TIDM32SS
RNS Number : 1231I
National Bank of Canada
30 November 2022
Regulatory Announcement
National Bank of Canada
November 30, 2022
2022 Management's Discussion and Analysis (Part 1)
National Bank of Canada (the "Bank") announces publication of
its 2022 Annual Report, including the Management's Discussion and
Analysis thereon (the "2022 MD&A"). The 2022 MD&A has been
uploaded to the National Storage Mechanism and will shortly be
available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
and is available on the Bank's website as part of the 2022 Annual
Report at:
https://www.nbc.ca/en/about-us/investors/investor-relations/annual-reports-proxy-circulars-aif.html
.
To view the full PDF of the 2022 MD&A, the 2022 Annual
Report and the 2022 Annual CEO and CFO Certifications please click
on the following link:
http://www.rns-pdf.londonstockexchange.com/rns/1231I_1-2022-11-30.pdf
http://www.rns-pdf.londonstockexchange.com/rns/1231I_2-2022-11-30.pdf
http://www.rns-pdf.londonstockexchange.com/rns/1231I_3-2022-11-30.pdf
The information found in the various documents and reports
published by the Bank or the information available on the Bank's
website and mentioned herein is not and should not be considered
incorporated by reference into the 2022 Annual Report, the
Management's Discussion and Analysis, or the Consolidated Financial
Statements, unless expressly stated otherwise.
Financial Reporting Method 16 Quarterly Financial Information 48
Analysis of the Consolidated
Financial Disclosure 22 Balance Sheet 49
Securitization and Off-Balance-Sheet
Overview 23 Arrangements 53
Financial Analysis 27 Capital Management 55
Business Segment Analysis 30 Risk Management 65
Critical Accounting Policies
Personal and Commercial 31 and Estimates 106
Wealth Management 35 Accounting Policy Changes 111
Financial Markets 38 Future Accounting Policy Changes 111
U.S. Specialty Finance
and International (USSF&I) 42 Additional Financial Information 112
Other 47 Glossary 122
Caution Regarding Forward-Looking Statements
Certain statements in this document are forward-looking
statements. All such statements are made in accordance with
applicable securities legislation in Canada and the United States.
Forward-looking statements in this document may include, but are
not limited to, statements with respect to the economy-particularly
the Canadian and U.S. economies-market changes, the Bank's
objectives, outlook and priorities for fiscal year 2023 and beyond,
the strategies or actions that will be taken to achieve them,
expectations for the Bank's financial condition, the regulatory
environment in which it operates, the impacts of-and the Bank's
response to-the COVID-19 pandemic, and certain risks it faces.
These forward-looking statements are typically identified by verbs
or words such as "outlook", "believe", "foresee", "forecast",
"anticipate", "estimate", "project", "expect", "intend" and "plan",
in their future or conditional forms, notably verbs such as "will",
"may", "should", "could" or "would" as well as similar terms and
expressions. Such forward-looking statements are made for the
purpose of assisting the holders of the Bank's securities in
understanding the Bank's financial position and results of
operations as at and for the periods ended on the dates presented,
as well as the Bank's vision, strategic objectives, and financial
performance targets, and may not be appropriate for other purposes.
These forward-looking statements are based on current expectations,
estimates, assumptions and intentions and are subject to
uncertainty and inherent risks, many of which are beyond the Bank's
control.
Assumptions about the performance of the Canadian and U.S.
economies in 2023 and how that performance will affect the Bank's
business are among the main factors considered in setting the
Bank's strategic priorities and objectives, including provisions
for credit losses. In determining its expectations for economic
conditions, both broadly and in the financial services sector in
particular, the Bank primarily considers historical economic data
provided by the governments of Canada, the United States and
certain other countries in which the Bank conducts business, as
well as their agencies.
Statements about the economy, market changes, and the Bank's
objectives, outlook and priorities for fiscal 2023 and thereafter
are based on a number of assumptions and are subject to risk
factors, many of which are beyond the Bank's control and the
impacts of which are difficult to predict. These risk factors
include, among others, the general economic environment and
financial market conditions in Canada, the United States, and other
countries where the Bank operates; exchange rate and interest rate
fluctuations; inflation; disruptions in global supply chains;
higher funding costs and greater market volatility; changes made to
fiscal, monetary, and other public policies; changes made to
regulations that affect the Bank's business; geopolitical and
sociopolitical uncertainty; the transition to a low-carbon economy
and the Bank's ability to satisfy stakeholder expectations on
environmental and social issues; significant changes in consumer
behaviour; the housing situation, real estate market, and household
indebtedness in Canada; the Bank's ability to achieve its long-term
strategies and key short-term priorities; the timely development
and launch of new products and services; the Bank's ability to
recruit and retain key personnel; technological innovation and
heightened competition from established companies and from
competitors offering non-traditional services; changes in the
performance and creditworthiness of the Bank's clients and
counterparties; the Bank's exposure to significant regulatory
matters or litigation; changes made to the accounting policies used
by the Bank to report financial information, including the
uncertainty inherent to assumptions and critical accounting
estimates; changes to tax legislation in the countries where the
Bank operates, i.e., primarily Canada and the United States;
changes made to capital and liquidity guidelines as well as to the
presentation and interpretation thereof; changes to the credit
ratings assigned to the Bank; potential disruptions to key
suppliers of goods and services to the Bank; potential disruptions
to the Bank's information technology systems, including evolving
cyberattack risk as well as identity theft and theft of personal
information; the risk of fraudulent activity; and possible impacts
of major events affecting the local and global economies, including
international conflicts, natural disasters, and public health
crises such as the COVID-19 pandemic, the evolution of which is
difficult to predict and could continue to have repercussions on
the Bank.
There is a strong possibility that the Bank's express or implied
predictions, forecasts, projections, expectations or conclusions
will not prove to be accurate, that its assumptions may not be
confirmed and that its vision, strategic objectives and financial
performance targets will not be achieved. The Bank recommends that
readers not place undue reliance on forward-looking statements, as
a number of factors could cause actual results to differ
significantly from the expectations, estimates or intentions
expressed in these forward-looking statements. These risk factors
include credit risk, market risk, liquidity and funding risk,
operational risk, regulatory compliance risk, reputation risk,
strategic risk, environmental and social risk, and certain emerging
risks or risks deemed significant, all of which are described in
greater detail in the Risk Management section beginning on page 65
of the 2022 Annual Report.
The foregoing list of risk factors is not exhaustive. Additional
information about these risk factors is provided in the Risk
Management section of the 2022 Annual Report. Investors and others
who rely on the Bank's forward-looking statements should carefully
consider the above factors as well as the uncertainties they
represent and the risk they entail. 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 it
or on its behalf. The Bank cautions investors that these
forward-looking statements are not guarantees of future performance
and that actual events or results may differ significantly from
these statements due to a number of factors.
Financial Reporting Method
The Bank's consolidated financial statements are prepared in
accordance with IFRS, as issued by the IASB. The financial
statements also comply with section 308(4) of the Bank Act
(Canada), which states that, except as otherwise specified by the
Office of the Superintendent of Financial Institutions (Canada)
(OSFI), the consolidated financial statements are to be prepared in
accordance with IFRS, which represent Canadian GAAP. None of the
OSFI accounting requirements are exceptions to IFRS.
The presentation of segment disclosures is consistent with the
presentation adopted by the Bank for the fiscal year beginning
November 1, 2021. This presentation reflects the fact that the loan
portfolio comprising borrowers in the "Oil and gas" and "Pipelines"
sectors as well as related activities, which had previously been
reported in the Personal and Commercial segment, are now reported
in the Financial Markets segment. The Bank made this change to
better align the monitoring of its activities with its management
structure.
In addition, a change in accounting policy, as described in the
Accounting Policy Changes section of Note 1 to the consolidated
financial statements, was applied retrospectively during the year
ended October 31, 2022 after the International Financial Reporting
Interpretations Committee (IFRIC) issued a final agenda decision on
accounting for the costs of configuring or customizing a supplier's
software in a cloud computing arrangement. The figures for the year
ended October 31, 2021 have been adjusted to reflect this change in
accounting policy.
Non-GAAP and Other Financial Measures
The Bank uses a number of financial measures when assessing its
results and measuring overall performance. Some of these financial
measures are not calculated in accordance with GAAP. Regulation
52-112 respecting Non-GAAP and Other Financial Measures Disclosure
(Regulation 52-112) prescribes disclosure requirements that apply
to the following measures used by the Bank:
-- non-GAAP financial measures;
-- non-GAAP ratios;
-- supplementary financial measures;
-- capital management measures.
Non-GAAP Financial Measures
The Bank uses non-GAAP financial measures that do not have
standardized meanings under GAAP and that therefore may not be
comparable to similar measures used by other companies. Presenting
non-GAAP financial measures helps readers to better understand how
management analyzes results, shows the impacts of specified items
on the results of the reported periods, and allows readers to
better assess results without the specified items if they consider
such items not to be reflective of the underlying performance of
the Bank's operations. In addition, like many other financial
institutions, the Bank uses the taxable equivalent basis to
calculate net interest income, non-interest income, and income
taxes. This calculation method consists of grossing up certain
tax-exempt income (particularly dividends) by the income tax that
would have been otherwise payable. An equivalent amount is added to
income taxes. This adjustment is necessary in order to perform a
uniform comparison of the return on different assets regardless of
their tax treatment.
The key non-GAAP financial measures used by the Bank to analyze
its results are described below, and a quantitative reconciliation
of these measures is presented in the tables in the Reconciliation
of Non-GAAP Financial Measures section on pages 20 and 21 and in
the Consolidated Results table on page 27. It should be noted that,
for the year ended October 31, 2022, no specified items have been
excluded from results, whereas an amount of $9 million in
intangible asset impairment losses ($7 million net of income taxes)
related to technology developments had been excluded as specified
items for the year ended October 31, 2021.
Adjusted Net Interest Income
This item represents net interest income on a taxable equivalent
basis and excluding specified items, if any. A taxable equivalent
is added to net interest income so that the performance of the
various assets can be compared irrespective of their tax treatment,
and specified items, if any, are excluded so that net interest
income can be better evaluated by excluding items that management
believes do not reflect the underlying financial performance of the
Bank's operations.
Adjusted Non-Interest Income
This item represents non -interest income on a taxable
equivalent basis and excluding specified items, if any. A taxable
equivalent is added to non-interest income so that the performance
of the various assets can be compared irrespective of their tax
treatment, and specified items, if any, are excluded so that
non--interest income can be better evaluated by excluding items
that management believes do not reflect the underlying financial
performance of the Bank's operations.
Adjusted Total Revenues
This item represents total revenues on a taxable equivalent
basis and excluding specified items, if any. It consists of
adjusted net interest income and adjusted non-interest income. A
taxable equivalent is added to total revenues so that the
performance of the various assets can be compared irrespective of
their tax treatment, and specified items, if any, are excluded so
that total revenues can be better evaluated by excluding items that
management believes do not reflect the underlying financial
performance of the Bank's operations.
Adjusted Non -Interest Expenses
This item represents non-interest expenses excluding specified
items, if any. Specified items, if any, are excluded so that
non-interest expenses can be better evaluated by excluding items
that management believes do not reflect the underlying financial
performance of the Bank's operations.
Adjusted Income Before Provisions for Credit Losses and Income
Taxes
This item represents income before provisions for credit losses
and income taxes on a taxable equivalent basis and excluding
specified items, if any. It also represents the difference between
adjusted total revenues and adjusted non-interest expenses. A
taxable equivalent is added to income before provisions for credit
losses and income taxes so that the performance of the various
assets can be compared irrespective of their tax treatment, and
specified items, if any, are excluded so that income before
provisions for credit losses and income taxes can be better
evaluated by excluding items that management believes do not
reflect the underlying financial performance of the Bank's
operations.
Adjusted Income Taxes
This item represents income taxes on a taxable equivalent basis
and excluding income taxes on specified items, if any.
Adjusted Net Income
This item represents net income excluding specified items, if
any. Specified items, if any, are excluded so that net income can
be better evaluated by excluding items that management believes do
not reflect the underlying financial performance of the Bank's
operations.
Adjusted Net income Attributable to Common Shareholders
This item represents net income attributable to common
shareholders excluding specified items, if any. Specified items, if
any, are excluded so that net income attributable to common
shareholders can be better evaluated by excluding items that
management believes do not reflect the underlying financial
performance of the Bank's operations.
Adjusted Basic Earnings Per Share
This item represents basic earnings per share excluding
specified items, if any. Specified items, if any, are excluded so
that basic earnings per share can be better evaluated by excluding
items that management believes do not reflect the underlying
financial performance of the Bank's operations.
Adjusted Diluted Earnings Per Share
This item represents diluted earnings per share excluding
specified items, if any. Specified items, if any, are excluded so
that diluted earnings per share can be better evaluated by
excluding items that management believes do not reflect the
underlying financial performance of the Bank's operations.
The Bank also uses the below-described measures to assess its
results. A quantitative reconciliation of these non-GAAP financial
measures is presented in the tables of the Reconciliation of
Non-GAAP Financial Measures section on pages 20 and 21 and in Table
5 on page 115.
Adjusted Non-Trading Net Interest Income
This item represents non-trading net interest income on a
taxable equivalent basis. It includes revenues related to financial
assets and financial liabilities associated with non-trading
activities, net of interest expenses and interest income related to
the financing of these financial assets and liabilities, and is
used to calculate adjusted non-trading net interest margin. A
taxable equivalent is added to non-trading net interest income so
that the performance of the various assets can be compared
irrespective of their tax treatment .
Net Interest Income From Trading Activities on a Taxable
Equivalent Basis
This item represents net interest income from trading activities
plus a taxable equivalent. It comprises dividends related to
financial assets and liabilities associated with trading
activities, net of interest expenses and interest income related to
the financing of these financial assets and liabilities. A taxable
equivalent is added to net interest income from trading activities
so that the performance of the various assets can be compared
irrespective of their tax treatment.
Non-Interest Income Related to Trading Activities on a Taxable
Equivalent Basis
This item represents non-interest income related to trading
activities to which a taxable equivalent amount is added. It
consists of realized and unrealized gains and losses as well as
interest income on securities measured at fair value through profit
or loss, income from held-for-trading derivative financial
instruments, changes in the fair value of loans at fair value
through profit or loss, changes in the fair value of financial
instruments designated at fair value through profit or loss,
certain commission income, other trading activity revenues, and any
applicable transaction costs. A taxable equivalent amount is added
to the non-interest income related to trading activities such that
the returns of different assets can be compared regardless of their
tax treatment.
