Banking the
Americas
Connecting Canada to the World
2019 Annual Report
Leading Bank in
the Americas
We are here for every future. We help our customers, their families and their
communities achieve success 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
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Earnings per
Share Growth*
Diluted, dollars per share
Dividend Growth
Dollars per share
Strong Capital
Position
$7.14
$3.49
CET1 Capital Ratio %
10.3
11.0
11.5
11.1
11.1
CAGR = 6%
15
15
16
16
17
17
18
18
19
19
Return on equity:*
3.5 -
3.5
6.5
3.0 -
3.0
6.0
2.5 -
2.5
5.5
2.0 -
2.0
5.0
15
15
6.5
13.9%
6.0
5.5
CAGR = 6%
16
16
17
17
18
18
19
19
15
16
17
18
19
VS
14.9%
in 2018
*Adjusted - please refer to page 15
6.5
6.0
5.5
5.0
7.5 -
7.5
7.0 -
7.0
6.5 -
6.5
6.0 -
6.0
5.5 -
5.5
6.5
6.0
5.5
5.0
5.0
• Leading Bank in the Americas with
strong market position in Canada
and the Pacific Alliance growth
markets of Mexico, Peru, Chile
and Colombia
• Strong balance sheet, capital and
liquidity ratios. Attractive return on
equity and dividend growth
• Gaining scale and market share in
six core markets of Canada, US,
Mexico, Peru, Chile and Colombia
• Lowering operational risk with
• High levels of technology
investment support digital banking
strategy to increase digital sales
and adoption
more focused geographic footprint.
Announced or completed the exit
from 21 countries and 11 non-core
businesses since 2013
• Well positioned to leverage
technology, risk management, and
funding advantages versus local
and global competitors
• Strong Canadian risk management
culture
CEO’s Message to Shareholders
Message to
our Shareholders
Dear fellow Shareholders,
Over the past year, I travelled throughout our footprint and
had the good fortune of meeting with customers, shareholders,
employees, community partners, and government officials.
I saw firsthand the important impact that Scotiabank
makes in the communities in which we live and work.
Across our footprint, our Bank is a driver of prosperity, an enabler of economic
transformation, and a partner in development. We are there for families as
they save for important milestones, for customers when they need to finance
a major project, for our communities when they need support, and for our
employees as they acquire the skills they need to thrive in a changing world.
We are there for every future.
Earlier this year, we undertook an effort to reimagine our purpose. For every future
is the culmination of that effort. It honours our long history, frames the roles we play
in society today, and sets out our vision for the future. You will read more about our
purpose throughout this report.
$0.7
$0.5
Earnings
by Market
(in $ billions)
$0.8
$9.0*
Total
$4.9
$2.1
*Adjusted - please refer to page 15
l Canada ............................................................55%
l Pacific Alliance. ............................................ 23%
l U.S. ......................................................................9%
l Caribbean .......................................................... 5%
l Other International .........................................8%
2019 Scotiabank Annual Report | 1
Brian J. Porter
President and Chief Executive Officer
What’s
inside
1 CEO’s Message to
Shareholders
7 Chairman’s Message
to Shareholders
8 Executive
Management Team
9 Board of Directors
10 Sustainable Business
11 Management’s
Discussion and Analysis
Highlights
12 Management’s
Discussion and Analysis
135 Consolidated Financial
Statements
CEO’s Message to Shareholders
Financial
Performance
The year was marked by persistent geopolitical tensions,
market volatility, and concerns about global economic
growth. The challenges faced in 2019 underscore why we
choose to lead with a long-term perspective, maintain
diversification, and focus on getting the fundamentals right.
After adjusting for acquisition-related costs, we earned
$9.4 billion – up 3% compared to last year.
Some highlights of our business performance in 2019
can be found below.
Canadian Banking
• Delivered adjusted earnings of $4.5 billion
• Strong balance sheet expansion; along with deposit
growth outpacing asset growth
• Continued to optimize our business mix and increased
our net interest margin
• Enhanced customer experience through strengthened
digital offerings and retail banking product suite
Global Wealth Management (GWM)
• On November 1st, 2019, we officially established
GWM as our fourth business line. GWM earnings are
derived from both the Canadian and International
Bank. We look forward to consistent, strong earnings
performance across GWM over the coming years
International Banking
• Delivered adjusted earnings of $3.2 billion
• Diversified operations have delivered another strong
year of double-digit earnings growth
• Main integrations from recent acquisitions in Chile
and Colombia have been completed
• Strategic repositioning efforts are largely complete
with improved earnings and credit quality
2 | 2019 Scotiabank Annual Report
Global Banking and Markets (GBM)
• Delivered earnings of $1.5 billion
• Improved performance in the second half of 2019
versus first half
• Strong momentum from our GBM businesses
• Growth in Capital Markets
As we look ahead to 2020, we are well positioned for
growth and optimistic for the future.
Strategic
Repositioning
Early on in my tenure as CEO, our leadership team, with
our Board of Directors’ support, set a course to become
a more focused Bank by sharpening our geographic
footprint and improving our business mix. More
specifically, over the past six years, we undertook a
comprehensive strategic repositioning program to exit
multiple businesses and countries while increasing our
investment and building scale in our six core markets and
the wealth management business.
Our program was based on two important beliefs:
1. An overly expansive geographic footprint has some
inherent risk and can distract management from its
core businesses.
2. Scale is critical to running our Bank efficiently and
therefore necessary in providing consistent, strong
returns to our shareholders.
I will cover both of these beliefs in greater detail. Before I
do that, let me outline our approach to acquisitions and
partnerships, which are inextricably linked and of critical
importance to our repositioning efforts.
We pride ourselves on partnerships done well. We
understand that partnerships are the foundation of our
success. The reputation we have earned as a trusted and
reliable partner has enabled us to win new business and
better serve our customers.
Looking at our acquisitions, we spent years cultivating
and deepening our relationships. When businesses came
up for sale that aligned with our strategy, we were there
CEO’s Message to Shareholders
as a strong and proven partner. Our approach to
acquisitions has been clear and consistent. Using
clear and disciplined criteria, we acquired high quality
businesses in strategically important markets including
BBVA in Chile, as well as Citibank’s retail and small
business operations in Colombia. We also considerably
strengthened our wealth business through our
acquisitions of MD Financial and Jarislowsky Fraser
in Canada.
Carrying out a series of acquisitions and divestitures
simultaneously is highly complex, particularly while
delivering earnings growth. It’s also hard to predict or
control the timing of acquisitions. When rare
opportunities to acquire strong businesses that fit
within our strategy arose, we chose to act.
Geographic Focus
Over the past two years, we considerably sharpened
our geographic focus. We announced or completed
exits from non-core countries and non-core business
operations where we either lacked scale, the markets
were too small, or the long-term operating outlook
was unfavourable.
The geographic aspect of our strategic repositioning
program is substantially complete. Our sharpened footprint
has positioned us as a leading Bank in the Americas and
allows us to connect our customers to the world.
Our business model is predicated on a high degree of
strategic diversification. Today, we are the only bank with
a significant presence in all the major countries in the
Americas corridor: Canada, the United States, Mexico,
Peru, Chile and Colombia. Today, our six core markets
represent 87% of our earnings. We also have a strong
and successful wholesale business in Brazil.
Looking at the US, where we originate more than
USD $150 billion in assets, we are one of the top 15
foreign banks. Our foundation in the US is strong and
we see more potential for growth. We have a highly
balanced portfolio anchored in Canada with diversified
exposure to the US and in growth markets in Latin
America. No single country outside of Canada represents
more than 10% of our earnings. This differentiates us
from some of our competitors who are heavily weighted
to the US.
Strengthened Pacific Alliance Presence
The past year has presented social and political challenges around the world, including in
the four Pacific Alliance countries. Recent events in Latin America are mirroring events we
are seeing elsewhere in Europe and Asia, as governments struggle to respond to growing
expectations from the people of their countries. While the situation in Latin America may
have a short-term impact, the long-term picture in the Pacific Alliance region is one of
healthier, more prosperous societies with stronger institutions.
At times like this, we choose to maintain perspective. Scotiabank is 187 years old and we
have operated through times of tremendous change and volatility. We have been operating
in the Pacific Alliance for more than 20 years and have seen change there as well.
Navigating through short-term challenges can be difficult. But if we look back, we appreciate
the resilience of the Pacific Alliance countries to economic and political cycles.
Our commitment to the Pacific Alliance region is unchanged: we are here for the bright
future ahead. We are here for every future.
2019 Scotiabank Annual Report | 3
CEO’s Message to Shareholders
Scale Begets Scale
There are many benefits that have come from our
strategic repositioning efforts. Most importantly, we are
generating higher quality earnings that are more reliable
and predictable. We also have room and appetite to grow.
Key Acquisitions
BBVA
Cencosud
Our size allows us to absorb fixed costs more effectively
and also lowers some funding costs. It facilitates
diversification by product and service which deepens
customer relationships. It more effectively allows for
investment in technology and digital banking capabilities.
Finally, it enhances our competitive advantages in
each market.
10%
As our Bank grows, so do the opportunities to further
leverage our scale. In other words: scale begets scale.
2019
2018
2015
15%
5%
5%
10%
Our investment in Chile is a great example. In 2015,
we completed our acquisition of Cencosud’s Chilean
financial services business. The transaction enabled us to
gain market share and grow our business. It also
made us a more competitive buyer when BBVA Chile
came up for sale a few years later. Were it not for the
acquisition of the Cencosud business, it is unlikely that
the opportunity to acquire BBVA Chile would have
materialized for us.
15%
Stronger Presence in Chile
e
r
a
h
S
t
e
k
r
a
M
15%
10%
5%
0%
Cencosud
BBVA
Key Acquisitions
Looking at our announced and completed divestitures, we
have thoughtfully withdrawn more than $9 billion from
non-core operations. Of that, the majority of the countries
were unrated, or had a non-investment grade rating. At
the same time, we deployed approximately $7.5 billion of
capital into core businesses and geographies, the majority in
markets with investment grade ratings (BBB+ and higher)
– principally in Wealth Management and the Pacific
Alliance countries of Mexico, Peru, Chile and Colombia.
Scotiabank has placed a strong emphasis on reallocating
capital to high-quality markets with investment-grade
ratings (an indicator of the risk level of the investing
environment of a particular country, also taking into
account political risk).
By thoughtfully refocusing our investments, we have
improved the Bank’s credit risk profile and reduced
operational risk. For example, the average ratios for credit
losses (i.e., PCLs, GILs) for divested entities are greater
than all-Bank, and significantly more volatile. Further, the
majority of Scotiabank’s divestitures are from countries
that experience a greater threat of money laundering and
terrorist financing, among other operational risks.
Another example of our de-risking efforts includes our
announced divestitures of Puerto Rico and El Salvador.
While Puerto Rico and El Salvador are immaterial to
all-Bank earnings, they represent approximately 10% of
all-Bank gross impaired loans.
Sharpening our Focus,
Reducing our Risk Profile
54
countries
*
33
countries
FY13 FY14 FY15 FY16
FY17 FY18 FY19
2013
2019
*Total countries including
announced divestitures
Today, we are the 3rd largest private sector bank in Chile
with more organic growth opportunities and even greater
profitability. We had similar success in Peru and see many
opportunities to grow in the same way in Mexico and
Colombia, as well as the Dominican Republic, which is one
of the fastest growing markets in the Caribbean.
Our efforts to strategically reposition the Bank have been
considerable. Execution has required alignment, focus,
and discipline. Our repositioning efforts are substantially
complete. We are very pleased with our progress to date
and we are confident that we will continue to realise the
substantial gains from our efforts and investments.
7.5
4 | 2019 Scotiabank Annual Report
7.0
6.5
6.0
5.5
54
countries
33
countries
15
16
17
18
19
2013
2019
15%
10%
5%
0%
FY13
FY14
FY15
FY16
FY17
FY18
FY19
95
95
89
90
89
86
30
29
31
31
30
Q3/18 Q4/18 Q1/19 Q2/19 Q3/19
89
90
89
86
30
29
31
31
30
Q3/18 Q4/18 Q1/19 Q2/19 Q3/19
FY16: 109; FY17: 93; FY18: 89
100
80
CEO’s Message to Shareholders
Significant Investments in
People, Processes, and Technology
Reducing Gross Impaired Loans
As a % of Period End Loans and Acceptances
0.89
95
89
People: Fostering Talent and Leadership
90
89
86
0.84
30
29
31
31
30
78 with
divestitures
Q4/18
Q4/19
Investing in
our Capabilities
FY16: 109; FY17: 93; FY18: 89
Looking at our organic investments, many of these are less
visible, but just as important when it comes to positioning
the Bank for success. We have invested in our team’s
talent and capabilities. We have improved our processes
to make us more efficient and effective. We have also
invested in technology to give our customers a superior
and secure banking experience and have led with digital
as a strategic differentiation.
Our investments in these areas are creating cost
efficiencies, modernizing our technology platforms,
and enhancing our ability to release new features and
capabilities with increased frequency. Our efforts will better
protect the Bank and enhance the customer experience.
Across the Bank, we undertook a series of efforts to modernize
our technology platform. Through one of our key platform
modernization projects in Mexico, we have simplified
operational processes and product offerings, reduced client
onboarding time by 85%, eliminated 70 older systems and
decreased the number of operating reports by 72%. The
ongoing, financial benefits of our modernization efforts in
Mexico are more than $75 million per year.
We are also embracing and executing a secure Cloud-first
technology strategy. Cloud computing is the on-demand
delivery of compute power, database, storage, and
applications on a pay-as-you-go basis. Moving to the
Cloud brings down costs, improves speed of innovation,
enables analytics and helps us deliver enhanced digital
solutions to our clients.
• Driving engagement: 81% employee engagement
score globally, up 2% from last year
Q3/18 Q4/18 Q1/19 Q2/19 Q3/19
· Building an inclusive workplace:
> 39% of Vice Presidents and above in
Canada are female;
> Approximately 80% of divisions at the Bank
saw an increase in female Emerging Leaders;
> 92% of employees believe Scotiabank’s
commitment to being an inclusive workplace
· Boosting skills today and for the future: 92,500
employees can now access LinkedIn Learning.
Process: Embracing Smart Automations
400 automations
in production
+ 25 new automations
per month
=
1 million hours saved
>$100 MM value
since January 2018
Technology: Cloud-First Approach
Lower costs
Faster
innovation
Enhanced
digital solutions
2019 Scotiabank Annual Report | 5
CEO’s Message to Shareholders
The year-over-year growth in our technology spending is
now moderating. Going forward, our steady state investment
in technology will focus on optimizing our operating
model and maintaining industry-leading technology.
As we run our business, we face different strategic choices
and trade-offs. With regard to technology, we made the
decision to modernize our foundation and build our
capabilities. As a result, our investment in technology
has been purposefully elevated since 2014. We could
have chosen to cut our technology spend to boost our
short-term bottom line. Instead, we made the strategic
choice to invest for the future.
We also work with Big Brothers Big Sisters to enable
mentorships that provide young people with much
needed support and guidance.
Through our partnership with FC Barcelona and the FC
Barcelona Foundation, we are committed to developing 18
FutbolNet festivals across six countries over a three-year
period. Our investment will positively impact more than
18,000 children. In 2019, over 5,000 young people
participated in the FutbolNet Festivals with 44% girls’
participation, which is up by 4% from 2018. We believe
strongly that giving back is the right thing for the Bank,
for our employees, for our communities and our society.
Scotiabankers in our
Communities
In Closing
At the Bank, we are an important part of the economic
and the social fabric of every country in which we operate.
We take that responsibility seriously. Last year, Scotiabankers
contributed more than 350,000 hours of volunteering
time in their respective communities. The Bank also
contributed nearly $100 million globally through donations,
sponsorships and other forms of assistance. I want to
thank our employees for representing our Bank well in
our communities.
Over the years, we have stood by our customers and
communities in good and challenging times. Earlier this
year, when Hurricane Dorian hit The Bahamas – the
worst Atlantic hurricane since 1935 in terms of velocity to
make landfall – we were there for our customers and
employees. We worked with our partners at the Red
Cross to provide much-needed aid and supplies.
One of our Bank’s philanthropic priorities is to see young
people in our communities thrive. We work with a number
of outstanding charitable partners to achieve our objective.
United Way is a great example. Our partnership with
United Way dates back more than 50 years. In 2019,
we pledged $15 million over five years to United Way
Greater Toronto. Our donation was the largest corporate
commitment in United Way Greater Toronto’s history.
Our progress in 2019 would not be possible without
the contributions of more than 100,000 Scotiabankers.
Their dedication and efforts have helped to build a
stronger business and culture. Over the past few years,
we have done a lot of heavy lifting. Today, we are an even
more competitive Bank in each of our core markets with
multiple avenues for growth. We have the capital, the
reputation, the partnerships, the expertise, and the
people to realise our ambitions for the future.
I want to thank our Board of Directors for their confidence
in our leadership team. In particular, I want to extend my
gratitude to our new Board Chairman Aaron Regent for
his leadership. The Bank is fortunate to have a highly
engaged Board of Directors and our success is a
testament to their support.
It continues to be my privilege to lead this tremendous
institution and to work alongside more than 100,000
dedicated Scotiabankers as we deliver for our customers.
I want to extend my profound thanks to you, our
shareholders, for the trust you continue to place in our
team. We do not take it for granted. We are more
confident than ever that the best is yet to come.
6 | 2019 Scotiabank Annual Report
Chairman’s Message to Shareholders
Building for
the future
Aaron W. Regent
Chairman of Scotiabank’s
Board of Directors
Dear fellow Shareholders,
2019 has been a productive year for
Scotiabank. Over the past year, our Bank
has made considerable progress on a
number of key strategic initiatives, including:
repositioning the Bank’s footprint, improving
our business mix, developing our talent,
and strengthening our digital capabilities.
Your Board is proud of the progress that
was made in 2019.
Building Trust through Governance
Corporate governance at Scotiabank is continually
evolving and forward-looking so that the Bank can meet
our diverse stakeholders’ needs and long-term interests.
Strong corporate governance is critical to maintaining
the trust of customers, shareholders, and employees.
Scotiabank has long been a leader in this regard. This
year, the Bank was again recognized by the Dow Jones
Sustainability Index as being in the top 1% of global
financial institutions in terms of corporate governance
practices. Our commitments to diversity of thought, risk
management and culture will continue to propel us forward.
Your Board is well-equipped to fulfill its responsibilities
for oversight and stewardship of the Bank. The Board is
composed of seasoned leaders who bring a broad range of
experiences to the table – both national and international
– and who come from diverse professional backgrounds.
For every future
Scotiabank is building for every future, and continues
to be more impactful as a partner with our clients and
the communities in which we live and work. We recently
announced our commitment to mobilize $100 billion by
2025 to reduce the impacts of climate change globally.
We also launched The Scotiabank Women Initiative, which
is creating more opportunities for women-led businesses
by providing them with access to capital, mentorship,
and education through a comprehensive program. While
this program initially started in our Canadian Banking
business, we are expanding its success to other business
lines, including Global Banking and Markets.
Executing on a Long-Term Vision
This year, it has been my honour to succeed Tom O’Neill,
who retired after serving on the Board for 11 years, including
five as Chairman. Tom’s experience, insight, and steady
hand have been instrumental in helping to position the
Bank for long-term success, and it is my privilege to
continue this work.
With the repositioning of the Bank’s geographic footprint
substantially complete, the Board looks forward to what
lies ahead in 2020 and beyond. On behalf of the Board,
I would also like to recognize the leadership of our
President and CEO Brian Porter and our team of more
than 100,000 Scotiabankers, whose contributions are
creating a better future for our Bank’s customers. With a
strong and visionary leadership team at the helm, we are
fully supportive of the Bank’s strategy to continue to
grow across our key markets and businesses.
I’d especially like to thank you, our shareholders, for your
continued confidence as the Bank continues to deliver
for every future.
2019 Scotiabank Annual Report | 7
Executive Management Team
Our Leadership Team
Paul Baroni
Executive Vice President
& Chief Auditor
Tracy Bryan
Executive Vice President,
Global Operations
John Doig
Executive Vice President,
Retail Distribution
Mike Henry
Executive Vice President,
Enterprise Risk Governance
Rania Llewellyn
Executive Vice President,
Global Business Payments
Loretta Marcoccia
Executive Vice President
& Chief Operating Officer,
Global Banking and Markets
Tom McGuire
Executive Vice President
& Group Treasurer
Gillian Riley
Executive Vice President,
President & CEO, Tangerine
Shawn Rose
Executive Vice President
& Chief Digital Officer
Adrián Otero Rosiles
Executive Vice President &
Country Head, Mexico
Francisco Sardón
Executive Vice President &
Country Head, Chile
Anya M. Schnoor
Executive Vice President, Retail Products
Kevin Teslyk
Executive Vice President,
Canadian Business Banking
Maria Theofilaktidis
Executive Vice President,
Chief Compliance Officer &
Head of Enterprise Risk
Phil Thomas
Executive Vice President,
Customer Insights, Data & Analytics
Miguel Uccelli
Executive Vice President &
Country Head, Peru
Ashley Veasey
Executive Vice President & Global Chief
Information Officer, Business Technology
Chadwick Westlake
Executive Vice President, Enterprise
Productivity & Canadian Banking Finance
Brian J. Porter
President and Chief Executive Officer
Ignacio “Nacho” Deschamps
Group Head, International Banking
& Digital Transformation
Jake Lawrence
Co-Group Head,
Global Banking and Markets,
Head, Global Capital Markets
Barbara Mason
Group Head &
Chief Human Resources Officer
Daniel Moore
Group Head & Chief Risk Officer
James Neate
Co-Group Head,
Global Banking and Markets,
Head, Global Corporate &
Investment Banking
Dan Rees
Group Head, Canadian Banking
Michael Zerbs
Group Head &
Chief Technology Officer
Ian Arellano
Executive Vice President
and General Counsel
Glen Gowland
Executive Vice President,
Global Wealth Management
Raj Viswanathan
Executive Vice President
and Chief Financial Officer
8 | 2019 Scotiabank Annual Report
Our Board of Directors
Board of Directors
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.
• Advisory partner of Partners Group
and Chairman of Partners Group
Board of Directors, USA
• Scotiabank director since
September 23, 2013
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
Aaron W. Regent
• Chairman of the Board
• Founding Partner of
Magris Resources Inc.
• Scotiabank director since
April 9, 2013
Committee Chairs
Nora A. Aufreiter
• Corporate Governance
Committee Chair
• Corporate director
• Scotiabank director since
August 25, 2014
Tiff Macklem, Ph.D.
• Risk Committee Chair
• Dean of the Rotman School of
Management at the University
of Toronto
• Scotiabank director since
June 22, 2015
Una M. Power
• Audit and Conduct Review
Committee Chair
• Corporate director
• Scotiabank director since
April 12, 2016
L. Scott Thomson
• Human Resources Committee Chair
• President and Chief Executive Officer
of Finning International Inc.
• Scotiabank director since
April 12, 2016
Board of Directors
Indira V. Samarasekera, O.C., Ph.D.
• Senior advisor at Bennett Jones LLP
and a corporate director
• Scotiabank director since
May 26, 2008
Susan L. Segal
• President and Chief Executive Officer
of the Americas Society and Council of
the Americas
• Scotiabank director since
December 2, 2011
Benita M. Warmbold
• Corporate director
• Scotiabank director since
October 29, 2018
2019 Scotiabank Annual Report | 9
Sustainable Business
A focus on ESG
At Scotiabank we are here for every future. Our long-term success is interwoven with the world around us. We are focused
on building trust and opportunity for our clients, customers, employees and shareholders through our environmental,
social and governance initiatives.
TRUST
S
Social
G
Governance
E
Environmental
We are here for every future
Highlights for 2019
• Announced our commitment to
mobilize $100 billion by 2025 to
reduce the impacts of climate change
• Issued inaugural USD 500 million
Green Bond of which proceeds
were used to fund assets under the
Scotiabank Green Bond Framework.
Includes the categories of renewable
energy, clean transportation and
green buildings
• Directed proceeds of internal fee
on carbon into renewable energy &
efficiency initiatives, and are on
track to achieve a greenhouse gas
reduction target of 10% by 2021
compared to 2016
• Launched our new, more efficient
workspace model at our head office
in Toronto, Canada, which has to date
reduced greenhouse gas emissions
by 741 tonnes and is expected to
reduce paper use by 86%
• Invested nearly $100 million
• For the second consecutive year,
globally in communities where we
operate as part of our global
philanthropy program
• Committed $3 billion in funding
over the first three years of
The Scotiabank Women Initiative
to advance women-led businesses
in Canada
ranked by the Dow Jones
Sustainability Index as among
the top 1% of global financial
institutions for Corporate
Governance
• 38% of our directors are female.
We first established a Board
diversity policy in 2013
• Signed the UN Women’s
• Appointed Mr. Aaron Regent as
Empowerment Principles and UN
LGBTI Codes for Business Conduct
• Continued to deliver on our
commitment of $250 million over
10 years to help employees adapt
to the digital economy
• Served as the lead bank in Canada
in the Finance Against Slavery and
Trafficking initiative, the Financial
Access Project, to open accounts
for survivors of modern slavery
Chairman of the Board. Mr. Regent
is Scotiabank’s third independent
Chairman, as we have separated
the CEO and Chairman roles
since 2004
• Dedicated significant Board time to
cybersecurity, anti-money
laundering, conduct and culture
issues, keeping the Bank safe
For more information about ESG at Scotiabank, please visit: www.scotiabank.com/sustainability
10 | 2019 Scotiabank Annual Report
Management’s Discussion and Analysis Highlights
Results at a glance
Medium-Term Financial Objectives
Key
Metrics
3-year
Performance
Adjusted 2019
Performance
(Y/Y)
Earnings Per Share Growth: 7%+
2
5.7%
+0.4%
Return on Equity: 14%+
14.5%
3
13.9%
150
Achieve Positive
Operating Leverage
100
2
+0.4%
(0.6%)1
09
10
11
12
13
14
15
16
Maintain Strong Capital Ratios
18
19
17
Strong
Levels
Strong
Levels
Total Assets
Revenue
$1,086
Billion
$31
Billion
Loans
$592
Billion
Net
Income
$9.4*
Billion
Deposits
$733
Billion
Total Taxes
Paid
$3.8
Billion
*Adjusted - please refer to page 15
1 Excluding the pension revaluation benefit gain in 2018 of $203 million pre-tax,
2 Reflects 3-year CAGR, 3 Reflects 3-year average
Share price appreciation plus dividends
reinvested, 2009 = 100
Share price appreciation plus dividends
reinvested, 2009 = 100
Total Return to
Common Shareholders
l Scotiabank
l S&P/TSX Banks Total Return Index
l S&P/TSX Composite Total Return Index
300
250
200
150
100
9
10
11
12
13
14
15
16
17
18
19
Common Equity
Tier 1 Capital Ratio %
Average Assets
by Market %
Earnings by
Business Line %*
11.5
11.1
11.1
12
4
14
17
12
58
34
49
2017
2018
2019
l Canada
l Pacific Alliance
l U.S.
l Caribbean
l Other International
l Canadian Banking
l International Banking
l Global Banking
and Markets
For more information, please refer to page 54
For more information, please refer to page 220
*Adjusted - please refer to pages 16-18
2019 Scotiabank Annual Report | 1 1
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
208
3-4
19-22
16-17
75
MD&A
75-76, 80, 88
71-74
78-79, 84-87
53-54, 96-97,
113-114
69-71
71-74
75-77
72
53-54
55
56-57
53-54
60-64, 77, 122
60-64
60-64
60-64
178, 233
6, 37-48, 78, 85
178, 227-233 14-15, 35, 60-62, 66
228 14-15, 35, 60-62, 66
77
51-54
61-63
94-97
96
99-101
98-99
93
89-94
89-94
89-94
232-233
232-233
233
84-87, 116-122 189-190, 229-231
35, 60-62
153-158, 190
190
32-33
176, 179
84, 116-117, 119,
120
82-83
82-83, 85
64, 102
68
12 | 2019 Scotiabank Annual Report
Management’s
Discussion and Analysis
Table of Contents
14
Forward-looking statements
15 Non-GAAP measures
21
Financial highlights
Overview of Performance
22
Financial results: 2019 vs 2018
22 Medium-term objectives
Group Financial Condition
52
Statement of financial position
53 Capital management
64 Off-balance sheet arrangements
67
68
Financial instruments
Selected credit instruments – publically known risk
items
22
23
23
Shareholder returns
Economic outlook
Risk Management
Impact of foreign currency translation
69
Risk management framework
Group Financial Performance
24 Net income
24 Net interest income
26 Non-interest income
27
Provision for credit losses
29 Non-interest expenses
30
31
33
35
Income taxes
Financial results review: 2018 vs 2017
Fourth quarter review
Trending analysis
Business Line Overview
36 Overview
38 Canadian Banking
42
International Banking
46 Global Banking and Markets
49 Global Wealth Management
50 Other
80 Credit risk
88 Market risk
94
Liquidity risk
102 Other risks
Controls and Accounting Policies
107
107
111
113
115
Controls and procedures
Critical accounting estimates
Future accounting developments
Regulatory developments
Related party transactions
Supplementary Data
116 Geographic information
118
123
125
126
Credit risk
Revenues and expenses
Selected quarterly information
Eleven-year statistical review
2019 Scotiabank Annual Report | 13
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 2019 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 2019 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 2019 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 26, 2019
14 | 2019 Scotiabank Annual Report
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, 2019. The MD&A should be read in conjunction with the Bank’s 2019 Consolidated Financial Statements,
including the Notes. This MD&A is dated November 26, 2019.
Additional information relating to the Bank, including the Bank’s 2019 Annual Report, are available on the Bank’s website at www.scotiabank.com.
As well, the Bank’s 2019 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) as issued by the International
Accounting Standards Board (IASB), 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:
Acquisition and divestiture-related amounts – Acquisition and divestiture-related amounts are defined as:
A. Acquisition-related costs
1. Integration costs – Includes costs that are incurred and relate to integrating the acquired operations and are recorded in the Canadian and
International Banking operating segments. These costs will cease once integration is complete. The costs relate to the following acquisitions:
• Banco Cencosud, Peru (closed Q2, 2019)
• Banco Dominicano del Progreso, Dominican Republic (closed Q2, 2019)
• MD Financial Management, Canada (closed Q4, 2018)
• Jarislowsky, Fraser Limited, Canada (closed Q3, 2018)
• Citibank consumer and small and medium enterprise operations, Colombia (closed Q3, 2018)
• BBVA, Chile (closed Q3, 2018)
2. 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. These credit losses are
considered Acquisition-related costs in periods where applicable and are recorded in the International Banking segment. The costs for 2019
relate to Banco Cencosud, Peru and Banco Dominicano del Progreso, Dominican Republic. The costs for 2018 relate to BBVA, Chile and Citibank,
Colombia.
3. Amortization of Acquisition-related intangible assets, excluding software. These costs relate to the six acquisitions above, as well as prior
acquisitions and are recorded in the Canadian and International Banking operating segments.
B. Net (gain)/loss on divestitures – The Bank has announced a number of divestitures in 2019 in accordance with its strategy to reposition the
Bank. The net loss attributable to equity holders of $308 million was recorded in the Other segment, relating to the following divestitures (refer
to Note 37 for further details):
• Gain on sale of banking operations in the Caribbean (closed Q4, 2019)
• Loss on sale of Colfondos AFP announced in Q4, 2019
• Loss on sale of operations in Puerto Rico announced in Q3, 2019
• Gain on divestiture of Scotia Crecer AFP and Scotia Seguros in the Dominican Republic (closed Q2, 2019)
• Loss on sale of the insurance and banking operations in El Salvador announced in Q2, 2019
2019 Scotiabank Annual Report | 15
Management’s Discussion and Analysis
T1 Reconciliation of reported and adjusted results and diluted earnings per share
As at October 31 ($ 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 and divestiture-related amounts
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
Net loss on divestitures(3)
Acquisition and divestiture-related amounts (Pre-tax)
Income tax expense/(benefit)
Acquisition and divestiture-related amounts (After tax)
Adjustment attributable to NCI
2019
2018
2017
$ 17,177
13,857
$ 16,191
12,584
$ 15,035
12,120
$
$
$
$
$
$
31,034
3,027
16,737
11,270
2,472
8,798
408
8,390
8,208
6.68
151
178
116
445
148
593
18
611
(50)
$
$
$
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)
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
Acquisition and divestiture-related amounts (After tax and NCI)
$
561
$
298
$
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)(4)
Impact of adjustments on diluted earnings per share (in dollars)
$ 17,177
13,984
$ 16,191
12,584
$ 15,035
12,120
31,161
2,876
16,422
11,863
2,454
9,409
458
8,951
8,769
8,769
160
8,929
1,222
29
1,251
7.14
0.46
$
$
$
$
$
$
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
$
$
$
$
$
$
Recorded in provision for credit losses.
(1)
(2) Recorded in non-interest expenses.
(3)
(4)
Loss/(gain) on divestitures are recorded in non-interest income; costs related to divestitures are recorded in non-interest expenses.
Earnings per share calculations are based on full dollar and share amounts.
16 | 2019 Scotiabank Annual Report
T2 Reconciliation of reported and adjusted results 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/(benefit)
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
Refer to Business Line Overview on page 36.
(1)
(2) Recorded in provision for credit losses.
(3) Recorded in non-interest expenses.
2019
2018
2017
$
8,284
5,609
$
7,898
5,452
$
7,363
5,488
13,893
972
6,943
5,978
1,554
4,424
–
4,424
–
27
56
83
(22)
61
–
61
8,284
5,609
13,893
972
6,860
6,061
1,576
4,485
–
4,485
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
2019 Scotiabank Annual Report | 17
2019
2018
2017
$
8,482
5,006
$
7,322
4,111
$
6,726
3,688
13,488
2,076
7,027
4,385
998
3,387
391
2,996
151
151
60
362
(104)
258
(66)
192
8,482
5,006
13,488
1,925
6,816
4,747
1,102
3,645
457
3,188
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
Management’s Discussion and Analysis
T2 Reconciliation of reported and adjusted results 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/(benefit)
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
Refer to Business Line Overview on page 36.
(1)
(2) Recorded in provision for credit losses.
(3) Recorded in non-interest expenses.
18 | 2019 Scotiabank Annual Report
T2 Reconciliation of reported and adjusted results by business line
Other(1)
As at October 31 ($ millions)
Reported Results
Net interest income
Non-interest income/(loss)
Total revenue
Provision for credit losses
Non-interest expenses
Income before taxes
Income tax expense/(benefit)
Net income (loss)
Net income attributable to non-controlling interests in subsidiaries (NCI)
Net income (loss) attributable to equity holders
Adjustments
Adjustments for Net loss on divestitures (Pre-tax)(2)
Income tax expense/(benefit)
Net loss on divestitures (After tax)
Adjustment attributable to NCI
Net loss on divestitures (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/(benefit)
Net income (loss)
Net income attributable to NCI
Net income (loss) attributable to equity holders
2019
2018
2017
$ (985)
158
$ (483)
(53)
$
(827)
1
304
(1,132)
(585)
$ (547)
17
$ (564)
$ 148
144
292
16
$ 308
(536)
–
60
(596)
(449)
$ (147)
–
$ (147)
$
$
–
–
–
–
–
$ (985)
285
$ (483)
(53)
(700)
1
283
(984)
(729)
(536)
–
60
(596)
(449)
$ (255)
1
$ (256)
$ (147)
–
$ (147)
(390)
(344)
(734)
–
319
(1,053)
(786)
(267)
–
(267)
–
–
–
–
–
(390)
(344)
(734)
–
319
$
$
$
$
$
(1,053)
(786)
$
$
(267)
–
(267)
(1)
(2)
Refer to Business Line Overview on page 36.
Loss/(gain) on divestitures are recorded in non-interest income; costs related to divestitures are recorded in non-interest expenses.
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)
2018
Foreign
exchange
$ 27
13
40
52
54
(15)
Constant
dollar
$ 7,295
4,098
11,393
1,815
6,057
721
Reported
$ 6,726
3,688
10,414
1,294
5,664
828
2017
Foreign
exchange
$ 107
76
183
44
120
5
Constant
dollar
$ 6,619
3,612
10,231
1,250
5,544
823
$ (51)
$ 2,800
$ 2,628
$ 14
$ 2,614
$ (1)
$ (50)
$
177
$ 2,623
$
238
$ 2,390
Reported
$ 7,322
4,111
11,433
1,867
6,111
706
$ 2,749
$
176
$ 2,573
$
$
$
$
6
8
(3)
1
$
232
$ 2,382
$
$
151
114
$
$
168
131
$
$
1
–
$
$
167
131
$
$
148
115
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 23.
2019 Scotiabank Annual Report | 19
Management’s Discussion and Analysis
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.
Return on equity
Return on equity is a profitability measure that presents the net income attributable to common shareholders as a percentage of average
common shareholders’ equity.
In the first quarter of 2019, in line with OSFI’s increased Domestic Stability Buffer announced requirements, the Bank increased the capital
attributed to its business lines to approximate 10.0% of Basel III common equity capital requirements based on credit, market and operational
risks and leverage inherent within each business segment. Previously, capital was attributed based on a methodology that approximated 9.5% of
Basel III common equity capital requirements.
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. Prior period returns on equity for the business segments have not been restated.
20 | 2019 Scotiabank Annual Report
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 (%)(3)
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(4)
Assets under management(4)
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)(5)
Liquidity coverage ratio (LCR) (%)
Credit quality
Net impaired loans ($ millions)(6)
Allowance for credit losses ($ millions)(7)
Net impaired loans as a % of loans and acceptances(6)
Provision for credit losses as a % of average net loans and acceptances(8)
Provision for credit losses on impaired loans as a % of average net loans and acceptances(8)
Net write-offs as a % of average net loans and acceptances
Adjusted results(3)
Adjusted net income ($ millions)
Adjusted diluted earnings per share ($)
Adjusted return on equity (%)
Adjusted productivity ratio (%)
Adjusted operating leverage (%)
Adjusted provision for credit losses as a % of average net loans and acceptances(8)
Common share information
Closing share price ($) (TSX)
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends paid per share ($)
Dividend yield (%)(9)
Market capitalization ($ 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)(4)
Branches and offices
2019(1)(2)
2018(1)
2017
17,177
13,857
31,034
3,027
16,737
2,472
8,798
8,208
6.72
6.68
13.1
53.9
(3.3)
2.44
46,720
127,488
592,483
1,086,161
733,390
63,638
3,884
558,408
301,631
11.1
12.2
14.2
4.2
421,185
125
3,540
5,145
0.58
0.51
0.49
0.50
9,409
7.14
13.9
52.7
(2.1)
0.49
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
517,596
280,656
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
75.54
70.65
83.28
1,222
1,251
1,216
3.49
4.9
91,867
52.33
1.4
11.2
1,213
1,229
1,227
3.28
4.2
86,690
49.75
1.4
10.2
1,203
1,223
1,199
3.05
4.0
99,872
46.24
1.8
12.7
101,813
3,109
97,021
3,095
87,761
3,003
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated.
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15, prior year amounts have not been restated.
(1)
(2)
(3) Refer to page 15 for a discussion of Non-GAAP measures.
(4) Prior period amounts have been restated to conform with current period presentation.
(5)
In accordance with OSFI’s requirements, effective January 31, 2019, credit valuation adjustment (CVA) risk-weighted assets (RWA) have been fully phased-in. In the prior year, CVA RWA were calculated using scalars of 0.80, 0.83 and 0.86 in
2018 and scalars of 0.72, 0.77 and 0.81 in 2017 to compute the CET1 capital ratio, Tier 1 capital ratio and Total capital ratio, respectively.
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.
Includes provision for credit losses on certain financial assets – loans, acceptances, and off-balance sheet exposures.
(6)
(7)
(8)
(9) Based on the average of the high and low common share price for the year.
2019 Scotiabank Annual Report | 21
Management’s Discussion and Analysis
Overview of Performance
Financial Results: 2019 vs 2018
Net income was $8,798 million, up 1% from $8,724 million last year. Diluted earnings per share (EPS) were $6.68 compared to $6.82. Return on
equity was 13.1% compared to 14.5%.
Adjusting for the impact of Acquisition and divestiture-related amounts (refer to Non-GAAP Measures), net income was $9,409 million, up 3%
from $9,144 million. Net income was positively impacted by increases in net interest income and non-interest income. Partially offsetting were
higher provision for credit losses and higher non-interest expenses. Adjusted Diluted EPS were $7.14 compared to $7.11 and adjusted Return on
equity was 13.9% compared to 14.9%.
Net interest income was $17,177 million, an increase of $986 million or 6%, mainly from the impact of acquisitions. Also contributing to the
increase was growth in core banking assets, partly offset by the negative impact of foreign currency translation.
The core banking margin of 2.44% was two basis points lower. The change in business mix from the impact of acquisitions in International Banking
and higher margins in Canadian Banking were more than offset by lower spreads on asset/liability management activities, and lower margins in
Global Banking and Markets.
Non-interest income was up $1,273 million or 10% to $13,857 million. The impact of acquisitions contributed 6% of the growth. The remaining 4%
growth was primarily from higher banking revenues and gains on investments, partly offset by the higher benefit in the prior year from Alignment
of reporting periods for certain businesses with the Bank.
The provision for credit losses was $3,027 million, compared to $2,611 million, an increase of $416 million. Adjusting for the Day 1 provision on
acquired performing financial instruments recorded in both years, the provision for credit losses increased $669 million or 30% due primarily to
higher provisions in the International Banking and Canadian Banking retail portfolios. The provision for credit losses ratio was 51 basis points, up
three basis points from 48 basis points last year. Adjusting for the Day 1 provision on acquired performing financial instruments, the provision for
credit losses ratio was 49 basis points, eight basis points above last year.
Non-interest expenses increased $1,679 million or 11%. Adjusting for Acquisition and divestiture-related amounts, non-interest expenses grew
10%. The prior year’s remeasurement of an employee benefit liability from certain plan modifications (“benefits remeasurement”), the impact of
acquisitions and the new revenue accounting standard that requires card expenses to be netted against card revenues contributed to
approximately 6% of the growth. The remaining 4% growth was due to investments in technology and regulatory initiatives, higher performance
based compensation and share-based payments, partly offset by the positive impact of foreign currency translation.
The productivity ratio was 53.9% compared to 52.3%. Adjusting for Acquisition and divestiture-related amounts and the impact of prior year’s
benefits remeasurement, the productivity ratio was 52.7%. Operating leverage on a reported basis was negative 3.3%. Adjusting for Acquisition and
divestiture-related amounts, operating leverage was negative 2.1%. The benefits remeasurement negatively impacted operating leverage by 1.5%.
The provision for income taxes was $2,472 million, an increase of $90 million. The Bank’s overall effective tax rate for the year was 21.9% compared
to 21.5% last year. The increase in the effective tax rate was due primarily to higher taxes related to the divestitures of foreign operations.
The Basel III Common Equity Tier 1 ratio was 11.1% as at October 31, 2019, compared to 11.1% last year, and remained well above the regulatory
minimum.
Medium-term financial objectives
The following table provides a summary of our 2019 performance against our medium-term financial performance 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 15.
Shareholder Returns
In fiscal 2019, the total shareholder return on the Bank’s shares was 12.4%, compared to the
total return of the S&P/TSX Composite Index of 13.4%.
The total compound annual shareholder return on the Bank’s shares over the past five years
was 6.4%, and 9.8% over the past 10 years. This exceeded the total annual return of the S&P/
TSX Composite Index, which was 5.6% over the past five years and 7.4% over the last 10 years.
Dividends were raised twice during the year – a two cent increase effective the second quarter
and a further three cent increase effective the fourth quarter. As a result, dividends per share
totaled $3.49 for the year, up 6% from $3.28 in 2018. The dividend payout ratio of 51.9% for
the year was slightly above the Bank’s target payout range of 40-50%.
2019 Results
Reported
Adjusted(1)
(2.1)%
13.1%
Negative 3.3%
CET1 capital ratio of 11.1%
0.4%
13.9%
Negative 2.1%
CET1 capital ratio of 11.1%
C1 Closing common share price
as at October 31
$90
80
70
60
50
40
09
11
13
15
17
19
22 | 2019 Scotiabank Annual Report
T4 Shareholder returns
For the years ended October 31
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)(1)
Increase (decrease) in share price (%)
Total annual shareholder return (%)(2)
2019
2018
2017
75.54
3.49
4.9
6.9
12.4
70.65
3.28
4.2
(15.2)
(11.6)
83.28
3.05
4.0
15.5
20.3
(1)
(2)
Dividend yield is calculated as the dividend paid divided by the average of the high and low common share price for the year.
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,
2009=100
350
300
250
200
150
100
09
11
13
15
17
19
Scotiabank
S&P/TSX Banks Total Return Index
S&P/TSX Composite Total Return Index
Economic Outlook
Global uncertainty remains elevated owing largely to developments in US trade policy. The trade conflict between China and the US is now clearly
affecting global business sentiment and activity, and indications are that this uncertainty will continue for some time. Partly in response to these
developments, and to counter further negative developments, a number of central banks have been cutting interest rates. We expect this to
continue over the next several months.
There are signs that external challenges are having a material impact on Canadian growth but activity remains solid in light of strong population
growth, remarkably robust employment growth, very accommodative monetary policy, strengthening activity in the housing market, and still-high
business and consumer confidence. Inventory levels are high, however, and we believe Canada is not immune to the ramifications of higher
uncertainty and lower global growth. Inflation remains firmly at the Bank of Canada’s target for the moment, though the rapid increase in wage
growth may put upward pressure on inflation going forward. We believe that even though inflation is on target, mounting external risks to the
outlook may prompt the Bank of Canada to join other central banks and cut policy rates by 50 basis points by mid 2020 as it insures against these
risks.
There are now clear indications that trade uncertainty is affecting the US business sector. Indicators of business activity are pointing to a
contraction in the manufacturing sector, even as confidence remains generally resilient. In conjunction with the waning impacts of the 2018 fiscal
stimulus package, the increase in uncertainty is leading to a slowdown in US growth. The Federal Reserve is expected to cut its policy rates one
more time in 2020, as US growth is expected to slow through the remainder of this year and into 2020.
The trade tensions between China and the US are being felt in the Pacific Alliance countries, as the price of important regional commodities has
fallen sharply over the year. Adding to these issues are political developments, challenges in executing key reforms, as well as the impact of
implemented reforms in Mexico. Social unrest and the associated political and economic developments are weighing on the Chilean outlook. As a
result, forecasts for the region have deteriorated along with that of most of the global economy. Importantly, however, growth prospects for PAC
countries in general remain much more solid than prospects for advanced economies.
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Impact of Foreign Currency Translation
The impact of foreign currency translation on net income is shown in the table below.
T5 Impact of foreign currency translation
For the fiscal years
U.S. Dollar/Canadian Dollar
Mexican Peso/Canadian Dollar
Peruvian Sol/Canadian Dollar
Colombian Peso/Canadian Dollar
Chilean Peso/Canadian Dollar
Impact on net income(1) ($ millions except EPS)
Net interest income
Non-interest income(2)
Non-interest expenses
Other items (net of tax)
Net income
Earnings per share (diluted)
Impact by business line ($ millions)
Canadian Banking
International Banking(2)
Global Banking and Markets
Other(2)
(1)
(2)
Includes impact of all currencies.
Includes the impact of foreign currency hedges.
2019
2018
2017
Average
exchange rate
% Change
Average
exchange rate
% Change
Average
exchange rate
% Change
0.753
14.607
2.512
2,447
517.805
(3.2)%
(1.3)%
(1.0)%
7.7%
5.1%
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)%
2019
vs. 2018
2018
vs. 2017
2017
vs. 2016
$ (52)
30
60
22
$ (101)
(21)
85
17
$ (112)
(65)
99
18
$
60
$
(20)
$
(60)
$ 0.05
$ (0.02)
$ (0.05)
$
7
51
28
(26)
$
(4)
(46)
(12)
42
$
(4)
(14)
(12)
(30)
$
60
$
(20)
$
(60)
2019 Scotiabank Annual Report | 23
Management’s Discussion and Analysis
Group Financial Performance
Net Income
Net income was $8,798 million, up 1% compared to $8,724 million last year reflecting strong revenue, and expense growth across all businesses.
Adjusting for the impact of Acquisition and divestiture-related amounts, net income was $9,409 million, up 3% from $9,144 million.
Net Interest Income
Net interest income was $17,177 million, an increase of $986 million or 6%, mainly from the impact of acquisitions. Also contributing to the
increase was growth in core banking assets, partly offset by the negative impact of foreign currency translation.
Net interest income in Canadian Banking was up $386 million or 5%, driven by strong asset and deposit growth and margin expansion. Net interest
income increased $1,160 million or 16% in International Banking primarily due to strong organic asset growth and the impact of acquisitions. Global
Banking and Markets net interest income decreased $58 million or 4% from lower margins in lending and deposits.
Core banking assets increased $51 billion to $704 billion. The increase was driven by strong retail and commercial loan growth in International
Banking, mainly driven by acquisitions, growth in residential mortgages, business and personal loans in Canadian Banking, and higher corporate
loans in Global Banking and Markets.
The core banking margin of 2.44% was two basis points lower. The change in business mix from the impact of acquisitions in International Banking
and higher margins in Canadian Banking were more than offset by lower margins on asset/liability management activities and Global Banking and
Markets.
Outlook
Net interest income is expected to increase in 2020 mainly due to growth in core banking assets across all business lines, net of announced
divestitures.
While there is continued pressure on the core banking margin due to the macro-environment, we are targeting to be largely in line with 2019.
T6 Net interest income and core banking margin(1)
($ billions, except percentage amounts)
Total average assets and net interest income
Less: trading related businesses in Global
Average
balance
2019
Interest
Average
rate
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
2018
2017
$1,056.1
$ 17.2
$ 945.7
$ 16.2
$ 912.6
$ 15.0
Banking and Markets(1)
279.5
0.1
234.6
0.1
249.2
–
Banking margin on average total assets
$ 776.6
$ 17.1
2.21%
$ 711.1
$ 16.1
2.26%
$ 663.4
$ 15.0
2.26%
Less: non-earning assets and customers’
liability under acceptances
72.8
–
58.7
–
54.6
–
Core banking assets and margin
$ 703.8
$ 17.1
2.44%
$ 652.4
$ 16.1
2.46%
$ 608.8
$ 15.0
2.46%
(1) Most net interest income from Capital Markets trading assets is recorded in trading revenues in non-interest income.
24 | 2019 Scotiabank Annual Report
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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
2019
2018
2017
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
$
49.6
116.9
$
121.0
87.5
261.5
97.7
17.5
206.3
(5.2)
577.8
952.8
16.3
87.0
$
$
0.9
0.3
0.5
2.0
9.4
6.8
3.3
9.6
1.87%
0.25%
$
54.2
101.6
$
0.41%
2.22%
3.59%
6.98%
18.76%
4.66%
94.4
79.8
244.2
92.1
15.1
177.0
(5.0)
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%
97.0
74.8
3.39%
6.55%
18.45%
4.45%
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
$ 29.1
$ 32.8
5.04%
$ 523.4
$ 25.0
4.77% $ 489.7
$ 21.7
3.44%
$ 853.4
$ 28.1
3.29% $ 821.9
$ 23.9
16.3
76.0
12.3
78.4
0.98%
0.13%
0.29%
1.68%
3.23%
6.08%
18.73%
3.94%
4.43%
2.91%
$ 1,056.1
$ 32.8
3.10%
$ 945.7
$ 28.1
2.97% $ 912.6
$ 23.9
2.62%
$
230.6
450.0
40.2
$
3.8
9.1
1.0
1.63%
2.02%
2.56%
$ 213.9
399.8
42.2
$
3.3
6.5
0.7
1.52% $ 203.8
374.7
1.64%
42.1
1.77%
Total deposits
$
720.8
$ 13.9
1.92%
$ 655.9
$ 10.5
1.61% $ 620.6
Obligations related to securities sold under
repurchase agreements and securities
lent
Subordinated debentures
Other interest-bearing liabilities
114.6
7.5
63.9
0.3
0.3
1.1
0.29%
3.91%
1.74%
96.0
5.7
60.1
0.3
0.2
0.9
0.25%
3.71%
1.46%
102.3
7.1
58.5
Total interest-bearing liabilities
$
906.8
$ 15.6
1.72%
$ 817.7
$ 11.9
1.45% $ 788.5
$
Other liabilities including acceptances
Equity(2)
79.8
69.5
63.9
64.1
65.3
58.8
$
$
2.7
4.7
0.5
7.9
0.2
0.2
0.6
8.9
1.30%
1.26%
1.23%
1.27%
0.21%
3.19%
0.99%
1.13%
Total liabilities and equity
$ 1,056.1
$ 15.6
1.48%
$ 945.7
$ 11.9
1.26% $ 912.6
$
8.9
0.97%
Net interest income
$ 17.2
$ 16.2
$ 15.0
(1)
(2)
Average of daily balances.
Includes non-controlling interest of $2.7 (2018 – $1.9; 2017 – $1.6).
2019 Scotiabank Annual Report | 25
C3 Sources of non-interest income
24%
7%
13%
9%
13%
Underwriting and
other advisory fees
Non-trading foreign
exchange fees
Trading revenues
Other non-interest
income
11%
5%
4%
8%
6%
Card revenues
Banking services fees
Credit fees
Mutual funds
Brokerage Fees
Investment
management and
trust
Management’s Discussion and Analysis
Non-Interest Income
T8 Non-interest income
For the fiscal years ($ millions)
2019
2018
2017
Banking
Card Revenues(1)
Banking services fees
Credit fees
$
977
1,812
1,316
$
1,105
1,705
1,191
$
1,018
1,684
1,153
Total banking revenues
$
4,105
$
4,001
$
3,855
Wealth management
Mutual funds
Brokerage fees
Investment management and trust
Investment management and custody
Personal and corporate trust
$
1,849
876
$
1,714
895
$
1,639
1,047
848
202
1,050
551
181
732
453
179
632
2019
versus
2018
(12)%
6
10
3%
8%
(2)
54
12
43
Total wealth management revenues
$
3,775
$
3,341
$
3,318
13%
Underwriting and other advisory
Non-trading foreign exchange
Trading revenues
Net gain on sale of investment securities
Net income from investments in associated
corporations
Insurance underwriting income, net of claims
Other fees and commissions
Other
497
667
1,488
351
650
676
949
699
514
622
1,420
146
559
686
841
454
598
557
986
380
407
626
903
490
(3)
7
5
140
16
(1)
13
54
Total non-interest income
$ 13,857
$ 12,584
$ 12,120
10%
(1)
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15, prior year amounts have not been restated. (Refer to
Notes 3 and 4 in the Consolidated Financial Statements).
Non-interest income was up $1,273 million or 10% to $13,857 million. The net impact of acquisitions in 2018 and 2019 contributed 6% of the
growth in non-interest income. The remaining 4% growth was primarily from higher banking revenues, income from investments in associated
corporations, and gains on investments.
Banking revenues, net of related expenses, were up $104 million or 3% to $4,105 million. The growth was due to higher credit fees across all
business lines, and growth in other fees and commissions in International Banking, partly offset by a $209 million impact of the new revenue
standard that requires card expenses to be netted against card revenues.
Wealth management revenues increased $434 million or 13% due to higher mutual funds and investment management and trust revenues due
primarily to the acquisitions of Jarislowsky Fraser and MD Financial.
Trading revenues were up $68 million or 5%, due primarily to higher revenues from acquisitions in International Banking.
Net income from investments in associated corporations was up $91 million or 16% due primarily to higher income from Thanachart Bank.
Other income increased $245 million due primarily to higher revenue from asset/liability management activities and International Banking, partly
offset by the net loss on divestitures.
Outlook
Non-interest income is expected to grow in 2020 due to higher wealth management fees, credit card revenues and banking fees, net of
announced divestitures.
T9 Trading revenues
For the fiscal years ($ millions)
By trading products:
Interest rate and credit
Equities
Commodities
Foreign exchange
Other
Total trading revenues
% of total revenues
26 | 2019 Scotiabank Annual Report
2019
2018
2017
$
241
480
235
268
264
$
272
441
231
295
181
$ 474
(125)
295
250
92
$ 1,488
$ 1,420
$ 986
4.8%
4.9%
3.6%
Provision for Credit Losses
The provision for credit losses was $3,027 million, compared to $2,611 million, an increase of $416 million from last year. Adjusting for the Day 1
provision on acquired performing financial instruments recorded in both years, the provision for credit losses increased $669 million or 30%.
The provision for credit losses on impaired financial instruments increased $544 million to $2,899 million primarily in the International Banking
retail portfolio, due mainly to organic and acquisition-driven asset growth in Latin America. The provision for credit losses ratio on impaired loans
was 49 basis points, an increase of six basis points. The provision for performing financial instruments was $128 million, compared to $256 million
last year. Adjusting for the Day 1 provision on acquired performing financial instruments, the provision for performing financial instruments
increased $125 million due primarily to less favourable macroeconomic forecasts in Canada and certain international jurisdictions, hurricane-
related provision reversals last year, and asset growth in the retail portfolios. On an adjusted basis, the provision for credit losses ratio was 49 basis
points, an increase of eight basis points.
Outlook
The quality of the Bank’s credit portfolio is expected to remain strong. The provision for credit losses is expected to increase mostly driven by
organic growth and the change in the Bank’s business mix in each of the Bank’s segments. Overall, the provision for credit losses ratio in 2020 is
expected to be within the Bank’s risk appetite.
T10 Provision for credit losses by business line
For the fiscal years ($ millions)
Canadian Banking
Retail
Commercial
Total
International Banking
Retail
Commercial
Total
Global Banking and Markets
Other
2019
2018
Performing
(Stage 1 and 2)
Impaired
(Stage 3)
Total
Performing
(Stage 1 and 2)
Impaired
(Stage 3)
$
3
(4)
(1)
134
21
155
(25)
–
$
889
84
973
$
892
80
972
1,728
194
1,922
4
–
1,862
215
2,077
(21)
–
$ (13)
21
$
8
304
(24)
280
(23)
–
759
27
786
1,363
193
1,556
(28)
–
$
Total
746
48
794
1,667
169
1,836
(51)
–
Provision for credit losses on loans, acceptances and off-balance
sheet exposures
International Banking
Global Banking and Markets
Other
Provision for credit losses on debt securities and deposits with
banks
$ 129
$ 2,899
$ 3,028
$ 265
$ 2,314
$ 2,579
$
$
(1)
(1)
1
$
$
$
(1)
$
–
–
–
–
$
$
(1)
(1)
1
$ (10)
1
$
$
$
–
41
–
–
$
$
31
1
–
$
(1)
$
(9)
$
41
$
32
Total provision for credit losses
$ 128
$ 2,899
$ 3,027
$ 256
$ 2,355
$ 2,611
T10A Provisions against impaired financial instruments by business line
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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
(1)
The amounts for 2019 and 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated.
2019(1)
2018(1)
2017
$
$
$
889
84
973
292
291
446
403
422
68
$
$
$
759
27
786
321
239
349
275
358
55
$
$
$
857
56
913
215
193
329
145
337
75
1,630
1,276
1,079
$ 1,922
$ 1,597
$ 1,294
$
$
11
(1)
(6)
4
$
$
(1)
(6)
(21)
(28)
$
(6)
(15)
63
$
42
$ 2,899
$ 2,355
$ 2,249
2019 Scotiabank Annual Report | 27
Management’s Discussion and Analysis
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
(1)
(2)
(3)
The amounts for 2019 and 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
Includes provision for credit losses on certain financial assets – loans, acceptances, and off-balance sheet exposures.
2018 and 2019 include Day 1 acquisition-related impact in International Banking.
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
(1) Write-offs net of recoveries.
(2)
(3)
The amounts for 2019 and 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
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.
