
116,794
–
$ 116,794
(1) Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
(2) Stage 3 includes purchased or originated credit impaired loans.
Business and government loans
Category of PD grades ($ millions)
Investment grade
Non-Investment grade
Watch list
Loans not graded(1)
Default
Total
Allowance for credit losses
Carrying value
As at October 31, 2018
$
Stage 1
87,047
83,730
130
1,050
–
171,957
132
$
Stage 2
3,770
9,706
2,689
652
–
16,817
260
$
Stage 3(2)
–
–
–
–
2,264
2,264
673
$
Total
90,817
93,436
2,819
1,702
2,264
191,038
1,065
$ 171,825
$ 16,557
$ 1,591
$ 189,973
(1) Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
(2) Stage 3 includes purchased or originated credit impaired loans.
Undrawn loan commitments – Business and government
As at October 31, 2018
Category of PD grades ($ millions)
Investment grade
Non-Investment grade
Watch list
Loans not graded(1)
Default
Total
Allowance for credit losses
Carrying value
Stage 1
Stage 2
Stage 3(2)
Total
$ 159,880
56,001
81
2,178
–
218,140
41
$ 1,663
3,445
977
28
–
6,113
31
$ –
–
–
–
4
4
2
$ 161,543
59,446
1,058
2,206
4
224,257
74
$ 218,099
$ 6,082
$ 2
$ 224,183
(1) Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
(2) Stage 3 includes purchased or originated credit impaired loans.
196 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
(g)
Loans acquired under FDIC guarantee
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 net loan losses. As at October 31, 2018, the carrying value of the loans covered by the FDIC guarantee was
$1.3 billion (October 31, 2017 – $1.4 billion).
A net receivable of $77 million (2017 – $106 million) from the FDIC is included in Other assets in the Consolidated Statement of Financial Position.
The remaining guarantee on single family home loans will expire in April 2020.
Loans past due but not impaired(1)
(h)
A loan is considered past due when a counterparty has not made a payment by the contractual due date. The following table presents the carrying
value of loans that are contractually past due but not classified as impaired because they are either less than 90 days past due or fully secured and
collection efforts are reasonably expected to result in repayment, or restoring it to a current status in accordance with the Bank’s policy.
As at October 31 ($ millions)
Residential mortgages
Personal loans
Credit cards
Business and government
Total
2018
2017(3)
31 – 60
days
1,290
609
231
167
2,297
$
$
61 – 90
days
521
322
154
40
1,037
$
$
91 days
and
greater(2)
$
$
–
–
353
–
353
Total
1,811
931
738
207
3,687
$
$
31 – 60
days
$ 1,035
522
202
215
$ 1,974
61 – 90
days
$ 446
284
139
55
$ 924
91 days
and
greater
$ 122
–
75
187
$ 384
Total
$ 1,603
806
416
457
$ 3,282
(1) Loans past due 30 days or less are not presented in this analysis as they are not administratively considered past due.
(2) Under IFRS 9, all loans that are 90 days past due are considered impaired with the exception of credit card receivables which are considered impaired when 180 days past due. Prior
amounts have not been restated (refer to Notes 3 and 4).
(3) Excludes loans acquired under the FDIC guarantee related to the acquisition of R-G Premier Bank of Puerto Rico.
(i)
Purchased credit-impaired loans
Certain financial assets including loans are credit-impaired on initial recognition either through acquisition or origination.
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
The following table provides details of such assets:
As at October 31 ($ millions)
Unpaid principal balance(1)
Credit related fair value adjustments
Carrying value
Stage 3 allowance
Carrying value net of related allowance
(1) Represents principal amount owed net of write-offs.
14 Derecognition of Financial Assets
2018
$ 548
(168)
380
–
$ 380
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
2018(1)
2017(1)
$20,498
2,679
$ 18,178
2,293
21,459
19,278
(1) The fair value of the transferred assets is $23,237 (2017 – $20,580) and the fair value of the associated liabilities is $22,468 (2017 – $19,863), for a net position of $769 (2017 –
$717).
(2) These include cash held in trust and trust permitted investment assets acquired as part of principal reinvestment account that the Bank is required to maintain in order to participate
in the programs.
Securitization of personal lines of credit, credit cards and auto loans
The Bank securitizes a portion of its unsecured personal lines of credit, credit card and auto loan receivables through consolidated structured entities.
These receivables continue to be recognized on the Consolidated Statement of Financial Position as personal loans and credit cards loans. For further
details, refer to Note 15.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 197
CONSOLIDATED FINANCIAL STATEMENTS
Securities sold under repurchase agreements and securities lent
The Bank enters into transactions, such as repurchase agreements and securities lending agreements, where the Bank transfers assets under
agreements to repurchase them on a future date and retains all the substantial risks and rewards associated with the assets. The transferred assets
remain on the Consolidated Statement of Financial Position.
The following table provides the carrying amount of the transferred assets and the associated liabilities:
As at October 31 ($ millions)
Carrying value of assets associated with:
Repurchase agreements(2)
Securities lending agreements
Total
Carrying value of associated liabilities(3)
2018(1)
2017(1)
$
82,816
49,718
132,534
$
86,789
40,535
127,324
$ 101,257
$
95,843
(1) The fair value of transferred assets is $132,534 (2017 – $127,324) and the fair value of the associated liabilities is $101,257 (2017 – $95,843), for a net position of $31,277 (2017 –
$31,481).
(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.
15 Structured Entities
(a) Consolidated structured entities
U.S. multi-seller conduit
The Bank-sponsored U.S. multi-seller conduit purchases high-quality financial assets from independent third parties (the sellers) funded by the issuance
of highly rated asset-backed commercial paper. The sellers continue to service the financial assets and provide credit enhancements through
overcollateralization protection and cash reserves.
Each asset purchased by the conduit has a deal-specific liquidity facility provided by the Bank in the form of a Liquidity Asset Purchase Agreement
(LAPA). The primary purpose of the backstop liquidity facility is to provide an alternative source of financing in the event the conduit is unable to
access the asset-backed commercial paper market. The administration agent can require the Bank in its capacity as liquidity provider to perform under
its asset-specific LAPA agreements, in which case the Bank is obliged to purchase an interest in the related assets owned by the conduit. The Bank is
not obligated to perform under the LAPA agreements in the event the conduit itself is insolvent.
The Bank’s liquidity agreements with the conduit call for the Bank to fund full par value of the assets, including defaulted assets, if any, of the
conduit. This facility is available to absorb the losses on defaulted assets, if any, in excess of losses absorbed by deal-specific seller credit
enhancements. Further, the Bank 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 Scotiabank Covered Bond Guarantor Limited Partnership, Halifax Receivables Trust, Trillium Credit Card Trust II and Securitized Term
Auto Receivables Trust 2016-1, 2017-1, 2017-2, 2018-1 and 2018-2.
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.
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, 2018, $29.1 billion (2017 – $25.7 billion) covered bonds were outstanding and included in Deposits – Business and government on
the Consolidated Statement of Financial Position. The Bank’s outstanding covered bonds are denominated in U.S. dollars, Australian dollars, British
pounds and Euros. As at October 31, 2018, assets pledged in relation to these covered bonds were uninsured residential mortgages denominated in
Canadian dollars of $30.7 billion (2017 – $27.8 billion).
Personal line of credit securitization trust
The Bank securitizes a portion of its Canadian unsecured personal line of credit receivables (receivables) through Halifax Receivables Trust (Halifax), a
Bank-sponsored structured entity. Halifax 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 Halifax. The subordinated notes
issued by Halifax are held by the Bank. As at October 31, 2018, $1 billion notes (2017 – $1 billion) were outstanding and included in Deposits –
Business and government on the Consolidated Statement of Financial Position. As at October 31, 2018, assets pledged in relation to these notes were
$1.3 billion (2017 – $1.3 billion).
198 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Credit card receivables securitization trust
The Bank securitizes a portion of its Canadian 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, 2018, US $1.2 billion ($1.6 billion Canadian dollars) (2017 – US $0.9 billion, $1.2 billion
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, 2018 assets pledged in relation to these notes were credit card receivables, denominated in Canadian dollars, of
$1.8 billion (2017 – $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,
2017-2, 2018-1 and 2018-2 (START entities). Each entity is a Bank-sponsored structured entity. START entities issue multiple series of Class A notes to
third-party investors and may issue Class A and/or 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 and
certain Class A notes issued by START are held by the Bank. As at October 31, 2018, the aggregate Class A notes issued to third parties outstanding
and included in Deposits – Business and government on the Consolidated Statement of Financial Position were US $1.8 billion ($2.4 billion Canadian
dollars) (2017 – US $1.6 billion, $2.1 billion Canadian dollars). As at October 31, 2018, assets pledged in relation to these notes were Canadian auto
loan receivables denominated in Canadian dollars of $3 billion (2017 – $2.3 billion).
Other
Assets of other consolidated structured entities are comprised of securities, deposits with banks and other assets to meet the Bank’s and customer
needs.
(b) Unconsolidated structured entities
The following table provides information about other structured entities in which the Bank has a significant interest but does not control and
therefore does not consolidate. A significant interest is generally considered to exist where the Bank is exposed to 10% or more of the unconsolidated
structured entities’ maximum exposure to loss.
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
($ millions)
As at October 31, 2018
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles
Total
Total assets (on structured entity’s financial statements)
$
3,216
$ 4,488
$ 1,520
$ 9,224
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
3
–
–
3
–
6
6
–
1,054
978
2,032
–
–
–
–
17
45
62
1,458
–
1,458
3
1,071
1,023
2,097
1,458
6
1,464
$
$
3,219
$ 2,032
$
62
$ 5,313
As at October 31, 2017
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles
Total
3,127
$ 3,991
$ 1,520
$ 8,638
–
–
–
–
–
6
6
5
1,091
731
1,827
–
–
–
–
15
40
55
1,465
–
1,465
5
1,106
771
1,882
1,465
6
1,471
Bank’s maximum exposure to loss
$
3,127
$ 1,827
$
55
$ 5,009
(1) Loan balances are presented net of allowance for credit losses.
2 0 1 8 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
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, 2018, the Bank has recorded
$2 billion (2017 – $1.8 billion), primarily its interest in the structured entities, on its Consolidated Statement of Financial Position.
Canadian multi-seller conduits that the Bank administers
The Bank sponsors two Canadian multi-seller conduits. The conduits purchase assets from independent third parties (the sellers) funded by the
issuance of asset-backed commercial paper. The sellers continue to service the assets and provide credit enhancements through overcollateralization
protection and cash reserves. The Bank has no rights to these assets as they are available to support the obligations of the respective programs, but
manages for a fee the commercial paper selling programs. To ensure timely repayment of the commercial paper, each asset pool financed by the
multi-seller conduits has a deal-specific 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 $0.8 billion (2017 – $1.9 billion)
based on future asset purchases by these conduits.
Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns, which results in the Bank not
consolidating the two Canadian conduits.
Structured finance entities
The Bank has interests in structured entities used to assist corporate clients in accessing cost-efficient financing through their securitization structures.
The Bank may act as an administrator, an investor or a combination of both in these types of structures.
Capital funding vehicles
These entities are designed to pass the Bank’s credit risk to the holders of the securities. Therefore the Bank does not have exposure or rights to
variable returns from these entities.
(c) Other unconsolidated Bank-sponsored entities
The Bank sponsors unconsolidated structured entities including mutual funds, in which it has insignificant or no interest at the reporting date. The
Bank is a sponsor when it is significantly involved in the design and formation at inception of the structured entities, and the Bank’s name is used by
the structured entities to create an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also considers other
factors, such as its continuing involvement and obligations to determine if, in substance, the Bank is a sponsor. The Bank considers mutual funds and
managed companies as sponsored entities.
The following table provides information on revenue from unconsolidated Bank-sponsored entities.
As at October 31 ($ millions)
Revenue
(1)
Includes mutual funds, other funds and trusts.
2018
Scotia
Managed
Companies
2017
Scotia
Managed
Companies
Total
Total
Funds(1)
$ 3
$ 2,121
$ 2,016
$ 5
$ 2,021
Funds(1)
$ 2,118
The Bank earned revenue of $2,121 million (2017 – $2,021 million) from its involvement with the unconsolidated Bank-sponsored structured entities
including mutual funds, for the year ended October 31, 2018, which was comprised of interest income of $1 million (2017 – $1 million), non-interest
income – banking of $137 million (2017 – $134 million) and non-interest income – wealth management of $1,983 million (2017 – $1,886 million),
including mutual fund, brokerage and investment management and trust fees.