Trading Activity Revenues on a Taxable Equivalent Basis
This item represents trading activity revenues plus a taxable
equivalent. They comprise dividends related to financial assets and
liabilities associated with trading activities, net of interest
expenses and interest income related to the financing of these
financial assets and liabilities, realized and unrealized gains and
losses, and interest income on securities measured at fair value
through profit or loss, income from held-for-trading derivative
financial instruments, changes in the fair value of loans at fair
value through profit or loss, changes in the fair value of
financial instruments designated at fair value through profit or
loss, certain commission income, other trading activity revenues,
and any applicable transaction costs. A taxable equivalent is added
to trading activity revenues so that the performance of the various
assets can be compared irrespective of their tax treatment.
Non-GAAP Ratios
The Bank uses non-GAAP ratios that do not have standardized
meanings under GAAP and that may therefore not be comparable to
similar measures used by other companies. A non-GAAP ratio is a
ratio in which at least one component is a non-GAAP financial
measure. The Bank uses non-GAAP ratios to present aspects of its
financial performance or financial position .
The key non-GAAP ratios used by the Bank are described
below.
Adjusted Return on Common Shareholders' Equity (ROE)
This item represents ROE excluding specified items, if any. It
is adjusted net income attributable to common shareholders
expressed as a percentage of average equity attributable to common
shareholders. It is a general measure of the Bank's efficiency in
using equity. Specified items, if any, are excluded so that ROE can
be better evaluated by excluding items that management believes do
not reflect the underlying financial performance of the Bank's
operations.
Adjusted Dividend Payout Ratio
This item represents the dividend payout ratio excluding
specified items, if any. It is dividends on common shares (per
share amount) expressed as a percentage of adjusted basic earnings
per share. This ratio is a measure of the proportion of earnings
that is paid out to shareholders in the form of dividends.
Specified items, if any, are excluded so that the dividend payout
ratio can be better evaluated by excluding items that management
believes do not reflect the underlying financial performance of the
Bank's operations.
Adjusted Operating Leverage
This item represents operating leverage on a taxable equivalent
basis and excluding specified items, if any. It is the difference
between the growth rate of adjusted total revenues and the growth
rate of adjusted non-interest expenses, and it measures the
sensitivity of the Bank's results to changes in its revenues.
Adjusted operating leverage is presented on a taxable equivalent
basis so that the performance of the various assets can be compared
irrespective of their tax treatment, and specified items, if any,
are excluded so that the efficiency ratio can be better evaluated
by excluding items that management believes do not reflect the
underlying financial performance of the Bank's operations.
Adjusted Efficiency Ratio
This item represents the efficiency ratio on a taxable
equivalent basis and excluding specified items, if any. The ratio
represents adjusted non-interest expenses expressed as a percentage
of adjusted total revenues. It measures the efficiency of the
Bank's operations. The adjusted efficiency ratio is presented on a
taxable equivalent basis so that the performance of the various
assets can be compared irrespective of their tax treatment, and
specified items, if any, are excluded so that the efficiency ratio
can be better evaluated by excluding items that management believes
do not reflect the underlying financial performance of the Bank's
operations.
Adjusted Net Interest Margin, Non-Trading
This item represents the non-trading net interest margin on a
taxable equivalent basis. It is calculated by dividing net interest
income related to adjusted non-trading activities by average
non-trading interest-bearing assets. This ratio is a measure of the
profitability of non-trading activities. The adjusted non-trading
net interest margin includes adjusted non-trading net interest
income, which includes a taxable equivalent amount so that the
performance of the various assets can be compared irrespective of
their tax treatment.
Supplementary Financial Measures
A supplementary financial measure is a financial measure that:
(a) is not reported in the Bank's consolidated financial
statements, and (b) is, or is intended to be, reported periodically
to represent historical or expected financial performance,
financial position, or cash flows. The composition of these
supplementary financial measures is presented in table footnotes or
in the Glossary section on pages 122 to 125 of this MD&A.
Capital Management Measures
The financial reporting framework used to prepare the financial
statements requires disclosure that helps readers assess the Bank's
capital management objectives, policies, and processes, as set out
in IFRS in IAS 1 - Presentation of Financial Statements. The Bank
has its own methods for managing capital and liquidity, and IFRS
does not prescribe any particular calculation method. These
measures are calculated using various guidelines and advisories
issued by OSFI, which are based on the standards, recommendations,
and best practices of the Basel Committee on Banking Supervision
(BCBS), as presented in the following table.
OSFI guideline or advisory Measure
Capital Adequacy Requirements Common Equity Tier 1 (CET1) capital
ratio
Tier 1 capital ratio
Total capital ratio
CET1 capital
Tier 1 capital
Tier 2 capital
Total capital
Risk-weighted assets
Maximum credit risk exposure under
the Basel asset classes
------------------------------------- ------------------------------------
Leverage Requirements Leverage ratio
Total exposure
------------------------------------- ------------------------------------
Total Loss Absorbing Capacity (TLAC) Key indicators - TLAC requirements
Available TLAC
TLAC ratio
TLAC leverage ratio
------------------------------------- ------------------------------------
Liquidity Adequacy Requirements Liquid asset portfolio
Encumbered assets and unencumbered
assets
Liquidity coverage ratio (LCR)
High-quality liquid assets (HQLA)
Cash inflows/outflows and net cash
outflows
Net stable funding ratio (NSFR)
Available stable funding items
Required stable funding items
------------------------------------- ------------------------------------
Global Systemically Important Banks G-SIB indicators
(G-SIBs) -
Public Disclosure Requirements
------------------------------------- ------------------------------------
Reconciliation of Non-GAAP Financial Measures
Presentation of Results - Adjusted
Year ended October 31
(millions of Canadian dollars) 2022 2021(1)
============================== =============== =========== ========= ====== ===== ===== =======
Personal Wealth Financial
and Commercial Management Markets USSF&I Other
============================= =============== =========== ========= ====== ===== ===== =======
Net interest income 2,865 594 1,029 1,090 (307) 5,271 4,783
Taxable equivalent - - 229 - 5 234 181
Net interest income - Adjusted 2,865 594 1,258 1,090 (302) 5,505 4,964
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Non-interest income 1,169 1,781 1,162 20 249 4,381 4,144
Taxable equivalent - - 48 - - 48 8
Non-interest income - Adjusted 1,169 1,781 1,210 20 249 4,429 4,152
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Total revenues - Adjusted 4,034 2,375 2,468 1,110 (53) 9,934 9,116
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Non-interest expenses 2,149 1,391 1,022 344 324 5,230 4,903
Impairment losses on
intangible
assets(2) - - - - - - (9)
Non-interest expenses -
Adjusted 2,149 1,391 1,022 344 324 5,230 4,894
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Income before provisions for
credit
losses and income taxes -
Adjusted 1,885 984 1,446 766 (377) 4,704 4,222
Provisions for credit losses 97 3 (23) 66 2 145 2
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Income before income taxes -
Adjusted 1,788 981 1,469 700 (379) 4,559 4,220
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Income taxes 474 260 112 143 (95) 894 882
Taxable equivalent - - 277 - 5 282 189
Income taxes related to
impairment
losses on intangible
assets(2) - - - - - - 2
Income taxes - Adjusted 474 260 389 143 (90) 1,176 1,073
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Net income - Adjusted 1,314 721 1,080 557 (289) 3,383 3,147
Specified items after income
taxes - - - - - - (7)
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Net income 1,314 721 1,080 557 (289) 3,383 3,140
Non-controlling interests - - - - (1) (1) -
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Net income attributable to the
Bank ' s shareholders
and holders of other equity
instruments 1,314 721 1,080 557 (288) 3,384 3,140
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Net income attributable to the
Bank ' s shareholders
and holders of other equity
instruments
- Adjusted 1,314 721 1,080 557 (288) 3,384 3,147
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Dividends on preferred shares
and
distributions on
limited recourse capital
notes 107 123
------------------------------ --------------- ----------- --------- ------ ----- ----- -------
Net income attributable to
common
shareholders - Adjusted 3,277 3,024
============================== =============== =========== ========= ====== ===== ===== =======
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to the consolidated financial
statements.
(2) During the year ended October 31, 2021, the Bank recorded $9
million ($7 million net of income taxes) in intangible asset
impairment losses related to technology developments, which were
considered a specified item.
Presentation of Basic and Diluted Earnings per Share -
Adjusted
Year ended October 31
(Canadian dollars) 2022 2021(1)
============================================ ==== =======
Basic earnings per share $ 9.72 $ 8.95
Impairment losses on intangible assets(2) - 0.02
Basic earnings per share - Adjusted $ 9.72 $ 8.97
-------------------------------------------- ---- -------
-
Diluted earnings per share $ 9.61 $ 8.85
Impairment losses on intangible assets(2) - 0.02
Diluted earnings per share - Adjusted $ 9.61 $ 8.87
============================================ ==== =======
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to the consolidated financial
statements.
(2) During the year ended October 31, 2021, the Bank recorded $9
million ($7 million net of income taxes) in intangible asset
impairment losses related to technology developments, which were
considered a specified item.
Presentation of Non-Trading Net Interest Income - Adjusted
Year ended October 31
(millions of Canadian dollars) 2022 2021
======================================================= ===== =====
Net interest income - Adjusted 5,505 4,964
Net interest income related to trading activities on
a taxable equivalent basis 911 948
------------------------------------------------------- ----- -----
Net interest income, non-trading - Adjusted 4,594 4,016
======================================================= ===== =====
Financial Disclosure
Disclosure Controls and Procedures
The Bank's financial information is prepared with the support of
a set of disclosure controls and procedures (DC&P) that are
implemented by the President and Chief Executive Officer (CEO) and
by the Chief Financial Officer and Executive Vice-President,
Finance (CFO). During the year ended October 31, 2022, in
accordance with Regulation 52-109 Respecting Certification of
Disclosure in Issuers' Annual and Interim Filings (Regulation
52-109) released by the CSA, the design and operation of these
controls and procedures were evaluated to determine their
effectiveness.
As at October 31, 2022, the CEO and the CFO confirmed the
effectiveness of the DC&P. These controls are designed to
provide reasonable assurance that the information disclosed in
annual and interim filings and in other reports filed or submitted
under securities legislation is recorded, processed, summarized,
and reported within the time periods specified by that legislation.
These controls and procedures are also designed to ensure that such
information is accumulated and communicated to the Bank's
management, including its signing officers, as appropriate, to
allow for timely decisions regarding disclosure.
This Annual Report was reviewed by the Bank's Disclosure
Committee, Audit Committee, and the Board of Directors (the Board),
which approved it prior to publication.
Internal Control Over Financial Reporting
The internal control over financial reporting (ICFR) is designed
to provide reasonable assurance that the financial information
presented is reliable and that the consolidated financial
statements were prepared in accordance with GAAP, which are based
on IFRS, unless indicated otherwise as explained on pages 16 to 21
of this MD&A. Due to inherent limitations of internal controls,
the ICFR may not prevent or detect all misstatements in a timely
manner.
The CEO and the CFO oversaw the evaluation work performed on the
design and operation of the Bank's ICFR in accordance with
Regulation 52--109. The ICFR was evaluated in accordance with the
control framework of the Committee of Sponsoring Organizations of
the Treadway Commission (COSO - 2013) for financial controls and in
accordance with the control framework of the Control Objectives for
Information and Related Technologies (COBIT) for general
information technology controls.
Based on the evaluation results, the CEO and CFO concluded, as
at October 31, 2022 , that there are no material weaknesses, that
the ICFR is effective and provides reasonable assurance that the
financial reporting is reliable, and that the Bank's consolidated
financial statements were prepared in accordance with GAAP.
Changes to Internal Control Over Financial Reporting
On February 1, 2022, the Bank deployed a new integrated
accounting software package, and certain processes that affect ICFR
were modified. The Bank has assessed the impact of this deployment
and has made sure that the key controls affected and the newly
implemented controls are well designed and effective.
The CEO and CFO also undertook work that enabled them to
conclude that, during the year ended October 31, 2022, aside from
the above-described change, no changes were made to the ICFR that
have materially affected, or are reasonably likely to materially
affect, the design or operation of the ICFR.
Disclosure Committee
The Bank's Disclosure Committee assists the CEO and CFO by
ensuring the design, implementation, and operation of the DC&P
and ICFR. In so doing, the committee ensures that the Bank is
meeting its disclosure obligations under current regulations and
that the CEO and CFO are producing the requisite
certifications.
Overview
Highlights
As at October 31 or for the year ended October
31
(millions of Canadian dollars, except per
share amounts) 2022 2021(1) % change
===================================================== === ======= ======= ========
Operating results
Total revenues 9,652 8,927 8
Income before provisions for credit losses
and income taxes 4,422 4,024 10
Net income 3,383 3,140 8
Net income attributable to the Bank's shareholders
and holders of other equity instruments 3,384 3,140 8
Return on common shareholders' equity(2) 18.8 % 20.7%
Dividend payout ratio(2) 36.8 % 31.7%
Earnings per share
Basic $ 9.72 $ 8.95 9
Diluted 9.61 8.85 9
---------------------------------------------------------- ------- ------- --------
Operating results - Adjusted (3)
Total revenues - Adjusted(3) 9,934 9,116 9
Income before provisions for credit losses
and income taxes - Adjusted(3) 4,704 4,222 11
Net income - Adjusted(3) 3,383 3,147 7
Return on common shareholders' equity - Adjusted(4) 18.8 % 20.7%
Dividend payout ratio - Adjusted(4) 36.8 % 31.7%
Operating leverage - Adjusted(4) 2.1 % 1.9%
Efficiency ratio - Adjusted(4) 52.6 % 53.7%
Earnings per share - Adjusted (3)
Basic $ 9.72 $ 8.97 8
Diluted 9.61 8.87 8
---------------------------------------------------------- ------- ------- --------
Common share information
Dividends declared $ 3.58 $ 2.84 26
Book value(2) 55.24 47.44
Share price
High 105.44 104.32
Low 83.12 65.54
Close 92.76 102.46
Number of common shares (thousands) 336,582 337,912
Market capitalization 31,221 34,622
----------------------------------------------------- --- ------- ------- --------
Balance sheet and off-balance-sheet
Total assets 403,740 355,621 14
Loans and acceptances, net of allowances 206,744 182,689 13
Deposits 266,394 240,938 11
Equity attributable to common shareholders 18,594 16,029 16
Assets under administration(2) 616,165 651,530 (5)
Assets under management(2) 112,346 117,186 (4)
----------------------------------------------------- --- ------- ------- --------
Regulatory ratios under Basel III (5)
Capital ratios
Common Equity Tier 1 (CET1) capital ratio 12.7 % 12.4%
Tier 1 15.4 % 15.0%
Total 16.9 % 15.9%
Leverage ratio 4.5 % 4.4%
----------------------------------------------------- --- ------- ------- --------
TLAC ratio(5) 27.7 % 26.3%
TLAC leverage ratio(5) 8.1 % 7.8%
----------------------------------------------------- --- ------- ------- --------
Liquidity coverage ratio (LCR)(5) 140 % 154%
Net stable funding ratio (NSFR)(5) 117 % 117%
----------------------------------------------------- --- ------- ------- --------
Other information
Number of employees - Worldwide 29,509 26,920 10
Number of branches in Canada 378 384 (2)
Number of banking machines in Canada 939 927 1
===================================================== === ======= ======= ========
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to the consolidated financial
statements.