2019
2018
2017
0.31%
0.14
0.28
2.56
0.28
1.39
(0.02)
0.49
0.02
0.26%
0.10
0.24
2.84
0.27
1.51
(0.06)
0.43
0.05
0.32%
0.13
0.29
2.09
0.37
1.21
0.05
0.45
0.00
0.51%
0.48%
0.45%
2019
2018
2017
0.31%
0.15
0.29
2.48
0.15
1.28
0.03
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
0.50%
0.44%
0.50%
28 | 2019 Scotiabank Annual Report
C4 Non-interest expenses
$ millions
18000
16000
14000
12000
10000
8000
6000
4000
2000
17
18
19
Other
Professional & taxes
Communications & advertising
Depreciation and amortization
Premises & technology
Salaries & employee benefits
C5 Direct and indirect taxes
$ millions
4500
4000
3500
3000
2500
2000
1500
1000
500
17
18
19
Total other taxes
Provision for income taxes
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Non-Interest Expenses
T13 Non-interest expenses and productivity
For the fiscal years ($ millions)
2019
2018
2017
2019
versus
2018
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
$
4,939
1,761
278
1,465
$
4,454
1,624
192
1,185
$
4,220
1,599
209
1,347
$
8,443
$
7,455
$
7,375
527
95
458
477
98
437
$
1,080
$
1,012
$
$
1,727
2,807
402
651
$
1,053
$
$
$
$
$
459
625
861
471
44
515
1,974
$
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
$
11%
8
45
24
13%
10
(3)
5
7%
10%
9%
14
32
24%
3%
8%
(2)%
12
(2)
11%
9%
Total non-interest expenses
$ 16,737
$ 15,058
$ 14,630
11%
Productivity ratio
53.9%
52.3%
53.9%
2019 Scotiabank Annual Report | 29
Management’s Discussion and Analysis
Non-interest expenses increased $1,679 million or 11%. Adjusting for Acquisition and divestiture-related costs, non-interest expenses grew 10%.
The prior year’s remeasurement of an employee benefit liability from certain plan modifications (“benefits remeasurement”), the impact of
acquisitions and the new revenue accounting standard that requires card expenses to be netted against card revenues contributed to
approximately 6% of the growth. The remaining 4% growth was due to investments in technology and regulatory initiatives, higher performance
based compensation and share-based payments, partly offset by the positive impact of foreign currency translation.
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 $3.6 billion, an increase of 7% compared to 2018. This reflects our continued investment in
modernization and technology, including cybersecurity.
The productivity ratio was 53.9% compared to 52.3%. Adjusting for Acquisition and divestiture-related amounts and the impact of prior year’s
benefits remeasurement, the productivity ratio was 52.7% compared to 52.4%. Operating leverage on a reported basis was negative 3.3%.
Adjusting for Acquisition and divestiture-related amounts, operating leverage was negative 2.1%. The benefits remeasurement negatively
impacted operating leverage by 1.5%.
Outlook
While Non-interest expense are expected to rise in 2020 in support of business growth initiatives and continued technology and regulatory
investments, the growth will be partly offset by further savings from efficiency initiatives. Expense management and delivery of positive operating
leverage remain key business priorities.
Income Taxes
The provision for income taxes was $2,472 million, an increase of $90 million. The effective tax rate increased marginally to 21.9% compared to
21.5% due primarily to higher taxes related to the divestitures of foreign operations partially offset by higher tax-exempt income.
Outlook
The Bank’s consolidated effective tax rate is expected to be in the range of 21% to 25% in 2020.
30 | 2019 Scotiabank Annual Report
Financial Results Review: 2018 vs. 2017
In order to identify key business trends between 2018 and 2017, commentary and the related financial results are below.
Net income
Net income was $8,724 million in 2018, up 6% from $8,243 million in 2017. 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 compared to $6.54, up 9%. Adjusted Return on equity was 14.9% compared to 14.7%.
Net interest income
Net interest income was $16,191 million in 2018, 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.
Non-interest income
Non-interest income was $12,584 million in 2018, up $464 million or 4%. The impact of the sale of the HollisWealth business (“Sale of
Business”) in 2017, net of the benefit from 2018 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
Provision for credit losses was $2,611 million, an increase of $362 million from 2017. Adjusting for the Day 1 provision on acquired performing
financial instruments, 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 in 2017. Adjusting for the Day 1 provision on acquired performing financial instruments, the provision for
credit losses ratio decreased four basis points to 41 basis points.
Non-interest expenses
Non-interest expenses were $15,058 million in 2018, 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 in 2017. 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.
Income taxes
The provision for income taxes was $2,382 million in 2018, an increase of $349 million. The Bank’s overall effective tax rate for 2018 was 21.5%
compared to 19.8% for 2017. The increase in the effective tax rate was due primarily to higher tax-exempt income from client-driven equity
trading activities in 2017, partially offset by lower taxes in certain foreign jurisdictions in 2018.
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T14 Financial Results Review
For the year ended October 31, 2018 ($ 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
$
7,898
5,452
$ 13,350
794
6,654
1,538
$
7,322
4,111
$ 11,433
1,867
6,111
706
$ 1,454
3,074
$ 4,528
(50)
2,233
587
Other(2)
Total
$ (483)
(53)
$ (536)
–
60
(449)
$ 16,191
12,584
$ 28,775
2,611
15,058
2,382
$
4,364
$
2,749
$ 1,758
$ (147)
$
8,724
Net income attributable to non-controlling interests
–
176
–
–
176
Net income attributable to equity holders of the Bank
$
4,364
$
2,573
$ 1,758
$ (147)
$
8,548
(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, 2018 – $112 to arrive at the amounts reported in Consolidated Statement of Income, and differences in the actual amount of costs incurred and charged to the operating segments.
2019 Scotiabank Annual Report | 31
Management’s Discussion and Analysis
For the year ended October 31, 2017 ($ 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
$
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
Other(2)
Total
$ (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 – $562 to arrive at the amounts reported in Consolidated Statement of Income, and differences in the actual amount of costs incurred and charged to the operating segments.
32 | 2019 Scotiabank Annual Report
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Fourth Quarter Review
T15 Fourth quarter financial results - reported
($ 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
2019(1)
July 31
2019(1)
October 31
2018
$ 4,336
3,632
$ 7,968
753
4,311
596
$ 4,374
3,285
$ 7,659
713
4,209
753
$ 2,308
$ 1,984
$
107
$
120
$ 2,201
64
$ 2,137
$ 1,864
25
$ 1,839
$ 4,220
3,228
$ 7,448
590
4,064
523
$ 2,271
$
92
$ 2,179
65
$ 2,114
(1)
The amounts for the periods ended October 31, 2019 and July 31, 2019 have been prepared in accordance with IFRS 15; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
T15A Fourth quarter financial results - adjusted for Acquisition and divestiture-related amounts (refer to non-GAAP measures on page 15)
($ 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
2019(1)
July 31
2019(1)
October 31
2018
$ 4,336
3,626
$ 7,962
753
4,197
612
$ 4,374
3,591
$ 7,965
713
4,122
675
$ 2,400
$ 2,455
$
102
$
125
$ 2,298
64
$ 2,234
$ 2,330
25
$ 2,305
$ 4,220
3,228
$ 7,448
590
3,962
551
$ 2,345
$
101
$ 2,244
65
$ 2,179
(1)
The amounts for the periods ended October 31, 2019 and July 31, 2019 have been prepared in accordance with IFRS 15; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
Transactions impacting results
Acquisition and divestiture-related amounts:
During the fourth quarter, the Bank completed the previously announced sale of its banking operations in seven non-core Caribbean markets and
entered into an agreement to sell its 51% interest in AFP Colfondos in Colombia and recorded a net loss of $9 million.
Integration and other costs recorded this quarter related to previously completed acquisitions amounted to $107 million (Q3,19 – $73 million).
Net income
Q4 2019 vs Q4 2018
Net income was $2,308 million, an increase of $37 million or 2%. Adjusting for Acquisition and divestiture-related amounts, net income was
$2,400 million, an increase of $55 million or 2%, due primarily to higher revenue.
Q4 2019 vs Q3 2019
Net income was $2,308 million, an increase of $324 million or 16%. Adjusting for Acquisition and divestiture-related amounts, net income was
$2,400 million, a decrease of $55 million or 2%, due primarily to higher provision for credit losses and higher non-interest expenses, offset by lower
income tax expense.
Net interest income
Q4 2019 vs Q4 2018
Net interest income was $4,336 million, an increase of $116 million or 3%, primarily from solid growth in assets and deposits in Canadian Banking,
commercial and retail lending in International Banking, as well as higher corporate loans in Global Banking and Markets. These increases were
partly offset by lower income contribution from asset/liability management activities, and the negative impact of foreign currency translation.
The core banking margin was down seven basis points to 2.40%. The decrease in margin was driven by lower spreads on asset/liability
management activities, and lower margins in International Banking and Global Banking and Markets, partially offset by higher margins in Canadian
Banking.
2019 Scotiabank Annual Report | 33
Management’s Discussion and Analysis
Q4 2019 vs Q3 2019
Net interest income was $4,336 million, a decrease of $38 million or 1%, from lower asset/liability management activities and the negative impact
of foreign currency translation, partly offset by strong asset growth in Canadian Banking.
The core banking margin of 2.40% was down five basis points. The decrease in the margin was driven by lower spreads on asset/liability
management activities, lower margin contribution from International Banking due mainly to unfavourable foreign currency translation on higher
margin assets, as well as lower margins in Canadian Banking.
Non-interest income
Q4 2019 vs Q4 2018
Non-interest income was $3,632 million, up $404 million or 13%. Acquisitions contributed to approximately one quarter of the growth. Other
primary contributors to growth were higher banking and wealth management revenues, underwriting and advisory fees, and net gains on
investments. These were partly offset by the impact of the new revenue accounting standard that requires credit card expenses to be netted
against credit card revenue.
Q4 2019 vs Q3 2019
Non-interest income was up $347 million or 11%. Adjusting for the net gain on divestitures in the current quarter and the loss on divestitures in the
prior quarter, non-interest income increased by $35 million or 1%. The growth was driven by higher banking, underwriting and advisory, and wealth
management fees, partly offset by lower trading revenues and income from associated corporations.
Provision for credit losses
Q4 2019 vs Q4 2018
The provision for credit losses was $753 million, an increase of $163 million or 28%, due to higher provisions in both the retail and commercial
portfolios in line with organic and acquisition driven asset growth.
The provision for credit losses on impaired financial instruments was $744 million, up $107 million due to higher retail portfolio provisions in
International Banking in line with growth and in Canadian Banking due to lower recoveries, as well as higher commercial portfolio provisions in
Canadian Banking and in Global Banking and Markets due to lower recoveries. Commercial portfolio provisions in International Banking remained
relatively stable, with the provision relating to the Barbados debt restructuring being offset with higher recoveries last year. The provision for credit
losses ratio on impaired loans was 49 basis points, an increase of seven basis points. The provision on performing financial instruments was
$9 million, an increase of $56 million due primarily to hurricane-related reversals last year and retail portfolio growth. The provision for credit
losses ratio increased 11 basis points to 50 basis points.
Q4 2019 vs Q3 2019
The provision for credit losses was $753 million, an increase of $40 million.
The provision on impaired financial instruments decreased $32 million or 4%, due primarily to lower retail portfolio provisions driven by lower
write-offs in Canada and credit quality improvements in International Banking, partially offset by higher commercial portfolio provisions in
Canadian Banking and Global Banking and Markets. The provision for credit losses ratio on impaired loans was 49 basis points, a decrease of three
basis points. The provision for performing financial instruments was $9 million, an increase of $72 million mainly in the International Banking retail
portfolio driven by less favourable macroeconomic impacts due to geopolitical uncertainty and hurricanes in the Bahamas. The prior quarter
benefitted from credit quality improvements. The provision for credit losses ratio increased two basis points to 50 basis points.
Non-interest expenses
Q4 2019 vs Q4 2018
Non-interest expenses were $4,311 million, up $247 million or 6%. Adjusting for Acquisition and divestiture-related amounts, non-interest
expenses also grew by 6%. Higher non-interest expenses from the impact of acquisitions, partly offset by the impact of the new revenue
accounting standard that requires card expenses to be netted against card revenues, contributed to approximately 1% of the growth. The
remaining 5% increase was due to higher salaries and benefits related to regulatory and technology initiatives and higher depreciation and
amortization, performance based compensation and other business growth related expenses. Partly offsetting were lower professional fees and
the positive impact of foreign currency translation.
The productivity ratio was 54.1% compared to 54.6%. Adjusting for Acquisition and divestiture-related amounts, the productivity ratio was 52.7%
compared to 53.2%.
Q4 2019 vs Q3 2019
Non-interest expenses were up $102 million or 2%. Adjusting for Acquisition and divestiture-related amounts, non-interest expenses also grew by
2%. The increase was due to higher professional fees, technology costs and other business growth related expenses partly offset by lower share-
based compensation costs, salaries and the positive impact of foreign currency translation.
The productivity ratio was 54.1% compared to 55.0%.
Income taxes
Q4 2019 vs Q4 2018
The effective tax rate was 20.5% compared to 18.7% due primarily to higher taxes in certain foreign jurisdictions.
Q4 2019 vs Q3 2019
The effective tax rate decreased to 20.5% from 27.5% due primarily to higher taxes related to the loss on the announced divestiture of Puerto Rico
in the prior quarter.
34 | 2019 Scotiabank Annual Report
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Trending Analysis
T16 Quarterly financial highlights
($ millions)
Reported results
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income tax expense
Basic earnings per share ($)
Diluted earnings per share ($)
Core banking margin (%)(2)
Effective tax rate (%)
Adjusted results(2)
Adjusted net income
Adjusted diluted earnings per share
October 31
2019(1)
July 31
2019(1)
April 30
2019(1)
January 31
2019(1)
October 31
2018
July 31
2018
April 30
2018
January 31
2018
For the three months ended
$ 4,336
3,632
$ 7,968
753
4,311
596
$ 4,374
3,285
$ 7,659
713
4,209
753
$ 4,193
3,610
$ 7,803
873
4,046
625
1.76
1.73
2.40
20.5
1.51
1.50
2.45
27.5
1.74
1.73
2.45
21.7
$ 4,274
3,330
$ 7,604
688
4,171
498
$ 2,247
1.72
1.71
2.45
18.1
$ 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
$ 2,271
$ 1,939
$ 2,177
1.72
1.71
2.47
18.7
1.60
1.55
2.46
21.5
1.70
1.70
2.47
22.2
$ 3,936
3,152
$ 7,088
544
3,498
709
$ 2,337
1.88
1.86
2.46
23.3
$ 2,400
$ 1.82
$ 2,455
$ 1.88
$ 2,263
$ 1.70
$ 2,291
$ 1.75
$ 2,345
$ 1.77
$ 2,259
$ 1.76
$ 2,190
$ 1.71
$ 2,350
$ 1.87
Net income
$ 2,308
$ 1,984
$ 2,259
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
(1)
(2) Refer to page 15 for a discussion of non-GAAP measures.
Net income
The Bank reported strong net income over the past eight quarters. The earnings in the current quarter were reduced by Acquisition and
divestiture-related amounts of $92 million ($108 million pre-tax). Last quarter’s earnings were reduced by Acquisition and divestiture-related
amounts of $471 million ($393 million pre-tax). The third quarter of 2018 was reduced by Acquisition and divestiture-related amounts of
$320 million ($453 million pre-tax).
The first quarter of 2018 included an accounting benefit of $150 million ($203 million pre-tax) from the remeasurement of an employee benefit
liability from certain plan modifications.
Net interest income
Net interest Income has generally increased through the period, driven by steady growth in retail loans in Canadian and International Banking,
commercial loan growth across all three business lines, strong deposit growth, and the impact of acquisitions. Net interest margin has remained
relatively stable over the period. The margin was 2.40% this quarter, down five basis points from the prior quarter.
Net interest income in the second quarter of 2019 was lower due to the impact of three fewer days in the quarter as well as lower contributions
from asset/liability management activities.
Non-interest income
Non-interest income has generally increased through the period driven by acquisitions, higher investment securities gains and the impact from
Alignment of reporting period of a number of units with the Bank. The prior quarter was impacted by the net loss on divestitures of $306 million,
and the second quarter of 2019 included net gain on divestitures of $173 million.
Provision for credit losses
The provision for credit losses has generally increased over the period primarily due to higher provision on impaired financial instruments in the
International Banking and Canadian Banking retail portfolios driven by portfolio growth, the impact of acquisitions in International Banking, and
lower recoveries. Adjusting for the Day 1 provision on acquired performing financial instruments recorded in the third quarter of 2018 and the
second quarter of 2019, the provision for performing financial instruments has remained relatively stable since the first quarter of 2018, with
fluctuations in credit quality and macroeconomic outlooks quarter over quarter.
Non-interest expenses
Non-interest expenses have generally trended upwards over the period, mostly from the ongoing impact of acquisitions, to support business
growth, and the Bank’s investments in technology, regulatory and strategic initiatives. The first quarter of 2018 included a benefits remeasurement
of $203 million, reducing that quarter’s expenses.
Income taxes
The effective tax rate was 20.5% this quarter and averaged 21.7% over the period, with a range of 18.1% to 27.5%. In the third quarter of 2019, the
tax rate was 27.5% reflecting higher taxes related to the divestitures of foreign operations announced in that period. 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.
2019 Scotiabank Annual Report | 35
Management’s Discussion and Analysis
Business Line Overview
Business line results are presented on a taxable equivalent basis, adjusting for the following:
• 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.
• 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.
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 2019.
CANADIAN BANKING
Canadian Banking reported net income attributable to equity holders of $4,424 million in 2019, up 1% from last year. Adjusting for Acquisition
related costs, net income was $4,485 million, up 2%. Solid growth in assets and deposits, along with an improving margin driven mainly from past
Bank of Canada interest rate increases and higher non-interest income contributed to growth in 2019. This was partly offset by higher non-interest
expenses and higher provision for credit losses. Return on equity was 18.8%, compared with 22.7% last year, mainly due to prior year acquisitions.
INTERNATIONAL BANKING
International Banking reported net income attributable to equity holders of $2,996 million, up $423 million or 16% from last year. Adjusting for
Acquisition-related costs, net income attributable to equity holders increased by $369 million or 13% to $3,188 million. Strong results in Latin
America, including benefits from acquisitions, and Asia, were complemented by good earnings in the Caribbean. The impact of acquisitions and
divestitures contributed approximately 3% to the adjusted earnings growth. The remaining increase was driven by strong loan growth in Latin
America, higher net interest income and non-interest income. This was partly offset by higher provision for credit losses, non-interest expenses
and higher income taxes. Return on equity was 13.9% compared to 14.4% last year. Adjusting for Acquisition-related costs, the return on equity
was 14.8%.
GLOBAL BANKING AND MARKETS
Global Banking and Markets reported net income attributable to equity holders of $1,534 million, a decrease of $224 million or 13% from last year.
Lower revenues in the equities business, higher expenses, as well as higher provision for credit losses, were partly offset by very strong results in
the fixed income business. Return on equity was 13.3%, compared to 16.0% last year.
36 | 2019 Scotiabank Annual Report
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KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES
Management uses a number of key metrics to monitor business line performance:
• Net income
• Return on equity
• Productivity ratio
• Provision for credit losses ratio
T17 Financial performance
For the year ended October 31, 2019 ($ millions)(1)(2)
Net interest income(4)
Non-interest income(4)
Total revenue(4)
Provision for credit losses
Non-interest expenses
Provision for income taxes(4)
Net income
Canadian
Banking
$ 8,284
5,609
13,893
972
6,943
1,554
International
Banking
Global Banking
and Markets
Other(3)
Total
$ 8,482
5,006
13,488
2,076
7,027
998
$ 1,396
3,084
$ (985)
158
$ 17,177
13,857
4,480
(22)
2,463
505
(827)
1
304
(585)
31,034
3,027
16,737
2,472
$ 4,424
$ 3,387
$ 1,534
$ (547)
$ 8,798
Net income attributable to non-controlling interests in subsidiaries
–
391
–
17
408
Net income attributable to equity holders of the Bank
$ 4,424
$ 2,996
$ 1,534
$ (564)
$ 8,390
Return on equity (%)(5)
Total average assets ($ billions)
Total average liabilities ($ billions)
18.8%
363
283
$
$
13.9%
203
157
$
$
13.3%
–%
13.1%
$ 372
$ 304
$ 118
$ 243
$ 1,056
987
$
(1)
(2)
(3)
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9, prior year amounts have not been restated.
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15, prior year amounts have not been restated.
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.
Taxable equivalent basis. Refer to Glossary.
(4)
(5) Refer to Glossary.
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
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
Net income attributable to non-controlling interests in subsidiaries
–
176
–
–
176
Net income attributable to equity holders of the Bank
$ 4,364
$ 2,573
$ 1,758
$ (147)
$ 8,548
Return on equity (%)(3)
Total average assets ($ billions)
Total average liabilities ($ billions)
22.7%
342
254
$
$
14.4%
168
131
$
$
16.0%
–%
$ 321
$ 265
$ 115
$ 232
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.
Taxable equivalent basis. Refer to Glossary.
(2)
(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
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
Net income attributable to non-controlling interests in subsidiaries
–
238
–
–
238
Net income attributable to equity holders of the Bank
$ 4,064
$ 2,390
$ 1,818
$ (267)
$ 8,005
Return on equity (%)(3)
Total average assets ($ billions)
Total average liabilities ($ billions)
22.8%
323
244
$
$
14.7%
148
115
$
$
16.0%
–%
$ 336
$ 267
$ 106
$ 228
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.
Taxable equivalent basis. Refer to Glossary.
(2)
(3) Refer to Glossary.
2019 Scotiabank Annual Report | 37
Management’s Discussion and Analysis
Canadian Banking
Effective November 1, 2019, Global Wealth Management will become a fourth business segment at Scotiabank. Wealth Management results
previously included in the Canadian Banking and International Banking business segments will be reported in the new business segment. Prior
period comparatives will be restated. Refer to page 49 for further details on the profile, strategy, 2020 priorities and outlook for the new Global
Wealth Management segment.
2019 Achievements
• Customer Focus - Deliver a leading customer experience and deepen relationships with customers across our businesses and channels.
• Ranked #1 in Retail Banking Advice Satisfaction in 2019 J.D. Power Study
• Tangerine ranked highest in Customer Satisfaction in the J.D. Power 2019 Retail Banking Satisfaction Study amongst mid-sized
•
•
•
•
banks for the eighth consecutive year
Launched the Scotiabank Women Initiative to support women-owned and led businesses with access to capital, mentorship and
coaching
Launched the Ultimate Package, our new premium retail banking offering combining multiple retail banking product benefits into
one
Scotia Global Asset Management won a record-number 28 FundGrade A+ Awards and eight Lipper Awards
Scotia Wealth Management won 2019 Best Global Private Bank – Best Private Bank for Net Worth Between $1 million and
$24.9 million
• Digital Transformation - Leverage digital as the foundation of all our activities to improve our operations, enhance the client experience,
and drive digital adoption.
• Awarded 2019 J.D. Power #1 bank in overall banking mobile app satisfaction. In addition, launch of new mobile app in May 2019
• Redesigned our ScotiaConnect Digital Banking Platform to improve the business banking experience, enhancing navigation, usability
and accessibility of the site
• Business Mix - Optimize our business mix by growing higher margin assets, building core deposits, and expanding fee based income.
• Award-winning credit card products with the Scotiabank Passport Visa Infinite Card & the Scotiabank Gold American Express Card
ranked as best travel cards by Rewards Canada, and the Scotia Momentum Visa Infinite Card as best cash back credit card by
Ratehub and RateSupermarket in 2019
• Delivered strong deposit growth and net interest margin expansion
•
Launched the Dynamic Liquid Alternative investment fund products
• Leadership and Employee Engagement - Grow and diversify talent and engage employees through a performance-oriented culture.
Increased employee engagement across Canadian Banking compared to the prior year based our internal ScotiaPulse survey
•
• Ranked in the Top 25 Most Diverse & Inclusive companies in REFINITIV’s Diversity & Inclusion Index
Business Profile
Canadian Banking provides a full suite of financial advice and banking solutions, supported by an excellent customer experience, to over 11 million
Retail, Small Business, and Commercial Banking customers. It serves these customers through its network of approximately 950 branches, more
than 3,650 automated banking machines (ABMs), and internet, mobile, telephone banking, and specialized sales teams. Canadian Banking also
provides an alternative self-directed banking solution to over 2 million Tangerine Bank customers. Canadian Banking is comprised of the following
areas:
• Retail and Small Business Banking provides financial advice and solutions as well as day-to-day banking products, including debit cards,
chequing accounts, credit cards, investments, mortgages, loans and 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.
• 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.
• 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.
Effective November 1, 2019, the wealth management businesses within the existing Canadian Banking and International Banking segments will be
reported separately as a single “Global Wealth Management” segment. Going forward, the Canadian Banking business segment will be comprised
of the following areas:
• Retail Banking provides financial advice and solutions as well as day-to-day banking products, including; debit cards, chequing accounts, credit
cards, investments, mortgages, loans and insurance products to individuals. Tangerine Bank provides everyday banking products, including;
chequing and saving accounts, credit cards, investments, mortgages, and loans to self-directed customers.
• Business Banking delivers advice and a full suite of lending, deposit, cash management, and trade finance solutions to small businesses and
commercial customers, including automotive financing solutions to dealers and their customers.
Strategy
Canadian Banking continues to execute its long-term strategy to deliver stable and consistent earnings. Underpinning this strategy is the focus on
accelerating growth in businesses and products that deliver the higher returns on equity. In support of this strategy, the Canadian Bank will build
38 | 2019 Scotiabank Annual Report
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stronger relationships with its customers in order to drive increased loyalty and higher engagement. This will be driven by ongoing efforts to build a
high-quality team comprised of diverse and highly engaged employees.
2020 Priorities
•
•
Improve Sustained Business Performance: Invest to grow the higher ROE businesses, including Business Banking, to deliver consistent and
stable long-term earnings growth.
Instill a Winning team Culture: Engage employees through a RESULTS (Revenue, Earnings, Simplify, Urgency, Listen, Trust, Support) focused
culture.
• Superior Customer Experience: Develop deeper household relationships for our customers across Canada by providing differentiated focus
and service to drive loyalty and engagement.
• Scale our unique partnerships and assets: Leverage our long-term partnerships and assets like MLSE, Scene and Wealth businesses to
generate growth across our division.
T18 Canadian Banking financial performance
($ millions)
Reported results
Net interest income(3)
Non-interest income(3)(4)
Total revenue(3)
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(5)
Productivity(3)
Net interest margin(6)
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(7)
Assets under management(7)
2019(1)(2)
2018
2017
$
8,284
5,609
13,893
972
6,943
1,554
$
7,898
5,452
13,350
794
6,654
1,538
$
7,363
5,488
12,851
913
6,487
1,387
$
4,424
$
4,364
$
4,064
–
–
–
$
4,424
$
4,364
$
4,064
$
$
18.8%
50.0%
2.47%
(1)
973
0.28%
0.28%
0.29%
$
$
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%
$ 348,994
362,735
263,993
283,193
$ 334,103
341,825
240,855
253,591
$ 315,916
322,712
233,260
243,748
$
$
386
243
$
$
357
223
$
$
315
155
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9, prior year amounts have not been restated.
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
Taxable equivalent basis (TEB).
Includes net income from investments in associated corporations of $65 (2018 – $93; 2017 – $66).
(1)
(2)
(3)
(4)
(5) Refer to Glossary.
(6) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
(7)
Prior period amounts have been restated to conform with current period presentation.
T18A Adjusted Canadian Banking financial performance(1)
($ 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.
2019
2018
2017
$ 8,284
5,609
$ 7,898
5,452
$ 7,363
5,488
13,893
972
6,860
6,061
1,576
13,350
794
6,583
5,973
1,557
12,851
913
6,452
5,486
1,396
$ 4,485
–
$ 4,485
$ 4,416
–
$ 4,416
$ 4,090
–
$ 4,090
2019 Scotiabank Annual Report | 39
Management’s Discussion and Analysis
Financial Performance
Net income
Canadian Banking reported net income to equity holders of $4,424 million in 2019, an increase
of $60 million or 1%. Adjusting for Acquisition-related costs, net income was $4,485, an
increase of $69 million or 2% due primarily to higher revenue driven by solid volume growth
and the impact of acquisitions, partly offset by higher non-interest expenses and provision for
credit losses. Lower gains on sale of real estate, the prior year gain on the reorganization of
Interac, and benefit from the Alignment of reporting period impacted earnings growth by 2%.
Average assets and liabilities
Average assets grew $21 billion or 6% to $363 billion. The growth included $7 billion or 3% in
residential mortgages, $5 billion or 10% in business loans and acceptances, and $2 billion or 3%
in personal and credit card loans.
Average liabilities increased $30 billion or 12%, including strong growth of $12 billion or 7% in
personal deposits and $11 billion or 15% in non-personal deposits.
Assets under management (AUM) and assets under administration (AUA)
AUM of $243 billion increased $20 billion or 9% and AUA of $386 billion increased $29 billion
or 8%, driven primarily by market appreciation.
Revenues
Total Revenue of $13,893 million increased $543 million or 4%, largely driven by improved
margins, solid balance sheet growth, and higher wealth management fee income from
acquisitions.
Net interest income
Net interest income of $8,284 million increased $386 million or 5%, reflecting improved
margins and solid growth in assets and deposits. Margin improved three basis points to 2.47%,
primarily driven by the impact of prior interest rate increases by the Bank of Canada.
Non-interest income
Non-interest income of $5,609 million increased $157 million or 3%. Higher wealth
management fee income from acquisitions and credit fees were partially offset by reduced net
card revenue due to the impact of the new revenue accounting standard and lower gains on
sale of real estate. The prior year benefitted from the gain on reorganization of Interac and
Alignment of reporting period of the insurance operations with the Bank.
Retail & Small Business Banking
Total retail and small business banking revenues were $7,700 million, down $48 million or 1%.
Net interest income grew $271 million or 5%, primarily driven by solid growth in residential
mortgages and continued momentum in deposit growth. Non-interest income decreased
$319 million or 15%, primarily due to the impact of the new revenue accounting standard, lower
gains on sale of real estate, and prior year benefits including the gain on reorganization
of Interac and Alignment of reporting period of the insurance operations with the Bank.
Commercial Banking
Total commercial banking revenues increased $104 million or 4% to $2,462 million. Net
interest income increased $73 million or 4% due primarily to growth in loans, business
operating accounts, and GICs. Non-interest income grew $31 million or 6% due to higher credit
fees.
Wealth Management
Total wealth management revenues were $3,731 million, an increase of $487 million or 15%
primarily due to the impact of acquisitions. Net interest income rose $42 million or 11% mainly
due to growth in deposits. Non-interest income was up $445 million or 16%, due primarily to
the impact of acquisitions of Jarislowsky Fraser and MD Financial.
Non-interest expenses
Non-interest expenses were $6,943 million, up $289 million or 4%. Adjusting for Acquisition-
related costs, non-interest expenses were $6,860 million, up 4% largely relating to the prior
year acquisitions. Higher personnel costs to support business development and regulatory
initiatives were offset by the impact of the new revenue accounting standard.
Provision for credit losses
The provision for credit losses was $972 million, compared to $794 million last year. The
provision on impaired loans was $973 million, up $187 million due to higher retail and
commercial provisions in line with asset growth and lower recoveries. The provision for credit
losses ratio on impaired loans was 28 basis points, an increase of four basis points. The
provision on performing loans decreased $9 million primarily due to lower commercial
40 | 2019 Scotiabank Annual Report
C6 Total revenue
27%
55%
18%
Retail & Small Business Banking
Commercial Banking
Wealth Management
C7 Total revenue by sub-segment
$ millions
14000
12000
10000
8000
6000
4000
2000
17
18
19
Wealth Management
Commercial Banking
Retail Banking and Small Business Banking
C8 Average loans and acceptances
$ billions
350
300
250
200
150
100
50
17
18
19
Commercial loans/acceptances
Retail loans (except mortgages)
Residential mortgages
C9 Canadian wealth management
asset growth
$ billions, as at October 31
400
350
300
250
200
150
100
50
300
275
250
225
200
175
150
125
100
75
50
25
17
18
19
Assets under administration (left scale)
Assets under management (right scale)
provisions driven by improved credit quality partially offset by higher retail provisions impacted by less favourable macroeconomic trends. The
provision for credit losses ratio was 28 basis points, an increase of four basis points.
Provision for income taxes
The effective tax rate was at 26.0%, in line with the prior year.
Outlook
Canadian Banking’s growth in 2020 is expected to be driven by balance sheet expansion, supported by a stable economic environment. Assets are
projected to grow across both retail and business banking. Deposits are also expected to grow across the business lines. Margins are expected to
remain under pressure over the next year. Non-interest revenues are expected to grow, underpinned by growth in fee income. Key priorities for
2020 will be to continue to drive growth in the core businesses along with improving operational efficiencies and targeting positive operating
leverage.
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2019 Scotiabank Annual Report | 41
Management’s Discussion and Analysis
International Banking
Effective November 1, 2019, Global Wealth Management will become a fourth business segment at Scotiabank. Wealth Management results
previously included in the Canadian Banking and International Banking business segments will be reported in the new business segment. Prior
period comparatives will be restated. Refer to page 49 for further details on the profile, strategy, 2020 priorities and outlook for the new Global
Wealth Management segment.
2019 Achievements
• Footprint Optimization
•
Significant progress has been made in our footprint optimization program, which is substantially complete
•
Integrations of our acquisitions in Chile, Colombia, Peru and Dominican Republic on-track in terms of execution and synergies
captured
• Announced divestitures in non-core markets and businesses, including selected eastern Caribbean countries, Puerto Rico, El
Salvador and Thailand
• Customer Focus
• Continued primary customer growth in both retail and commercial. Retail customer growth maintains its steady progress towards
our goal of adding 1 million new primary customers
•
Significant Customer Experience improvements across countries in the Pacific Alliance; our proprietary system allowed us to
accurately identify and improve on customer satisfaction following system migration and integration in Mexico and Chile
respectively
• Leadership
•
•
Scotiabank named #6 best workplace in Latin America by Great Place to Work, up from 15th in 2018
Significant progress made in women leadership. Recognized among the top 10 organizations in gender equality in 3 of our Pacific
Alliance countries by the Aequales PAR Ranking
• Continue to strengthen a diverse leadership team and to leverage international mobility
• Enterprise Productivity
• Adjusting for Acquisition-related costs, productivity ratio improved by more than 190 basis points while delivering positive
operating leverage of more than 400 basis points
• Digital Transformation
• Achieved strong progress on digital targets across our markets; reached milestone of selling 50%+ of all retail products via digital
banking in Chile
•
Successfully launched new mobile applications across the 4 Pacific Alliance countries
• Built good momentum in new revenue flows generated from products sold digitally, surpassing the operating cost of running our
Digital Factories
• Began deployment of digital solutions in branches across key markets for enhanced customer experience and productivity;
Colombia leads with more than 90% of saving accounts completed through end-to-end digital solutions
• Business Mix Alignment
• Closed a 15-year strategic partnership to accelerate our insurance business
• Strong Risk Culture
•
Enhanced in-country organizational structures for anti-money laundering (AML) with senior leaders and local teams in-place.
• Delivery of priority initiatives strengthening internal controls and continued AML risk mitigation underway.
Business Profile
International Banking has a strong and diverse franchise with more than 11 million Retail, Corporate and Commercial customers. We have almost
60,000 employees and our customers are served by a network of more than 1,900 branches, 5,500 ATMs and 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 Central America and the Caribbean.
Strategy
International Banking continues to execute its medium-term strategy that is aligned with the all-Bank strategic priorities of: customer focus,
leadership, enterprise productivity, digital transformation, business mix alignment, and strong risk culture. Underpinning this strategy is our
increased focus on growth in the Pacific Alliance while optimizing operations in Central America and the Caribbean.
2020 Priorities
• Optimize Footprint: Continue executing with discipline announced acquisitions and divestitures to enhance the risk profile of our portfolio and
improve quality of our earnings.
• Lead in Customer Experience and Digital: Continue accelerating our digital transformation to amplify business impact and continue deploying
digital solutions to other channels to optimize our distribution model.
• Accelerate Growth Drivers: Leverage new strategic partnership to accelerate insurance growth, scale our Capital Markets business in the Pacific
Alliance and build our Wealth business with focus in affluent customer segment.
42 | 2019 Scotiabank Annual Report
T19 International Banking financial performance
($ millions)
Reported results
Net interest income(3)
Non-interest income(3)(4)(5)(6)
Total revenue(3)
Provision for credit losses(7)
Non-interest expenses
Income tax expense(3)
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(8)
Productivity(3)
Net interest margin(9)
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(10)
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(11)
Total assets
Deposits
Total liabilities
Other ($ billions)
Assets under administration(12)(13)
Assets under management(13)
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2019(1)(2)
2018
2017
$
$
$
$
$
8,482
5,006
13,488
2,076
7,027
998
3,387
391
2,996
13.9%
52.1%
4.49%
154
1,922
1.39%
1.29%
1.28%
$
$
$
$
$
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
14.7%
54.4%
4.79%
n/a
n/a
1.21%
1.21%
1.31%
$ 188,724
203,440
118,501
156,820
$ 157,513
167,694
103,629
130,789
$ 140,471
147,537
95,232
114,694
$
$
161
59
$
$
153
58
$
$
146
52
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9, prior year amounts have not been restated.
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
Taxable equivalent basis.
Includes net income from investments in associated corporations of $763 (2018 – $643; 2017 – $482).
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 Peru of $58 for the year ended October 31, 2019, and 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 financial instruments of $151 for the year ended October 31, 2019 (October 31, 2018 – $404; October 31, 2017 – nil).
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8) Refer to Glossary.
(9) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
(10) Provision for credit losses as a percentage of average net loans and acceptances adjusted for Day 1 provision for credit losses was 1.18% in 2018 and 1.29% in 2019.
(11)
(12) Excludes Affiliates.
(13) Prior period amounts have been restated to conform with current period presentation.
Includes bankers’ acceptances.
T19A Adjusted International Banking financial performance(1)
($ 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 (NCI)
Net income attributable to equity holders
(1)
Refer to Non-GAAP measures for reconciliation of Reported and Adjusted results.
2019
2018
2017
$
8,482
5,006
$
7,322
4,111
$
6,726
3,688
13,488
1,925
6,816
4,747
1,102
3,645
457
3,188
$
$
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
$
$
2019 Scotiabank Annual Report | 43
Management’s Discussion and Analysis
Financial Performance
Net income
Net income attributable to equity holders was $2,996 million, an increase of $423 million or
16%. Adjusting for Acquisition-related costs, net income was $3,188 million up $369 million or
13%. Strong results in Latin America, including benefits from acquisitions, and Asia,
complemented by good earnings in Caribbean. The impact of acquisitions and divestitures
contributed approximately 3% to the adjusted earnings growth. The remaining increase was
driven by strong loan growth in Latin America, higher net interest income and higher
non-interest income. This was partly offset by higher provisions for credit losses, non-interest
expenses, and income taxes.
Financial Performance on Constant Dollar Basis
The discussion below on the results of operations is on a constant dollar basis that excludes the
impact of foreign currency translation, and is a non-GAAP financial measure (refer to
Non-GAAP Measures). The Bank believes that reporting in constant dollars is useful to readers in
assessing ongoing business performance. Ratios are on a reported basis.
T20 International Banking financial performance on constant dollar basis
($ millions)
Net interest income(3)
Non-interest income(3)(4)
Total revenue(3)
Provision for credit losses
Non-interest expenses
Income tax expense(3)
2019(1)(2)
$
8,482
5,006
13,488
2,076
7,027
998
$
2018
7,295
4,098
11,393
1,815
6,057
721
$
2017
6,619
3,612
10,231
1,250
5,544
823
Net income on constant dollar basis
$
3,387
$
2,800
$
2,614
Net income attributable to non-controlling interests in
subsidiaries on a constant dollar basis
391
177
232
Net income attributable to equity holders of the Bank on a
constant dollar basis
$
2,996
$
2,623
$
2,382
Selected Consolidated Statement of Financial Position data
(average balances)
Total assets
Total liabilities
203,440
156,820
167,777
130,759
151,117
113,744
(1)
(2)
(3)
(4)
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9, prior year amounts have not been
restated.
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated (refer to Notes
3 and 4 in the consolidated financial statements).
Taxable equivalent basis.
Includes net income from investments in associated corporations of $763 (2018 – $674; 2017 – $532).
C10 Total revenue
5.1%
24.4%
70.5%
Caribbean and Central America
Latin America
Asia
C11 Total revenue by region
$ millions
16000
14000
12000
10000
8000
6000
4000
2000
17
18
19
Asia
Caribbean and Central America
Latin America
C12 Average loans and acceptances
$ billions
140
120
100
80
60
40
20
17
18
19
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
17
18
19
Asia
Caribbean and Central America
Latin America
(1)
Average earning assets excluding bankers
acceptances
44 | 2019 Scotiabank Annual Report
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Net income
Net income attributable to equity holders was $2,996 million, an increase of $373 million or 14%. Adjusting for Acquisition-related costs, net
income was $3,188 million up $341 million or 12%. Strong results in Latin America, including benefits from acquisitions, and Asia, complemented by
good earnings in Caribbean. The impact of acquisitions and divestitures contributed approximately 3% to the adjusted earnings growth. The
remaining increase was driven by strong loan growth in Latin America, higher net interest income and higher non-interest income. This was partly
offset by higher provisions for credit losses, non-interest expenses, and higher income taxes.
Assets and liabilities
Average assets of $203 billion increased $36 billion or 21% driven by strong retail and commercial loan growth, primarily in Latin America, partly
due to acquisitions. Retail loan growth was 24% and commercial loan growth was 21%. Average liabilities increased $26 billion or 20% to
$157 billion due to strong deposit growth in Pacific Alliance, partly due to acquisitions. Commercial and retail deposits increased 17% and 13%
respectively.
Revenues
Total revenues of $13,488 million increased $2,095 million or 18%. Net interest income was $8,482 million, up 16% driven by strong retail and
commercial loan growth, approximately two-thirds of the increase is driven by acquisitions. The net interest margin decreased 16 basis points to
4.49% due primarily to the impact of acquisitions and margin compression in Mexico and Chile. Non-interest income increased $908 million or
22% to $5,006 million, approximately half of the increase is driven by acquisitions. The remaining increase was due primarily to higher banking
fees, investment gains, trading revenues and increased contribution from associated corporations.
Latin America
Total revenues of $9,502 million increased 23% from last year. Net interest income increased $1,124 million or 22%, driven by strong asset growth,
approximately two-thirds of the increase is driven by acquisitions. The net interest margin decreased 23 basis points to 4.43% due primarily to the
impact of acquisitions and margin compression in Mexico and Chile. Non-interest income increased $643 million or 26% to $3,162 million,
approximately half of the increase is driven by acquisitions. The remaining increase was due to higher banking fees, credit card fees, investment
gains and trading revenues.
Caribbean and Central America
Total revenues were $3,295 million, up 8% over last year. Net interest income was up $63 million or 3%, driven by acquisitions. Non-interest
income was up $172 million or 18% as a result of good growth in banking fees and investment gains.
Asia
Total revenues were $691 million, up 15% versus last year, driven by higher contributions from Thanachart Bank, partly due to lower provisions for
credit losses.
Non-interest expenses
Non-interest expenses increased $970 million or 16% to $7,027 million. Adjusting for Acquisition-related costs, non-interest expenses were up
15%, approximately two-thirds of the increase is driven by acquisitions. The remaining increase was due primarily to business volume growth,
inflation, and higher technology costs, partly offset by benefits from cost-reduction initiatives. Operating leverage was a positive 3.0% or 4.3%
adjusting for Acquisition-related costs.
Provision for credit losses
The provision for credit losses was $2,076 million compared to $1,815 million in 2018. Adjusting for the Day 1 provision on acquired performing
financial instruments, the provision for credit losses increased $491 million driven by higher retail provisions.
The provision on impaired financial instruments was $1,922 million, up $349 million due primarily to organic and acquisition-driven asset growth in
the retail portfolio partially offset by lower commercial provisions. Last year, the impact of the commercial provision relating to the Barbados debt
restructuring was offset with higher recoveries. The provision for credit losses ratio on impaired loans was 129 basis points, an increase of one basis
point. The provision on performing financial instruments was $154 million, compared to $242 million last year. Adjusting for the impact of Day 1
provision on acquired performing financial instruments, the provision on performing financial instruments increased $138 million. This was due to
an increase in commercial provisions resulting from hurricane-related provision reversals in the prior year and less favourable macroeconomic
forecasts for the Pacific Alliance countries, as well as higher retail provisions due to asset growth. The provision for credit losses ratio was 151 basis
points, an increase of 12 basis points. On an adjusted basis, the provision for credit losses ratio was 129 basis points, an increase of 11 basis points.
Provision for income taxes
The effective tax rate was 23.2% compared to 21.6% due mainly to lower tax benefits in Mexico and lower inflation in Chile.
Outlook
In 2020, International Banking will continue to leverage its diversified footprint, focused on the Pacific Alliance countries of Mexico, Colombia, Peru
and Chile and supported by a simplified footprint in the Caribbean and Central America. With a reshaped footprint we will have more scale in key
markets, less risk, more growth potential, and higher quality of earnings. Expense management and delivery of positive operating leverage remain
key business priorities. The main source of uncertainty is in Chile where the government is implementing a number of social policy measures and
governance reforms to address the concerns of its population and a change in the Constitution will take place in 2020.
2019 Scotiabank Annual Report | 45
Management’s Discussion and Analysis
Global Banking and Markets
2019 Achievements
Build strategic approach to lending by up-tiering corporate relationships and increasing lending penetration:
• Deepened client focus to expand client relationships and drive multi-faceted revenue opportunities from origination, advisory, hedging,
deposits and payments.
• Demonstrated leadership in green bonds financings, having participated in approximately 30 green bond offerings across six currencies,
totaling more than CAD $18 billion equivalent, over the past two years.
Strengthen Investment Banking:
• As part of a multi-year strategy, built out Canadian and regional leadership capabilities to enhance the client coverage model.
• Capturing cross-sell opportunities in Equity Capital Markets, Debt Capital Markets and Foreign Exchange in focus sectors such as Power
and Utilities, Energy, and Infrastructure and gaining in new sectors such as Healthcare and Real Estate.
Deepen penetration across core markets:
• Continuous progress on multi-year strategy of creating a top-tier local and cross-border wholesale banking business in the Americas.
• Re-formulated Global Capital Markets Strategy and executing a GCM Transformation Program in the Pacific Alliance.
• Achieved significant league table advancement in the Pacific Alliance and Latin America.
• Ranked #2 in Pacific Alliance DCM, up from #6 in fiscal 2018
• Ranked #3 in Latin America Syndicated Loans
• Demonstrated continued leadership in Canadian Syndicated Loans; ranked #3 in Canada Loans (New Money) League Table, up from #4 in
fiscal 2018.
Select awards and deal highlights:
Introduced the innovative Scotiabank Alternative Mutual Fund Index to track the performance of Canadian liquid alternative investments.
• Scotiabank achieved top-tier results in the 2019 Brendan Wood International Canadian Equities report.
• Best Global Wholesale Bank 2019 – International Finance Awards (2019), Acquisition International.
• Canada Large M&A Deal of the Year (2019), M&A Atlas Awards.
•
• Continued modernization of payments infrastructure – first to market with digital wire tracking for business payments.
• Launched The Scotiabank Women Initiative™ for Global Banking and Markets to deepen client relationships.
• Global Coordinator and Joint Bookrunner for Chilean company Arauco’s US$1 billion two-tranche Sustainable issuance.
• Lead Bookrunner on over $7 billion in debt issuance for the Canadian Telecommunication sector having co-led multiple bond offerings as
well as providing backstop financing to support requirements for Canadian wireless spectrum auction.
• Financial Advisor, Initial Underwriter and Joint Bookrunner on Brookfield Business Partners’ financing for the acquisition of Johnson
Controls’ Power Solutions business – one of the largest Leveraged Buyouts (LBO) since the financial crisis.
• Bookrunner on US$1.5 billion Senior Facilities for Global Power Generation, whereby Scotiabank provided a customized multi-currency,
multi-product financing solution.
• Joint Bookrunner, Dealer Manager, and Billing & Delivery Bank for a liability management transaction and simultaneous new issue for the
Republic of Peru.
46 | 2019 Scotiabank Annual Report
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Business Profile
Global Banking and Markets (GBM) provides corporate clients with lending and transaction services, investment banking advice and access to
capital markets. GBM is a full-service wholesale bank in the Americas, with operations in 21 countries, serving clients across Canada, the United
States, Latin America, Europe and Asia-Pacific.
Strategy
Global Banking and Markets’ strategy is focused on strengthening our franchise by expanding our full service corporate offering, and our regional
and institutional capabilities, to better serve our clients and deliver profitable growth.
2020 Priorities
• Client Focus: Increase our relevance to our corporate clients and drive alignment of resources with the most significant revenue opportunities,
to capture more of the non-lending wallet.
• Strengthen our capital markets offering: Enhance distribution and product capabilities and deepen institutional relationships.
• Build on our presence in the Americas: Enhance our franchise in Canada, continue to pursue targeted, phased growth in the U.S., create a
top-tier local and cross-border Pacific Alliance business, and leverage Europe and Asia for distribution of our Americas product in support of our
corporate clients.
T21 Global Banking and Markets financial performance
($ millions)
Net interest income(3)
Non-interest income(3)
Total revenue(3)
Provision for credit losses
Non-interest expenses
Income tax expense(3)
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(3)
Net interest margin(5)(6)
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
$
2019(1)(2)
1,396
3,084
4,480
(22)
2,463
505
$
2018
1,454
3,074
4,528
(50)
2,233
587
2017
$ 1,336
3,288
4,624
42
2,160
604
$
1,534
$
1,758
$ 1,818
–
–
–
$
1,534
$
1,758
$ 1,818
$
$
13.3%
55.0%
1.68%
(26)
4
(0.02)%
–%
0.03%
$
$
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%
$112,317
92,977
337,589
371,909
99,346
304,253
$ 98,130
81,838
282,997
320,850
86,260
264,983
$103,861
79,937
291,870
335,599
77,158
267,377
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9, prior year amounts have not been restated.
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
Taxable equivalent basis.
(1)
(2)
(3)
(4) Refer to Glossary.
(5) Corporate Banking and Securitization only.
(6) Net interest income (TEB) as % of average earning assets excluding bankers’ acceptances.
2019 Scotiabank Annual Report | 47
Management’s Discussion and Analysis
Financial Performance
Net income
Global Banking and Markets reported net income attributable to equity holders of
$1,534 million, a decrease of $224 million or 13%. Lower net interest income, higher
non-interest expenses, as well as lower recoveries for credit losses, were partly offset by higher
trading revenue and credit fees.
Average assets and liabilities
Average assets increased by $51 billion or 16% to $372 billion this year. Adjusting for the
impact of foreign currency translation, assets increased $47 billion mainly due to increases in
securities purchased under resale agreements, trading securities, and business and
government loans.
Average liabilities increased by $39 billion or 15% to $304 billion this year. Adjusting for the
impact of foreign currency translation, liabilities increased $35 billion due primarily to growth in
securities sold under repurchase agreements and deposits.
Net interest income
Net interest income decreased by 4% to $1,396 million, mainly driven by lower interest income
from capital markets operations, lower lending margins across the regions and deposit margin
compression, which is offsetting the positive impact of higher loan and deposits volume. The
net interest margin was 1.68%, a decrease of 15 basis points.
Non-interest income
Non-interest income of $3,084 million increased by $10 million mainly due to higher trading
revenues in equities and fixed income, as well as higher credit fees. This was partly offset by
lower advisory and underwriting fees.
Non-interest expense
Non-interest expenses increased by $230 million or 10% to $2,463 million. This was due
primarily to higher compliance and technology investments driven by regulatory requirements,
higher share-based compensation, and the unfavourable impact of foreign currency
translation. Operating leverage was negative 11.3%.
Provision for credit losses
The provision for credit losses increased $28 million due primarily to higher recoveries in
Europe and the U.S. last year and higher impaired loan provisions in Canada this year. The
provision for credit losses ratio was negative two basis points, an increase of 4 basis points.
Provision for income taxes
The effective tax rate was 24.8%, compared to 25.0% in the prior year.
Outlook
In 2020, Global Banking and Markets’ growth will result from leveraging our unique footprint
centered on the Americas and by increasing our relevance to our corporate clients,
strengthening our Capital Markets offerings and building our presence in key markets. Global
Banking and Markets expects to continue to deliver strong balance sheet growth as well as
improved results in Capital Markets and Business Banking. Provisions for credit losses are
expected to increase following two years of recoveries. Continued regulatory and technology
investments will lead to expense growth, but at a moderating pace. Global Banking and
Markets is targeting to achieve positive operating leverage.
48 | 2019 Scotiabank Annual Report
C14 Total revenue
56%
44%
Capital Markets
Business Banking
C15 Business banking revenue
$ millions
2500
2000
1500
1000
500
17
18
19
Metals & Other
Corporate & Investment Banking
C16 Capital markets revenue by business
line
$ millions
2500
2000
1500
1000
500
17
18
19
Global Equities
Fixed Income & Commodities
C17 Composition of average assets
$ billions
400
350
300
250
200
150
100
50
17
18
19
Corporate loans and acceptances
Trading assets
Securities purchased under resale agreement
Other
C18 Trading day losses
14
12
10
8
6
4
2
17
18
19
Global Wealth Management
The Wealth Management businesses within the Canadian Banking and International Banking segments will be reported separately as a single
“Global Wealth Management” segment effective November 1, 2019. The composition, strategy, 2020 priorities and outlook of our new reportable
segment has been provided below.
Business Profile
Global Wealth Management is focused on delivering comprehensive wealth management advice and solutions to clients across Scotiabank’s
footprint. Global Wealth Management serves over 2.5 million investment fund and advisory clients across 14 countries – managing over
$490 billion in assets.
Through organic growth and acquisitions, Global Wealth Management has built a robust client-centric business with comprehensive advice,
products, and platforms to meet a broad range of client needs.
Global Wealth Management is comprised of the following businesses:
• Advisory: Online brokerage (Scotia iTRADE), Mobile investment specialists (Scotiabank), Full-service brokerage (ScotiaMcLeod), Trust, Private
Banking, Private Investment Counsel (Scotia Wealth Management and MD Financial Management)
• Product Manufacturing: Retail mutual funds (Scotia & Dynamic Funds), Exchange Traded Funds (Scotia & Dynamic Funds), Liquid
Alternatives (Dynamic Funds), Institutional funds (Scotia & Jarislowsky Fraser)
Scotiatrust, ScotiaMcLeod, Scotia iTRADE, Private Banking, Private Investment Counsel, 1832 Asset Management and Dynamic Funds are
top-performers in key industry metrics.
Strategy
Global Wealth Management continues to execute on its strategy of delivering comprehensive wealth advice and investment solutions globally,
through integrated advice platforms and industry leading investment management capabilities to meet client needs.
2020 Priorities
• Maximize growth in asset management and advisory businesses by enhancing the product shelf to deliver superior investment
management results to investors across our distribution network; and delivering integrated wealth management solutions for clients with
complex needs.
• Leverage our acquisitions to grow in new segments including institutional mandates in Canada and internationally; and deliver value added
wealth management services to Jarislowsky Fraser and MD Financial clients.
• Expand international capabilities and offering to deliver investment solutions and wealth management advice to new clients in priority
markets.
Outlook
Global Wealth Management’s unique operating model is well positioned for growth in 2020 driven by continued momentum in the core asset
management and advisory businesses; leveraging MD Financial and Jarislowsky Fraser for growth in new segments; and delivering best in class
products and solutions through the Bank’s footprint in Canada and internationally. Expense management and delivery of positive operating
leverage remain key business priorities.
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2019 Scotiabank Annual Report | 49
Management’s Discussion and Analysis
Other
The Other segment includes Group Treasury, smaller operating segments, Net gain/loss on divestitures, and corporate items which are not
allocated to a business line.
Financial Performance
T22 Other financial performance
($ millions)
Net interest income(3)
Non-interest income(3)(4)
Total revenue(3)
Provision for (recovery of) credit losses
Non-interest expenses
Income tax expense(3)
Net income (loss)
Net income attributable to non-controlling interests in subsidiaries
Net income (loss) attributable to equity holders
2019(1)(2)
2018
2017
$ (985)
158
$ (483)
(53)
$ (390)
(344)
(827)
1
304
(585)
(536)
–
60
(449)
(734)
–
319
(786)
$ (547)
$ (147)
$ (267)
17
–
–
$ (564)
$ (147)
$ (267)
(1)
(2)
(3)
(4)
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9, prior year amounts have not been restated.
The amounts for year ended October 31, 2019 have been prepared in accordance with IFRS 15; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
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 $(178) in 2019; (2018 – $(177); 2017 – $(141)).
T22A Adjusted Other financial performance(1)
($ 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 (loss)
Net income (loss) attributable to non-controlling interests (NCI)
Net income (loss) attributable to equity holders
(1)
Refer to Non-GAAP measures for reconciliation of Reported and Adjusted results.
2019
2018
2017
$ (985)
285
$ (483)
(53)
$ (390)
(344)
(700)
1
283
(984)
(729)
(536)
–
60
(596)
(449)
(734)
–
319
(1,053)
(786)
$ (255)
1
$ (256)
$ (147)
–
$ (147)
$ (267)
–
$ (267)
Net income
Net interest income, other operating income, and the provision for income taxes in each period include the elimination of tax-exempt income
grossup. This amount is included in the operating segments, which are reported on a taxable equivalent basis.
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 $564 million in 2019. Adjusting for the Net loss on divestitures of $308 million,
net loss attributable to equity holders was $256 million compared to $147 million in 2018. The prior year had lower expenses primarily related to
the benefits remeasurement of $150 million ($203 million pre-tax).
Revenues
Revenues of negative $827 million included $127 million Net Loss on divestitures. On an adjusted basis, revenues decreased by $164 million due
mainly to lower contributions from asset/liability management activities, as well as higher taxable equivalent basis offsets (eliminated in tax
expenses). This was partly offset by higher investment gains.
Non-interest expenses
Non-interest expenses were $304 million. On an adjusted basis, non-interest expenses were $283 million, compared to $60 million in 2018. Higher
expenses were mainly due to the benefits remeasurement in the prior current year of $203 million.
50 | 2019 Scotiabank Annual Report
Financial Performance of Business Lines: 2018 vs. 2017
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.
Other
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 ($203 million pre-tax).
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2019 Scotiabank Annual Report | 51
Management’s Discussion and Analysis
Group Financial Condition
T23 Condensed statement of financial position
As at October 31 ($ 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
2019
2018
2017
$
50.4
127.5
$ 65.5
100.3
$ 65.4
98.5
131.2
82.4
592.5
102.2
104.0
78.4
551.8
98.5
95.3
69.3
504.4
82.4
$1,086.2
$998.5
$915.3
$ 733.4
$676.5
$625.4
124.1
151.2
7.3
101.3
147.3
5.7
95.8
126.5
5.9
$1,016.0
$930.8
$853.6
63.6
3.9
2.7
61.0
4.2
2.5
55.5
4.6
1.6
$
70.2
$ 67.7
$ 61.7
$1,086.2
$998.5
$915.3
C19 Loan portfolio
loans & acceptances,
$ billions, as at October 31
675
600
525
450
375
300
225
150
75
17
18
19
Business & Government
Credit cards
Personal loans
Residential mortgages
C20 Deposits
$ billions, as at October 31
800
700
600
500
400
300
200
100
17
18
19
Banks
Business & government
Personal
Assets
The Bank’s total assets as at October 31, 2019 were $1,086 billion, up $88 billion or 9% from October 31, 2018. This increase was primarily in loans,
trading securities and securities purchased under resale agreements and securities borrowed, partially offset by a decrease in cash and deposits
with financial institutions.
Cash and deposits with financial institutions decreased $16 billion due primarily to lower balances on deposit with central banks, while trading
securities increased by $27 billion primarily to hedge client driven transactions. Securities purchased under resale agreements and securities
borrowed increased by $27 billion due to increased client demand.
Investment securities increased $4 billion from October 31, 2018 due primarily to higher holdings of U.S. government debt. As at October 31, 2019,
the net unrealized loss on debt securities measured at fair value through other comprehensive income was $71 million, after the impact of
qualifying hedges.
Loans increased $41 billion from October 31, 2018. Residential mortgages increased $15 billion due to growth in Canada and Latin America.
Personal loans and credit cards grew $4 billion mainly in Canada and Latin America. Business and government loans increased $22 billion due
primarily to growth in Canada and Latin America.
Other assets increased $5 billion due mainly to loans sold but not yet settled.
Liabilities
Total liabilities were $1,016 billion as at October 31, 2019, up $85 billion or 9% from October 31, 2018.
Total deposits increased $57 billion. Personal deposits grew by $10 billion due primarily to growth in Canada. Business and government deposits
grew by $40 billion mainly in Canada, the U.S., and Latin America. Deposits from financial institutions increased $7 billion.
Obligations related to securities sold under repurchase agreements and securities lent increased by $23 billion which was in line with higher
securities purchased under resale agreements and securities borrowed. Financial instruments designated at fair value through profit or loss
increased $4 billion.