200 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
16 Property and Equipment
($ millions)
Cost
Balance as at October 31, 2016
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2017
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2018
Accumulated depreciation
Balance as at October 31, 2016
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2017
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2018
Net book value
Balance as at October 31, 2017
Balance as at October 31, 2018
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Land &
Building
Equipment
Technology
Assets
Leasehold
Improvements
Total
$ 2,071
169
(224)
(294)
$ 1,728
147
(52)
69
$ 1,983
161
(41)
(15)
$ 1,357
126
(28)
(45)
$ 7,139
603
(345)
(285)
$ 1,722
$ 1,892
$ 2,088
$ 1,410
$ 7,112
214
142
(231)
36
96
56
(38)
95
186
141
(33)
(86)
97
148
(49)
(21)
593
487
(351)
24
$ 1,883
$ 2,101
$ 2,296
$ 1,585
$ 7,865
$
$
766
47
(58)
(69)
686
62
(56)
13
$ 1,362
91
(37)
34
$ 1,450
80
(35)
174
$ 1,653
131
(40)
(25)
$ 1,719
143
(24)
10
$
$
838
71
(17)
(16)
876
69
(17)
31
$ 4,619
340
(152)
(76)
$ 4,731
354
(132)
228
$
705
$ 1,669
$ 1,848
$
959
$ 5,181
$ 1,036
$ 1,178
$
$
442
432
$
$
369
448
$
$
534
626
$ 2,381(1)
$ 2,684(1)
(1)
Includes $36 (2017 – $16) of investment property.
17 Investments in Associates
The Bank had significant investments in the following associates:
As at October 31 ($ millions)
Thanachart Bank Public Company Limited
Canadian Tire’s Financial Services business
(CTFS)(2)
Bank of Xi’an Co. Ltd.
Maduro & Curiel’s Bank N.V.(3)
Country of
incorporation
Thailand
Canada
China
Curacao
Nature of business
Ownership
percentage
Date of financial
statements(1)
Carrying
value
2018
2017
Carrying
value
Banking
49.0%
October 31, 2018
$ 2,961
$ 2,789
Financial Services
Banking
Banking
20.0%
19.9%
48.1%
September 30, 2018
September 30, 2018
September 30, 2018
518
772
304
542
711
284
(1) Represents the date of the most recent 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 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, 2018 these reserves amounted to $62 (2017 – $61).
Summarized financial information of the Bank’s significant associates are as follows.
($ 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.
For the twelve months ended(1)
As at
Revenue
$ 1,871
1,143
1,123
348
Net
income
$ 590
348
456
92
Total assets
Total liabilities
$ 39,875
6,256
45,261
5,832
$ 34,289
5,279
41,595
5,165
2 0 1 8 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
($ 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.
(1) Based on the most recent available financial statements.
18 Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amounts of goodwill by cash-generating unit (CGU) are as follows:
For the twelve months ended and as at September 30, 2017(1)
Revenue
$ 1,718
1,040
915
343
Net
income
$ 508
334
411
80
Total assets
Total liabilities
$ 38,050
6,233
41,170
5,501
$ 32,902
5,235
37,821
4,896
($ millions)
Balance as at October 31, 2016
Acquisitions
Dispositions
Foreign currency adjustments and other
Balance as at October 31, 2017
Acquisitions
Dispositions
Foreign currency adjustments and other
Balance as at October 31, 2018
Canadian
Banking
$ 3,403
–
(36)
18
3,385
1,710
–
–
Global
Banking and
Markets
$ 265
–
–
(10)
255
–
–
5
Latin
America
$ 2,461
–
–
(61)
2,400
1,164
–
(110)
Caribbean
and
Central
America
$ 1,255
–
–
(52)
1,203
–
–
(5)
$
Total
7,384
–
(36)
(105)
7,243
2,874
–
(110)
$ 5,095
$ 260
$ 3,454
$ 1,198
$ 10,007
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 13.5 times (2017 – 11 to 12.5 times) have been used.
The fair value less costs of disposal of the CGU is sensitive to changes in net income, P/E multiples and control premiums.
Goodwill was assessed for annual impairment as at July 31, 2018 and July 31, 2017 and no impairment was determined to exist.
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. No significant negative changes were noted as of October 31, 2018.
202 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Intangible assets
Intangible assets consist of assets with indefinite and finite useful lives. Indefinite life intangible assets consist substantially of fund management
contracts. The fund management contracts are for the management of open-ended funds. Finite life intangible assets include assets such as computer
software, customer relationships and core deposit intangibles.
($ millions)
Cost
Balance as at October 31, 2016
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2017
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2018
Accumulated amortization
Balance as at October 31, 2016
Amortization
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2017
Amortization
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2018
Net book value
As at October 31, 2017
As at October 31, 2018
Finite life
Indefinite life
Computer
software
Other
intangibles
Fund management
contracts(1)
Other
intangibles
Total
$ 2,737
$ 1,631
$ 2,325
$ 68
$ 6,761
–
584
(3)
(40)
–
5
(56)
(17)
–
–
–
–
–
–
–
–
–
589
(59)
(57)
$ 3,278
$ 1,563
$ 2,325
$ 68
$ 7,234
47
673
(8)
(44)
480
3
–
(30)
2,090
–
–
–
98
–
–
–
2,715
676
(8)
(74)
$ 3,946
$ 2,016
$ 4,415
$ 166
$ 10,543
$ 1,009
$
995
339
(2)
(25)
82
(18)
(9)
$ 1,321
$ 1,050
409
(8)
(17)
85
–
(9)
$ 1,705
$ 1,126
$
$
$
–
–
–
–
–
–
–
–
–
$
$
$
–
–
–
–
–
–
–
–
–
$ 2,004
421
(20)
(34)
$ 2,371
494
(8)
(26)
$ 2,831
$ 1,957(2)
$ 2,241(2)
$
$
513
890
$ 2,325
$ 4,415
$ 68
$ 166
$ 4,863
$ 7,712
(1) Fund management contracts are attributable to HollisWealth Inc. (formerly DundeeWealth Inc.).
(2) Computer software comprises of purchased software of $483 (2017 – $500), internally generated software of $1,208 (2017 – $981), and in process software not subject to
amortization of $550 (2017 – $476).
Impairment testing of indefinite life intangible assets
Indefinite life intangible assets are not amortized and are assessed for impairment annually or more frequently if events or changes in circumstances
indicate that the asset may be impaired. Impairment is assessed by comparing the carrying value of the indefinite life intangible asset to its recoverable
amount. The recoverable amount of the fund management contracts is based on a value in use approach using the multi-period excess earnings
method. This approach uses cash flow projections from management-approved financial budgets which include key assumptions related to market
appreciation, net sales of funds, and operating margins taking into consideration past experience and market expectations. The forecast cash flows
cover a 5-year period, with a terminal growth rate of 4.5% (2017 – 4.5%) applied thereafter. These cash flows have been discounted at a rate of
10% (2017 – 10%).
Indefinite life intangible assets were assessed for annual impairment as at July 31, 2018 and July 31, 2017 and no impairment was determined to
exist.
Management believes that reasonable negative changes in any one key assumption used to determine the recoverable amount would not result in an
impairment. No significant negative changes were noted as of October 31, 2018.
19 Other Assets
As at October 31 ($ millions)
Accrued interest
Accounts receivable and prepaids
Current tax assets
Margin deposit derivatives
Segregated fund assets
Pension assets (Note 28)
Receivable from brokers, dealers and clients
Receivable from the Federal Deposit Insurance Corporation (Note 13)
Other
Total
$
2018
2,800
1,878
657
3,247
2,736
360
2,061
77
3,617
$
2017
2,176
1,674
327
3,041
–
256
913
106
4,256
$ 17,433
$ 12,749
2 0 1 8 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
20 Deposits
As at October 31 ($ millions)
Personal
Business and government
Financial institutions
Total
Recorded in:
Canada
United States
United Kingdom
Mexico
Peru
Chile
Colombia
Other International
Total(5)
2018
2017
Payable on demand(1)
$
Interest-
bearing
7,517
94,812
6,510
Non-interest
bearing
$
7,488
24,310
2,804
Payable after
Payable on a
notice(2)
fixed date(3)
Total
$ 123,302
34,600
1,895
$
76,238
268,280
28,778
$ 214,545
422,002
39,987
$ 108,839
$ 34,602
$ 159,797(4)
$ 373,296
$ 676,534
$
84,638
14,080
–
14
2,738
3,392
37
3,940
$ 17,825
128
–
4,362
1,284
3,029
507
7,467
$ 122,974
8,950
152
5,382
4,129
146
3,963
14,101
$ 247,361
36,780
16,695
11,393
7,062
17,613
5,036
31,356
$ 472,798
59,938
16,847
21,151
15,213
24,180
9,543
56,864
$
$
$
200,030
384,988
40,349
625,367
445,487
58,070
12,041
19,419
15,216
11,574
7,587
55,973
$ 108,839
$ 34,602
$ 159,797
$ 373,296
$ 676,534
$
625,367
(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 $219,195 (2017 – $216,018), deposits denominated in Chilean pesos amount to $22,731 (2017 – $11,066), deposits denominated
Includes $141 (2017 – $141) of non-interest bearing deposits.
in Mexican pesos amount to $18,341 (2017 – $17,156) and deposits denominated in other foreign currencies amount to $79,582 (2017 – $70,217).
The following table presents the maturity schedule for term deposits in Canada greater than $100,000(1).
($ millions)
As at October 31, 2018
As at October 31, 2017
Within three
months
$
$
36,670
33,678
Three to six
months
Six to
twelve months
$
$
23,913
26,579
$
$
42,830
31,190
$
$
One to
five years
99,734
94,563
Over
five years
19,872
16,073
$
$
Total
$
$
223,019
202,083
(1) The majority of foreign term deposits are in excess of $100,000.
21 Subordinated Debentures
These debentures are direct, unsecured obligations of the Bank and are subordinate to the claims of the Bank’s depositors and other creditors. The
Bank, where appropriate, enters into interest rate and cross-currency swaps to hedge the related risks.
As at October 31 ($ millions)
Maturity date
October 2024
Interest
rate (%)
3.036
June 2025
December 2025(3) 3.367
8.90
December 2025(3) 4.50
March 2027(3)
2.58
November 2037(4) 3.015
April 2038(5)
August 2085
3.37
Floating
Terms(1)
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. Redeemed 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.
2018
Carrying
value(2)
2017
Carrying
value(2)
$ 1,740
259
$ 1,756
260
729
1,645
1,195
–
–
737
1,613
1,219
113
110
130
$ 5,698
127
$ 5,935
(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 $5.00 (subject to, in each case, adjustments in certain events as set out in the respective prospectus supplements),
and (ii) the current market price of the Bank’s common shares at the time of the trigger event (10-day weighted average), where applicable converted from CAD to USD.
(4) On November 29, 2017, the Bank redeemed all outstanding 3.015% subordinated debentures due November 30, 2038 at their par value of JPY 10 billion plus accrued interest.
(5) On April 9, 2018, the Bank redeemed all outstanding 3.370% subordinated debentures due April 9, 2038 at their par value of JPY 10 billion plus accrued interest.
204 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
22 Other Liabilities
As at October 31 ($ millions)
Accrued interest
Accounts payable and accrued expenses
Current tax liabilities
Deferred tax liabilities (Note 27)
Gold and silver certificates and bullion
Margin and collateral accounts
Segregated fund liabilities
Payables to brokers, dealers and clients
Provisions (Note 23)(1)
Allowance for credit losses on off-balance sheet exposures - IFRS 9 (Note 13)
Allowance for credit losses on off-balance sheet exposures - IAS 39(1)
Pension liabilities (Note 28)
Other liabilities of subsidiaries and structured entities
Other
Total
(1) Prior year amounts have been reclassified to conform with current period presentation.
23 Provisions
($ millions)
As at November 1, 2016
Provisions made during the year
Provisions utilized / released during the year
Balance as at October 31, 2017
Provisions made during the year
Provisions utilized / released during the year
Balance as at October 31, 2018
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
2018
2017
$
2,634
6,198
435
1,205
5,019
6,523
2,736
564
181
74
n/a
593
19,933
6,649
$
2,172
5,867
408
697
6,819
7,129
–
796
213
n/a
120
808
12,954
5,331
$ 52,744
$ 43,314
Restructuring
$
$
$
277
–
(174)
103
–
(79)
24
Litigation &
other
$
$
$
121
27
(38)
110
79
(32)
157
Total
398
27
(212)
213
79
(111)
181
$
$
$
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, 2018, $24 million of
the restructuring provision remains.
Litigation and Other
Other primarily includes provisions related to litigation. In the ordinary course of business, the Bank and its subsidiaries are routinely defendants in, or parties
to a number of pending and threatened legal actions and regulatory proceedings, including actions brought on behalf of various classes of claimants. In view
of the inherent difficulty of predicting the outcome of such matters, the Bank cannot state what the eventual outcome of such matters will be. However,
based on current knowledge, management does not believe that liabilities, if any, arising from pending litigation or regulatory proceedings will have a
material adverse effect on the Consolidated Statement of Financial Position or results of operations of the Bank.