(2) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
(3) See the Financial Reporting Method section on pages 16 to 21
for additional information on non-GAAP financial measures.
(4) See the Financial Reporting Method section on pages 16 to 21
for additional information on non-GAAP ratios.
(5) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
About National Bank
The Bank carries out its activities in four business segments:
Personal and Commercial, Wealth Management, Financial Markets as
well as U.S. Specialty Finance and International (USSF&I),
which comprises the activities of the Credigy Ltd. (Credigy) and
Advanced Bank of Asia Limited (ABA Bank) subsidiaries. Other
operating activities, certain specified items, Treasury activities,
and the operations of the Flinks Technology Inc. (Flinks)
subsidiary are grouped in the Other heading of segment results.
Each reportable segment is distinguished by services offered, type
of clientele, and marketing strategy. For additional information,
see the Business Segment Analysis section of this MD&A.
Objectives and 2022 Results
When setting its objectives, the Bank aims for a realistic
challenge in the prevailing business environment by considering
such factors as changes in banking industry financial results as
well as the Bank's business development plan. When the Bank sets
its medium-term objectives, it does not take into consideration
specified items, if any, which are not reflective of the underlying
financial performance of the Bank's operations. Management
therefore excludes specified items when assessing the Bank's
performance against its objectives.
In fiscal 2022, the Bank recorded $3,383 million in net income
compared to $3,140 million in fiscal 2021, and its diluted earnings
per share stood at $9.61 compared to $8.85 in fiscal 2021. The
Bank's fiscal 2022 return on common shareholders' equity (ROE) was
18.8% versus 20.7% in fiscal 2021. Its diluted earnings per share
stood at $9.61 in fiscal 2022, an 8% increase from adjusted diluted
earnings per share of $8.87 in fiscal 2021. Furthermore, the 18.8%
ROE in fiscal 2022 compares to an adjusted ROE of 20.7% in fiscal
2021.
The following table compares the Bank's medium-term objectives
with its fiscal 2022 results.
Medium-Term 2022
Objectives (%) Results
Growth in diluted earnings - Adjusted(1) 5 - 10 8.3%
ROE - Adjusted(2) 15 - 20 18.8%
Dividend payout ratio - Adjusted(2) 40 - 50 36.8%
CET1 capital ratio(3) Strong level 12.7%
Leverage ratio(3) Strong level 4.5 %
The Bank's financial results met all of its medium-term
objectives, except for the dividend payout ratio. Year over year,
adjusted diluted earnings per share grew 8%, which is within the
target range, and was driven by strong revenue growth in every
business segment, growth that more than offset increases in
non-interest expenses and in provisions for credit losses. For
fiscal 2022, adjusted ROE was in the upper range of the target
objective. The CET1 capital ratio and the leverage ratio, at 12.7%
and 4.5%, respectively, also met the objectives. As for the
adjusted dividend payout ratio, it was below the target
distribution range given strong growth in net income and the
interruptions to dividend increases prescribed by OSFI between
March 13, 2020 and November 4, 2021.
The Bank also examines its performance using the efficiency
ratio and operating leverage. For fiscal 2022, the Bank's
efficiency ratio stood at 54.2% compared to 54.9% in fiscal 2021.
Its adjusted efficiency ratio for fiscal 2022 was 52.6%, a 1.1
percentage point improvement from 53.7% in fiscal 2021. These
improvements are reflective of disciplined cost management by all
the Bank's segments. Also for fiscal 2022, operating leverage and
adjusted operating leverage were positive, at 1.4% and 2.1%,
respectively.
Net Income Diluted Earnings Per Efficiency Ratio (4)
Share
Year ended October Year ended October Year ended October
31 31 31
(millions of Canadian (Canadian dollars) (%)
dollars)
2021 2022 2021 2022 2018 2019 2020 2021 2022
Published Published Published
Adjusted (1) Adjusted (1) Adjusted (2)
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on non-GAAP financial measures.
(2) See the Financial Reporting Method section on pages 16 to 21
for additional information on non-GAAP ratios.
(3) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
(4) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
Dividends
For fiscal 2022, the Bank declared $1,206 million in dividends
to common shareholders (2021: $ 958 million), representing 36.8% of
net income attributable to common shareholders (2021: 31.7%).
Solid Capital Levels(1)
As at October 31, 2022, the Bank's CET1, Tier 1, and Total
capital ratios were, respectively, 12.7 %, 15.4 % and 16.9 %,
compared to ratios of, respectively, 12.4%, 15.0% and 15.9% as at
October 31, 2021. All of the capital ratios have therefore
increased since October 31, 2021, essentially due to net income net
of dividends and to common share issuances under the Stock Option
Plan. These factors were partly offset by growth in RWA, common
share repurchases, and the impact of the transitional measures
applicable to ECL provisioning, of which the scaling factor
decreased from 50% to 25%. The increase in the Tier 1 capital ratio
was also due to the $500 million issuance of limited recourse
capital notes, i.e., Limited Recourse Capital Notes (LRCN) - Series
3, on September 8, 2022. The increase in the Total capital ratio
was also due to the $750 million issuance of medium-term notes on
July 25, 2022 . As at October 31, 2022, the leverage ratio was 4.5
% compared to 4.4 % as at October 31, 2021. The growth in Tier 1
capital was partly offset by growth in total exposure, which will
continue to benefit, until April 1, 2023, from the temporary
measure permitted by OSFI with respect to the exclusion of
exposures from central bank reserves.
High-Quality Loan Portfolio
Loans and acceptances, net of allowances for credit losses,
accounted for 51% of the Bank's total assets and amounted to $206.7
billion as at October 31, 2022. For fiscal 2022, the Bank recorded
$145 million in provisions for credit losses compared to $2 million
in fiscal 2021. This increase was due to higher provisions for
credit losses on non-impaired loans recorded to reflect a less
favourable macroeconomic environment in fiscal 2022 and to a slight
deterioration in certain risk parameters, and was also due to an
increase in provisions for credit losses on purchased or originated
credit-impaired (POCI) loans, as there had been higher reversals on
certain portfolios recorded in fiscal 2021. These increases were
tempered by lower provisions for credit losses on impaired loans
excluding POCI loans, particularly Commercial Banking loans and
Financial Markets loans, partly offset by higher provisions for
credit losses on the impaired ABA Bank loans recorded to reflect
the end of COVID-19 relief measures that had been granted to
clients. Gross impaired loans totalled $1,271 million as at October
31, 2022 compared to $1,126 million as at October 31, 2021 and
represented 0.61% of total loans and acceptances.
Risk Profile
As at October 31 or for the year ended October
31
(millions of Canadian dollars) 2022 2021
=========================================================================== =================== ======== ======== =======
Provisions for credit losses 145 2
Provisions for credit losses as a % of average
loans and acceptances(2) 0.07 % -%
Provisions for credit losses on impaired loans
excluding POCI loans as a % of average loans
and acceptances(2) 0.07 % 0.11%
Net write-offs as a % of average loans and acceptances(2) 0.10 % 0.09%
Gross impaired loans as a % of total loans and
acceptances(2) 0.61 % 0.61%
Gross impaired loans 1,271 1,126
Net impaired loans 1,030 836
=========================================================================== =================== ======== ======== =======
Annual Dividend Per Evolution of Regulatory Gross Impaired Loans
Common Share Ratios Under Basel As at October 31
Year ended October III (1) (millions of Canadian
31 As at October 31 dollars)
(Canadian dollars)
2018 2019 2020 2021 2022 2021 2022 2018 2019 2020 2021 2022
CET1 Gross impaired loans
Tier 1 - Stage 3
Total Gross impaired loans
Leverage - POCI
ratio Gross impaired loans
as a % of total loans
and acceptances (bps)(2)
Gross impaired loans
exlcuding POCI loans
as a % of total loans
and acceptances (bps)(2)
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
(2) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
Economic Review and Outlook
Global Economy
After a somewhat late start, the cycle of tightening global
monetary policy seems well under way, with more and more central
banks now taking a more restrictive approach to rein in inflation.
While this trend reversal offers promise of greater price stability
in the future, the economic impacts will still be significant,
especially if the reversal comes at a time when growth has already
slowed considerably in several regions. In the eurozone, for
example, annualized GDP growth was only 0.7% in the third quarter
of 2022, since soaring energy costs are being felt and resulting in
a decrease in actual compensation. While the energy situation
improved slightly in the third quarter of 2022, several signs are
pointing to a recession starting in the fourth quarter of 2022.
Elsewhere in the world, emerging markets continue to feel the brunt
of a strong U.S. dollar, which is putting upward pressure on
inflation and making it more difficult to repay loans in U.S.
dollars. All the while, China has continued to feel the economic
impacts of its zero-COVID policy at a time when weak consumer
demand and sluggish real estate markets can no longer be offset by
higher exports. Against this backdrop, the global economy is
expected to grow by only 2.2%(1) in 2023, on the heels of 3.1%(1)
growth in 2022.
The last time that the U.S. Federal Reserve (the Fed) raised
interest rates, bringing the target range between 3.75 and 4.00%,
Jerome Powell, Chair of the Fed, stated that data published since
the last Fed meeting justified having a higher terminal rate than
what had previously been presented. And yet, there are increasing
signs that an economic slowdown lies ahead. While GDP figures for
the third quarter of 2022 showed that growth is rebounding, this is
mainly due to international trade since private domestic demand is
weakening. More specifically, residential investment decreased for
a sixth consecutive quarter-something not seen since the Great
Recession of 2008-2009. Inflation continues to hover at abnormally
high levels, although there are now many signs pointing to a
turnaround, especially given the manufacturing sector slowdown,
high inventory levels, a sharp decline in shipping costs, lower
selling prices by Chinese producers, and a strong U.S. dollar.
Where services are concerned, it may take longer to return
inflation to a reasonable level, although there is evidence
suggesting far fewer new hires in an environment characterized by
anemic growth, which will help to reduce wage pressures. Given this
context, the central bank should be able to end its monetary
tightening cycle no later than for the first monetary policy
meeting in 2023. Otherwise, a recession is practically unavoidable
in 2023. Moreover, even if the Fed changes direction, this would
not prevent a major slowdown in growth next year. We anticipate a
difficult first half next year and growth of only 0.2%(1) for
2023.
Canadian Economy
In Canada, efforts to soft-land the economy after a period of
overheating are continuing. So far, indicators are moving in the
right direction for the Bank of Canada, which suggests that we are
approaching the terminal rate in this extremely aggressive
tightening cycle. In fact, the labour market is showing signs of
moderation: private-sector and full-time jobs have been at a
standstill for several months, and hiring intentions are declining,
suggesting that there will be no rebound in the short term.
Inflationary pressures are less acute and widespread than earlier
this year. Nevertheless, given the rushed response and the
transmission lag for monetary policy, it is normal for observers to
be nervous. Unfortunately, we will only know in hindsight if the
response was too aggressive. One thing is certain: we are already
seeing a notable slowdown in the real estate market, which is
leading to extremely rapid real estate deflation. In our view, it
will not be necessary to keep interest rates at current levels for
long to cool down inflation; consequently, we expect that the
central bank will have to lower them in the second half of next
year. In light of this monetary tightening, we anticipate an anemic
growth rate of 0.7%(1) in 2023, as consumers will be hit
simultaneously
by a loss of purchasing power, a negative wealth effect, and
interest payment shock.
Quebec Economy
Quebec's economy, which had experienced a spectacular
post-pandemic recovery compared to the country as a whole, lost its
lead in July 2022 after posting the fourth monthly decline in a
row. But that is not overly concerning for now, since this decline
has not had a significant adverse effect on the labour market,
which is still one of the most stable in the country. The
unemployment rate reached 4.1% in October 2022, which is the lowest
in all of the provinces, while the job vacancy rate is among the
highest in the country. We also see some encouraging structural
factors for the Quebec economy, such as a highly diversified
economy, fiscal support from the Quebec government, and low
electricity costs. Moreover, Quebec households are in a better
financial situation (lower financial leverage and higher savings
rate), mainly because housing accessibility is significantly better
than in the rest of the country. They are therefore less vulnerable
to the recent interest rate increase. Our forecast for growth in
2023 is 0.7%(1) , in line with Canada as a whole, despite less
favourable demographic factors.
(1) GDP growth forecasts, National Bank Financial's Economics and Strategy group
Financial Analysis
Consolidated Results
Year ended October 31
(millions of Canadian dollars) 2022 2021(1) % change
================================================ ======= ======= ========
Operating results
Net interest income 5,271 4,783 10
Non-interest income 4,381 4,144 6
------------------------------------------------- ------- ------- --------
Total revenues 9,652 8,927 8
Non-interest expenses 5,230 4,903 7
------------------------------------------------- ------- ------- --------
Income before provisions for credit losses
and income taxes 4,422 4,024 10
Provisions for credit losses 145 2
------------------------------------------------- ------- ------- --------
Income before income taxes 4,277 4,022 6
Income taxes 894 882 1
------------------------------------------------- ------- ------- --------
Net income 3,383 3,140 8
Diluted earnings per share (dollars) 9.61 8.85 9
------------------------------------------------- ------- ------- --------
Taxable equivalent basis (2)
Net interest income 234 181
Non-interest income 48 8
Income taxes 282 189
------------------------------------------------- ------- ------- --------
Impact of taxable equivalent basis on net
income - -
------------------------------------------------ ------- ------- --------
Specified items (2)
Impairment losses on intangible assets - (9)
Specified items before income taxes - (9)
Income taxes on specified items - (2)
------------------------------------------------- ------- ------- --------
Specified items after income taxes - (7)
------------------------------------------------- ------- ------- --------
Operating results - Adjusted (2)
Net interest income - Adjusted 5,505 4,964 11
Non-interest income - Adjusted 4,429 4,152 7
------------------------------------------------- ------- ------- --------
Total revenues - Adjusted 9,934 9,116 9
Non-interest expenses - Adjusted 5,230 4,894 7
------------------------------------------------- ------- ------- --------
Income before provisions for credit losses
and income taxes - Adjusted 4,704 4,222 11
Provisions for credit losses 145 2
------------------------------------------------- ------- ------- --------
Income before income taxes - Adjusted 4,559 4,220 8
Income taxes - Adjusted 1,176 1,073 10
------------------------------------------------- ------- ------- --------
Net income - Adjusted 3,383 3,147 7
------------------------------------------------- ------- ------- --------
Diluted earnings per share - Adjusted (dollars) 9.61 8.87 8
------------------------------------------------- ------- ------- --------
Average assets(3) 393,847 363,506 8
Average loans and acceptances(3) 194,340 172,323 13
Average deposits(3) 258,929 236,229 10
Operating leverage(4) 1.4 % 6.4%
Operating leverage - Adjusted(5) 2.1 % 1.9%
Efficiency ratio(4) 54.2 % 54.9%
Efficiency ratio - Adjusted(5) 52.6 % 53.7%
Net interest margin, non-trading - Adjusted(5) 1.96 % 1.90%
================================================= ======= ======= ========
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to the consolidated financial
statements.