Equity
Total shareholders’ equity increased $2,512 million from October 31, 2018. This increase was driven mainly by current year earnings of
$8,798 million. Partly offsetting were dividends paid of $4,442 million, the repurchase and cancellation of approximately 15 million common shares
of $1,075 million, other comprehensive loss of $625 million due mainly to revaluation of the Bank’s employee benefit plans and a decrease in
unrealized foreign currency translation gains on the Bank’s net investments in its foreign operations, and the redemption of preferred shares of
$300 million.
Outlook
While global growth is currently moderating, expected growth in 2020 for the Canadian economy and Pacific Alliance countries should support
assets and deposits growth across all business lines. In Canada, a strong labour market and strong population growth should lead to continued
expansion in retail and commercial lending. Internationally, improving economic strength in the Pacific Alliance countries should aid in further
increases in assets and personal deposits.
52 | 2019 Scotiabank Annual Report
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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.
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.
OSFI requires Canadian deposit-taking institutions to meet minimum requirements related to risk-weighted assets 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, in line with the requirements for global systemically important banks.
Furthermore, an additional Domestic Stability Buffer of 2.0% was implemented as a Pillar 2 requirement as noted below.
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
Capital Adequacy and Leverage Requirements
Effective the first quarter of 2019, OSFI finalized revisions to its Capital Adequacy Requirements (CAR) Guideline that include: implementation of
the revised standardized approach to counterparty credit risk and centralized counterparties (CCPs); implementation of the revised securitization
framework, including OSFI’s transitional provisions which substantially delay the impact on regulatory capital to the first quarter of 2020; and, the
removal of the CVA phase-in transitional arrangements which concluded at the end of 2018. The revisions also codify in the CAR Guideline
changes to the Basel II standardized regulatory capital floor, which were announced in January 2018 and implemented in the second quarter of
2018. OSFI’s 2019 revisions to its Leverage Ratio framework and its disclosure requirements align the Leverage Ratio Guideline with related
changes within the CAR Guideline in respect of securitizations and counterparty credit risk.
In addition, effective 2019 OSFI implemented the amendments to Basel III as finalized by the BCBS in respect of holdings of Other Total Loss
Absorbing Capital (TLAC) instruments issued by global systemically important banks (G-SIBs) which 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 also determined that it is appropriate to extend the Basel III treatment to
holdings of Other TLAC instruments issued by Canadian D-SIBs.
Domestic Stability Buffer
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-
2019 Scotiabank Annual Report | 53
Management’s Discussion and Analysis
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.
During fiscal 2019, OSFI announced a 25 basis point increase to its Domestic Stability Buffer at each semi-annual review. As at year end, the
Domestic Stability Buffer was set at 2.0% of total risk-weighted assets.
Total Loss Absorbing Capacity (TLAC)
OSFI has issued its guideline on Total Loss Absorbing Capacity (TLAC), which applies 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 the 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 applied from November 1, 2018.
In addition, we continue to monitor and prepare for new regulatory capital developments to ensure compliance with these requirements.
Planning, managing and monitoring capital
Capital is managed and monitored based on planned changes in the Bank’s strategy, identified changes in its operating environment or changes in
its risk profile. As part of the Bank’s comprehensive ICAAP, sources and uses of capital are continuously measured and monitored through financial
metrics, including regulatory thresholds, and internal capital. These results are used in capital planning and strategic decision-making.
The Bank’s assessment of capital adequacy is in the context of its current position and its expected future risk profile and position relative to its
internal targets while considering the potential impact of various stress scenarios. Specific scenarios are selected based on the current economic
conditions and business events facing the Bank. In addition, the Bank’s forward looking capital adequacy assessment includes a consideration of
the results of more severe multi-risk scenarios within its enterprise-wide stress testing. This testing is used to determine the extent to which
severe, but plausible events, impact the Bank’s capital.
The Bank sets internal regulatory capital targets to ensure the Bank’s available capital is sufficient within the context of its risk appetite.
The Bank’s internal target includes an adequate buffer over the regulatory minimum ensuring sufficient flexibility for future capital deployment and
in consideration of the Bank’s risk appetite, the volatility of planning assumptions, the results from stress testing and contingency planning.
The Bank has a comprehensive risk management framework to ensure that the risks taken while conducting its business activities are consistent
with its risk appetite, its impact on capital relative to internal targets, and that there is an appropriate balance between risk and return. Refer to the
Risk Management section for further discussion on the Bank’s risk management framework. In managing the Bank’s capital base, close attention is
paid to the cost and availability of the various types of capital, desired leverage, changes in the assets and risk-weighted assets, and the
opportunities to profitably deploy capital. The amount of capital required for the business risks being assumed, and to meet regulatory
requirements, is balanced against the goal of generating an appropriate return for the Bank’s shareholders.
Capital generation
Capital is generated internally through net earnings after dividend payments. As well, capital is generated by the issuance of common shares,
preferred shares and other equity instruments, and subordinated debentures, net of redemptions.
Capital 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 Common Equity Tier 1
(CET1) ratio as at October 31, 2019 was 11.1%, remaining flat from prior year due primarily to strong internal capital generation which was offset by
strong risk-weighted asset growth, share buybacks under the Bank’s Normal Course Issuer Bid, the impact from employee pension and retirement
benefits on accumulated other comprehensive income, and the impact from the Bank’s acquisitions during the year.
The Bank’s Tier 1 capital ratio was 12.2% as at October 31, 2019, a decline of approximately 30 basis points from the prior year, primarily due to the
redemptions of $650 million of Scotiabank Tier 1 Trust Securities and $300 million of preferred shares. The Total capital ratio was 14.2% as at
October 31, 2019, a decline of 10 basis points from 2018, due primarily to the redemptions of Tier 1 capital noted above and the redemption of
$1.75 billion of subordinated debentures. These redemptions were partly offset by the issuances of $3.25 billion of subordinated debentures
during the year. The Leverage ratio was 4.2% a decline of approximately 30 basis points in 2019 due primarily to the Bank’s acquisitions and strong
organic asset growth.
The Bank’s capital ratios continue to be well in excess of OSFI’s minimum capital ratio requirements for 2019 (including the 1% D-SIB surcharge and
2% Domestic Stability Buffer requirements) of 10.0%, 11.5% and 13.5% for CET1, Tier 1 and Total Capital, respectively. The Bank was well above the
OSFI minimum Leverage ratio as at October 31, 2019.
54 | 2019 Scotiabank Annual Report
Outlook
The Bank will continue to have a strong capital position in 2020 that will improve from strong internal generation and divestitures of certain
non-core businesses. Capital will be prudently managed to support the Bank’s growth initiatives that enhance shareholder returns.
T24 Regulatory capital(1)
As at October 31 ($ millions)
Common Equity Tier 1 capital
Total Common Equity
Qualifying non-controlling interest in common equity of subsidiaries
Goodwill and 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
2019
2018
2017
63,320
1,734
(16,144)
(907)
(286)
(1,139)
46,578
2,324
1,560
750
92
$
60,727
1,628
(16,428)
(863)
(335)
(286)
44,443
2,624
1,560
1,400
160
$
55,454
636
(11,505)
(271)
(417)
(545)
43,352
3,019
1,560
1,400
142
51,304
50,187
49,473
7,252
1,200
96
(2)
8,546
5,698
1,380
99
–
7,177
5,935
602
103
–
6,640
59,850
57,364
56,113
365.4
8.7
47.1
–
421.2
11.1%
12.2%
14.2%
347.1
8.4
45.0
–
$
400.5
$
11.1%
12.5%
14.3%
315.2
7.8
40.6
12.8
376.4
11.5%
13.1%
14.9%
$ 1,230,648
$ 1,119,099
$ 1,052,891
4.2%
4.5%
4.7%
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Regulatory capital ratios are determined in accordance with Basel III rules.
(1)
(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 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 Basel III rules include eligible non-controlling interests in subsidiaries.
(6)
(7)
Eligible allowances for 2019, 2018, and 2017.
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, 2019 (October 31, 2018 - nil; Basel I floor add-on: October 31, 2017 - $12.8 billion).
In accordance with OSFI’s requirements, effective January 31, 2019, credit valuation adjustment (CVA) risk-weighted assets (RWA) have been fully phased-in. In the prior year, CVA RWA were calculated using scalars of 0.80, 0.83 and 0.86 to
compute the CET1 capital ratio, Tier 1 capital ratio and Total capital ratio, respectively, (scalars of 0.72, 0.77, and 0.81 in 2017).
(8)
(9) OSFI designated the Bank as a domestic systemically important bank (D-SIB), increasing its minimum capital ratio requirements by 1% for the identified D-SIBs. This 1% surcharge was applicable to all minimum capital ratio requirements for
CET1, Tier 1 and Total Capital, by January 1, 2016, in line with the requirements for global systemically important banks.
2019 Scotiabank Annual Report | 55
Management’s Discussion and Analysis
T25 Changes in regulatory capital(1)
For the fiscal years ($ 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 15/ IFRS 9 impacts(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
Basel III
2019
2018
2017
$ 57,364
$ 56,113
$ 53,330
8,208
(4,260)
255
(1,075)
(37)
(1,193)
105
284
(152)
49
(58)
(330)
242
(55)
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)
$ 2,135
$ 1,091
$ 3,363
–
(950)
(68)
300
(695)
18
1,560
(575)
59
$ (1,018)
$
(377)
$ 1,044
3,250
(1,771)
(180)
70
–
(232)
778
(9)
–
(1,500)
74
(198)
$ 1,369
$
537
$ (1,624)
$ 2,486
$ 1,251
$ 2,783
$ 59,850
$ 57,364
$ 56,113
Regulatory capital ratios are determined in accordance with Basel III rules.
(1)
(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 15 (Revenue from Contracts with Customers) on November 1, 2018 (IFRS 9 (Financial Instruments) on November 1, 2017).
(4)
Eligible allowances for 2019, 2018, and 2017.
56 | 2019 Scotiabank Annual Report
C21 CET1 capital
%, as at October 31
14
12
10
8
6
4
2
17
18
19
C22 Dividend growth
dollars per share
4
3
2
1
09
11
13
15
17
19
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
17
18
19
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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, regulatory derived non-controlling
interest capital, and prescribed 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 assets, shortfall (if any) of the allowance for credit losses
to regulatory parameter-based 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 subordinated debentures, or non-qualifying subordinated debentures subject to
phase-out, and any eligible allowances for credit losses.
The Bank’s CET1 capital was $46.6 billion as at October 31, 2019, an increase of $2.1 billion from
the prior year primarily due to:
• $3.9 billion growth from strong internal capital generation, including the impacts on
retained earnings from the Bank’s acquisitions and divestitures; and,
• $0.2 billion from lower regulatory capital deductions, mainly relating to goodwill and
intangibles.
Partly offset by:
• $1.2 billion decrease from movements in Accumulated Other Comprehensive Income,
excluding cash flow hedges, primarily from the impact of foreign currency translation and
losses from employee pensions and benefits plans; and,
• $0.8 billion from common share buybacks net of common share issuances under the
Bank’s employee share purchase and stock options plans.
The Bank’s Tier 1 capital increased by $1.1 billion, primarily due to the above impacts to CET1
capital, partly offset by the planned redemptions of $650 million of Scotiabank Tier 1 Trust
Securities and $300 million of preferred shares. In addition, Total capital increased by
$2.5 billion, mainly due to the issuances of $1.75 billion and $1.5 billion of subordinated
debentures during the year, which were partly offset by the redemption of $1.75 billion of
subordinated debentures.
Dividends
The strong earnings and capital position allowed the Bank to increase its dividends by 5 cents
per common share in 2019. The annual dividend in 2019 was $3.49, compared to $3.28 in
2018, an increase of 6.4%. The dividend payout ratio on an adjusted basis was 48.6% in line
with the Bank’s Board approved target dividend payout ratio of 40-50%.
T26 Selected capital management activity
For the fiscal years ($ millions)
2019
2018
2017
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(3)
Subordinated debentures issued
Maturity, redemption and repurchase of subordinated debentures
$4,260
182
255
$3,985
187
2,708
$3,668
129
313
1,075
–
300
3,250
1,771
632
300
695
–
232
1,009
1,560
575
–
1,500
(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).
Excludes the redemption on June 30, 2019 of Scotiabank Tier 1 Securities - Series 2009-1 issued by Scotiabank Tier 1 Trust.
(3)
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.
2019 Scotiabank Annual Report | 57
Management’s Discussion and Analysis
Normal Course Issuer Bid
On May 30, 2019, the Bank announced that OSFI and the Toronto Stock Exchange have approved a normal course issuer bid (the “2019 NCIB”)
pursuant to which it may repurchase for cancellation up to 24 million of the Bank’s common shares. Purchases under the 2019 NCIB commenced
on June 4, 2019 and terminate upon earlier of: (i) the Bank purchasing the maximum number of common shares under the 2019 NCIB, (ii) the Bank
providing a notice of termination, or (iii) June 3, 2020. On a quarterly basis, the Bank will notify OSFI prior to making purchases.
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. Under the 2018 NCIB, which terminated on
June 3, 2019, the Bank cumulatively repurchased and cancelled approximately 14.8 million common shares at an average price of $73.46 per
share.
During the year ended October 31, 2019, the Bank repurchased and cancelled approximately 15 million common shares (2018 – approximately 8.23
million) at a volume weighted average price of $71.51 per share (2018 – $76.77) for a total amount of $1,075 million (2018 – $632 million).
58 | 2019 Scotiabank Annual Report
Share data and other capital instruments
The Bank’s common and preferred share data, as well as other capital instruments, are shown in T27. Further details, including exchangeability
features, are discussed in Note 21 and Note 24 of the consolidated financial statements.
T27 Shares and other instruments
As at October 31, 2019
Common shares(2)
Preferred shares
Preferred shares Series 22(3)
Preferred shares Series 23(3)
Preferred shares Series 30(4)(5)
Preferred shares Series 31(4)(6)
Preferred shares Series 32(4)(7)
Preferred shares Series 33(4)(8)
Preferred shares Series 34(4)(9)(10)
Preferred shares Series 36(4)(9)(11)
Preferred shares Series 38(4)(9)(12)
Preferred shares Series 40(4)(9)(13)
Additional Tier 1 securities
Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust(15a,b,c)
Scotiabank Tier 1 Securities – Series 2009-1 issued by Scotiabank Tier 1 Trust(16)
Subordinated additional Tier 1 capital securities (NVCC)
NVCC subordinated debentures
Subordinated debentures due March 2027
Subordinated debentures due December 2025
Subordinated debentures due December 2025
Subordinated debentures due January 2029
Subordinated debentures due July 2029
Options
Outstanding options granted under the Stock Option Plans to purchase common shares(2)
Amount
($ millions)
Dividends
declared
per share(1)
Number
outstanding
(000s)
Conversion
features
$
18,264
$
3.49
1,216,132
n/a
–
–
154
111
279
130
350
500
500
300
Amount
($ millions)
$
750
–
US$ 1,250
0.239375
0.215885
0.455000
0.657072
0.515752
0.742073
1.375000
1.375000
1.212500
1.271475
–
–
6,143
4,457
11,162
5,184
14,000
20,000
20,000
12,000
Distribution(14)
Yield (%)
28.25
–
23.25
US$
5.650
–
4.650
Amount
($ millions)
$
US$
1,250
750
1,250
1,750
1,500
–
–
Series 31
Series 30
Series 33
Series 32
Series 35
Series 37
Series 39
Series 41
Number
outstanding
(000s)
750
–
1,250
Interest
Rate (%)
2.58
3.37
4.50
3.89
2.84
Number
outstanding
(000s)
11,509
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(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
Dividends declared from November 1, 2018 to October 31, 2019.
Dividends on common shares are paid quarterly, if and when declared. As at November 15, 2019, the number of outstanding common shares and options was 1,216,136 thousand and 11,392 thousand, respectively.
On January 28, 2019, the Bank redeemed all outstanding Non-cumulative Preferred share Series 22 and Series 23 and paid a dividend of $0.239375 and $0.215885, 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 2019 Annual Report for
further details.
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 2019
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.
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.
Semi-annually per face amount of $1,000 or US$1,000, as applicable.
(14)
(15)(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(c) – Restrictions on dividend payments. Under the circumstances outlined in 15(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.
(15)(b) The Scotia BaTS II Series 2006-1 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.
(15)(c) No cash distributions will be payable on the Scotia BaTS II Series 2006-1 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 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(c) – Restrictions on dividend payments.
On June 30, 2019, the 7.802% Scotiabank Tier 1 Securities - Series 2009-1 issued by Scotiabank Tier 1 Trust were redeemed for 100% of their principal amount, together with accrued and unpaid interest to the redemption date.
(16)
2019 Scotiabank Annual Report | 59
Management’s Discussion and Analysis
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 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). The Bank’s bail-inable senior debt is rated AA (low) by DBRS, A2 by Moody’s, AA- by Fitch and A- by S&P. All four
credit rating agencies have a Stable outlook on the Bank.
There were no changes to the Bank’s credit ratings during the year.
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.
As at year end, the Bank’s RWA of $421.2 billion, represents an increase in CET1, Tier 1 and Total Capital RWA of approximately $20.7 billion, $20.5
billion, and $20.3 billion, respectively, from 2018. Increases to RWA during the year are primarily due to organic growth and the Bank’s acquisitions
which closed during the year, partly offset by the impacts from foreign currency translation and the Bank’s divestitures.
CET1 Credit risk-weighted assets
As shown in Table T28, CET1 credit risk-weighted assets increased by approximately $18.3 billion to $365.4 billion, due primarily to the following
components:
• Higher volumes increased RWA by $19.7 billion;
• Book quality changes, including parameter recalibrations, decreased RWA by $2.0 billion;
• Model updates increased RWA by $1.1 billion;
• Methodology and policy changes increased RWA by $1.2 billion;
• Acquisitions and divestitures, on a net basis, increased RWA by $0.6 billion;
• The impact of foreign exchange translation decreased RWA by $1.0 billion; and,
• Other changes decreased RWA by $1.4 billion.
T28 Flow statement for Basel III credit risk-weighted assets ($ millions)
Credit risk-weighted assets movement by key driver
($ millions)
CET1 Credit risk-weighted assets as at beginning of year
Book size(1)
Book quality(2)
Model updates(3)
Methodology and policy(4)
Acquisitions and disposals
Foreign exchange movements
Other
CET1 Credit risk-weighted assets as at end of year(5)
Tier 1 CVA scalar
Tier 1 Credit risk-weighted assets as at end of year(5)
Total CVA scalar
2019
2018
Credit risk
$ 347,096
19,722
(2,000)
1,127
1,238
614
(955)
(1,411)
$ 365,431
–
365,431
–
Of which
counterparty
credit risk
$ 17,543
1,645
(499)
169
1,238
–
30
–
$ 20,126
–
20,126
–
Credit risk
$ 315,159
13,351
(488)
(1,037)
332
21,195
(1,249)
(167)
$ 347,096
173
347,269
173
Total Credit risk-weighted assets as at end of year(5)
$ 365,431
$ 20,126
$ 347,442
Of which
counterparty
credit risk
$ 16,494
(2,525)
(109)
–
332
2,998
353
–
$ 17,543
173
17,716
173
$ 17,889
Book size is defined as organic changes in book size and composition (including new business and maturing loans).
(1)
(2) 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.
(3) Model updates are defined as model implementation, change in model scope or any change to address model enhancement.
(4) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes, such as new regulation (e.g. Basel III).
(5)
In accordance with OSFI’s requirements, effective January 31, 2019, credit valuation adjustment (CVA) risk-weighted assets (RWA) have been fully phased-in. In the prior year, CVA RWA were calculated using scalars of 0.80, 0.83 and 0.86 to
compute the CET1 capital ratio, Tier 1 capital ratio and Total capital ratio, respectively.
60 | 2019 Scotiabank Annual Report
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% – 0.0433%
0.0433% – 0.1204%
0.0526% – 0.1298%
0.0817% – 0.2044%
0.1151% – 0.2985%
0.1622% – 0.4358%
0.2661% – 0.4837%
0.4366% – 0.5368%
0.5368% – 0.7163%
0.7163% – 1.3857%
1.3857% – 2.6809%
2.6809% – 9.7903%
9.7903% – 18.4807%
18.4807% – 35.1941%
35.1941% – 59.3246%
100%
(1)
(2)
Applies to non-retail portfolio.
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)
2019
2018
Grade
Exposure
at default
IG Code
($)(3)
RWA
($)(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)
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–
0.05
0.07
0.10
0.15
0.23
0.33
0.47
0.72
1.39
2.68
9.78
18.47
29.96
57.31
100
0.55
–
0.47
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
81,333
55,829
65,058
59,294
49,291
44,253
48,807
29,938
21,049
8,539
3,485
727
1,198
616
225
990
920
5,780
10,040
14,323
18,101
19,920
27,178
17,928
13,444
6,505
3,068
1,202
1,404
1,296
425
2,727
Total
Government guaranteed residential
mortgages
Total
470,632
144,261
76,114
–
546,746
144,261
Excludes securitization exposures.
Excludes government guaranteed residential mortgages of $76.1 billion ($82.2 billion in 2018).
(1)
(2)
(3) After credit risk mitigation.
(4) RWA prior to 6% scaling factor.
PD – Probability of Default.
(5)
LGD – Loss Given Default.
(6)
RW – Risk Weight.
(7)
(8)
Exposure at default used as basis for estimated weightings.
(9) Gross defaulted exposures, before any related allowances.
14
32
36
40
46
45
45
43
40
36
35
42
25
40
46
42
36
24
34
1
10
15
24
37
45
56
60
64
76
88
165
117
210
189
275
31
–
26
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
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
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
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).
• 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.
2019 Scotiabank Annual Report | 61
Management’s Discussion and Analysis
• 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.
• Exposure at default (EAD) measures the expected exposure on a facility at the time of default.
All three risk measures are estimated using the Bank’s historical data, as well as available external benchmarks, and are updated on a regular basis.
The historical data used for estimating these risk measures exceeds the minimum five-year AIRB requirement for PD estimates and the minimum
seven-year AIRB requirement for LGD and EAD estimates. Further analytical adjustments, as required under the Basel III Framework and OSFI’s
requirements set out in its Domestic Implementation Notes, including any input floor requirements, are applied to average estimates obtained
from historical data. These analytical adjustments incorporate the regulatory requirements pertaining to:
• 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;
• Downturn estimation for LGD, which requires that LGD estimates appropriately reflect conditions observed during periods where credit losses
are substantially higher than average; and
• Downturn estimation for EAD, which requires that EAD estimates appropriately reflect conditions observed during periods of economic
downturn; and
• 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.
• 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;
• 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,
2019, 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)
0.72
40.79
48.96
Actual
0.20
23.00
24.77
(1)
(2)
Estimated parameters are based on portfolio averages at Q3/18, whereas actual parameters are based on averages of realized parameters during the subsequent four quarters.
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:
• Residential real estate secured exposures consist 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;
• Qualifying revolving retail exposures consists of all unsecured credit cards and lines of credit;
• 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:
• Probability of default (PD) is the likelihood that the facility will default within the next 12 months.
• Loss Given Default (LGD) measures the economic loss as a proportion of the defaulted balance.
• 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:
• 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.
• LGD is adjusted to appropriately reflect economic downturn conditions.
• EAD may also be adjusted to reflect downturn conditions when PD and EAD are highly correlated.
• 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.
62 | 2019 Scotiabank Annual Report
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The table below summarizes the credit quality distribution of the Bank’s AIRB retail portfolio as at October 31, 2019.
T32 Retail AIRB portfolio exposure by PD range(1)
As at October 31 ($ millions)
2019
2018
RWA
($)(2)
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
RWA
($)(2)
PD
(%)(3)(6)
LGD
(%)(4)(6)
RW
(%)(5)(6)
Exposure
at default
($)(1)
12,792
92,440
121,184
22,015
9,039
886
2,107
617
330
4,687
24,557
12,436
8,994
1,190
3,421
0.04
0.09
0.52
1.98
5.41
12.57
32.36
–
100.00
Exposure
at default
($)(1)
12,155
89,544
107,036
20,578
7,211
1,370
1,591
588
74
29
32
51
70
46
58
81
36
3
5
20
56
100
134
162
–
21
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
74
29
33
58
69
52
58
82
37
3
5
20
58
107
133
171
–
21
261,080
55,615
1.17
240,073
50,794
1.19
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%
(1)
After credit risk mitigation.
(2) RWA prior to 6% scaling factor.
PD – Probability of Default.
(3)
(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, 2019 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)
0.78
0.58
0.36
1.96
1.79
0.51
0.32
0.23
1.49
1.10
–
19.11
29.72
77.45
62.34
–
11.33
18.80
73.13
55.22
–
–
91
721
8
–
–
83
624
8
EAD is estimated for revolving products only.
Estimates and actual values are recalculated to align with new models implemented during the period.
(1)
(2) Account weighted aggregation.
(3) Default weighted aggregation.
(4)
(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)
(8) Actual and estimated LGD for insured mortgages are not shown. Actual LGD includes the insurance benefit, whereas estimated LGD may not.
Estimates are based on the four quarters prior to the reporting date.
Credit risk-weighted assets – International retail
International retail credit portfolios follow the Standardized approach and consist of the following components:
• Residential real estate secured lending; and,
• Other retail, consisting of term loans, credit cards and lines of credit.
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.
2019 Scotiabank Annual Report | 63
Management’s Discussion and Analysis
Below are the market risk requirements as at October 31, 2019 and 2018:
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 $8,674 million of market risk-weighted assets (2018 – $8,357 million).
T35 Risk-weighted assets movement by key drivers
($ millions)
RWA as at beginning of the year
Movement in risk levels(1)
Model updates(2)
Methodology and policy(3)
Acquisitions and divestitures
RWA as at end of the year
2019
2018
$ 128
430
87
–
49
$ 124
419
95
–
31
$ 694
$ 669
Market risk
2019
2018
$ 8,357
145
172
–
–
$ 7,839
(554)
(1,963)
–
3,035
$ 8,674
$ 8,357
(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 $0.3 billion to $8.7 billion, as shown in the table above, due primarily to 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 2019.
Operational risk-weighted assets increased by $2.0 billion during the year to $47.1 billion primarily due to organic growth in gross income and the
acquisitions which closed during the year.
Internal capital
The Bank utilizes economic capital methodologies and measures to calculate internal capital. Internal capital is a measure of the unexpected losses
inherent in the Bank’s business activities. The calculation of internal capital relies on models that are subject to independent vetting and validation
as required by the Bank’s Model Risk Management Policy.
Management assesses its risk profile to determine those risks for which the Bank should attribute internal capital. The major risk categories
included in internal capital are:
• 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.
• 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.
• 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.
• 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.
64 | 2019 Scotiabank Annual Report
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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:
• 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.
• Structured entities that the Bank sponsors and actively manages (see discussion on other unconsolidated structured entities and
securitizations on page 66).
All structured entities are subject to a rigorous review and approval process to ensure 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.
Noteholders of securitizations may also be exposed to these risks. The Bank may earn 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, 2019, total assets of consolidated structured entities were $55 billion, compared to $48 billion at the end of 2018. The change
was primarily due to increased assets sold into the Scotiabank Covered Bond Guarantor Limited Partnership. More details of the Bank’s
consolidated structured entities are provided in Note 15(a) to the consolidated financial statements.
Unconsolidated structured entities
There are two primary types of association the Bank has with unconsolidated structured entities:
• Canadian multi-seller conduits administered by the Bank, and
• Structured finance entities.
The Bank earned total fees of $24 million in 2019 (October 31, 2018 – $28 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 $22 million in 2019, compared to
$26 million in 2018. These multi-seller conduits purchase high-quality financial assets and finance these assets through the issuance of highly-
rated commercial paper.
As further described below, the Bank’s exposure to these off-balance sheet conduits primarily consists of liquidity support and temporary holdings
of commercial paper. Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns,
which results in the Bank not consolidating the two Canadian conduits. The Bank has a process to monitor these exposures and significant events
impacting the conduits to ensure there is no change in control, which could require the Bank to consolidate the assets and liabilities of the
conduits at fair value.
A significant portion of the conduits’ assets have been structured to receive credit enhancements from the sellers, including overcollateralization
protection and cash reserve accounts. Each asset purchased by the conduits is supported by a backstop liquidity facility provided by the Bank in
the form of a liquidity asset purchase agreement (LAPA). The primary purpose of the backstop liquidity facility is to provide an alternative source
of financing in the event the conduits are unable to access the commercial paper market. Under the terms of the LAPA, in most cases, the Bank is
not obliged to purchase defaulted assets.
The Bank’s primary exposure to the Canadian-based conduits is the liquidity support provided, with total liquidity facilities of $3.8 billion as at
October 31, 2019 (October 31, 2018 – $4 billion). The year-over-year decrease was due to normal business operations. As at October 31, 2019, total
commercial paper outstanding for the Canadian-based conduits was $2.6 billion (October 31, 2018 – $3.2 billion) and the Bank held 0.1% of the
total commercial paper issued by these conduits. Table T36 presents a summary of assets purchased and held by the Bank’s two Canadian multi-
seller conduits as at October 31, 2019 and 2018, by underlying exposure.
All of the funded assets have at least an equivalent rating of AA– or higher based on the Bank’s internal rating program. Assets held in these
conduits were investment grade as at October 31, 2019. Approximately 81% of the funded assets have final maturities falling within three years,
and the weighted-average repayment period, based on cash flows, approximates 1.2 years.
T36 Assets held by Bank-sponsored Canadian-based multi-seller conduits
As at October 31 ($ millions)
Auto loans/leases
Trade receivables
Canadian residential mortgages
Total(3)
(1)
(2)
(3)
Funded assets are reflected at original cost, which approximates estimated fair value.
Exposure to the Bank is through global-style liquidity facilities.
These assets are substantially sourced from Canada.
2019
2018
Funded
assets(1)
Unfunded
commitments
Total
exposure(2)
Funded
assets(1)
Unfunded
commitments
Total
exposure(2)
$ 1,833
259
484
$ 2,576
$
652
522
26
$ 2,485
781
510
$ 2,375
469
372
$ 1,200
$ 3,776
$ 3,216
$ 361
312
154
$ 827
$ 2,736
781
526
$ 4,043
2019 Scotiabank Annual Report | 65
Management’s Discussion and Analysis
Structured finance entities
The Bank has interests in structured finance entities used to assist corporate clients in accessing cost-efficient financing through their
securitization structures. The Bank’s maximum exposure to loss from structured finance entities was $2,194 million as at October 31, 2019,
(October 31, 2018 – $2,032 million). The year-over-year increase was due to normal business operations.
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, 2019, the Bank earned $2,190 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, 2018 – $2,121 million).
Securitizations
The Bank securitizes its retail loans, as described further below, as an efficient source of financing its operations.
The Bank securitizes fully insured residential mortgage loans, originated by the Bank and third parties, 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 meet the derecognition
requirements, where the Bank retains substantially all of the risks and rewards of ownership of the securitized mortgages. The transferred
mortgages continue to be recognized on the Consolidated Statement of Financial Position, along with the proceeds from sale treated as secured
borrowings. More details have been provided in Note 14 of the consolidated financial statements.
Third-party originated mortgages purchased by the Bank and social housing mortgage pools originated by the Bank qualify for derecognition
where the Bank transfers substantially all of the risks and rewards of ownership to third parties. As at October 31, 2019, the outstanding amount of
off-balance sheet securitized third-party originated mortgages was $2,734 million (October 31, 2018 – nil) and off-balance sheet securitized social
housing pools was $945 million (October 31, 2018 - $1,101 million).
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 issues Class A notes to third-party investors and subordinated notes to the Bank. Trillium issues Class A notes to investors and
subordinated notes to investors or the Bank. 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 noteholders is limited to the purchased
co-ownership interests. During the year, no receivables were securitized through Halifax (2018 – nil) and $1,792 million of receivables were
securitized through Trillium (2018 – $1,678 million). As at October 31, 2019, the outstanding Bank-held subordinated notes issued by Halifax of
$102 million (2018 – $205 million) and Trillium of $134 million (2018 – $134 million) 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, 2018-2 and 2019-1 (START) Bank-sponsored structured entities. The START entities issue 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 $896 million were securitized through the START program (2018 – $1,874 million). As at October 31, 2019,
the outstanding subordinated notes issued by the START entities that are held by the Bank of $325 million (2018 – $447 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:
• Standby letters of credit and letters of guarantee. As at October 31, 2019, these amounted to $36 billion, compared to $35 billion last year.
These instruments are issued at the request of a Bank customer to secure the customer’s payment or performance obligations to a third
party.
•
• 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;
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;
• 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, 2019, these commitments amounted
to $212 billion, compared to $197 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 $588 million in 2019, compared to $572 million in the prior year. Detailed information on guarantees and loan commitments is
disclosed in Note 35 in the consolidated financial statements.
66 | 2019 Scotiabank Annual Report
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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):
• debt instruments measured at fair value through OCI,
• equity instruments measured at fair value through OCI,
• derivatives designated as cash flow hedges, and
• 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 69 to 106. In addition,
Note 36 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 91. For trading activities, Table T45 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% (2018 – 18%) 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 $5 billion as at October 31, 2019
(October 31, 2018 – favourable $2.8 billion). This difference relates mainly to loan assets, deposit liabilities, subordinated debentures and other
liabilities. These changes are primarily driven by movements in interest rates and by volume changes. Fair value estimates are based on market
conditions as at October 31, 2019, and may not be reflective of future fair values. Further information on how fair values are estimated is contained
in the section on critical accounting estimates.
Disclosures specific to certain financial instruments designated at fair value through profit and loss can be found in Note 9 to the consolidated
financial statements. These designations were made primarily to significantly reduce accounting mismatches.
2019 Scotiabank Annual Report | 67
Management’s Discussion and Analysis
Selected Credit Instruments – Publically Known Risk Items
Mortgage-backed securities
Total mortgage-backed securities held in the Non-trading and Trading portfolios are shown in Table T37.
T37 Mortgage-backed securities
As at October 31
Carrying value ($ millions)
Canadian NHA mortgage-backed securities(2)
Commercial mortgage-backed securities
U.S. Agency mortgage-backed securities(3)
Total
2019
2018
Non-trading
portfolio(1)
Trading
portfolio
Non-trading
portfolio
$
3,502
–
9,452
$ 2,081
11
–
$ 2,254
–
504
Trading
portfolio
$ 1,791
15
–
$ 12,954
$ 2,092
$ 2,758
$ 1,806
The balances are comprised of securities under the amortized cost and FVOCI measurement categories.
(1)
(2) Canada Mortgage and Housing Corporation is a corporation of the Government of Canada that provides a guarantee of timely payment to NHA mortgage-backed security investors.
(3)
The Government National Mortgage Association (Ginnie Mae) is a U.S. Government corporation that provides a guarantee of timely payment to U.S. Agency mortgage-backed security investors.
Other
As at October 31, 2019, 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.
68 | 2019 Scotiabank Annual Report
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 in order for it to
meet 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
Operational, IT & Cybersecurity, Data, Compliance, ML/TF and Sanctions,
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:
• Risk Governance
• Risk Appetite
• Risk Management Tools
• Risk Identification and Assessment
• Risk Culture
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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:
• the First Line of Defence (typically comprised of the business lines and most corporate functions) incurs and owns the risks,
• the Second Line of Defence (typically comprised of control functions such as Global Risk Management, Global Compliance, AML Risk and
Global Finance) provides independent oversight and objective challenge to the First Line of Defence, as well as monitoring and managing risk,
and
• the Third Line of Defence (Internal Audit) provides enterprise-wide independent assurance to management and the Board on the
effectiveness of risk management practices.
2019 Scotiabank Annual Report | 69
Management’s Discussion and Analysis
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 Owners’ 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 and anti-money laundering / anti-terrorist financing and
sanctions functions. 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 includes
oversight of climate-change related disclosure as part of the Bank’s financial reporting as well as the external auditor’s qualifications,
independence and performance. This Committee assists the Board in fulfilling its oversight responsibilities for setting standards of conduct and
ethical behaviour, and the oversight of conduct and conduct risk management. The Committee also oversees the Bank’s compliance with legal and
regulatory requirements, and oversees the Global Finance, Compliance and Audit functions at the Bank. 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.
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 (including conduct risk) associated with the Bank’s material compensation programs and that such
procedures are consistent with the Bank’s risk management programs. The Committee has further responsibilities relating to leadership,
succession planning and total rewards.
Corporate Governance Committee of the Board: acts in an advisory capacity to the Board to enhance the Bank’s corporate governance through a
continuing assessment of the Bank’s approach to corporate governance and makes policy recommendations.
President and Chief Executive Officer (CEO): reports directly to the Board and is responsible for defining, communicating and implementing the
strategic direction, goals and core values for Scotiabank that maximize long term shareholder value. The CEO oversees the establishment of the
Bank’s risk appetite, in collaboration with the CRO and CFO, which is consistent with the Bank’s short and long term strategy, business and capital
plans, as well as compensation programs.
Group Head and Chief Risk Officer (CRO): reports to the CEO and is responsible for the overall management of Global Risk Management, Global
Compliance and AML Risk. The CRO and the heads of Global Compliance and AML Risk also have unfettered access to certain Committees of the
70 | 2019 Scotiabank Annual Report
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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.
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.
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, manages compliance risk which includes regulatory compliance, conduct, and privacy risks
throughout Scotiabank. A primary objective of Global Compliance is to take a holistic view of compliance risk to ensure consistency in the
application of the Compliance Program, and assurance of outputs from its compliance risk management processes. Global Compliance provides
independent oversight of Compliance Risk through the Compliance Program by:
• developing and maintaining compliance frameworks, policies, standards, and procedures;
• effectively challenging compliance risk management in the Bank’s Business Lines and Corporate Functions;
• acting as a consultant and educator on regulatory compliance, internal policies and procedures; and
• being responsible for conducting ongoing risk-based enterprise-wide assessment, monitoring, testing, issues management, regulatory
relationship management, and reporting.
AML Risk: on an enterprise-wide basis, develops controls and standards for the prevention, detection, deterrence and reporting of money
laundering, terrorist financing, and sanctions risks. AML Risk is responsible for maintaining the program in accordance with Scotiabank’s needs,
industry practice, and anti-money laundering / anti-terrorist financing (AML/ATF) and Sanctions legal and regulatory requirements, as well as
providing risk-tailored oversight of Scotiabank’s compliance with these standards and requirements.
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 management practices. The mission of the audit department is to provide enterprise-wide independent, objective assurance over the
design and operating effectiveness of the Bank’s internal controls, risk management and 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 as well as governance activities 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
Risk
Appetite
Metrics
Risk
Capacity
Risk
Appetite
Framework
Roles and
Responsibilities
Risk Appetite Statement
The Bank’s Risk Appetite Statement can be summarized as follows:
• The Bank favours businesses that generate sustainable, consistent and predictable earnings.
• 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.
• 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.
2019 Scotiabank Annual Report | 71
Management’s Discussion and Analysis
• Capital considerations are part of all material risk decisions.
• The Bank has low appetite for reputational, legal, regulatory or taxation risk, and no appetite for breaches of the Code of Conduct.
• 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.
Other components of Scotiabank’s risk appetite metrics:
• Set risk capacity and appetite in relation to regulatory constraints
• Use stress testing to provide forward-looking metrics
• Ensure Scotiabank’s credit rating remains strong
• Minimize earnings volatility
• Limit exposure to operational events that can have an impact on earnings, including regulatory fines
• 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 Enterprise Risk Appetite Framework and integrated with the Bank’s
strategies and business planning processes.
Scotiabank’s risk management framework is supported by a variety of risk management tools that are used together to manage enterprise-wide
risks. Risk management tools are regularly reviewed and updated to ensure consistency with risk-taking activities, and relevance to the business
and financial strategies of the Bank.
Policies, 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 and other control and corporate functions including 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 govern and 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:
• valuing transactions
• measuring risk exposures
• determining credit risk ratings and parameters
• calculating internal economic and regulatory capital
• 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 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.
72 | 2019 Scotiabank Annual Report
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 resulting from 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 & Scenarios
Committee (SSC) or other management committees as appropriate. The Stress & Scenarios Model Review Committee (SSMRC) was established as
a subcommittee of the SSC to review and approve enterprise-wide stress testing models as well as review IFRS 9 models prior to submission for
approval to the SSC. 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.
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 Senior Management team and key personnel, by simulating a potential stress scenario. Simulated stress scenarios may include several
complexities and disruptions through which Senior 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.
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.
Principal Risk Types
Principal Risks are defined as:
Those risks which management considers of primary importance: i) having a significant impact or influence on the Bank’s primary business and
revenue generating activities (Financial Risks) or ii) inherent in the Bank’s business and can have significant negative strategic, business, financial
and/or reputational consequences (Non-Financial Risks (i.e. Core Risks)).
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Principal Risks are assessed on an annual basis considering, amongst other things, the following factors:
• Potential impact (direct or indirect) on the Bank’s financial results, operations, management and strategy
• Effect on the Bank’s long term prospects and ongoing viability
• Regulatory focus and/or social concern
• Short to mid-term macroeconomic and market environment
• Financial and human resources required to manage and monitor the risk
• Establishment of key risk indicators, performance indicators or management limits to monitor and control the risk
• Peer identification and global best practices
• Regular monitoring and reporting to the Board on the risk is warranted
Once a Principal Risk has been identified, governance for that risk should be developed including:
• appropriate committee oversight structures;
• dedicated 2nd line resources; and
• regular measurement, monitoring and reporting supporting adequate and effective Board oversight.
The Bank’s principal risk types are reviewed annually to determine that they adequately reflect the Bank’s risk profile. Principal risks are categorized
into two main groups:
Financial Risks:
Credit, Market, Liquidity
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.
2019 Scotiabank Annual Report | 73
Management’s Discussion and Analysis
Non-Financial Risks (i.e. Core Risks):
Operational, Information Technology & Cybersecurity, Data, Compliance, Money Laundering & Terrorist Financing and Sanctions, Environmental,
Reputational, Strategic
These are risks that are inherent in the Bank’s 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 accordingly.
Other Considerations
• Other non-principal risks are reviewed and assessed as part of the Assessment of Risks process
• Risk identification and assessment is performed on an ongoing basis through the following:
o Transactions – risks, including credit and market exposures, are assessed by the business lines and reviewed by GRM, as applicable.
o Monitoring – risks are identified by constantly monitoring and reporting current trends and analysis.
o New Products and Services – new products and services are assessed for potential risks through a standardized process.
o Strategic Investments – investment transactions are thoroughly reviewed for risks and are approved by the Strategic Transactions and
Investment Committee (STIC) which provides advice, counsel and decisions on effective allocation and prioritization of resources.
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.
A strong risk culture promotes behaviours that align to the Bank’s values, supports sound
risk taking and enables employees to identify risk taking activities that are beyond the
established risk appetite.
The Bank’s Risk Culture Program is based on four indicators of a strong risk culture:
1. Tone from the Top – Clear and consistent communication on risk behaviour
expectations, the importance of Scotiabank’s values, and fostering an environment
where everyone has ownership and responsibility for “doing the right thing”.
2. Accountability – All employees are accountable for risk management. There is an
environment of open communication where employees feel safe to speak-up and raise
concerns without fear of retaliation.
3. Risk Management – Risk taking activities are consistent with the Bank’s strategies and
risk appetite. Risk appetite considerations are embedded in key decision making
processes.
4. People Management – Performance and compensation structures encourage desired
behaviors and reinforce the Bank’s risk culture.
Other elements that influence and support the Bank’s risk culture:
Risk
Management
Tools
Risk
Governance
Risk
Culture
Risk Appetite
Organizational
Culture
Strategy
• 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.
• Values: Integrity – Act With Honour; Respect – Value Every Voice; Accountability – Make It Happen; Passion – Be Your Best.
• 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
• 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.
• 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.
• 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.
• Executive Mandates: all Executives across the Bank have risk management responsibilities within their mandates.
74 | 2019 Scotiabank Annual Report
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Principal Risk Types
Risk Type
Credit Risk
Key Governing Documentation
Ways that they support Risk Appetite
• Credit Risk Summary Framework
• Credit Risk Policy
• Credit Risk Appetite
• Residential Mortgage
Underwriting Policy
Quantitative limits, such as: Credit Risk Appetite limits at the all-Bank level and
Business Line level; Exposure to a single counterparty or group of related
parties; Country risk; and Industry concentrations.
Market Risk
• Market and Structural Risk
Summary Framework
• Market and Structural Risk
Management Policy
Liquidity Risk
• Liquidity Risk Management
Summary Framework
• Liquidity Risk and Collateral
Management Policy
• Liquidity Stress Testing
Framework
Operational Risk
• Operational Risk Management
Summary Framework
• Operational Risk Management
Policy and Framework
•
Internal Control Policy
• New Initiative Risk
Management Policy
• Global Third Party Risk
Management Policy
• Financial Crisis Management
Planning policies & framework
•
•
•
IT & Cybersecurity Risk
Management Policy and
Framework
Information Security Policy
Information Security
Governance Framework
• Cybersecurity Policy
• Enterprise Portfolio
Management & Project
Governance Policy
Information
Technology &
Cybersecurity
Risk
Quantitative limits, such as: Value at Risk (VaR); Stress test results; Debt investment
exposures; and Structural interest rate and foreign exchange exposures.
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.
Operational risk appetite expresses how much residual risk the Bank is willing to
tolerate and is expressed quantitatively by an aggregate loss event limit, a single
event loss limit, and a variety of limits for individual categories of operational
risk.
The Bank has established minimum expectations and requirements for the
systematic identification, measurement, mitigation and monitoring of IT and
Cybersecurity risk, including requirements for the protection of information
throughout its lifecycle.
Data Risk
• Data Risk Summary
Framework
• Scotiabank Data
Management & Governance
Policy
The Policy sets out data lifecycle based governance principles for all business
lines, corporate functions, and countries/regions to comply with and outlines an
interaction model including various forums for stakeholders to communicate
and resolve data related issues. The Policy identifies key roles and
responsibilities for management and governance of the Bank’s data.
2019 Scotiabank Annual Report | 75
Management’s Discussion and Analysis
Compliance Risk
• Compliance Risk Summary
Framework
• Conduct Risk Summary
Framework
• Risk Culture Summary
Framework
• Conduct Risk Management
Policy
• Global Compliance Risk
Management Policy
• Privacy Risk
Management Framework
• Code of Conduct
• AML/ATF Policy
• AML/ATF Procedures and
Standards
• Sanctions Policy
• Sanctions Procedures and
Standards
Money
Laundering
& Terrorist
Financing and
Sanctions Risks
Reputational Risk
• Reputational Risk Policy
Environmental Risk
• Environmental Policy
Compliance Risk appetite is based on the moderate all-Bank Residual
Compliance Risk Rating obtained through the annual Compliance Risk and
Control Assessment.
The Bank has no appetite for Clients where money laundering/terrorist
financing risk is not well understood or where there is insufficient expertise,
resources and infrastructure to effectively measure and manage the risk.
The Bank has no appetite for any business activity or services to Clients that are
prohibited by sanctions laws and regulations, or for the changing, manipulation,
or stripping of data with an intent to avoid sanctions obligation.
Low appetite for reputational, legal, or taxation risk arising in business activities,
initiatives, products, services, transactions or processes, or from a lack of
suitability of products for clients.
The Bank has policies and procedures in place to ensure that it provides loans
to borrowers that demonstrate an ability and willingness to practice sound
environmental risk management.
Strategic Risk
• Annual Strategy Report to the
Board of Directors
Strategy report considers linkages between the Bank’s Enterprise Risk Appetite
Framework with the enterprise strategy, business line strategies and corporate
function strategies.
76 | 2019 Scotiabank Annual Report
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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
• Deposits
• Accounts services
• Credit and lending
• Commercial banking
• Payments and cash
management
• Advisory services
• Asset management
• Online brokerage
• Deposits
• Accounts services
• Credit and lending
• Commercial banking
• Payments and cash
management
• Advisory services
• Asset management
• Group treasury
• Other control
functions
• Deposits
• Accounts services
• Corporate lending
• Equity and debt
underwriting
• M&A advisory services
• Capital markets
products & services
• Foreign exchange
• Precious metals
• Payment and cash
management
• Average assets $363bn
• Average assets $203bn
• Average assets $372bn
• Average assets(1) $118bn
Business
Activities
Balance
Sheet
Attributed
Capital(2)
• Attributed Capital $24bn
• Proportion of Bank 41%
Comprised of:
• Credit risk 44%
• Market risk ‑%
• Operational risk 8%
• Other(3) 48%
• Attributed Capital $21bn
• Proportion of Bank 36%
Comprised of:
• Credit risk 62%
• Market risk 1%
• Operational risk 8%
• Other(3) 29%
• Attributed Capital $12bn
• Proportion of Bank 20%
Comprised of:
• Credit risk 70%
• Market risk 5%
• Operational risk 7%
• Other(3) 18%
• Attributed Capital $2bn
• Proportion of Bank 3%
Comprised of:
• Credit risk 65%
• Market risk 5%
• Operational risk -5%
• Other(3) 35%
• RWA $137.6bn
• Proportion of Bank 33%
Comprised of:
• Credit risk 85%
• Market risk ‑%
• Operational risk 15%
Risk-
Weighted
Assets(4)
• RWA $174.5bn
• Proportion of Bank 41%
Comprised of:
• Credit risk 88%
• Market risk 1%
• Operational risk 11%
• RWA $100.8bn
• Proportion of Bank 24%
Comprised of:
• Credit risk 85%
• Market risk 6%
• Operational risk 9%
• RWA $8.3bn
• Proportion of Bank 2%
Comprised of:
• Credit risk 99%
• Market risk 13%
• Operational risk -12%
Credit, market, liquidity, operational, reputational, environmental and strategic risk.
Average assets for the Other segment include certain non-earning assets related to the business lines.
(1)
(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, 2019 as measured for regulatory purposes in accordance with the Basel III approach.
Includes Attributed Capital for significant investments, goodwill, intangibles and leverage capital.
2019 Scotiabank Annual Report | 77
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 and macroeconomic uncertainty
Geopolitical risks including trade tensions 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 or economic consequences of
trade-related events, 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.
Money laundering, terrorist financing and sanctions compliance
Money laundering, terrorist financing and sanctions compliance continues to receive significant attention as nations attempt to deal with the
harmful legal, economic, and social consequences of criminal 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 means
to assist in the fight against money laundering, terrorist financing, and criminal activity (including anti-trafficking and exploitation) through
prevention, detection, deterrence and the exchange/reporting of information.
Scotiabank is subject to the expanding and constantly evolving anti-money laundering/anti-terrorist financing and economic sanctions, laws and
regulations internationally across the Bank’s global footprint. Money laundering, terrorist financing, and economic sanctions violations represent
material risk to the Bank including regulatory, legal, financial and reputational exposure.
The Bank is committed to sustaining secure financial systems in the countries in which it maintains a presence by taking the necessary action,
using a risk tailored approach. The Bank’s AML Risk program includes policies, procedures and control standards relating to client identification
and due diligence, transaction monitoring, payment and name screening, investigating and reporting of suspicious activity, and evaluation of new
products and services to prevent and/or detect activities that may pose risk to the Bank. The AML Risk program also facilitates an annual
enterprise-wide AML/ATF and Sanctions risk assessment process and ensures that all employees, including the Board of Directors and Executive
Management, undergo initial and ongoing AML/ATF and Sanctions training.
Information Technology and cybersecurity risk
Technology, information and cybersecurity 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
The pace of technology innovation continues to impact the financial services industry and its customers. Global regulators continue to push for
increased competition with open banking, in addition to, non-traditional new participants entering certain segments of the market and challenging
the position of financial institutions. New participants are disrupting the traditional Bank operating model with the use of advanced technologies
and analytical tools offering a highly customized user experience with lower fixed costs which has the potential to impact revenues and costs in
certain areas 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 focus markets, in Mexico, Peru, Chile and Colombia to contribute to financial innovation, while
continuing to monitor for evolving risks in new technology tools.
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 indistinct. 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.
Legal and 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
78 | 2019 Scotiabank Annual Report
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 increased focus on risks associated with conduct, privacy, model risk, and operational resilience. This focus could lead to more
regulatory or other enforcement actions including for practices which may historically have been considered acceptable.
The Bank continues to monitor and respond to global regulatory developments relating to a broad spectrum of topics, such that control and
business units are responsive on a timely basis and business impacts, if any, are minimized.
For additional information on some of the key regulatory developments that have the potential of impacting the Bank’s operations, see
“Regulatory Developments” on page 113.
Canadian household indebtedness
After a period of low interest rates, Canadians have increased household borrowing at a pace that exceeded their income growth. Canadian
household indebtedness and household debt-service ratio are nearing historic highs. Household saving rates are at record lows, leaving little
margin to sustain consumption if the macro-economic outlook proves more negative. The Bank performs stress tests considering these
sensitivities and actively manages its lending portfolio. The Bank continues to enhance risk management capabilities through investments in
technology and analytics.
Climate change
Climate change has the potential to impact the Bank’s retail and business banking profitability through credit losses. Severe weather can damage
Bank properties and disrupt operations. Emerging policy/regulatory actions on climate can elevate the Bank’s reputational, legal and regulatory
compliance risks. There are also sustainable finance opportunities to invest in. For further details on the Bank’s Climate Change strategy and
actions taken, please refer to the Other Risks section of the MD&A.
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2019 Scotiabank Annual Report | 79
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.
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
80 | 2019 Scotiabank Annual Report
Page
Tables and charts
Page
81
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83
83
83
84
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85
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86
67
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
T59 Gross impaired loans by geographic segment
T60 Provision against impaired loans by geographic segment
T61 Cross-border exposure to select countries
T62 Loans and acceptances by type of borrower
T63 Off-balance sheet credit instruments
T64 Changes in net impaired loans
T65 Provision for credit losses
T66 Provision for credit losses against impaired loans by type of borrower
T67 Impaired loans by type of borrower
T68 Total credit risk exposures by geography
T69 AIRB credit risk exposures by maturity
T70 Total credit risk exposures and risk-weighted assets
Analysis of the aggregate credit risk exposure including market risk exposure,
assets of the Bank’s insurance subsidiaries and other assets that fully reconciles to
the balance sheet (refer Note 36 – Financial instruments – risk management in the
consolidated financial statements)
C24 Well diversified in Canada and internationally – loans and acceptances
C25 and in household and business lending – loans and acceptances
T58 Loans and acceptances by geography
T43 Bank’s exposure distribution by country
T37 Mortgage-backed securities
21
28
28
117
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118
119
119
120
120
121
121
122
227
85
85
116
87
68
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Credit risk summary
• 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 7%, Mexico 5% and Other 17%). Financial Services constitutes 5.6% of overall gross
exposures (before consideration of collateral) and was $34 billion, an increase of $5 billion from October 31, 2018. These exposures are
predominately to highly rated counterparties and are generally collateralized.
• The Bank’s overall loan book as of October 31, 2019 increased to $611 billion versus $573 billion as of October 31, 2018, with growth reflected in
Personal, and Business and Government lending. Residential mortgages were $268 billion as of October 31, 2019, with 85% in Canada. The
corporate loan book, which accounts for 37% of the total loan book, is composed of 55% of loans with an investment grade rating as of
October 31, 2019, unchanged from October 31, 2018.
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.
• 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.
• 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:
• Credit risk rating methodologies and parameters are appropriately designed and developed, independently validated, and regularly reviewed;
and
• 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 the Bank’s 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.
2019 Scotiabank Annual Report | 81
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:
• 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.
Based on this assessment, a risk rating is assigned to the individual borrower or counterparty, using the Bank’s risk rating systems.
A separate risk rating is also assigned at the facility level, taking into consideration additional factors, such as security, seniority of claim, structure,
term and any other forms of credit risk mitigation that affect the amount of potential loss in the event of a default of the facility. Security typically
takes the form of charges over inventory, receivables, real estate, and operating assets when lending to corporate and commercial borrowers; and
cash or treasuries for trading lines such as securities lending, repurchase transactions, and derivatives. The types of acceptable collateral, and
related valuation processes are documented in risk management policies and manuals.
Other forms of credit risk mitigation include third party guarantees and, in the case of derivatives facilities, master netting agreements.
Internal borrower and facility risk ratings are assigned when a facility is first authorized, and are promptly re-evaluated and adjusted, if necessary,
as a result of changes to the customer’s financial condition or business prospects. Re-evaluation is an ongoing process, and is done in the context
of general economic changes, specific industry prospects, and event risks, such as revised financial projections, interim financial results and
extraordinary announcements.
The internal credit risk ratings are also considered as part of the Bank’s adjudication limits, as guidelines for hold levels are tied to different risk
ratings. Single borrower limits are much lower for higher risk borrowers than low risk borrowers.
The credit adjudication process also uses a risk-adjusted return on equity profitability model to ensure that the client and transaction structure
offers an appropriate return for a given level of risk. For the corporate portfolio, and the large borrowers in International, the Loan Portfolio
Management Group reviews the profitability model results, together with external benchmarks, and provides an opinion on the relative return and
pricing of each transaction above a minimum threshold.
Individual credit exposures are regularly monitored by both the business line units and GRM for any signs of deterioration. In addition, the business
line units and GRM conduct a review and risk analysis of each borrower annually, or more frequently for higher-risk borrowers. If, in the judgement
of management, an account requires the expertise of specialists in workouts and restructurings, it will be transferred to a special accounts group
for monitoring and resolution.
Credit Risk Mitigation – Collateral/Security
Traditional Non-Retail Products (e.g. Operating lines of Credit, Term Loans)
Collateral values are accurately identified at the outset and throughout the tenure of a transaction by using standard evaluation methodologies.
Collateral valuation estimates are conducted at a frequency that is appropriate to the frequency by which the market value fluctuates, using the
collateral type and the borrower risk profile.
In addition, when it is not cost effective to monitor highly volatile collateral (e.g. accounts receivable, inventory), appropriate lending margins are
applied to compensate (e.g. accounts receivable are capped at 80% of value, inventory at 50%). The frequency of collateral valuations is also
increased when early warning signals of a borrower’s deteriorating financial condition are identified.
Borrowers are required to confirm adherence to covenants including confirmation of collateral values on a periodic basis, which are used by the
Bank to provide early warning signals of collateral value deterioration. Periodic inspections of physical collateral are performed where appropriate
and where reasonable means of doing so are available.
Bank procedures require verification including certification by banking officers during initial, annual, and periodic reviews, that collateral values/
margins/etc. have been assessed and, where necessary, steps have been taken to mitigate any decreased collateral values.
The Bank does not use automated valuation models (AVMs) for valuation purposes for traditional non-retail products. GRM performs its own
valuations of companies based on various factors such as book value, discounted book value, enterprise value etc.
Commercial/Corporate Real Estate
New or updated appraisals are generally obtained at inception of a new facility, as well as during loan modifications, loan workouts and troubled
debt restructure. The primary reason for requiring a new appraisal is if, in the reasonable opinion of the banking execution unit, or GRM, there has
been a material change in value. Additionally, none of the appraisal guidelines contained within the policies should dissuade the Bank from
requesting an appraisal more frequently if an adverse change in market conditions, sponsorship, credit worthiness, or other underwriting
assumptions is realized or expected.
Appraisals must be in writing and must contain sufficient information and analysis to support the Bank’s decision to make the loan. Moreover, in
rendering an opinion of the property’s market value, third party appraisers are responsible for establishing the scope of work necessary to develop
credible assignment results. The appraisal must meet the regulatory and industry requirements which, depending on the type of property being
appraised, contain any or all of the following three approaches to value:
i.
ii.
comparable sales approach
replacement cost approach
iii.
income approach
82 | 2019 Scotiabank Annual Report
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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 86% of the credit risk. Approximately 30% of the Bank’s
derivative counterparty exposures are to bank counterparties. After taking into consideration, where applicable, netting and collateral
arrangements, no net credit risk amount arising from traded products transactions with any single counterparty was considered material to the
financial position of the Bank as at October 31, 2019. No individual exposure to an investment grade bilateral counterparty exceeded $1,114 million
and no individual exposure to a corporate counterparty exceeded $464 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 in line with our risk appetite. 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, a more consistent experience to the customer, 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 at least monthly to identify emerging trends in loan quality and to assess whether corrective action is required.
Risk ratings
The Bank’s consumer risk rating systems are oriented to borrower or transaction risk. Each retail exposure is assigned a risk grade based on the
customer’s credit history and/or internal credit score. The Bank’s automated risk rating systems assess the ongoing credit-worthiness of individual
customers on a monthly basis. This process provides for meaningful and timely identification and management of problem loans.
The risk rating system under the AIRB approach is subject to regular review and ongoing performance monitoring of key components. Risk model
validations are conducted independently from the areas responsible for rating system development and implementation, to ensure effective
independence in design and performance review.
Customer behavior characteristics which are used as inputs within the Bank’s Basel III AIRB models are consistent with those used by the Bank’s
Canadian consumer risk rating systems. The International portfolios are subject to the Standardized approach at this time.