Legal provisions are established when it becomes probable that the Bank will incur an expense related to a legal action and the amount can be reliably
estimated. Such provisions are recorded at the best estimate of the amount required to settle any obligation related to these legal actions as at the
balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Management and internal and external experts are
involved in estimating any amounts that may be required. The actual costs of resolving these claims may vary significantly from the amount of the
legal provisions. The Bank’s estimate involves significant judgement, given the varying stages of the proceedings, the fact that the Bank’s liability, if
any, has yet to be determined and the fact that the underlying matters will change from time to time. As such, there is a possibility that the ultimate
resolution of those legal actions may be material to the Bank’s consolidated results of operations for any particular reporting period.
24 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:
As at October 31 ($ millions)
Number of shares
Amount
Number of shares
Amount
Outstanding at beginning of year
Issued in relation to share-based payments, net (Note 26)
Issued in relation to the acquisition of a subsidiary or associated corporation
Repurchased for cancellation under the Normal Course Issuer Bid
Outstanding at end of year
1,199,231,715
2,238,468
33,788,141
(8,230,700)
1,227,027,624(1)
$ 15,644
135
2,573
(118)
$ 18,234
1,207,893,604
5,338,111
–
(14,000,000)
1,199,231,715(1)
$ 15,513
313
–
(182)
$ 15,644
(1)
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
2018, the number of such shares bought and sold was 14,667,143 (2017 – 15,856,738).
2018
2017
2 0 1 8 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
Dividend
The dividends paid on common shares in fiscal 2018 and 2017 were $3,985 million ($3.28 per share) and $3,668 million ($3.05 per share),
respectively. The Board of Directors approved a quarterly dividend of 85 cents per common share at its meeting on November 26, 2018. This quarterly
dividend applies to shareholders of record at the close of business on January 2, 2019, and is payable January 29, 2019.
Common shares issued
On May 1, 2018, the Bank issued 11,133,141 common shares at a price of $78.86 per common share in connection with the acquisition of
Jarislowsky Fraser. As a result of the issuance, the Bank recorded an increase to equity – common shares of $878 million.
On June 8, 2018, the Bank completed its public offering of 22,655,000 common shares, at a price of $76.15 per common share. As a result of the
public offering, the Bank recorded an increase to equity – common shares of $1,696 million, net of transaction costs of $29 million. The Bank has
used the proceeds of the public offering to partially fund the acquisition of MD Financial Management.
Normal Course Issuer Bid
On May 29, 2018, the Bank announced that OSFI and TSX approved a normal course issuer bid (the “2018 NCIB”) pursuant to which it may
repurchase for cancellation up to 24 million of the Bank’s common shares. Purchases under the 2018 NCIB will terminate upon earlier of: (i) the Bank
purchasing the maximum number of common shares under the 2018 NCIB, (ii) the Bank providing a notice of termination, or (iii) June 3, 2019. On a
quarterly basis, the Bank will notify OSFI prior to making purchases. Under the 2018 NCIB, the Bank has cumulatively repurchased and cancelled
approximately 5.98 million common shares at an average price of $75.85 per share.
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. The 2017 NCIB terminated on June 1, 2018.
Under the 2017 NCIB, the Bank cumulatively repurchased and cancelled approximately 6.25 million common shares at an average price of $76.41 per
share.
During the year ended October 31, 2018, under normal course issuer bids, the Bank repurchased and cancelled approximately 8.23 million common
shares (2017 – 14 million) at a volume weighted average price of $76.77 per share (2017 – $72.09) for a total amount of $632 million (2017 – $1,009
million). Approximately 2 million of the common shares purchased were pursuant to a private agreement with an arm’s length third party seller and at
a discount to the prevailing market price of the Bank’s common shares on the TSX at the time of the purchases.
Non-viability Contingent Capital
The maximum number of common shares issuable on conversion of NVCC subordinated debentures, NVCC subordinated additional tier 1 capital
securities and NVCC preferred shares as at October 31, 2018 would be 1,835 million common shares (2017 – 1,757 million common shares) based on
the floor price and excluding the impact of any accrued and unpaid interest and any declared but unpaid dividends (refer to Note 21 – Subordinated
debentures and Note 24(b) – Preferred shares and Other Equity Instruments for further details).
(b) Preferred shares and other equity instruments
Preferred shares
Authorized:
An unlimited number of preferred shares without nominal or par value.
Issued and fully paid:
2018
2017
As at October 31 ($ millions)
Preferred shares:(a)
Number
of shares
Amount
Series 18(b)
Series 19(b)
Series 20(c)
Series 21(c)
Series 22(d)(e)
Series 23(d)(e)
Series 30(d)(f)
Series 31(d)(f)
Series 32(d)(g)
Series 33(d)(g)
Series 34(d)(h)(i)
Series 36(d)(h)(j)
Series 38(d)(h)(k)
Series 40(d)(h)(l)
–
–
–
–
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
12,000,000
–
–
–
–
234
66
154
111
279
130
350
500
500
300
Dividends
declared
per share
0.418750
0.374547
0.902500
0.691967
0.957500
0.736967
0.455000
0.516968
0.515752
0.601968
1.375000
1.375000
1.212500
–
Conversion
feature
Number
of shares
Amount
–
–
–
–
Series 23
Series 22
Series 31
Series 30
Series 33
Series 32
Series 35
Series 37
Series 39
Series 41
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
0.837500
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
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
–
Total preferred shares
104,945,767
$ 2,624
120,745,767
$ 3,019
206 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
Terms of preferred shares
Preferred shares(a):
Series 18(b)
Series 19(b)
Series 20(c)
Series 21(c)
Series 22(d)(e)
Series 23(d)(e)
Series 30(d)(f)
Series 31(d)(f)
Series 32(d)(g)
Series 33(d)(g)
Series 34(d)(h)(i)
Series 36(d)(h)(j)
Series 38(d)(h)(k)
Series 40(d)(h)(l)
First issue date
Issue
price
Initial
dividend
Initial dividend
payment date
Rate
reset
spread
Redemption date
Redemption
price
March 25, 2008
April 26, 2013
June 10, 2008
October 26, 2013
September 9, 2008
January 26, 2014
25.00
25.00
25.00
25.00
25.00
25.00
0.431500
0.189250
0.167800
0.167875
0.482900
0.173875
July 29, 2008
July 29, 2013
July 29, 2008
January 29, 2014
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 28, 2011
February 2, 2016
25.00
25.00
0.215410
0.105690
April 27, 2011
April 27, 2016
December 17, 2015
March 14, 2016
September 16, 2016
October 12, 2018
25.00
25.00
25.00
25.00
0.497300
0.508600
0.441800
0.362100
April 27, 2016
July 27, 2016
January 27, 2017
January 29, 2019
April 26, 2018
0.00%
0.00%
April 26, 2018
0.00% October 26, 2018
0.00% October 26, 2018
1.88% January 26, 2019
1.88% January 26, 2014 to
January 26, 2019
1.00%
April 26, 2020
1.00% April 26, 2015 to
April 26, 2020
1.34% February 2, 2021
1.34% February 2, 2016 to
February 2, 2021
April 26, 2021
4.51%
July 26, 2021
4.72%
4.19% January 27, 2022
2.43% January 27, 2024
25.00
25.00
25.00
25.00
25.00
25.50
25.00
25.50
25.00
25.50
25.00
25.00
25.00
25.00
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
(a) 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 22, 30 and 32) and the Non-cumulative 5-Year Rate Reset Preferred Shares Non
Viability Contingent Capital (NVCC) (Series 34, 36, 38, and 40) 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 23, 31, 33, 35, 37, 39, and 41 are payable
quarterly, as and when declared by the Board. Dividends on the Non-cumulative 5-Year Rate Reset Preferred Shares (Series 23, 31 and 33) and
the Non-cumulative 5-Year Rate Reset Preferred Shares NVCC (Series 35, 37, 39, and 41) 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 April 26, 2018, the Bank redeemed all outstanding Non-cumulative Preferred Shares Series 18 and Series 19 and paid dividends of $0.209375
and $0.181788 per share, respectively.
(c) On October 26, 2018, the Bank redeemed all outstanding Non-Cumulative Preferred Shares 20 and 21 and paid a dividend of $0.225625 and
$0.187403, respectively, 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 22 and 23, 30 and
31, 32 and 33, 34 and 35, 36 and 37, 38 and 39, and 40 and 41, 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 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.
(f) 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.
(g) 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, 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
2 0 1 8 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
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.
(h) These preferred shares contain NVCC provisions necessary for the shares to qualify as Tier 1 regulatory capital under Basel III.
(i) 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 every five years thereafter, and for Series 35 preferred shares
(NVCC), if applicable, on April 26, 2026 and every five years thereafter, at $25.00 per share, together with declared and unpaid dividends.
(j) 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 every five years thereafter, and for Series 37 preferred
shares, if applicable, on July 26, 2026 and every five years thereafter, at $25.00 per share, together with declared and unpaid dividends.
(k) 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 every five years thereafter, and for
Series 39 preferred shares, if applicable, on January 27, 2027 and every five years thereafter, at $25.00 per share, together with declared and
unpaid dividends.
(l) On October 12, 2018, the Bank issued 12 million Non-Cumulative 5-year Rate Reset Preferred Shares Series 40 (NVCC) for $300 million. The
initial dividend, if declared, will be payable on January 29, 2019. Holder of Series 40, Non-Cumulative 5-Year Rate Reset Preferred Shares (NVCC)
will have the option to convert shares into equal number of Non-Cumulative Floating Rate Preferred Shares Series 41 (NVCC), on January 27,
2024 and on January 27 every five years thereafter. With regulatory approval, Series 40 may be redeemed by the Bank on January 27, 2024 and
every five years thereafter, and for Series 41, if applicable, on January 27, 2029 and every five years thereafter, at $25.00 per share together with
declared and unpaid dividends.
Under NVCC provisions, NVCC preferred shares Series 34, 35, 36, 37, 38, 39, 40 and 41, 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, 39, 40 and 41, 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).
The terms of the notes are described below:
(cid:129) 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%.
(cid:129) 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.
(cid:129) 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.
(cid:129) The notes are the Bank’s direct unsecured obligations, ranking subordinate to all of the Bank’s subordinated indebtedness.
(cid:129) 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.
During the year ended October 31, 2018, the Bank paid interest of US$58 million (2017 - nil) in respect of these notes.
(c) Restrictions on dividend payments
Under the Bank Act, the Bank is prohibited from declaring any dividends on its common or preferred shares when the Bank is, or would be placed by
such a declaration, in contravention of the capital adequacy, liquidity or any other regulatory directives issued under the Bank Act. In addition,
common share dividends cannot be paid unless all dividends to which preferred shareholders are then entitled have been paid or sufficient funds have
been set aside to do so.
208 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
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.
25 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.
The Bank’s regulatory capital ratios were as follows:
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
As at October 31 ($ millions)
Capital
Common Equity Tier 1 Capital
Net Tier 1 Capital
Total regulatory capital
Risk-weighted assets/exposures used in calculation of capital ratios
CET1 risk-weighted assets(1)(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
2018(3)
2017
All-in
All-in
Transitional
$
44,443
50,187
57,364
$
43,352
49,473
56,113
$
46,051
50,623
57,222
$ 400,507
400,680
400,853
1,119,099
$ 376,379
376,379
376,379
1,052,891
$ 387,292
387,292
387,292
1,053,928
11.1%
12.5%
14.3%
4.5%
11.5%
13.1%
14.9%
4.7%
11.9%
13.1%
14.8%
4.8%
(1)
In accordance with OSFI’s requirements, scalars for CVA risk-weighted assets of 0.80, 0.83 and 0.86 (0.72, 0.77 and 0.81 in 2017) 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. OSFI replaced the Basel I regulatory capital floor with a capital floor based on the Basel II standardized
approach for credit risk, effective April 30, 2018. Revised capital floor requirements also include risk-weighted assets for market risk and CVA. Under this new Basel II regulatory
capital floor requirement, the Bank does not have a capital floor add-on as at October 31, 2018 (as at October 31, 2017 – Basel I floor add-on: CET1 $12.8 billion, Tier 1
$12.6 billion, and Total Capital $12.4 billion).
(3) The Transitional approach is no longer applicable effective Fiscal 2018.
The Bank substantially exceeded the OSFI minimum capital ratios as at October 31, 2018, including the Domestic Stability Buffer requirement.
26 Share-Based Payments
(a) Stock option plans
The Bank grants stock options and stand-alone stock appreciation rights (SARs) as part of the Employee Stock Option Plan. Options to purchase
common shares and/or to receive an equivalent cash payment, as applicable, may be granted to selected employees at an exercise price of the higher
of the closing price of the Bank’s common shares on the Toronto Stock Exchange (TSX) on the trading day prior to the grant date or the volume
weighted average trading price for the five trading days immediately preceding the grant date.