(2) See the Financial Reporting Method section on pages 16 to 21
for additional information on non-GAAP financial measures.
(3) Represents an average of the daily balances for the period.
(4) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
(5) See the Financial Reporting Method section on pages 16 to 21
for additional information on non-GAAP ratios.
Analysis of Consolidated Results
Financial Results
For fiscal 2022, the Bank's net income totalled $3,383 million,
an 8% increase from $3,140 million in fiscal 2021. Excellent
performance in all of the business segments, driven by revenue
growth, contributed to this increase in net income, which was
partly offset by higher provisions for credit losses recorded in
part to reflect a deterioration in the macroeconomic outlook in
fiscal 2022. Income before provisions for credit losses and income
taxes totalled $4,422 million for fiscal 2022, a 10% year-over-year
increase that was due to the revenue growth in all of the business
segments.
Total Revenues
For fiscal 2022, the Bank's total revenues amounted to $9,652
million versus $8,927 million in fiscal 2021, a $725 million or 8%
increase that was driven by the revenue growth across all of the
Bank's business segments. For additional information on total
revenues, see Table 2 on page 114. The fiscal 2022 adjusted total
revenues grew $818 million or 9% year over year.
Net Interest Income
For fiscal 2022, net interest income totalled $5,271 million, up
$488 million or 10% from $4,783 million in fiscal 2021 (see Table
3, page 114). As for the adjusted net interest income in fiscal
2022, it amounted to $5,505 million, up 11% from $4,964 million in
fiscal 2021.
In the Personal and Commercial segment, net interest income
totalled $2,865 million in fiscal 2022, a $318 million or 12%
year-over-year increase owing mainly to growth in loans and
deposits, which rose 11% and 7%, respectively, year over year. The
loan growth came mainly from mortgage credit and business lending.
The increase in net interest income was also due to a higher net
interest margin, which rose to 2.14% in 2022 from 2.11% in 2021 as
a result of interest rate hikes, and that was primarily
attributable to the deposit margin. In the Wealth Management
segment, net interest income totalled $594 million in fiscal 2022,
a 33% year-over-year increase owing to higher interest rates,
growth in loan and deposit volumes, and the deposit margin.
In the Financial Markets segment, net interest income on a
taxable equivalent basis was down $4 million in fiscal 2022
compared to fiscal 2021, mainly due to trading activities, and
should be examined together with the other items of trading
activity revenues. In the USSF&I segment, net interest income
rose $183 million or 20% year over year owing to loan and deposit
growth at the ABA Bank subsidiary in fiscal 2022 as well as to an
increase in the Credigy subsidiary's net interest income given
growth in loan portfolios and solid performance in certain
portfolios.
Non-Interest Income
The Bank's non-interest income amounted to $4,381 million in
fiscal 2022, up $237 million or 6% from $4,144 million in fiscal
2021. For additional information on non-interest income, see Table
4 on page 115.
For fiscal 2022, revenues from underwriting and advisory fees
were down 22% year over year, notably due to capital markets
activities in the Financial Markets segment. Revenues from
securities brokerage commissions were down 14% year over year,
essentially due to a decrease in commission-generating transactions
in the Wealth Management segment. Combined, mutual fund revenues
and revenues from investment management and trust service fees
totalled $1,584 million, a $121 million year-over-year increase
owing to growth in average assets under administration and under
management as a result of net inflows into various solutions and of
stock market performance in the first half of 2022.
Credit fee revenues and revenues from acceptances and letters of
credit and guarantee were down $16 million year over year, as
greater business activity at Commercial Banking was more than
offset by a decrease in the activities of Financial Markets.
Conversely, card revenues and revenues from deposits and payment
service charges rose 26% and 9%, respectively, as an upswing in
economic activity led to greater transaction volume during fiscal
2022.
Non-interest income related to trading activity on a taxable
equivalent basis totalled $596 million, up from $290 million in
fiscal 2021 (Table 5, page 115). Including the portion recorded in
net interest income, trading activity revenues on a taxable
equivalent basis amounted to $1,507 million in fiscal 2022, a $269
million year-over-year increase that was essentially driven by
equity securities revenues from the Financial Markets segment.
Conversely, trading activity revenues on a taxable equivalent basis
from the Bank's other business segments decreased year over
year.
For fiscal 2022, gains on non-trading securities were down $38
million year over year, in part due to Treasury activities, while
insurance revenues were up $27 million year over year, reflecting a
revision to actuarial reserves. Also up year over year were foreign
exchange revenues and the share in the net income of associates and
joint ventures, which rose $9 million and $5 million, respectively.
Other revenues amounted to $242 million in fiscal 2022, an $83
million decrease that was notably due to a gain realized on the
disposal of certain loan portfolios and to a more favourable impact
of the fair value remeasurements of certain Credigy loan portfolios
in fiscal 2021. In addition, in fiscal 2021, the Other revenues
item had included a $33 million gain on the remeasurement of the
previously held equity interest in Flinks and a $30 million loss
related to the fair value measurement of the Bank's equity interest
in AfrAsia Bank Limited (AfrAsia).
Non-Interest Expenses
For fiscal 2022, non-interest expenses stood at $5,230 million,
up $327 million or 7% from fiscal 2021 (Table 6, page 116). In
fiscal 2021, non-interest expenses had included $9 million in
intangible asset impairment losses. The fiscal 2022 non-interest
expenses, compared to $4,894 million in adjusted non-interest
expenses, were up $336 million or 7%.
Compensation and employee benefits totalled $3,284 million in
fiscal 2022, an 8% year-over-year increase that was notably due to
wage growth and a greater number of employees as well as to the
variable compensation associated with revenue growth. An increase
in technology expenses, including amortization, was attributable to
significant investments made to support the Bank's technological
evolution and the business development plan. In addition, fiscal
2022 travel and business development expenses increased year over
year as activities with clients resumed. These higher expenses were
tempered by decreases in certain expenses; in particular, there was
a $20 million reversal of the provision for the compensatory tax on
salaries paid in Quebec during the first quarter of 2022 as well as
a decrease in COVID-19 response expenses, which had been higher
during fiscal 2021. Furthermore, a portion of the overall increase
in non-interest expenses was attributable to the Flinks acquisition
at the end of fiscal 2021.
Provisions for Credit Losses
For fiscal 2022, the Bank recorded $145 million in provisions
for credit losses compared to $2 million in fiscal 2021 (Table 7,
page 117). This increase was mainly attributable to $1 million in
provisions for credit losses on non-impaired loans during fiscal
2022 compared to the $155 million in reversals of allowances for
credit losses recorded during fiscal 2021. The macroeconomic
outlook deteriorated in the second half of fiscal 2022, notably due
to high inflationary pressure, geopolitical instability, and global
supply chain disruptions, whereas in fiscal 2021, the macroeconomic
outlook had been more favourable. Provisions for credit losses on
impaired loans excluding POCI(1) loans were down $45 million in
fiscal 2022, mainly those in Commercial Banking and Financial
Markets, which decreased $13 million and $77 million, respectively.
These decreases were partly offset by a $10 million increase in
Personal Banking's provisions for credit losses (including credit
card receivables) and a $35 million increase in USSF&I's
provisions for credit losses (excluding POCI loans), essentially
attributable to the ABA Bank subsidiary, where COVID-19 relief
measures that had been granted to customers ended. The provisions
for credit losses on Credigy's POCI loans also increased, rising
$32 million given the favourable remeasurements of certain
portfolios during fiscal 2021. At $138 million for fiscal 2022, the
provisions for credit losses on impaired loans excluding POCI
loans(1) decreased and represented 0.07% of average loans and
acceptances, down from 0.11% in fiscal 2021.
Income Taxes
Detailed information about the Bank's income taxes is provided
in Note 24 to the consolidated financial statements. For fiscal
2022, income taxes stood at $894 million, representing an effective
tax rate of 21%, which compares to income taxes of $882 million and
a 22% effective tax rate in fiscal 2021. The change in effective
tax rates stems mainly from a higher level of tax-exempt dividend
income during fiscal 2022.
(1) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
Business Segment Analysis
The Bank carries out its activities in four business segments,
which are defined below. For presentation purposes, other
activities are grouped in the Other heading. Each reportable
segment is distinguished by services offered, type of clientele,
and marketing strategy.
National Bank of Canada
Business Personal and Wealth Financial U.S. Specialty
Segments Commercial Management Markets Finance and
International
Core
Activities * Banking services * Full-service brokerage * Equities, fixed-incom * U.S. Specialty Finance
e securities, commodities a
nd
* Credit services * Private banking foreign exchange * Credigy
* Financing * Direct brokerage * Corporate banking * International
* Investment solutions * Investment solutions * Investment banking * ABA Bank (Cambodia)
* Insurance * Administrative and trade execution services * Minority interests in emerging markets
* Transaction products for advisors
* Trust and estate services
Other: Treasury activities, liquidity management, Bank funding, asset/liability
management, Flinks subsidiary activities (a fintech specialized in financial
data aggregation and distribution), and corporate units.
Total Revenues by Income Before Provisions Net Income by Business
Business Segment (1) for Segment(1)
Year ended October 31, Credit Losses and Income Year ended October 31,
2022 Taxes by Business Segment(1) 2022
Year ended October 31,
2022
Personal and Commercial Personal and Comemrcial Personal and Commercial
(2021: 40%) (2021: 36%) (2021: 35%)
Wealth Mangement (2021 Wealth Mangement (2021: Wealth Management (2021:
: 24%) 20%) 19%)
Financial Markets (2021: Financial Markets (2021: Financial Markets (2021:
25%) 29%) 29%)
USSF&I ( 2021: 11%) USSF&I (2021: 15%) USSF&I ( 2021 : 17%)
(1) Excluding the Other heading.
Personal and Commercial
The Personal and Commercial segment meets the financial needs of
close to 2.6 million individuals and over 145,000 businesses across
Canada. These clients entrust the Bank to manage, invest, and
safeguard their assets and to finance their projects. Clients turn
to the Bank's experienced advisors who take the time to understand
their specific needs and help them reach their financial goals.
Thanks to the Bank's convenient self-banking channels, 378
branches, and 939 banking machines across Canada, clients can do
their daily banking whenever and wherever they wish.
Total Revenues by Category Total Revenues by Geographic
Year ended October Distribution
31, 2022 Year ended October 31,
2022
Retail (2021: 46%) Province of Quebec (2021:
Payment Solutions (2021: 75%)
11%) Other provinces (2021:
Insurance (2021: 5%) 25%)
Commercial Banking
(2021: 38%)
Key Success Factors
Personal Banking
Personal Banking provides a complete range of financing and
investment
products and services to help clients reach their financial
goals throughout every stage in their lives. It offers everyday
transaction solutions, mortgage loans and home equity lines of
credit, consumer loans, payment solutions, savings and investment
solutions as well as a range of insurance products.
Commercial Banking
Commercial Banking serves the financial needs of small- and
medium-sized enterprises (SMEs) and large corporations, helping
them to achieve growth. It offers a full line of financial products
and services, including credit, deposit, and investment solutions
as well as international trade, foreign exchange transaction,
payroll, cash management, insurance, electronic transaction, and
complementary services. With deep roots in the business community
for over 160 years, Commercial Banking is the leading bank in the
Quebec market.
Economic and Market Review
In Canada, efforts continue to soft-land the economy after a
period of overheating. Interest rate hikes brought real estate
activity to an abrupt halt, after it had reached record levels
since the start of the pandemic and was characterized by soaring
house prices. With house hunters now having less buying power,
prices across Canada are undergoing a correction, generating more
of an impact on household wealth already falling as a result of
weak financial market performance. However, many people seized
opportunities that arose during the pandemic to get their financial
house in order. In fact, some consumers have amassed excess savings
that can be used to cushion the blow of the rising cost of living
and higher interest rates. Personal and corporate bankruptcies are
on the rise, even though they remain below pre-pandemic levels. The
labour market is showing signs of moderation, with full-time
private-sector employment stagnating in recent months and hiring
intentions slowing down-which does not point to a turnaround in the
short-term. Corporate investment remains strong for now, but
activity may slow down due to higher funding costs and the
uncertain economic outlook.
The economic environment in 2022 and the outlook for 2023 are
discussed in more detail in the Economic Review and Outlook section
on page 26.
Objectives and Strategic Priorities
The Personal and Commercial segment is targeting growth by
becoming a more simple, efficient bank focused on constantly
improving the client experience.
2022 Achievements and Highlights 2023 Priorities
============================================ =======================================
Accelerate net client
acquisition > Delivered unparalleled > Achieve greater coverage
performance in terms of total in promising markets and
client acquisition. high-growth client segments.
> Enhanced our visibility > Further develop a distinctive
and proximity through targeted offering for clients who
campaigns. are in both our PB1859
> Continued our client acquisition and Commercial Banking
strategy by intensifying coverage sectors by adding differentiating
in promising markets and among revenue-generating components
high-growth target clients such that they can go to
such as newcomers, professionals, market together.
Gen Z, millennials, and SMEs. > Continue our acquisition
> Strengthened the synergies efforts by further developing
between our business units our digital acquisition
to achieve even greater acquisition capabilities and client
success. eligibility and by focusing
> Strengthened ties between branch efforts on advisory
Private Banking (PB1859) and service.