Credit risk mitigation – collateral/security
The property values for residential real estate secured exposures are confirmed at origination through a variety of validation methodologies,
including AVM and full appraisal’s (in-person inspection). The appraisal is completed by a third party, Bank approved appraiser. For monitoring of
material portfolios, property values are indexed quarterly to house prices. For loan impairment within material portfolios, residential property
values are re-confirmed using third party AVM’s.
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
2019 Scotiabank Annual Report | 83
Management’s Discussion and Analysis
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
As at October 31 ($ millions)
Canadian Banking
Retail
Commercial
International Banking
Caribbean and Central America
Latin America
Mexico
Peru
Chile
Colombia
Other Latin America
Total Latin America
Global Banking and Markets
Canada
U.S.
Asia and Europe
Totals
Allowance for credit losses against performing loans
Total allowance for credit losses on loans
Impaired loan metrics
As at October 31 ($ millions)
Net impaired loans as a % of loans and acceptances
Allowance against impaired loans as a % of gross impaired loans
2019
Gross
impaired
loans
Allowance
for credit
losses
Net
impaired
loans
Gross
impaired
loans
$
878
214
$ 1,092
$ 1,197
485
642
844
505
133
2,609
$
$
$
265
102
367
265
178
332
180
151
85
926
$
$
$
613
112
725
932
307
310
664
354
48
$
$
840
158
998
$ 1,389
359
581
753
619
148
1,683
2,460
2018
Allowance
for credit
losses
$
$
$
276
104
380
326
164
317
158
159
98
896
Net
impaired
loans
$
$
564
54
618
$ 1,063
195
264
595
460
50
1,564
$ 3,806
$ 1,191
$ 2,615
$ 3,849
$ 1,222
$ 2,627
$
$
41
94
102
237
$
$
8
5
24
37
$ 5,135
$ 1,595
$
33
89
78
$
200
$ 3,540
$
$
1
80
202
283
$
$
1
25
49
75
$
$
–
55
153
208
$ 5,130
$ 1,677
$ 3,453
3,482
$ 5,077
3,388
$ 5,065
Net impaired loans
2019
2018
0.58%
31%
0.60%
33%
Impaired loans
Gross impaired loans increased to $5,135 million as at October 31, 2019, from $5,130 million last year. Impaired loans in Canadian Banking
increased by $94 million, primarily in the commercial portfolio. In International Banking, impaired loans decreased by $43 million, due primarily to
the impact of divestitures in the Caribbean region and foreign exchange impacts. Impaired loans in Global Banking and Markets decreased by
$46 million, primarily due to resolutions during the year.
Net impaired loans, after deducting the allowance for credit losses, were $3,540 million as at October 31, 2019, an increase of $87 million from a
year ago. Net impaired loans as a percentage of loans and acceptances were 0.58% as at October 31, 2019, a decrease of two basis points from
0.60% a year ago.
Allowance for credit losses
The total allowance for credit losses as at October 31, 2019 was $5,145 million. The allowance for credit losses on loans was $5,077 million, up
$12 million from $5,065 million last year due primarily to the impact of Day 1 provision for credit losses on acquired performing loans partially
offset by divestitures in the Caribbean region.
The total allowance for credit loss for Impaired Loans is $1,595 million, compared to $1,677 million last year. Allowances for Impaired Loans in
Canadian Banking decreased by $13 million to $367 million, primarily in the retail portfolio. In International Banking, allowances for Impaired Loans
decreased by $31 million to $1,191 million, mainly due to the impact of divestitures. In Global Banking and Markets, allowances for Impaired Loans
decreased by $38 million to $37 million, due mainly to write-offs during the year. Allowances for performing loans have increased to $3,482 million
compared to $3,388 million as at October 31, 2018, due primarily to the impact of Day 1 provision for credit losses on acquired performing loans.
Portfolio review
Canadian Banking
Gross impaired loans in the retail portfolio increased by $38 million or 5% from last year. Total provision for credit losses in the retail portfolio was
$892 million, up $146 million or 20% from last year.
In the commercial loan portfolio, gross impaired loans increased by $56 million to $214 million. The provision for credit losses was $80 million, up
$32 million or 67% from last year.
International Banking
In the retail portfolio, gross impaired loans increased by $20 million to $2,046 million. Adjusting for the day 1 provision on acquired performing
loans, the total provision for credit losses in the retail portfolio increased to $1,713 million from $1,318 million last year.
84 | 2019 Scotiabank Annual Report
In the commercial portfolio, gross impaired loans were $1,760 million, a decrease of $63 million
over the prior year, due primarily to the impact of divestitures and foreign exchange. Adjusting for
the day 1 provision on acquired performing loans, the total provision for credit losses in the
commercial portfolio was $212 million compared with $145 million last year, up $67 million or 46%.
Global Banking and Markets
Gross impaired loans in Global Banking and Markets decreased by $46 million to $237 million,
due primarily to resolutions during the year. The total provision for credit losses was a net
reversal of $22 million compared with a net reversal of $50 million last year.
Risk diversification
The Bank’s exposure to various countries and types of borrowers are well diversified (see T58
and T62). Chart C24 shows loans and acceptances by geography. Ontario represents the
largest Canadian exposure at 33% of the total. Latin America was 15% of the total exposure
and the U.S. was 7%.
Chart C25 shows loans and acceptances by type of borrower (see T62). Excluding loans to
households, the largest industry exposures were financial services (5.6% including banks and
non-banks), real estate and construction (5.3%), wholesale and retail (4.5%), and energy (2.7%).
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 2019,
loan sales totaled $8 million, compared to $25 million in 2018. The largest volume of loan sales
in 2019 related to loans in the Energy industry. As at October 31, 2019, credit derivatives used
to mitigate exposures in the portfolios totaled $13 million (notional amount) unchanged from
October 31, 2018. 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.
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.
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, 2019, these loans accounted for
$385 billion or 63% of the Bank’s total loans and acceptances outstanding (October 31, 2018 –
$366 billion or 64%). Of these, $289 billion or 75% are real estate secured loans (October 31, 2018 –
$274 billion or 75%). The tables below provide more details by portfolios.
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C24 Well diversified in Canada and
internationally...
loans and acceptances,
October 2019
2%
5%
1%
15%
5%
7%
Canada
United States
Mexico
Latin America
Europe
65%
Caribbean and
Central America
Other
C25 …and in household and business
lending loans and acceptances,
October 2019
31%
3%
6%
44%
16%
Corporate
Credit cards
Financial and sovereign
Personal loans
Residential mortgages
Insured and uninsured residential mortgages and home equity lines of credit
The following table presents amounts of insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic
area.
T40 Insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic areas
As at October 31
($ millions)
Canada:(2)
Atlantic provinces
Quebec
Ontario
Manitoba & Saskatchewan
Alberta
British Columbia & Territories
Canada(3)
International
Total
Canada(3)
International
Total
Residential mortgages
Home equity lines of credit
Insured(1)
Uninsured
Total
Insured(1)
Uninsured
Total
Amount
%
Amount
%
Amount
% Amount %
Amount
%
Amount
%
2019
$ 5,696
7,546
2.5
3.3
38,825 17.2
2.4
7.8
5.6
5,347
17,745
12,746
$ 5,421
8,857
77,807
4,157
13,033
29,429
2.4
3.9
34.3
1.8
5.8
13.0
$ 11,117
16,403
4.9
7.2
116,632 51.5
4.2
30,778 13.6
42,175 18.6
9,504
$ –
–
–
1
–
–
–
–
–
–
–
–
$ 1,153
978
5.5
4.7
11,354 54.0
3.6
2,915 13.8
3,871 18.4
763
$ 1,153
978
5.5
4.7
11,354 54.0
3.6
2,915 13.8
3,871 18.4
764
$87,905 38.8% $138,704
61.2% $226,609
100% $ 1
–% $21,034 100% $21,035
100%
–
–
41,560
100
41,560
100
–
–
–
–
–
–
$87,905 32.8% $180,264
67.2% $268,169
100% $ 1
–% $21,034 100% $21,035
100%
$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%
2018
(1)
(2)
(3)
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.
The province represents the location of the property in Canada.
Includes multi-residential dwellings (4+ units) of $3,365 (October 31, 2018 – $2,899) of which $2,424 are insured (October 31, 2018 – $2,029).
2019 Scotiabank Annual Report | 85
Management’s Discussion and Analysis
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
As at October 31
Canada
International
Canada
International
2019
Residential mortgages by remaining amortization periods
Less than
20 years
20-24
years
25-29
years
30-34
years
35 years
and
greater
Total
residential
mortgage
33.7%
38.4%
26.8%
65.9%
17.3%
13.7%
33.9%
38.0%
27.1%
65.1%
18.9%
13.2%
2018
1.0%
3.0%
0.9%
2.7%
0.1%
0.1%
0.1%
0.1%
100%
100%
100%
100%
Loan to value ratios
The Canadian residential mortgage portfolio is 61% uninsured (October 31, 2018 – 57%). The average loan-to-value (LTV) ratio of the uninsured
portfolio is 55% (October 31, 2018 – 54%).
The following table presents the weighted average LTV ratio for total newly originated uninsured residential mortgages and home equity lines of
credit during the year, which include mortgages for purchases, refinances with a request for additional funds and transfers from other financial
institutions, by geographic areas.
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, 2019
Residential mortgages
LTV%
Home equity lines of credit(2)
LTV%
67.3%
65.7
64.2
68.3
67.2
63.2
64.5%
71.4%
57.8%
69.1
62.2
61.9
72.1
61.6
63.0%
n/a
For the year ended October 31, 2018
63.8%
68.9%
62.0%
n/a
(1)
(2)
The province represents the location of the property in Canada.
Includes all home equity lines of credit (HELOC). For Scotia Total Equity Plan HELOC’s, 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 $1,461 million as at October 31, 2019 (October 31,
2018 – $1,192 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
(90% 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 $6.7 billion as at October 31, 2019 (October 31, 2018 – $8.5 billion), $6.5 billion to banks (October 31, 2018 –
$5.8 billion) and $18.4 billion to corporates (October 31, 2018 – $15.8 billion).
86 | 2019 Scotiabank Annual Report
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 $0.5 billion as at October 31, 2019 (October 31, 2018 – $0.7 billion).
The Bank’s current European exposure is distributed as follows:
T43 Bank’s exposure distribution by country
As at October 31
2019
($ millions)
Greece
Ireland
Italy
Portugal
Spain
Loans and
loan
equivalents(1)
Deposits
with
financial
institutions
Securities(2)
SFT and
derivatives(3)
Funded
Total
Undrawn
Commitments(4)
$
54
762
9
–
1,083
$
–
510
–
–
2
$
–
72
(16)
–
75
$
–
200
4
17
148
$
54
1,544
(3)
17
1,308
$
–
1,216
170
–
256
2018
Total
146
2,612
148
2
1,701
$
$
Total
54
2,760
167
17
1,564
Total GIIPS
$
1,908
$
512
$
131
$
369
$
2,920
$
1,642
$
4,562
$
4,609
U.K.
Germany
France
Netherlands
Switzerland
Other
Total Non-GIIPS
Total Europe
As at October 31, 2018
$ 10,568
953
1,327
858
839
1,773
$ 16,318
$ 18,226
$ 15,684
$ 2,320
374
61
89
20
423
$ 1,675
987
83
865
45
1,959
$ 2,503
63
35
144
177
579
$ 17,066
2,377
1,506
1,956
1,081
4,734
$
6,764
825
1,687
1,345
829
2,462
$ 23,830
3,202
3,193
3,301
1,910
7,196
$ 20,003
4,285
4,199
2,525
1,492
7,988
$ 3,287
$ 5,614
$ 3,501
$ 28,720
$ 13,912
$ 42,632
$ 40,492
$ 3,799
$ 5,745
$ 3,870
$ 31,640
$ 15,554
$ 47,194
$ 45,101
$ 6,196
$ 6,364
$ 1,839
$ 30,083
$ 15,018
$ 45,101
(1)
(2)
(3)
Individual allowances for credit losses are $3. 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 $4,008 as at
October 31, 2019 (October 31, 2018 – $3,867).
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.
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 $1,349 and collateral held against SFT was $27,508.
(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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2019 Scotiabank Annual Report | 87
Management’s Discussion and Analysis
Market Risk
Market risk is the risk of loss from changes in market prices and rates (including interest rates, credit spreads, equity prices, foreign exchange rates
and commodity prices), the correlations between them, and their levels of volatility. Below is an index of market risk disclosures:
Index of all market risk disclosures
Page
Tables and charts
Page
89
89
89
89
89
89
89
89
89
90
90
90
90
90
90
90-91
91-92
92
92
93
93
93
94
86
T44 Structural interest sensitivity
T45 Market risk measures
C26 Trading revenue distribution
C27 Daily trading revenue vs. VaR
T46 Market risk linkage to Consolidated Statement of Financial
Position of the Bank
T43 Bank’s exposure distribution by country
63-64
T34 Total market risk capital
67
T37 Mortgage-backed securities
91
92
92
92
93
87
64
68
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
88 | 2019 Scotiabank Annual Report
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:
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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 results quarterly.
2019 Scotiabank Annual Report | 89
Management’s Discussion and Analysis
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.
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:
• Theoretical review or tests to demonstrate whether assumptions made within the internal model are appropriate; and
•
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 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.
90 | 2019 Scotiabank Annual Report
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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.
T44 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 2019, 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 $273 million
over the next 12 months, assuming no further management actions. During fiscal 2019, this measure ranged between $66 million and $275 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
$1,448 million. During fiscal 2019, this measure ranged between $363 million and $1,657 million. The directional sensitivity of these two key metrics
is largely determined by the difference in time horizons (annual income captures the impact over the next twelve months only, whereas economic
value considers the potential impact of interest rate changes on the present value of all future cash flows). The annual income and economic value
results are compared to the authorized Board limits. Both interest rate sensitivities remained within the Bank’s approved consolidated limits in the
reporting period.
T44 Structural interest sensitivity
As at October 31 ($ millions)
After-tax impact of
100bp increase in rates
Non-trading risk
100bp decrease in rates
Non-trading risk
2019
2018
Economic
Value of
Shareholders’
Equity
Annual
Income
Economic
Value of
Shareholders’
Equity
Annual
Income
$(1,448)
$(273)
$(870)
$(105)
$ 1,173
$ 267
$ 797
$ 101
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.
2019 Scotiabank Annual Report | 91
Management’s Discussion and Analysis
As at October 31, 2019, 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 $64 million (October 31, 2018 – $65 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 2019, the total one-day VaR for trading activities averaged $12.4 million, compared to $12.9 million in 2018.
T45 Market risk measures
($ millions)
Year end
Avg
High
Low
Year end
Avg
High
Low
2019
2018
Credit Spread plus Interest Rate
$
13.8 $
11.1 $
Credit Spread
Interest Rate
Equities
Foreign Exchange
Commodities
Debt Specific
Diversification Effect
All-Bank VaR
All-Bank Stressed VaR
Incremental Risk Charge
$
$
$
8.0
7.2
3.4
2.7
3.1
3.3
7.7
7.8
3.5
3.5
2.3
3.9
17.5 $
11.2
12.6
8.1
7.0
4.7
5.9
7.7
3.8
5.1
1.0
1.5
1.3
2.0
n/a
9.2
$
11.0 $
11.6 $
6.2
7.7
5.8
2.8
1.7
3.6
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
13.2 $
12.9 $
18.4 $
6.9
4.8
4.3
1.2
1.1
1.0
2.6
n/a
8.6
(10.9)
(11.9)
n/a
15.4 $
12.4 $
17.9 $
45.9 $
40.1 $
60.6 $
26.7
80.0 $ 108.9 $ 208.8 $
79.4
44.6 $
42.7 $
59.0 $
26.3
77.9 $ 173.4 $ 474.7 $
60.0
$
$
$
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 2019, the total one-day Stressed VaR for trading activities averaged
$40.1 million compared to $42.7 million in 2018.
In fiscal 2019, the average IRC decreased to $108.9 million from $173.4 million in 2018, primarily driven by bought credit protection on Brazil and a
reduction in North American corporate bonds in the first two quarters.
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 2019 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 $9.8 million per day, compared to $5.9 million in 2018. Revenue was
positive on 99.6% of trading days during the year, the same level in 2018. During the year, the largest single day trading loss was $0.2 million which
occurred on March 25, 2019, and was smaller than the total VaR of $15.5 million on the same day.
C26 Trading revenue distribution
Year ended October 31, 2019
C27 Daily trading revenue vs. VaR
$ millions, November 1, 2017 to October 31, 2019
80
70
60
50
30
20
10
0
# of days
Gain
Loss
-1
3
4
5
6
7
8
$ millions
9
10
15
20
25
40
92 | 2019 Scotiabank Annual Report
Trading revenue
VaR, 99%, 1 day holding period
40
30
20
10
0
-10
-20
-30
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 captured under trading risk
measures are related to the activities of Global Banking and Markets, while derivatives captured under non-trading risk measures comprise those
used in asset/liability management and designated in a hedge relationship. 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.
T46 Market risk linkage to Consolidated Statement of Financial Position of the Bank
As at October 31, 2019
($ 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)
Market Risk Measure
Consolidated
Statement of
Financial
Position Trading Risk
Non-
trading risk
Not subject to
market risk
$
3,709 $
3,709 $
127,488
–
38,119
82,359
592,483
242,003
126,846
–
34,489
–
–
–
–
642
–
3,630
82,359
592,483
–
$
–
–
–
–
–
–
242,003
Primary risk sensitivity of
non-trading risk
n/a
Interest rate, FX
n/a
Interest rate, FX, equity
Interest rate, FX, equity
Interest rate, FX
n/a
Total assets
$ 1,086,161 $ 165,044 $ 679,114
$ 242,003
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)
$
733,390 $
12,235
30,404
40,222
4,124
2,956
192,638
– $ 699,462
12,235
–
–
30,404
5,402
34,820
–
4,124
2,956
–
–
–
$
Interest rate, FX, equity
33,928
Interest rate, equity
–
n/a
–
Interest rate, FX, equity
–
n/a
–
– Interest rate, credit spread, equity
n/a
192,638
Total liabilities
$ 1,015,969 $
69,348 $ 720,055
$ 226,566
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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, 2018
($ millions)
Market Risk Measure
Consolidated
Statement of
Financial
Position
Trading Risk
Non-trading
risk
Not subject to
market risk
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)
$
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
Total assets
$ 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)
Total liabilities
$ 676,534 $
8,188
32,087
37,967
5,019
1,727
169,291
– $ 641,791 $
–
32,087
32,300
5,019
–
–
8,188
–
5,667
–
1,727
–
34,743
–
–
–
–
–
169,291
$ 930,813 $
69,406 $ 657,373 $ 204,034
Interest rate, FX, equity
Interest rate, equity
n/a
Interest rate, FX, equity
n/a
Interest rate, credit spread, equity
n/a
Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.
(1)
(2) Gold and silver certificates and bullion included in other liabilities.
(3)
Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities.
Derivative instruments and structured transactions
Derivatives
The Bank uses derivatives to meet customer needs, generate revenues from trading activities, manage market and credit risks arising from its
lending, funding and investment activities, and to lower its cost of capital. The Bank uses several types of derivative products, including interest
rate swaps, futures and options, to hedge interest rate risk exposure. Forward contracts, swaps and options are used to manage foreign currency
risk exposures. Credit exposures in its lending and investment books are managed using credit default swaps. As a dealer, the Bank markets a
range of derivatives to its customers, including interest rate, foreign exchange, equity, commodity and credit derivatives.
2019 Scotiabank Annual Report | 93
Management’s Discussion and Analysis
Market risk arising from derivatives transactions is subject to the control, reporting and analytical techniques noted above. Additional controls and
analytical techniques are applied to address certain market-related risks that are unique to derivative products.
Structured transactions
Structured transactions are specialized transactions that may involve combinations of cash, other financial assets and derivatives designed to
meet the specific risk management or financial requirements of customers. These transactions are carefully evaluated by the Bank to identify and
address the 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:
• 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.
• Reporting – Global Risk Management provides independent oversight of all significant liquidity risks, supporting the ALCO with analysis, risk
measurement, stress testing, monitoring and reporting.
• 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.
• 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.
• Funding diversification – the Bank actively manages the diversification of its deposit liabilities by source, type of depositor, instrument, term and
geography.
• 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, 2019, unencumbered liquid assets were $211 billion (October 31, 2018 – $202 billion). Securities including
NHA mortgage-backed securities, comprised 80% of liquid assets (October 31, 2018 – 71%). Other unencumbered liquid assets, comprising cash
94 | 2019 Scotiabank Annual Report
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and deposits with central banks, deposits with financial institutions, precious metals and call and short loans, were 20% (October 31, 2018 – 29%).
The increase in liquid assets was mainly attributable to an increase in liquid securities and precious metals, which was partially offset by a decrease
in cash and deposits with central banks, deposits with financial institutions, NHA mortgage-backed securities, and call and short loans.
The carrying values outlined in the liquid asset table are consistent with the carrying values in the Bank’s Consolidated Statement of Financial
Position as at October 31, 2019. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the
stress scenarios.
The Bank’s liquid asset pool is summarized in the following table:
T47 Liquid asset pool
As at October 31, 2019
($ 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
$
36,068
10,652
3,709
42,508
70,101
78,422
33,571
525
$
–
–
–
19,622
78,904
78,415
–
–
$
$
36,068
10,652
3,709
$
–
–
–
$ 9,604
71
58
62,130
149,005
156,837
33,571
525
31,798
90,617
106,179
3,602
–
–
–
–
–
–
26,464
10,581
3,651
30,332
58,388
50,658
29,969
525
$ –
–
–
–
–
–
–
–
Total
$ 275,556
$ 176,941
$ 452,497
$ 232,196
$ 9,733
$ 210,568
$ –
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
$ –
(1)
(2)
Assets which are restricted from being used to secure funding for legal or other reasons.
These mortgage-backed securities, which are available for sale, are reported as residential mortgage loans on the Consolidated Statement of Financial Position.
A summary of total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries, is presented
below:
T48 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
2019
2018
$ 153,584
17,667
39,317
$ 152,728
15,344
34,311
$ 210,568
$ 202,383
The Bank’s liquidity pool is held across major currencies, mostly comprised of Canadian and U.S. dollar holdings. As shown above, the vast majority
(81%) of liquid assets are held by the Bank’s corporate office, branches of the Bank, and Canadian subsidiaries of the Bank. To the extent a liquidity
reserve held in a foreign subsidiary of the Bank is required for regulatory purposes, it is assumed to be unavailable to the rest of the Group. Other
liquid assets held by a foreign subsidiary are assumed to be available only in limited circumstances. The Bank monitors and ensures compliance in
relation to minimum levels of liquidity required and assets held within each entity, and/or jurisdiction.
2019 Scotiabank Annual Report | 95
Management’s Discussion and Analysis
Encumbered assets
In the course of the Bank’s day-to-day activities, securities and other assets are pledged to secure an obligation, participate in clearing or
settlement systems, or operate in a foreign jurisdiction. Securities are also pledged under repurchase agreements. A summary of encumbered and
unencumbered assets is presented below:
T49 Asset encumbrance
As at October 31, 2019
($ 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
$
36,068
10,652
3,709
42,508
70,101
78,422
3,992
33,571
525
572,216
189,802
44,595
$
–
–
–
$
19,622
78,904
78,415
5,633
–
–
–
(119,889)
–
36,068
10,652
3,709
62,130
149,005
156,837
9,625
33,571
525
572,216
69,913
44,595
$
–
–
–
31,798
90,617
106,179
4,329
3,602
–
9,102
5,433
–
Other(1)
$
9,604
71
58
–
–
–
–
–
–
54,814
–
–
Available as
collateral(2)
Other(3)
$
26,464 $
10,581
3,651
30,332
58,388
50,658
–
29,969
525
13,293
–
–
–
–
–
–
–
–
5,296
–
–
495,007
64,480
44,595
$ 1,086,161
$ 62,685
$ 1,148,846
$ 251,060
$ 64,547
$ 223,861 $ 609,378
Encumbered assets
Unencumbered assets
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
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
Total
$
998,493
$ 54,346
$ 1,052,839
$ 208,907
$ 67,509
$ 215,247 $ 561,176
Assets which are restricted from being used to secure funding for legal or other reasons.
(1)
(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.
Securities received as collateral against other financial assets are included within liquid securities and other securities.
(4)
As of October 31, 2019, total encumbered assets of the Bank were $316 billion (October 31, 2018 – $276 billion). Of the remaining $833 billion
(October 31, 2018 – $776 billion) of unencumbered assets, $224 billion (October 31, 2018 – $215 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, 2019, 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 $16 million or $162 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%.
96 | 2019 Scotiabank Annual Report
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OSFI’s LAR stipulates that banks must maintain an adequate level of unencumbered HQLA that can be converted into cash to meet liquidity
needs over a 30 calendar day horizon under a pre-defined significantly severe liquidity stress scenario. The LCR-prescribed liquidity stress scenario
includes assumptions for asset haircuts, deposit run-off, wholesale rollover rates, and outflow rates for commitments.
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, 2019 based on the average daily position in the quarter.
T50 Bank’s average LCR
For the quarter ended October 31, 2019 ($ 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, 2018 ($ millions)
Total HQLA
Total net cash outflows
Liquidity coverage ratio (%)
Total
unweighted
value
Total
weighted
value
(Average)(2)
(Average)(3)
*
$ 165,088
$ 181,137
75,337
105,800
209,636
67,035
119,271
23,330
*
207,152
29,740
3,544
173,868
1,278
506,926
13,017
2,437
10,580
102,755
15,865
63,560
23,330
37,512
41,614
17,637
3,544
20,433
1,162
8,760
*
$ 204,820
$ 142,514
25,507
28,546
$
27,352
16,797
28,546
$ 196,567
$
72,695
Total
adjusted
value(5)
$ 165,088
$ 132,125
125%
Total
adjusted
value(5)
$ 144,349
$ 116,735
124%
*
*
*
*
*
*
Disclosure is not required under regulatory guideline.
Based on the average daily positions of the 63 business days in the quarter.
*
(1)
(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)
(5)
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.
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, 2019 was in line with
the quarter ended October 31, 2018.
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.
2019 Scotiabank Annual Report | 97
Management’s Discussion and Analysis
Funding
The Bank ensures that its funding sources are well diversified. Funding concentrations are regularly monitored and analyzed by type. The sources
of funding are capital, deposits from retail and commercial clients sourced through the Canadian and international branch network, deposits from
financial institutions as well as wholesale debt issuances.
Capital and personal deposits are key components of the Bank’s core funding and these amounted to $303 billion as at October 31, 2019
(October 31, 2018 – $289 billion). The increase since October 31, 2018, was primarily due to deposit growth, internal capital generation and
subordinated debentures 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 $164 billion (October 31, 2018 –
$157 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.
The Department of Finance’s bail-in regulations under the Canada Deposit Insurance Corporation (CDIC) Act and the Bank Act, became effective
September 23, 2018. Senior long-term debt issued by the Bank on or after September 23, 2018, that has an original term greater than 400 days
and is marketable, subject to certain exceptions, is subject to the Canadian Bank Recapitalization (Bail-in) regime. Under the Bail-in regime, in
circumstances when the Superintendent of Financial Institutions has determined that a bank may no longer be viable, the Governor in Council
may, upon a recommendation of the Minister of Finance that they are of the opinion that it is in the public interest to do so, grant an order
directing the CDIC to convert all or a portion of certain shares and liabilities of that bank into common shares. As at October 31, 2019, issued and
outstanding liabilities of $11 billion were subject to conversion under the bail-in regime.
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The table below provides the remaining contractual maturities of funding raised through wholesale funding. In the Consolidated Statement of
Financial Position, these liabilities are primarily included in Business & Government Deposits.
T51 Wholesale funding(1)
As at October 31,
2019 ($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
$
3,284
$
596
$
566
$
198
$
268
$
4,912
$
–
$
–
$
–
$
4,912
6,590
18,923
27,866
24,778
13,497
91,654
2,139
717
62
94,572
1,096
1,372
–
2
–
–
–
3,069
3,842
–
12
545
601
–
1,324
2,533
–
1,290
1,844
771
–
–
5,080
26
–
1,882
663
–
–
3,520
–
791
–
353
–
5,489
16,347
26
2,095
4,271
2,388
–
14,114
1,314
2,466
8,979
–
25,609
6,568
1,176
10,171
4,376
12,675
–
78
156
–
11,636
2,920
210
2,379
4,486
9,121
5,489
67,706
10,828
5,947
25,800
23,925
9,355
funding sources
$ 12,344
$ 27,588
$ 36,194
$ 32,627
$ 18,429
$127,182
$ 33,466
$ 57,072
$ 30,814
$ 248,534
Of Which:
Unsecured funding
Secured funding
$ 11,246
1,098
$ 23,361
4,227
$ 30,965
5,229
$ 30,082
2,545
$ 17,285
1,144
$112,939
14,243
$ 17,645
15,821
$ 33,050
24,022
$ 23,739
7,075
$ 187,373
61,161
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)
Asset-backed
securities
Covered bonds
Mortgage
securitization(6)
Subordinated
debentures(7)
Total wholesale
$
1,720
$
196
$
211
$
212
$
116
$
2,455
$
29
$
145
$
32
$
2,661
8,807
14,201
21,517
15,961
7,580
68,066
5,487
666
56
74,275
2,088
180
6
–
–
–
4,697
2,714
15
2,910
765
–
165
4,070
47
1,491
316
–
–
6,214
500
–
567
–
–
5,168
–
1,975
508
–
6,950
18,346
568
6,376
2,156
–
–
15,179
2,714
4,312
–
36,765
1,944
16,779
2,388
12,966
–
237
–
14,298
304
1,772
4,646
7,539
6,950
84,588
5,530
29,239
22,156
7,776
funding sources
$ 12,801
$ 25,498
$ 27,817
$ 23,454
$ 15,347
$104,917
$ 30,109
$ 69,502
$ 28,647
$ 233,175
Of Which:
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
(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.
(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 $211 billion as at October 31, 2019 (October 31, 2018 – $202 billion) were well in excess of wholesale funding
sources that mature in the next twelve months.
Contractual maturities and obligations
The table below provides the maturity of assets and liabilities as well as the off-balance sheet commitments as at October 31, 2019, 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
2019 Scotiabank Annual Report | 99
Management’s Discussion and Analysis
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 $527 million in 2019 (2018 – $477 million). The increase primarily reflects business acquisitions of BBVA Chile,
Citibank Colombia, Banco Dominicano del Progreso and MD Financial, along with higher contractual rents, the impact of branch and office sale/
leasebacks and organic business growth.
T52 Contractual maturities
($ millions)
Assets
Cash and deposits with financial
institutions and precious metals
$
Trading assets
Financial instruments designated at
fair value through profit or loss
Securities purchased under resale
agreement and securities
borrowed
Derivative financial instruments
Investment securities – 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)
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, 2019
35,392 $
4,519
696 $
462 $
239 $
181 $
426 $
796 $
685 $
6,856
5,349
2,646
2,486
7,280
19,849
16,474
11,552 $
62,029
50,429
127,488
–
–
–
–
–
–
–
–
–
–
92,411
2,145
4,347
298
–
37,312
3,432
4,097
–
29,783
–
12,072
–
188,496
26,942
3,363
4,967
723
–
31,178
5,980
2,652
–
22,546
–
1,486
–
76,211
8,859
1,219
5,157
1,512
–
34,801
12,031
3,752
–
19,018
–
297
–
57,656
2,483
1,692
4,730
869
–
34,026
15,555
3,711
–
14,760
–
27
–
46,712
483
1,748
1,487
1,159
–
31,746
13,318
3,525
–
14,903
–
14
–
39,304
–
6,556
10,887
6,917
–
88,939
49,618
12,667
–
26,654
–
–
–
121,005
–
5,841
14,995
3,399
–
229,317
134,923
23,556
–
70,838
–
–
–
274,197
–
15,555
11,587
6,968
–
44,620
30,921
5,737
–
7,962
–
–
–
95,889
–
–
1,561
–
796
60,544
2,391(1)
38,934
17,788
6,508(2)
(5,077)
131,178
38,119
59,718
21,845
796
592,483
268,169
98,631
17,788
212,972
(5,077)
–
50,209
186,691
13,896
50,209
1,086,161
$
73,415 $ 59,827 $ 60,036 $ 51,468 $ 35,723 $
9,486
63,929
11,138
48,689
14,479
45,557
12,287
39,181
12,380
23,343
45,624 $
11,277
34,347
69,082 $ 18,219 $ 319,996 $
562
11,257
17,657
57,825
141,934
178,062
733,390
224,800
508,590
229
12,077
892
2,210
410
1,486
871
4,374
398
297
829
27
826
14
704
1,859
305
1,621
422
1,956
114,864
–
3,410
–
207,097
5,496
–
1,581
–
74,045
2,930
–
1,154
–
67,378
793
–
871
–
55,914
–
–
964
–
39,905
4,028
–
1,771
8,659
–
–
3,821
–
63,903
1,844
–
5,626
6,437
3,671
–
–
–
6,658
13,106
13,155
–
12,235
13,901
30,404
40,222
–
–
6,452
–
89,441
–
7,252
5,952
–
54,858
–
–
30,277
70,192
433,620
124,083
7,252
54,482
70,192
1,086,161
$
38 $
76 $
112 $
109 $
106 $
387 $
894 $
4,289
–
18
5,264
–
36
15,370
–
52
16,398
–
52
14,745
–
52
28,007
–
173
119,308
–
154
1,011 $
8,493
–
–
– $
–
36,387
1
2,733
211,874
36,387
538
(1)
(2)
(3)
(4)
(5)
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.
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.
100 | 2019 Scotiabank Annual Report
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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
($ millions)
Assets
Cash and deposits with financial
institutions and precious metals
$
Trading assets
Financial instruments designated at fair
54,254 $
4,792
920 $
284 $
101 $
117 $
326 $
726 $
223 $
8,509 $
5,311
3,326
5,463
2,309
7,934
12,765
18,130
40,232
65,460
100,262
value 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 $ 303,238 $ 676,534
214,545
11,953
461,989
66,342
138,307
164,931
261
18,052
22
13,838
910
2,520
77
2,082
972
4,288
360
338
410
50
523
30
870
1,613
305
2,716
1,013
1,583
3,090
–
3,896
6,773
1,646
–
8,685
7,699
96,157
–
2,720
–
173,132
3,466
–
592
–
64,808
1,634
–
1,302
–
54,778
–
–
422
–
43,619
–
–
757
–
36,659
–
–
1,784
–
60,805
–
–
6,167
–
102,492
1,969
–
7,388
10,775
–
5,698
5,978
–
50,121
$
36 $
72 $
106 $
104 $
102 $
378 $
818 $
880 $
4,232
–
18
5,588
–
36
13,438
–
52
15,182
–
52
22,619
–
52
23,906
–
207
105,988
–
311
6,486
–
–
91
–
8,048
–
8,188
16,338
32,087
37,967
–
–
33,022
67,680
412,079
101,257
5,698
52,744
67,680
998,493
– $
–
36,423
1
2,496
197,439
36,423
729
(1)
(2)
(3)
(4)
(5)
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.
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.
2019 Scotiabank Annual Report | 101
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 the Bank’s 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:
• 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.
• 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).
• 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.
• 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.
• 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.
• The Bank’s centralized operational loss event database, which captures key information on operational losses and near-misses.
• 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.
• 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 the Bank’s customers and assets.
• 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 the Bank’s application to use the Advanced
Measurement Approach (AMA) for operational risk, subject to a capital floor. In 2017, the Bank formally began utilizing AMA to report regulatory
capital. In keeping with updated OSFI requirements in Chapter 8 of the Capital Adequacy Requirements Guideline, all banks currently approved to
use the Advanced Measurement Approach (AMA) will be required to use a revised Basel III Standardized Approach when the revised requirements
are implemented in Canada.
Information Technology (IT) & Cybersecurity Risk
IT Risk refers to the effect of uncertainty on the Bank’s objectives associated with the use, ownership, operation, involvement, influence and
adoption of IT within an enterprise. Cybersecurity risk is a subset of unique IT Risks faced as a result of using interconnected systems and
digital technologies.
IT and Cybersecurity 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.
The Board of Directors approves the IT and Cyber Risk Management, Cybersecurity and Information Security policies, 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 Cybersecurity program in line with the industry standards and best
practices. The Bank continues to expand its capabilities to defend against potential threats and minimize the impact to the business, including the
regular testing activities to 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 will expect more regulatory oversight of IT and Cybersecurity risk management practices going forward.
102 | 2019 Scotiabank Annual Report
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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.
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 Compliance Risk Summary Framework 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 Risk Summary Framework is an integral part of the enterprise-wide framework, 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 Compliance Risk Summary Framework where necessary or appropriate.
Money Laundering, Terrorist Financing and Sanctions Risk
Money Laundering, Terrorist Financing (ML/TF) and Sanctions 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 detect and deter 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 Risk program
(“the Program”). The Board appointed Chief Anti-Money Laundering Officer is responsible for the Program, development and application of written
policies, procedures, and standards that are kept up to date and approved by senior management, assessing and documenting money laundering,
terrorist-financing or sanctions risks, developing and maintaining an ongoing and tailored training program, and regular review of the effectiveness
of the Program. The review of effectiveness is supplemented by an independent assessment conducted by Internal Audit. The Chief Anti-Money
Laundering Officer has unfettered access to, and direct communication with, the Bank’s Senior Management and the Board.
The Bank’s business units conduct an annual self-assessment of their ML/TF and sanctions risks, as well as self-assessments of their control
measures designed to manage such risks. The process is overseen by the Bank’s AML Risk unit and the results shared with the Bank’s Senior
Management and its Board. All active employees are provided with mandatory AML/ATF and Sanctions training on an annual basis.
The Bank performs Customer Due Diligence sufficiently to form a reasonable belief that it knows the true-identity of its customers, including in the
case of an entity, its material ultimate 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 tailored monitoring of its customers to detect and report
suspicious transactions and activity, and conducts customer and transaction screening against terrorist, sanctions, and other designated watch-
lists.
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. Such negative publicity has an impact on the Bank’s brand and reputation.
Negative publicity and related reputational risk frequently arise as a by-product of some other kind of risk management control failure such as
compliance and operational risks. In some cases, reputational risk can arise through no direct fault of an institution, but indirectly as a ripple-effect
of an association or problems arising within the industry or external environment.
Reputational risk is managed and controlled throughout the Bank by the Scotiabank Code of Conduct (Code), 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 Code, and in a manner that minimizes reputational
risk and safeguards the Bank’s reputation. While all employees, officers and directors are expected to protect the reputation of Scotiabank by
complying with the Code, the activities of the Legal, Global Tax, Corporate Secretary, Global Communications, AML Risk, Global Compliance and
Global Risk Management departments, and the Reputational Risk Committee, are particularly oriented to the management of reputational risk.
2019 Scotiabank Annual Report | 103
Management’s Discussion and Analysis
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.
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. The Bank considers climate change as a type of Environmental Risk.
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.
Climate Change Risks – Taskforce on Climate Related Financial Disclosures (TCFD)
In 2018, Scotiabank announced its support of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD). The
implementation of the recommendations across Scotiabank is a multi-year journey.
In 2019 the Board of Directors approved an updated climate change strategy. Scotiabank’s Climate Commitments detail the Bank’s approach to
addressing the risks and opportunities arising from climate change. These five commitments are detailed in an external position statement.
Governance
Board Oversight
As the topic of climate change requires a multidisciplinary approach, the risks and opportunities it poses to the Bank are addressed by the Board of
Directors and its committees. The Board of Directors approved the Bank’s Climate Change Strategy in October 2019. In addition, the following
committees provide ongoing oversight.
• Risk Committee: Provides oversight of key risks, including those affected by climate change. This includes review (and, where appropriate,
recommendation to the Board for approval) of risk appetite limits and policy oriented documents addressing credit risk, environmental risk, and
operational risk as well as reporting on potentially material climate change risks.
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• Corporate Governance Committee: Provides oversight of the Sustainable Business strategy, of which climate change is a key priority, and the
annual Sustainable Business report.
• Audit Conduct and Review Committee: Provides oversight of climate change-related disclosure in the Bank’s financial reporting, including its
Annual Report.
Management’s Role
The management of climate change risk is ultimately overseen by the Group Head and Chief Risk Officer, who reports directly to the CEO and has
unfettered access to the Risk Committee of the Board. This is aided through a Climate Change Committee, chaired by the Bank’s head of its Senior
Credit Committee and made up of senior officers across the business lines and control/stewardship functions. The Committee meets quarterly
and is accountable for monitoring of progress against targets.
Supporting the Committee are cross-functional Working Groups that meet more frequently and support the day-to-day implementation and
tracking of the climate change strategy. This includes the Bank’s own operations, as well as managing climate change risks and opportunities with
clients. Climate change considerations are integrated into credit applications and industry reviews, through climate-related risk policies and
procedures, specialized tools and training to banking officers and credit adjudicators.
Strategy
Scotiabank recognizes that climate change is significantly impacting natural systems and communities across the globe and poses a significant risk
to the global economy and society as a whole. Efforts to address climate change will require significant mobilization of capital from public and
private sources worldwide.
Through Scotiabank’s Climate Commitments the Bank committed to mobilizing $100 billion by 2025 to reduce the impacts of climate change. This
includes lending, investing, finance and advisory, as well as investments in the Bank’s direct operations and communities where it operates, and
will help the Bank capitalize on the financial opportunity of the transition to a low-carbon economy. This commitment is supported by the
Scotiabank Green and Transition Taxonomy and includes the creation of new products and services, including the issuance of our inaugural Green
Bond (USD$500 million 3.5 year senior unsecured). It has also led to enhanced integration of climate risk assessments in the credit adjudication
process and further commitments to decarbonize the Bank’s own operations.
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 ultimately affect Bank performance by giving rise to credit, reputational,
operational or legal risk. Climate-related risks could be in the form of physical or transition risk. Examples of physical risk considerations include
severe weather (e.g. floods, hurricanes, extreme cold or heat). Examples of transition risk considerations include policy/regulatory actions such as
subsidies, taxes or increased fuel costs, as well as changing market conditions.
For over a decade, the Bank has utilized and refined a comprehensive environmental risk management process. The identification, assessment and
management of climate change risk is done through due diligence as part of the overall existing environmental risk assessment and credit
adjudication processes.
Highlights in 2019 include the following:
– Integrated new Climate Commitments into environmental risk framework
• The existing framework was expanded to better identify transition and physical risks and opportunities for business lending.
– Integration of climate change risk assessment (CCRA) at the sector and borrower-levels
• A sector sensitivity methodology was developed that identifies key physical and transition risk drivers to determine potential material risks
and opportunities which were added to industry reviews for 28 economic sectors. This was aided by a climate change risk and vulnerability
analysis of the banking loan book.
• The Bank standardized the process of performing CCRAs for all business borrowers, updated internal systems to track CCRAs, and provided
training for banking and credit officers.
– Knowledge building on climate change risk and scenario-analysis
• A module on climate change risk was incorporated into the mandatory environmental risk training for all banking officers and credit
adjudicators.
• The Bank is developing a methodology for stress testing the Bank’s business loan portfolio according to various internationally recognized
climate change scenarios and models.
– External collaboration with peers
• Scotiabank is a participant in industry groups to develop consistent methodologies and metrics for TCFD reporting.
• Scotiabank is a participant in the United National Environment Program – Finance Initiative (UNEP FI) TCFD pilot to harmonize industry-wide
approaches for climate scenario analysis in bank lending portfolios.
• Scotiabank is involved in the initiative to create a standard climate change financing taxonomy for Canada, run by the Canadian Standards
Authority.
Metrics and Targets
Scotiabank sets, monitors and reports on climate change related performance and targets annually in Scotiabank’s Sustainable Business Report.
The Bank also reports to CDP (formerly the Carbon Disclosure Project). As part of Scotiabank’s Climate Commitments, the Bank is tracking the
initiatives that underlie its commitment as part of the metrics and targets it has adopted pursuant to these Commitments.
The targets and performance include:
• Target to reduce Scope 1 and 2 greenhouse gas emissions globally by 10% by 2021 (based on 2016 levels). Data will be available in our 2019
Sustainable Business Report. As of fiscal 2018, we are 90% of the way towards achieving this target.
• Set an Internal Carbon Price of $15/tonne CO2 for Scope 1 and 2 emissions. This was achieved in fiscal 2018 and fiscal 2019. Funds were utilized
to address energy efficiency initiatives including HVAC installation and solar panels at select branches in the Caribbean.
2019 Scotiabank Annual Report | 105
Management’s Discussion and Analysis
The implementation of CCRA in the business loan book will provide the Bank with the data necessary to support stress testing and scenario
planning. The data obtained will help the Bank to determine the right metrics before setting targets, such as those related to credit exposures in
high-carbon sectors.
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 conducts a comprehensive annual strategic planning process through a series of coordinated efforts between the entire Executive
Management Team which culminates in a written submission to the Board. The Board reviews this material along with other relevant presentations
by the President and Chief Executive Officer and Management. These efforts address a wide range of relevant considerations including the
strategic plans of the Business Lines, an evaluation by Global Risk Management that the Business Line strategies can be achieved within the Bank’s
Risk Appetite, progress reports (quantitative and qualitative) against previously agreed-upon strategic commitments, updates from the major
Corporate Functions and a 3-year financial outlook for the Bank. Collectively, these written submissions are referred to as the Strategic Plan. [The
assessment of Strategic Risk is a judgment made by management that the Bank is operating within the parameters of the Board-approved
Strategic Plan, including quantitative and qualitative considerations.].
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 Enterprise Data Governance team, in partnership with 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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Controls and Accounting Policies
Controls and Procedures
Management’s responsibility for financial information contained in this annual report is described on page 136.
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, 2019, 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:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the Bank;
• 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
• 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, 2019.
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.
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:
• Determination of point-in-time parameters such as probability of default (PD), loss given default (LGD) and exposure at default (EAD).
• Forecast of macroeconomic variables for multiple scenarios and probability weighting of the scenarios.
• 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.
2019 Scotiabank Annual Report | 107
Management’s Discussion and Analysis
Details of these statistical parameters/inputs are as follows:
• 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 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
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that are used in the IPV process. These sources include, but are not limited to, brokers, dealers and consensus pricing services. The valuation
policies relating to the IPV process require that all pricing or rate sources used be external to the Bank. On a periodic basis, an independent
assessment of pricing or rate sources is also performed by GRM to determine market presence or market representative levels.
Where quoted prices are not readily available, such as for transactions in inactive or illiquid markets, internal models that maximize the use of
observable inputs are used to estimate fair value. An independent senior management committee within GRM oversees the vetting, approval and
ongoing validation of valuation models used in determining fair value. Risk policies associated with model development are approved by Executive
Management and/or key risk committees.
In determining fair value for certain instruments or portfolios of instruments, valuation adjustments or reserves may be required to arrive at a more
accurate representation of fair value. The Bank’s policy of applying valuation reserves to a portfolio of instruments is approved by a senior
management committee. These reserves include adjustments for credit risk, bid-offer spreads, unobservable parameters, constraints on prices in
inactive or illiquid markets and when applicable funding costs. The methodology for the calculation of valuation reserves are reviewed at least
annually by senior management.
Valuation adjustments recorded against the fair value of financial assets and financial liabilities totaled $175 million as at October 31, 2019, (2018 –
$138 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, 2019, a funding valuation adjustment (FVA) of $108 million pre-tax (2018 – $57 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:
• Level 1 – fair value is based on unadjusted quoted prices in active markets for identical instruments,
• Level 2 – fair value is based on models using significant market-observable inputs other than quoted prices for the instruments, or
• 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:
T53 Fair value hierarchy of financial instruments carried at fair value
Fair value hierarchy
As at October 31, 2019
Level 1
Level 2
Level 3
Assets
Liabilities
Trading
assets
(incl. precious
metals)
69%
31%
–%
100%
Investment
securities
Derivatives
61%
37%
2%
100%
2%
98%
–%
100%
Obligations
related to
securities
sold short
88%
12%
–%
100%
Derivatives
1%
99%
–%
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 2019 would have been $117 million
higher. Other key assumptions include future compensation, health care costs, employee turnover, retirement age and mortality. When making
these estimates, management considers expectations of future economic trends and business conditions, including inflation rates as well as other
factors, such as plan specific experience and best practices.
The Bank uses a measurement date of October 31, and based on this measurement date, the Bank reported a deficit of $1,268 million (2018 – $231
million) in its principal pension plans and a deficit of $1,264 million (2018 – $1,134 million) in its principal other benefit plans, which are typically
unfunded, as at October 31, 2019, 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
2019 Scotiabank Annual Report | 109
Management’s Discussion and Analysis
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 $286 million as at October 31,
2019 (2018 – $338 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 $40 million (2018 – $14 million). The amount related to unrecognized
tax losses was $16 million, which will expire as follows: $4 million in 2020, $11 million in 2023, and $1 million with no expiry date.
The Bank maintains provisions for uncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit,
dispute, or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the Bank’s best
estimate of the amount expected to be paid based on an assessment of all relevant factors, which are reviewed at the end of each reporting
period.
Since 2016, the Bank has received reassessments totalling $575 million of tax and interest as a result of the Canada Revenue Agency denying the
tax deductibility of certain Canadian dividends received during the 2011-2013 taxation years. In October 2019, the Bank was reassessed for
$223 million of tax and interest in respect of certain Canadian dividends received during the 2014 taxation year. The circumstances of the
dividends subject to these reassessments are similar to those prospectively addressed by rules introduced in 2015 and 2018. 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
vigourously defend its position.
Note 27 of the 2019 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:
• power over the investee;
• 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.
This definition of control applies to circumstances:
• 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;
• 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);
•
involving agency relationships; and
• 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 2019, 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
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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, 2019, and no impairment was determined to exist.
Additionally, there were no impairment indicators noted as of October 31, 2019.
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, 2019, and no impairment was determined to exist.
Additionally, there were no impairment indicators noted as of October 31, 2019.
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 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.
2019 Scotiabank Annual Report | 111
Management’s Discussion and Analysis
Effective November 1, 2019
Leases
In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”), which replaces IAS 17, Leases (“IAS 17”), requiring 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 generally result in all operating leases being
recorded on the Bank’s balance sheet as a right-of-use (“ROU”) asset with a corresponding lease liability. The Bank will also recognize amortization
expense on the ROU asset in non-interest expenses and interest expense on the lease liability in interest expenses, in the statement of income.
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.
The two main areas of judgment with regards to quantification of the ROU asset and lease liability are the determination of lease term and the
discount rate.
Determining lease term
The Bank’s expectation of exercising the option to renew a lease will be determined by assessing if the Bank is “reasonably certain” to exercise that
option. The Bank will be reasonably certain to exercise an option when factors create a significant economic incentive to do so. This assessment
will require a significant level of judgement as it is based on current expectations of future decisions.
The lease term will have an impact on the calculation of the ROU asset and the lease liability; the longer the lease term, the higher the ROU asset
and the related lease liability. Changes in the economic environment may impact the Bank’s assessment of lease term, and any changes in the
estimate of lease terms may have a material impact on the Bank’s ROU assets and lease liabilities.
Discount rate
At commencement date, the Bank will measure the lease liability at the present value of the future lease payments, discounted using the Bank’s
incremental borrowing rate. The Bank will consider a broad range of factors to determine the appropriate discount rate. These will include the
Bank’s credit risk, term of the lease, the economic environment and geographical location in which the lease is entered into.
Elections and estimated impact
The Bank will apply IFRS 16 on a modified retrospective basis by adjusting the consolidated balance sheet as at November 1, 2019, the date of
initial application, with no restatement of comparative periods. The Bank will elect certain transition elections that include:
• Measure the ROU asset at the date of initial application as equal to lease liability with certain adjustments.
• Not apply IFRS 16 to operating leases with a remaining lease term of less than 12 months (short-term leases) or low value assets.
• Not apply IFRS 16 to leases of intangible assets.
The adoption of IFRS 16 as at November 1, 2019 is expected to result in an increase to total assets of approximately $3.7 billion, substantially
representing real estate leases and an increase in lease liabilities of approximately $3.7 billion. The Bank estimates that the adoption of IFRS 16 will
also decrease its CET1 capital ratio by approximately 10 bps.
IFRIC 23 Uncertainty over income tax treatments
On June 7, 2017, the IASB issued IFRIC 23 which clarifies application of recognition and measurement requirements in IAS 12 income taxes when
there is uncertainty over income tax treatments. The impact on the Bank’s consolidated financial statements is not material.
Employee Benefits
On February 7, 2018, the IASB issued narrow-scope amendments to pension accounting. 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
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 amendments
will apply prospectively to new transactions.
Interest Rate Benchmark Reform
The IASB issued amendments to IFRS 9, IAS 39 and IFRS 7 on September 26, 2019, to amend certain requirements for hedge accounting in order
to support the provision of useful information by entities during the period of uncertainty arising from the phase out of interest rate benchmarks
(e.g. interbank offered rates – IBORs). The amendments aim to provide relief for financial instruments qualifying for hedge accounting which are
affected during the period of uncertainty leading up to contractual rate replacement. The amendments would no longer apply once uncertainties
arising from IBOR reform are no longer present. The amendments require providing specific disclosure for the affected hedging relationships. The
amendments are effective for the Bank from November 1, 2020. Early application is permitted. The Bank is currently assessing the impact and
extent of disclosure requirements.
Effective November 1, 2021
Insurance contracts
On May 18, 2017, the IASB issued IFRS 17 Insurance Contracts, which provides a comprehensive principle-based framework for the measurement
and presentation of all insurance contracts. The new standard will replace IFRS 4 Insurance Contracts and requires insurance contracts to be
measured using current fulfillment cash flows and for revenue to be recognized as the service is provided over the coverage period. The standard
is required to be adopted retrospectively, if this is impractical, the modified retrospective or fair value method may be used.
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The IASB issued an exposure draft on June 26, 2019 proposing some amendments to IFRS 17, including a proposal to defer the effective date, by
one year, to annual periods on or after January 1, 2022. The Bank continues to monitor developments related to the standard and industry
discussions on the application of the standard.
The project to implement IFRS 17 is a multi-year project consisting of technology upgrades and policy and process changes. The project structure
and governance has been established along with a Project Management Office to assist the Executive Steering and Project Operations
Committees. The committees are comprised of representatives from Global Finance, Global Insurance Actuarial Services, Information Technology
and the Insurance Business Operation. The Bank has completed a preliminary gap analysis of the differences between IFRS 4 and IFRS 17, an initial
contract scoping assessment and project plan. The Bank has determined that it will require new technology to manage the insurance business and
prepare additional disclosures, for the separate insurance legal entity financial statements, under the new standard. During 2020 the Bank will
continue to evaluate the impact to existing IT systems and processes and formulate the accounting policies under IFRS 17 in order to perform an
initial quantification of the impact to the new standard.
Regulatory Developments
The Bank continues to monitor and respond to global regulatory developments relating to a broad spectrum of topics, in order to ensure that
control and business units are responsive on a timely basis and business impacts, if any, are minimized. The following provides a high-level
summary of some of the key regulatory developments that have the potential of impacting the Bank’s operations.
United Kingdom and European Regulatory Reform
The UK gave formal notice of intention to withdraw from the EU on March 29, 2017. Negotiation of the terms of withdrawal are ongoing and the
final date for the UK to leave the EU has been extended until January 31, 2020. Withdrawal may be earlier if the UK Parliament ratifies the
agreement that has already been negotiated with the EU or if an amended agreement is negotiated and ratified by both the EU and the UK.
Political agreement has been reached on a transition period, which would extend until at least December 31, 2020, providing additional time in
which to ensure readiness, subject to the overall withdrawal agreement being concluded and ratified. If this occurs, then all EU legislation will
continue to apply in the UK during such transition period.
There remains a possibility that the UK will leave the EU on or before January 31, 2020 without having a withdrawal agreement in place (a so-called
“hard” Brexit).
The UK’s exit from the EU 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 UK and elsewhere in Europe and is developing and revising its contingency plans
accordingly.
Regulatory Initiatives Impacting Financial Services in Canada
In April 2019, Parliament approved changes to the Canada Deposit Insurance Corporation Act that will strengthen and modernize deposit
protection. The changes will occur in two phases on April 30, 2020 and April 30, 2021. Some of the changes include extending CDIC coverage to
foreign currency deposits and deposits with terms greater than 5 years, eliminating coverage for travellers’ cheques and introducing new
requirements for deposits held in trust.
On October 3, 2019, the Canadian Securities Administrators published reforms focused on advisor conduct, including enhanced standards for
conflicts of interest, suitability, “Know Your Client” and “Know Your Product”. Investment Industry Regulatory Organization of Canada (IIROC)
published its new “Plain Language” Rulebook in August 2019, which is intended to make the rules easier to understand as well as introducing a
number of substantive changes. These changes will impact the Bank’s Wealth Management businesses and the Bank is developing new processes
and working with its advisors to comply with the new Rulebook, which will go into force in June 2020, and the CSA reforms, which will go into force
on December 31, 2019 with a staggered implementation of December 2020 and 2021.
In 2019, the Financial Consumer Agency of Canada (FCAC) released a new voluntary principles-based Code of Conduct for the delivery of banking
services to seniors, defined as an individual in Canada who is 60 years of age or older and who is transacting for non-business purposes.
The Code is to be adopted on publication, with additional timelines starting in January 2020. The FCAC will monitor compliance with the Code.
Industry consultation continues with the Canadian Bankers Association (CBA) and Department of Finance regarding the interpretation of the new
Federal Consumer Protection Framework (Bill C-86). The new consumer protection framework and regulations are expected to be implemented by
the fall of 2021, although no date has been formally set.
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.
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
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Management’s Discussion and Analysis
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, 2019 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 were effective for quarterly reporting commencing the first quarter of 2019.
Regulatory developments relating to liquidity
The Net Stable Funding Ratio (NSFR) is aimed at reducing structural funding risk by requiring banks to fund their activities with sufficiently stable
sources of funding. The NSFR becomes a minimum standard in OSFI’s liquidity framework in January 2020 with public disclosure required by the
first quarter of 2021.
Interest Rate Benchmark Reform
In July, 2017, the UK Financial Conduct Authority (FCA), which began regulating the London Interbank Offered Rate (LIBOR) in 2013, announced
that after December 31, 2021, it would stop making efforts to sustain the rate. This decision follows regulatory efforts to reform LIBOR and other
interbank offered rates, which have been under increased scrutiny due to thinning underlying markets. As the administrator of LIBOR, the FCA,
and regulators in other jurisdictions, have urged users of LIBOR to transition away from LIBOR and other interbank offered rates in favour of
alternative risk-free rates (RFRs). The UK, Europe, the United States, Japan and Switzerland, have all recommended alternatives to LIBOR, based
on either secured or unsecured overnight funding markets.
Some of those alternative rates, such as the Sterling Overnight Index Average (SONIA), the alternative to GBP LIBOR, and the Swiss Average Rate
Overnight (SARON), the alternative for CHF LIBOR, were already widely used in those jurisdictions; others, like the Secured Overnight Financing
Rate (SOFR), the rate recommended as the alternative to USD LIBOR, was newly introduced in 2018. These rates are inherently different from
LIBOR and other interbank offered rates, lacking both a term structure and a credit component. These rate differences add complexity to the
transition from LIBOR and other IBORs to their overnight alternatives, and mean that in some markets, such as those based on new rates like
SOFR, have been slower to develop. In Canada, the Canadian Overnight Repo Rate (CORRA) has been recommended as the alternative to the
Canadian Dollar Offered Rate (CDOR) for both derivative and cash products. Already available in the market, CORRA is currently being enhanced
and reformed by its administrator, the Bank of Canada.
The Bank has established an enterprise wide program, aimed at ensuring a smooth transition from LIBOR and other IBORs to RFRs. The program
has been focused on identifying and quantifying our exposures to various interest rate benchmarks, providing the capability to trade products
referencing alternative RFRs and evaluating our existing contract amendment language in the event LIBOR ceases to exist. The Bank is reviewing
contracts that reference IBORs with consideration to those extending past 2021. In addition, the Bank is assessing technology to ensure that it is fit
for purpose and the Bank is working on consistent messaging to clients. The Bank’s approach contemplates transition risks as part of a
comprehensive program of change to ensure that systems, processes and strategy provides for a smooth transition from the use of legacy rates
and supports trading in alternative reference rates.
The International Accounting Standards Board (IASB) has approached the impact of Interest Rate Benchmark Reform on financial reporting in two
phases. Phase one addresses issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark with
an alternative RFR; and phase two focuses on issues that might affect financial reporting when an existing interest rate benchmark is replaced with
an RFR. The IASB has finalized phase one and published the relief in September 2019, which will be effective for the Bank on November 1, 2020,
with early application permitted. The IASB has started the discussions on phase two and the Bank is closely monitoring these developments to
better assess the accounting implications.