Stock Options granted since December 2014 vest 50% at the end of the third year and 50% at the end of the fourth year. This change is prospective
and does not impact prior period grants. Stock Options are exercisable no later than 10 years after the grant date. In the event that the expiry date
falls within an insider trading blackout period, the expiry date will be extended for 10 business days after the end of the blackout period. As approved
by the shareholders, a total of 129 million common shares have been reserved for issuance under the Bank’s Employee Stock Option Plan of which
106.8 million common shares have been issued as a result of the exercise of options and 14 million common shares are committed under outstanding
options, leaving 8.2 million common shares available for issuance as options. Outstanding options expire on dates ranging from December 5, 2018 to
December 7, 2027.
The cost of these options is recognized on a graded vesting basis except where the employee is eligible to retire prior to a tranche’s vesting date, in
which case the cost is recognized between the grant date and the date the employee is eligible to retire.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 209
CONSOLIDATED FINANCIAL STATEMENTS
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, 2018, 3,900 Tandem SARs were outstanding (2017 – 5,900).
The share-based payment liability recognized for vested Tandem SARs as at October 31, 2018 was $0.1 million (2017 – nil). The corresponding
intrinsic value of this liability as at October 31, 2018 was $0.2 million (2017 – nil).
In 2018, an expense of $0.6 million (2017 – $0.4 million expense) was recorded in salaries and employee benefits in the Consolidated Statement of
Income. This expense is net of losses arising from derivatives used to manage the volatility of share-based payments of nil (2017 – $0.3 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, 2018 was $164 million (2017 – $177 million).
In 2018, an expense of $7 million (2017 – $7 million) was recorded in salaries and employee benefits in the Consolidated Statement of Income. As
at October 31, 2018, future unrecognized compensation cost for non-vested stock options was $4 million (2017 – $4 million) which is to be
recognized over a weighted-average period of 2.07 years (2017 – 1.90 years).
Š Stock appreciation rights
Stand-alone SARs are granted instead of stock options to selected employees in countries where local laws may restrict the Bank from issuing
shares. When a SAR is exercised, the Bank pays the appreciation amount in cash equal to the rise in the market price of the Bank’s common shares
since the grant date.
During fiscal 2018, 53,056 SARs were granted (2017 – 60,840) and as at October 31, 2018, 1,073,146 SARs were outstanding (2017 – 1,275,608),
of which 1,032,495 SARs were vested (2017 – 1,229,330).
The share-based payment liability recognized for vested SARs as at October 31, 2018 was $14 million (2017 – $31 million). The corresponding
intrinsic value of this liability as at October 31, 2018 was $27 million (2017 – $28 million).
In 2018, a benefit of $3 million (2017 – benefit of $2 million) was recorded in salaries and employee benefits in the Consolidated Statement of
Income. This benefit is net of losses arising from derivatives used to manage the volatility of share-based payment of $8 million (2017 – $20 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
2018
2017
2.26% - 2.34%
4.58%
13.75% - 28.12%
0.00 - 4.58 years
1.38% - 1.59%
3.61%
15.3% - 23.38%
0.00 - 4.53 years
$
13.39
$
25.72
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 2018 and 2017 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
2018 Grant
2017 Grant
1.73%
3.62%
15.86%
6.64 years
1.27%
3.81%
17.24%
6.67 years
$
7.68
$
6.51
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.
210 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Details of the Bank’s Employee Stock Option Plan are as follows(1):
As at October 31
Outstanding at beginning of year
Granted
Exercised as options
Exercised as Tandem SARs
Forfeited
Expired
Outstanding at end of year(2)
Exercisable at end of year(2)
Available for grant
As at October 31, 2018
Range of exercise prices
$33.89 to $47.75
$49.93 to $55.21
$55.63 to $60.67
$63.98 to $81.81
2018
2017
Number of stock
options (000’s)
Weighted average
exercise price
Number of stock
options (000’s)
Weighted average
exercise price
15,555
988
(2,238)
(19)
(146)
–
14,140
10,176
8,334
$ 57.42
81.81
51.37
41.95
65.93
–
$ 60.02
$ 55.76
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
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
1,571
1,838
4,794
5,937
14,140
0.84
3.00
4.18
6.40
4.59
$ 44.02
$ 50.30
$ 56.88
$ 69.80
$ 60.02
1,571
1,838
3,606
3,161
10,176
$ 44.02
$ 50.30
$ 55.63
$ 64.91
$ 55.76
(1) Excludes SARs.
(2)
Includes options of 3,900 Tandem SARs (2017 – 5,900) and 130,000 options originally issued under HollisWealth plans (2017 – 156,520).
(b) Employee share ownership plans
Eligible employees can contribute up to a specified percentage of salary towards the purchase of common shares of the Bank. In general, the Bank
matches 50% of eligible contributions, up to a maximum dollar amount, which is expensed in salaries and employee benefits. During 2018, the
Bank’s contributions totalled $55 million (2017 – $54 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, 2018, an aggregate of 16 million common shares were held under the employee share ownership plans (2017 – 18 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 2018, an aggregate expense of $188 million (2017 – $203 million) was recorded in salaries and employee benefits in the Consolidated Statement
of Income for these plans. This expense includes losses from derivatives used to manage the volatility of share-based payment of $85 million (2017 –
$160 million gains).
As at October 31, 2018, the share-based payment liability recognized for vested awards under these plans was $745 million (2017 – $946 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, 2018, there were 939,290 units (2017 –
755,472) awarded and outstanding of which 795,783 units were vested (2017 – 684,017).
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, 2018,
there were 314,424 units outstanding (2017 – 299,867).
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, 2018, there were 2,639,165 units
(2017 – 2,197,100) awarded and outstanding of which 1,665,885 were vested (2017 – 1,497,340).
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 211
CONSOLIDATED FINANCIAL STATEMENTS
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, 2018, there were 7,813,011 units (2017 – 8,250,143) outstanding subject to performance criteria, of which 6,403,107
units were vested (2017 – 6,718,738).
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, 2018, there were 1,251,576 units outstanding (2017 – 1,587,037). November 30, 2017
was the last grant under this plan, there will be no further grants.
27 Corporate Income Taxes
Corporate income taxes recorded in the Bank’s consolidated financial statements for the years ended October 31 are as follows:
(a) Components of income tax provision
For the year ended October 31 ($ millions)
Provision for income taxes in the Consolidated Statement of Income:
Current income taxes:
Domestic:
Federal
Provincial
Adjustments related to prior periods
Foreign
Adjustments related to prior periods
Deferred income taxes:
Domestic:
Federal
Provincial
Foreign
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
Accumulated Other Comprehensive Income
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
212 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
2018
2017
2016
$
797
633
(25)
994
(14)
$
533
424
24
903
(29)
$
467
386
4
935
(19)
2,385
1,855
1,773
34
16
(53)
33
16
129
141
70
46
(3)
$ 2,382
178
$ 2,033
257
$ 2,030
$ (136)
(193)
(329)
$
82
198
280
$
(158)
(168)
(326)
(145)
(194)
18
(10)
2
(329)
$ 2,053
275
(1)
–
1
5
280
$ 2,313
(322)
(10)
–
1
5
(326)
$ 1,704
$
$
64
(2)
(65)
(3)
$
$
191
(2)
(11)
178
$
$
372
(4)
(111)
257
(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
2018
2017
2016
Percent
of pre-tax
income
Amount
Percent
of pre-tax
income
Percent
of pre-tax
income
Amount
Amount
$ 2,943
26.5% $ 2,715
26.4% $ 2,485
26.4%
(439)
(90)
(3.9)
(0.8)
(286)
(407)
(2.8)
(3.9)
(234)
(220)
(2)
(30)
$ 2,382
(2)
–
13
(0.3)
21.5% $ 2,033
–
0.1
(4)
3
19.8% $ 2,030
(2.5)
(2.3)
–
–
21.6%
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
(c) Deferred taxes
Significant components of the Bank’s deferred tax assets and liabilities are as follows:
October 31 ($ millions)
Deferred tax assets:
Loss carryforwards
Allowance for credit losses
Deferred compensation
Deferred income
Property and equipment
Pension and other post-retirement benefits
Securities
Other
Total deferred tax assets
Deferred tax liabilities:
Deferred income
Property and equipment
Pension and other post-retirement benefits
Securities
Intangible assets
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)(1)
Statement of Income
Statement of Financial Position
For the year ended
As at
2018
2017
2018
2017
$
$
$
$
$
73
(177)
41
(68)
48
16
(17)
(235)
(319)
(22)
(93)
(12)
(8)
69
(250)
(316)
(3)
$
62
45
(25)
(124)
(19)
(6)
(17)
(169)
$
338
877
178
476
417
536
199
633
$
417
793
219
405
133
720
169
640
$ (253)
$ 3,654
$ 3,496
$ (21)
(32)
(9)
111
(53)
(427)
$ (431)
$ 178
$
156
137
110
166
1,788
564
$
133
138
136
126
1,094
853
$ 2,921
733
$
$ 2,480
$ 1,016
(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 $733
(2017 – $1,016) are represented by deferred tax assets of $1,938 (2017 – $1,713), and deferred tax liabilities of $1,205 (2017 – $697) on the Consolidated Statement of Financial
Position.
The major changes to net deferred taxes were as follows:
For the year ended October 31 ($ 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
2018
2017
$ 1,016
3
193
(493)
14
$ 1,410
(178)
(198)
–
(18)
$
733
$ 1,016
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 $14 million (October 31, 2017 – $82 million). The amount related to unrecognized losses is $7 million,
which will expire as follows: $1 million in 2020 and beyond and $6 million in 2023.
Included in the net deferred tax asset are tax benefits of $92 million (2017 – $92 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, 2018 is approximately $33 billion (2017 – $27 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
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 213
CONSOLIDATED FINANCIAL STATEMENTS
prospectively addressed by recently enacted rules which had been introduced in the 2015 Canadian federal budget. In June 2018, the Bank received a
reassessment of $211 million for tax and interest in respect of the same circumstances for the 2013 taxation year. 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.
28 Employee Benefits
The Bank sponsors a number of employee benefit plans, including pensions (defined benefit and defined contribution) and other benefit plans (post-
retirement benefits and other long-term employee benefits) for most of its employees globally. The information presented below relates to the Bank’s
principal plans; other plans operated by certain subsidiaries of the Bank are not considered material and are not included in these disclosures.
Global pension plans
The principal pension plans include plans in Canada, the US, Mexico, the UK, Ireland, Jamaica, Trinidad & Tobago and other countries in the
Caribbean in which the Bank operates. The Bank has a strong and well defined governance structure to manage these global obligations. The
investment policy for each principal plan is reviewed periodically and all plans are in good standing with respect to legislation and local regulations.
Actuarial valuations for funding purposes for the Bank’s funded pension plans are conducted as required by applicable legislation. The purpose of the
actuarial valuation is to determine the funded status of the plans on a going-concern and statutory basis and to determine the required contributions.
The plans are funded in accordance with applicable pension legislation and the Bank’s funding policies such that future benefit promises based on
plan provisions are well secured. The assumptions used for the funding valuations are set by independent plan actuaries on the basis of the
requirements of the local actuarial standards of practice and 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) which was recently amended to include a defined
contribution pension plan for employees in Canada hired on or after May 1, 2018 (the defined benefit provision of the pension plan is closed to
employees hired on or after May 1, 2018). As the administrator of the SPP, the Bank has established a well-defined governance structure and policies
to maintain 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.
(cid:129) 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.
(cid:129) 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.
(cid:129) 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.
(cid:129) 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, 2017. 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 is 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. 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 the
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:
(cid:129) there is a decline in discount rates; and/or
(cid:129) plan assets returns are less than expected; and/or
(cid:129) plan members live longer than expected; and/or
(cid:129) 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.
214 | 2 0 1 8 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, 2018
Percentage of total benefit obligations
Percentage of total plan assets
Percentage of total benefit expense(1)
For the year ended October 31, 2017
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
70% 14%
72%
9%
82% 16%
16%
19%
2%
58%
16%
39%
42%
84%
61%
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%
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) 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 2018, and the two prior years.
Contributions to the principal plans for the year ended October 31 ($ millions)
2018
2017
2016
Defined benefit pension plans (cash contributions to fund the plans, including paying beneficiaries under the
unfunded pension arrangements)
SPP (excluding DC provision)
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)
$ 238
78
61
41
$ 418
$ 286
185
51
35
$ 557
$ 187
77
45
31
$ 340
(1) Based on preliminary estimates, the Bank expects to make contributions of $238 to the SPP (excluding the DC provision), $51 to all other defined benefit pension plans, $65 to
other benefit plans and $63 to all other defined contribution plans for the year ending October 31, 2019.
Funded and unfunded plans
c)
The excess (deficit) of the fair value of assets over the benefit obligation at the end of the year includes the following amounts for plans that are
wholly unfunded and plans that are wholly or partly funded.