Commercial Banking using a > Simplify and modernize
mixed approach and a market our product offering such
presence that is delivering that it is better tailored
impressive results in terms to client needs.
of the engagement of our commercial > Grow the Bank's brand
and high net worth clients. across Canada and demonstrate
> Enhanced our preferential our ESG impact.
offering to our strategic
client sectors, such as professionals.
> Continued to expand financial
literacy content in response
to common concerns arising
in the current economic environment.
> Improved our digital approval
processes for our signature
products (bank accounts and
credit cards).
-------------------------- ============================================ =======================================
Improve client engagement
> Implemented a new, more > Develop account and
client-centric and advisory--driven market strategies designed
distribution approach. to raise the penetration
> Enhanced the capabilities rate of both Commercial
of the transactional platform Banking and PB1859 clients.
and the mobile app to deliver > Increase the quality
a simpler, safer, and more of our advice and our value
intuitive digital experience among clients by continuing
for all our clients. to develop our distribution
> Personalized client interaction network and personalize
with the use of client data, our contacts.
which helps us to proactively > Achieve greater synergy
contact clients, through both by improving the penetration
assisted and unassisted channels, rate of banking services
during key life moments. among our investor clients.
> Deployed an advisory and > Enhance our payment
support strategy to clients facilities offering.
most affected by market fluctuations > Optimize client experience
in the volatile economic environment, by modernizing the most
particularly to help them frequently used cash management
manage their liquidity. capabilities.
> Improved our digital investment > Further develop our
platform, notably though the key technological capacities
Enhanced Investing Experience, in the areas of account
by adding several self-serve management and client profile
capabilities that promote services.
client autonomy.
========================== ============================================ =======================================
2022 Achievements and Highlights 2023 Priorities
=================== =============================================== ===================================
Improve efficiency
> Simplified the transactional > Continue simplifying
banking capabilities most the customer journey for
frequently used by personal priority clients as well
and commercial clients on as our business processes.
our priority approaches by > Bolster our digital
ensuring an integrated experience capabilities such that
among the channels. it promotes client autonomy
> Finalized the automation and simplifies our processes.
of the financing process for > Maximize the support
all Commercial Banking segments, structure provided to our
thereby providing a simple sales force by optimizing
and quick experience. the operational support
> Simplified the customer offered to our client-facing
journey, both for retail clients employees.
(account opening and payments) > Continue modernizing
and commercial clients (account our range of cash management
opening, financing, and cash offerings, adapting them
management). to client needs and helping
> Aligned our product offering business clients manage
to evolving market needs (transactional, their cash cycle.
card, payment, and cash management
solutions).
=================== =============================================== ===================================
Segment Results - Personal and Commercial
Year ended October 31
(millions of Canadian dollars) 2022 2021(1) % change
============================================== ======= ======= ========
Net interest income 2,865 2,547 12
Non-interest income 1,169 1,068 9
---------------------------------------------- ------- ------- --------
Total revenues 4,034 3,615 12
Non-interest expenses 2,149 2,008 7
---------------------------------------------- ------- ------- --------
Income before provisions for credit losses
and income taxes 1,885 1,607 17
Provisions for credit losses 97 40
---------------------------------------------- ------- ------- --------
Income before income taxes 1,788 1,567 14
Income taxes 474 416 14
---------------------------------------------- ------- ------- --------
Net income 1,314 1,151 14
---------------------------------------------- ------- ------- --------
Net interest margin(2) 2.14 % 2.11%
Average interest-bearing assets(2) 133,754 120,956 11
Average assets(3) 140,514 126,637 11
Average loans and acceptances(3) 139,749 125,917 11
Net impaired loans(2) 193 213 (9)
Net impaired loans as a % of total loans and
acceptances(2) 0.1 % 0.2%
Average deposits(3) 82,005 76,442 7
Efficiency ratio(2) 53.3 % 55.5%
============================================== ======= ======= ========
(1) For the year ended October 31, 2021, certain amounts have
been reclassified, in particular amounts of the loan portfolio of
borrowers in the "Oil and gas" and "Pipelines" sectors as well as
related activities, which were transferred from the Personal and
Commercial segment to the Financial Markets segment. Moreover,
certain amounts have been adjusted to reflect an accounting policy
change applicable to cloud computing arrangements (for additional
information, see Note 1 to the consolidated financial
statements).
(2) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
(3) Represents an average of the daily balances for the period.
Financial Results
In the Personal and Commercial segment, net income totalled
$1,314 million in fiscal 2022 compared to $1,151 million in fiscal
2021, a 14% increase that was due to $419 million in total revenue
growth, partly offset by higher provisions for credit losses. The
segment's income before provisions for credit losses and income
taxes totalled $1,885 million in fiscal 2022, up 17% year over
year. The growth in total revenues was driven by a $318 million
increase in net interest income and a $101 million increase in
non-interest income. The increase in net interest income came
mainly from growth in personal and commercial loans and deposits.
In addition, the successive interest rate increases that occurred
in fiscal 2022 had a favourable impact on net interest margin,
which rose to 2.14% from 2.11% in fiscal 2021, an increase
attributable mainly to the deposit margin.
For fiscal 2022, the Personal and Commercial segment's
non-interest expenses stood at $2,149 million, a 7% year-over-year
increase that was mainly due to higher compensation and employee
benefits (given wage growth and a greater number of employees), to
greater investments made as part of the segment's technological
evolution, and to higher operations support charges. Furthermore,
travel and business development costs increased as activities with
clients resumed. At 53.3%, the segment's 2022 efficiency ratio
improved by 2.2 percentage points from 55.5% in 2021.
The segment recorded $97 million in provisions for credit losses
in fiscal 2022, which is $57 million more than the $40 million
recorded in fiscal 2021. This increase came mainly from higher
provisions for credit losses on non-impaired Personal Banking loans
(including credit card receivables) recorded to reflect less
favourable macroeconomic conditions, whereas, in fiscal 2021, a
more favourable macroeconomic environment had led to significant
reversals of allowances for credit losses on non-impaired loans.
These increases were tempered by lower provisions for credit losses
on impaired Commercial Banking loans as well as by a decrease in
provisions for credit losses on non-impaired Commercial Banking
loans resulting from more favourable risk parameters in fiscal
2022.
Personal Banking
Personal Banking's total revenues amounted to $2,359 million in
fiscal 2022, a 6% increase from $2,234 million in fiscal 2021. Its
net interest income increased, as there was 8% growth in loan
volumes, 4% growth in deposit volumes and a higher deposit margin,
partly offset by a lower net interest margin on loans. Non-interest
income was also up, rising $53 million year over year, essentially
due to higher credit card revenues given a notable increase in
purchasing volume, higher insurance revenues (reflecting a revision
to actuarial reserves), and higher internal commission revenues
related to the distribution of Wealth Management products. For
fiscal 2022, Personal Banking's non-interest expenses rose $105
million year over year, mainly due to higher compensation and
employee benefits (given wage growth and a greater number of
employees), to greater investments made as part of the segment's
technological evolution, and to higher operations support
charges.
Commercial Banking
Commercial Banking's total revenues amounted to $1,675 million
in fiscal 2022, rising 21% from $1,381 million in fiscal 2021. Net
interest income was up, essentially due to 17% growth in loans and
11% growth in deposits as well as to a higher net interest margin
as interest rates were raised successively during fiscal 2022.
Non-interest income was also up, rising $48 million compared to
fiscal 2021, mainly due to increases in revenues from bankers'
acceptances, in revenues from derivative financial instruments, and
in revenues from foreign exchange activities. For fiscal 2022,
Commercial Banking's non-interest expenses rose $36 million year
over year, mainly due to higher compensation and employee benefits
(given wage growth and a greater number of employees), to higher
operations support charges, and to higher travel and business
development costs as activities with clients resumed.
Average Loans and Acceptances Average Deposits
Year ended October 31 Year ended October 31
(millions of Canadian dollars) (millions of Canadian Dollars)
2021 2022 2021 2022
Total - Personal and Commercial Total - Personal and Commercial
Banking Banking
Personal Banking Personal Banking
Commercial Banking Commercial Banking
Wealth Management
As a leader in Quebec and firmly established across Canada, the
Wealth Management segment serves all market segments by emphasizing
advisory-based service and close client relationships. It delivers
a full range of wealth management products and solutions through a
multi-channel distribution network and a differentiated business
model. Wealth Management also provides services to independent
advisors and institutional clients.
Total Revenues by Category Total Revenues by Geographic
Year ended October 31, Distribution
2022 Year ended October 31,
2022
Net interest income Province of Quebec (2021:
(2021: 21%) 63%)
Fee-based services (2021: Other provinces (2021:
61%) 37%)
Transaction-based and
other revenues (2021:
18%)
Key Success Factors
Full-Service Brokerage
Drawing on the largest network of investment advisors in Quebec,
National Bank Financial Wealth Management (NBFWM) provides wealth
management advisory services through 800-plus advisors at close to
100 service points across Canada. Its advisors serve approximately
400,000 retail clients, proposing portfolio management services,
financial and succession planning services, and insurance services
while working in close collaboration with other segments of the
Bank.
Private Banking
Private Banking 1859 (PB1859) offers highly personalized wealth
management services and advice across Canada, helping affluent
clients benefit from comprehensive management of their personal and
family fortunes. As a true market leader in Quebec, PB1859 is
continuing to expand its operations throughout Canada with its
extensive range of financial solutions and strategies for the
protection, growth, and transition of wealth.
Direct Brokerage
National Bank Direct Brokerage (NBDB) offers a multitude of
financial products and investment tools to self-directed investors
across Canada through its online investment solution. NBDB helps
customers who want to manage their own investments to do so through
an online trading platform or by speaking directly to a
representative on the phone.
Investment Solutions
National Bank Investments Inc. (NBI) manufactures and offers
mutual funds, exchange-traded funds (ETF), investment solutions,
and services to consumers and institutional investors through the
Bank's extended network. With its open architecture model, NBI is
Canada's largest investment fund manager to entrust the management
of its investments exclusively to external portfolio managers.
Administrative and Trade Execution Services
National Bank Independent Network (NBIN) is a Canadian leader in
providing administrative services such as trade execution,
custodial services, and brokerage solutions to many independent
financial services firms across Canada, in particular to
introducing brokers, portfolio managers, and investment fund
managers.
Transaction Products
The Wealth Management segment provides independent advisors
across Canada with a vast array of investment products, including
guaranteed investment certificates (GICs), mutual funds, notes,
structured products, and monetization, helping to support their own
business needs and client relationships.
Trust and Estate Services
Through National Bank Trust (NBT), Wealth Management provides
retail and institutional clients with turnkey services and
solutions. Its team of experts offers a full range of high
value-added services designed to consolidate, protect, and transfer
its customers' wealth and give them peace of mind. NBT also
provides integrated trustee and depository services as well as
securities custody services.
Economic and Market Review
Soaring inflation resulting from the war in Ukraine has led to
the fastest tightening of monetary policies since the mid-1990s.
The financial market corrections were brutal, and rising interest
rates caused bond and stock portfolios to post losses. A number of
stock markets, including the S&P 500, entered bear market
territory (market decline of over 20%). Canada's stock market also
declined, although it was more resilient, primarily owing to the
country's raw materials sectors, which are doing quite well in the
current geopolitical context. While the market impacts of rising
interest rates were felt very quicky, it will take some time to
assess the full economic impacts, which could create volatility in
the months to come. Although the North American economy is holding
up well, the outlook for 2023 is less rosy. The real estate sector
has been hit very hard-both in the U.S. and Canada-and house prices
have already begun to slide despite a resilient labour market.
Business leaders' confidence has been shaken by the growing risk of
recession, and anemic economic growth is expected in 2023.
The economic environment in 2022 and the outlook for 2023 are
discussed in more detail in the Economic Review and Outlook section
on page 26.
Objectives and Strategic Priorities
The Wealth Management segment will capitalize on the strength of
the Bank's brand by generating sustained earnings growth, further
improving client satisfaction, and maintaining high employee
engagement.
2022 Achievements and 2023 Priorities
Highlights
======================== ======================== ==================================================================
Create h ighly engaged
clients thanks to > Focused on our > Further develop the
an exceptional growth strategies quality of our advice and
advisory--based by leveraging our closeness to clients
experience intersegment by leveraging client relationship
synergies and by tools and accelerating
looking beyond synergies, both in terms
Quebec and also of our expertise as well
towards sectors as geographically.
with strong > Continue developing
potential. a fully-integrated solution
> Reconciled the that helps advisors become
activities independent.
of PB1859 and > Further develop a distinctive
Commercial Banking offering for clients who
to better meet client are in both PB1859 and
needs. the Commercial Banking
> Raised client sectors by adding differentiating
satisfaction revenue-generating components
across all channels such that they can go to
despite market together.
an uncertain economic
environment.
------------------------ ========================== ================================================================
Have best-in-class
investment and digital > Continually > Continue developing
solutions simplified new investment solutions
and improved our that are constantly aligning
digital ecosystem with client needs (responsible
to improve client and investing, ETFs, private
employee investments, life goals,
experience. etc.).
> Enhanced our > Further simplify and
responsible improve digital solutions
investment and according to client needs
non-traditional and on a continual basis.
investment product
offerings
through teams of
experts.
------------------------ ========================== ================================================================
Target fast, expert
and flawless execution > Continued > Maintain the pace of
developing our progress on transformation
analytic foundations projects and continue executing
and the our automation and digitalization
360-degree holistic plan.
view of > Continue developing
clients. analytic foundations in
> Made ongoing order to put data (360-degree
investments holistic view) at the service
to automate and of clients.
digitalize
key processes to
improve both
client and employee
experience.
------------------------ ========================== ================================================================
Encourage
entrepreneurial > Deployed multiple > Continue delivering
culture and talent tools an engaging employee experience
development and programs to by:
further improve * providing experiences tailored to employee needs and
diversity and that support flexibility and quality of life;
inclusion and
to support the
ongoing development * having an inclusive culture that is conducive to
of our employees. synergy, agility, and a client focus.
> Created conditions
that
encourage employees
to return
to work, notably a
flexible
hybrid work model.