Use of the Advance Measurement Approach for Operational Risk Capital
In July 2019, OSFI revised its capital requirements for operational risk in consideration of the final Basel III revisions published by the Basel
Committee on Banking Supervision in December 2017. Effective Q1 2021, institutions will be required to use the revised Basel III Standardized
Approach for operational risk.
In the interim, for fiscal year 2020, institutions currently approved for the Basel II Advanced Measurement Approach (AMA) for operational risk
capital are to report using the existing Basel II Standardized Approach (TSA). As the Bank’s AMA requirements are floored at TSA requirements,
the impact from the adoption of the interim 2020 requirement is not material to the Bank.
Regulatory Developments Relating to Interest Rate Risk
In May 2019, OSFI updated its guidelines on Interest Rate Risk in the Banking Book (IRRBB), a risk control framework to identify, assess and manage
interest rate risk. The Bank will apply the updated guidelines starting in January 2020, consistent with OSFI’s requirement.
114 | 2019 Scotiabank Annual Report
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Volcker Rule Amendments
The proposed Volcker rule amendments have now been approved by each of the five U.S. regulators responsible for this legislation (i.e. FDIC, OCC,
Federal Reserve, CFTC & SEC). As anticipated, the final amendments will reduce the regulatory burden on certain financial institutions, including
foreign banking organizations such as the Bank. The amendments take effect on January 1, 2020, with full compliance required by January 1, 2021.
Canadian Anti-Money Laundering (AML) Regulations
In July 2019, amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act regulations were released following
extensive industry consultation. Amendments will take effect in a phased approach, with the majority coming into effect by June 2021. These
changes aim to improve the effectiveness of Canada’s anti-money laundering and counter-terrorism financing regime, and to improve compliance
with international standards. New regulations will require the Bank to implement changes to processes, technology and data, to satisfy Financial
Transactions and Reports Analysis Centre of Canada (FINTRAC) reporting requirements. The Bank is proactively working to implement the new
regime with the aim to protect the Canadian financial system and our communities.
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.
T54 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.
2019
2018
$ 17
25
5
$ 47
$ 18
27
4
$ 49
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.
T55 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
2019
2018
$ 14
9
$
$ 13
6
$
The Bank’s committed credit exposure to companies controlled by directors totaled $18.9 million as at October 31, 2019 (October 31, 2018 –
$132.4 million) while actual utilized accounts were $3.3 million (October 31, 2018 – $23.9 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed
as related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party
transactions and are as follows:
T56 Transactions with associates and joint ventures
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
2019
2018
$ (68)
327
194
16
$
$ (64)
702
151
$ 123
Scotiabank principal pension plan
The Bank manages assets of $4.1 billion (October 31, 2018 – $3.8 billion) which is a portion of the Scotiabank principal pension plan assets and
earned $7.2 million (October 31, 2018 – $5.0 million) in fees.
Oversight and governance
The oversight responsibilities of the Audit and Conduct Review Committee (ACRC) with respect to related party transactions include reviewing
policies and practices for identifying transactions with related parties that may materially affect the Bank, and reviewing the procedures for
ensuring compliance with the Bank Act for related party transactions. The Bank Act requirements encompass a broader definition of related party
transactions than is set out in IFRS. The Bank has various procedures in place to ensure that related party information is identified and reported to
the ACRC on a semi-annual basis. The ACRC is provided with detailed reports that reflect the Bank’s compliance with its established procedures.
The Bank’s Internal Audit department carries out audit procedures as necessary to provide the ACRC with reasonable assurance that the Bank’s
policies and procedures to identify, authorize and report related party transactions are appropriately designed and operating effectively.
2019 Scotiabank Annual Report | 115
Management’s Discussion and Analysis
Supplementary Data
Geographic Information
T57 Net income by geographic segment
2019
2018(1)
2017(1)
For the fiscal years
($ millions)
Canada
U.S. Mexico
Peru
Chile Colombia
Caribbean
and
Central
America
Other
Inter-
national
Total Canada U.S. Mexico
Peru
Chile Colombia
Caribbean
and
Central
America
Other
Inter-
national
Total Canada U.S. Mexico
Peru Chile Colombia
Caribbean
and
Central
America
Other
Inter-
national
Total
Net interest income
$7,630 $ 720 $1,684 $1,576 $1,613
$1,017
$2,143
$ 794 $17,177
$7,780 $691 $1,561 $1,378 $1,117
$839
$2,028
$ 797 $16,191
$7,382 $460 $1,380 $1,287 $817
$710
$2,065
$ 934 $15,035
Non-interest income
7,435
1,189
Provision for credit losses
Non-interest expenses
Income tax expense
981
8,261
952
(16)
870
267
671
335
790
523
806
436
1,306
846 1,166
121
248
185
Subtotal
4,871
788
593
749
632
603
362
919
106
233
Net income attributable
to non-controlling
319
548
1,007
1,356
13,857
6,805
843
352
54
3,027
802
(34)
613
239
1,931
1,438
16,737
274
2,472
7,683
1,310
701
220
1,196
76
662
351
770
235
565
498
837
51
968
211
1,644
12,584
6,753
830
33
2,611
906
(14)
536
193
635 409
329 145
1,795
1,353
15,058
7,820
606 1,123
762 630
276
2,382
882
147
125
225
77
455
337
620
71
384
8,798
4,790
647
663
684
296
779
8,724
4,527
551
475
606 374
137
484
511
723
39
50
175
815
968
215
1,534
12,120
138
2,249
1,786
1,283
14,630
226
806
280
2,033
767
8,243
interests in subsidiaries
18
–
14
(11)
179
107
101
–
408
–
–
17
12
28
16
102
1
176
–
–
12
11
53
60
102
–
238
Net income attributable
to equity holders of the
Bank
Adjustments
Adjusted net income (loss)
attributable to equity
$4,853 $ 788 $ 579 $ 760 $ 453
$ 126
$ 447
$ 384 $ 8,390
$4,790 $647 $ 646 $ 672 $ 268
$ 34
$ 713
$ 778 $ 8,548
$4,527 $551 $ 463 $ 595 $321
$ 77
$ 704
$ 767 $ 8,005
74
–
–
50
73
78
286
–
561
52
–
–
4
172
63
3
4
298
26
–
–
4
17
4
5
4
60
holders of the Bank
$4,927 $ 788 $ 579 $ 810 $ 526
$ 204
$ 733
$ 384 $ 8,951
$4,842 $647 $ 646 $ 676 $ 440
$ 97
$ 716
$ 782 $ 8,846
$4,553 $551 $ 463 $ 599 $338
$ 81
$ 709
$ 771 $ 8,065
(1)
Prior period amounts have been restated to conform with current period presentation.
T58 Loans and acceptances by geography (1)
IFRS 9
IAS 39
2019
2018
2017
$ 22.1
30.6
203.0
17.9
53.5
66.5
393.6
44.3
31.9
21.7
45.6
11.7
10.2
9.1
30.2
13.2
62.7
$
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
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
$611.5
$ 573.2
$ 522.2
(5.1)
(5.1)
(4.3)
$606.4
$ 568.1
$ 517.9
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
(1)
The amounts for the years 2019 and 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
116 | 2019 Scotiabank Annual Report
T59 Gross impaired loans by geographic segment
As at October 31 ($ millions)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Total
(1)
Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico, for periods prior to 2018.
T60 Provision against impaired financial instruments by geographic segment(1)
For the fiscal years ($ millions)
Canada
U.S.
Mexico
Peru
Chile
Colombia
Other International
Total
2019
$ 1,133
94
485
642
844
505
1,432
$
2018
999
80
359
581
753
619
1,739
2017(1)
$ 1,049
140
303
704
565
462
1,642
$ 5,135
$ 5,130
$ 4,865
$
2019
2018
2017
984
(1)
291
446
403
422
354
$
785
(6)
239
349
275
358
355
$
906
(14)
193
329
145
337
353
$ 2,899
$ 2,355
$ 2,249
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The amounts for the years 2019 and 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
T61 Cross-border exposure to select countries(1)
As at October 31 ($ millions)
Loans
Trade
Interbank
deposits
Government
and other
securities
Investment in
subsidiaries
and affiliates
Other
Asia
China
India
Thailand
Singapore
Hong Kong
Japan
Others(2)
Total
Latin America
Chile
Mexico
Brazil
Peru
Colombia
Others(3)
Total
Caribbean and Central America
Panama
Costa Rica
Dominican Republic
Others(4)
Total
As at October 31, 2019
As at October 31, 2018
$
1,484
1,595
234
1,892
1,606
321
1,296
$ 2,291
212
5
72
82
27
20
$
390
–
124
68
42
34
–
$
909
–
–
–
39
4,988
–
$
55
–
3,554
–
–
–
326
$
8,428
$ 2,709
$
658
$ 5,936
$
3,935
$
5,110
4,512
382
5,676
1,526
522
$
3,857
3,998
6,536
3,162
1,227
127
$ 1,145
315
1,441
76
195
10
$ 2,383
–
–
18
–
–
$ 18,907
$ 3,182
$ 2,401
$
4,534
1,930
1,206
2,034
$
122
77
11
149
$
65
–
123
2
$
9,704
$
359
$
190
$
$
$
$
156
610
13
177
1
11
968
40
–
–
–
40
$
$
$
$
2019
Total
5,184
1,812
3,919
2,049
1,787
5,424
1,684
$
2018
Total
4,714
1,672
3,640
1,248
1,813
5,625
1,931
55
5
2
17
18
54
42
193
$ 21,859
$ 20,643
744
261
653
12
4
–
$ 13,395
9,696
9,025
9,121
2,953
670
$ 11,965
7,533
7,596
7,611
3,050
677
$ 17,728
$ 1,674
$ 44,860
$ 38,432
$
$
278
1,120
402
1,593
$
3,393
$
1
15
11
1
28
$
5,040
3,142
1,753
3,779
$
4,850
2,971
1,182
4,051
$ 13,714
$ 13,054
$ 37,039
$ 32,192
$ 6,250
$ 5,691
$ 3,249
$ 3,204
$ 6,944
$ 5,865
$ 25,056
$ 24,004
$ 1,895
$ 1,173
$ 80,433
$ 72,129
(1)
(2)
(3)
(4)
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.
Includes Indonesia, Macau, Malaysia, South Korea, and Taiwan.
Includes Venezuela and Uruguay.
Includes other English and Spanish Caribbean countries, such as Bahamas, Barbados, British Virgin Islands, El Salvador, Jamaica, Trinidad & Tobago, and Turks & Caicos.
2019 Scotiabank Annual Report | 117
2019
2018
2017
$ 268.2
98.6
17.8
$ 253.4
96.0
16.5
$ 236.9
89.2
14.1
$ 384.6
$ 365.9
$ 340.2
$
28.8
5.2
27.6
32.4
16.6
9.5
14.0
13.3
4.4
6.8
2.9
10.8
6.1
13.4
2.4
8.5
3.1
16.0
5.1
$
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
$ 226.9
$ 207.3
$ 182.0
$ 611.5
$ 573.2
$ 522.2
(5.1)
(5.1)
(4.3)
$ 606.4
$ 568.1
$ 517.9
2019
2018
2017
$ 211.9
35.6
52.2
$ 197.4
35.4
53.7
$ 185.7
35.5
42.0
$ 299.7
$ 286.5
$ 263.2
Management’s Discussion and Analysis
Credit Risk
T62 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
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated.
(1)
(2) Deposit taking institutions and securities firms.
(3)
(4) Other related to $1.1 in financing products, $2.8 in services and $3.4 in wealth management (2018 – $2.3, $2.6, and $2.7 respectively).
(5)
Includes central banks, regional and local governments, and supra-national agencies.
Prior periods have been restated to conform to the current presentation.
T63 Off-balance sheet credit instruments
As at October 31 ($ 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.
118 | 2019 Scotiabank Annual Report
T64 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 financial instruments(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 financial instruments
Balance at end of year
(1)
(2)
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.
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated.
T65 Provision for credit losses(1)
For the fiscal years ($ millions)
New provisions
Reversals
Recoveries
Provision for credit losses on impaired financial instruments (Stage 3)
Provision for credit losses – performing (Stage 1 and 2)
Total Provision for credit losses
(1)
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated.
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
M
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2019
2018
2017
$ 5,130
$
5,070
$ 5,394
4,213
18
(45)
(469)
(58)
3,659
(99)
(1,818)
(1,325)
(274)
(3,516)
(138)
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)
$ 5,135
$
5,130
$ 4,865
$ 1,677
2,899
(3,516)
$
1,756
2,355
(3,040)
$ 2,948
2,249
(3,173)
26
285
218
45
574
(39)
96
275
250
68
689
(83)
70
252
303
55
680
(82)
$ 1,595
$
1,677
$ 2,622
$ 3,453
5
82
$
3,314
60
79
$ 2,446
(529)
326
$ 3,540
$
3,453
$ 2,243
2019
2018
$ 3,599
(126)
(574)
2,899
128
$ 3,267
(223)
(689)
2,355
256
$ 3,027
$ 2,611
2017
$ 3,057
(128)
(680)
2,249
–
$ 2,249
2019 Scotiabank Annual Report | 119
Management’s Discussion and Analysis
T66 Provision for credit losses against impaired financial instruments 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 financial instruments
T67 Impaired loans by type of borrower
$
2019
59
1,480
1,078
2,617
$
2018
91
1,198
833
2,122
$
2017
61
1,152
734
1,947
–
–
85
48
–
8
13
20
–
1
7
14
24
16
–
25
5
19
(3)
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
282
233
302
$ 2,899
$ 2,355
$ 2,249
2019
Allowance
for credit
losses
$
325
591
–
$
916
Gross
$ 1,830
1,094
–
$ 2,924
Net
Gross
$ 1,505
503
–
$ 2,008
$ 1,797
1,069
–
$ 2,866
2018
Allowance
for credit
losses
$
360
644
–
$ 1,004
Net
$ 1,437
425
–
$ 1,862
42
2
370
344
155
150
49
250
2
39
56
35
92
33
14
154
47
137
240
11
2
182
84
13
45
25
69
1
7
28
21
22
11
5
63
11
75
4
31
–
188
260
142
105
24
181
1
32
28
14
70
22
9
91
36
62
236
19
2
390
469
135
233
50
150
37
25
48
51
76
21
10
99
27
159
263
13
2
168
112
30
60
16
50
1
5
17
22
19
5
3
50
7
78
15
6
–
222
357
105
173
34
100
36
20
31
29
57
16
7
49
20
81
248
$ 2,211
$ 5,135
$
679
$ 1,595
$ 1,532
$ 3,540
$ 2,264
$ 5,130
$
673
$ 1,677
$ 1,591
$ 3,453
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
120 | 2019 Scotiabank Annual Report
T68 Total credit risk exposures by geography(1)(2)
As at October 31 ($ millions)
Drawn
Undrawn
Other
exposures(3)
Retail
Total
Total
2019
2018
Non-Retail
Canada
U.S.
Chile
Mexico
Peru
Colombia
Other International
Europe
Caribbean and Central America
Latin America (other)
Other
Total
As at October 31, 2018
$ 112,412
95,268
23,476
21,392
19,246
5,382
23,050
17,841
10,478
23,699
$ 45,419
37,529
1,309
1,189
745
397
6,656
1,849
999
4,069
$
33,232
43,239
4,077
2,871
3,139
637
16,179
1,476
239
5,403
$ 358,170
–
24,659
12,517
9,824
7,257
–
17,470
686
44
$ 549,233
176,036
53,521
37,969
32,954
13,673
45,885
38,636
12,402
33,215
$ 521,803
178,139
53,152
33,294
28,495
13,649
42,613
38,302
11,368
28,419
$ 352,244
$100,161
$ 110,492
$ 430,627
$ 993,524
$ 949,234
$ 341,493
$ 92,303
$ 105,232
$ 410,206
$ 949,234
(1)
(2) Amounts represent exposure at default.
(3)
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.
Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, derivatives, securitization and repo-style transactions after collateral.
T69 AIRB credit risk exposures by maturity(1)(2)
Residual maturity as at October 31 ($ millions)
Drawn
Undrawn
2019
2018
Other
exposures(3)
Total
Total
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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
$ 144,421
122,302
23,960
$
30,058
63,091
3,142
$
65,738
27,516
7,205
$ 240,217
212,909
34,307
$ 290,683
$
96,291
$ 100,459
$ 487,433
$
40,732
192,344
15,488
39,084
$
21,004
–
–
29,839
$
$ 287,648
$
50,843
$
–
–
–
–
–
$
61,736
192,344
15,488
68,923
$ 338,491
$ 323,589
$ 578,331
$ 147,134
$ 100,459
$ 825,924
$ 785,637
$ 235,630
208,800
17,618
$ 462,048
$
50,941
188,922
15,259
68,467
As at October 31, 2018
$ 549,472
$ 134,884
$ 101,281
$ 785,637
Remaining term to maturity of the credit exposure. Includes all credit risk portfolios and excludes equity securities and other assets.
Exposure at default, before credit risk mitigation.
(1)
(2)
(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.
2019 Scotiabank Annual Report | 121
Management’s Discussion and Analysis
T70 Total credit risk exposures and risk-weighted assets
AIRB
Standardized(1)
Total
2019
2018
Total
As at October 31 ($ millions)
Exposure at
Default(2)
CET1 risk-
weighted
assets(3)
Exposure at
Default(2)
CET1 risk-
weighted
assets(3)
Exposure at
Default(2)
CET1 risk-
weighted
assets(3)
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
$ 172,597
93,026
46,766
$
83,506
33,655
10,868
$
312,389
128,029
19,788
2,451
9,787
32,026
98,298
814
2,990
102,102
290,683
96,291
59,543
3,782
404
1,153
5,339
3,659
93
65
3,817
90,947
34,152
12,086
52,814
3,684
3,495
59,993
1,998
156
57
2,211
6,749
30
2
6,781
61,561
3,870
3,554
$
50,219
3,644
3,419
57,282
1,529
155
57
1,741
840
29
–
869
52,588
3,828
3,476
$
225,411
96,710
50,261
372,382
$ 133,725
37,299
14,287
185,311
$
21,786
2,607
9,844
34,237
105,047
844
2,992
108,883
352,244
100,161
63,097
5,311
559
1,210
7,080
4,499
122
65
4,686
143,535
37,980
15,562
204,018
89,198
46,941
340,157
25,888
2,306
9,989
38,183
111,587
799
1,812
114,198
341,493
92,303
58,742
$ 127,647
36,376
14,020
178,043
6,363
446
1,192
8,001
4,948
111
96
5,155
138,958
36,933
15,308
$ 446,517
$ 137,185
$
68,985
$
59,892
$
515,502
$ 197,077
$
492,538
$ 191,199
$ 217,673
$
20,756
$
47,427
$
19,727
$
265,100
$
40,483
$
250,461
$
35,851
217,673
20,756
47,427
19,727
265,100
40,483
250,461
35,851
21,130
18,524
39,654
16,046
29,839
45,885
32,799
2,480
35,279
287,648
50,843
3,846
1,102
4,948
9,198
3,806
13,004
16,131
776
16,907
49,931
5,684
–
–
–
–
–
–
–
–
–
–
–
–
44,709
–
44,709
92,136
–
33,196
–
33,196
52,923
–
21,130
18,524
39,654
16,046
29,839
45,885
77,508
2,480
79,988
3,846
1,102
4,948
9,198
3,806
13,004
49,327
776
50,103
21,047
17,864
38,911
17,337
28,550
45,887
73,276
1,671
74,947
379,784
50,843
102,854
5,684
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
$ 338,491
$
55,615
$
92,136
$
52,923
$
430,627
$ 108,538
$
410,206
$ 100,212
Securitization exposures
Trading derivatives
CVA derivatives
18,098
22,818
–
183
6,790
6,537
5,207
1,272
–
1,784
1,250
–
23,305
24,090
–
1,967
8,040
6,537
23,346
23,144
–
2,287
7,895
4,616
Subtotal
Equities
Other assets(5)
Total credit risk, before
scaling factor
Add-on for 6% scaling
factor(6)
$ 825,924
$ 206,310
$ 167,600
$ 115,849
$
993,524
$ 322,159
$
949,234
$ 306,209
2,279
–
2,136
–
–
61,320
–
29,033
2,279
61,320
2,136
29,033
1,754
60,124
1,619
28,258
$ 828,203
$ 208,446
$ 228,920
$ 144,882
$ 1,057,123
$ 353,328
$ 1,011,112
$ 336,086
–
12,103
–
–
–
12,103
–
11,010
Total credit risk
$ 828,203
$ 220,549
$ 228,920
$ 144,882
$ 1,057,123
$ 365,431
$ 1,011,112
$ 347,096
(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)
In accordance with OSFI’s requirements, effective 2019, CVA risk-weighted assets have been fully phased-in. In the prior year, scalars for CVA risk-weighted assets of 0.80, 0.83 and 0.86 were used to compute the CET1 capital ratio, Tier 1 capital
ratio and Total capital ratio, respectively.
(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)
(6) Basel Committee imposed a scaling factor (6%) on risk-weighted assets for Internal Ratings-Based credit risk portfolios.
Exposures at Default for Other Assets include amounts related to central counterparties effective Q4 2019.
122 | 2019 Scotiabank Annual Report
Revenues and Expenses
T71 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:
2019 versus 2018
Increase (decrease) due to change in:
2018 versus 2017
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
$ 2,938
1,209
$ 1,729
$ 1,779
2,521
$ 4,717
3,730
$ (742)
$
987
$ 1,645
408
$ 1,237
$ 2,495
2,576
$ 4,140
2,984
$
(81)
$ 1,156
$
(73)
25
126
155
586
373
443
1,303
2,705
$
142
96
(70)
191
510
420
55
435
1,420
$
69
121
56
346
1,096
793
498
1,738
4,125
$
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
$ 2,938
$ 1,779
$ 4,717
$ 1,645
$ 2,495
$ 4,140
$
255
821
(36)
1,040
47
66
56
$
249
1,722
316
2,287
41
15
178
$
504
2,543
280
3,327
88
81
234
$
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
Total interest-bearing liabilities
$ 1,209
$ 2,521
$ 3,730
$
408
$ 2,576
$ 2,984
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T72 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)
(2)
Comprising $1,998 of Canadian taxes (2018 – $2,218; 2017 – $1,758) and $1,814 of foreign taxes (2018 – $1,455; 2017 – $1,490).
Total income and other taxes as a percentage of net income before income and other taxes.
2019
2018
2017
2019
versus
2018
$ 2,472
$
2,382
$
2,033
4%
439
515
386
390
464
437
380
423
412
1,340
1,291
1,215
$ 3,812
$
3,673
$
3,248
$11,270
$ 11,106
$ 10,276
21.9
30.2
21.5
29.6
19.8
28.3
13
11
(12)
4
4%
1%
0.4
0.6
2019 Scotiabank Annual Report | 123
2019
2018
2017
$ 153.6
121.6
$ 146.5
113.9
$ 151.7
107.0
275.2
205.3
77.9
260.4
187.5
69.7
258.7
148.3
63.2
$ 558.4
$ 517.6
$ 470.2
$
57.7
188.6
55.3
$
54.7
173.0
52.9
$
51.8
134.0
20.9
$ 301.6
$ 280.6
$ 206.7
2019
2018
2017
$ 517.6
6.9
33.9
$ 470.2
53.1
(5.7)
$ 472.8
(33.6)
31.0
$ 558.4
$ 517.6
$ 470.2
2019
2018
2017
$ 280.6
13.8
7.2
$ 206.7
72.8
1.1
$ 192.7
3.6
10.4
$ 301.6
$ 280.6
$ 206.7
$
2019
32.6
1.3
–
0.5
$
2018
28.7
1.0
–
0.4
$
2017
28.5
0.8
–
0.4
$
34.4
$
30.1
$
29.7
Management’s Discussion and Analysis
T73 Assets under administration and management
($ billions)
Assets under administration
Personal
Retail brokerage
Investment management and trust
Mutual funds
Institutional(1)
Total
Assets under management
Personal
Mutual funds
Institutional
Total
(1)
Prior period amounts have been restated to conform with current period presentation.
T74 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(2)
(1)
(2)
Includes impact of business acquisitions/dispositions of $(3.1) (2018 – $49.2; 2017 – $(33.5)).
Prior period amounts have been restated to conform with current period presentation.
As at October 31 ($ 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(2)
(1)
(2)
Includes impact of business acquisitions/dispositions of nil (2018 – $76.0; 2017 – $(4.3)).
Prior period amounts have been restated to conform with current period presentation.
T75 Fees paid to the shareholders’ auditors
For the fiscal years ($ millions)
Audit services
Audit-related services
Tax services outside of the audit scope
Other non-audit services
Total
124 | 2019 Scotiabank Annual Report
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Selected Quarterly Information
T76 Selected quarterly information
As at and for the quarter ended
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2019
2018
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 (%)(1)
Financial position information ($ billions)
Cash and deposits with financial institutions
Trading assets
Loans
Total assets
Deposits
Common equity
Preferred shares and other equity instruments
Assets under administration
Assets under management
Capital and liquidity measures
Common Equity Tier 1 (CET1) capital ratio (%)
Tier 1 capital ratio (%)
Total capital ratio (%)
Leverage ratio (%)
CET1 risk-weighted assets ($ billions)(3)
Liquidity coverage ratio (LCR) (%)
Credit quality
Net impaired loans ($ millions)
Allowance for credit losses ($ millions)(4)
Net impaired loans as a % of loans and acceptances
Provision for credit losses as a % of average net loans and
acceptances (annualized)(5)
Provision for credit losses on impaired loans as a % of average
net loans and acceptances (annualized)(5)
Net write-offs as a % of average net loans and acceptances
(annualized)
Adjusted results(1)
Adjusted net income ($ millions)
Adjusted diluted earnings per share ($)
Adjusted return on equity (%)
Adjusted productivity ratio (%)
Adjusted provision for credit losses as a % of average net loans
and acceptances(5)
Common share information
Closing share price ($) (TSX)
Shares outstanding (millions)
Average – Basic
Average – Diluted
End of period
Dividends paid per share ($)
Dividend yield (%)(6)
Market capitalization ($ billions) (TSX)
Book value per common share ($)
Market value to book value multiple
Price to earnings multiple (trailing 4 quarters)
4,336
3,632
7,968
753
4,311
596
2,308
2,137
1.76
1.73
13.3
54.1
2.40
46.7
127.5
592.5
1,086.2
733.4
63.6
3.9
558.4
301.6
11.1
12.2
14.2
4.2
421.2
125
3,540
5,145
0.58
0.50
0.49
0.49
2,400
1.82
13.8
52.7
4,374
3,285
7,659
713
4,209
753
1,984
1,839
1.51
1.50
11.5
55.0
2.45
45.3
131.1
589.2
1,066.7
722.3
63.5
3.9
547.9
297.1
11.2
12.3
14.8
4.2
417.1
123
3,559
5,273
0.58
0.48
0.52
0.50
2,455
1.88
14.3
51.7
4,193
3,610
7,803
873
4,046
625
2,259
2,125
1.74
1.73
13.8
51.8
2.45
50.1
117.1
583.8
1,058.2
712.3
63.6
3.9
549.8
297.2
11.1
12.5
14.7
4.3
415.2
125
3,695
5,376
0.61
0.61
0.49
0.50
2,263
1.70
13.6
52.3
4,274
3,330
7,604
688
4,171
498
2,247
2,107
1.72
1.71
13.5
54.9
2.45
52.9
107.0
566.1
1,034.3
690.9
62.5
3.9
521.9
281.5
11.1
12.5
14.6
4.4
408.6
128
3,607
5,199
0.61
0.47
0.47
0.50
2,291
1.75
13.7
54.1
4,220
3,228
7,448
590
4,064
523
2,271
2,114
1.72
1.71
13.8
54.6
2.47
4,085
3,096
7,181
943
3,770
529
1,939
1,956
1.60
1.55
13.1
52.5
2.46
62.3
100.3
551.8
998.5
676.5
61.0
4.2
517.6(2)
280.6(2)
51.9
92.9
548.6
946.7
654.2
60.8
4.2
484.7(2)
253.3(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
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
0.50
0.48
0.51
0.47
0.39
0.40
0.42
0.42
75.54
70.46
73.78
74.80
70.65
77.09
78.92
81.72
1,218
1,260
1,216
0.90
5.0
91.9
52.33
1.4
11.2
1,221
1,251
1,220
0.87
4.9
86.0
52.06
1.4
10.5
1,224
1,252
1,222
0.87
4.8
90.2
52.01
1.4
10.9
1,226
1,255
1,226
0.85
4.8
91.7
51.01
1.5
11.1
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
Refer to page 15 for a discussion of non-GAAP measures.
(1)
(2) Amounts have been restated to conform with current period presentation.
(3)
In accordance with OSFI’s requirements, effective January 31, 2019, credit valuation adjustment (CVA) risk-weighted assets (RWA) have been fully phased-in. In the prior year, CVA RWA were calculated using scalars of 0.80, 0.83 and 0.86 to
compute the CET1 capital ratio, Tier 1 capital ratio and Total capital ratio, respectively.
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.
(4)
(5)
(6) Based on the average of the high and low common share price for the period.
2019 Scotiabank Annual Report | 125
Management’s Discussion and Analysis
Eleven-Year Statistical Review
T77 Consolidated Statement of Financial Position
As at October 31 ($ millions)
2019(1)
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
$
46,720
3,709
$
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
112,664
13,829
995
127,488
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
131,178
38,119
82,359
268,169
98,631
17,788
–
212,972
597,560
5,077
592,483
13,896
2,669
5,614
17,465
1,570
22,891
64,105
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
$ 1,086,161
$ 998,493
$ 915,273
$ 896,266
$ 856,497
$ 805,666
$ 743,644
$ 668,225
$ 594,423
$
224,800
461,851
46,739
733,390
$ 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
12,235
8,188
4,663
1,459
1,486
465
174
157
101
13,901
16,338
13,560
11,978
10,296
9,876
10,556
8,932
8,172
30,404
40,222
32,087
37,967
30,766
34,200
23,312
42,387
20,212
45,270
27,050
36,438
24,977
29,267
18,622
35,323
15,450
40,236
124,083
7,252
–
54,482
270,344
1,015,969
18,264
44,439
570
365
101,257
5,698
–
52,744
246,091
930,813
18,234
41,414
992
404
63,638
61,044
95,843
5,935
–
43,314
223,618
853,648
15,644
38,117
1,577
116
55,454
97,083
7,633
–
42,716
225,109
838,445
15,513
34,752
2,240
152
52,657
77,015
6,182
–
41,638
200,613
803,018
15,141
31,316
2,455
173
49,085
88,953
4,871
–
34,785
201,973
756,455
15,231
28,609
949
176
77,508
5,841
–
32,047
180,196
698,257
14,516
25,068
388
193
56,968
10,143
–
32,726
162,714
628,560
13,139
21,775
(745)
166
38,216
6,923
2,003
29,848
140,848
562,183
8,336
18,421
(497)
96
44,965
40,165
34,335
26,356
3,884
4,184
4,579
3,594
2,934
2,934
4,084
4,384
4,384
67,522
65,228
60,033
56,251
52,019
47,899
44,249
38,719
30,740
2,670
–
70,192
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
$ 1,086,161
$ 998,493
$ 915,273
$ 896,266
$ 856,497
$ 805,666
$ 743,644
$ 668,225
$ 594,423
(1)
The amounts for the year ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
126 | 2019 Scotiabank Annual Report
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T78 Consolidated Statement of Income
For the year ended October 31
($ millions)
Revenue
Interest income(1)
Loans
Securities
Securities purchased under resale
2019
2018
2017
2016
2015
2014
2013
2012
2011
IFRS
$29,116
2,238
$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
502
928
446
859
283
522
158
394
161
292
180
263
190
279
221
287
221
275
32,784
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)(2)
Total revenue
Provision for credit losses(1)
Non-interest expenses(2)
Income before taxes
Income tax expense
Net income
Net income attributable to
non-controlling interests
Non-controlling interests in
subsidiaries
Capital instrument equity holders
Net income attributable to equity
holders of the Bank
Preferred shareholders and other
13,871
294
–
1,442
15,607
17,177
13,857
31,034
3,027
16,737
11,270
2,472
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
$ 8,798
$ 8,724
$ 8,243
$ 7,368
$ 7,213
$ 7,298
$ 6,610
$ 6,390
$ 5,330
$
408
$
176
$
238
$
251
$
199
$
227
$
231
$
196
$
149
408
–
176
–
238
–
251
–
199
–
227
–
231
–
196
–
91
58
$ 8,390
$ 8,548
$ 8,005
$ 7,117
$ 7,014
$ 7,071
$ 6,379
$ 6,194
$ 5,181
equity instrument holders
Common shareholders
182
$ 8,208
187
$ 8,361
129
$ 7,876
130
$ 6,987
117
$ 6,897
155
$ 6,916
217
$ 6,162
220
$ 5,974
216
$ 4,965
Earnings per common share (in dollars)
Basic
Diluted
Dividends per common share (in dollars)
$
$
$
6.72
6.68
3.49
$
$
$
6.90
6.82
3.28
$
$
$
6.55
6.49
3.05
$
$
$
5.80
5.77
2.88
$
$
$
5.70
5.67
2.72
$
$
$
5.69
5.66
2.56
$
$
$
5.15
5.11
2.39
$
$
$
5.27
5.18
2.19
$ 4.63
$ 4.53
$ 2.05
(1)
(2)
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated.
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).
2019 Scotiabank Annual Report | 127
Management’s Discussion and Analysis
T77A 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
128 | 2019 Scotiabank Annual Report
CGAAP
2010
2009
$
46,027
$
43,278
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
284,224
266,302
7,616
26,852
2,450
15,005
51,923
9,583
25,992
2,372
13,922
51,869
$ 526,657
$ 496,516
$ 128,850
210,687
22,113
$ 123,762
203,594
23,063
361,650
350,419
7,616
40,286
21,519
31,990
28,947
9,583
36,568
14,688
28,806
24,682
130,358
114,327
5,939
500
5,944
500
3,975
3,710
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
$ 526,657
$ 496,516
T78A 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.
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2010
2009
$ 12,171
4,227
201
292
$ 13,973
4,090
390
482
16,891
18,935
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
14,266
12,713
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
$
$
$
$
$
$
2019 Scotiabank Annual Report | 129
Management’s Discussion and Analysis
T79 Consolidated Statement of Changes in Equity
For the year ended October 31 ($ millions)
2019
2018
2017
2016
2015
2014
2013
2012
IFRS
Common shares
Balance at beginning of year
Issued
Purchased for cancellation
Balance at end of year
Retained earnings
Balance at beginning of year
IFRS adjustment
Restated balances
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
$18,234
255
(225)
$18,264
$15,644
2,708
(118)
$15,513
313
(182)
$15,141
391
(19)
$15,231
104
(194)
$14,516
771
(56)
$18,234
$15,644
$15,513
$15,141
$15,231
$13,139
1,377
–
$14,516
$ 8,336
4,803
–
$13,139
41,414
(58)(1)
41,356
8,208
–
(4,260)
(850)
(15)
38,117
(564)
37,553
8,361
–
(3,985)
(514)
(1)
34,752
–
34,752
7,876
–
(3,668)
(827)
(16)
31,316
–
31,316
6,987
–
(3,468)
(61)
(22)
28,609
–
28,609
6,897
–
(3,289)
(761)
(140)(4)
25,315
(247)
25,068
6,916
–
(3,110)
(264)
(1)
21,978
(203)
21,775
6,162
–
(2,858)
–
(11)
18,421
(144)
18,277
5,974
–
(2,493)
–
17
$44,439
$41,414
$38,117
$34,752
$31,316
$28,609
$25,068
$21,775
992
–
992
–
(422)
–
1,577
51
1,628
–
(693)
57
2,240
–
2,240
–
(663)
–
2,455
–
2,455
–
(215)
–
949
–
949
(5)(5)
1,511
–
$
570
$
992
$ 1,577
$ 2,240
$ 2,455
$
404
7
(46)
$
365
$63,638
116
6
282
404
$
152
8
(44)
116
$
173
7
(28)
152
176
14
(17)
173
$
$
$
$61,044
$55,454
$52,657
$49,085
$44,965
$40,165
545
(157)
388
–
561
–
949
193
30
(47)
176
(31)
(714)
(745)
–
1,133
–
(497)
32
(465)
–
(280)
–
$
388
$ (745)
166
36
(9)
193
$
96
38
32
$
166
$34,335
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
4,184
4,579
182
(182)
–
(300)
187
(187)
300
(695)
3,594
129
(129)
1,560
(575)
2,934
130
(130)
1,350
(690)
2,934
4,084
4,384
4,384
117
(117)
–
–
155
(155)
–
(1,150)
217
(217)
–
(300)
220
(220)
–
–
$ 3,884
$ 4,184
$ 4,579
$ 3,594
$ 2,934
$ 2,934
$ 4,084
$ 4,384
2,452
–
2,452
408
(150)
(40)
1,592
(97)
1,495
176
(199)
980
1,570
–
1,570
238
(133)
(83)
1,460
–
1,460
251
(116)
(25)
1,312
–
1,312
199
(86)
35
1,155
(17)
1,138
227
(76)
23
1,743
(797)
946
231
(80)
41
$ 2,670
$70,192
$ 2,452
$67,680
$ 1,592
$61,625
$ 1,570
$57,821
$ 1,460
$53,479
$ 1,312
$49,211
$ 1,138
$45,387
1,500
(891)
609
196
(44)
185
946
$
$39,665
Refer to Note 4 in the consolidated financial statements.
(1)
(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)
(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).
Includes retrospective adjustments primarily related to foreign currency translation on Allowance for Credit Losses with respect to periods prior to 2013 ($152).
To reflect the adoption of the own credit risk provisions of IFRS 9 pertaining to financial liabilities designated at fair value through profit or loss.
T80 Consolidated Statement of Comprehensive Income
IFRS
For the year ended October 31 ($ millions)
2019
2018
2017
2016
2015
2014
2013
2012
Net income
Other comprehensive income (loss), net of income taxes:
Items that will be reclassified subsequently to net income
$8,798
$8,724
$ 8,243
$7,368
$7,213
$7,298
$6,610
$6,390
Net change in unrealized foreign currency translation gains (losses)
Net change in unrealized gains (losses) on available-for-sale securities (debt and
(819)
(606)
(1,259)
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
n/a
105
708
103
(815)
95
8
(10)
(625)
n/a
(252)
(361)
66
318
60
(22)
(7)
(804)
(55)
n/a
(28)
56
592
n/a
(21)
6
(709)
$8,173
$7,920
$ 7,534
$7,139
$7,786
182
205
–
$8,173
$7,668
187
65
–
$7,920
$ 7,213
129
192
–
$ 7,534
$6,772
130
237
–
$7,139
396
(172)
n/a
258
31
(716)
n/a
(16)
(10)
(229)
1,855
889
(480)
n/a
55
(9)
(1)
n/a
15
1
1,436
$8,649
$8,408
117
124
–
$8,649
(38)
n/a
(6)
60
(320)
n/a
n/a
(2)
583
$7,881
$7,477
155
249
–
$7,881
346
110
n/a
93
20
563
n/a
n/a
–
1,132
$7,742
$7,298
217
227
–
$7,742
149
151
n/a
116
25
(747)
n/a
n/a
–
(306)
$6,084
$5,694
220
170
–
$6,084
(1)
(2)
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
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.
130 | 2019 Scotiabank Annual Report
IFRS
CGAAP
2011
2010
2009
$ 5,750
2,586
–
$ 8,336
21,932
(6,248)
15,684
4,965
–
(2,200)
–
(28)
$ 4,946
804
–
$ 5,750
19,916
–
19,916
4,239
(201)
(2,023)
–
1
$ 3,829
1,117
–
$ 4,946
18,549
–
18,549
3,547
(186)
(1,990)
–
(4)
$ 18,421
$ 21,932
$ 19,916
(4,051)
4,320
269
–
(766)
–
(3,800)
–
(3,800)
–
(251)
–
(3,596)
–
(3,596)
595(6)
(799)
–
$ (497)
$ (4,051)
$(3,800)
25
46
25
96
$
–
25
–
25
$
–
–
–
–
$
$26,356
$23,656
$21,062
3,975
216
(216)
409
–
3,710
2,860
–
–
265
–
–
–
850
–
$ 4,384
$ 3,975
$ 3,710
579
936
1,515
149
(181)
17
554
–
554
100
(35)
(40)
502
–
502
114
(36)
(26)
$ 1,500
$32,240
$
579
$ 28,210
$
554
$25,326
IFRS
2011
$5,330
(697)
(169)
n/a
105
–
–
n/a
n/a
–
(761)
$4,569
$ 4,199
216
96
58
$4,569
CGAAP
2010
$ 4,339
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
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2019 Scotiabank Annual Report | 131
Management’s Discussion and Analysis
T81 Other statistics
For the year ended October 31
Operating performance
Basic earnings per share ($)
Diluted earnings per share ($)
Return on equity (%)
Productivity ratio (%)
Return on assets (%)
Core banking margin (%)(1)
Net interest margin on total average assets (%)
Capital measures(2)
Common Equity Tier 1 (CET1) capital ratio (%)
Tier 1 capital ratio (%)
Total capital ratio (%)
Leverage ratio (%)
Common share information
Closing share price ($) (TSX)
Number of shares outstanding (millions)
Dividends paid per share ($)
Dividend yield (%)(3)
Price to earnings multiple (trailing 4 quarters)
2019
2018
2017
2016
2015
2014
2013
2012
IFRS
6.72
6.68
13.1
53.9
0.83
2.44
n/a
11.1
12.2
14.2
4.2
75.54
1,216
3.49
4.9
11.2
6.90
6.82
14.5
52.3
0.92
2.46
n/a
11.1
12.5
14.3
4.5
70.65
1,227
3.28
4.2
10.2
6.55
6.49
14.6
53.9
0.90
2.46
n/a
11.5
13.1
14.9
4.7
83.28
1,199
3.05
4.0
12.7
5.80
5.77
13.8
55.2
0.81
2.38
n/a
11.0
12.4
14.6
4.5
72.08
1,208
2.88
4.7
12.4
5.70
5.67
14.6
54.2
0.84
2.39
n/a
10.3
11.5
13.4
4.2
61.49
1,203
2.72
4.4
10.8
5.69
5.66
16.1
53.4
0.92
2.39
n/a
10.8
12.2
13.9
n/a
69.02
1,217
2.56
3.8
12.1
5.15
5.11
16.6
54.8
0.88
2.31
n/a
9.1
11.1
13.5
n/a
63.39
1,209
2.39
4.1
12.3
5.27
5.18
19.9
53.1
0.97
2.31
n/a
n/a
13.6
16.7
n/a
54.25
1,184
2.19
4.2
10.3
Book value per common share ($)
52.33
49.75
46.24
43.59
40.80
36.96
33.23
28.99
Other information
Average total assets ($ millions)
Number of branches and offices
Number of employees
1,056,063
945,683
912,619
913,844
860,607
795,641
748,901
659,538
3,109
3,095
3,003
3,113
3,177
3,288
3,330
3,123
101,813
97,021(4)
87,761(4)
88,901
89,214
86,932
86,690
81,497
Number of automated banking machines
9,391
9,029
8,140
8,144
8,191
8,732
8,471
7,341
Refer to page 15 for a discussion of non-GAAP measures.
Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules. Comparative amounts for periods 2012-2009 were determined in accordance with Basel II rules.
(1)
(2)
(3) Based on the average of the high and low common share price for the year.
(4) Amounts have been restated to conform with current period presentation.
132 | 2019 Scotiabank Annual Report
IFRS
CGAAP
2011
2010
2009
4.63
4.53
20.3
54.8
0.91
2.32
n/a
n/a
12.2
13.9
n/a
52.53
1,089
2.05
3.7
11.3
3.91
3.91
18.3
52.8
0.84
n/a
1.67
n/a
11.8
13.8
n/a
54.67
1,043
1.96
3.9
14.0
3.32
3.31
16.7
54.8
0.71
n/a
1.62
n/a
10.7
12.9
n/a
45.25
1,025
1.96
5.4
13.6
24.20
22.68
20.55
586,101
515,991
513,149
2,926
2,784
2,686
75,362
70,772
67,802
6,260
5,978
5,778
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2019 Scotiabank Annual Report | 133
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, 2019, 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 26, 2019
Report of Independent Registered Public Accounting Firm
To the Shareholders of The Bank of Nova Scotia
Opinion on Internal Control Over Financial Reporting
We have audited The Bank of Nova Scotia’s internal control over financial reporting as of October 31, 2019, 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 of Nova Scotia (the Bank) maintained, in all material respects, effective internal control over financial reporting as of
October 31, 2019, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated statements of financial position of the Bank as at October 31, 2019, and 2018, the related 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, 2019, and the related
notes (collectively, the consolidated financial statements) and our report dated November 26, 2019 expressed an 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 under the heading “Management’s Report on Internal Control Over Financial Reporting” above.
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.
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
Toronto, Canada
November 26, 2019
134 | 2019 Scotiabank Annual Report
Consolidated
Financial Statements
Table of Contents
136
137
142
Management’s Responsibility for
Financial Information
Independent Auditors’ Reports of
Registered Public Accounting Firm
Consolidated Statement of
Financial Position
143
Consolidated Statement of Income
144
145
Consolidated Statement of
Comprehensive Income
Consolidated Statement of Changes
in Equity
146
Consolidated Statement of Cash Flows
147
Notes to the 2019 Consolidated
Financial Statements
2019 Scotiabank Annual Report | 135
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, 2019 and October 31, 2018 and its consolidated financial performance and its consolidated cash flows for each of the years in the
three-year period ended October 31, 2019 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 reports 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 26, 2019
136 | 2019 Scotiabank Annual Report
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Independent Auditors’ Report
To the Shareholders of The Bank of Nova Scotia
Opinion
We have audited the consolidated financial statements of The Bank of Nova Scotia (the Bank), which comprise:
• the consolidated statements of financial position as at October 31, 2019 and October 31, 2018;
• the consolidated statements of income for each of the years in the three-year period ended October 31, 2019;
• the consolidated statements of comprehensive income for each of the years in the three-year period ended October 31, 2019;
• the consolidated statements of changes in equity for each of the years in the three-year period ended October 31, 2019;
• the consolidated statements of cash flows for each of the years in the three-year period ended October 31, 2019;
• and notes to the consolidated financial statements, including a summary of significant accounting policies
(hereinafter 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, 2019 and October 31, 2018, and its consolidated financial performance and its consolidated cash flows for each of the years in the
three-year period ended October 31, 2019 in accordance with International Financial Reporting Standards (IFRS) as issued by the International
Accounting Standards Board.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are
further described in the “Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements” section of our auditors’ report.
We are independent of the Bank in accordance with the ethical requirements that are relevant to our audit of the consolidated financial
statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial
statements for the year ended October 31, 2019. These matters were addressed in the context of our audit of the consolidated financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
The key audit matters for the consolidated financial statements are set out on the pages that follow.
(i) Assessment of Allowance for Credit Losses on Financial Assets (ACL)
Refer to Notes 3 and 13 to the consolidated financial statements.
The Bank’s ACL was $5,077 million as at October 31, 2019. The Bank applies a three-stage approach to measure the ACL, using an expected credit
loss (ECL) approach as required under IFRS 9 Financial Instruments. The estimation of the ACL involves the use of complex models and
incorporates inputs, assumptions and techniques that involve significant management judgment. The ACL reflects a probability-weighted
outcome that considers multiple economic scenarios based on the Bank’s view of forecast economic conditions, and is determined as a function of
the Bank’s assessment of the probability of default (PD), loss given default (LGD) and exposure at default (EAD) associated with the financial asset.
When the Bank determines that there has been a significant increase in credit risk subsequent to origination or where the financial asset is in
default, lifetime ACL is recorded; otherwise, ACL equal to 12 month expected credit losses is recorded. Qualitative adjustments or overlays may
also be recorded by the Bank using expert credit judgment where the inputs, assumptions and/or modelling techniques do not capture all relevant
risk factors.
We identified the assessment of the ACL as a key audit matter. There is a high degree of measurement uncertainty associated with the ACL as a
result of the judgments relating to the inputs, assumptions, adjustments and techniques and complex models involved, as described above.
Assessing the ACL required significant auditor attention and complex auditor judgment, involving our credit risk, economics, and information
technology specialists, as well as knowledge and experience in the industry.
The primary procedures we performed to address this key audit matter included the following. With the involvement of our credit risk, economics,
and information technology professionals with specialized skills, industry knowledge and relevant experience, we tested certain internal controls
over the Bank’s ACL process. These included controls related to: (1) validation of the models that determine PD, LGD and EAD; (2) the Bank’s
monitoring over the determination of the ACL; (3) information technology controls over the data inputs into the ACL models and the ACL
calculation; (4) the assessment to identify whether there has been a significant increase in credit risk; (5) the review of the macroeconomic
variables and probability weighting of scenarios used in the ACL models; and (6) the assessment of qualitative adjustments. Additionally for
non-retail loans, we tested the controls related to loan reviews, including the determination of loan risk grades and write-offs. We involved credit
risk, economics, and information technology professionals with specialized skills, industry knowledge and relevant experience who assisted in:
(1) evaluating the methodology and key inputs used in determining PD, LGD and EAD parameters produced by the models; (2) evaluating
macroeconomic variables and probability weighting of scenarios used in the ACL models, including consideration of alternative inputs for certain
variables; (3) recalculating a sample of ECL models and related inputs; and (4) assessing the qualitative adjustments applied to the ACL.
Additionally for a sample of non-retail loans, we evaluated the Bank’s assigned credit risk ratings to loans against the Bank’s borrower risk rating
scale, and the Bank’s judgment on whether there was a significant increase in credit risk, and the related ACL.
(ii) Assessment of the Measurement of Fair Value of Certain Difficult-to-value Financial Instruments
Refer to Notes 3 and 7 to the consolidated financial statements.
The Bank measures $229,830 million of financial assets and $83,005 million of financial liabilities as at October 31, 2019 at fair value on a recurring
basis. Included in these amounts are certain difficult-to-value financial instruments for which the Bank determines fair value using internal models
and third party pricing that use significant unobservable inputs. Unobservable inputs require the use of significant management judgment. The
key unobservable inputs used in the Bank’s internal models to value such difficult-to-value financial instruments include net asset value, volatility
and correlation.
2019 Scotiabank Annual Report | 137
Consolidated Financial Statements
We identified the assessment of the measurement of fair value for difficult-to-value financial instruments as a key audit matter. Due to the
significant measurement uncertainty associated with the fair value of difficult-to-value financial assets and financial liabilities, there was a high
degree of subjectivity and judgment in evaluating the methodology used in developing the models. Subjective auditor judgment was also required
to evaluate the models’ significant inputs and assumptions which were not directly observable in financial markets, such as net asset value,
volatility and correlation.
The primary procedures we performed to address this key audit matter included the following. We tested certain internal controls over the Bank’s
process to determine the fair value of its difficult-to-value financial instruments with the involvement of valuation and information technology
professionals with specialized skills, industry knowledge and relevant experience. These included controls related to: (1) development and ongoing
validation of the models and methodologies; (2) review of significant unobservable model inputs and assumptions; (3) independent price
verification; and (4) segregation of duties and access controls. We tested, with involvement of valuation professionals with specialized skills,
industry knowledge and relevant experience, the fair value of a sample of difficult-to-value financial instruments. Depending on the nature of the
financial instruments, we did this by comparing the key unobservable inputs to external information or by developing an independent estimate of
fair value and comparing it to the fair value determined by the Bank.
(iii) Assessment of Uncertain Tax Provisions
Refer to Notes 3 and 27 to the consolidated financial statements.
In determining the provision for income taxes, the Bank records its best estimate of the amount required to settle uncertain tax positions based on
its assessment of relevant factors.
We identified the assessment of uncertain tax provisions as a key audit matter. There is a high degree of subjectivity and complex auditor
judgment required in assessing the Bank’s interpretation of tax law and its estimate of the ultimate resolution of tax positions.
The primary procedures we performed to address this key audit matter included the following. We tested certain internal controls over the Bank’s
income tax uncertainties process with the involvement of taxation professionals with specialized skills, industry knowledge and relevant
experience. This included controls related to the (1) identification of tax uncertainties, including the interpretation of tax law and (2) determination
of the best estimate of the provision required to settle these tax uncertainties. Since tax law is complex and often subject to interpretation, we
involved tax professionals with specialized skills and knowledge, who assisted in: (1) evaluating the Bank’s interpretations of tax laws and the
assessment of certain tax uncertainties, including, if applicable, the measurement thereof; (2) reading advice obtained by the Bank from external
specialists; and (3) inspecting correspondence with taxation authorities.
Other Information
Management is responsible for the other information. Other information comprises:
• the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions; and
• the information, other than the consolidated financial statements and the auditors’ report thereon, included in a document entitled the
2019 Annual Report.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in
doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained
in the audit and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis and the 2019 Annual Report filed with the relevant Canadian
Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude
that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to
report in this regard.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS 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.
In preparing the consolidated financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to
liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
Auditors’ Responsibilities of the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted
auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of the consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit.
We also:
•
identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our
opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
138 | 2019 Scotiabank Annual Report
• obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control;
• evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by
management;
• conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a
going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related
disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Bank to cease to
continue as a going concern;
• evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the
consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation;
• communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that we identify during our audit;
• provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence,
and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where
applicable, related safeguards;
• obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Bank to express
an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion; and
• determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of
the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our
auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine
that a matter should not be communicated in our auditors’ report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
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Toronto, Canada
November 26, 2019
2019 Scotiabank Annual Report | 139
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders of The Bank of Nova Scotia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of The Bank of Nova Scotia (the Bank) as at October 31, 2019
and 2018, the related 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, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Bank as at October 31, 2019 and 2018, and its
financial performance and its cash flows for each of the years in the three-year period ended October 31, 2019 in conformity with International
Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Bank’s
internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 26, 2019 expressed
an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. 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.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that
were communicated or required to be communicated to the Audit and Conduct Review Committee and that: (1) relate to accounts or disclosures
that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
(i) Assessment of Allowance for Credit Losses on Financial Assets (ACL)
As discussed in Notes 3 and 13 to the consolidated financial statements, the Bank’s ACL for credit losses was $5,077 million as at October 31, 2019.
The Bank applies a three-stage approach to measure the ACL, using an expected credit loss (ECL) approach as required under IFRS 9 Financial
Instruments. The estimation of the ACL involves the use of complex models and incorporates inputs, assumptions and techniques that involve
significant management judgment. The ACL reflects a probability-weighted outcome that considers multiple economic scenarios based on the
Bank’s view of forecast economic conditions, and is determined as a function of the Bank’s assessment of the probability of default (PD), loss given
default (LGD) and exposure at default (EAD) associated with the financial asset. When the Bank determines that there has been a significant
increase in credit risk subsequent to origination or where the financial asset is in default, lifetime ACL is recorded; otherwise, ACL equal to 12
month expected credit losses is recorded. Qualitative adjustments or overlays may also be recorded by the Bank using expert credit judgment
where the inputs, assumptions and/or modelling techniques do not capture all relevant risk factors.
We identified the assessment of the ACL as a critical audit matter. There is a high degree of measurement uncertainty associated with the ACL as
a result of the judgments relating to the inputs, assumptions, adjustments and techniques and complex models involved, as described above.
Assessing the ACL required significant auditor attention and complex auditor judgment, involving our credit risk, economics, and information
technology specialists, as well as knowledge and experience in the industry.
The primary procedures we performed to address this critical audit matter included the following. With the involvement of our credit risk,
economics, and information technology professionals with specialized skills, industry knowledge and relevant experience, we tested certain
internal controls over the Bank’s ACL process. These included controls related to: (1) validation of the models that determine PD, LGD and EAD;
(2) the Bank’s monitoring over the determination of the ACL; (3) information technology controls over the data inputs into the ACL models and the
ACL calculation; (4) the assessment to identify whether there has been a significant increase in credit risk; (5) the review of the macroeconomic
variables and probability weighting of scenarios used in the ACL models; and (6) the assessment of qualitative adjustments. Additionally for non-
retail loans, we tested the controls related to loan reviews, including the determination of loan risk grades and write-offs. We involved credit risk,
economics, and information technology professionals with specialized skills, industry knowledge and relevant experience who assisted in: (1)
evaluating the methodology and key inputs used in determining PD, LGD and EAD parameters produced by the models; (2) evaluating
macroeconomic variables and probability weighting of scenarios used in the ACL models, including consideration of alternative inputs for certain
variables; (3) recalculating a sample of ECL models and related inputs; and (4) assessing the qualitative adjustments applied to the ACL.
Additionally for a sample of non-retail loans, we evaluated the Bank’s assigned credit risk ratings to loans against the Bank’s borrower risk rating
scale, and the Bank’s judgment on whether there was a significant increase in credit risk, and the related ACL.
(ii) Assessment of the Measurement of Fair Value of Certain Difficult-to-value Financial Instruments
As discussed in Notes 3 and 7 to the consolidated financial statements, the Bank measures $229,830 million of financial assets and
$83,005 million of financial liabilities as at October 31, 2019 at fair value on a recurring basis. Included in these amounts are certain
difficult-to-value financial instruments for which the Bank determines fair value using internal models and third party pricing that use significant
140 | 2019 Scotiabank Annual Report
unobservable inputs. Unobservable inputs require the use of significant management judgment. The key unobservable inputs used in the Bank’s
internal models to value such difficult-to-value financial instruments include net asset value, volatility and correlation.
We identified the assessment of the measurement of fair value for difficult-to-value financial instruments as a critical audit matter. Due to the
significant measurement uncertainty associated with the fair value of difficult-to-value financial assets and financial liabilities, there was a high
degree of subjectivity and judgment in evaluating the methodology used in developing the models. Subjective auditor judgment was also required
to evaluate the models’ significant inputs and assumptions which were not directly observable in financial markets, such as net asset value,
volatility and correlation.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the
Bank’s process to determine the fair value of its difficult-to-value financial instruments with the involvement of valuation and information
technology professionals with specialized skills, industry knowledge and relevant experience. These included controls related to: (1) development
and ongoing validation of the models and methodologies; (2) review of significant unobservable model inputs and assumptions; (3) independent
price verification; and (4) segregation of duties and access controls. We tested, with involvement of valuation professionals with specialized skills,
industry knowledge and relevant experience, the fair value of a sample of difficult-to-value financial instruments. Depending on the nature of the
financial instruments, we did this by comparing the key unobservable inputs to external information or by developing an independent estimate of
fair value and comparing it to the fair value determined by the Bank.
(iii) Assessment of Uncertain Tax Provisions
As discussed in Notes 3 and 27 to the consolidated financial statements, in determining the provision for income taxes, the Bank records its best
estimate of the amount required to settle uncertain tax positions based on its assessment of relevant factors.
We identified the assessment of uncertain tax provisions as a critical audit matter. There is a high degree of subjectivity and complex auditor
judgment required in assessing the Bank’s interpretation of tax law and its estimate of the ultimate resolution of tax positions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the
Bank’s income tax uncertainties process with the involvement of taxation professionals with specialized skills, industry knowledge and relevant
experience. This included controls related to the (1) identification of tax uncertainties, including the interpretation of tax law and (2) determination
of the best estimate of the provision required to settle these tax uncertainties. Since tax law is complex and often subject to interpretation, we
involved tax professionals with specialized skills and knowledge, who assisted in: (1) evaluating the Bank’s interpretations of tax laws and the
assessment of certain tax uncertainties, including, if applicable, the measurement thereof; (2) reading advice obtained by the Bank from external
specialists; and (3) inspecting correspondence with taxation authorities.
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We have served as the Bank’s auditor since 2006 and as joint auditor for 14 years prior to that.