As at October 31 ($ millions)
2018
2017
2016
2018
2017
2016
Pension plans
Other benefit plans
Benefit obligation
Benefit obligation of plans that are wholly unfunded
Benefit obligation of plans that are wholly or partly funded
$
400
7,868
$
418
8,424
$
408
8,731
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
$ 7,868
8,037
$ 8,424
8,329
$ 8,731
7,770
(95)
418
$
(961)
408
$
169
400
$ (231)
(2)
$
$
$
$
$
1,101
273
$ 1,324
334
$ 1,310
372
273
240
(33)
1,101
$
$
334
266
(68)
1,324
$
$
372
284
(88)
1,310
(513)
(39)
$ (1,369)
(60)
$ (1,134)
–
$ (1,392)
–
$ (1,398)
–
Net asset (liability) at end of year
$ (233)
$
(552)
$ (1,429)
$ (1,134)
$ (1,392)
$ (1,398)
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 215
CONSOLIDATED FINANCIAL STATEMENTS
d)
Financial information
The following tables present financial information related to the Bank’s principal plans.
Pension plans
Other benefit plans
2018
2017
2016
2018
2017
2016
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 acquisition
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 (less than) interest income on
fair value of assets
Employer contributions
Employee contributions
Benefits paid
Administrative expenses
Business acquisition
Settlements
Foreign exchange
Fair value of assets at end of year
Funded status
Excess (deficit) of fair value of assets over benefit obligation at
end of year
Effect of asset limitation and minimum funding requirement(1)
Net asset (liability) at end of year
Recorded in:
Other assets in the Bank’s Consolidated Statement of Financial
Other liabilities in the Bank’s Consolidated Statement of
Position
Financial Position
Net asset (liability) at end of year
Annual benefit expense
Current service cost
Net interest expense (income)
Administrative expenses
Past service costs
Amount of settlement (gain) loss recognized
Remeasurement of other long-term benefits
Benefit expense (income) recorded in the Consolidated
Statement of Income
Defined contribution benefit expense
Remeasurements
(Return) on plan assets in excess of interest income on fair value
of assets
Actuarial loss (gain) on benefit obligation
Change in the asset limitation
Remeasurements recorded in OCI
Total benefit cost
Additional details on actual return on assets and actuarial
(gains) and losses
Actual return on assets (net of administrative expenses)
Actuarial (gains) and losses from changes in demographic
Actuarial (gains) and losses from changes in financial
assumptions
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
$ 8,842
334
309
22
(1,012)
(495)
5
264
(2)
1
$ 8,268
8,329
305
(166)
316
22
(1,012)
(14)
251
(2)
8
$ 8,037
(231)
(2)
(233)
360
(593)
(233)
334
7
12
5
–
–
358
41
166
(495)
(40)
(369)
30
$
$
$
$
$
$
$
$
$ 9,139
330
297
24
(724)
(46)
–
–
(157)
(21)
$ 8,842
7,770
273
700
471
24
(724)
(13)
–
(157)
(15)
$ 8,329
(513)
(39)
(552)
256
(808)
(552)
330
29
11
–
–
–
370
35
(700)
(46)
(25)
(771)
(366)
$
$
$
$
$
$
$ 8,113
284
314
24
(593)
1,119
(16)
–
–
(106)
$ 9,139
7,615
310
275
264
24
(593)
(12)
–
–
(113)
$ 7,770
$ 1,658
30
70
–
(90)
(96)
(196)(2)
6
–
(8)
$ 1,374
$ 1,682
39
72
–
(76)
(36)
4
1
–
(28)
$ 1,658
$ 1,639
39
77
–
(71)
95
(77)
9
–
(29)
$ 1,682
266
20
(11)
61
–
(90)
–
–
–
(6)
240
284
19
1
51
–
(76)
–
–
(1)
(12)
266
307
22
5
45
–
(71)
–
2
–
(26)
284
$
$
$
(1,369)
(60)
$ (1,429)
(1,134)
–
$ (1,134)
(1,392)
–
$ (1,392)
(1,398)
–
$ (1,398)
184
–
1
–
(1,613)
$ (1,429)
(1,134)
$ (1,134)
(1,393)
$ (1,392)
(1,398)
$ (1,398)
284
9
13
(16)
–
–
290
31
(275)
1,119
18
862
$
$
$
$ 1,183
30
50
–
(196)(2)
–
(10)
$
$
(126)
–
11
(86)
–
(75)
(201)
9
(23)
(92)
19
3
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
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)
–
–
–
–
–
–
–
$
$
$
$
$
$
125
$
960
$
573
(148)
(548)
201
377
4
39
3
(40)
–
2
(6)
(71)
31
457
4
60
5
(25)
(1)
39
$
9
1,116
(6)
410
5
41
5
18
(4)
60
$
(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.
(2) The past service cost for other benefit plans includes a decrease of $203 million in the first quarter of fiscal 2018, related to modifications to the Bank’s postretirement benefits plan.
216 | 2 0 1 8 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, 2018 is 14.4 years (2017 – 15.3 years, 2016 – 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
2018
2017
2016
2018
2017
2016
57% 58% 60%
9% 29% 33%
43% 42% 40% 91% 71% 67%
100% 100% 100% 100% 100% 100%
26% 27% 29% 54% 55% 57%
74% 73% 71% 46% 45% 43%
100% 100% 100% 100% 100% 100%
45% 48% 33% 34% 35% 38%
55% 52% 67% 66% 65% 62%
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
Key assumptions (%)
f)
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
2018
2017
2016
2018
2017
2016
4.35% 3.90% 3.86% 5.54% 4.86% 4.74%
4.10% 3.60% 3.60% 3.96% 3.53% 3.42%
2.80% 2.76% 2.72% 3.83% 4.07% 4.09%
3.90% 3.86% 4.64% 4.86% 4.74% 5.33%
3.55% 3.33% 4.03% 4.60% 4.42% 4.91%
4.04% 4.01% 4.83% 5.11% 5.09% 5.62%
3.77% 3.64% 4.31% 5.04% 4.94% 5.56%
3.60% 3.60% 4.40% 3.53% 3.42% 4.27%
3.20% 3.00% 3.70% 3.18% 2.98% 3.67%
3.70% 3.70% 4.60% 3.76% 3.75% 4.54%
3.40% 3.30% 4.00% 3.66% 3.56% 4.44%
2.76% 2.72% 2.75% 4.07% 4.09% 4.41%
n/a
n/a
n/a
23.3
24.4
24.3
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
24.4
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
5.81% 5.99% 6.12%
4.66% 4.93% 4.93%
2040
2030
2030
23.3
24.4
24.3
25.3
21.3
23.8
21.7
24.0
22.7
24.4
24.3
25.9
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
(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 8 S C O T I A B A N K A N N U A L R E P O R T | 217
CONSOLIDATED FINANCIAL STATEMENTS
Sensitivity analysis
g)
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, 2018 ($ 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
$ 1,383
78
n/a
n/a
151
2
4
$ 122
9
n/a
n/a
10
–
–
$ 189
1
132
(106)
20
2
4
$ 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 not
common, and typically reflect a change in the pension plan’s situation (e.g. plan amendments) and/or in the investment strategy. 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, 2018
Asset category %
Cash and cash equivalents
Equity investments
Fixed income investments
Property
Other
Total
218 | 2 0 1 8 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
2018
Actual
2017
Actual
2016
Actual
2018
Actual
2017
Actual
2016
4%
2%
2%
1%
1%
2%
36%
12%
48%
9%
29%
38%
–%
1%
1%
43%
16%
59%
5%
26%
31%
–%
–%
–%
44%
16%
60%
4%
27%
31%
–%
–%
–%
42%
2%
44%
34%
21%
55%
–%
–%
–%
46%
–%
46%
32%
21%
53%
–%
–%
–%
45%
–%
45%
29%
24%
53%
–%
–%
–%
–%
9%
9%
–%
–%
–%
100% 100% 100% 100% 100% 100%
–%
8%
8%
1%
6%
7%
–%
–%
–%
–%
–%
–%
Pension plans
Other benefit plans
–%
48%
42%
2%
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
29 Operating Segments
Scotiabank is a diversified financial services institution that provides a wide range of financial products and services to retail, commercial and corporate
customers around the world. The Bank’s businesses are grouped into three business lines: Canadian Banking, International Banking and Global
Banking and Markets. Other smaller business segments are included in the Other segment. The results of these business segments are based upon the
internal financial reporting systems of the Bank. The accounting policies used in these segments are generally consistent with those followed in the
preparation of the consolidated financial statements as disclosed in Note 3. Notable accounting measurement differences are:
(cid:129) 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.
(cid:129) 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, 2018(1)
Taxable equivalent basis ($ millions)
Net interest income(3)
Non-interest income(4)
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
7,898
5,452
13,350
794
460
6,194
1,538
International
Banking
Global Banking
and Markets
Other(2)
Total
$
7,322
4,111
11,433
1,867
304
5,807
706
$ 1,454
3,074
$ (483)
(53)
$ 16,191
12,584
4,528
(50)
69
2,164
587
(536)
–
15
45
(449)
28,775
2,611
848
14,210
2,382
$
4,364
$
2,749
$ 1,758
$ (147)
$
8,724
–
4,364
342
254
176
2,573
168
131
–
1,758
321
265
–
(147)
115
232
176
8,548
946
882
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4).
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
(2)
non-interest income and provision for income taxes for the year ended October 31, 2018 amounting to $112 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 – $93; International Banking – $643 and Other – $(177).
(3)
(4)
For the year ended October 31, 2017
Taxable equivalent basis ($ 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
$ 6,726
3,688
10,414
1,294
283
5,381
828
$ 1,336
3,288
4,624
42
55
2,105
604
Other(1)
$ (390)
(344)
Total
$ 15,035
12,120
(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 – $(141).
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 219
CONSOLIDATED FINANCIAL STATEMENTS
For the year ended October 31, 2016
Taxable equivalent basis ($ 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
$ 6,359
3,482
$ 1,293
3,139
9,841
1,281
265
5,258
707
4,432
249
68
1,972
572
Other(1)
$ (384)
273
Total
$ 14,292
12,058
(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 – $(137).
Geographical segmentation
The following table summarizes the Bank’s financial results by geographic region. Revenues and expenses which have not been allocated back to
specific operating business lines are reflected in corporate adjustments.
For the year ended October 31, 2018 ($ millions)(1)(2)
Canada
Mexico
Peru
Chile
Colombia
Net interest income
Non-interest income(2)
Total revenues(3)
Provision for credit losses
Non-interest expenses
Income tax expense
Subtotal
Net income attributable to
non-controlling interests in
subsidiaries
Total
Corporate adjustments
Net income attributable to equity
holders of the Bank
Total average assets ($ billions)
Corporate adjustments
Total average assets, including
corporate adjustments
United
States
$ 691
843
1,534
(34)
701
220
647
$
7,823
7,040
14,863
802
7,591
1,596
4,874
$ 1,561
613
$ 1,378
662
$ 1,117
565
2,174
239
1,196
76
663
2,040
351
770
235
684
1,682
498
837
51
296
Other
International
$ 2,825
2,612
5,437
244
3,148
451
1,594
Total
$ 16,234
12,819
29,053
2,611
14,966
2,668
8,808
103
176
$ 1,491
$
8,632
$ 839
484
1,323
511
723
39
50
16
34
–
–
17
12
28
$
4,874
$ 647
$
646
$
672
$
268
$
$
548
$ 119
$
32
$
24
$
33
$
12
$
161
(84)
$
$
$
8,548
929
17
946
(1) The amounts for the year ended October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated (refer to Notes 3 and 4).
(2)
(3) Revenues are attributed to countries based on where services are performed or assets are recorded.
Includes net income from investments in associated corporations for Canada – $93; Peru – $9 and Other International – $634.
220 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
For the year ended October 31, 2017 ($ millions)
Canada
Net interest income
Non-interest income(1)
Total revenues(2)
Provision for credit losses
Non-interest expenses
Income tax expense
Subtotal
Net income attributable to
non-controlling interests in
subsidiaries
Total
Corporate adjustments
Net income attributable to equity
holders of the Bank
Total average assets ($ billions)
Corporate adjustments
Total average assets, including
corporate adjustments
United
States
460
830
1,290
(14)
606
147
551
Mexico
Peru
$ 1,380
536
$ 1,287
635
$
1,916
193
1,123
125
475
1,922
329
762
225
606
Chile
817
409
1,226
145
630
77
374
Colombia
$
710
455
1,165
337
620
71
137
Other
International
$ 2,999
2,502
5,501
353
3,069
506
1,573
Total
$ 15,093
12,291
27,384
2,249
14,460
2,217
8,458
$
7,440
6,924
$
14,364
906
7,650
1,066
4,742
–
–
12
11
53
$
4,742
$
551
$
463
$
595
$
321
$
60
77
102
238
$ 1,471
$
8,220
$
539
$
111
$
28
$
24
$
23
$
11
$
162
(215)
8,005
898
15
913
$
$
$
Includes net income from investments in associated corporations for Canada – $66; Peru – $6 and Other International – $476.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
For the year ended October 31, 2016 ($ millions)
Net interest income
Non-interest income(1)
Total revenues(2)
Provision for credit losses
Non-interest expenses
Income tax expense
Subtotal
Net income attributable to non-controlling interests in
subsidiaries
Total
Corporate adjustments
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
4,465
450
1,778
225
1,121
69
363
1,831
315
740
201
575
Chile
763
325
1,088
113
605
45
325
Colombia
Other
International
Total
$
674
419
1,093
320
550
89
134
93
41
$ 2,950
2,409
$ 14,343
12,071
5,359
401
3,036
497
1,425
26,414
2,362
14,024
2,291
7,737
99
251
$ 1,326
$
7,486
–
–
9
12
38
$
4,465 $
450 $
354 $
563
$
287
$
$
529 $
126 $
27 $
23
$
20
$
10
$
165
(369)
7,117
900
14
914
$
$
$
Includes net income from investments in associated corporations for Canada – $78; Peru – $5 and Other International – $468.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
30 Related Party Transactions
Compensation of key management personnel of the Bank
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank,
directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and
Chief Executive Officer and Group Heads.