======================== ========================== ================================================================
Segment Results - Wealth Management
Year ended October 31
(millions of Canadian dollars) 2022 2021(1) % change
============================================ ======= ======= ========
Net interest income 594 446 33
Fee-based revenues 1,429 1,322 8
Transaction and other revenues 352 398 (12)
-------------------------------------------- ------- ------- --------
Total revenues 2,375 2,166 10
Non-interest expenses 1,391 1,293 8
-------------------------------------------- ------- ------- --------
Income before provisions for credit losses
and income taxes 984 873 13
Provisions for credit losses 3 1
-------------------------------------------- ------- ------- --------
Income before income taxes 981 872 13
Income taxes 260 231 13
-------------------------------------------- ------- ------- --------
Net income 721 641 12
-------------------------------------------- ------- ------- --------
Average assets(2) 8,226 7,146 15
Average loans and acceptances(2) 7,132 5,998 19
Net impaired loans(3) 15 16 (6)
Average deposits(2) 35,325 33,934 4
Efficiency ratio(3) 58.6 % 59.7%
============================================ ======= ======= ========
Assets under administration (3) 616,165 651,530 (5)
-------------------------------------------- ------- ------- --------
Assets under management (3)
Individual 65,214 64,941 -
Mutual funds 47,132 52,245 (10)
-------------------------------------------- ------- ------- --------
112,346 117,186 (4)
============================================ ======= ======= ========
(1) For the year ended October 31, 2021, certain amounts have
been reclassified, notably certain amounts that have been adjusted
to reflect an accounting policy change applicable to cloud
computing arrangements (for additional information, see Note 1 to
the consolidated financial statements).
(2) Represents an average of the daily balances for the period.
(3) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
Financial Results
In the Wealth Management segment, net income
totalled $721 million in fiscal 2022, up 12%
from $641 million in fiscal 2021. The segment's
total revenues amounted to $2,375 million in
fiscal 2022, up 10% from $2,166 million in fiscal Assets Under Administration
2021. Its fiscal 2022 net interest income grew and Assets Under Management
$148 million or 33% year over year owing to Year ended October 31
higher interest rates, to growth in loan and (millions of Canadian dollars)
deposit volumes, and to the deposit margin.
Fee-based revenues rose 8% year over year due 2021 2022
to growth in average assets under administration Assets under administration
and assets under management as a result of net Assets under management
inflows into various solutions and to stock
market performance in the first half of fiscal
2022. As for transaction and other revenues,
they decreased 12% year over year as a result
of lower commission-generating trading volume
during fiscal 2022.
For fiscal 2022, Wealth Management's non-interest
expenses stood at $1,391 million compared to
$1,293 million in fiscal 2021, an increase attributable
to higher compensation and employee benefits,
notably the variable compensation associated
with revenue growth, as well as to higher operations
support charges related to the segment's business
growth and initiatives. At 58.6%, the segment's
2022 efficiency ratio improved by 1.1 percentage
points from 59.7% in 2021.
Wealth Management recorded $3 million in provisions
for credit losses in fiscal 2022 to reflect
a less favourable macroeconomic environment,
whereas $1 million had been recorded in fiscal
2021.
Financial Markets
The Financial Markets segment offers a complete suite of
products and services to corporations, institutional clients, and
public-sector entities. Whether providing comprehensive advisory
services and research or capital markets products and services, the
segment focuses on relationships with clients and their growth.
Over 900 professionals serve clients through its offices in North
America, Europe, the UK, and Asia.
Total Revenues by Category Total Revenues by Geographic
Year ended October Distribution
31, 2022 Year ended October 31,
2022
Global Markets (2021: Province of Quebec (2021:
53 %) 30 %)
Corporate and Investment Other provinces (2021:
Banking (2021: 47 %) 57 %)
Outside of Canada (2021:
13 %)
Global Markets
Financial Markets is a Canadian leader in risk management
solutions, structured products, and market-making in
exchange-traded funds (ETFs) by volume. The segment offers
solutions in the areas of fixed-income securities, currencies,
equities, and commodities in order to mitigate the financial and
business risks of clients. It also provides new product development
expertise to asset managers and fund companies and supports their
success by providing liquidity, research, and counterparty
services. Financial Markets also provides tailored investment
products across all asset classes to institutional and retail
distribution channels.
Corporate and Investment Banking
Financial Markets provides corporate banking, advisory, and
capital markets services. It offers loan origination and
syndication to large corporations for project financing, merger and
acquisition transactions, and corporate financing solutions. The
segment is also an investment banking leader in Quebec and across
Canada. Its comprehensive services include strategic advisory for
financing and merger and acquisition initiatives as well as for
debt and equity underwriting. It is the Canadian leader in
government debt and corporate high--yield debt underwriting.
Dominant in Quebec, the segment is the leader in
debt underwriting for provincial and municipal governments
across Canada while growing its national position in infrastructure
and project financing. Financial Markets is active in
securitization financing, mainly mortgages insured by the
Government of Canada and mortgage-backed securities.
Economic and Market Review
The impacts of tighter monetary policy announced several months
ago by a number of central banks are clearly being felt the world
over. In Europe, rising interest rates (and soaring prices) have
again stymied growth and shone a light on certain financial
weaknesses, notably in the UK, where poor fiscal management nearly
derailed the bond market. U.S. growth remained stronger, even
though cracks have begun to appear in sectors that are more
sensitive to interest rate fluctuations. The Bank of Canada
followed the global trend, quickly raising its benchmark rate,
which is weighing heavily on the housing market. After skyrocketing
increases during the pandemic, house prices have begun to cool,
putting downward pressure on household wealth at a time when
consumer spending power has already been eroded by steep
prices.
The economic environment in 2022 and the outlook for 2023 are
discussed in more detail in the Economic Review and Outlook section
on page 26.
Objectives and Strategic Priorities
2022 Achievements and Highlights 2023 Priorities
============================== ========================================== ====================================
Ensure continued growth > Advanced our Inclusion > Implement innovative
by recruiting, coaching, and Diversity strategy through practices for employee
and retaining a diversified scholarship and sponsorship recruitment, coaching,
workforce programs. and retention while fostering
> Coached and retained our inclusion.
talent at all levels through
mentorship and executive development
programs.
------------------------------ ========================================== ====================================
Carry on international > Enhanced U.S. coverage > Assist our clients in
expansion supported in key sectors and distribution their growth ambitions
by an innovative offering of selected products. and funding needs.
------------------------------ ========================================== ====================================
Maintain our leadership > Ranked number one in Canadian > Maintain our leadership
in established businesses government debt underwriting through quality and innovation
and leverage our strengths for an eighth consecutive .
onto other businesses year. > Grow market shares in
> Maintained our ETF leadership corporate debt issuance.
position.
> Ranked number one in International
Securities Finance's (ISF)
survey in the G2 Borrowers
category for the Americas.
------------------------------ ========================================== ====================================
Strengthen our leadership
role in sustainable > Guided and advised our > Continue discussions
financing solutions clients in their energy transition. with clients, employees,
> Exclusive financial advisor and other stakeholders
to Tidewater Renewables Ltd. to achieve net-zero greenhouse
on its $60 million renewable gas (GHG) emissions by
natural gas (RNG) and feedstock 2050.
partnership with Rimrock RNG > Ensure depth and quality
Inc., allowing each party of our coverage regarding
to focus on their core competencies the global energy transition.
to build and advance RNG projects; > Make ESG principles
lead lender to a wholly owned a growth lever and impact
subsidiary of Tidewater Renewables multiplier for Financial
Ltd. on a $26 million credit Markets.
facility used to fund investment
into the partnership.
> Exclusive financial advisor
to Whitecap Resources Inc.,
a leader in driving forward
best ESG practices, on its
$1.9 billion acquisition of
XTO Energy Canada; joint bookrunner
and co-lead arranger on a
$1.4 billion four-year committed
term loan.
> Supported several cleantech
companies through increased
capacity.
============================== ========================================== ====================================
2022 Achievements and Highlights 2023 Priorities
============================ =========================================== =========================================
Further strengthen > Invested in technology > Continue to create differentiated
information technology and talent to deploy technology technology across all Financial
to enhance and accelerate enhancements. Markets' business lines.
our execution > Leveraged and exported
our technology expertise
to other segments of the
Bank.
> Used the latest advances
in deep learning to automate
and scale our platform.
---------------------------- =========================================== =========================================
Strengthen our ability
to deliver integrated > Exclusive financial advisor > Deepen our relationships
advice and solutions to Stantec Inc. on its acquisition with corporations, institutional
to clients of select assets of Australian-listed clients, and public-sector
Cardno Limited for US$500 entities and help support
million. their growth.
> Financial advisor to Cominar
Real Estate Investment Trust
on its sale to a consortium
led by Canderel Management
Inc. for $5.7 billion.
> Sole bookrunner and lead
underwriter on an $86 million
bought deal equity offering
for Artemis Gold Inc., following
the Bank's inaugural project
loan facility; co-lead arranger
and underwriter of a committed
credit facility of up to
$385 million, plus an additional
$40 million standby cost
overrun facility.
> Exclusive financial advisor
to Nomad Royalty Company
Ltd. (Nomad) on its sale
to Sandstorm Gold Ltd. (Sandstorm)
for US$590 million, including
a fairness opinion provided
to the Special Committee
of Nomad; co-manager on bought
deal equity offerings for
Nomad ($42.5 million) and
Sandstorm (US$90 million).
> Exclusive financial advisor
to the Credit Union Central
of Saskatchewan on the sale
of its 84% ownership stake
in Concentra Bank to Equitable
Group Inc. (Equitable); co-manager
on a $230 million bought
deal offering of subscription
receipts for Equitable.
> Exclusive financial advisor
to Vegpro International Inc.
on the sale of the majority
of its operations to Vision
Ridge Partners, LLC; sole
bookrunner, administrative
agent and arranger on the
acquisition financing.
> Exclusive financial advisor
to IBI Group Inc. on its
$873 million sale to Dutch-listed
Arcadis N.V.
> Received Consensus Economics'
Forecast Accuracy Award (FAA)
for Canada.
> Sponsored the tenth annual
Bloomberg Canadian Finance
Conference.
============================ =========================================== =========================================
Segment Results - Financial Markets
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars) 2022 2021(2) % change
============================================== ======= ======= === ========
Global markets
Equities 979 685 43
Fixed-income 367 357 3
Commodities and foreign exchange 156 128 22
---------------------------------------------- ------- ------- --- --------
1,502 1,170 28
Corporate and investment banking 966 1,048 (8)
---------------------------------------------- ------- ------- --- --------
Total revenues(1) 2,468 2,218 11
Non-interest expenses 1,022 906 13
---------------------------------------------- ------- ------- --- --------
Income before provisions for credit losses
and income taxes 1,446 1,312 10
Provisions for credit losses (23) (24) 4
---------------------------------------------- ------- ------- --- --------
Income before income taxes 1,469 1,336 10
Income taxes(1) 389 353 10
---------------------------------------------- ------- ------- --- --------
Net income 1,080 983 10
---------------------------------------------- ------- ------- --- --------
Average assets(3) 154,349 151,240 2
Average loans and acceptances(3) (Corporate
Banking only) 22,311 19,630 14
Net impaired loans(4) 91 14
Net impaired loans as a % of total loans and
acceptances(4) 0.4 % 0.1 %
Average deposits(3) 47,242 44,006 7
Efficiency ratio(4) 41.4 % 40.8%
============================================== ======= ======= ========
(1) The Total revenues and Income taxes items of the Financial
Markets segment are presented on a taxable equivalent basis.
Taxable equivalent basis is a calculation method that consists in
grossing up certain tax-exempt income by the amount of income tax
that would have been otherwise payable. For the year ended October
31, 2022, Total revenues were grossed up by $277 million ($183
million in 2021) and an equivalent amount was recognized in Income
taxes. The effect of these adjustments is reversed under the Other
heading in the segment results.
(2) For the year ended October 31, 2021, certain amounts have
been reclassified, in particular amounts of the loan portfolio of
borrowers in the "Oil and gas" and "Pipelines" sectors as well as
related activities, which were transferred from the Personal and
Commercial segment to the Financial Markets segment. Moreover,
certain amounts have been adjusted to reflect an accounting policy
change applicable to cloud computing arrangements (for additional
information, see Note 1 to the consolidated financial
statements).
(3) Represents an average of the daily balances for the period.
(4) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
Financial Results
In the Financial Markets segment, net income
totalled $1,080 million in fiscal 2022, a 10%
year-over-year increase driven by growth in
total revenues. The segment's income before
provisions for credit losses and income taxes Total Revenues by Category
totalled $1,446 million in fiscal 2022, up $134 Year ended October 31
million or 10% from fiscal 2021. Its fiscal (millions of Canadian dollars)
2022 total revenues amounted to $2,468 million,
up $250 million or 11% year over year. Global
markets revenues rose 28% year over year owing 2021 2022
to growth across every revenue category, notably Global markets - Equities
revenues from equities as market conditions Global markets - Fixed income
favoured greater client activity. As for the Global markets - Commodities and
fiscal 2022 corporate and investment banking foreign exchange
revenues, they were down 8% year over year, Corporate and investment banking
mainly due to a decrease in revenues related
to capital markets activity, tempered by revenues
generated by favourable merger and acquisition
activity and by growth in loan volumes.
For fiscal 2022, the segment's non-interest
expenses rose 13% year over year, essentially
attributable to higher compensation and employee
benefits, notably the variable compensation
associated with revenue growth, and to higher
technology investment expenses and operations
support charges. The segment's 2022 efficiency
ratio was 41.4% versus 40.8% in 2021.
Financial Markets recorded $23 million in recoveries
of credit losses during fiscal 2022 compared
to $24 million in recoveries of credit losses
in fiscal 2021. A $78 million increase in provisions
for credit losses on non-impaired loans, resulting
from a less favourable macroeconomic outlook
than in fiscal 2021, was offset by a $77 million
decrease in provisions for credit losses on
impaired loans.
U.S. Specialty Finance and International
The Bank complements its Canadian growth with a targeted,
disciplined international strategy that aims for superior returns.
The Bank is currently focused on specialty finance in the U.S.
through its Credigy subsidiary and on personal and commercial
banking in Cambodia through its ABA Bank subsidiary. The Bank also
holds minority positions in financial groups operating in
French-speaking Africa and Africa-Asia. The Bank currently has a
moratorium on any new significant investments in emerging markets.
During fiscal 2022, the U.S. Specialty Finance and International
(USSF&I) segment generated 12% of the Bank's consolidated total
revenue and 16% of its net income.
Credigy Breakdown of Total Revenues ABA Bank
Year ended October 31,
2022
Credigy (2021: 49 %)
ABA Bank (2021: 51 %)
U.S. Specialty Finance - Credigy
Founded in 2001 and based in Atlanta, Georgia, Credigy is a
specialty finance company primarily active in financing and
acquiring a diverse range of performing assets. Its portfolio is
mostly comprised of diversified secured consumer receivables in the
U.S. market. Through its landmark modelling expertise, flexibility,
and client-centric approach, Credigy is a partner of choice for
financial services institutions.