Toronto, Canada
November 26, 2019
2019 Scotiabank Annual Report | 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
Aaron W. Regent
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 | 2019 Scotiabank Annual Report
Note
2019
2018
6
$
46,720
3,709
$ 62,269
3,191
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)
112,664
13,829
995
127,488
–
131,178
38,119
82,359
268,169
98,631
17,788
212,972
597,560
5,077
592,483
13,896
2,669
5,614
17,465
1,570
22,891
64,105
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
$ 1,086,161
$ 998,493
$
224,800
461,851
46,739
733,390
12,235
13,901
30,404
40,222
124,083
7,252
54,482
270,344
1,015,969
18,264
44,439
570
365
63,638
3,884
67,522
2,670
70,192
$ 214,545
422,002
39,987
676,534
8,188
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
$ 1,086,161
$ 998,493
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)
Card revenues(3)
Banking services fees
Credit fees
Mutual funds
Brokerage fees
Investment management and trust
Underwriting and other advisory
Non-trading foreign exchange
Trading revenues
Net gain on sale of investment securities
Net income from investments in associated corporations
Insurance underwriting income, net of claims
Other fees and commissions
Other
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(3)
Income before taxes
Income tax expense
Net income
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Note
2019
2018
2017
32
32
33
12(e)
17
13(e)
$ 29,116
2,238
502
928
32,784
$ 24,991
1,771
446
859
28,067
$ 21,719
1,403
283
522
23,927
13,871
294
1,442
15,607
17,177
977
1,812
1,316
1,849
876
1,050
497
667
1,488
351
650
676
949
699
13,857
31,034
3,027
28,007
8,443
2,807
1,053
459
625
861
515
1,974
16,737
10,544
214
1,118
11,876
16,191
1,105
1,705
1,191
1,714
895
732
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
7,878
226
788
8,892
15,035
1,018
1,684
1,153
1,639
1,047
632
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
27
11,270
2,472
$ 8,798
11,106
2,382
$ 8,724
10,276
2,033
$ 8,243
Net income attributable to non-controlling interests in subsidiaries
31(b)
408
176
238
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)
$ 8,390
182
$ 8,208
$ 8,548
187
$ 8,361
$ 8,005
129
$ 7,876
$
34
34
24(a)
6.72
6.68
3.49
$
6.90
6.82
3.28
$
6.55
6.49
3.05
(1)
(2)
(3)
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated.
Interest income on financial assets measured at amortized cost and FVOCI is calculated using the effective interest method. Includes interest income for the year ended October 31, 2019 of $32,436 (October 31, 2018 – $27,854) from these
financial assets.
The amounts for the year ended October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated (refer to Notes 3 and 4).
The accompanying notes are an integral part of these consolidated financial statements.
2019 Scotiabank Annual Report | 143
Consolidated Financial Statements
Consolidated Statement of Comprehensive Income
For the year ended October 31 ($ 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 to net income
Income tax expense (benefit):
Net gains (losses) on derivative instruments designated as cash flow hedges
Reclassification of net (gains) losses to net income
Other comprehensive income (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
(1)
(2)
The amounts for the years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
Includes amounts related to qualifying hedges.
The accompanying notes are an integral part of these consolidated financial statements.
144 | 2019 Scotiabank Annual Report
2019
2018
2017
$ 8,798
$ 8,724
$ 8,243
(626)
(232)
21
(60)
(819)
n/a
n/a
n/a
n/a
n/a
1,265
(1,150)
308
(298)
105
361
596
86
163
708
103
(1,096)
(281)
(815)
121
26
95
11
3
8
(10)
(406)
(281)
(7)
(74)
(606)
n/a
n/a
n/a
n/a
n/a
(605)
281
(145)
73
(252)
(1,564)
404
(8)
107
(1,259)
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2019 Scotiabank Annual Report | 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)/loss on divestitures
Net income from investments in associated corporations
Income tax expense
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/divestiture 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 preferred shares and other equity instruments issued
Redemption of preferred shares
Proceeds from common shares issued
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)
The amounts for years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated.
(1)
(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.
2019(1)
2018(1)
2017
$
8,798
$
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$
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(17,177)
1,053
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(27,235)
(44,337)
60,705
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32,696
(15,322)
(2,958)
(12,025)
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(89,018)
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(1,183)
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(32,589)
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(2,012)
16,584
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(64,560)
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(12,540)
3,250
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255
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(150)
2,945
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2
1,907
8,997
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$
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1,830
(632)
(4,172)
(199)
931
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(44)
1,172
7,825
8,997
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1,560
(575)
313
(1,009)
(3,797)
(133)
2,209
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(142)
970
6,855
7,825
$
146 | 2019 Scotiabank Annual Report
Notes to the
2019 Consolidated
Financial Statements
Table of Contents
Page Note
Page Note
148
148
149
166
166
167
168
174
175
176
184
185
189
197
197
200
201
201
203
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Reporting entity
Basis of preparation
Significant accounting policies
Transition to IFRS 15
Future accounting developments
Cash and deposits with financial institutions
Fair value of financial instruments
Trading assets
Financial instruments designated at fair value
through profit or loss
Derivative financial instruments
Offsetting financial assets and financial
liabilities
Investment securities
Loans, impaired loans and allowance for
credit losses
Derecognition of financial assets
Structured entities
Property and equipment
Investments in associates
Goodwill and other intangible assets
Other assets
203
204
204
204
205
208
208
211
213
218
221
223
224
224
225
225
227
234
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
Deposits
Subordinated debentures
Other liabilities
Provisions
Common shares, preferred shares and other
equity instruments
Capital management
Share-based payments
Corporate income taxes
Employee benefits
Operating segments
Related party transactions
Principal subsidiaries and non-controlling
interests in subsidiaries
Interest income and expense
Trading revenues
Earnings per share
Guarantees, commitments and pledged
assets
Financial instruments – risk management
Acquisitions and divestitures
2019 Scotiabank Annual Report | 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, 2019 have been approved by the Board of Directors for issue on
November 26, 2019.
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:
• Financial assets and liabilities measured at fair value through profit or loss
• Financial assets and liabilities designated at fair value through profit or loss
• Derivative financial instruments
• Available-for-sale investment securities (applicable prior to November 1, 2017)
• Equity instruments designated at fair value through other comprehensive income (effective November 1, 2017)
• 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 | 2019 Scotiabank Annual Report
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Significant estimates, assumptions and judgments have been made in the following areas and are discussed as noted in the consolidated financial
statements:
Allowance for credit losses
Fair value of financial instruments
Corporate income taxes
Employee benefits
Goodwill and intangible assets
Fair value of all identifiable assets and liabilities as a result of business combinations
Impairment of investment securities
Impairment of non-financial assets
Structured entities
De facto control of other entities
Derecognition of financial assets and liabilities
Provisions
3
Significant Accounting Policies
Note 3
Note 13(d)
Note 3
Note 7
Note 3
Note 27
Note 3
Note 28
Note 3
Note 18
Note 3
Note 37
Note 3
Note 12
Note 3
Note 16
Note 3
Note 15
Note 3
Note 31
Note 3
Note 14
Note 3
Note 23
The significant accounting policies used in the preparation of these consolidated financial statements, including any additional accounting
requirements of OSFI, as set out below, have been applied consistently to all periods presented in these consolidated financial statements, with
the exception of the adoption of IFRS 15, effective November 1, 2018 (refer to Note 4), and IFRS 9, effective November 1, 2017.
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:
• power over the investee;
• exposure, or rights, to variable returns from involvement with the equity 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:
• by virtue of an agreement, over more than half of the voting rights;
• 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).
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.
2019 Scotiabank Annual Report | 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 meeting the definition of 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:
• Amortized cost;
•
•
•
• 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 | 2019 Scotiabank Annual Report
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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:
• Amortized cost;
•
•
• 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:
• 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.
• Held to collect and for sale: Both collecting contractual cash flows and sales are integral to achieving the objectives of the business model.
• 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:
• 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;
• How compensation is determined for the Bank’s business lines’ management that manages the assets;
• 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.
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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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:
•
•
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 and dividends received 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);
•
• Amortized cost; or
• 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
• 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.
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.
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:
• Amortized cost financial assets;
• Debt securities classified as at FVOCI;
• Off-balance sheet loan commitments; and
•
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:
•
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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•
•
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:
• 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. 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.
154 | 2019 Scotiabank Annual Report
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;
•
• 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;
• 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:
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significant financial difficulty of the borrower;
•
• default or delinquency in interest or principal payments;
•
• measurable decrease in the estimated future cash flows from the loan or the underlying assets that back the loan.
high probability of the borrower entering a phase of bankruptcy or a financial reorganization;
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.
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
2019 Scotiabank Annual Report | 155
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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:
•
•
•
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:
• 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 Other 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:
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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:
•
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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.
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Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the
resultant present value with the loan’s current carrying amount. This results in interest income being recognized using the original effective interest
rate.
Collective impairment allowance
For loans that have not been individually assessed as being impaired, the Bank pools them into groups to assess them on a collective basis.
Collective allowances are calculated for impaired loans and performing loans. Allowances related to performing loans estimate probable incurred
losses that are inherent in the portfolio but have not yet been specifically identified as impaired.
Internal risk rating parameters are used in the calculation of the collective impairment allowance. For non-retail loan portfolios, internal risk rating
parameters form the basis for calculating the quantitative portion of the collective allowance for performing loans:
• Probability of Default rates (PD) which are based upon the internal risk rating for each borrower;
•
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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:
• historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product);
• 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
• 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
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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 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:
• their economic characteristics and risks are not closely related to those of the host contract;
• a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and
• the combined contract is not held for trading or designated at fair value through profit or loss.
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Consolidated Financial Statements
Where an embedded derivative is separable from the host contract but the fair value, as at the acquisition or reporting date, cannot be reliably
measured separately, the entire combined contract is measured at fair value. All embedded derivatives are presented on a combined basis with
the host contracts although they are separated for measurement purposes when conditions requiring separation are met. Subsequent changes in
fair value of embedded derivatives are recognized in non-interest income in the Consolidated Statement of Income.
All derivatives, including embedded derivatives that must be separately accounted for, are recorded at fair value in the Consolidated Statement of
Financial Position. The determination of the fair value of derivatives includes consideration of credit risk, estimated funding costs and ongoing
direct costs over the life of the instruments. Inception gains or losses on derivatives are only recognized where the valuation is dependent only on
observable market data, otherwise, they are deferred and amortized over the life of the related contract, or until the valuation inputs become
observable.
The gains and losses resulting from changes in fair values of trading derivatives are included in non-interest income – trading revenues in the
Consolidated Statement of Income.
Changes in the fair value of non-trading derivatives that do not qualify for hedge accounting are recorded in the Consolidated Statement of
Income in non-interest income – other. Where derivative instruments are used to manage the volatility of share-based payment expense, these
derivatives are carried at fair value with changes in the fair value in relation to units hedged included in non-interest expenses – salaries and
employee benefits in the Consolidated Statement of Income.
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, subordinated debentures 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.
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Investment property
Investment property is property held either for rental income or for capital appreciation or for both. The Bank holds certain investment properties
which are presented in property and equipment on the Consolidated Statement of Financial Position.
Investment property is carried at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated using the
straight-line method over the estimated useful life of 40 years. Depreciation methods, useful lives and residual values are reassessed at each
financial year-end and adjusted as appropriate.
Assets held-for-sale
Non-current non-financial assets (and disposal groups) are classified as held-for-sale if their carrying amount will be recovered principally through
a sale transaction rather than through continuing use. These assets meet the criteria for classification as held-for-sale if they are available for
immediate sale in their present condition and their sale is considered highly probable to occur within one year.
Non-current non-financial assets classified as held-for-sale are measured at the lower of their carrying amount and fair value (less costs to sell) and
are presented within other assets in the Consolidated Statement of Financial Position. Any subsequent write-down to fair value less costs to sell is
recognized in the Consolidated Statement of Income, in non-interest income. Any subsequent increase in the fair value less costs to sell, to the
extent this does not exceed the cumulative write-down, is also recognized in non-interest income, together with any realized gains or losses on
disposal.
Non-financial assets acquired in exchange for loans as part of an orderly realization are recorded as assets held-for-sale or assets held-for-use. If
the acquired asset does not meet the requirement to be considered held-for-sale, the asset is considered held-for-use, measured initially at cost
which equals the carrying value of the loan and accounted for in the same manner as a similar asset acquired in the normal course of business.
Business combinations and goodwill
The Bank follows the acquisition method of accounting for the acquisition of subsidiaries. The Bank considers the date on which control is
obtained and it legally transfers the consideration for the acquired assets and assumed liabilities of the subsidiary to be the date of acquisition.
The cost of an acquisition is measured at the fair value of the consideration paid. The fair value of the consideration transferred by the Bank in a
business combination is calculated as the sum of the acquisition date fair value of the assets transferred by the Bank, the liabilities incurred by the
Bank to former owners of the acquiree, and the equity interests, including any options, issued by the Bank. The Bank recognizes the acquisition
date fair values of any previously held investment in the subsidiary and contingent consideration as part of the consideration transferred in
exchange for the acquisition. A gain or loss on any previously held investments of an acquiree is recognized in non-interest income – other in the
Consolidated Statement of Income.
In general, all identifiable assets acquired (including intangible assets) and liabilities assumed (including any contingent liabilities) are measured at
the acquisition date fair value. The Bank records identifiable intangible assets irrespective of whether the assets have been recognized by the
acquiree before the business combination. Non-controlling interests, if any, are recognized at their proportionate share of the fair value of
identifiable assets and liabilities, unless otherwise indicated. Where the Bank has an obligation to purchase a non-controlling interest for cash or
another financial asset, 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:
• 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.
Indemnification assets are measured on the same basis as the item to which the indemnification relates.
•
• Contingent consideration classified as a liability is measured at fair value, with any change recognized in the Consolidated Statement
of Income.
• 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.
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Consolidated Financial Statements
Intangible assets
Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business combination or generated
internally. The Bank’s intangible assets are mainly comprised of computer software, customer relationships, contract intangibles, core deposit
intangibles and fund management contracts.
The cost of a separately acquired intangible asset includes its purchase price and directly attributable costs of preparing the asset for its intended
use. Intangibles acquired as part of a business combination are initially recognized at fair value.
In respect of internally generated intangible assets, cost includes all directly attributable costs necessary to create, produce, and prepare the asset
to be capable of operating in the manner intended by management.
After initial recognition, an intangible asset is carried at its cost less any accumulated amortization and accumulated impairment losses.
Intangible assets that have finite useful lives are initially measured at cost and are amortized on a straight-line basis over their useful lives as
follows: computer software – 5 to 10 years; and other intangible assets – 5 to 20 years. Amortization expense is included in the Consolidated
Statement of Income under operating expenses – depreciation and amortization. As intangible assets are considered to be non-financial assets,
the impairment model for non-financial assets is applied. Intangible assets with indefinite useful lives are not amortized but are tested for
impairment annually and when circumstances indicate that the carrying value may be impaired.
Impairment of non-financial assets
The carrying amount of the Bank’s non-financial assets, other than goodwill and indefinite life intangible assets and deferred tax assets which are
separately addressed, is reviewed at each reporting date to determine whether there is any indication of impairment. For the purpose of
impairment testing, non-financial assets that cannot be tested individually are grouped together into the smallest group of assets that generate
cash inflows from continuing use that are largely independent from the cash inflows of other assets or groups of assets.
If any indication of impairment exists then the asset’s recoverable amount is estimated. The recoverable amount of an asset or CGU is the greater
of its value in use and its fair value less costs of disposal. The Bank’s corporate assets do not generate separate cash inflows. If there is an
indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.
An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses of continuing
operations are recognized in the Consolidated Statement of Income in those expense categories consistent with the nature of the impaired asset.
Impairment losses recognized in prior periods are reassessed at each reporting date for any indication that the loss had decreased or no longer
exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss
is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of
depreciation or amortization, if no impairment loss had been recognized. Such reversal is recognized in the Consolidated Statement of Income.
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
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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 lease-back 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 lease-back transaction results in a finance lease, any gain on sale is deferred and recognized in net
income over the remaining term of the lease.
Leasehold improvements
Leasehold improvements are investments made to customize buildings and offices occupied under operating lease contracts to make them
suitable for their intended purpose. The present value of estimated reinstatement costs to bring a leased property into its original condition at the
end of the lease, if required, is capitalized as part of the total leasehold improvements costs. At the same time, a corresponding liability is
recognized to reflect the obligation incurred. Reinstatement costs are recognized in net income through depreciation of the capitalized leasehold
improvements over their estimated useful life.
Provisions
A provision, including for restructuring, is recognized if, as a result of a past event, the Bank has a present legal or constructive obligation that can
be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
The amount recognized as a provision is the Bank’s best estimate of the consideration required to settle the present obligation, taking into
account the risks and uncertainties surrounding the obligation. If the effect of the time value of money is considered material, provisions are
determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money
and, where appropriate, the risks specific to the liability. The increase in the provision due to the passage of time is recorded as interest expense –
other in the Consolidated Statement of Income.
Insurance contracts
Gross premiums for life insurance contracts are recognized as income when due. Gross premiums for non-life insurance business, primarily
property and casualty, are recognized as income over the term of the insurance contracts. Unearned premiums represent the portion of premiums
written in the current year that relate to the period of risk after the reporting date. Insurance claims recoveries are accounted as income in the
same period as the related claims.
Gross insurance claims for life insurance contracts reflect the cost of all claims arising during the year. Gross insurance claims for property and
casualty insurance contracts include paid claims and movements in outstanding claim liabilities. Insurance premiums ceded to reinsurers are
accounted as an expense in the same period as the premiums for the direct insurance contracts to which they relate.
Guarantees
A guarantee is a contract that contingently requires the Bank to make specified payments to reimburse the holder for a loss it incurs because a
specified debtor failed to make payment when due in accordance with the original or modified terms of a debt instrument. Guarantees include
standby letters of credit, letters of guarantee, indemnifications, credit enhancements and other similar contracts. Guarantees that qualify as a
derivative are accounted for in accordance with the policy for derivative instruments. For guarantees that do not qualify as a derivative, a liability is
recorded for the fair value of the obligation assumed at inception. The fair value of the obligation at inception is generally based on the discounted
cash flow of the premium to be received for the guarantee, resulting in a corresponding asset. Subsequent to initial recognition, such guarantees
are measured at the higher of the initial amount, less amortization to recognize any fee income earned over the period, and the best estimate of
the amount required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability is reported in the
Consolidated Statement of Income.
Employee benefits
The Bank provides pension and other benefit plans for eligible employees in Canada and internationally. Pension benefits are offered in the form of
defined benefit pension plans (generally based on an employee’s length of service and 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.
2019 Scotiabank Annual Report | 163
Consolidated Financial Statements
The current service cost, net interest expense (income), past service cost (credit), 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 Other Comprehensive Income (OCI) in the period in which they occur. Amounts recorded in OCI are not recycled to the Consolidated
Statement of Income.
Other long-term employee benefits
Other long-term employee benefits are accounted for similarly to defined benefit pension plans and other post-retirement benefit plans described
above, except that remeasurements are recognized in the Consolidated Statement of Income in the period in which they arise.
Defined contribution plans
The cost of such plans are equal to contributions payable by the Bank to employees’ accounts for service rendered during the period and
expensed.
Short-term employee benefits
Short-term employee benefits are expensed as the related service is provided and a liability is measured on an undiscounted basis net of
payments made.
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 deferred and amortized in interest income over the term of the loan where the yield the Bank retains is less than that of
the comparable lenders in the syndicate.
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 in non-interest income.
Fee and commission revenues
Revenue is recognized once the Bank’s customer has obtained control of the service. The transfer of control occurs when the Bank’s customer has
the ability to direct the use of and obtain the benefits of the banking services and the contractual performance obligation to the customer has
been satisfied. The Bank records revenue gross of expenses where it is the principal in performing a service to the customer and net of expenses
where the Bank it is an agent for these services. The assessment of principal or agent requires judgement on the basis of whether the Bank
controls the services before they are transferred to the customer. From time to time, the Bank may receive variable consideration such as
performance fees. These fees are only recognized when it is highly probable that the Bank will not need to reverse a significant amount of revenue
once the uncertainty relating to the actual consideration received is resolved. Judgement is required to estimate these fees.
Card revenues include interchange fees, annual fees and other card related fees. Interchange fees are recognized in connection with the
customer’s purchase of goods and services and are calculated as a percentage of the transaction amount as established by the payment network.
Interchange fees are recognized on the transaction date. The Bank presents interchange fees net of network association costs incurred and reward
costs for associated cards. Annual fees are recognized in income over 12 months. Other card fees are transaction-based and are recognized on the
transaction date.
The Bank operates various loyalty points programs, which allow customers to accumulate points when they use the Bank’s products and services.
The points to be redeemed require management judgement to estimate the liability. The liability is reduced by the cost of points redeemed and
subject to remeasurement to reflect the expected cost of redemption. Where the customer has the option to redeem points for statement credits,
the cost of the loyalty program is presented net of card fees. Where points can only be redeemed for goods or services, a portion of the
interchange revenue is allocated to the loyalty rewards recognized when rewards are redeemed. The associated cost of these points is recorded in
non-interest expense.
Banking services fees consist of fees earned on personal, business and government deposit activities. Personal deposit-related fees consist of
account maintenance and various transaction-based services. Business and government deposit-related fees consist of commercial deposit and
treasury management services and other cash management services. These fees are recognized on the transaction date or over time as services
are provided to the customer.
164 | 2019 Scotiabank Annual Report
Credit fees include fees earned for providing letters of credit and guarantee, loan commitments, bankers’ acceptances, and for arranging loan
syndications. These fees are recognized on the transaction date or over time as services are provided based on contractual agreements with the
customer.
Mutual funds fees include management and administration fees which are earned in the Bank’s wealth management business. These fees are
calculated as a percentage of the fund’s net asset value and recognized as the service is provided. From time to time, the Bank may also recognize
performance fees from some funds. These fees are only recognized to the extent that it is highly probable that a significant reversal of revenue will
not occur.
Brokerage fees relate to fees earned for providing full-service and discount brokerage services to clients. These fees are contractually agreed and
can be asset-based or linked to individual transactions. Such fees are recognized as the service is provided to clients or on the trade date.
Investment management and trust fees include administration, trust services and other investment services provided to clients. These fees are
contractually agreed upon and can be linked to portfolio values or individual transactions. Such fees are recognized as the service is provided to
clients to the extent that it is highly probable that a significant reversal of revenue will not occur.
Underwriting and other advisory fees relate to fees earned for services provided to clients in relation to the placement of debt and equities. Such
fees also include services to clients for mergers, acquisitions, financial restructurings and other corporate finance activities. These fees are
recognized when the service has been performed and/or contractual milestones are completed. Performance and completion fees are variable
consideration and generally contingent on the successful completion of a transaction.
Other fees and commissions include commissions earned on the sale of third party insurance products to the Bank’s customers. Such fees and
commissions are recognized when the performance obligation is completed.
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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 when the Bank’s right to receive payment is established, which is on the ex-dividend date for
listed equity securities.
Share-based payments
Share-based payments awarded to employees are recognized as compensation expense in the Consolidated Statement of Income over the
vesting period based on the number of awards expected to vest including the impact of expected forfeitures. For awards that are delivered in
tranches, each tranche is considered a separate award and accounted for separately.
Stock appreciation rights and other awards that must be settled for cash are classified as liabilities. Liability-classified awards are re-measured to
fair value at each reporting date while they remain outstanding, with any changes in fair value recognized in compensation expense in the period.
The liability is expensed over the vesting period which incorporates the re-measurement of the fair value and a revised forfeiture rate that
anticipates units expected to vest.
Employee stock options with tandem stock appreciation rights give the employee the right to exercise for shares or settle in cash. These options
are classified as liabilities and are re-measured to fair value at each reporting date while they remain outstanding. If an option is exercised, thereby
cancelling the tandem stock appreciation right, both the exercise price proceeds together with the accrued liability and associated taxes are
credited to equity – common shares in the Consolidated Statement of Financial Position.
Plain vanilla options and other awards that must be settled for shares are classified as equity awards. Equity-classified awards are expensed based
on the grant date fair value with a corresponding increase to equity – other reserves in the Consolidated Statement of Financial Position. If an
option is exercised, both the exercise price proceeds together with the amount recorded in other reserves is credited to equity – common shares in
the Consolidated Statement of Financial Position.
For tandem stock appreciation rights, stock appreciation rights and plain vanilla options, the Bank estimates fair value using an option pricing
model. The option pricing model requires inputs such as the exercise price of the option, the current share price, the risk free interest rate,
expected dividends, expected volatility (calculated using an equal weighting of implied and historical volatility) and specific employee exercise
behaviour patterns based on statistical data. For other awards, fair value is the quoted market price of the Bank’s common shares at the reporting
date.
Where derivatives are used to economically hedge share-based payment expense, related mark-to-market gains and losses are included in
non-interest expenses – salaries and employee benefits in the Consolidated Statement of Income.
A voluntary renouncement of a tandem stock appreciation right where an employee retains the corresponding option for shares with no change in
the overall fair value of the award, results in a reclassification of the accrued liability and associated tax to equity – other reserves in the
Consolidated Statement of Financial Position. This reclassification is measured at the fair value of the renounced awards as of the renouncement
date. Subsequent to the voluntary renouncement, these awards are accounted for as plain vanilla options, based on the fair value as of the
renouncement date.
Customer loyalty programs
The following accounting policy was applicable prior to November 1, 2018.
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.
2019 Scotiabank Annual Report | 165
Consolidated Financial Statements
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 15
On November 1, 2018, the Bank adopted IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), which specifies how and when revenue is
recognized, but does not impact income recognition related to financial instruments in scope of IFRS 9. The new standard replaces the previous
standard IAS 18 Revenue and provides a single, principles-based five-step model to be applied to all contracts with customers and to determine
whether the performance obligation is to provide the service itself (i.e., act as a principal) or to arrange another party to provide the service (i.e., act
as an agent).
The Bank adopted IFRS 15 using the modified retrospective approach and accordingly, comparative periods have not been restated. The Bank
recorded a cumulative-effect adjustment to decrease opening retained earnings on November 1, 2018 of $58 million (net of tax). This adjustment
primarily relates to certain costs that are no longer eligible for deferral under the new standard and the remeasurement of certain liabilities at
fulfilment cost. For the year ended October 31, 2019, the impact of IFRS 15 was a decrease in non-interest income and non-interest expenses of
approximately $209 million, primarily representing certain loyalty rewards previously recorded in non-interest expenses and now being recorded
as a reduction to non-interest income.
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, 2019
Leases
In January 2016, the IASB issued IFRS 16 Leases (IFRS 16), which replaces IAS 17, Leases (IAS 17), requiring 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 generally result in all operating leases being
recorded on the Bank’s balance sheet as a right-of-use (ROU) asset with a corresponding lease liability. The Bank will also recognize amortization
166 | 2019 Scotiabank Annual Report
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expense on the ROU asset in non-interest expenses and interest expense on the lease liability in interest expenses, in the statement of income.
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.
The Bank will apply IFRS 16 on a modified retrospective basis by adjusting the consolidated balance sheet as at November 1, 2019, the date of
initial application, with no restatement of comparative periods. The Bank will elect certain transition elections that include:
• Measure the ROU asset at the date of initial application as equal to lease liability with certain adjustments.
• Not apply IFRS 16 to operating leases with a remaining lease term of less than 12 months (short-term leases) or low value assets.
• Not apply IFRS 16 to leases of intangible assets.
The adoption of IFRS 16 as at November 1, 2019 is expected to result in an increase to total assets of approximately $3.7 billion, substantially
representing real estate leases and an increase in lease liabilities of approximately $3.7 billion. The Bank estimates that the adoption of IFRS 16 will
also decrease its CET1 capital ratio by approximately 10 bps.
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 impact on the Bank’s consolidated financial statements is not material.
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
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 amendments
will apply prospectively to new transactions.
Interest Rate Benchmark Reform
The IASB issued amendments to IFRS 9, IAS 39 and IFRS 7 on September 26, 2019, to amend certain requirements for hedge accounting in order
to support the provision of useful information by entities during the period of uncertainty arising from the phase out of interest rate benchmarks
(e.g. interbank offered rates – IBORs). The amendments aim to provide relief for financial instruments qualifying for hedge accounting which are
affected during the period of uncertainty leading up to contractual rate replacement. The amendments would no longer apply once uncertainties
arising from IBOR reform are no longer present. The amendments require providing specific disclosures for the affected hedging relationships. The
amendments are effective for the Bank from November 1, 2020. Early application is permitted. The Bank is currently assessing the impact and
extent of disclosure requirements.
Effective November 1, 2021
Insurance Contracts
On May 18, 2017, the IASB issued IFRS 17 Insurance Contracts, which provides a comprehensive principle-based framework for the measurement
and presentation of all insurance contracts. The new standard will replace IFRS 4 Insurance Contracts and requires insurance contracts to be
measured using current fulfillment cash flows and for revenue to be recognized as the service is provided over the coverage period. The standard
is required to be adopted retrospectively, if this is impractical, the modified retrospective or fair value method may be used.
The IASB issued an exposure draft on June 26, 2019 proposing some amendments to IFRS 17, including a proposal to defer the effective date, by
one year, to annual periods on or after January 1, 2022. The Bank continues to monitor developments related to the standard and industry
discussions on the application of the standard.
The project to implement IFRS 17 is a multi-year project consisting of technology upgrades and policy and process changes. The 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 Operation. The Bank has completed a preliminary gap analysis of the differences between IFRS 4 and IFRS 17, an initial
contract scoping assessment and project plan. The Bank has determined that it will require new technology to manage the insurance business and
prepare additional disclosures, for the separate insurance legal entity financial statements, under the new standard. During 2020 the Bank will
continue to evaluate the impact to existing IT systems and processes and formulate the accounting policies under IFRS 17 in order to perform an
initial quantification of the impact to the new standard.
6
Cash and Deposits with Financial Institutions
As at October 31 ($ millions)
Cash and non-interest-bearing deposits with financial institutions
Interest-bearing deposits with financial institutions
Total
(1) Net of impairment allowances of $3 (2018 – $3).
2019
2018
$10,904
35,816
$ 8,997
53,272
$46,720(1)
$62,269(1)
The Bank is required to maintain balances with central banks, other regulatory authorities and certain counterparties and these amounted to
$9,401 million (2018 – $8,886 million).
2019 Scotiabank Annual Report | 167
Consolidated Financial Statements
7
Fair Value of Financial Instruments
Determination of fair value
The calculation of fair value is based on market conditions at a specific point in time and therefore may not be reflective of future fair values. The
Bank has controls and processes in place to ensure that the valuation of financial instruments is appropriately determined.
The best evidence of fair value for a financial instrument is the quoted price in an active market. 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 173.
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 (Level 2).
168 | 2019 Scotiabank Annual Report
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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 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:
• 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).
• 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).
• 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).
• 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).
2019 Scotiabank Annual Report | 169
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
2019
Total
fair
value
$
46,720
127,488
–
131,178
38,119
60,514
22,000
600,155
13,896
15,142
735,270
12,235
13,901
30,404
40,222
124,083
7,553
38,338
$
Total
carrying
value
46,720
127,488
–
131,178
38,119
60,514
21,845
592,483
13,896
15,142
733,390
12,235
13,901
30,404
40,222
124,083
7,252
37,713
2018
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
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.
170 | 2019 Scotiabank Annual Report
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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
2019
2018
Instruments carried at fair value on a recurring
basis:
Assets:
Precious metals(1)
Trading assets
Loans
Canadian federal government and government
guaranteed debt
Canadian provincial and municipal debt
US treasury and other US agencies’ debt
Other foreign governments’ debt
Corporate and other debt
Income funds
Equity securities
Other(2)
$
–
–
9,345
–
8,604
6,058
–
73
65,215
995
$
3,709
$
13,829
1,828
7,615
–
3,224
10,523
–
161
–
Financial assets designated at fair value through
profit or loss
$
–
$
–
$ 90,290
$ 40,889
Investment securities(3)
Canadian federal government and government
guaranteed debt
Canadian provincial and municipal debt
US treasury and other US agencies’ debt
Other foreign governments’ debt
Corporate and other debt
Other mortgage-backed securities
Equity securities
Derivative financial instruments
Interest rate contracts
Foreign exchange and gold contracts
Equity contracts
Credit contracts
Commodity contracts
Liabilities:
Deposits(4)
Financial liabilities designated at fair value
through profit or loss
Obligations related to securities sold short
Derivative financial instruments
Interest rate contracts
Foreign exchange and gold contracts
Equity contracts
Credit contracts
Commodity contracts
Instruments not carried at fair value(5):
Assets:
Investment securities – amortized cost
Loans(6)
Liabilities:
Deposits(6)(7)
Subordinated debentures
Other liabilities
8,464
197
16,117
10,973
230
–
1,204
3,917
3,044
3,772
9,608
1,784
–
284
$ 37,185
$ 22,409
–
8
599
–
6
613
$ 16,621
17,309
1,394
406
1,759
$ 37,489
–
$
144
–
26,669
12,235
3,735
–
–
530
–
–
530
13,867
20,350
2,557
38
2,803
$ 39,615
$
$
$
$
$
$
–
–
–
–
–
–
17
–
1
–
18
$
3,709
$
13,829
11,173
7,615
8,604
9,282
10,540
73
65,377
995
–
–
13,003
–
7,164
4,610
3
29
39,513
454
$
3,175
$ 16
$ 3,191
14,334
–
14,334
–
10,159
–
1,833
8,984
–
158
–
–
–
–
–
18
–
–
–
13,003
10,159
7,164
6,443
9,005
29
39,671
454
$ 131,197
$ 64,776
$ 38,643
$ 34
$103,453
–
$
–
$
12
$
–
$
–
$
12
–
–
–
30
21
–
869
920
15
–
2
–
–
17
–
–
–
71
–
6
–
–
77
$
$
$
$
12,381
3,241
19,889
20,611
2,035
–
2,357
6,373
366
18,472
10,457
732
–
838
2,518
3,986
669
9,485
1,818
906
263
–
–
–
48
13
–
709
8,891
4,352
19,141
19,990
2,563
906
1,810
60,514
$ 37,238
$ 19,645
$770
$ 57,653
16,636
17,317
1,995
406
1,765
38,119
144
12,235
30,404
13,938
20,350
3,093
38
2,803
$
$
$
–
5
797
–
92
894
$
8,927
22,197
1,556
349
3,515
$112
–
8
–
–
$ 9,039
22,202
2,361
349
3,607
$ 36,544
$120
$ 37,558
–
$
(401)
$
–
24,563
8,188
7,524
–
–
1,057
–
34
11,012
20,537
1,884
70
3,294
–
–
–
74
–
5
–
–
$
(401)
8,188
32,087
11,086
20,537
2,946
70
3,328
$
40,222
$
1,091
$ 36,797
$ 79
$ 37,967
$
$
$
$
$
$
5,495
–
$ 16,377
–
$
128
351,832
$
22,000
351,832
$
7,392
–
$ 12,815
313,959
$109
–
$ 20,316
313,959
–
–
–
318,091
7,553
23,141
–
–
–
318,091
7,553
23,141
–
–
–
293,898
5,627
20,383
–
–
–
293,898
5,627
20,383
The fair value of precious metals is determined based on quoted market prices and forward spot prices, where applicable.
Excludes debt investment securities measured at amortized cost of $21,845 (October 31, 2018 – $20,743).
These amounts represent embedded derivatives bifurcated from structured notes.
(1)
(2) Represents energy related assets.
(3)
(4)
(5) Represents the fair value of financial assets and liabilities where the carrying amount is not a reasonable approximation of fair value.
(6) During fiscal year 2019, fair value of these fixed rate loans were impacted by multiple interest rate benchmark changes that reduced observability causing loans to be classified as level 3.
(7)
Excludes embedded derivatives bifurcated from structured notes.
2019 Scotiabank Annual Report | 171
Consolidated Financial Statements
Level 3 instrument fair value changes
Financial instruments categorized as Level 3 as at October 31, 2019, in the fair value hierarchy comprise certain precious metals, certain foreign
government bonds, structured corporate bonds, investments in private equity securities, and complex derivatives.
The following table summarizes the changes in Level 3 instruments carried at fair value for the year ended October 31, 2019.
All positive balances represent assets and negative balances represent liabilities. Consequently, positive amounts indicate purchases of assets or
settlements of liabilities and negative amounts indicate sales of assets or issuances of liabilities.
As at October 31, 2019
($ millions)
Precious metals
Trading assets
Corporate and other debt
Equity securities
Investment securities
Other foreign governments’ debt
Corporate and other debt
Equity securities
Derivative financial instruments –
assets
Interest rate contracts
Equity contracts
Derivative financial instruments –
liabilities
Interest rate contracts
Equity contracts
Fair value
November 1
2018
Gains/(losses)
recorded in
income
Gains/(losses)
recorded in
OCI
Purchases/
Issuances
Sales/
Settlements
Transfers
into/out of
Level 3
Fair value
October 31
2019
$
16
16
18
–
18
48
13
709
770
112
8
(74)
(5)
41
$
–
–
2
–
2
–
–
43
43
(80)
(4)
20
3
(61)
$
–
–
–
–
–
(2)
12
28
38
–
–
–
–
–
$
25
25
1
1
2
–
–
277
277
5
–
(38)
(2)
(35)
$
(41)
(41)
(8)
–
(8)
(9)
–
(165)
(174)
(22)
–
21
–
(1)
$
–
–
4
–
4
(7)
(4)
(23)
(34)
–
(2)
–
(2)
(4)
$
–
–
17
1
18
30
21
869
920
15
2
(71)
(6)
(60)
Total
$ 845
$ (16)
$ 38
$ 269
$ (224)
$ (34)
$ 878
Change in
unrealized
gains/(losses)
recorded in
income for
instruments
still held(1)
$ –
–
2
–
2
n/a
n/a
36
36
(25)
–(2)
5(3)
–(2)
(20)
$ 18
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.
(1)
(2) 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.
(3) 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, 2018.
($ millions)
Precious metals
Trading assets
Investment securities
Derivative financial instruments
As at October 31, 2018
Fair value
November 1
2017
Gains/(losses)
recorded in
income(1)
Gains/(losses)
recorded
in OCI
Purchases/
Issuances
Sales/
Settlements
Transfers
into/out of
Level 3
Fair value
October 31
2018
$
–
39
589
(238)
$
–
(10)
16
(43)
$
–
–
13
–
$
5
–
279(2)
–
$
(8)
(18)
(107)
–
$ 19
7
(20)
322
$ 16
18
770
41
(1)
(2)
Gains or losses for items in Level 3 may be offset with losses or gains on related hedges in Level 1 or Level 2.
Includes amount related to BBVA Chile acquisition of $45 million.
172 | 2019 Scotiabank Annual Report
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.
There were no significant transfers into and out of Level 3 for the year ended October 31, 2019.
The following significant transfers were made among Levels 2 and 3 for the year ended October 31, 2018:
Derivative liabilities of $316 million were transferred out of Level 3 into Level 2 for the year ended October 31, 2018. All transfers were as a result of
new information being obtained regarding the observability of inputs used in the valuation.
Level 3 sensitivity analysis
The table below sets out information about significant unobservable inputs used in measuring financial instruments categorized as Level 3 in the
fair value hierarchy.
Valuation technique
Significant unobservable inputs
unobservable inputs(1)
Range of estimates for
Changes in fair value
from reasonably
possible alternatives
($ millions)
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Investment securities
Private equity securities(2)
Market comparable
per financial statements
General Partner valuations
Capitalization rate
93%
7%
Derivative financial instruments
Interest rate contracts
Option pricing
model
Interest rate
9% - 190%
volatility
Equity contracts
Option pricing
Equity volatility
2% - 131%
model
Single stock correlation
(70)% - 97%
(25)/25
(1)/1
(7)/7
(1)
(2)
The range of estimates represents the actual lowest and highest level inputs used to fair value financial instruments within each financial statement category.
The valuation of private equity securities utilizes net asset values as reported by fund managers. Net asset values are not considered observable as the Bank cannot redeem these instruments at such values. The range for net asset values per unit
or price per share has not been disclosed for these instruments since the valuations are not model-based.
The Bank applies judgment in determining unobservable inputs used to calculate the fair value of Level 3 instruments.
The following section discusses the significant unobservable inputs for Level 3 instruments.
General Partner (GP) Valuations per Statements
Asset values provided by GPs represent the fair value of investments in private equity securities.
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.
2019 Scotiabank Annual Report | 173
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, 2019 ($ 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
$ 1,338
810
455
3,237
–
734
$ 6,574
$ 1,246
606
378
4,344
$ 6,574
$ 1,097
944
306
2,047
–
1,527
$ 5,921
$ 2,429
1,085
458
1,949
$ 5,921
$
4,990
1,257
6,013
2,655
–
6,309
$ 21,224
$
8,042
8,802
1,494
2,886
$ 21,224
$ 1,363
687
1,627
1,084
–
1,398
$ 6,159
$ 2,595
2,462
96
1,006
$ 6,159
$ 2,385
3,917
203
259
–
560
$ 7,324
$ 6,602
465
60
197
$ 7,324
$
–
–
–
–
65,450
12
$ 65,462
$ 18,990
27,952
507
18,013
$
11,173
7,615
8,604
9,282
65,450
10,540
$ 112,664
$
39,904
41,372
2,993
28,395
$ 65,462
$ 112,664
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
(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
2019
2018
$
8,112
3,414
1,339
434
530
$
9,080
3,066
1,077
280
831
$ 13,829
$ 14,334
(1)
(2)
(3)
(4)
Geographic segmentation of trading loans is based upon the location of the ultimate risk of the underlying asset.
Loans are denominated in U.S. dollars.
Includes trading loans that serve as a hedge to loan-based credit total return swaps of $5,559 (2018 – $6,071), while the remaining relates to short-term precious metals trading and lending activities.
These loans are primarily related to short-term precious metals trading and lending activities.
174 | 2019 Scotiabank Annual Report
9
Financial Instruments Designated at Fair Value Through Profit or Loss
In accordance with its risk management strategy, the Bank has elected to designate certain investments and senior note liabilities at fair value
through profit or loss to reduce an accounting mismatch between fair value changes in these instruments and fair value changes in related
derivatives, and where a hybrid financial liability contains one or more embedded derivatives that are not closely related to the host contract.
Changes in fair value of financial liabilities arising from the Bank’s own credit risk are recognized in other comprehensive income, without
subsequent reclassification to net income.
The cumulative fair value adjustment due to own credit risk is determined at a point in time by comparing the present value of expected future
cash flows over the term of these liabilities discounted at the Bank’s effective funding rate, and the present value of expected future cash flows
discounted under a benchmark rate.
The following table presents the fair value of financial assets and liabilities designated at fair value through profit or loss and their changes in fair
value.
October 31 ($ millions)
Assets
Investment securities(2)
Liabilities
Senior note liabilities(3)
Fair value
As at
Change in fair value
Cumulative change in FV(1)
For the year ended
2019
2018
2019
2018
2019
2018
$
–
$
12
$
–
$
–
$
–
$
–
$ 12,235
$ 8,188
$ (1,230)
$ 869
$ (452)
$ 778
The cumulative change in fair value is measured from the instruments’ date of initial recognition.
(1)
(2) Changes in fair value are recorded in non-interest income – other.
(3) Changes in fair value attributable to changes in the Bank’s own credit risk are recorded in other comprehensive income. Other changes in fair value are recorded in non-interest income – 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
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($ millions)
As at October 31, 2019
As at October 31, 2018
(1)
The cumulative change in fair value is measured from the instruments’ date of initial recognition.
Contractual
maturity
amount(1)
Carrying
Value
$ 11,783
8,966
$
$ 12,235
8,188
$
Senior Note Liabilities
Difference
between
carrying value
and
contractual
maturity
amount
$ (452)
$ 778
Changes in fair value
for the period
attributable to
changes in own
credit risk recorded
in other
comprehensive
income
$
11
$ (30)
Cumulative changes
in fair value
attributable to
changes in own
credit risk(1)
$ (55)
$ (66)
2019 Scotiabank Annual Report | 175
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
2019
2018
Trading
Hedging
Total
Trading
Hedging
Total
$
130,310
11,287
3,699
145,296
8,184
413,261
27,356
29,617
478,418
$
$
–
–
–
–
–
34,718
–
–
34,718
130,310
11,287
3,699
145,296
8,184
447,979
27,356
29,617
513,136
$
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
529,893
3,154,442
–
–
3,684,335
$ 4,308,049
–
249,610
–
–
249,610
$ 284,328
529,893
3,404,052
–
–
3,933,945
$ 4,592,377
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
$
$
$
8,368
686
417
9,471
431,547
383,708
44,890
44,936
905,081
25,724
–
–
–
25,724
940,276
40,095
–
69,416
109,511
91,869
18,678
61,257
171,804
$
$
–
–
–
–
8,368
686
417
9,471
37,582
68,793
–
–
106,375
469,129
452,501
44,890
44,936
1,011,456
–
–
–
–
–
$ 106,375
25,724
–
–
–
25,724
$ 1,046,651
$
–
–
–
–
726
–
–
726
$
40,095
–
69,416
109,511
92,595
18,678
61,257
172,530
$
$
$
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
–
8,053
411
8,464
$
289,779
$ 5,538,104
–
–
–
–
$
726
$ 391,429
–
8,053
411
8,464
$
290,505
$ 5,929,533
–
10,964
326
11,290
$
252,991
$ 5,082,978
–
–
–
–
$
756
$ 251,237
–
10,964
326
11,290
$
253,747
$ 5,334,215
(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.
176 | 2019 Scotiabank Annual Report
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(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, 2019 ($ 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, 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
Within one year
One to five years
Over five years
Total
$
$
81,584
414,294
1,182,231
19,633
8,408
1,706,150
$
48,087
117,694
1,781,124
16,813
19,148
1,982,866
6,574
465,712
104,706
39,105
40,628
656,725
1,762
25,605
206,695
6,218
4,493
244,773
639
6,089
888,676
2,197
5,760
903,361
32
3,536
141,100
253
232
145,153
$
130,310
538,077
3,852,031
38,643
33,316
4,592,377
8,368
494,853
452,501
45,576
45,353
1,046,651
75,388
13,562
93,950
182,900
$ 2,545,775
54,045
11,418
36,603
102,066
$ 2,329,705
3,257
1,751
531
5,539
$1,054,053
132,690
26,731
131,084
290,505
$ 5,929,533
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
Total
$ 2,406,758
$ 1,954,040
$ 973,417
$ 5,334,215
(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, 2019. To control credit risk
associated with derivatives, the Bank uses similar credit risk management activities and procedures to the approaches used in the lending business
in assessing and adjudicating exposure. The Bank utilizes a risk metric, potential future exposure (PFE) for derivatives, to measure utilization
against established credit limits to the counterparty. PFE measures the effect that changes in the market have on derivative exposures throughout
2019 Scotiabank Annual Report | 177
Consolidated Financial Statements
the lifetime of the counterparties’ trades. Additionally, PFE considers risk mitigants such as netting and collateralization. PFE limits and utilization
for derivatives counterparties are authorized and monitored by the Bank’s risk management unit.
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 83 of the 2019 Annual Report).
Derivative 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, and 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. CRA takes into account master netting or collateral arrangements that have
been made1. CRA does not reflect actual or expected losses.
The credit equivalent amount (CEA) is the exposure at default (EAD) prescribed in the Capital Adequacy Requirements (CAR) Guidelines of the
Office of the Superintendent of Financial Institutions (OSFI). The risk-weighted asset 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
2019
Credit risk
amount
(CRA)(1)
–
49
5,345
42
–
5,436
–
3,594
2,188
755
–
6,537
698
167
Credit
equivalent
amount
(CEA)(1)
$
39
249
6,369
43
26
6,726
39
4,990
7,015
284
35
12,363
7,882
295
$
CET1
Risk
Weighted
Assets(2)
–
127
2,145
19
10
2,301
–
1,797
2,678
157
8
4,640
1,166
98
2018
Credit risk
amount
(CRA)(1)
$
–
36
96
36
–
168
–
2,571
4,297
712
–
7,580
455
239
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
$
CET1
Risk
Weighted
Assets(2)
–
82
1,125
63
1
1,271
–
2,006
2,604
76
5
4,691
1,505
119
Notional amount
$
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
$
$
130,310
538,077
3,852,031
38,643
33,316
4,592,377
8,368
494,853
452,501
45,576
45,353
1,046,651
132,690
26,731
131,084
290,505
–
$ 5,929,533
693
1,558
–
$ 13,531
4,775
12,952
–
$ 32,041
513
1,777
6,537
$ 15,255
100,576
253,747
–
$ 5,334,215
1,182
1,876
–
$ 9,624
8,052
13,399
–
$ 32,242
830
2,454
4,616
$ 13,032
264,278
3,968,133
$ 4,232,411
$
–
–
–
5,811
1,084
6,895
$
128
22
150
$
236,956
3,523,060
$ 3,760,016
$
–
–
–
7,300
781
8,081
$
153
16
169
$
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)
Total derivatives
Amount settled through central
counterparties(3)
Exchange-traded
Over-the-counter
The amounts presented are net of collateral and master netting agreements at the product level. The total amounts relating to netting and collateral were $24,588 (2018 – $27,934) for CRA, and $62,521 (2018 – $63,831) for CEA.
In accordance with OSFI’s requirements, effective 2019, Credit Valuation Adjustment (CVA) to CET1 RWA for derivatives have been fully phased-in. In the prior year, the CVA was 0.80.
(1)
(2)
(3) Amounts are included under total derivatives above. Amounts include exposures settled directly through central counterparties and exposures settled through clearing members of central counterparties.
1 Regulatory haircuts prescribed by the OSFI CAR Guidelines are applied to the collateral balances of the CRA measure.
178 | 2019 Scotiabank Annual Report
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(d) Fair value
The following table summarizes the fair value of derivatives segregated by type and segregated between trading and those derivatives designated
in hedging relationships.
As at October 31 ($ millions)
2019
2019
2018
Average fair value
Year-end fair value
Year-end fair value(1)
Favourable
Unfavourable
Favourable
Unfavourable
Favourable
Unfavourable
Trading
Interest rate contracts
Forward rate agreements
Swaps
Options
Foreign exchange and gold contracts
Forwards
Swaps
Options
Other derivative contracts
Equity
Credit
Commodity and other contracts
Trading derivatives’ market valuation
Hedging
Interest rate contracts
Swaps
Foreign exchange and gold contracts
Forwards
Swaps
Other derivative contracts
Equity
Hedging derivatives’ market valuation
Total derivative financial instruments as per
Statement of Financial Position
Less: impact of master netting and collateral(2)
Net derivative financial instruments(2)
$
116
10,919
61
11,096
$
4
10,158
82
10,244
$
108
14,719
47
14,874
$
9
11,617
173
11,799
$
57
8,158
104
8,319
$
–
8,956
128
9,084
6,171
10,012
854
17,037
1,644
348
2,434
4,426
$ 32,559
5,500
10,601
837
16,938
3,051
53
3,014
6,118
$ 33,300
5,790
8,932
761
15,483
1,961
406
1,765
4,132
$ 34,489
5,592
10,781
714
17,087
3,093
38
2,803
5,934
$ 34,820
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
$
1,762
$
2,139
$
720
$
2,002
214
1,620
1,834
34
3,630
$
$
$
269
2,994
3,263
–
5,402
$
$
$
331
2,570
2,901
–
3,621
$
$
$
310
3,304
3,614
51
5,667
$
$
$
$ 38,119
$ 40,222
$ 37,558
$ 37,967
24,588
$ 13,531
24,588
$ 15,634
27,934
9,624
$
27,934
$ 10,033
(1)
The average fair value of trading derivatives’ market valuation for the year ended October 31, 2018 was: favourable $30,577 and unfavourable $31,020. 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. 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.
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, including purchase considerations for business acquisitions
and sale proceeds for business divestitures that are 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.
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 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.
2019 Scotiabank Annual Report | 179
Consolidated Financial Statements
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:
• 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;
• 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 table summarizes the notional amounts of derivatives and carrying amounts of cash and deposit liabilities designated as hedging
instruments.
As at October 31 ($ millions)
Within one year One to five years Over five years
Total Within one year One to five years Over five years
Total
2019
Notional amounts(1)
2018
Notional amounts(1)
Remaining term to maturity
Remaining term to maturity
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
$
26,742
689
14,952
2,630
35,982
13,129
70
216
24,453
6,080
$ 111,077 $ 13,546 $ 151,365
755
66
–
$ 16,006
–
$
78,236 $ 11,270 $ 105,512
689
689
–
71,785
26,325
62,381
–
–
510
16,646
4,000
103,383
32,955
12,015
–
–
–
110,378
13,129
70
726
12,257
5,539
20,983
8,999
92
298
21,908
19,193
63,697
–
–
458
9,713
2,489
8,465
–
–
–
43,878
27,221
93,145
8,999
92
756
–
–
–
–
24,453
6,080
17,434
6,077
–
–
–
–
17,434
6,077
Total
$ 124,943
$ 272,144 $ 46,207 $ 443,294
$ 87,685
$ 184,181 $ 31,937 $ 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.
180 | 2019 Scotiabank Annual Report
The following table shows the average rate or price of significant hedging instruments.
As at October 31
Fixed interest rate
FX rate
Price
Fixed interest rate
FX rate
Price
2019
2018
Average rate or price(1)
Average rate or price(1)
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
MXN-CAD
PEN-CAD
THB-CAD
2.11%
n/a
2.22%
3.02%
1.29
1.33
2.22%
n/a
1.85%
1.28
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1.31
1.48
1.71
1.32
n/a
1.33
15.58
2.56
23.56
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
$ 76.35
n/a
n/a
n/a
n/a
2.04%
n/a
2.22%
3.02%
1.29
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
n/a
1.30
1.48
1.74
1.30
n/a
1.29
15.77
2.59
24.57
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
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 to 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.
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
Carrying amount of the
hedging instruments(1)
Assets
Liabilities
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
$ 760
$ (1,296)
$
582
$ (562)
$
(879)
(491)
1,872
892
491
(1,865)
80
5
2
3
(80)
(5)
(2)
(3)
20
13
–
7
–
–
–
–
$
25,576
57,711
(54,727)
$ 682
294
(324)
$ 112
(112)
(252)
(5,500)
(48)
27
247
(267)
4
–
–
–
For the year ended
October 31, 2019 ($ millions)
Fair value hedges
Interest rate risk – swaps
Investment securities
Loans
Deposit liabilities
Subordinated
debentures
Foreign currency/interest
rate risk – swaps
8
(23)
Investment securities
Deposit liabilities
Total
$ 768
$ (1,319)
$ 587
$ (567)
$ 20
$
23,040
$ 608
$ (225)
(1)
(2)
(3)
(4)
Comprises unrealized gains/losses 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, 2019.
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 adjustment, except for investment securities which are carried at fair
value.
This represents the accumulated fair value hedge adjustment and is a component of the carrying amount of the hedged item.
2019 Scotiabank Annual Report | 181
Consolidated Financial Statements
Carrying amount of
the hedging
instruments(1)
Assets
Liabilities
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
$ 448
$
(1,454)
$
(475)
$
469
$
(6)
360
260
(1,037)
(58)
–
5
(4)
(1)
(367)
(265)
1,043
58
(1)
(5)
4
–
(7) $
(5)
6
–
16,286
23,763
(58,026)
(3,923)
$ (149)
(246)
1,065
37
$
63
(149)
186
40
(1)
–
–
(1)
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
7
(31)
Investment securities
Deposit liabilities
Subordinated debentures
Total
$ 455
$ (1,485)
$ (475)
$
468
$ (7)
$ (21,552) $ 716
$ 140
(1)
(2)
(3)
(4)
Comprises unrealized gains/losses 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.
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 adjustment, except for investment securities which are carried at fair
value.
This represents the accumulated fair value hedge adjustment and is a component of the carrying amount of the hedged item.
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, 2019 ($ 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
$
897
380
$
(1,208)
(524)
$
525
756
$
518
759
$
1,337
38
70
34
2,756
176
n/a
176
(2,082)
(57)
–
–
(3,871)
(212)
(6,080)
(6,292)
(1,050)
49
–
83
363
(388)
(2)
(390)
(1,055)
44
–
83
349
(388)
(2)
(390)
Total
$ 2,932
$ (10,163)
$
(27)
$
(41)
$
(1)
(2)
(3)
(4)
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, 2019.
For cash flow hedges, hypothetical derivatives having critical terms which match those of the underlying hedged item are used to assess hedge ineffectiveness.
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.
(7)
7
(1)
3
–
–
2
–
–
–
2
182 | 2019 Scotiabank Annual Report
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
n/a
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)
(2)
(3)
(4)
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.
For cash flow hedges, hypothetical derivatives having critical terms which match those of the underlying hedged item are used to assess hedge ineffectiveness.
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.
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, 2019 ($ millions)
Cash flow hedges
Interest rate risk
Foreign currency/interest
rate risk
Foreign currency risk
Equity risk
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)
Balance in cash flow hedge
reserve/unrealized foreign
currency translation account
as at October 31, 2019
Active
hedges
Discountinued
hedges
AOCI as at
October 31,
2019
AOCI as at
November 1,
2018
Net gains/
(losses)
recognized in
OCI
$ (154)
$ 532
$ 85
$
–
$
–
$ 463
$ (148)
$ 611
(450)
445
(7)
(166)
749
(1,003)
83
361
(91)
672
(55)
611
Net investment hedges
Foreign currency risk
Total
(3,251)
$(3,417)
(390)
$
(29)
158
$ 769
–
(4)
–
(4)
–
–
(11)
–
(11)
208
99
21
791
260
91
21
224
–
(3,483)
(3,408)
$ (4)
$ (11)
$(2,692)
$(3,184)
(52)
8
–
567
(75)
$ 492
(1)
Amounts reclassified from the cash flow hedge and net investment hedge reserves to net income are recorded in non-interest income-other.
2019 Scotiabank Annual Report | 183
Consolidated Financial Statements
For the year ended
October 31, 2018 ($ millions)
Cash flow hedges
Interest rate risk
Foreign currency/interest rate risk
Foreign currency risk
Equity risk
Net investment hedges
Foreign currency risk
Total
AOCI as at
November 1,
2017
Net gains/
(losses)
recognized in
OCI
$
104
(151)
321
46
320
$
(341)
(524)
(224)
(92)
(1,181)
(2,970)
(281)
Amount
reclassified
to net
income as
the hedged
item affects
net income(1)
$
83
225
464
39
811
–
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
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
$
–
–
(22)
–
(22)
–
$
$
–
–
(94)
–
(94)
(154) $
(450)
445
(7)
(166)
(262)
(352)
433
(7)
(188)
–
(3,251)
(3,199)
$ 108
(98)
12
–
22
(52)
$ (2,650) $ (1,462)
$ 811
$ (22)
$ (94) $ (3,417) $ (3,387)
$ (30)
(1)
Amounts reclassified from the cash flow hedge reserve to net income are recorded in non-interest income-other.
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, 2019 ($ 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)
$
38,448
$
(329)
$
38,119
$ (21,395)
$
(3,474)
$ 13,250
Types of financial assets
Derivative financial instruments
Securities purchased under resale agreements
and securities borrowed
139,571
(8,393)
131,178
(8,709)
(120,199)
2,270
Total
$ 178,019
$ (8,722)
$ 169,297
$ (30,104)
$ (123,673)
$ 15,520
As at October 31, 2019 ($ millions)
Types of financial liabilities
Derivative financial instruments
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
$
40,551
$
(329)
$
40,222
$ (21,395)
$
(8,986)
$
9,841
repurchase agreements and securities lent
132,476
(8,393)
124,083
(8,709)
(107,732)
7,642
Total
$ 173,027
$ (8,722)
$ 164,305
$ (30,104)
$ (116,718)
$ 17,483
(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.
184 | 2019 Scotiabank Annual Report
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, 2018 ($ millions)
Types of financial assets
Derivative financial instruments
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)
$
37,887
$
(329)
$
37,558
$ (24,568)
$
(4,085)
$
8,905
and securities borrowed
116,375
(12,357)
104,018
(6,849)
(91,347)
5,822
Total
$ 154,262
$ (12,686)
$ 141,576
$ (31,417)
$ (95,432)
$ 14,727
As at October 31, 2018 ($ millions)
Types of financial liabilities
Derivative financial instruments
Obligations related to securities sold
under repurchase agreements and
securities lent
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
$
(329)
$
37,967
$ (24,568)
$
(5,051)
$
8,348
113,614
(12,357)
101,257
(6,849)
(88,154)
6,254
Total
$ 151,910
$ (12,686)
$ 139,224
$ (31,417)
$ (93,205)
$ 14,602
(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.
12 Investment Securities
The following table presents the carrying amounts of the Bank’s investment securities per measurement category.
As at October 31 ($ millions)
Debt investment securities measured at FVOCI
Debt investment securities measured at amortized cost
Equity investment securities designated at FVOCI
Equity investment securities measured at FVTPL
Total investment securities
2019
2018
$ 58,157
21,845
1,561
796
$ 55,843
20,743
1,305
505
$ 82,359
$ 78,396
(a) Debt investment securities measured at fair value through other comprehensive income (FVOCI)
As at October 31 ($ millions)
Cost
2019
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
Cost
2018
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
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
$ 12,176
$ 216
$ 11
$ 12,381
$
8,903
$
38
$
50
$
8,891
3,203
19,527
20,543
2,012
42
384
87
24
4
22
19
1
3,241
4,403
19,889
20,611
2,035
19,298
20,022
3,503
3
6
49
6
54
163
81
40
4,352
19,141
19,990
3,469
Total
$ 57,461
$ 753
$ 57
$ 58,157
$ 56,129
$ 102
$ 388
$ 55,843
2019 Scotiabank Annual Report | 185
Consolidated Financial Statements
(b) Debt investment securities measured at amortized cost
As at October 31 ($ millions)
Canadian federal and provincial government issued or guaranteed debt
U.S. treasury and other U.S. agency debt
Other foreign government debt
Corporate debt
Total
(1)
Balances are net of impairment allowances of $0 (2018 – $1).