For the year ended October 31 ($ 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.
2018
2017
$ 18
27
4
$ 49
$ 17
25
3
$ 45
Directors can use some or all of their director fees earned to buy common shares of the Bank at market rates through the 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
26 for further details of these plans.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 221
CONSOLIDATED FINANCIAL STATEMENTS
Loans and deposits of key management personnel
As at October 31 ($ millions)
Loans
Deposits
2018
$ 13
6
$
2017
$ 6
$ 8
The Bank’s committed credit exposure to companies controlled by directors totaled $132.4 million as at October 31, 2018 (2017 – $145.2 million),
while actual utilized amounts were $23.9 million (2017 – $11.5 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as
related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions
and were recorded as follows:
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
2018
2017
2016
$ (64)
702
151
123
$ (46)
703
217
114
$ (45)
788
338
99
Scotiabank principal pension plan
The Bank manages assets of $3.8 billion (2017 – $3.0 billion) which is a portion of the Scotiabank principal pension plan assets and earned
$5.0 million (2017 – $3.7 million) in fees.
222 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
31 Principal Subsidiaries and Non-Controlling Interests in Subsidiaries
(a) Principal subsidiaries(1)
The following table presents the major operating subsidiaries the Bank owns, directly or indirectly. All of these subsidiaries are included in the Bank’s
consolidated financial statements.
As at October 31 ($ millions)
Canadian
1832 Asset Management L.P.
BNS Investments Inc.
Montreal Trust Company of Canada
National Trust Company(2)
Roynat Inc.
Scotia Capital Inc.
Scotia Dealer Advantage Inc.
Scotia Life Insurance Company
Scotia Mortgage Corporation
Scotia Securities Inc.
Tangerine Bank
Jarislowsky, Fraser Limited
MD Financial Management Inc.
International
Scotiabank Colpatria S.A. (formerly Banco Colpatria Multibanca Colpatria
S.A.) (51%)(3)
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. (75.5%)
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. (99.6%)
Scotiabank Europe plc
Scotiabank Peru S.A.A. (98.05%)
Principal office
Toronto, Ontario
Toronto, Ontario
Montreal, Quebec
Stratford, Ontario
Calgary, Alberta
Toronto, Ontario
Burnaby, British Columbia
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Montreal, Quebec
Ottawa, 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
Panama City, Panama
Mexico City, Mexico
Santiago, Chile
Santiago, Chile
New York, New York
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
Panama City, Panama
Montevideo, Uruguay
San Juan, Puerto Rico
San Salvador, El Salvador
London, United Kingdom
Lima, Peru
Carrying value of shares
2018
2017
$
1,524
13,870
$
2,006
13,551
415
432
1,391
592
219
588
40
3,525
947
2,612
449
239
1,024
567
189
615
34
3,488
–
–
1,221
318
19,312
1,160
303
18,223
3,901
5,100
3,544
3,325
635
642
386
1,847
223
1,710
490
1,555
686
2,432
4,877
496
1,395
659
2,400
4,518
(1) The Bank (or immediate parent of an entity) owns 100% of the outstanding voting shares of each subsidiary unless otherwise noted.
(2) Effective October 29, 2018, National Trustco Inc. was dissolved and National Trust Company is held by the Bank.
(3) Effective June 15, 2018, the name was changed to Scotiabank Colpatria S.A.
(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.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 223
CONSOLIDATED FINANCIAL STATEMENTS
Subsidiaries may have a different reporting date from that of the Bank of October 31. Dates may differ for a variety of reasons including local
reporting requirements or tax laws. In accordance with our accounting policies, for the purpose of inclusion in the consolidated financial statements
of the Bank, adjustments are made where significant for subsidiaries with different reporting dates.
(b) Non-controlling interests in subsidiaries
The Bank’s significant non-controlling interests in subsidiaries are comprised of the following entities:
Scotiabank Chile S.A.(1)
Scotiabank Colpatria S.A. (formerly Banco Colpatria Multibanca
Colpatria S.A.) (51%)(2)
Scotia Group Jamaica Limited
Scotiabank Trinidad and Tobago Limited
Other
As at and for the year ended
2018
2017
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
24.5%
$
917
$ 115
$
191
$
14
49.0%
28.2%
49.1%
0.1% -
49.0%(3)
519
340
365
311
–
17
49
18
445
300
354
302
38
17
56
8
Total
$ 2,452
$ 199
$ 1,592
$ 133
(1) Non-controlling interest holders for Scotiabank Chile S.A. have a right to sell their holding to the Bank at fair market value that can be settled at the Bank’s discretion, by issuance of
common shares or cash.
(2) Non-controlling interest holders for Scotiabank 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.
(3) Range of non-controlling interest % for other subsidiaries.
Summarized financial information of the Bank’s subsidiaries with significant non-controlling interests are as follows:
($ millions)
Total
As at and for the year ended October 31, 2018
As at and for the year ended October 31, 2017
Total
comprehensive
income
Revenue
Total assets
Total
liabilities
Revenue
Total
comprehensive
income
Total assets
Total
liabilities
$ 3,615
$ 173
$ 80,352
$ 73,449
$ 2,978
$ 567
$ 49,077
$ 42,943
32 Interest Income and Expense
The following table presents details of interest income from financial assets.
For the year ended October 31 ($ millions)
Loans at amortized cost(1)
Securities
Amortized cost(1)
FVOCI(1)
Other
Securities purchased under resale agreements and securities borrowed not at FVTPL(1)
Deposit with financial institutions(1)
Interest income
(1) The interest income on the financial assets measured at amortized cost and FVOCI is calculated using the effective interest method.
The following table presents details of interest expense from financial liabilities.
For the year ended October 31 ($ millions)
Deposits
Amortized cost(1)
FVTPL
Subordinated debentures(1)
Other
Amortized cost(1)
FVTPL
Interest expense
(1) The interest expense on the financial liabilities measured at amortized cost is calculated using the effective interest method.
224 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
2018
$ 24,991
353
1,205
213
446
859
$ 28,067
2018
$ 10,460
84
214
1,084
34
$ 11,876
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
33 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(1)
Investment management and trust(1)
Total wealth management
(1) Prior period amounts have been reclassified to conform with current period presentation.
34 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
(1) Certain comparative amounts have been restated to conform with current period presentation.
35 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
Dilutive impact of share-based payment options and others(2)
Net income attributable to common shareholders (diluted)
Weighted average number of common shares outstanding (millions)
Dilutive impact of 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)
2018
2017
2016
$ 1,656
1,366
1,191
466
4,679
678
$ 1,514
1,324
1,153
472
4,463
608
$ 1,359
1,279
1,154
436
4,228
559
$ 4,001
$ 3,855
$ 3,669
$ 1,714
895
732
$ 3,341
$ 1,639
1,047
632
$ 3,318
$ 1,624
1,034
624
$ 3,282
$
2018
272
441
231
295
181
$ 1,420
2017(1)
2016(1)
$ 474
(125)
295
250
92
$ 986
$
559
(20)
376
262
51
$ 1,228
2018
2017
2016
$ 8,361
1,213
$ 7,876
1,203
$ 6,987
1,204
$
6.90
$
6.55
$
5.80
$ 8,361
16
$ 7,876
59
$ 6,987
83
$ 8,377
$ 7,935
$ 7,070
1,213
16
1,229
1,203
20
1,223
1,204
22
1,226
$
6.82
$
6.49
$
5.77
(1) Earnings per share calculations are based on full dollar and share amounts.
(2) Certain tandem stock appreciation rights or options as well as acquisition related put/call 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.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 225
CONSOLIDATED FINANCIAL STATEMENTS
36 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
2018
2017
Maximum potential
amount of future
payments(1)
Maximum potential
amount of future
payments(1)
$ 35,376
4,043
6,969
571
$ 35,523
4,996
5,398
587
(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, 2018,
$4 million (2017 – $4 million) was included in other liabilities in the Consolidated Statement of Financial Position with respect to these guarantees.
Liquidity facilities
(ii)
The Bank’s backstop liquidity facilities are committed liquidity and provided to asset-backed commercial paper conduits, administered by the Bank.
These facilities generally provide an alternative source of financing in the event market disruption prevents the conduit from issuing commercial paper
or, in some cases, when certain specified conditions or performance measures are not met. These facilities generally have a term of up to three years.
(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, 2018, $377 million (2017 – $274 million) was included in derivative instrument liabilities in the Consolidated Statement
of Financial Position with respect to these derivative instruments.
Indemnifications
(iv)
In the ordinary course of business, the Bank enters into many contracts which contain indemnification provisions, such as purchase contracts, service
agreements, trademark licensing agreements, director / officer contracts, escrow arrangements, sales of assets or businesses, outsourcing agreements,
leasing arrangements, clearing system arrangements, securities lending agency agreements and structured transactions. The Bank cannot estimate the
maximum potential future amount that may be payable. The Bank has not made any significant payments under such indemnifications. Historically,
the Bank has not made any significant payments under these indemnities. As at October 31, 2018, $2 million (2017 – $2 million) was included in
other liabilities in the Consolidated Statement of Financial Position with respect to indemnifications.
(b) Other indirect commitments
In the normal course of business, various other indirect commitments are outstanding which are not reflected on the Consolidated Statement of
Financial Position. These may include:
(cid:129) Commercial letters of credit which require the Bank to honour drafts presented by a third-party when specific activities are completed;
(cid:129) Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financings for specific amounts
and maturities, subject to specific conditions;
(cid:129) Securities lending transactions under which the Bank, acting as principal or agent, agrees to lend securities to a borrower. The borrower must fully
collateralize the security loan at all times. The market value of the collateral is monitored relative to the amounts due under the agreements, and
where necessary, additional collateral is obtained; and
(cid:129) Security purchase commitments which require the Bank to fund future investments.
These financial instruments are subject to normal credit standards, financial controls and monitoring procedures.
226 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
The table below provides a detailed breakdown of the Bank’s other indirect commitments expressed in terms of the contractual amounts of the
related commitment or contract which are not reflected on the Consolidated Statement of Financial Position.
As at October 31 ($ millions)
Commercial letters of credit
Commitments to extend credit(1)
Original term to maturity of one year or less
Original term to maturity of more than one year
Securities lending
Securities purchase and other commitments
Total
(1)
Includes liquidity facilities.
(c)
Lease commitments
2018
$
1,046
$
2017
821
75,033
122,407
51,723
888
57,321
128,345
40,535
614
$ 251,097
$ 227,636
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
2018
420
1,196
880
2,496
$
$
$
2017
349
967
593
$
1,909
Building rent expense, included in premises and technology expense in the Consolidated Statement of Income, was $477 million (2017 – $444 million).
(d) Assets pledged and repurchase agreements
In the ordinary course of business, securities and other assets are pledged against liabilities. As well, securities are sold under repurchase agreements.
The carrying value of pledged assets and details of related activities are shown below.
As at October 31 ($ 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 15)
Assets pledged in relation to other securitization programs (Note 15)
Assets pledged under CMHC programs (Note 14)
Other
Total assets pledged
Obligations related to securities sold under repurchase agreements
Total(2)
2018
2017
$
118
3,147
1,629
3,127
7,246
128,383
30,725
6,085
23,178
963
$
25
2,653
1,195
2,181
8,126
115,987
27,806
4,801
20,471
643
$ 204,601
82,816
$ 183,888
86,789
$ 287,417
$ 270,677
(1)
(2)
Includes assets pledged in order to participate in clearing and payment systems and depositories, or pledged to have access to the facilities of central banks in foreign jurisdictions.
Includes assets that have been received from counterparties through normal course of business in securities financing and derivative transactions.
(e) Other executory contracts
Effective July 2018, the Bank has entered into an $800 million contract for naming rights of an arena for 20 years.