Economic and Market Review
The U.S. Federal Reserve (Fed) has already raised its policy
rate by 375 basis points since March 2022, and its most recent
announcements show that it believes that more work is needed to
rein in inflation. Yet, the U.S. economy has begun to grow again
after a difficult first six months. While the labour market remains
solid, consumers are managing to cope with their reduced buying
power by digging into their savings amassed during the pandemic.
Americans are also maintaining their spending levels using credit.
In fact, credit card debt rose 15%, year over year in the third
quarter of 2022, the highest increase seen in 20 years. However,
there are growing signs of an economic slowdown on the horizon.
Residential investment declined for a
sixth consecutive quarter-something not seen since the Great
Recession of 2008-09. Moreover, the manufacturing sector growth
outlook is less rosy. While inflation is showing some encouraging
signs that should soon enable the Fed to press the pause button,
there has been so much monetary tightening that growth is expected
to slow substantially in 2023.
The economic environment in 2022 and the outlook for 2023 are
discussed in more detail in the Economic Review and Outlook section
on page 26.
Objectives and Strategic Priorities - Credigy
Credigy aims to provide customized solutions for the acquisition
or financing of customer receivable assets in pursuit of the best
risk-adjusted returns and a pre-tax return on assets (ROA) of at
least 2.5%.
2022 Achievements and Highlights 2023 Priorities
============================ ========================================= ===========================================
Sustain deal flow
by being a partner > Conducted active monitoring > Leverage relationships
of choice for institutions of the economy and opportunities. with current and prospective
facing complex challenges > Achieved a balance in transactions partners.
and strategic changes among new and existing partners. > Remain prepared to seize
> Maintained average assets opportunities in rapidly
of approximately $8.2 billion. evolving markets.
---------------------------- =========================================== ===========================================
Maintain a diversified
mix of performing > Performing assets accounted > Favour asset diversification
assets for 99% of assets. and a prudent investment
> Continued asset class profile.
diversification > Maintain a stable risk-reward
focused on secured high-quality balance while optimizing
consumer assets. for capital efficiency.
> Leveraged flexibility to
invest via financing and direct
acquisitions.
---------------------------- =========================================== ===========================================
Achieve best risk-adjusted
returns > Refined and monitored credit > Actively monitor macroeconomic
models to target the best conditions to implement
risk-return investments. risk mitigation strategies.
> Maintained a disciplined > Deliver asset growth
approach to ensure a risk-return through a balanced mix
balance and a pre-tax return of financing and direct
on assets (ROA) of at least acquisitions.
2.5%.
============================ =========================================== ===========================================
Key Success Factors
International - ABA Bank
Established in 1996, ABA Bank provides financial services to
individuals and businesses in Cambodia. It is now the largest by
assets and the fastest growing commercial bank in Cambodia. ABA
Bank offers a full spectrum of financial services to micro, small
and medium enterprises (MSMEs) as well as to individuals through 81
branches, 30 self-banking units, 1,024 automated teller machines
(ATMs) and other self-service machines, and advanced online banking
and mobile banking platforms. It has been selected as the Best Bank
in Cambodia by financial magazines T he Banker , Global Finance
(eighth consecutive year), Euromoney (ninth consecutive year) and
Asiamoney.
Economic and Market Review
The persistent impact of the pandemic, most notably in China,
continues to affect Cambodia's tourism industry. The export sectors
on the other hand are growing with textile and agriculture
benefitting from the economic recovery in developed countries and
the new Regional Comprehensive Trade Partnership between the
Association of Southeast Asian Nations (ASEAN), Australia, New
Zealand, Brunei Darussalam, China and Japan. The highly dollarized
nature of the Cambodian economy (more than 80%) helps to keep
inflation under control. After peaking at 8% in mid-2022, it is
expected to level off at year end and return to historical averages
of 3% by 2024.
The economy grew by 3% in 2021 and is expected to grow by close
to 5% in 2022. In 2023, growth rates should remain close to 5%, as
tourism returns to more normalized levels. Cambodia will also
continue to benefit from increased regional economic integration
under the ASEAN trade association. The Cambodian market is
underbanked; there is a high adoption and use of mobile technology
and social media in the country, and over 65% of the population of
17 million is under 35 years of age.
Objectives and Strategic Priorities - ABA Bank
ABA Bank is pursuing an omnichannel banking strategy with the
goal of becoming the lending partner of choice to MSMEs while
increasing market penetration in deposits and transactional
services for retail and business clients.
2022 Achievements and Highlights 2023 Priorities
============================ ========================================== ============================================
Grow market share
in MSME lending > Achieved 39% growth in > Open four branches and
loan volumes. ten self-banking units in
> Went from the third-largest 2023 to extend its reach
bank in the market to the in Cambodia, continue modernizing
largest by increasing market its branch network, and
share. gain direct access to a
> Continued to adapt the larger pool of MSME customers
MSME lending strategy to and retail deposits.
support the growing needs > Focus on MSME clients
of customers as their businesses in industries that have
become more mature. been minimally affected
> Opened two new branches, by the current economic
bringing the total to 81 slowdown.
throughout the country. > Continue to adapt the
lending strategy in line
with the growing needs of
MSME customers as their
businesses become more mature.
---------------------------- ========================================== ==========================================
Maintain credit quality
> Maintained a well-diversified > Maintain strong governance,
portfolio (99% of loans are disciplined risk management,
secured). and sound business processes.
> At 2.8% of the loan portfolio > Ensure strong credit
as at October 31, 2022, quality across the loan
non-performing portfolio to keep non-performing
loans were below market average. loan levels below market
> Closely monitored clients averages.
as they exited the payment > Continue to focus on
deferral program established secured lending.
in 2020 to offer relief to
clients affected by the slowdown
caused by the COVID-19 pandemic.
> Standard & Poor's maintained
ABA Bank's long-term credit
rating at B+ with a "Stable"
outlook, based on its strengthening
business franchise underpinned
by a growing market share
and above-average profitability.
---------------------------- ========================================== ==========================================
Sustain growth in
deposits and transactional > Grew deposit volume by > Further develop the transactional
services 28% from fiscal 2021. banking model to accelerate
> Continued to enhance self-banking the migration of cash transactions,
capabilities, including the payments, and money transfers
market-leading full-scale to self-service and digital
mobile banking application banking channels.
in Cambodia. > Adapt the product offering
> Self-banking transactions to support the growth and
made up 98% of total transactions. evolving needs of clients.
> Further expanded ABA 24/7, > Increase the deposit
a network of standalone self-banking base by providing convenience
locations that provide customers to retail customers through
with round-the-clock access an advanced digital and
to their accounts and now self-banking infrastructure
has 30 locations throughout and by expanding the network
the country. of self-service locations.
============================ ========================================== ==========================================
Segment Results - USSF&I
Year ended October 31
(millions of Canadian dollars) 2022 2021 % change
============================================ ====== ====== ========
Total revenues
Credigy 439 486 (10)
ABA Bank 669 510 31
International 2 5
-------------------------------------------- ------ ------ --------
1,110 1,001 11
------------------------------------------- ------ ------ --------
Non-interest expenses
Credigy 131 139 (6)
ABA Bank 212 173 23
International 1 3
-------------------------------------------- ------ ------ --------
344 315 9
------------------------------------------- ------ ------ --------
Income before provisions for credit losses
and income taxes 766 686 12
-------------------------------------------- ------ ------ --------
Provisions for credit losses
Credigy 35 (41)
ABA Bank 31 26 19
-------------------------------------------- ------ ------ --------
66 (15)
------------------------------------------- ------ ------ --------
Income before income taxes 700 701 -
-------------------------------------------- ------ ------ --------
Income taxes
Credigy 57 86 (34)
ABA Bank 86 60 43
-------------------------------------------- ------ ------ --------
143 146 (2)
------------------------------------------- ------ ------ --------
Net income
Credigy 216 302 (28)
ABA Bank 340 251 35
International 1 2
-------------------------------------------- ------ ------ --------
557 555 -
------------------------------------------- ------ ------ --------
Average assets(1) 18,890 16,150 17
Average loans and receivables(1) 15,283 12,558 22
Purchased or originated credit-impaired
(POCI) loans 459 464 (1)
Net impaired loans excluding POCI loans
(2) 180 40
Average deposits(1) 8,577 6,699 28
Efficiency ratio(2) 31.0 % 31.5%
============================================ ====== ====== ========
(1) Represents an average of the daily balances for the period.
(2) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
Financial Results
In the USSF&I segment, net income totalled $557 million in
fiscal 2022 compared to $555 million in fiscal 2021 as total
revenue growth was offset by higher provisions for credit losses.
The segment's total revenues amounted to $1,110 million in fiscal
2022 versus $1,001 million in fiscal 2021, an 11% increase
resulting from a $159 million or 31% increase in the ABA Bank
subsidiary's revenues driven by loan and deposit growth, partly
offset by a $47 million decrease in the Credigy subsidiary's
revenues.
For fiscal 2022, the segment's non-interest expenses stood at
$344 million compared to $315 million in fiscal 2021, a $29 million
increase attributable to higher non-interest expenses at ABA Bank
resulting from its business growth.
The segment's provisions for credit losses increased by $81
million compared to fiscal 2021, resulting in part from the more
favourable macroeconomic outlook in fiscal 2021 as well as from
more favourable remeasurements of Credigy's POCI loan portfolios in
fiscal 2021.
Credigy
For fiscal 2022, the Credigy subsidiary's net income totalled
$216 million, a 28% year-over-year decrease that was notably due to
lower revenue and a significant increase in provisions for credit
losses. Its income before provisions for credit losses and income
taxes totalled $308 million in fiscal 2022, down 11% year over
year. Credigy's fiscal 2022 total revenues amounted to $439
million, down from $486 million in fiscal 2021. While there was
growth in net interest income, it was more than offset by a
decrease in non-interest income, that was due to a $26 million gain
that had been realized in the first quarter of 2021 upon a disposal
of loan portfolios, to a favourable impact of fair value
remeasurements of certain portfolios during fiscal 2021, and to an
unfavourable impact upon remeasurements of certain portfolios in
fiscal 2022. Credigy's non-interest expenses were down $8 million
year over year, mainly due to a decrease in variable compensation.
Provisions for credit losses rose $76 million year over year,
whereas in fiscal 2021, reversals of allowances for credit losses
on non-impaired loans had been recorded to reflect more favourable
macroeconomic conditions at that time and more favourable
remeasurements of POCI loan portfolios had also been carried
out.
ABA Bank
For fiscal 2022, ABA Bank's net income totalled $340 million, up
35% from fiscal 2021. Growth in the subsidiary's business
activities, mainly in the form of sustained loan and deposit
growth, drove total revenues up 31% year over year. This increase
was, however, partly offset by lower interest rates on loans given
a competitive environment in Cambodia. The subsidiary's fiscal 2022
non-interest expenses stood at $212 million, a 23% year-over-year
increase resulting from higher compensation and employee benefits
(notably due to higher salaries given a greater number of employees
and higher variable compensation associated with revenue growth)
and from higher occupancy expenses attributable to business growth.
ABA Bank recorded $31 million in provisions for credit losses in
fiscal 2022, which is $5 million more than last year, as provisions
for credit losses on impaired loans increased to reflect the end of
COVID-19 relief measures that had been granted to the subsidiary's
clients.
Average Loans and Receivables - Average Loans and Average Deposits
Credigy - ABA Bank
Year ended October 31 Year ended October 31
(millions of Canadian dollars) (millions of Canadian dollars)
2021 2022 2021 2022
Loans Loans
POCI loans Deposits
Other
The Other heading reports on Treasury operations; liquidity
management; Bank funding; asset and liability management; the
activities of the Flinks subsidiary, a fintech company specialized
in financial data aggregation and distribution; certain specified
items; and the unallocated portion of corporate units. Corporate
units include Technology and Operations, Risk Management, Employee
Experience, and Finance. These units provide advice and guidance
throughout the Bank and to its business segments in addition to
expertise and support in their respective fields.
Segment Results - Other
Year ended October 31
(millions of Canadian dollars) 2022 2021(1)
============================================================= ====== =======
Net interest income(2) (536) (379)
Non-interest income(2) 201 306
-------------------------------------------------------------- ------ -------
Total revenues (335) (73)
Non-interest expenses 324 381
-------------------------------------------------------------- ------ -------
Income before provisions for credit losses and income
taxes (659) (454)
Provisions for credit losses 2 -
------------------------------------------------------------- ------ -------
Income before income taxes (661) (454)
Income taxes (recovery)(2) (372) (264)
-------------------------------------------------------------- ------ -------
Net loss (289) (190)
Non-controlling interests (1) -
-------------------------------------------------------------- ------ -------
Net loss attributable to the Bank's shareholders and holders
of other equity instruments (288) (190)
-------------------------------------------------------------- ------ -------
Specified items after income taxes(3) - (7)
-------------------------------------------------------------- ------ -------
Net loss - Adjusted (3) (289) (183)
-------------------------------------------------------------- -------
Average assets(4) 71,868 62,333
============================================================== ====== =======
(1) For the year ended October 31, 2021, certain amounts have been reclassified.
(2) For the year ended October 31, 2022, Net interest income was
reduced by $234 million ($181 million in 2021), Non-interest income
was reduced by $48 million ($8 million in 2021), and an equivalent
amount was recorded in Income taxes. These adjustments include a
reversal of the taxable equivalent of the Financial Markets segment
and the Other heading. Taxable equivalent basis is a calculation
method that consists in grossing up certain tax-exempt income by
the amount of income tax that would have otherwise been
payable.
(3) See the Financial Reporting Method section on pages 16 to 21
for additional information on non-GAAP financial measures.
(4) Represents an average of the daily balances for the period.
Financial Results
For the Other heading of segment results, there was a net loss
of $289 million in fiscal 2022 compared to a net loss of $190
million in fiscal 2021. This change in net loss was due to a
decrease in total revenues arising mainly from a lower contribution
from Treasury activities and from lower gains on investments in
fiscal 2022. This decrease in revenues was tempered by a reduction
in non-interest expenses, notably variable compensation, and in
pension plan expense as well as by a $20 million reversal of the
provision for the compensatory tax on salaries paid in Quebec. In
fiscal 2021, the net loss had included a $33 million gain on a
remeasurement of the previously held equity interest in Flinks and
a $30 million loss ($26 million net of income taxes) related to the
fair value measurement of the Bank's equity interest in
AfrAsia.