2019
2018
$
Fair Value
7,575
9,419
1,979
3,027
$
Carrying
value(1)
7,580
9,279
1,970
3,016
$
Fair Value
6,530
4,321
3,086
6,379
$
Carrying
value(1)
6,681
4,462
3,131
6,469
$ 22,000
$ 21,845
$ 20,316
$ 20,743
(c) Equity investment securities designated at fair value through other comprehensive income (FVOCI)
The Bank has designated certain equity securities at FVOCI shown in the following table as these investments are held for strategic purposes.
As at October 31, 2019 ($ millions)
Preferred equity instruments
Common shares
Total
As at October 31, 2018 ($ millions)
Preferred equity instruments
Common shares
Total
Cost
$
146
1,262
$ 1,408
$
Cost
334
937
$ 1,271
Gross
unrealized
gains
$
–
223
$ 223
Gross
unrealized
gains
$
–
126
$ 126
Gross
unrealized
losses
$ 53
17
$ 70
Gross
unrealized
losses
$ 54
38
$ 92
Fair value
$
93
1,468
$ 1,561
Fair value
$
280
1,025
$ 1,305
Dividend income on equity securities designated at FVOCI of $56 million for the year ended October 31, 2019 (2018 – $42 million) has been
recognized in interest income.
During the year ended October 31, 2019, the Bank has disposed of certain equity securities designated at FVOCI with a fair value of $314 million
(2018 – $290 million). These dispositions has resulted in a cumulative loss of $(36) million (2018 – $(41) million) that remains in OCI.
186 | 2019 Scotiabank Annual Report
–
–
–
–
–
–
–
–
–
–
–
93
1,468
1,561
1,561
–
–
–
–
–
$ 12,381
1.9
3,241
2.1
19,889
2.2
20,611
2.2
2,035
2.2
58,157
93
1,468
1,561
59,718
7,580
9,279
1,970
3,016
21,845
(d) 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, 2019 ($ 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
$
7,097
1.8
$ 1,153
1.8
$
1,347
3.3
$
766
1.9
379
1.8
2,885
2.1
6,958
1.3
385
2.2
$
2,018
1.7
$
255
1.4
645
2.0
6,176
1.4
221
1.9
9,315
–
–
2,300
2.2
9,634
2.2
5,444
3.8
1,408
2.2
307
2.3
3,377
2.3
1,830
3.8
–
–
6,667
–
–
–
–
3,348
2.4
203
3.4
21
5.9
4,919
–
–
11,373
25,883
–
–
–
–
C
o
n
s
o
l
i
d
a
t
e
d
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Total FVOCI
9,315
11,373
25,883
6,667
4,919
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
321
395
189
114
1,019
1,407
656
384
1,088
3,535
5,580
2,231
811
1,710
10,332
–
–
–
267
7
490
66
830
–
5
5,990
96
38
6,129
–
796
796
Total investment securities
$ 10,334
$ 14,908
$ 36,215
$ 7,497
$ 11,048
$ 2,357
$ 82,359
Total by currency (in Canadian
equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
$
2,117
1,716
97
6,404
$
1,095
7,271
187
6,355
$ 13,029
19,520
964
2,702
$ 1,482
3,977
305
1,733
$
1,208
9,513
–
327
$ 1,183
675
16
483
$ 20,114
42,672
1,569
18,004
Total investment securities
$ 10,334
$ 14,908
$ 36,215
$ 7,497
$ 11,048
$ 2,357
$ 82,359
(1)
Represents the weighted-average yield of fixed income securities.
2019 Scotiabank Annual Report | 187
Consolidated Financial Statements
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
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
Total investment securities
Total by currency (in Canadian equivalent):
Canadian dollar
U.S. dollar
Mexican peso
Other currencies
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
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
–
–
$
–
–
–
–
–
–
–
–
–
–
–
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
$ 1,102
354
—
470
$ 1,926
$
967
366
15
462
$ 18,650
39,091
2,370
18,285
$ 1,810
$ 78,396
2019(1)
2018(1)
2017
$ n/a
34
317
351
–
$ n/a
–
146
146
–
$ 399
–
n/a
399
19(2)
$ 351
$ 146
$ 380
Total FVOCI
10,455
12,282
28,349
3,017
1,740
692
197
354
637
1,880
868
988
1,193
1,113
4,162
5,121
3,266
966
4,414
13,767
–
–
–
–
–
502
246
748
–
–
11
116
59
186
$ 12,335
$ 16,444
$ 42,116
$ 3,765
$ 1,926
$ 1,810
$ 78,396
–
505
505
$
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
Total investment securities
$ 12,335
$ 16,444
$ 42,116
$ 3,765
(1)
Represents the weighted-average yield of fixed income securities.
(e) 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 instruments measured at amortized cost
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
(1)
(2)
The amounts for years ended October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
In 2017, impairment losses were comprised of $14 from equity securities and $5 from other debt securities.
188 | 2019 Scotiabank Annual Report
13 Loans, Impaired Loans and Allowance for Credit Losses
(a) Loans at amortized cost
As at October 31 ($ millions)
Residential mortgages
Personal loans
Credit cards
Business and government
Total
2019
Allowance
for credit
losses
$
680
2,065
1,255
1,077
Gross
loans
$ 268,169
98,631
17,788
212,972
Net
carrying
amount
$ 267,489
96,566
16,533
211,895
Gross
loans
$ 253,357
96,019
16,485
191,038
2018
Allowance
for credit
losses
$
678
2,109
1,213
1,065
Net
carrying
amount
$ 252,679
93,910
15,272
189,973
$ 597,560
$ 5,077
$ 592,483
$ 556,899
$ 5,065
$ 551,834
(b) Loans and acceptances outstanding by geography(1)
C
o
n
s
o
l
i
d
a
t
e
d
F
i
n
a
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c
i
a
l
S
t
a
t
e
m
e
n
t
s
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
Total loans and acceptances net of allowances for loan losses
2019
2018
$ 226,609
75,478
7,758
69,933
$ 213,083
72,935
7,361
57,918
379,778
351,297
715
43,615
44,330
8,915
3,741
815
18,326
31,797
16,105
5,833
2,737
20,955
45,630
2,863
4,847
2,192
11,804
21,706
2,322
2,800
2,213
4,338
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
11,673
11,578
11,355
5,217
2,073
44,001
62,646
597,560
13,896
611,456
12,174
5,544
2,028
41,529
61,275
556,899
16,329
573,228
(5,083)
(5,073)
$ 606,373
$ 568,155
(1)
(2)
(3)
Geographic segmentation is based on the location of the property for residential mortgages; otherwise, the residence of the borrower.
1.3% of borrowers reside outside Canada.
Loans and acceptances denominated in US dollars were $117,099 (2018 – $107,944), in Chilean pesos $35,721 (2018 – $37,515), Mexican pesos $25,060 (2018 – $21,561), and in other foreign currencies $52,741 (2018 – $49,223).
2019 Scotiabank Annual Report | 189
Consolidated Financial Statements
(c) Loan maturities
As at October 31, 2019
Remaining term to maturity
Rate sensitivity
($ millions)
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
Residential mortgages $ 50,316 $ 184,541 $ 11,141 $ 19,780 $ 2,391 $ 268,169 $ 49,676 $ 216,036 $ 2,457 $ 268,169
Personal loans
98,631
Credit cards
17,788
Business and
55,169
17,788
98,631
17,788
38,934
17,788
42,373
–
36,223
–
17,737
–
1,089
–
4,975
–
762
–
government
101,010
97,492
7,235
727
6,508
212,972
155,627
55,167
2,178
212,972
Total
Allowance for credit
losses
Total loans net of
allowance for
credit losses
$ 169,063 $ 318,256 $ 23,351 $ 21,269 $ 65,621 $ 597,560 $ 247,676 $ 344,160 $ 5,724 $ 597,560
–
–
–
–
(5,077)
(5,077)
–
–
(5,077)
(5,077)
$ 169,063 $ 318,256 $ 23,351 $ 21,269 $ 60,544 $ 592,483 $ 247,676 $ 344,160 $ 647 $ 592,483
As at October 31, 2018
Remaining term to maturity
Rate sensitivity
($ millions)
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
Residential mortgages $ 49,762 $ 180,563 $ 10,326 $ 11,040 $ 1,666 $ 253,357 $ 59,351 $ 191,802 $ 2,204 $ 253,357
96,019
Personal loans
Credit cards
16,485
Business and
53,142
16,485
96,019
16,485
38,079
16,485
35,050
–
41,868
–
17,422
–
4,775
–
1,009
–
693
–
government
85,090
91,595
7,378
773
6,202
191,038
138,510
50,606
1,922
191,038
Total
Allowance for credit
losses
Total loans net of
allowance for
credit losses
$ 152,274 $ 307,208 $ 22,479 $ 12,506 $ 62,432 $ 556,899 $ 239,729 $ 312,035 $ 5,135 $ 556,899
–
–
–
–
(5,065)
(5,065)
–
–
(5,065)
(5,065)
$ 152,274 $ 307,208 $ 22,479 $ 12,506 $ 57,367 $ 551,834 $ 239,729 $ 312,035 $
70 $ 551,834
(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
Gross
impaired
loans(1)
$ 1,830
1,094
–
2,211
2019
Allowance
for credit
losses
$
325
591
–
679
Net
$ 1,505
503
–
1,532
Gross
impaired
loans(1)
$ 1,797
1,069
–
2,264
2018
Allowance
for credit
losses
$
360
644
–
673
Net
$ 1,437
425
–
1,591
$ 5,135
$ 1,595
$ 3,540
$ 5,130
$ 1,677
$ 3,453
$ 1,133
94
485
642
844
505
1,432
$ 5,135
$
375
5
178
332
180
151
374
$ 1,595
$
758
89
307
310
664
354
1,058
$ 3,540
$
999
80
359
581
753
619
1,739
$ 5,130
$
381
25
164
317
158
159
473
$ 1,677
$
618
55
195
264
595
460
1,266
$ 3,453
Interest income recognized on impaired loans during the year ended October 31, 2019 was $51 (2018 – $49).
(1)
(2) Additional interest income of approximately $384 would have been recorded if the above loans had not been classified as impaired (2018 – $370).
190 | 2019 Scotiabank Annual Report
(e) Allowance for credit losses
(i) Key inputs and assumptions
The Bank’s allowance for credit losses is measured using a three-stage approach based on the extent of credit deterioration since origination. The
calculation of the Bank’s allowance for credit losses is an output of complex models with a number of underlying assumptions regarding the choice
of variable inputs and their interdependencies. Some of the key drivers include the following:
• Changes in risk ratings of the borrower or instrument reflecting changes in their credit quality;
• Changes in the volumes of transactions;
• 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;
• Changes in macroeconomic scenarios and the probability weights assigned to each scenario; and
• Borrower migration between the three stages.
The Bank determines its allowance for credit losses using three probability-weighted forward-looking scenarios (base case, optimistic and
pessimistic). The Bank considers both internal and external sources of information and data to achieve unbiased projections and forecasts in
determining the allowance for credit losses. The Bank prepares the scenarios using forecasts generated by Scotiabank Economics (SE). The
forecasts are generated using models whose outputs are modified by SE as necessary to formulate a ‘base case’ view of the most probable future
direction of economic developments. 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
incorporate judgment both in the determination of the scenarios’ forecasts and the probability weights that are assigned to them.
(ii) Key macroeconomic variables
The following table shows certain key macroeconomic variables used to estimate the allowance for credit losses. 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.
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. Qualitative adjustments or overlays may be made for certain portfolios or geographies as temporary adjustments in
circumstances where, in the Bank’s view, the inputs, assumptions, and/or modelling techniques do not capture all relevant risk factors, including
the emergence of economic or political events.
C
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s
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l
i
d
a
t
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d
F
i
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a
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c
i
a
l
S
t
a
t
e
m
e
n
t
s
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
2019
Canada
Real GDP growth, y/y % change
Unemployment rate, average %
Bank of Canada overnight rate target, average %
HPI – Housing 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
1.9
5.8
1.4
2.3
1.29
1.8
3.9
0.5
3.9
3.3
6.4
3.4
6.5
3.4
9.4
3.9
1.8
5.8
2.3
4.3
1.22
1.8
4.1
1.8
4.4
3.0
5.8
3.6
6.7
3.4
8.3
4.1
2.4
5.6
1.6
2.7
1.28
2.3
3.7
1.0
3.7
4.5
6.0
4.3
6.0
4.5
8.7
5.1
WTI oil price, average USD/bbl
Copper price, average USD/lb
Global GDP, PPP-weighted, y/y % change
54
2.74
3.03
59
3.14
3.51
56
2.78
3.91
2.5
4.6
3.5
5.2
1.19
2.5
3.6
2.7
3.6
4.9
3.1
4.7
5.1
4.5
6.5
5.3
73
3.49
4.63
1.3
6.1
1.2
2.0
1.30
1.4
4.0
0.0
4.0
2.2
6.9
2.5
7.0
2.3
10.0
2.8
53
2.70
2.14
1.2
7.0
1.2
3.4
1.26
1.2
4.6
0.9
5.2
1.2
8.4
2.6
8.3
2.4
10.1
2.8
48
2.85
2.41
2019 Scotiabank Annual Report | 191
Consolidated Financial Statements
2018
Canada
Real GDP growth, y/y % change
Unemployment rate, average %
Bank of Canada overnight rate target, average %
HPI – Housing 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
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
2.1
5.1
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
2.9
3.7
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
2.3
5.4
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
3.7
4.1
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
2.0
4.9
1.25
1.9
4.3
1.3
4.0
2.7
6.7
3.1
6.8
3.0
9.3
2.8
1.2
6.8
2.1
3.3
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
2.41
WTI oil price, average USD/bbl
Copper price, average USD/lb
Global GDP, PPP-weighted, y/y % change
71
2.91
3.58
67
3.11
3.46
75
2.98
4.47
84
3.44
4.53
67
2.84
2.67
(iii) Sensitivity
The weighting of these multiple scenarios increased our reported allowance for credit losses for financial assets in Stage 1 and Stage 2, relative to
our base case scenario, to $3,551 million (2018 – $3,475 million) from $3,534 million (2018 – $3,467 million). If we were to only use our pessimistic
scenario for the measurement of allowance for credit losses for such assets, our allowance for credit losses on performing financial instruments
would be $164 million higher than the reported allowance for credit losses as at October 31, 2019 (2018 – $143 million). Actual results will differ
from the pessimistic scenario as it does not consider the migration of exposures or incorporate changes that would occur in the portfolio due to
risk mitigation actions and other factors.
Under our current probability-weighted scenarios, if all of our performing financial assets were in Stage 1, reflecting a 12 month expected loss
period, the allowance for credit losses would be $450 million (2018 – $453 million) lower than the reported allowance for credit losses on
performing financial assets.
(iv) Allowance for credit losses
($ millions)
Residential mortgages
Personal loans
Credit cards
Business and government
Presented as:
Balance as at
November 1,
2018
$
678
2,109
1,213
1,147
Provision for
credit losses
$
104
1,489
1,161
274
Net write-offs
$
(74)
(1,534)
(1,105)
(229)
$ 5,147
$ 3,028
$ (2,942)
Other, including
foreign
currency
adjustment
$ (28)
1
(14)
(53)
$ (94)
Allowance for credit losses on loans
Allowance for credit losses on acceptances
Allowance for credit losses on off-balance sheet exposures
$ 5,065
8
74
Balance as at
October 31,
2019
$
680
2,065
1,255
1,139
$ 5,139
$ 5,077
6
56
192 | 2019 Scotiabank Annual Report
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
Presented as:
Balance as at
November 1,
2017
$
717
1,879
1,163
1,261
Provision for
credit losses
$
104
1,411
898
166
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
Allowance for credit losses on loans
Allowance for credit losses on acceptances
Allowance for credit losses on off-balance sheet exposures
$ 4,920
16
84
Allowance for credit losses on loans
As at October 31, 2019 ($ millions)
Residential mortgages
Personal loans
Credit cards
Business and government
Total(1)
$ 5,065
8
74
Stage 1
Stage 2
Stage 3
$
126
609
424
153
$
229
865
831
245
$
325
591
–
679
$
Total
680
2,065
1,255
1,077
$ 1,312
$ 2,170
$ 1,595
$ 5,077
(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 $68.
As at October 31, 2018 ($ millions)
Residential mortgages
Personal loans
Credit cards
Business and government
Total(1)
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 $89.
2019 Scotiabank Annual Report | 193
Consolidated Financial Statements
The following table presents the changes to the allowance for credit losses on loans.
($ millions)
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
As at October 31, 2019
As at October 31, 2018
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(6)
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(6)
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(6)
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
$ 112
$ 206
$ 360
$ 678
$ 103
$ 214
$ 400
$ 717
(88)
58
(1)
–
61
(15)
–
–
–
(1)
27
–
(9)
–
(52)
108
(44)
–
–
(7)
117
–
–
–
(9)
(93)
44
(100)
26
(20)
56
58
(10)
–
–
–
–
(100)
26
(28)
(131)
88
(2)
–
77
(18)
–
–
–
(5)
5
–
(7)
–
(65)
106
(39)
–
–
(8)
151
–
–
–
(12)
(88)
39
(219)
96
(7)
25
88
(9)
–
–
–
–
(219)
96
(20)
$ 126
$ 229
$ 325
$ 680
$ 112
$ 206
$ 360
$ 678
$ 578
$ 887
$ 644
$ 2,109
$ 477
$ 802
$ 600
$ 1,879
(597)
460
(81)
–
458
(198)
(4)
–
–
(7)
561
–
(100)
–
(450)
281
(321)
–
–
7
1,246
–
–
–
(8)
(83)
325
(1,818)
284
1
1,210
460
(181)
–
–
–
–
(1,818)
284
1
(670)
615
(82)
–
453
(189)
(4)
–
–
(22)
629
–
(96)
–
(442)
284
(286)
–
–
(4)
1,015
–
–
–
(11)
(95)
290
(1,441)
275
11
974
615
(178)
–
–
–
–
(1,441)
275
(15)
$ 609
$ 865
$ 591
$ 2,065
$ 578
$ 887
$ 644
$ 2,109
$ 401
$ 812
$
–
$ 1,213
$ 364
$ 799
$
–
$ 1,163
(356)
312
(59)
–
263
(131)
–
–
–
(6)
543
–
(64)
–
(263)
131
(293)
–
–
(35)
785
–
–
–
–
–
293
(1,324)
219
27
972
312
(123)
–
–
–
–
(1,324)
219
(14)
(276)
329
(91)
–
259
(162)
(1)
–
–
(21)
448
–
(105)
–
(259)
162
(239)
–
–
6
593
–
–
–
–
–
240
(1,104)
250
21
765
329
(196)
–
–
–
–
(1,104)
250
6
$ 424
$ 831
$
–
$ 1,255
$ 401
$ 812
$
–
$ 1,213
$ 173
$ 291
$ 675
$ 1,139
$ 178
$ 307
$ 760
$ 1,245
(47)
178
(141)
(9)
55
(15)
–
–
–
(3)
50
–
(27)
(5)
(55)
18
(7)
–
–
(2)
305
–
(27)
–
–
(3)
7
(274)
45
(49)
308
178
(195)
(14)
–
–
–
(274)
45
(54)
(93)
322
(108)
3
63
(187)
(2)
–
–
(3)
6
–
(164)
14
(58)
218
(30)
–
–
(2)
264
–
(68)
–
(5)
(31)
32
(276)
68
(69)
177
322
(340)
17
–
–
–
(276)
68
(74)
exposures(2)
$ 191
$ 263
$ 679
$ 1,133
$ 173
$ 291
$ 675
$ 1,139
Less: Allowance for credits losses on off-balance sheet
exposures(2)(3)
Balance at end of year(2)
38
18
–
56
41
31
2
74
$ 153
$ 245
$ 679
$ 1,077
$ 132
$ 260
$ 673
$ 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.
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Interest income on impaired loans for residential mortgages, personal loans, credit cards, and business and government loans totaled $384 (2018 – $370).
(2)
(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) During the year ended October 31, 2019, 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 $205.
(6) Divestitures are included in the foreign exchange and other movements.
(f) Carrying value of exposures by risk rating
Residential mortgages
As at October 31, 2019
As at October 31, 2018
Category of PD grades ($ millions)
Stage 1
Stage 2
Stage 3(1)
Total
Stage 1
Stage 2
Stage 3(1)
Total
Very low
Low
Medium
High
Very high
Loans not graded(2)
Default
Total
Allowance for credit losses
$ 151,824
61,317
14,476
1,404
11
26,497
–
255,529
126
$
405
489
1,059
3,309
1,728
3,820
–
10,810
229
$
–
–
–
–
–
–
1,830
1,830
325
$ 152,229
61,806
15,535
4,713
1,739
30,317
1,830
268,169
680
$ 146,461
58,154
11,689
1,615
25
23,139
–
241,083
112
$
307
378
972
3,515
1,779
3,526
–
10,477
206
$
–
–
–
–
–
–
1,797
1,797
360
$ 146,768
58,532
12,661
5,130
1,804
26,665
1,797
253,357
678
Carrying value
$ 255,403
$ 10,581
$ 1,505
$ 267,489
$ 240,971
$ 10,271
$ 1,437
$ 252,679
(1)
(2)
Stage 3 includes purchased or originated credit impaired loans.
Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
Personal loans
As at October 31, 2019
As at October 31, 2018
Category of PD grades ($ millions)
Stage 1
Stage 2
Stage 3(1)
Total
Stage 1
Stage 2
Stage 3(1)
Total
Very low
Low
Medium
High
Very high
Loans not graded(2)
Default
Total
Allowance for credit losses
$ 29,988
26,928
8,961
7,472
44
15,973
–
89,366
609
$
92
263
396
3,617
1,604
2,199
–
8,171
865
$
–
–
–
–
–
–
1,094
1,094
591
$ 30,080
27,191
9,357
11,089
1,648
18,172
1,094
98,631
2,065
$ 30,660
26,039
8,315
6,686
58
15,452
–
87,210
578
$
66
151
402
3,647
1,362
2,112
–
7,740
887
$
–
–
–
–
–
–
1,069
1,069
644
$ 30,726
26,190
8,717
10,333
1,420
17,564
1,069
96,019
2,109
Carrying value
$ 88,757
$ 7,306
$
503
$ 96,566
$ 86,632
$ 6,853
$
425
$ 93,910
(1)
(2)
Stage 3 includes purchased or originated credit impaired loans.
Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
Credit cards
Category of PD grades ($ millions)
Very low
Low
Medium
High
Very high
Loans not graded(1)
Default
$
Stage 1
1,509
2,580
3,688
3,139
23
3,217
–
Total
Allowance for credit losses
14,156
424
As at October 31, 2019
As at October 31, 2018
$
$
Stage 2
9
17
34
1,424
735
1,413
–
3,632
831
Stage 3
–
–
–
–
–
–
–
–
–
–
$
$
Total
1,518
2,597
3,722
4,563
758
4,630
–
$
Stage 1
1,418
2,436
3,358
2,929
37
2,906
–
17,788
1,255
13,084
401
$
Stage 2
5
14
71
1,455
697
1,159
–
3,401
812
$ 16,533
$ 12,683
$ 2,589
$
Stage 3
–
–
–
–
–
–
–
–
–
–
$
Total
1,423
2,450
3,429
4,384
734
4,065
–
16,485
1,213
$ 15,272
Carrying value
$ 13,732
$ 2,801
$
(1)
Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
2019 Scotiabank Annual Report | 195
Consolidated Financial Statements
Undrawn loan
commitments –Retail
As at October 31, 2019
As at October 31, 2018
Category of PD grades ($ millions)
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Very low
Low
Medium
High
Very high
Loans not graded(1)
Default
$
77,614
17,787
6,218
2,408
12
11,167
–
$
1
–
80
462
64
2,673
–
Carrying value
$ 115,206
$ 3,280
$ –
–
–
–
–
–
–
$ –
$
77,615
17,787
6,298
2,870
76
13,840
–
$
72,321
16,531
6,029
2,631
26
14,774
–
$
–
2
79
670
367
3,364
–
$ 118,486
$ 112,312
$ 4,482
$ –
–
–
–
–
–
–
$ –
$
Total
72,321
16,533
6,108
3,301
393
18,138
–
$ 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.
Business and government
loans
As at October 31, 2019
As at October 31, 2018
Category of PD grades ($ millions)
Stage 1
Stage 2
Stage 3(1)
Total
Stage 1
Stage 2
Stage 3(1)
Total
Investment grade
Non-Investment grade
Watch list
Loans not graded(2)
Default
$ 105,033
93,117
53
1,962
–
Total
Allowance for credit losses
200,165
153
$
1,025
6,527
2,957
87
–
10,596
245
$
–
–
–
–
2,211
2,211
679
$ 106,058
99,644
3,010
2,049
2,211
212,972
1,077
$
87,047
83,730
130
1,050
–
171,957
132
$
3,770
9,706
2,689
652
–
16,817
260
$
–
–
–
–
2,264
2,264
673
$
90,817
93,436
2,819
1,702
2,264
191,038
1,065
Carrying value
$ 200,012
$ 10,351
$ 1,532
$ 211,895
$ 171,825
$ 16,557
$ 1,591
$ 189,973
(1)
(2)
Stage 3 includes purchased or originated credit impaired loans.
Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
Undrawn loan
commitments –Business
and government
As at October 31, 2019
As at October 31, 2018
Category of PD grades ($ millions)
Stage 1
Stage 2
Stage 3(1)
Total
Stage 1
Stage 2
Stage 3(1)
Total
Investment grade
Non-investment grade
Watch list
Loans not graded(2)
Default
Total
Allowance for credit
losses
$ 176,926
55,238
8
1,808
–
233,980
$
980
4,225
774
207
–
6,186
38
18
$
–
–
–
–
153
153
–
$ 177,906
59,463
782
2,015
153
$ 159,880
56,001
81
2,178
–
$ 1,663
3,445
977
28
–
240,319
218,140
6,113
56
41
31
$ –
–
–
–
4
4
2
$ 161,543
59,446
1,058
2,206
4
224,257
74
Carrying value
$ 233,942
$ 6,168
$ 153
$ 240,263
$ 218,099
$ 6,082
$ 2
$ 224,183
(1)
(2)
Stage 3 includes purchased or originated credit impaired loans.
Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.
(g) Loans past due but not impaired(1)
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
2019
2018
31 – 60
days
$ 1,128
624
278
188
$
61 – 90
days
526
330
179
89
91 days
and
greater(2)
$
–
–
417
–
Total
31 – 60 days
61 – 90 days
$1,654
954
874
277
$ 1,290
609
231
167
$
521
322
154
40
91 days
and
greater(2)
$
–
–
353
–
Total
$ 1,811
931
738
207
Total
$ 2,218
$ 1,124
$ 417
$3,759
$ 2,297
$ 1,037
$ 353
$ 3,687
Loans past due 30 days or less are not presented in this analysis as they are not administratively considered past due.
(1)
(2) All loans that are over 90 days past due are considered impaired with the exception of credit card receivables which are considered impaired when 180 days past due.
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(h) Purchased credit-impaired loans
Certain financial assets including loans are credit-impaired on initial recognition either through acquisition or origination. 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
2019
2018
$ 489
(125)
$ 548
(168)
364
(9)
380
–
$ 355
$ 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 program does not meet the derecognition requirements, where the Bank retains the pre-payment and
interest rate risk associated with the mortgages, which represents substantially all the risks 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
2019(1)
2018(1)
$ 20,885
4,364
$ 20,498
2,679
22,786
21,459
(1)
(2)
The fair value of the transferred assets is $25,453 (2018 – $23,237) and the fair value of the associated liabilities is $25,112 (2018 – $22,468), for a net position of $341 (2018 – $769).
These include cash held in trust and trust permitted investment assets acquired as part of principal reinvestment account that the Bank is required to maintain in order to participate in the programs.
Securitization of personal lines of credit, credit cards and auto loans
The Bank securitizes a portion of its unsecured personal lines of credit, credit card and auto loan receivables through consolidated structured
entities. These receivables continue to be recognized on the Consolidated Statement of Financial Position as personal loans and credit cards loans.
For further details, refer to Note 15.
Securities sold under repurchase agreements and securities lent
The Bank enters into transactions, such as repurchase agreements and securities lending agreements, where the Bank transfers assets under
agreements to repurchase them on a future date and retains all the substantial risks and rewards associated with the assets. The transferred
assets remain on the Consolidated Statement of Financial Position.
The following table provides the carrying amount of the transferred assets and the associated liabilities:
As at October 31 ($ millions)
Carrying value of assets associated with:
Repurchase agreements(2)
Securities lending agreements
Total
Carrying value of associated liabilities(3)
2019(1)
2018(1)
$ 110,879
50,300
$
82,816
49,718
161,179
132,534
$ 124,083
$ 101,257
The fair value of transferred assets is $161,179 (2018 – $132,534) and the fair value of the associated liabilities is $124,083 (2018 – $101,257), for a net position of $37,096 (2018 – $31,277).
(1)
(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.
2019 Scotiabank Annual Report | 197
Consolidated Financial Statements
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, 2018-2 and 2019-1.
Activities of these structured entities are generally limited to holding an interest in a pool of assets or receivables generated by the Bank.
These structured entities are consolidated due to the Bank’s decision-making power and ability to use the power to affect the Bank’s returns.
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, 2019, $26 billion (2018 – $29.1 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, Swiss francs and Euros. As at October 31, 2019, assets pledged in relation to these covered bonds were uninsured residential
mortgages denominated in Canadian dollars of $27.2 billion (2018 – $30.7 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, 2019, $0.5 billion notes (2018 – $1 billion) were outstanding and included in Deposits –
Business and government on the Consolidated Statement of Financial Position. As at October 31, 2019, assets pledged in relation to these notes
were $0.6 billion (2018 – $1.3 billion).
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 senior notes to third-party investors and subordinated notes to third party investors or the Bank. 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. As at October 31, 2019,
US $2.5 billion ($3.2 billion Canadian dollars) (2018 – US $1.2 billion, $1.6 billion Canadian dollars) Class A notes and US $109 million ($143 million
Canadian dollars) (2018 – nil) subordinated Class B and Class C notes were outstanding and included in Deposits – Business and government on
the Consolidated Statement of Financial Position. As at October 31, 2019 assets pledged in relation to these notes were credit card receivables,
denominated in Canadian dollars, of $3.7 billion (2018 – $1.8 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, 2018-2 and 2019-1 (START entities). Each entity is a Bank-sponsored structured entity. START entities issue 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. Recourse of the note holders is limited to the receivables.
The Bank is responsible for servicing the transferred receivables as well as performing administrative functions for START. The subordinated notes
issued by START entities are held by the Bank. As at October 31, 2019, 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 $1.4 billion ($1.8 billion Canadian
dollars) (2018 – US $1.8 billion, $2.4 billion Canadian dollars). As at October 31, 2019, assets pledged in relation to these notes were Canadian auto
loan receivables denominated in Canadian dollars of $2.3 billion (2018 – $3.0 billion).
Other
Assets of other consolidated structured entities are comprised of securities, deposits with banks and other assets to meet the Bank’s
and customer needs.
198 | 2019 Scotiabank Annual Report
(b) Unconsolidated structured entities
The following table provides information about other structured entities in which the Bank has a significant interest but does not control and
therefore does not consolidate. A significant interest is generally considered to exist where the Bank is exposed to 10% or more of the
unconsolidated structured entities’ maximum exposure to loss.
($ millions)
As at October 31, 2019
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles
Total
Total assets (on structured entity’s financial statements)
$ 2,576
$ 3,114
$
833
$ 6,523
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)
3
–
–
3
–
1
1
–
1,124
1,070
2,194
–
–
$ 2,579
$ 2,194
$
As at October 31, 2018
–
10
44
54
779
–
779
54
3
1,134
1,114
2,251
779
1
780
$ 4,827
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
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
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
(1)
Loan balances are presented net of allowance for credit losses.
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
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, 2019, the Bank has
recorded $2.2 billion (2018 – $2 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 $1.2 billion (2018 – $0.8 billion) based on future asset purchases by these conduits.
Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns, which results in the Bank
not consolidating the two Canadian conduits.
Structured finance entities
The Bank has interests in structured entities used to assist corporate clients in accessing cost-efficient financing through their securitization
structures. The Bank may act as an administrator, an investor or a combination of both in these types of structures.
2019 Scotiabank Annual Report | 199
Consolidated Financial Statements
Capital funding vehicles
These entities are designed to pass the Bank’s credit risk to the holders of the securities. Therefore the Bank does not have exposure or rights to
variable returns from these entities.
(c) Other unconsolidated Bank-sponsored entities
The Bank sponsors unconsolidated structured entities including mutual funds, in which it has insignificant or no interest at the reporting date. The
Bank is a sponsor when it is significantly involved in the design and formation at inception of the structured entities, and the Bank’s name is used
by the structured entities to create an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also
considers other factors, such as its continuing involvement and obligations to determine if, in substance, the Bank is a sponsor. The Bank considers
mutual funds and managed companies as sponsored entities.
The following table provides information on revenue from unconsolidated Bank-sponsored entities.
As at October 31 ($ millions)
Revenue
(1)
Includes mutual funds, other funds and trusts.
2019
Scotia
Managed
Companies
Funds(1)
2018
Scotia
Managed
Companies
Total
Total
Funds(1)
$ 2,189
$ 1
$ 2,190
$ 2,118
$ 3
$ 2,121
Substantially all of the revenue earned from the mutual funds and managed companies is presented as non-interest income – mutual funds.
Land &
Building
Equipment
Technology
Assets
Leasehold
Improvements
Total
$ 1,722
214
142
(231)
36
$ 1,883
61
560
(631)
(130)
$ 1,892
96
56
(38)
95
$ 2,101
82
139
(171)
3
$ 2,088
186
141
(33)
(86)
$ 2,296
44
166
(66)
(68)
$ 1,410
97
148
(49)
(21)
$ 1,585
48
60
(85)
7
$ 7,112
593
487
(351)
24
$ 7,865
235
925
(953)
(188)
$ 1,743
$ 2,154
$ 2,372
$ 1,615
$ 7,884
$
$
686
62
(56)
13
705
56
(134)
45
$ 1,450
80
(35)
174
$ 1,669
83
(58)
(63)
$ 1,719
143
(24)
10
$ 1,848
179
(68)
(24)
$
$
876
69
(17)
31
959
84
(75)
9
$ 4,731
354
(132)
228
$ 5,181
402
(335)
(33)
$
672
$ 1,631
$ 1,935
$
977
$ 5,215
$ 1,178
$ 1,071
$
$
432
523
$
$
448
437
$
$
626
638
$ 2,684(1)
$ 2,669(1)
16 Property and Equipment
($ millions)
Cost
Balance as at October 31, 2017
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2018
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2019
Accumulated depreciation
Balance as at October 31, 2017
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2018
Depreciation
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2019
Net book value
Balance as at October 31, 2018
Balance as at October 31, 2019
(1)
Includes $38 (2018 – $36) of investment property.
200 | 2019 Scotiabank Annual Report
17 Investments in Associates
The Bank had significant investments in the following associates:
As at October 31 ($ millions)
Thanachart Bank Public Company Limited(2)
Canadian Tire’s Financial Services business
(CTFS)(3)
Bank of Xi’an Co. Ltd.(4)
Maduro & Curiel’s Bank N.V.(5)
Country of
incorporation
Thailand
Nature of business
Ownership
percentage
Date of financial
statements(1)
Carrying
value
2019
2018
Carrying
value
Banking
49.00%
October 31, 2019
$ 3,554
$ 2,961
Canada
China
Curacao
Financial Services
Banking
Banking
20.00%
17.99%
48.10%
September 30, 2019
September 30, 2019
September 30, 2019
529
815
327
518
772
304
(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) Refer to Note 37 –Acquisitions and Divestitures.
(3) 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.
(4) Based on the quoted price on the Shanghai Stock Exchange, the Bank’s investment in Bank of Xi’an Co. Ltd was $1,021 as at October 31, 2019
(5)
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, 2019 these reserves amounted to $61 (2018 – $62).
Summarized financial information of the Bank’s significant associates are as follows.
C
o
n
s
o
l
i
d
a
t
e
d
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
($ 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.
($ 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
For the twelve months ended(1)
As at October 31, 2019
Revenue
$ 2,050
1,218
1,295
371
Net
income
$ 627
364
496
115
Total assets
Total liabilities
$ 46,475
6,370
49,556
5,677
$ 39,827
5,382
45,225
4,982
For the twelve months ended(1)
As at October 31, 2018
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
Goodwill
The changes in the carrying amounts of goodwill by cash-generating unit (CGU) are as follows:
($ millions)
Balance as at October 31, 2017
Acquisitions
Dispositions
Foreign currency adjustments and other
Balance as at October 31, 2018
Acquisitions
Dispositions
Foreign currency adjustments and other
Balance as at October 31, 2019
Canadian
Banking
$ 3,385
1,710
–
–
5,095
Global
Banking and
Markets
$ 255
–
–
5
260
Caribbean
and
Central
America
$ 1,203
–
–
(5)
Latin
America
$ 2,400
1,164
–
(110)
$
Total
7,243
2,874
–
(110)
3,454
1,198
10,007
–
–
(2)
–
–
–
–
(36)
(146)
250
(453)
11
250
(489)
(137)
$ 5,093
$ 260
$ 3,272
$ 1,006
$
9,631
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
2019 Scotiabank Annual Report | 201
Consolidated Financial Statements
quarters as of the test date, a control premium is added based on a five year weighted average acquisition premium paid for comparable
companies, and costs of disposal are deducted from the fair value of the CGU. The resulting recoverable amount determined is then compared to
its respective carrying amount to identify any impairment. P/E multiples ranging from 10.5 to 12.5 times (2018 – 11 to 13.5 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, 2019 and July 31, 2018 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, 2019.
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, 2017
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2018
Acquisitions
Additions
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2019
Accumulated amortization
Balance as at October 31, 2017
Amortization
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2018
Amortization
Disposals
Foreign currency adjustments and other
Balance as at October 31, 2019
Net book value
As at October 31, 2018
As at October 31, 2019
Finite life
Indefinite life
Computer
software
Other
intangibles
Fund management
contracts(1)
Other
intangibles
$ 3,278
47
673
(8)
(44)
$ 1,563
480
3
–
(30)
$ 2,325
2,090
–
–
–
$
68
98
–
–
–
$
Total
7,234
2,715
676
(8)
(74)
$ 3,946
$ 2,016
$ 4,415
$ 166
$ 10,543
–
705
(113)
(13)
151
23
–
(59)
–
–
–
–
–
–
–
–
151
728
(113)
(72)
$ 4,525
$ 2,131
$ 4,415
$ 166
$ 11,237
$ 1,321
409
(8)
(17)
$ 1,050
85
–
(9)
$ 1,705
$ 1,126
535
(102)
31
116
–
(8)
$ 2,169
$ 1,234
$
$
$
–
–
–
–
–
–
–
–
–
$
$
$
–
–
–
–
–
–
–
–
–
$
2,371
494
(8)
(26)
$
2,831
651
(102)
23
$
3,403
$ 2,241(2)
$ 2,356(2)
$
$
890
897
$ 4,415
$ 4,415
$ 166
$ 166
$
$
7,712
7,834
Fund management contracts are attributable to HollisWealth Inc. (formerly DundeeWealth Inc.), MD Financial Management Inc., and Jarislowsky Fraser Limited.
(1)
(2) Computer software comprises of purchased software of $404 (2018 – $483), internally generated software of $1,363 (2018 – $1,208), and in process software not subject to amortization of $589 (2018 – $550).
Impairment testing of indefinite life intangible assets
Indefinite life intangible assets are not amortized and are assessed for impairment annually or more frequently if events or changes in
circumstances indicate that the asset may be impaired. Impairment is assessed by comparing the carrying value of the indefinite life intangible
asset to its recoverable amount. The recoverable amount of the fund management contracts is based on a value in use approach using the multi-
period excess earnings method. This approach uses cash flow projections from management-approved financial budgets which include key
assumptions related to market appreciation, net sales of funds, and operating margins taking into consideration past experience and market
expectations. The forecast cash flows cover a 5-year period, with a terminal growth rate in the range of 3 to 5% (2018 – 3 to 5%) applied thereafter.
These cash flows have been discounted at rates in the range of 10 to 12% (2018 – 10 to 12%) depending on the nature of the fund management
contract intangible asset.
Indefinite life intangible assets were assessed for annual impairment as at July 31, 2019 and July 31, 2018 and no impairment was determined to
exist.
Management believes that reasonable negative changes in any one key assumption used to determine the recoverable amount would not result in
an impairment. No significant negative changes were noted as of October 31, 2019.
202 | 2019 Scotiabank Annual Report
19 Other Assets
As at October 31 ($ 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
Other
Total
20 Deposits
As at October 31 ($ millions)
Personal
Business and government
Financial institutions
Total
Recorded in:
Canada
United States
United Kingdom
Mexico
Peru
Chile
Colombia
Other International
Total(5)
$
2019
2,790
2,298
1,534
5,560
2,405
422
1,161
6,721
$
2018
2,800
1,878
657
3,247
2,736
360
2,061
3,694
$ 22,891
$ 17,433
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
2019
2018
Payable on demand(1)
Interest-
bearing
Non-interest-
bearing
Payable after
Payable on a
notice(2)
fixed date(3)
Total
$
6,687
100,321
7,399
$
7,783
25,093
915
$ 127,464
43,058
1,276
$
82,866
293,379
37,149
$ 224,800
461,851
46,739
$ 214,545
422,002
39,987
$ 114,407
$ 33,791
$ 171,798(4)
$ 413,394
$ 733,390
$ 676,534
$
87,470
14,379
–
10
5,505
3,173
36
3,834
$ 17,174
50
–
4,321
130
4,514
540
7,062
$ 134,205
7,999
203
7,435
4,456
136
4,498
12,866
$ 264,309
53,247
20,107
11,906
8,647
14,891
4,772
35,515
$ 503,158
75,675
20,310
23,672
18,738
22,714
9,846
59,277
$ 472,798
59,938
16,847
21,151
15,213
24,180
9,543
56,864
$ 114,407
$ 33,791
$ 171,798
$ 413,394
$ 733,390
$ 676,534
Deposits payable on demand include all deposits for which we do not have the right to notice of withdrawal, generally chequing accounts.
(1)
(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 $250,886 (2018 – $219,195), deposits denominated in Chilean pesos amount to $21,021 (2018 – $22,731), deposits denominated in Mexican pesos amount to $21,039 (2018 – $18,341) and deposits
Includes $137 (2018 – $141) of non-interest bearing deposits.
denominated in other foreign currencies amount to $83,837 (2018 – $79,582).
The following table presents the maturity schedule for term deposits in Canada greater than $100,000(1).
($ millions)
As at October 31, 2019
As at October 31, 2018
(1)
The majority of foreign term deposits are in excess of $100,000.
Within three
months
Three to six
months
Six to
twelve months
One to
five years
Over
five years
Total
$ 48,411
$ 23,797
$ 43,377
$ 91,687
$ 14,616
$ 221,888
$ 36,670
$ 23,913
$ 42,830
$ 99,734
$ 19,872
$ 223,019
2019 Scotiabank Annual Report | 203
Consolidated Financial Statements
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(3)
June 2025
December 2025(4)
Interest
rate (%)
3.036
8.90
3.367
December 2025(4)
4.50
March 2027(4)
2.58
January 2029(4)
3.89
July 2029(4)
2.836
August 2085(5)
Floating
Terms(1)
$1,750 million. Redeemed on October 18, 2019.
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%.
Redeemable on or after January 18, 2024. After January 18, 2024, interest will be
payable at an annual rate equal to the 90-day bankers’ acceptance rate plus 1.58%.
Redeemable on or after July 3, 2024. After July 3, 2024, interest will be payable at an
annual rate equal to the 90-day bankers’ acceptance rate plus 1.18%.
US$83 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.
2019
Carrying
value(2)
–
256
730
$
2018
Carrying
value(2)
$ 1,740
259
729
1,643
1,645
1,239
1,195
1,788
1,487
–
–
109
130
$ 7,252
$ 5,698
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.
The carrying value of subordinated debentures may differ from par value due to fair value hedge adjustments related to hedge accounting and adjustments related to subordinated debentures held for market-making purposes.
(1)
(2)
(3) On October 18, 2019, the Bank redeemed all of its outstanding $1,750 million 3.036% subordinated debentures due October 18, 2024 at a redemption price of 100% of the principal amount plus accrued and unpaid interest.
(4)
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.
(5) During the year, the Bank purchased for cancellation approximately US$16 million subordinated debentures due 2085.
22 Other Liabilities
As at October 31 ($ 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)
Allowance for credit losses on off-balance sheet exposures (Note 13)
Pension liabilities (Note 28)
Other liabilities of subsidiaries and structured entities
Other
Total
23 Provisions
($ millions)
As at November 1, 2017
Provisions made during the year
Provisions utilized / released during the year
Balance as at October 31, 2018
Provisions made during the year
Provisions utilized / released during the year
Balance as at October 31, 2019
2019
2018
$
2,902
5,924
342
1,307
4,124
5,826
2,405
377
224
56
1,692
22,626
6,677
$
2,634
6,198
435
1,205
5,019
6,523
2,736
564
181
74
593
19,933
6,649
$ 54,482
$ 52,744
Restructuring
Litigation
& other
$
$
103
–
(79)
24
–
(10)
$
$
110
79
(32)
157
125
(72)
$
$
Total
213
79
(111)
181
125
(82)
$
14
$
210
$
224
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, 2019, $13.5 million
of the restructuring provision established in 2016 remains.
204 | 2019 Scotiabank Annual Report
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.
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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:
2019
2018
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
1,227,027,624
4,111,476
$ 18,234
253
1,199,231,715
2,238,468
$ 15,644
135
21,250
(15,028,100)
2
(225)
33,788,141
(8,230,700)
2,573
(118)
Outstanding at end of year
1,216,132,250(1)
$ 18,264
1,227,027,624(1)
$ 18,234
(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 2019, the number of such shares bought and sold was
16,818,144 (2018 – 14,667,143).
Dividend
The dividends paid on common shares in fiscal 2019 and 2018 were $4,260 million ($3.49 per share) and $3,985 million ($3.28 per share),
respectively. The Board of Directors approved a quarterly dividend of 90 cents per common share at its meeting on November 25, 2019. This
quarterly dividend applies to shareholders of record at the close of business on January 7, 2020, and is payable January 29, 2020.
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 used
the proceeds from the public offering to partially fund the acquisition of MD Financial Management.
Normal Course Issuer Bid
On May 30, 2019, the Bank announced that OSFI and the Toronto Stock Exchange have approved a normal course issuer bid (the “2019 NCIB”)
pursuant to which it may repurchase for cancellation up to 24 million of the Bank’s common shares. Purchases under the 2019 NCIB commenced
on June 4, 2019 and terminate upon earlier of: (i) the Bank purchasing the maximum number of common shares under the 2019 NCIB, (ii) the Bank
providing a notice of termination, or (iii) June 3, 2020. On a quarterly basis, the Bank will notify OSFI prior to making purchases.
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. Under the 2018 NCIB, which terminated on
June 3, 2019, the Bank cumulatively repurchased and cancelled approximately 14.8 million common shares at an average price of $73.46 per
share.
During the year ended October 31, 2019, the Bank repurchased and cancelled approximately 15 million common shares (2018 – 8.23 million) at a
volume weighted average price of $71.51 per share (2018 – $76.77) for a total amount of $1,075 million (2018 – $632 million).
Non-viability Contingent Capital
The maximum number of common shares issuable on conversion of NVCC subordinated debentures, NVCC subordinated additional tier 1 capital
securities and NVCC preferred shares as at October 31, 2019 would be 2,810 million common shares (2018 – 1,835 million common shares) based
on the floor price and excluding the impact of any accrued and unpaid interest and any declared but unpaid dividends (refer to Note 21 –
Subordinated debentures and Note 24(b) – Preferred shares and Other Equity Instruments for further details).
2019 Scotiabank Annual Report | 205
Consolidated Financial Statements
(b) Preferred shares and other equity instruments
Preferred shares
Authorized:
An unlimited number of preferred shares without nominal or par value.
Issued and fully paid:
As at October 31 ($ millions)
Preferred shares:(a)
Series 22(b)
Series 23(b)
Series 30(c)(d)
Series 31(c)(d)
Series 32(c)(e)
Series 33(c)(e)
Series 34(c)(f)(g)
Series 36(c)(f)(h)
Series 38(c)(f)(i)
Series 40(c)(f)(j)
2019
2018
Number
of shares
Amount
–
–
6,142,738
4,457,262
11,161,422
5,184,345
14,000,000
20,000,000
20,000,000
12,000,000
–
–
154
111
279
130
350
500
500
300
Dividends
declared
per share(1)
0.239375
0.215885
0.455000
0.657072
0.515752
0.742073
1.375000
1.375000
1.212500
1.271475
Conversion
feature
Series 23
Series 22
Series 31
Series 30
Series 33
Series 32
Series 35
Series 37
Series 39
Series 41
Number
of shares
Amount
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(1)
0.957500
0.736967
0.455000
0.516968
0.515752
0.601968
1.375000
1.375000
1.212500
–
Conversion
feature
Series 23
Series 22
Series 31
Series 30
Series 33
Series 32
Series 35
Series 37
Series 39
Series 41
Total preferred shares
92,945,767
$ 2,324
104,945,767
$ 2,624
(1)
Dividends declared from November 1, 2018 to October 31, 2019.
Terms of preferred shares
First issue date
Issue
price
Initial
dividend
Initial dividend
payment date
Rate
reset
spread
Redemption date
Redemption
price
Preferred shares(a):
Series 22(b)
Series 23(b)
Series 30(c)(d)
Series 31(c)(d)
Series 32(c)(e)
Series 33(c)(e)
Series 34(c)(f)(g)
Series 36(c)(f)(h)
Series 38(c)(f)(i)
Series 40(c)(f)(j)
September 9, 2008
January 26, 2014
April 12, 2010
April 26, 2015
25.00
25.00
25.00
25.00
0.482900
0.173875
0.282200
0.095500
January 28, 2009
April 28, 2014
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
n/a
n/a
1.00%
1.00%
January 28, 2019
January 28, 2019
April 26, 2020
April 26, 2015 to
April 26, 2020
February 2, 2021
1.34%
1.34% February 2, 2016 to
February 2, 2021
April 26, 2021
July 26, 2021
January 27, 2022
January 27, 2024
4.51%
4.72%
4.19%
2.43%
25.00
25.00
25.00
25.50
25.00
25.50
25.00
25.00
25.00
25.00
(a) Non-cumulative preferential cash dividends on all series are payable quarterly, as and when declared by the Board. Dividends on the Non-cumulative 5-Year Rate Reset Preferred Shares (Series 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 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 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 January 28, 2019, the Bank redeemed all outstanding Non-cumulative Preferred shares Series 22 and 23 and paid dividends of $0.239375 and $0.215885, respectively, per share.
(c) Holders of Fixed Rate Reset Preferred Shares (Series 30, 32, 34, 36, 38, and 40) 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 (Series 31, 33, 35, 37, 39, and 41, if outstanding) have reciprocal conversion options into the relevant series of Fixed Rate Reset Preferred Shares. With respect to
Series 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.
(d) 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.
206 | 2019 Scotiabank Annual Report
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(e) 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 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.
These preferred shares contain NVCC provisions necessary for the shares to qualify as Tier 1 regulatory capital under Basel III.
(f)
(g) 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.
(i)
(h) 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.
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.
Holders of Series 40 Non-cumulative 5-Year Rate Reset Preferred Shares (NVCC) will have the option to convert shares into an equal number of Series 41 non-cumulative floating rate preferred shares (NVCC) on January 27, 2024, and on
January 27 every five years thereafter. With regulatory approval, Series 40 preferred shares may be redeemed by the Bank on January 27, 2024 and every five years thereafter, and for Series 41 preferred shares, if applicable, on January 27, 2029
and every five years thereafter, at $25.00 per share, together with declared and unpaid dividends.
(j)
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:
• 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%.
• 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.
• 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.
• The notes are the Bank’s direct unsecured obligations, ranking subordinate to all of the Bank’s subordinated indebtedness.
• 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, 2019, the Bank paid interest of US$58 million (2018 – US$58 million) in respect of these notes.
2019 Scotiabank Annual Report | 207
Consolidated Financial Statements
(c) Restrictions on dividend payments
Under the Bank Act, the Bank is prohibited from declaring any dividends on its common or preferred shares when the Bank is, or would be placed
by such a declaration, in contravention of the capital adequacy, liquidity or any other regulatory directives issued under the Bank Act. In addition,
common share dividends cannot be paid unless all dividends to which preferred shareholders are then entitled have been paid or sufficient funds
have been set aside to do so.
In the event that applicable cash distributions on any of the Scotiabank Trust Securities are not paid on a regular distribution date, the Bank has
undertaken not to declare dividends of any kind on its preferred or common shares. Similarly, should the Bank fail to declare regular dividends on
any of its directly issued outstanding preferred or common shares, cash distributions will also not be made on any of the Scotiabank Trust
Securities.
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 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, OSFI expects D-SIBs to hold a 2.0% Domestic Stability Buffer, as at October 31, 2019. This results in
current targets, including all buffers, for CET1, Tier 1 and Total Capital ratios of 10.0%, 11.5%, 13.5%, respectively.
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:
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
2019
2018
$
46,578
51,304
59,850
$
44,443
50,187
57,364
$ 421,185
421,185
421,185
1,230,648
$ 400,507
400,680
400,853
1,119,099
11.1%
12.2%
14.2%
4.2%
11.1%
12.5%
14.3%
4.5%
(1)
(2)
In accordance with OSFI’s requirements, effective 2019, CVA risk-weighted assets have been fully phased-in. In the prior year, scalars for CVA risk-weighted assets of 0.80, 0.83 and 0.86 were used to compute the CET1 capital ratio, Tier 1 capital
ratio and Total capital ratio, respectively.
Since the introduction of Basel II in 2008, OSFI has prescribed a minimum capital floor for institutions that use the advanced internal ratings-based approach for credit risk. The Basel I capital floor add-on is determined by comparing a capital
requirement calculated by reference to Basel I against the Basel III calculation, as specified by OSFI. A shortfall in the Basel III capital requirement as compared with the Basel I floor is added to RWA. 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, 2019 and October 31, 2018.
The Bank substantially exceeded the OSFI minimum capital ratios as at October 31, 2019, including the Domestic Stability Buffer requirement.
26 Share-Based Payments
(a) Stock option plans
The Bank grants stock options as part of the employee Stock Option Plan as well as stand-alone stock appreciation rights (SARs). Options to
purchase common shares and/or to receive an equivalent cash payment, as applicable, may be granted to select 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 110.9 million common shares have been issued as a result of the exercise of options and 11.4 million common shares are
committed under outstanding options, leaving 6.7 million common shares available for issuance as options. Outstanding options expire on dates
ranging from December 11, 2019 to December 6, 2028.
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.
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The Stock Option Plan includes:
•
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, 2019, nil Tandem SARs were outstanding (2018 – 3,900).
The share-based payment liability recognized for vested Tandem SARs as at October 31, 2019 was nil (2018 – $0.1 million). The corresponding
intrinsic value of this liability as at October 31, 2019 was nil (2018 – $0.2 million).
In 2019, a benefit of $0.1 million (2018 – $0.6 million expense) was recorded in salaries and employee benefits in the Consolidated Statement
of Income.
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 SAR features.
The amount recorded in equity – other reserves for vested stock options as at October 31, 2019 was $133 million (2018 – $164 million).
In 2019, an expense of $6 million (2018 – $7 million) was recorded in salaries and employee benefits in the Consolidated Statement of
Income. As at October 31, 2019, future unrecognized compensation cost for non-vested stock options was $5 million (2018 – $4 million)
which is to be recognized over a weighted-average period of 2.11 years (2018 – 2.07 years).
Stock appreciation rights
Stand-alone SARs are granted instead of stock options to select 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 2019, 70,554 SARs were granted (2018 – 53,056) and as at October 31, 2019, 805,481 SARs were outstanding (2018 – 1,073,146),
of which 801,116 SARs were vested (2018 – 1,032,495).
The share-based payment liability recognized for vested SARs as at October 31, 2019 was $10 million (2018 – $14 million). The corresponding
intrinsic value of this liability as at October 31, 2019 was $16 million (2018 – $27 million).
In 2019, an expense of $2 million (2018 – benefit of $3 million) was recorded in salaries and employee benefits in the Consolidated Statement
of Income. This expense is net of gains arising from derivatives used to manage the volatility of share-based payments of $5 million (2018 –
$8 million losses).
Determination of fair values
The share-based payment liability and corresponding expense for SARs and options with Tandem SAR features were quantified using the Black-
Scholes option pricing model with the following assumptions and resulting fair value per award:
As at October 31
Assumptions
Risk-free interest rate%
Expected dividend yield
Expected price volatility
Expected life of option
Fair value
Weighted-average fair value
2019
2018
1.48% - 1.88%
4.50%
13.00% - 26.10%
0.00 - 4.74 years
2.26% - 2.34%
4.58%
13.75% - 28.12%
0.00 - 4.58 years
$
13.49
$
13.39
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 2019 and 2018 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
2019 Grant
2018 Grant
2.01%
4.49%
15.64%
6.67 years
1.73%
3.62%
15.86%
6.64 years
$
5.01
$
7.68
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.
2019 Scotiabank Annual Report | 209
Consolidated Financial Statements
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, 2019
Range of exercise prices
$33.89 to $47.75
$49.93 to $55.21
$55.63 to $60.67
$63.98 to $81.81
2019
2018
Number of stock
options (000’s)
Weighted average
exercise price
Number of stock
options (000’s)
Weighted average
exercise price
14,140
1,549
(4,111)
(51)
(18)
–
11,509
7,318
6,853
$ 60.02
72.28
52.51
55.19
75.20
33.89
$ 64.35
$ 59.20
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
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
338
1,086
5,218
4,867
11,509
0.11
2.00
3.67
7.32
4.95
$ 47.75
$ 50.51
$ 59.70
$ 73.57
$ 64.35
338
1,086
4,624
1,270
7,318
$ 47.75
$ 50.51
$ 59.57
$ 68.32
$ 59.20
(1)
(2)
Excludes SARs.
Includes options of nil Tandem SARs (2018 – 3,900) and 130,000 options originally issued under HollisWealth plans (2018 – 130,000).
(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 50-60% of eligible contributions, depending on the region, up to a maximum dollar amount, which is expensed in salaries and employee
benefits. On January 1, 2019, the Bank increased the match in Canada from 50% to 60%. During 2019, the Bank’s contributions totalled
$66 million (2018 – $55 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, 2019, an aggregate of 15 million common shares were held under the employee share ownership plans (2018 – 16 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. Most grants of 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 the Performance Share 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 2019, an aggregate expense of $269 million (2018 – $188 million) was recorded in salaries and employee benefits in the Consolidated Statement
of Income for these plans. This expense includes gains from derivatives used to manage the volatility of share-based payments of $55 million
(2018 – $85 million losses).
As at October 31, 2019, the share-based payment liability recognized for vested awards under these plans was $735 million (2018 – $745 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, 2019, there were 1,024,416 units
(2018 – 939,290) awarded and outstanding of which 792,273 units were vested (2018 – 795,783).
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, 2019, there were 243,537 units outstanding (2018 – 314,424).
Restricted Share Unit Plan (RSU)
Under the RSU Plan, select 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-
210 | 2019 Scotiabank Annual Report
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, 2019, there were
3,234,439 units (2018 – 2,639,165) awarded and outstanding of which 2,147,611 were vested (2018 – 1,665,885).
Performance Share Unit Plan (PSU)
Eligible executives receive an award of performance share units which, for the majority of grants, vest at the end of three years. Certain grants
provide for a graduated vesting schedule which includes a specific performance factor calculation. 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 units 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, 2019, there were 7,634,641 units (2018 – 7,813,011) outstanding subject to performance criteria, of which
6,007,448 units were vested (2018 – 6,403,107).
Deferred Performance Plan
Under the Deferred Performance Plan, a portion of the bonus received by Global Banking and Markets employees in 2017 and prior years (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, 2019, there were 558,100 units outstanding (2018 –
1,251,576). November 30, 2017 was the last grant under this plan, there will be no further grants.