The Bank and its subsidiaries have also entered into other long-term executory contracts, relating to outsourced services. The significant outsourcing
arrangements have variable pricing based on utilization and are cancellable with notice.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 227
CONSOLIDATED FINANCIAL STATEMENTS
37 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, 2018:
(cid:129)
extensive risk management policies define the Bank’s risk appetite, set the limits and controls within which the Bank and its subsidiaries can
operate, and reflect the requirements of regulatory authorities. These policies are approved by the Bank’s Board of Directors, either directly
or through the Risk Committee of the Board, (the Board);
(cid:129) guidelines are developed to clarify risk limits and conditions under which the Bank’s risk policies are implemented;
(cid:129) processes are implemented to identify, evaluate, document, report and control risk. Standards define the breadth and quality of information
required to make a decision; and
compliance with risk policies, limits and guidelines is measured, monitored and reported to ensure consistency against defined goals.
(cid:129)
Further details on the fair value of financial instruments and how these amounts were determined are provided in Note 7. Note 10 provides details on
the terms and conditions of the Bank’s derivative financial instruments including notional amounts, remaining term to maturity, credit risk, and fair
values of derivatives used in trading and hedging activities.
(a) Credit risk
Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Bank. The
Bank’s Credit Risk Appetite and Credit Risk Policy are developed by its Global Risk Management (GRM) department and limits 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, and the calculation of allowance for credit losses. 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 10(c).
(i) Credit risk exposures
Credit risk exposures disclosed below are presented based on the Basel framework utilized by the Bank i.e. exposures subject to credit risk capital. The
Bank uses the Advanced Internal Ratings Based approach (AIRB) for all material Canadian, U.S., European portfolios, and effective 2011 for a
significant portion of all international corporate and commercial portfolios. The remaining portfolios, including other individual portfolios, are treated
under the standardized approach. Under the AIRB approach, the Bank uses internal risk parameter estimates, based on historical experience, for
probability of default (PD), loss given default (LGD) and exposure at default (EAD), as defined below:
(cid:129)
(cid:129)
(cid:129)
EAD: Generally represents the expected gross exposure – outstanding amount for on-balance sheet exposure and loan equivalent amount for
off-balance sheet exposure.
PD: Measures the likelihood that a borrower will default within a 1-year time horizon, expressed as a percentage.
LGD: Measures the severity of loss on a facility in the event of a borrower’s default, expressed as a percentage of exposure at default.
Under the standardized approach, credit risk is estimated using the risk weights as prescribed by the Basel framework either based on credit
assessments by external rating agencies or based on the counterparty type for non-retail exposures and product type for retail exposures. Standardized
risk weights also takes into account other factors such as specific provisions for defaulted exposures, eligible collateral, and loan-to-value for real
estate secured retail exposures.
228 | 2 0 1 8 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
Chile
Mexico
Peru
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
2018
Exposure at default(1)
2017
Drawn(2)
Undrawn
commitments
Other
exposures(3)
Total
Total
$ 146,324
22,680
188,480
357,484
59,018
3,208
5,299
67,525
$ 425,009
143,475
17,337
31,176
$ 191,988
44,517
42,100
86,617
$ 278,605
$ 703,614
$ 394,279
102,265
47,048
29,344
23,997
12,729
25,357
35,716
10,232
22,647
$
$
$
83,885
2,146
768
86,799
5,313
160
31
5,504
92,303
17,864
28,550
1,671
48,085
$
77,751
16,676
6,854
101,281
3,802
143
6
3,951
$ 105,232
–
–
–
–
$
–
–
–
48,085
$
$ 140,388
–
–
–
–
$
$ 105,232
$
89,776
33,103
1,038
1,339
1,506
486
7,041
1,676
909
3,514
$
37,748
42,771
5,066
2,611
2,992
434
10,215
910
227
2,258
$ 307,960
41,502
196,102
545,564
68,133
3,511
5,336
76,980
$ 622,544
161,339
45,887
32,847
$ 240,073
44,517
42,100
86,617
$ 326,690
$ 949,234
$ 521,803
178,139
53,152
33,294
28,495
13,649
42,613
38,302
11,368
28,419
$ 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
27,190
30,528
28,733
10,859
43,030
39,358
9,035
30,070
$ 703,614
$ 140,388
$ 105,232
$ 949,234
$ 878,413
(1) Exposure at default is presented after credit risk mitigation. Exposures exclude equity securities and other assets.
(2) Non-retail drawn includes loans, acceptances, deposits with financial institutions and FVOCI 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 (2017 – nil),
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 8 S C O T I A B A N K A N N U A L R E P O R T | 229
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, 2018 ($ 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 loans
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)
$
58,728 $
–
24
7,183
–
12
–
–
75,837
86,417
–
–
180,164
(560)
16,338
–
–
–
866
–
–
–
12
–
–
–
–
–
166,752
94,392
14,331
3,193
(786)
–
–
–
–
711
$
– $
–
–
–
–
–
–
–
–
–
1,613
687
7,748
–
–
–
–
–
–
$
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
104,010
–
–
–
37,558
–
–
–
1,754
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
$
–
3,191
$
3,541 $
–
62,269
3,191
–
6,606
–
–
–
33,937
–
–
–
–
–
–
–
–
–
–
–
85,450
7,139
454
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
85,474
14,334
454
12
8
–
805
104,018
37,558
78,396
188
14
1,467
(67)
(3,719)
(9)
2,684
4,850
17,719
17,794
253,357
96,019
16,485
191,038
(5,065)
16,329
2,684
4,850
17,719
19,371
Total
$ 425,009 $ 278,605
$ 10,048 $ 104,010
$ 37,558
$ 1,754
$ 40,543
$ 96,234
$ 45,275 $ 998,493
Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks.
Includes $82.2 billion in mortgages guaranteed by Canada Mortgage Housing Corporation including 90% of privately insured mortgages.
(1)
(2)
(3) Amounts for AIRB exposures are reported gross of allowances and amounts for standardized exposures are reported net of allowances.
Credit Risk Exposures
Other Exposures
Drawn
Other Exposures
Market Risk Exposures
As at October 31, 2017 ($ 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 loans(3)
Credit cards(3)
Business & government
Allowances for credit losses(4)
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
87,892
12,289
2,878
–
–
–
–
–
545
–
1,314
724
7,032
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
$
–
5,717
$
2,559 $
–
59,663
5,717
–
9,087
–
–
–
30,648
–
–
–
–
–
–
–
–
–
–
–
78,652
8,225
2,500
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
733
158
21
1,091
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
89,227
14,104
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) Restated to reflect the current period presentation.
(4) Amounts for AIRB exposures are reported gross of allowances and amounts for standardized exposures are reported net of allowances.
230 | 2 0 1 8 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, 2018, and October 31, 2017, 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, 2017.
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
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
$
IG Code
99 – 98
95
90
87
85
83
80
77
75
73
70
65
60
40
30
21
Drawn
77,598
35,694
25,281
21,318
21,472
22,544
26,618
20,005
13,267
5,905
2,157
892
936
526
141
938
2018
Exposure at Default(1)
Undrawn
commitments
Other
exposures(2)
$
2,758
9,315
15,394
13,714
12,861
13,230
10,019
4,944
2,717
1,049
432
105
90
41
–
130
$
17,456
19,661
25,234
12,513
9,992
7,054
2,993
1,945
3,296
566
228
146
78
9
–
110
$
Total
97,812
64,670
65,909
47,545
44,325
42,828
39,630
26,894
19,280
7,520
2,817
1,143
1,104
576
141
1,178
$
2017
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
Total
Government guaranteed residential mortgages(3)
Total
$ 275,292
82,192
$ 357,484
$ 86,799
–
$ 86,799
$ 101,281
–
$ 101,281
$ 463,372
82,192
$ 545,564
$ 429,786
91,737
$ 521,523
(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 (2017 – nil), 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 8 S C O T I A B A N K A N N U A L R E P O R T | 231
CONSOLIDATED FINANCIAL STATEMENTS
Non-retail standardized portfolio
The non-retail standardized portfolio relies on external credit ratings (e.g. S&P, Moody’s, DBRS, etc.,) of the borrower, if available, to compute
regulatory capital for credit risk. Exposures are risk-weight based on prescribed percentages and a mapping process as defined within OSFI’s Capital
Adequacy Requirements Guideline. Non-retail standardized portfolio as at October 31, 2018 comprised of drawn, undrawn and other exposures to
corporate, bank and sovereign counterparties amounted to $77 billion (October 31, 2017 – $68 billion). Within this portfolio, the majority of
Corporate/Commercial exposures are to unrated counterparties, mainly in the Caribbean and Latin American region.
(iii) Credit quality of retail exposures
The Bank’s retail portfolios consist of a number of relatively small loans to a large number of borrowers. The portfolios are distributed across Canada
and a wide range of countries. As such, the portfolios inherently have a high degree of diversification. In addition, as of October 31, 2018, 43% of
the Canadian banking residential mortgage portfolio is insured and the average loan-to-value ratio of the uninsured portion of the portfolio is 54%.
Retail AIRB portfolio
The data in the table below provides a distribution of the retail AIRB exposure within each PD range by asset class:
As at October 31 ($ millions)
Category of (PD) grades
Exceptionally Low
Very Low
Low
Medium Low
Medium
High
Extremely High
Default
Total
2018
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%
–
41,146
73,094
6,494
738
345
416
$
HELOC
–
32,079
5,130
1,068
310
185
69
Qualifying
revolving
$ 11,657
9,348
12,091
7,893
3,594
354
803
Other retail
Total
$
498
6,971
16,721
5,123
2,569
486
303
$
$
12,155
89,544
107,036
20,578
7,211
1,370
1,591
2017
Total
16,026
80,507
94,081
17,070
8,583
889
1,453
100%
195
$ 122,428
70
$ 38,911
147
$ 45,887
176
$ 32,847
588
$ 240,073
607
$ 219,216
(1) After credit risk mitigation.
Retail standardized portfolio
The retail standardized portfolio of $87 billion as at October 31, 2018 (2017 – $70 billion) was comprised of residential mortgages, personal loans,
credit cards and lines of credit to individuals, mainly in the Latin American and Caribbean region. Of the total retail standardized exposures, $45 billion
(2017 –$34 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 for capital markets related activities.
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, 2018, the approximate market value of cash and securities collateral accepted that may be sold or repledged by the Bank was
$136 billion (2017 – $115 billion). This collateral is held primarily in connection with reverse repurchase agreements, margin loans, securities lending
and derivative transactions. The Bank also borrows securities under standard securities borrowing agreements that it is able to re-pledge. Including
these borrowed securities, the approximate market value of securities collateral accepted that may be sold or re-pledged was $183 billion (2017 –
$169 billion), of which approximately $29 billion was not sold or re-pledged (2017 – $24 billion).
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 36(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 assets acquired in exchange for loans as at October 31, 2018 was $426 million (2017 – $412 million) mainly comprised of real
estate and was classified as either held for sale or held for use as appropriate.
(b) Liquidity risk
Liquidity risk is the risk that the Bank is unable to meet its financial obligations in a timely manner at reasonable prices. The Bank’s liquidity risk is
subject to extensive risk management controls and is managed within the framework of policies and limits approved by the Board. The Board receives
reports on risk exposures and performance against approved limits. The Asset-Liability Committee (ALCO) provides senior management oversight of
liquidity risk.
232 | 2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
The 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/Bank-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 10(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 protecting and 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. These calculations are based on a constant balance sheet and make no
assumptions for management actions that may mitigate the risk.
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 interest income over the next
twelve months and economic value of shareholders’ equity of an immediate and sustained 100 basis point increase and decrease in interest rates
across major currencies as defined by the Bank.
As at October 31 ($ millions)
2018
2017
100 bp increase
100 bp decrease
Canadian
dollar
$ (181)
$ 177
Net income
Other
currencies
$ 76
$ (76)
Economic value of equity
Total
$ (105)
$ 101
Canadian
dollar
$ (458)
$ 291
Other
currencies
$ (412)
$ 506
Total
$ (870)
$ 797
Net
income
$ 64
$ (67)
Economic value
of equity
$ (354)
$ 183
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 233
CONSOLIDATED FINANCIAL STATEMENTS
(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, 2018, 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 $65 million (October 31, 2017 – $58 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, 2018 would increase (decrease) the unrealized
foreign currency translation losses in the accumulated other comprehensive income in equity by approximately $384 million (2017 – $345 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 equity securities designated at FVOCI is shown in Note 12.
(iv) Trading portfolio risk management
The Bank’s policies, processes and controls for trading activities are designed to achieve a balance between pursuing profitable trading opportunities
and managing earnings volatility within a framework of sound and prudent practices. Trading activities are primarily customer focused.
Market risk arising from the Bank’s trading activities is managed in accordance with Board-approved policies and limits, including aggregate VaR and
stress testing limits.