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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
2019
2018
2017
$
525
444
5
1,215
(48)
2,141
$
797
633
(25)
994
(14)
$
533
424
24
903
(29)
2,385
1,855
174
103
54
331
34
16
(53)
(3)
33
16
129
178
Total provision for income taxes in the Consolidated Statement of Income
$ 2,472
$ 2,382
$ 2,033
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
$ (108)
60
$ (136)
(193)
$
(48)
(33)
(18)
–
–
3
(48)
(329)
(145)
(194)
18
(10)
2
(329)
82
198
280
275
(1)
–
1
5
280
Total provision for income taxes
$ 2,424
$ 2,053
$ 2,313
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 unrecognized tax losses, tax credits and temporary differences
$
$
329
2
–
331
$
$
64
(2)
(65)
(3)
$
191
(2)
(11)
$
178
2019 Scotiabank Annual Report | 211
Consolidated Financial Statements
(b) Reconciliation to statutory rate
Income taxes in the Consolidated Statement of Income vary from the amounts that would be computed by applying the composite federal and
provincial statutory income tax rate for the following reasons:
For the year ended October 31 ($ millions)
Income taxes at 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
2019
2018
2017
Percent
of pre-tax
income
Amount
Percent
of pre-tax
income
Amount
Percent
of pre-tax
income
Amount
$ 2,983
26.5% $ 2,943
26.5% $ 2,715
26.4%
(300)
(221)
2
8
(2.7)
(2.0)
–
0.1
(439)
(90)
(2)
(30)
(3.9)
(0.8)
–
(0.3)
(286)
(407)
(2)
13
(2.8)
(3.9)
–
0.1
Total income taxes and effective tax rate
$ 2,472
21.9% $ 2,382
21.5% $ 2,033
19.8%
(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
Cash flow hedges
Other
Total deferred tax assets
Deferred tax liabilities:
Cash flow hedges
Deferred compensation
Deferred income
Property and equipment
Pension and other post-retirement benefits
Securities
Investment in subsidiaries and associates
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
2019
2018
2019
2018
$
$
$
48
(13)
34
15
112
(44)
(14)
–
(195)
$
73
(117)
41
(68)
48
16
(17)
–
(235)
$
286
767
208
475
321
853
161
–
633
$
338
858
242
476
433
537
199
33
525
(57)
$ (259)
$ 3,704
$ 3,641
–
(48)
(31)
(20)
(67)
(12)
(116)
(5)
(89)
$
–
–
(22)
(93)
(12)
(8)
(26)
69
(164)
$
317
109
178
132
150
158
180
1,836
381
$
–
64
181
137
110
166
63
1,788
399
$ (388)
$ (256)
$ 3,441
$ 2,908
$ 331
$
(3)
$
263
$
733
(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 $263 (2018 – $733) are represented by deferred tax assets of $1,570 (2018 –
$1,938), and deferred tax liabilities of $1,307 (2018 – $1,205) on the Consolidated Statement of Financial Position.
The major changes to net deferred taxes were as follows:
For the year ended October 31 ($ 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
2019
2018
$ 733
(331)
(60)
(56)
(23)
$ 1,016
3
193
(493)
14
$ 263
$
733
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 $40 million (October 31, 2018 – $14 million). The amount related to unrecognized losses
is $16 million, which will expire as follows: $4 million in 2020; $11 million in 2023 and $1 million with no expiry date.
Included in the net deferred tax asset are tax benefits of $52 million (2018 – $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.
212 | 2019 Scotiabank Annual Report
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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, 2019 is approximately $36 billion (2018 – $33 billion).
Reassessment of dividend deductions
Since 2016, the Bank has received reassessments totalling $575 million of tax and interest as a result of the Canada Revenue Agency denying the
tax deductibility of certain Canadian dividends received during the 2011-2013 taxation years. In October 2019, the Bank was reassessed for
$223 million of tax and interest in respect of certain Canadian dividends received during the 2014 taxation year. The circumstances of the
dividends subject to these reassessments are similar to those prospectively addressed by rules introduced in 2015 and 2018. 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
vigourously 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.
• 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.
• 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. PAIC has independent member
representation on the committee.
• 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.
• 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, 2018. 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.
2019 Scotiabank Annual Report | 213
Consolidated Financial Statements
Risk management
The Bank’s defined benefit pension plans and other benefit plans expose the Bank to a number of risks. Some of the more significant risks include
interest rate risk, investment risk, longevity risk and health care cost increases, among others. These risks could result in higher defined benefit
expense and a higher defined benefit obligation to the extent that:
• there is a decline in discount rates; and/or
• plan assets returns are less than expected; and/or
• plan members live longer than expected; and/or
• health care costs are higher than assumed.
In addition to the governance structure and policies in place, the Bank manages risks by regularly monitoring market developments and asset
investment performance. The Bank also monitors regulatory and legislative changes along with demographic trends and revisits the investment
strategy and/or plan design as warranted.
(a) Relative size of plan obligations and assets
For the year ended October 31, 2019
Percentage of total benefit obligations
Percentage of total plan assets
Percentage of total benefit expense(1)
For the year ended October 31, 2018
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%
71%
75%
15%
9%
22%
15%
20%
3%
54%
1%
40%
46%
99%
60%
Pension plans
Other benefit plans
Canada
SPP
Other
International
Canada
International
70%
72%
82%
14%
9%
16%
16%
19%
2%
58%
16%
39%
42%
84%
61%
(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 2019, and the two prior years.
Contributions to the principal plans for the year ended October 31 ($ millions)
2019
2018
2017
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)
$ 196
53
78
69
$ 396
$ 238
78
61
41
$ 286
185
51
35
$ 418
$ 557
(1)
Based on preliminary estimates, the Bank expects to make contributions of $196 to the SPP (excluding the DC provision), $75 to all other defined benefit pension plans, $61 to other benefit plans and $91 to all defined contribution plans for the
year ending October 31, 2020.
(c) Funded and unfunded plans
The excess (deficit) of the fair value of assets over the benefit obligation at the end of the year includes the following amounts for plans that are
wholly unfunded and plans that are wholly or partly funded.
As at October 31 ($ millions)
2019
2018
2017
2019
2018
2017
Pension plans
Other benefit plans
$
459
9,248
$
400
7,868
$
418
8,424
$ 1,157
300
$ 1,101
273
$ 1,324
334
Benefit obligation
Benefit obligation of plans that are wholly unfunded
Benefit obligation of plans that are wholly or partly funded
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
$ (809)
459
$
169
400
$
(95)
418
$ 9,248
8,439
$ 7,868
8,037
$ 8,424
8,329
$
$
300
193
(107)
1,157
$
$
273
240
(33)
1,101
$
$
334
266
(68)
1,324
Excess (deficit) of fair value of assets over total benefit
obligation
Effect of asset limitation and minimum funding requirement
$ (1,268)
(2)
$ (231)
(2)
$ (513)
(39)
$ (1,264)
–
$ (1,134)
–
$ (1,392)
–
Net asset (liability) at end of year
$ (1,270)
$ (233)
$ (552)
$ (1,264)
$ (1,134)
$ (1,392)
214 | 2019 Scotiabank Annual Report
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m
e
n
t
s
(d) Financial information
The following tables present financial information related to the Bank’s principal plans.
For the year ended October 31 ($ millions)
Change in benefit obligation
Benefit obligation at beginning of year
Current service cost
Interest cost on benefit obligation
Employee contributions
Benefits paid
Actuarial loss (gain)
Past service cost
Business 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
Pension plans
Other benefit plans
2019
2018
2017
2019
2018
2017
$ 8,268
291
331
25
(770)
1,590
7
(4)
(2)
(29)
$ 8,842
334
309
22
(1,012)
(495)
5
264
(2)
1
$ 9,139
330
297
24
(724)
(46)
–
–
(157)
(21)
$ 1,374
26
72
–
(96)
120
(9)
1
(45)
14
$ 1,658
30
70
–
(90)
(96)
(196)(2)
6
–
(8)
$ 1,682
39
72
–
(76)
(36)
4
1
–
(28)
$ 9,707
$ 8,268
$ 8,842
$ 1,457
$ 1,374
$ 1,658
8,037
331
634
249
25
(770)
(17)
–
(2)
(48)
8,329
305
(166)
316
22
(1,012)
(14)
251
(2)
8
7,770
273
700
471
24
(724)
(13)
–
(157)
(15)
240
23
(16)
78
–
(96)
–
–
(46)
10
266
20
(11)
61
–
(90)
–
–
–
(6)
284
19
1
51
–
(76)
–
–
(1)
(12)
Fair value of assets at end of year
$ 8,439
$ 8,037
$ 8,329
$
193
$
240
$
266
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)
(1,268)
(2)
(231)
(2)
(513)
(39)
(1,264)
–
(1,134)
–
(1,392)
–
Net asset (liability) at end of year
$ (1,270)
$
(233)
$ (552)
$ (1,264)
$ (1,134)
$ (1,392)
Recorded in:
Other assets in the Bank’s Consolidated Statement of Financial Position
Other liabilities in the Bank’s Consolidated Statement of Financial Position
422
(1,692)
360
(593)
256
(808)
–
(1,264)
–
(1,134)
1
(1,393)
Net asset (liability) at end of year
$ (1,270)
$
(233)
$ (552)
$ (1,264)
$ (1,134)
$ (1,392)
Annual benefit expense
Current service cost
Net interest expense (income)
Administrative expenses
Past service costs
Amount of settlement (gain) loss recognized
Remeasurement of other long-term benefits
Benefit expense (income) recorded in the Consolidated Statement of
Income
Defined contribution benefit expense
Remeasurements
(Return) on plan assets in excess of interest income on fair value of assets
Actuarial loss (gain) on benefit obligation
Change in the asset limitation
Remeasurements recorded in OCI
Total benefit cost
Additional details on actual return on assets and actuarial (gains) and
losses
Actual return on assets (net of administrative expenses)
Actuarial (gains) and losses from changes in demographic assumptions
Actuarial (gains) and losses from changes in financial assumptions
Actuarial (gains) and losses from changes in experience
Additional details on fair value of pension plan assets invested
In Scotiabank securities (stock, bonds)
In property occupied by Scotiabank
Change in asset ceiling/onerous liability
Asset ceiling /onerous liability at end of prior year
Interest expense
Remeasurements
Foreign exchange
291
–
14
7
–
–
312
66
$
$
(634)
1,590
–
$
956
$ 1,334
$
948
(5)
1,496
99
392
4
2
–
–
–
2
334
7
12
5
–
–
358
41
330
29
11
–
–
–
370
35
$
$
166
(495)
(40)
(369)
(700)
(46)
(25)
$ (771)
30
$ (366)
125
(148)
(548)
201
377
4
39
3
(40)
–
2
$
$
960
(6)
(71)
31
457
4
60
5
(25)
(1)
39
$
$
$
$
$
$
26
49
–
(9)
1
(5)
62
3
17
124
–
141
206
7
(35)
150
5
–
–
–
–
–
–
–
$
$
$
$
$
$
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
–
–
–
–
–
–
Asset ceiling /onerous liability at end of year
$
(1)
(2)
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.
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 post-retirement benefits plan.
2019 Scotiabank Annual Report | 215
Consolidated Financial Statements
(e) Maturity profile of the defined benefit obligation
The weighted average duration of the total benefit obligation at October 31, 2019 is 15.7 years (2018 – 14.4 years, 2017 – 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
2019
2018
2017
2019
2018
2017
53%
47%
29%
71%
100% 100% 100% 100% 100% 100%
6%
94%
9%
91%
58%
42%
57%
43%
25%
75%
55%
45%
100% 100% 100% 100% 100% 100%
49%
51%
54%
46%
27%
73%
26%
74%
42%
58%
35%
65%
100% 100% 100% 100% 100% 100%
38%
62%
34%
66%
48%
52%
45%
55%
(f) Key assumptions (%)
The key weighted-average assumptions used by the Bank for the measurement of the benefit obligation and benefit expense for all of the Bank’s
principal plans are summarized as follows:
For the year ended October 31
Benefit obligation at end of year
Discount rate – all plans
Discount rate – Canadian plans only
Rate of increase in future compensation(1)
Benefit expense (income) for the year
Discount rate – All plans
Discount rate for defined benefit obligations
Discount rate for net interest cost
Discount rate for service cost
Discount rate for interest on service cost
Discount rate – Canadian plans only
Discount rate for defined benefit obligations
Discount rate for net interest cost
Discount rate for service cost
Discount rate for interest on service cost
Rate of increase in future compensation(1)
Health care cost trend rates at end of year
Initial rate
Ultimate rate
Year ultimate rate reached
Assumed life expectancy in Canada (years)
Life expectancy at 65 for current pensioners – male
Life expectancy at 65 for current pensioners – female
Life expectancy at 65, for future pensioners currently aged 45 – male
Life expectancy at 65, for future pensioners currently aged 45 – female
Assumed life expectancy in Mexico (years)
Life expectancy at 65 for current pensioners – male
Life expectancy at 65 for current pensioners – female
Life expectancy at 65, for future pensioners currently aged 45 – male
Life expectancy at 65, for future pensioners currently aged 45 – female
Assumed life expectancy in United States (years)
Life expectancy at 65 for current pensioners – male
Life expectancy at 65 for current pensioners – female
Life expectancy at 65, for future pensioners currently aged 45 – male
Life expectancy at 65, for future pensioners currently aged 45 – female
Pension plans
Other benefit plans
2019
2018
2017
2019
2018
2017
3.32% 4.35% 3.90%
3.10% 4.10% 3.60%
2.70% 2.80% 2.76%
4.71% 5.54%
2.98% 3.96%
3.86% 3.83%
4.86%
3.53%
4.07%
4.35% 3.90% 3.86%
4.09% 3.55% 3.33%
4.41% 4.04% 4.01%
4.14% 3.77% 3.64%
5.54% 4.86%
5.37% 4.60%
5.78% 5.11%
5.67% 5.04%
4.10% 3.60% 3.60%
3.80% 3.20% 3.00%
4.10% 3.70% 3.70%
3.80% 3.40% 3.30%
2.80% 2.76% 2.72%
3.96% 3.53%
3.70% 3.18%
4.07% 3.76%
3.88% 3.66%
3.83% 4.07%
4.74%
4.42%
5.09%
4.94%
3.42%
2.98%
3.75%
3.56%
4.09%
n/a
n/a
n/a
23.4
24.5
24.3
25.3
21.3
23.8
21.7
24.0
21.9
23.3
23.4
24.9
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
5.80% 5.81%
4.69% 4.66%
2040
2040
5.99%
4.93%
2030
23.4
24.5
24.3
25.3
21.3
23.8
21.7
24.0
21.9
23.3
23.4
24.9
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
(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.
216 | 2019 Scotiabank Annual Report
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
(g) Sensitivity analysis
The sensitivity analysis presented represents the impact of a change in a single assumption with other assumptions left unchanged. For purposes
of the sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end
of the reporting period, which is the same as that applied in calculating the defined benefit obligation recognized in the statement of financial
position.
For the year ended October 31, 2019 ($ 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
$ 1,816
101
n/a
n/a
198
3
6
$ 110
10
n/a
n/a
10
–
–
$ 208
1
155
(125)
23
4
6
$
7
–
14
(11)
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 across 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. Derivatives are not a
significant component of the investment strategy and cannot be used 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, 2019
Asset category %
Cash and cash equivalents
Equity investments
Fixed income investments
Property
Other
Total
Pension plans
Other benefit plans
Actual
2019
Actual
2018
Actual
2017
Actual
2019
Actual
2018
Actual
2017
3%
4%
2%
1%
1%
1%
33%
10%
43%
13%
30%
43%
–%
1%
1%
–%
10%
10%
36%
12%
48%
9%
29%
38%
–%
1%
1%
–%
9%
9%
43%
16%
59%
5%
26%
31%
–%
–%
–%
–%
8%
8%
42%
–%
42%
57%
–%
57%
–%
–%
–%
–%
–%
–%
42%
2%
44%
34%
21%
55%
–%
–%
–%
–%
–%
–%
46%
–%
46%
32%
21%
53%
–%
–%
–%
–%
–%
–%
100%
100%
100%
100%
100%
100%
Pension plans
Other benefit plans
–%
45%
44%
2%
9%
1%
44%
55%
–%
–%
100%
100%
2019 Scotiabank Annual Report | 217
Consolidated Financial Statements
29 Operating Segments
Scotiabank is a diversified financial services institution that provides a wide range of financial products and services to retail, commercial and
corporate customers around the world. The Bank’s businesses are grouped into three business lines: Canadian Banking, International Banking and
Global Banking and Markets. Other smaller business segments are included in the Other segment. The results of these business segments are
based upon the internal financial reporting systems of the Bank. The accounting policies used in these segments are generally consistent with
those followed in the preparation of the consolidated financial statements as disclosed in Note 3. Notable accounting measurement differences
are:
• tax normalization adjustments related to the gross-up of income from associated corporations. This adjustment normalizes the effective tax
rate in the divisions to better present the contribution of the associated companies to the divisional results.
• the grossing up of tax-exempt net interest income and non-interest income to an equivalent before-tax basis for those affected segments.
These differences in measurement enable comparison of net interest income and non-interest income arising from taxable and tax-exempt
sources.
Changes to operating segments effective November 1, 2019
Effective November 1, 2019, Global Wealth Management will become a fourth business segment at Scotiabank. The Canadian and International
businesses of Global Wealth results that were previously included in Canadian Banking and International Banking’s results, respectively, will be
included in Global Wealth Management results. Prior period comparative results will be restated.
Scotiabank’s results, and average assets and liabilities, allocated by these operating segments, are as follows:
For the year ended October 31, 2019(1)
Taxable equivalent basis ($ millions)
Net interest income(4)
Non-interest income(5)(6)
Total revenues
Provision for credit losses
Depreciation and amortization
Non-interest expenses
Income tax expense
Net income
Canadian
Banking
International
Banking
Global Banking
and Markets
Other(2)(3)
Total
$
8,284
5,609
$
8,482
5,006
$ 1,396
3,084
$ (985)
158
$ 17,177
13,857
13,893
972
550
6,393
1,554
13,488
2,076
396
6,631
998
4,480
(22)
91
2,372
505
(827)
1
16
288
(585)
31,034
3,027
1,053
15,684
2,472
$
4,424
$
3,387
$ 1,534
$ (547)
$
8,798
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
–
4,424
391
2,996
–
1,534
17
(564)
408
8,390
Represented by:
Net income attributable to equity holders of the Bank – relating to
divested operations(7)
–
56
–
–
56
Net income attributable to equity holders of the Bank – relating to
operations other than divested operations
4,424
2,940
1,534
(564)
Average assets ($ billions)
Average liabilities ($ billions)
363
283
203
157
372
304
118
243
8,334
1,056
987
(1)
(2)
The amounts for the year ended October 31, 2019 and 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
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, 2019 amounting to $181 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.
(3) Net income attributable to equity holders includes Net loss on divestitures of $308 (pre-tax $148).
(4)
(5) Card revenues, Banking services fees, and Investment management and trust fees are mainly earned in Canadian and International Banking. Mutual fund and Brokerage fees are primarily earned in Canadian Banking with the remainder being
Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure.
earned in International Banking. Underwriting and other advisory fees are predominantly earned in Global Banking and Markets.
Includes net income (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $65; International Banking – $763 and Other – $(178).
Refer to Note 37 for closed divestitures impacting the current year.
(6)
(7)
218 | 2019 Scotiabank Annual Report
For the year ended October 31, 2018
Taxable equivalent basis ($ 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
Canadian
Banking
International
Banking
Global Banking
and Markets
Other(1)
Total
$
7,898
5,452
$ 7,322
4,111
$ 1,454
3,074
$ (483)
(53)
$ 16,191
12,584
13,350
794
460
6,194
1,538
11,433
1,867
304
5,807
706
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
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
–
4,364
176
2,573
–
–
1,758
(147)
176
8,548
Represented by:
Net income attributable to equity holders of the Bank – relating to
divested operations(4)
–
78
–
–
78
Net income attributable to equity holders of the Bank – relating to
operations other than divested operations
4,364
2,495
1,758
(147)
8,470
Average assets ($ billions)
Average liabilities ($ billions)
342
254
168
131
321
265
115
232
946
882
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)
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, 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 (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $93; International Banking – $643 and Other – $(177).
(2)
(3)
(4) Refer to Note 37 for closed divestitures impacting the current year.
For the year ended October 31, 2017
Taxable equivalent basis ($ 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
Canadian
Banking
International
Banking
Global Banking
and Markets
Other(1)
Total
$
7,363
5,488
$ 6,726
3,688
$ 1,336
3,288
$ (390)
(344)
$ 15,035
12,120
12,851
913
412
6,075
1,387
10,414
1,294
283
5,381
828
4,624
42
55
2,105
604
(734)
–
11
308
(786)
27,155
2,249
761
13,869
2,033
$
4,064
$ 2,628
$ 1,818
$ (267)
$
8,243
Net income attributable to non-controlling interests in subsidiaries
Net income attributable to equity holders of the Bank
–
4,064
238
2,390
–
–
1,818
(267)
238
8,005
Represented by:
Net income attributable to equity holders of the Bank – relating to
divested operations(4)
–
63
–
–
63
Net income attributable to equity holders of the Bank – relating to
operations other than divested operations
4,064
2,327
1,818
(267)
7,942
Average assets ($ billions)
Average liabilities ($ billions)
323
244
148
115
336
267
106
228
913
854
(1)
Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income and non-interest income and provision for income taxes for the year ended
October 31, 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 (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $66; International Banking – $482 and Other – $(141).
(2)
(3)
(4) Refer to Note 37 for closed divestitures impacting the current year.
2019 Scotiabank Annual Report | 219
Provision for credit
losses
Non-interest expenses
Income tax expense
Subtotal
Net income
attributable to non-
controlling interests
in subsidiaries
Net income
Consolidated Financial Statements
Geographical segmentation
The following table summarizes the Bank’s financial results by geographic region. Revenues and expenses which have not been allocated back to
specific operating business lines are reflected in corporate adjustments.
For the year ended October 31,
2019 ($ millions)(1)(2)
Net interest income
Non-interest income(2)
$
Canada
7,630
7,435
Total revenues(3)
15,065
$
United
States
720
1,189
1,909
Mexico
Peru
Chile
Colombia
$ 1,684
671
$ 1,576
790
$ 1,613
806
$ 1,017
603
2,355
2,366
2,419
1,620
Caribbean and
Central America
Other
International
$ 2,143
1,007
3,150
$
794
1,356
2,150
981
8,261
952
4,871
(16)
870
267
788
335
1,306
121
593
523
846
248
749
436
1,166
185
632
362
919
106
233
352
1,931
319
548
54
1,438
274
384
Total
$ 17,177
13,857
31,034
3,027
16,737
2,472
8,798
18
–
14
(11)
179
107
101
–
408
attributable to equity
holders of the Bank
$
4,853
Total average assets
($ billions)
$
607
$
$
788
149
$
$
579
37
$
$
760
28
$
$
453
51
$
$
126
13
$
$
447
42
$
$
384
$
8,390
129
$
1,056
The amounts for the year ended October 31, 2019 and 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.
Includes net income from investments in associated corporations for Canada – $65; Peru – $7, Caribbean and Central America – $69, and Other International – $688.
(1)
(2)
(3) Revenues are attributed to countries based on where services are performed or assets are recorded.
For the year ended October 31, 2018
($ millions)(1)(3)
Canada
United
States
Mexico
Peru
Chile
Colombia
Caribbean and
Central America
Other
International
Total
Net interest income
Non-interest income(1)
$ 7,780
6,805
$ 691
843
$ 1,561
613
$ 1,378
662
$ 1,117
565
$ 839
484
$ 2,028
968
$ 797
1,644
$ 16,191
12,584
14,585
802
7,683
1,310
4,790
1,534
(34)
701
220
647
2,174
239
1,196
76
663
2,040
351
770
235
684
1,682
498
837
51
296
1,323
511
723
39
50
2,996
211
1,795
175
815
2,441
33
1,353
276
779
28,775
2,611
15,058
2,382
8,724
–
–
17
12
28
16
102
1
176
Total revenues(2)
Provision for credit losses
Non-interest expenses
Income tax expense
Subtotal
Net income attributable to
non-controlling interests
in subsidiaries
Net income attributable to
equity holders of the
Bank
Total average assets
($ billions)
$
565
$ 119
$ 4,790
$ 647
$
$
646
32
$
$
672
24
$
$
268
33
$
$
34
12
$
$
713
$ 778
$
8,548
40
$ 121
$
946
Includes net income from investments in associated corporations for Canada – $93, Peru – $9, Caribbean and Central America – $58, and Other International – $576.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
(3)
Prior period amounts have been restated to conform with current period presentation.
220 | 2019 Scotiabank Annual Report
Canada
7,382
6,753
14,135
906
7,820
882
4,527
$
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
Caribbean
and Central
America
$ 2,065
968
3,033
215
1,786
226
806
Other
International
$
934
1,534
2,468
138
1,283
280
767
Total
$ 15,035
12,120
27,155
2,249
14,630
2,033
8,243
–
–
12
11
53
60
102
–
238
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For the year ended October 31,
2017 ($ millions)(3)
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
Net income attributable to
equity holders of the
Bank
Total average assets
($ billions)
$
554
$
4,527
$
$
551
111
$
$
463
28
$
$
595
24
$
$
321
23
$
$
77
11
$
$
704
41
$
$
767
$
8,005
121
$
913
Includes net income from investments in associated corporations for Canada – $66, Peru – $6, Caribbean and Central America – $52, and Other International – $424.
(1)
(2) Revenues are attributed to countries based on where services are performed or assets are recorded.
(3)
Prior period amounts have been restated to conform with current period presentation.
30 Related Party Transactions
Compensation of key management personnel of the Bank
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank,
directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and
Chief Executive Officer and Group Heads.
For the year ended October 31 ($ 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.
2019
2018
$ 17
25
5
$ 47
$ 18
27
4
$ 49
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.
Loans and deposits of key management personnel
As at October 31 ($ millions)
Loans
Deposits
2019
2018
$ 14
9
$
$ 13
6
$
The Bank’s committed credit exposure to companies controlled by directors totaled $18.9 million as at October 31, 2019 (2018 – $132.4 million),
while actual utilized amounts were $3.3 million (2018 – $23.9 million).
2019 Scotiabank Annual Report | 221
Consolidated Financial Statements
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed
as related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party
transactions and were recorded as follows:
As at and for the year ended October 31 ($ millions)
Net income / (loss)
Loans
Deposits
Guarantees and commitments
2019
2018
2017
$ (68)
327
194
16
$ (64)
702
151
123
$ (46)
703
217
114
Scotiabank principal pension plan
The Bank manages assets of $4.1 billion (2018 – $3.8 billion) which is a portion of the Scotiabank principal pension plan assets and earned
$7.2 million (2018 – $5.0 million) in fees.
222 | 2019 Scotiabank Annual Report
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31 Principal Subsidiaries and Non-Controlling Interests in Subsidiaries
(a) Principal subsidiaries(1)
The following table presents certain operating subsidiaries the Bank owns, directly or indirectly. All of these subsidiaries are included in the Bank’s
consolidated financial statements.
As at October 31 ($ millions)
Canadian
1832 Asset Management L.P.
BNS Investments Inc.
Montreal Trust Company of Canada
National Trust Company
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. (51%)
The Bank of Nova Scotia Berhad
BNS International (Bahamas) Limited (formerly The Bank of Nova
Scotia International Limited)(2)
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.(3)
Scotia Capital (USA) Inc.(3)(4)
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%)
Banco Dominicano del Progreso, S.A. – Banco Multiple (98.29%)
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
New York, New York
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
Santo Domingo, Dominican Republic
Carrying value of shares
2019
2018
$
1,691
14,292
$
1,524
13,870
449
439
1,634
642
20
675
47
3,629
952
2,639
1,251
326
415
432
1,391
592
219
588
40
3,525
947
2,612
1,221
318
19,824
19,312
4,512
5,096
3,901
5,100
382
1,842
386
1,847
489
1,017
325
2,418
5,676
402
490
1,555
686
2,432
4,877
–
(1)
(2)
(3)
(4)
The Bank (or immediate parent of an entity) owns 100% of the outstanding voting shares of each subsidiary unless otherwise noted.
Effective April 5, 2019, the name was changed to BNS International (Bahamas) Limited.
The carrying value of this subsidiary is included with that of its parent, BNS Investments Inc.
The carrying value of this subsidiary is included with that of its parent, Scotia Holdings (US) Inc.
2019 Scotiabank Annual Report | 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.(2)
Scotia Group Jamaica Limited
Scotiabank Trinidad and Tobago Limited
Other
Total
As at and for the year ended
2019
2018
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%
49.0%
28.2%
49.1%
0.1% –
49.0%(3)
$ 1,017
564
323
380
386
$
38
12
40
52
8
$
917
519
340
365
311
$ 2,670
$ 150
$ 2,452
$ 115
–
17
49
18
$ 199
(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:
As at and for the year ended October 31, 2019
As at and for the year ended October 31, 2018
Total
comprehensive
income
Total assets
Total
liabilities
Revenue
Total
comprehensive
income
Total assets
Total
liabilities
$ 313
$ 86,435
$ 78,851
$ 3,615
$ 173
$ 80,352
$ 73,449
($ millions)
Total
Revenue
$ 4,700
32 Interest Income and Expense
For the year ended October 31 ($ millions)
Measured at amortized cost(1)
Measured at FVOCI(1)
Other
Total
(1)
(2)
The interest income/expense on financial assets/liabilities are calculated using the effective interest method.
Includes dividend income on equity securities designated at FVOCI.
33 Trading Revenues
The following table presents details of trading revenues.
For the year ended October 31 ($ millions)
Interest rate and credit
Equities
Commodities
Foreign exchange
Other
Total
224 | 2019 Scotiabank Annual Report
2019
2018
Interest
income
Interest
expense
Interest
income
Interest
expense
$ 30,996
1,440
$ 15,575
–
$ 26,649
1,205
$ 11,757
–
32,436
348(2)
15,575
32
27,854
213(2)
11,757
119
$ 32,784
$ 15,607
$ 28,067
$ 11,876
$
2019
241
480
235
268
264
$
2018
272
441
231
295
181
2017
$ 474
(125)
295
250
92
$ 1,488
$ 1,420
$ 986
34 Earnings Per Share
For the year ended October 31 ($ millions)
2019
2018
2017
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)
$ 8,208
1,222
$ 8,361
1,213
$ 7,876
1,203
$
6.72
$
6.90
$
6.55
$ 8,208
142
$ 8,361
16
$ 7,876
59
$ 8,350
$ 8,377
$ 7,935
1,222
29
1,251
1,213
16
1,229
1,203
20
1,223
$
6.68
$
6.82
$
6.49
Earnings per share calculations are based on full dollar and share amounts.
(1)
(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.
35 Guarantees, Commitments and Pledged Assets
(a) Guarantees
The Bank enters into various types of guarantees and indemnifications in the normal course of business. Guarantees represent an undertaking to
another party to make a payment to that party when certain specified events occur. The various guarantees and indemnifications that the Bank
provides with respect to its customers and other third parties are presented below:
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As at October 31 ($ millions)
Standby letters of credit and letters of guarantee
Liquidity facilities
Derivative instruments
Indemnifications
2019
2018
Maximum potential
amount of future
payments(1)
Maximum potential
amount of future
payments(1)
$ 35,577
3,758
7,104
583
$ 35,376
4,043
6,969
571
(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.
(i) Standby letters of credit and letters of guarantee
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,
2019, $4 million (2018 – $4 million) was included in other liabilities in the Consolidated Statement of Financial Position with respect to these
guarantees.
(ii) Liquidity facilities
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, 2019, $617 million (2018 – $377 million) was included in derivative instrument
liabilities in the Consolidated Statement of Financial Position with respect to these derivative instruments.
(iv) Indemnifications
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
2019 Scotiabank Annual Report | 225
Consolidated Financial Statements
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, 2019, $2 million (2018 –
$2 million) was included in other liabilities in the Consolidated Statement of Financial Position with respect to indemnifications.
(b) Other indirect commitments
In the normal course of business, various other indirect commitments are outstanding which are not reflected on the Consolidated Statement of
Financial Position. These may include:
• Commercial letters of credit which require the Bank to honour drafts presented by a third-party when specific activities are completed;
• Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financings for specific
amounts and maturities, subject to specific conditions;
Securities lending transactions under which the Bank, acting as principal or agent, agrees to lend securities to a borrower. The borrower
must fully collateralize the security loan at all times. The market value of the collateral is monitored relative to the amounts due under the
agreements, and where necessary, additional collateral is obtained; and
Security purchase commitments which require the Bank to fund future investments.
•
•
These financial instruments are subject to normal credit standards, financial controls and monitoring procedures.
The table below provides a detailed breakdown of the Bank’s other indirect commitments expressed in terms of the contractual amounts of the
related commitment or contract which are not reflected on the Consolidated Statement of Financial Position.
As at October 31 ($ millions)
Commercial letters of credit
Commitments to extend credit(1)
Original term to maturity of one year or less
Original term to maturity of more than one year
Securities lending
Securities purchase and other commitments
Total
(1)
Includes liquidity facilities.
(c) Lease commitments
2019
811
2018
$
1,046
$
70,862
141,011
50,300
1,142
75,033
122,407
51,723
888
$ 264,126
$ 251,097
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
$
2019
441
1,281
1,011
$
2018
420
1,196
880
$ 2,733
$ 2,496
Building rent expense, included in premises and technology expense in the Consolidated Statement of Income, was $527 million (2018 –
$477 million).
(d) Assets pledged and repurchase agreements
In the ordinary course of business, securities and other assets are pledged against liabilities. As well, securities are sold under repurchase
agreements. The carrying value of pledged assets and details of related activities are shown below.
As at October 31 ($ 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)
(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.
226 | 2019 Scotiabank Annual Report
2019
2018
$
164
4,505
1,221
3,579
13,491
123,760
27,154
6,683
25,249
1,047
$
118
3,147
1,629
3,127
7,246
128,383
30,725
6,085
23,178
963
$ 206,853
110,879
$ 204,601
82,816
$ 317,732
$ 287,417
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(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.
36 Financial Instruments – Risk Management
The Bank’s principal business activities result in a balance sheet that consists primarily of financial instruments. In addition, the Bank uses
derivative financial instruments for both trading and hedging purposes. The principal financial risks that arise from transacting financial
instruments include credit risk, liquidity risk and market risk. The Bank’s framework to monitor, evaluate and manage these risks is consistent with
that in place as at October 31, 2019:
•
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);
guidelines are developed to clarify risk limits and conditions under which the Bank’s risk policies are implemented;
•
• 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.
•
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:
•
•
•
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 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:
•
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.
2019 Scotiabank Annual Report | 227
Consolidated Financial Statements
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
2019
Exposure at default(1)
2018
Drawn(2)
Undrawn
commitments
Other
exposures(3)
Total
Total
$ 173,893
19,788
174,413
368,094
$
93,026
2,451
814
96,291
$
77,113
16,487
6,859
$ 344,032
38,726
182,086
$ 307,960
41,502
196,102
100,459
564,844
545,564
52,814
1,998
6,749
61,561
3,684
156
30
3,870
9,974
57
2
10,033
66,472
2,211
6,781
75,464
68,133
3,511
5,336
76,980
$ 429,655
$ 100,161
$ 110,492
$ 640,308
$ 622,544
161,392
16,046
32,799
18,524
29,839
2,480
$ 210,237
$
50,843
$
47,427
44,709
92,136
–
–
–
$ 302,373
$
50,843
$
–
–
–
–
–
–
–
–
179,916
45,885
35,279
161,339
45,887
32,847
$ 261,080
$ 240,073
47,427
44,709
92,136
44,517
42,100
86,617
$ 353,216
$ 326,690
$ 732,028
$ 151,004
$ 110,492
$ 993,524
$ 949,234
$
$ 419,739
95,268
48,135
33,909
29,070
12,639
23,050
35,311
11,164
23,743
96,262
37,529
1,309
1,189
745
397
6,656
1,849
999
4,069
$
33,232
43,239
4,077
2,871
3,139
637
16,179
1,476
239
5,403
$ 549,233
176,036
53,521
37,969
32,954
13,673
$ 521,803
178,139
53,152
33,294
28,495
13,649
45,885
38,636
12,402
33,215
42,613
38,302
11,368
28,419
$ 732,028
$ 151,004
$ 110,492
$ 993,524
$ 949,234
Exposure at default is presented after credit risk mitigation. Exposures exclude equity securities and other assets.
(1)
(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 (2018 – 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.
228 | 2019 Scotiabank Annual Report
C
o
n
s
o
l
i
d
a
t
e
d
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Consolidated Statement of Financial Position asset categories cross-referenced to credit risk exposures
The table below provides mapping of on-balance sheet asset categories that are included in the various Basel III exposure categories as presented
in the credit risk exposure summary table 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.
As at October 31, 2019 ($ millions)
Non-retail
Retail
Securitization
Repo-style
Transactions
OTC
Derivatives
Equity
Also
subject to
Credit Risk
All Other(1)
Total
Credit Risk Exposures
Other Exposures
Drawn
Other Exposures
Market Risk Exposures
Cash and deposits with financial
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)
$
43,392
–
$
21
7,255
–
–
–
–
78,235
80,777
–
–
202,935
(583)
13,902
–
–
–
3,721
–
–
–
145
–
–
–
–
–
187,284
97,253
14,033
3,461
(708)
–
–
–
–
905
$
– $
–
– $
–
– $
–
$
– $
–
– $
3,709
3,328 $
–
46,720
3,709
–
–
–
–
–
–
–
–
–
6,779
–
–
131,173
–
–
–
38,119
–
–
–
2,279
–
34,489
–
–
–
–
–
–
–
–
–
–
62
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
112,643
6,429
995
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5
–
1,845
108
12
3,180
321
(3,786)
(6)
2,669
5,614
17,465
19,773
112,664
13,829
995
–
131,178
38,119
82,359
268,169
98,631
17,788
212,972
(5,077)
13,896
2,669
5,614
17,465
24,461
Total
$ 429,655
$ 302,373
$ 8,196 $ 131,235 $ 38,119 $ 2,279
$ 41,268 $ 123,776 $ 50,528 $ 1,086,161
Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks.
Includes $81.5 billion in mortgages guaranteed by Canada Mortgage Housing Corporation including 90% of privately insured mortgages.
(1)
(2)
(3) Amounts for AIRB exposures are reported gross of allowances and amounts for standardized exposures are reported net of allowances.
As at October 31, 2018 ($ millions)
Non-retail
Retail
Securitization
Repo-style
Transactions
OTC
Derivatives
Equity
Also
subject to
Credit Risk
All Other(1)
Total
Credit Risk Exposures
Other Exposures
Drawn
Other Exposures
Market Risk Exposures
$
– $
–
– $
–
– $
–
$
–
–
$
– $
3,191
3,541
–
$
62,269
3,191
Cash and deposits with financial
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
–
–
–
–
–
–
–
–
–
6,606
–
–
104,010
–
–
–
37,558
–
–
–
1,754
–
33,937
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
85,450
7,139
454
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8
–
805
188
14
1,467
(67)
(3,719)
(9)
2,684
4,850
17,719
17,794
85,474
14,334
454
12
104,018
37,558
78,396
253,357
96,019
16,485
191,038
(5,065)
16,329
2,684
4,850
17,719
19,371
–
–
–
–
–
–
–
–
1,366
575
6,255
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,613
687
7,748
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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.
2019 Scotiabank Annual Report | 229
Consolidated Financial Statements
(ii) Credit quality of non-retail exposures
Credit decisions are made based upon an assessment of the credit risk of the individual borrower or counterparty. Key factors considered in the
assessment include: the borrower’s management; the borrower’s current and projected financial results and credit statistics; the industry in which
the borrower operates; economic trends; and geopolitical risk. Banking units and Global Risk Management also review the credit quality of the
credit portfolio across the organization on a regular basis to assess whether economic trends or specific events may affect the performance of the
portfolio.
The Bank’s non-retail portfolio is well diversified by industry. As at October 31, 2019, and October 31, 2018, 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, 2018.
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
Internal Grade Code
PD Range(2)
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% – 0.0433%
0.0433% – 0.1204%
0.0526% – 0.1298%
0.0817% – 0.2044%
0.1151% – 0.2985%
0.1622% – 0.4358%
0.2661% – 0.4837%
0.4366% – 0.5368%
0.5368% – 0.7163%
0.7163% – 1.3857%
1.3857% – 2.6809%
2.6809% – 9.7903%
9.7903% – 18.4807%
18.4807% – 35.1941%
35.1941% – 59.3246%
100%
(1)
(2)
Applies to non-retail portfolio.
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
71,648
30,413
27,694
30,357
23,437
24,221
33,415
22,577
15,832
6,622
2,639
596
914
555
225
835
2019
Exposure at Default(1)
Undrawn
commitments
Other
exposures(2)
$
2,661
9,517
17,887
17,170
14,939
12,109
10,944
5,442
3,348
1,457
541
37
58
48
–
133
$
16,064
21,999
22,435
11,767
10,915
7,923
4,448
1,919
1,869
460
305
94
226
13
–
22
$
Total
90,373
61,929
68,016
59,294
49,291
44,253
48,807
29,938
21,049
8,539
3,485
727
1,198
616
225
990
$
2018
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
Total
Government guaranteed residential mortgages(3)
$ 291,980
76,114
$ 96,291
–
$ 100,459
–
$ 488,730
76,114
$ 463,372
82,192
Total
$ 368,094
$ 96,291
$ 100,459
$ 564,844
$ 545,564
(1)
(2)
(3)
After credit risk mitigation.
Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, securitizations, excluding nil first loss protection (2018 – nil), derivatives and repo-style transactions (reverse repurchase agreements, repurchase
agreements and securities lending and borrowing), net of related collateral.
These exposures are classified as sovereign exposures and are included in the non-retail category.
230 | 2019 Scotiabank Annual Report
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, 2019 comprised of drawn, undrawn and other
exposures to corporate, bank and sovereign counterparties amounted to $75 billion (October 31, 2018 – $77 billion). Within this portfolio, the
majority of Corporate/Commercial exposures are to unrated counterparties, mainly in the Caribbean and Latin American region.
(iii) Credit quality of retail exposures
The Bank’s retail portfolios consist of a number of relatively small loans to a large number of borrowers. The portfolios are distributed across
Canada and a wide range of countries. As such, the portfolios inherently have a high degree of diversification. In addition, as of October 31, 2019,
39% of the Canadian banking residential mortgage portfolio is insured and the average loan-to-value ratio of the uninsured portion of the portfolio
is 55%.
Retail AIRB portfolio
The data in the table below provides a distribution of the retail AIRB exposure within each PD range by asset class:
C
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s
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i
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a
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e
d
F
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a
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c
i
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l
S
t
a
t
e
m
e
n
t
s
As at October 31 ($ millions)
Category of (PD) grades
Exceptionally Low
Very Low
Low
Medium Low
Medium
High
Extremely High
Default
Total
(1)
After credit risk mitigation.
2019
Exposure at default(1)
Real estate secured
2018
PD range
Mortgages
HELOC
0.0000% – 0.0499% $
0.0500% – 0.1999%
0.2000% – 0.9999%
1.0000% – 2.9999%
3.0000% – 9.9999%
10.0000% – 19.9999%
20.0000% – 99.9999%
100%
–
44,045
85,350
8,998
865
357
422
225
$
–
32,487
5,381
1,106
344
195
73
68
Qualifying
revolving
$ 12,257
9,188
12,169
6,065
5,000
308
764
134
Other retail
Total
Total
$
535
6,720
18,284
5,846
2,830
26
848
190
$
12,792
92,440
121,184
$
12,155
89,544
107,036
22,015
9,039
886
2,107
617
20,578
7,211
1,370
1,591
588
$ 140,262
$ 39,654
$ 45,885
$ 35,279
$ 261,080
$ 240,073
Retail standardized portfolio
The retail standardized portfolio of $92 billion as at October 31, 2019 (2018 – $87 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,
$47 billion (2018 – $45 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.
• Additional collateral is required when the market value of the transaction exceeds thresholds agreed upon with the pledgor.
• 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.
• 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, 2019, the approximate market value of cash and securities collateral accepted that may be sold or repledged by the Bank was
$167 billion (2018 – $136 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 $211 billion
(2018 – $183 billion), of which approximately $27 billion was not sold or re-pledged (2018 – $29 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 35(d) details the nature and extent of the Bank’s asset pledging activities. Asset pledging transactions are
conducted under terms that are common and customary to standard derivative, securities financing, and other borrowing activities. Standard risk
management controls are applied with respect to asset pledging.
Assets acquired in exchange for loans
The carrying value of assets acquired in exchange for loans as at October 31, 2019 was $372 million (2018 – $426 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.
2019 Scotiabank Annual Report | 231
Consolidated Financial Statements
The key elements of the Bank’s liquidity risk management framework include:
•
liquidity risk measurement and management limits, including limits on maximum net cash outflow by currency over specified short-term
horizons;
• 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.
•
•
•
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 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;
and mortgage prepayment rates. 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)
2019
2018
100 bp increase
100 bp decrease
Canadian
dollar
$ (228)
$ 226
Net income
Other
currencies
Economic value of equity
Total
Canadian
dollar
Other
currencies
Total
Net
income
Economic value
of equity
$ (45)
$ 41
$ (273)
$ 267
$ (533)
$ 360
$ (915)
$ 813
$ (1,448)
$ 1,173
$ (105)
$ 101
$ (870)
$ 797
232 | 2019 Scotiabank Annual Report
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(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, 2019, 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 $64 million (October 31, 2018 – $65 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, 2019 would increase (decrease) the unrealized
foreign currency translation losses in the accumulated other comprehensive income in equity by approximately $374 million (2018 – $384 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)
As at October 31, 2019
Average
High
Low
As at October 31, 2018
For the year ended October 31, 2019
Credit spread plus interest rate
Credit spread
Interest rate
Equities
Foreign exchange
Commodities
Debt specific
Diversification effect
All-Bank VaR
All-Bank stressed VaR
$ 13.8
8.0
7.2
3.4
2.7
3.1
3.3
(10.9)
$ 11.1
7.7
7.8
3.5
3.5
2.3
3.9
(11.9)
$ 17.5
11.2
12.6
8.1
7.0
4.7
5.9
n/a
$
7.7
3.8
5.1
1.0
1.5
1.3
2.0
n/a
$ 15.4
$ 12.4
$ 17.9
$
9.2
$ 45.9
$ 40.1
$ 60.6
$ 26.7
Below are the market risk capital requirements as at October 31, 2019.
($ millions)
All-Bank VaR
All-Bank stressed VaR
Incremental risk charge
Standardized approach
Total market risk capital
(1)
Equates to $8,674 million of risk-weighted assets (2018 – $8,357 million).
$ 11.0
6.2
7.7
5.8
2.8
1.7
3.6
(11.7)
$ 13.2
$ 44.6
$ 128
430
87
49
$ 694(1)
2019 Scotiabank Annual Report | 233
Consolidated Financial Statements
(d) Operational risk
Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to inadequate or failed internal processes or
systems, human error, or external events. Operational risk includes legal and regulatory risk, business process and change risk, fiduciary or
disclosure breaches, technology failure, financial crime and environmental risk. Operational risk, in some form, exists in each of the Bank’s
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.
37 Acquisitions and divestitures
Acquisitions
Current year
Banco Dominicano del Progreso, Dominican Republic
On March 1, 2019, the Bank acquired 97.44% of the voting shares of Banco Dominicano del Progreso, a bank with operations in Dominican
Republic, in exchange for total consideration of $440 million in cash. The acquired business forms part of the International Banking business
segment.
The fair value of the identifiable assets and liabilities acquired of Banco Dominicano del Progreso, Dominican Republic at the date of acquisition
were:
($ millions)
Total net assets acquired(1)
Goodwill arising on acquisition
Deferred tax liabilities
Non-controlling interest
Total purchase consideration transferred
(1)
Includes finite life intangible assets of $26 million relating to core-deposits and customer relationships.
176
271
(3)
(4)
$440
Goodwill value of $271 million arising on acquisition largely reflects the synergies through combining and streamlining the Bank’s current
operations in Dominican Republic with Banco Dominicano del Progreso’s operations.
Banco Cencosud, Peru
On March 1, 2019, the Bank acquired 51% of the voting shares of Banco Cencosud, Peru in exchange for total consideration of $133 million in cash.
The Bank and Banco Cencosud will jointly manage the credit card operations and offer other products and services to customers in partnership for
15 years. On acquisition, the Bank recorded $562 million of assets (mainly loans and intangible assets), $386 million of liabilities (mainly deposits)
and a non-controlling interest of $43 million. The intangible assets arising from acquisition of $123 million relates to the 15 year exclusivity contract.
The acquired business forms part of the International Banking business segment.
Aggregate impact to Consolidated Income
For the year ended October 31, 2019, both acquisitions contributed revenue of $217 million in aggregate and a net loss of $64 million in aggregate.
The primary reason for the net loss is the recording of a provision for credit losses of $151 million ($106 million after-tax) on acquired performing
financial assets, as required under IFRS 9.
Prior year
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 $56
million in additional common shares which may be paid based on achieving future growth targets. The acquired business forms part of the
Canadian Banking business segment.
234 | 2019 Scotiabank Annual Report
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The fair value of the identifiable net assets of Jarislowsky, Fraser Limited at the date of acquisition was:
($ millions)
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
Comprised of customer relationship intangible of $255.
(1)
(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 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.
On acquisition, approximately $2.0 billion of assets (mainly loans) and $1.4 billion of liabilities (mainly deposits) were recorded. During the 2019
fiscal year, the Bank completed its estimation of fair values of assets acquired and liabilities assumed. This acquisition is not considered material to
the Bank.
BBVA, Chile
On July 6, 2018, the Bank acquired 68.2% of Banco Bilbao Vizcaya Argentaria, Chile, 100% of BBVA Seguros Vida S.A., 100% of Servicios
Corporativos S.A., 68.1% of Inmobiliaria e Inversiones S.A. and 4.1% of Inversiones DCV S.A. (together “BBVA Chile”) in Chile for cash consideration
of US$ 2.2 billion. 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 non-controlling shareholders 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 fair value, which can be settled, at the Bank’s discretion, by the issuance of common shares or cash. The Bank recorded a non-controlling
interest in BBVA Chile of approximately $0.6 billion at the time of the acquisition, which changed to approximately $0.7 billion on the merger of
BBVA Chile with Scotiabank Chile. During the 2019 fiscal year, the Bank completed its estimation of fair values of assets acquired and liabilities
assumed.
The fair values of the identifiable net assets of BBVA at the date of acquisition were:
($ millions)
Total identifiable net assets at fair value(1)
Intangible assets
Finite life intangible assets
Deferred tax liability
Goodwill arising on acquisition
Non-controlling interest
Purchase consideration transferred
(1)
Includes loans of $20,469 and deposits of $13,444.
$ 2,272
143
(90)
1,281
(677)
$ 2,929
MD Financial Management, Canada
On October 3, 2018, the Bank completed the acquisition of MD Financial Management (“MD Financial”) from the Canadian Medical Association for
approximately $2.7 billion, paid in cash. The acquired business forms part of the Canadian Banking business segment. During the 2019 fiscal year,
the Bank completed its estimation of fair values of assets acquired and liabilities assumed.
2019 Scotiabank Annual Report | 235
Consolidated Financial Statements
The fair values of the identifiable net assets of MD Financial at the date of acquisition were:
($ millions)
Total identifiable net assets at fair value
Intangible assets
Finite life intangible assets(1)
Indefinite life intangible assets(2)
Deferred tax liability
Goodwill arising on acquisition
Purchase consideration transferred
$
97
70
1,880
(501)
1,154
$ 2,700
Comprised of customer relationship intangible.
(1)
(2) Comprised of fund management contract of $1.8 billion and acquired trademark of $80 million.
Goodwill largely reflects the value of synergies expected by combining certain operations within the Bank’s asset management businesses as well
as MD Financial’s strong market presence and future growth prospects.
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 related costs directly related to the four acquisitions of $44 million are included in non-interest expenses in the Consolidated
Statement of Income.
Divestitures
Announced divestitures impacting the current year
Insurance and banking operations in El Salvador
On February 8, 2019, the Bank announced that it has reached an agreement under which the Bank will sell its banking and insurance operations in
El Salvador, including Scotiabank El Salvador, its subsidiaries and Scotia Seguros to Imperia Intercontinental Inc. The transaction is expected to
close in fiscal 2020 and is subject to regulatory approvals and closing conditions.
As this transaction met the accounting requirements of assets held for sale, a total loss of approximately $136 million after tax, that primarily
represents the carrying value of goodwill relating to this business, was recorded in Non-interest income – Other and reported in the Other
segment. The transaction will increase the Bank’s common equity Tier 1 (CET1) ratio by approximately five basis points.
Operations in Puerto Rico and the U.S. Virgin Islands
On June 26, 2019, the Bank announced the sale of its operations in Puerto Rico and the U.S. Virgin Islands (“USVI”) to Oriental Bank, a subsidiary of
OFG Bancorp. The transaction is expected to close in fiscal 2020 and is subject to regulatory approvals and closing conditions.
As this transaction met the accounting requirements of assets held for sale, a loss of approximately $402 million after tax, that primarily
represents the carrying value of goodwill relating to this business, was recorded in Non-interest income – Other and reported in the Other
segment.
Upon closing, an after-tax gain of approximately $50 million is expected to be recorded relating primarily to accumulated foreign currency
translation gains and the premium received on the USVI operations. The amounts are subject to closing adjustments including fair values and
foreign exchange rates prevailing at the date of closing. The transaction will increase the Bank’s common equity Tier 1 (CET1) ratio by
approximately five basis points.
Pension fund operations in Colombia
On August 9, 2019, the Bank announced the sale of its 51% interest in AFP Colfondos to AFP Habitat. The transaction is expected to close in fiscal
2020 and is subject to regulatory approvals and closing conditions.
As this transaction met the accounting requirements of assets held for sale, a loss of approximately $46 million after tax, that primarily represents
the carrying value of goodwill relating to this business, was recorded in Non-interest income – Other and reported in the Other segment.
Closed divestitures impacting the current year
Pension and insurance operations in the Dominican Republic
On April 30, 2019, the Bank completed the sale of Scotia Crecer AFP and Scotia Seguros, its pension and related insurance businesses in the
Dominican Republic to Grupo Rizek, upon receiving regulatory approvals and satisfying closing conditions.
All assets and liabilities of approximately $111 million and $26 million, respectively, in relation to this business have been derecognized on the date
of close and a net gain of approximately $273 million after tax was recorded in Non-interest income – Other and reported in the Other segment.
Banking operations in the Caribbean
On November 27, 2018, the Bank announced it has entered into an agreement to sell its banking operations in nine non-core markets in the
Caribbean. Subsequently, the Bank did not close operations in two markets (Antigua and Barbuda, and Guyana) while remaining seven (Anguilla,
Dominica, Grenada, St. Kitts & Nevis, St. Lucia, St. Maarten, St. Vincent & the Grenadines) were sold to Republic Financial Holdings Limited on
October 31, 2019, upon receiving regulatory approvals and satisfying closing conditions.
236 | 2019 Scotiabank Annual Report
All assets and liabilities of approximately $2,086 million and $2,069 million, respectively, in relation to these operations have been derecognized
on the date of close and a net gain of approximately $38 million after tax was recorded in Non-interest income – Other and reported in the Other
segment.
Divestitures previously announced not yet impacting the Bank’s financial results
Thanachart Bank, Thailand
On August 8, 2019, the Bank announced that it has signed agreements with ING Groep N.V., Thanachart Bank Public Company Limited (“TBank”)
and TMB Bank Public Company Limited (“TMB”) that largely follow the memorandum of understanding announced on February 26, 2019. The
carrying value of the Bank’s 49% interest in TBank was $3.55 billion as at October 31, 2019.
Upon closing and pursuant to these agreements, the Bank will sell its interest in TBank in exchange for cash and shares in TMB (and ultimately the
new bank resulting from the subsequent merger of TMB and TBank (“the Merged Bank”)). Based on current values, this would result in the Bank
owning approximately 6% of the Merged Bank.
The announced transaction is subject to customary closing conditions, including regulatory approvals, and other non-customary closing
conditions which are particular to the many parties involved. The transaction is expected to close in fiscal 2020.
The Bank will continue to retain 49% interest in two TBank subsidiaries that are not part of these signed agreements.
Insurance operations in the Caribbean
On November 27, 2018, the Bank announced its subsidiaries in Jamaica and Trinidad & Tobago will sell their insurance operations. The Bank will
partner with the buyer to provide an expanded suite of insurance products and services to its customers. Subsequently, the Bank and acquirer
have mutually agreed not to proceed with the proposed sale of insurance operations in Jamaica.
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2019 Scotiabank Annual Report | 237
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)
DBRS
Moody’s
Standard & Poor’s BBB-/P-2(low)*
Pfd-2
Baa3(hyb)
*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 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). The Bank’s bail-inable
senior debt is rated AA (low) by DBRS, A2 by Moody’s, AA- by Fitch
and A- by S&P. All four credit rating agencies have a Stable outlook
on the Bank.
There were no changes to the Bank’s credit ratings during the year.
(1)
Excluding instruments with Non-Viability Contingent Capital Features
Shareholder Information
Annual meeting
Shareholders are invited to attend the 188th Annual Meeting of
Holders of Common Shares, to be held on April 7, 2020, 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 11, 2020.
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 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 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.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 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 2020
Record and payment dates for common and preferred shares,
subject to approval by the Board of Directors.
RECORD DATE PAYMENT DATE
January 7
April 7
July 7
October 6
January 29
April 28
July 29
October 28
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.
238 | 2019 Scotiabank Annual Report
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.
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.
Other TLAC Instruments: Prescribed shares and liabilities that are
subject to conversion into common shares pursuant to the CDIC Act
and which meet all of the eligibility criteria set out in the TLAC
Guidelines.
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.
2019 Scotiabank Annual Report | 239
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
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.
TLAC: Total loss absorbing capacity.
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.
240 | 2019 Scotiabank Annual Report
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.
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.
2019 Scotiabank Annual Report | 241
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: www.scotiabank.com
Global Communications
Scotiabank
44 King Street West, Toronto, Ontario
Canada M5H 1H1
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
242 | 2019 Scotiabank Annual Report
Home of the Toronto Maple
Leafs and Toronto Raptors
Since 2008, Scotiabank has
proudly supported one million
kids and counting through our
commitment to community
hockey across Canada.
Scotiabank is the Official Bank of the NHL®,
NHL Alumni Association, Toronto Maple Leafs,
Winnipeg Jets, Calgary Flames, and
Edmonton Oilers. The Bank also supports
the Montreal Canadiens.
We the
champs!
Year one of Scotiabank’s 20-year deal with
Maple Leaf Sports and Entertainment was a
big one. Fans from across Canada, and around
the world, came together and cheered on the
Toronto Raptors – sponsored by Tangerine
Bank – as they defeated team after team to
win the NBA Championship, in Our House
– Scotiabank Arena.
Soccer Partnerships
The Scotiabank Futbol Club has impacted
over 450,000 young people in 10 Latin
American countries and four Caribbean
countries through various programs,
partnerships and sponsorships such as
Campeonato Infantil (youth championships),
FMF Sector Amateur, FC Barcelona foundation,
Campos de Futbol, NextPlay and
indestructible red soccer balls. Scotiabank
is also a proud sponsor of Concacaf and a
regional partner with FC Barcelona.
® NHL and the NHL Shield are registered trademarks of the National Hockey League. All Rights Reserved.
Copyright © 2019 NBA. All rights reserved.
Our Purpose
Scotiabank’s purpose is:
Why?
TM
Through our work, we enable futures for:
• Employees
• Customers
• Communities
• And building the future of the Bank,
delivering for shareholders.
The vision and the journey may differ
– but by focusing on our customers and
delivering results, Scotiabankers make
the possible possible.
We believe banking is a calling. We have
seen the positive impact that our Bank has
had in communities across our footprint.
From the jobs we create, to the investments
we make in businesses and communities,
to the values we uphold and promote, our
Bank continues to serve as an important
part of the economic and social fabric of
the countries in which we live and work.
As we build a stronger Bank, it’s up to
each and every one of us to contribute to
the legacy of those who have come before
us and to continue to build our Bank
for every future.
Our Values
Respect: Value Every Voice
Integrity: Act with Honour
Passion: Be Your Best
Accountability: Make it Happen
TM Trademark of The Bank of Nova Scotia.
® Registered trademark of The Bank of Nova Scotia.
946001E (2019)