Trading portfolios are marked-to-market in accordance with the Bank’s valuation policies. Positions are marked-to-market daily and valuations are
independently reviewed by back office, GRM or finance units on a regular basis. These units also provide profit and loss reporting, as well as VaR and
limit compliance reporting to business unit management and executive management for evaluation and action as appropriate. VaR is calculated daily
using a 99% confidence level, and a one-day holding period. This means that, once in every 100 days, the trading positions are expected to lose more
than the VaR estimate. The Bank calculates general market risk VaR using historical simulation based on 300 days of market data. For debt specific risk
VaR, the Bank uses historical resampling. The table below shows the Bank’s VaR by risk factor:
($ millions)
Credit spread plus interest rate
Credit spread
Interest rate
Equities
Foreign exchange
Commodities
Debt specific
Diversification effect
All-Bank VaR
All-Bank stressed VaR
For the year ended October 31, 2018
As at October 31, 2018
Average
High
$ 11.0
6.2
7.7
5.8
2.8
1.7
3.6
(11.7)
$ 13.2
$ 44.6
$ 11.6
7.8
9.5
3.0
3.3
1.6
3.4
(10.0)
$ 12.9
$ 42.7
$ 17.8
12.2
17.2
15.5
5.8
2.1
4.2
n/a
$ 18.4
$ 59.0
$
Low
6.9
4.8
4.3
1.2
1.1
1.0
2.6
n/a
8.6
$
$ 26.3
Below are the market risk capital requirements as at October 31, 2018.
($ millions)
All-Bank VaR
All-Bank stressed VaR
Incremental risk charge
Standardized approach
Total market risk capital
(1) Equates to $8,357 million of risk-weighted assets (2017 – $7,839 million).
234 | 2 0 1 8 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, 2017
$ 10.1
6.9
8.4
3.2
2.9
1.3
3.3
(10.3)
$ 10.6
$ 34.7
$
$
124
419
95
31
669(1)
(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 businesses 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.
38 Business Combinations
Acquisitions that closed in 2018
Jarislowsky, Fraser Limited, Canada
On May 1, 2018, the Bank completed the acquisition of Jarislowsky, Fraser Limited, an independent investment firm with approximately $40 billion in
assets under management on behalf of institutional and high net worth clients. The purchase price of $978 million was satisfied primarily by the
issuance of 11.1 million common shares valued at $878 million and cash of $44 million. The fair value of the common shares issued is based on the
quoted price of the shares of the Bank as at May 1, 2018 which was $78.86. Included in this purchase price is an earn-out of an amount of
$56 million in additional common shares which may be paid based on achieving future growth targets. The acquired business forms part of the
Canadian Banking business segment.
The fair value of the identifiable net assets of Jarislowsky, Fraser Limited at the date of acquisition was:
C
O
N
S
O
L
I
D
A
T
E
D
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
($ million)
Total net assets acquired
Intangible assets
Finite life intangible asset arising on acquisition(1)
Indefinite life intangible assets arising on acquisition(2)
Deferred tax liability
Goodwill arising on acquisition
Purchase consideration transferred
(1) Comprised of customer relationship intangible of $255.
(2) Comprised of fund management contracts of $290 and trademark of $18.
$
9
255
308
(150)
556
$ 978
Goodwill of $556 million largely reflects the value of synergies expected by combining certain operations within the Bank’s asset management
businesses as well as Jarislowsky Fraser’s strong market presence and future growth prospects.
Citibank’s consumer and small and medium enterprise operations, Colombia
On June 30, 2018, the Bank’s Colombian subsidiary, Scotiabank Colpatria S.A., completed the previously announced acquisition of Citibank’s
consumer (retail and credit cards) and small and medium enterprise operations in Colombia. The acquired business forms part of the Bank’s
International Banking business segment.
The Bank has not finalized its initial accounting for the acquisition as it is still completing its valuation of the assets acquired and liabilities assumed. As
at October 31, 2018, $2.0 billion of assets (mainly loans of $1.9 billion) and $1.4 billion of liabilities (mainly deposits of $1.3 billion) have been
recorded. Subsequent adjustment during the measurement period will occur as the Bank completes its estimation of fair values of assets acquired and
liabilities assumed.
BBVA, Chile
On July 6, 2018, the Bank acquired 68.2% of Banco Bilbao Vizcaya Argentaria, Chile, 100% of BBVA Seguros Vida S.A., 100% of Servicios
Corporativos S.A., 68.1% of Inmobiliaria e Inversiones S.A. and 4.1% of Inversiones DCV S.A. (together “BBVA Chile”) in Chile for cash consideration
of US$ 2.2 billion, following receipt of regulatory approvals in Chile and Canada. The Bank consolidated 100% of BBVA Chile’s assets and liabilities
and recorded a non-controlling interest of 31.8%. The acquired business forms part of the International Banking business segment.
On September 1, 2018, BBVA Chile merged with Scotiabank Chile. The minority shareholder in BBVA Chile paid the Bank US$ 0.4 billion to increase
their pro forma ownership of the merged entity. Subsequent to these transactions, the Bank retained control over the combined entity with 75.5% of
the total shares. Under this agreement, the non-controlling shareholders have the option to sell all or a portion of their shares to the Bank at the then
fair value, which can be settled, at the Bank’s discretion, by the issuance of common shares or cash.
Based on the current estimates of acquisition date fair values, the Bank has estimated and recorded loans of $19.9 billion, other assets of $8.4 billion
and an aggregate amount of goodwill and intangibles of $1.3 billion. Simultaneously, the Bank has recorded deposits of $13.4 billion and other
liabilities of $12.8 billion. The Bank had recorded a non-controlling interest in BBVA Chile of approximately $0.6 billion at the time of the acquisition,
which changed to approximately $0.8 billion at the time of the merger of BBVA Chile with Scotiabank Chile. The purchase price allocation is
considered to be preliminary and subsequent adjustments during the measurement period will occur as the Bank completes its estimation of fair
values of assets acquired and liabilities assumed.
MD Financial Management, Canada
On October 3, 2018, the Bank completed the previously announced acquisition of MD Financial Management (“MD Financial”) from the Canadian
Medical Association, (“CMA”), for approximately $2.7 billion, payable in cash. MD Financial is Canada’s leading provider of financial services to
physicians and their families, with approximately $49 billion in assets under management and administration. The acquired business forms part of the
Canadian Banking business segment.
On closing, the Bank and the CMA entered into a 10- year affinity agreement under which the Bank has committed to pay $115 million over the next
10 years to support the advancement of the medical profession and health care in Canada.
Based on current estimates of acquisition date fair values, the Bank has estimated and recorded approximately $1.9 billion of indefinite life intangibles,
goodwill of $1.2 billion, $70 million of finite life intangibles, $0.5 billion of deferred tax liabilities and $0.1 billion of other net assets acquired. The
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 235
CONSOLIDATED FINANCIAL STATEMENTS
purchase price allocation is considered to be preliminary and will be refined as the Bank completes its valuation of the fair value of assets acquired and
liabilities assumed.
Aggregate impact to Consolidated Income
For the year ended October 31, 2018, all four acquisitions contributed revenue of $394 million in aggregate and a net loss of $257 million in
aggregate.
The primary reason for the net loss is the recording of a provision for credit losses of $404 million ($285 million after-tax) on acquired performing
financial assets, as required under IFRS 9.
Acquisition costs directly related to the four acquisitions of $44 million are included in non-interest expenses in the Consolidated Statement of
Income.
Acquisitions announced but not closed
Banco Cencosud, Peru
On May 9, 2018, the Bank announced that Scotiabank Peru, its wholly owned subsidiary, has reached an agreement to acquire a 51% controlling
interest in Banco Cencosud, which offers credit cards and consumer loans in Peru, for approximately $130 million. Under the terms of the agreement,
the two companies will also enter into a 15-year partnership to manage the credit card business and provide additional products and services to
customers.
Subject to regulatory approvals and closing conditions the acquisition is expected to close in the first quarter of 2019.
Banco Dominicano del Progreso, Dominican Republic
On August 14, 2018, the Bank announced that it has reached an agreement to acquire Banco Dominicano del Progreso, S.A. – Banco Mu´ ltiple (Banco
Dominicano del Progreso), a bank with operations in the Dominican Republic, subject to regulatory approval. The transaction is not considered
financially material to the Bank.
Subject to regulatory approvals and closing conditions the acquisition is expected to close in the first quarter of 2019.
236 | 2 0 1 8 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 187th Annual Meeting of Holders
of Common Shares, to be held on April 9, 2019, 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 12, 2019.
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 22, Series 23, Series 30, Series 31, Series 32, Series 33, Series 34,
Series 36, Series 38, and Series 40 preferred shares of the Bank are
listed on the Toronto Stock Exchange.
Stock Symbols
STOCK
Common shares
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
Series 40, Preferred
TICKER SYMBOL
BNS
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
BNS.PR.I
CUSIP NO.
064149 10 7
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
06415E 30 3
Dividend Dates for 2019
Record and payment dates for common and preferred shares, subject
to approval by the Board of Directors.
RECORD DATE
January 2
April 2
July 2
October 1
PAYMENT DATE
January 29
April 26
July 29
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
LEGACY SENIOR DEBT/DEPOSITS
AA
DBRS
AA-
Fitch
Moody’s
Aa2
Standard & Poor’s A+
SENIOR DEBT
AA(low)
DBRS
AA-
Fitch
Moody’s
A2
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 DEBENTURES(1)
DBRS
Fitch
Moody’s
Standard & Poor’s A-
A(high)
A+
Baa1
SUBORDINATED DEBENTURES (NVCC)
A(low)
DBRS
–
Fitch
Baa1
Moody’s
Standard & Poor’s BBB+
NON-CUMULATIVE PREFERRED SHARES(1)
Pfd-2(high)
DBRS
Moody’s
Baa3(hyb)
Standard & Poor’s BBB/P-2*
NON-CUMULATIVE PREFERRED SHARES (NVCC)
Pfd-2
DBRS
Moody’s
Baa3(hyb)
Standard & Poor’s BBB-/P-2(low)*
*Canadian Scale
Credit ratings are one of the factors that impact the Bank’s access to
capital markets and the terms on which it can conduct derivatives,
hedging transactions and borrow funds. The credit ratings and outlook
that the rating agencies assign to the Bank are based on their own
views and methodologies.
The Bank continues to have strong credit ratings(2) and its deposits and
legacy senior debt are rated AA by DBRS, Aa2 by Moody’s, AA- by Fitch
and A+ by Standard and Poor’s (S&P). All four credit rating agencies
have a stable outlook on the Bank. The rating agencies took various
actions around the finalization and implementation of Canada’s bail-in
regime in 2018. On April 19, 2018, DBRS changed the Bank’s trend to
Stable from Negative (on the Long Term Issuer Ratings, Senior Debt
Ratings, and Deposits Ratings) and assigned AA (low) provisional rating
to the new Bail-inable Senior Debt to be issued after September 23,
2018, following the finalization of Canada’s impending bail-in regime.
On July 16, 2018, Moody’s upgraded the Bank’s long-term ratings by
two-notches to Aa2 from A1 and changed the trend to Stable from
Negative (on the Bank’s Long-Term Issuer Ratings, Senior Debt Ratings
and Deposit Ratings), following the finalization of Canada’s impending
bail-in regime. On September 24, 2018, Moody’s aligned the Bank’s
Issuer Rating with the A2 provisional rating of bail-inable debt to be
issued after September 23, 2018. Canadian banking peers’ ratings
were aligned in a similar manner. The Bank’s Legacy Senior Debt Rating
and Deposit Rating both remain unchanged at Aa2.
(1)
(2)
Excluding instruments with Non-Viability Contingent Capital Features
Referring to the long term deposit rating and legacy senior debt rating. Senior debt
post September 23, 2018 issued under the “bail-in” regime will be notched down
by Moody’s(A2), S&P(A-) and DBRS(AA(low)) relative to the legacy senior debt. The
Bank has not issued such bail-inable senior debt as of November 26, 2018.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 237
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.
238 | 2 0 1 8 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 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 FVOCI 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 II Regulatory Capital Floor: Since the introduction of Basel II in
2008, OSFI has prescribed a minimum regulatory capital floor for
institutions that use the advanced internal ratings-based approach for
credit risk. Effective Q2 2018, the Basel II capital floor add-on is
determined by comparing a capital requirement calculated by reference
to the Basel II standardized approach for credit risk. Revised Basel II
capital floor requirements also include risk-weighted assets for market
risk and CVA. A shortfall in the Basel III capital requirement as
compared with the Basel II floor is added to RWA.
2 0 1 8 S C O T I A B A N K A N N U A L R E P O R T | 239
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
Investors
Financial Analysts, Portfolio Managers and other Institutional Investors
Scotiabank
Scotia Plaza, 44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 775-0798
E-mail: investor.relations@scotiabank.com
Online
For product, corporate, financial and shareholder information: scotiabank.com
Global Communications
Scotiabank
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 775-0828
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
Corporate Secretary’s Department
Scotiabank
Scotia Plaza, 44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 866-3672
E-mail: corporate.secretary@scotiabank.com
240 | 2 0 1 8 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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