The specified items, net of income taxes, recorded in fiscal
2021 had consisted of $7 million in intangible asset impairment
losses. For fiscal 2022, net loss stood at $289 million compared to
a $183 million adjusted net loss in fiscal 2021.
Quarterly Financial Information
Several trends and factors have an impact on the Bank's
quarterly net income, revenues, non-interest expenses and
provisions for credit losses. The following table presents a
summary of results for the past eight quarters.
Quarterly Results Summary (1)
(millions of Canadian
dollars) 2022(2) 2021(2)
========================= ========================== ===== ===== ===== =======
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
======================= ===== ===== ===== ===== ===== ===== ===== =======
Statement of income data
Net interest income 1,207 1,419 1,313 1,332 1,190 1,230 1,156 1,207
Non-interest income 1,127 994 1,126 1,134 1,021 1,024 1,082 1,017
------------------------- ----- ----- ----- ----- ----- ----- ----- -------
Total revenues 2,334 2,413 2,439 2,466 2,211 2,254 2,238 2,224
Non-interest expenses 1,346 1,305 1,299 1,280 1,268 1,224 1,217 1,194
------------------------- ----- ----- ----- ----- ----- ----- ----- -------
Income before provisions
for credit losses and
income taxes 988 1,108 1,140 1,186 943 1,030 1,021 1,030
Provisions for credit
losses 87 57 3 (2) (41) (43) 5 81
Income taxes 163 225 248 258 215 240 228 199
------------------------- ----- ----- ----- ----- ----- ----- ----- -------
Net income 738 826 889 930 769 833 788 750
========================= ===== ===== ===== ===== ===== ===== ===== =======
(1) For additional information about the 2022 fourth-quarter
results, visit the Bank's website at nbc.ca or the SEDAR website at
sedar.com to consult the Bank's Press Release for the Fourth
Quarter of 2022 , published on November 30, 2022 . Also, a summary
of results for the past 12 quarters is provided in Table 1 on pages
112 and 113 of this MD&A.
(2) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to the consolidated financial
statements.
The analysis of the past eight quarters reflects the sustained
performance of all the business segments and helps readers identify
the items that have favourably or unfavourably affected results. In
the third and fourth quarters of fiscal 2022, the Bank's net income
results decreased year over year; this was due to higher provisions
for credit losses, as more favourable macroeconomic conditions in
these quarters of 2021 had led to reversals of allowances for
credit losses. Conversely, for the first two quarters of fiscal
2022, the net income results increased year over year. These
increases came from the net income growth generated in each
business segment, notably due to higher revenues, and from lower
provisions for credit losses recorded in these quarters of fiscal
2022.
Net interest income posted year-over-year increases in every
quarter of fiscal 2022. These increases were driven by loan and
deposit growth in both the Personal and Commercial segment and the
Wealth Management segment, by trading activity revenues in the
Financial Markets segment (except for the fourth quarter), by loan
portfolio growth and the good performance of certain Credigy
portfolios, and by an increase in ABA Bank's net interest income
owing to sustained business growth. In addition, interest rates
were increased successively during fiscal 2022, which had a
favourable impact on net interest income in the third and fourth
quarters of fiscal 2022.
Non-interest income posted year-over-year increases in every
quarter of fiscal 2022 except for the third quarter; the increases
were driven partly by sustained business growth in the Personal and
Commercial segment, particularly in the area of card revenues,
where there was a notable increase in purchasing volume. In the
Wealth Management segment, non-interest income grew substantially
in the first and second quarters of fiscal 2022 given growth in
average assets under administration and under management as a
result of net inflows into various solutions and also due to stock
market performance. Conversely, in the third quarter of fiscal
2022, non-interest income was down year over year, notably because
higher gains on non-trading securities had been realized during the
third quarter of 2021. In the fourth quarter of fiscal 2022,
non-interest income was favourably affected by trading activity
revenues in the Financial Markets segment. Some factors, however,
had an unfavourable impact on non-interest income, including the
more favourable fair value remeasurements of Credigy loan
portfolios during the quarters of 2021 and a gain realized in the
first quarter of 2021 upon a disposal of certain Credigy loan
portfolios.
In fiscal 2022, non-interest expenses posted year-over-year
increases in every quarter. These increases came from compensation
and employee benefits, notably due to wage growth and a greater
number of employees, as well as from investments made as part of
the Bank's technological evolution. Travel and business development
expenses were also up in every quarter of fiscal 2022, as
activities with clients resumed during the year. However, certain
expenses decreased, in particular the compensatory tax on salaries
for which a downward adjustment was recorded in the first quarter
of 2022 as well as the expenses incurred to implement client and
employee health and safety measures in response to COVID-19, which
had been higher during fiscal 2021.
For the first two quarters of fiscal 2022, provisions for credit
losses decreased year over year; these decreases were due to
reversals of allowances for credit losses on non-impaired loans
recorded in the first half of fiscal 2022 given improvements in
both the macroeconomic outlook and credit conditions, as well as to
lower provisions for credit losses on impaired Commercial Banking
and Financial Markets loans. Conversely, in the last two quarters
of fiscal 2022, the provisions for credit losses increased year
over year given less favourable macroeconomic conditions and a
slight deterioration in credit conditions during the third and
fourth quarters of fiscal 2022. For the third quarter of fiscal
2022, the year-over-year increase in the provisions for credit
losses was also due to the favourable remeasurements of Credigy's
POCI loan portfolios that had been recorded in the third quarter of
2021.
The change in the effective tax rates between the quarters of
fiscal 2022 and fiscal 2021 came essentially from a higher level
and proportion of tax-exempt dividend income in every quarter of
fiscal 2022, except for the first quarter of fiscal 2022.
Analysis of the Consolidated Balance Sheet
Consolidated Balance Sheet Summary
As at October 31
(millions of Canadian dollars) 2022 2021(1) % change
================================================== ======= ======= ========
Assets
Cash and deposits with financial institutions 31,870 33,879 (6)
Securities 109,719 106,304 3
Securities purchased under reverse repurchase
agreements and securities borrowed 26,486 7,516 252
Loans and acceptances, net of allowances 206,744 182,689 13
Other 28,921 25,233 15
-------------------------------------------------- ------- ------- --------
403,740 355,621 14
------------------------------------------------- ------- ------- --------
Liabilities and equity
Deposits 266,394 240,938 11
Other 114,101 95,233 20
Subordinated debt 1,499 768 95
Equity attributable to the Bank ' s shareholders
and holders of other equity instruments 21,744 18,679 16
Non-controlling interests 2 3 (33)
-------------------------------------------------- ------- ------- --------
403,740 355,621 14
================================================= ======= ======= ========
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to the consolidated financial
statements.
As at October 31, 2022, the Bank had total assets of $403.7
billion, which rose $48.1 billion or 14% from $355.6 billion since
the end of fiscal 2021.
Cash and Deposits With Financial Institutions
At $31.9 billion as at October 31, 2022, cash and deposits with
financial institutions were down $2.0 billion since October 31,
2021, mainly due to a decrease in deposits with the Bank of Canada,
partly offset by an increase in deposits with the U.S. Federal
Reserve. The high level of cash and deposits with financial
institutions is explained in part by the excess liquidity related
to the accommodative monetary policies that have been applied by
central banks since 2020. The Bank's liquidity and funding risk
management practices are described on pages 91 to 100 of this
MD&A.
Securities
Securities, totalling $109.7 billion as at October 31, 2022,
rose $3.4 billion since October 31, 2021, due to a $2.6 billion or
3% increase in securities at fair value through profit or loss,
notably securities issued or guaranteed by the Canadian government
and by U.S. Treasury, other U.S. agencies, and other foreign
governments, partly offset by a decrease in equity securities.
Securities other than those measured at fair value through profit
or loss were also up, rising $0.8 billion. Securities purchased
under reverse repurchase agreements and securities borrowed rose
$19.0 billion, an increase that is mainly related to the activities
of the Financial Markets segment and of Treasury. The Bank's market
risk management policies are described on pages 84 to 90 of this
MD&A.
Loans and Acceptances
As at October 31, 2022, loans and acceptances, net of allowances
for credit losses, accounted for 51% of total assets and totalled
$206.7 billion, rising $24.0 billion or 13% since October 31,
2021.
Residential mortgage loans outstanding amounted to $80.1 billion
as at October 31, 2022, rising $7.6 billion or 10% since October
31, 2021. This growth was mainly driven by sustained demand for
mortgage credit in the Personal and Commercial segment as well as
by the activities of the Financial Markets segment and the ABA Bank
and Credigy subsidiaries. Personal loans totalled $45.3 billion at
year-end 2022, rising $4.2 billion from $41.1 billion since October
31, 2021. This increase came mainly from business growth in
Personal Banking and at ABA Bank. At $2.4 billion, credit card
receivables rose $0.2 billion since October 31, 2021, as the
consumer spending habits of clients gradually resumed and resulted
in a notable increase in purchasing volume.
As at October 31, 2022, loans and acceptances to business and
government totalled $79.9 billion, a $12.0 billion or 18% increase
since October 31, 2021 that was mainly due to business growth in
Commercial Banking, in the corporate financial services, and at ABA
Bank.
Table 9 (page 119) shows, among other information, gross loans
and acceptances by borrower category as at October 31, 2022. At
$95.6 billion as at October 31, 2022, residential mortgages
(including home equity lines of credit) have posted strong growth
since 2018 and accounted for 46% of total loans and acceptances.
The growth in residential mortgages was driven by sustained demand
for mortgage credit in the Personal and Commercial segment and by
the business activity at Financial Markets, ABA Bank, and Credigy.
As for personal loans (including credit card receivables), they
totalled $18.7 billion as at October 31, 2022, rising $2.2 billion
since October 31, 2021. With respect to commercial loans, the key
increases were recorded in the agriculture, utilities,
manufacturing, financial services, real estate and
real-estate-construction, and other services categories. As at
October 31, 2022, certain categories were down compared to a year
ago, notably the oil and gas category as well as the education and
health care category. Furthermore, the Credigy subsidiary's POCI
loans remained relatively stable since October 31, 2021.
Impaired Loans
Impaired loans include all loans classified in Stage 3 of the
expected credit loss model and the Credigy subsidiary's POCI
loans.
As at October 31, 2022, gross impaired loans stood at $1,271
million compared to $1,126 million as at October 31, 2021 (Table
10, page 120). As for net impaired loans, they totalled $1,030
million as at October 31, 2022 compared to $836 million as at
October 31, 2021. Net impaired loans excluding POCI loans amounted
to $479 million, rising $196 million from $283 million as at
October 31, 2021. This increase was essentially due to the loan
portfolio of the Financial Markets segment and to the loan
portfolio of ABA Bank, as the COVID-19 relief measures that had
been granted to this subsidiary's clients ceased. The increase was
partly offset by decreases in the net impaired loans of the
Commercial Banking loan portfolio and of the Credigy loan portfolio
(excluding POCI loans). Net POCI loans stood at $551 million as at
October 31, 2022 compared to $553 million as at October 31,
2021.
A detailed description of the Bank's credit risk management
practices is provided on pages 75 to 83 of this MD&A as well as
in Note 7 to the consolidated financial statements.
Other Assets
As at October 31, 2022, other assets totalled $28.9 billion
versus $25.2 billion as at October 31, 2021, a $3.7 billion
increase that came mainly from a $2.0 billion increase in
derivative financial instruments, related to the activities of the
Financial Markets segment, and from a $1.4 billion increase in
receivables, prepaid expenses and other items.
Deposits
As at October 31, 2022, deposits stood at $266.4 billion, rising
$25.5 billion or 11% since the end of fiscal 2021. At $78.8
billion, personal deposits, as presented in Table 12 (page 121),
accounted for 30% of all deposits, and had increased $8.7 billion
since October 31, 2021. This increase was driven by business growth
in Personal Banking, in both the Wealth Management and Financial
Markets segments, and at ABA Bank.
As shown in Table 12, business and government deposits totalled
$184.2 billion as at October 31, 2022, rising $16.3 billion from
$167.9 billion as at October 31, 2021. This increase came from the
funding activities of the Financial Markets segment and of
Treasury, including $2.0 billion in deposits subject to bank
recapitalization (bail-in) conversion regulations, as well as from
business and government deposits from the business activities of
Commercial Banking and Wealth Management. Deposits from
deposit-taking institutions totalled $3.4 billion as at October 31,
2022, rising $0.4 billion since the end of fiscal 2021.
Other Liabilities
Other liabilities stood at $114.1 billion as at October 31,
2022, rising $18.9 billion since October 31, 2021, essentially due
to a $16.2 billion increase in obligations related to securities
sold under repurchase agreements and securities loaned. Obligations
related to securities sold short and liabilities related to
transferred receivables were also up, rising $1.5 billion and $1.1
billion, respectively.
Subordinated Debt and Other Contractual Obligations
Subordinated debt increased since October 31, 2021 as a result
of the issuance, on July 25, 2022, of $750 million medium-term
notes, partly offset by the US$7 million redemption, on August 31,
2022, of debentures denominated in foreign currency. The
contractual obligations are presented in detail in Note 29 to the
consolidated financial statements.
Equity
As at October 31, 2022, equity attributable to the Bank's
shareholders and holders of other equity instruments totalled $21.7
billion, rising $3.0 billion from $18.7 billion since October 31,
2021. This increase was due to net income net of dividends, to the
$500 million issuance of LRCN - Series 3, to the issuances of
common shares under the Stock Option Plan, to the net fair value
change attributable to the credit risk on financial liabilities
designated at fair value through profit or loss, and to accumulated
other comprehensive income, notably net unrealized foreign currency
translation gains on investments in foreign operations. These
increases were partly offset by the repurchases of common shares
for cancellation and by remeasurements of pension plans and other
post-employment benefit plans.
The Consolidated Statements of Changes in Equity on page 136 of
this Annual Report present the items that make up equity. In
addition, an analysis of the Bank's regulatory capital is presented
in the Capital Management section of this MD&A.
Exposures to Certain Activities
The Financial Stability Board (FSB) formed a working group, the
Enhanced Disclosure Task Force (EDTF), that was mandated to develop
principles for enhancing the risk disclosures of major banks. The
EDTF published a report containing 32 recommendations. The risk
disclosures required by the EDTF are provided in this Annual Report
and in the documents entitled Supplementary Regulatory Capital and
Pillar 3 Disclosure and Supplementary Financial Information, which
are available on the Bank's website at nbc.ca. In addition, on page
13 of this Annual Report is a table of contents that readers can
use to locate information relative to the 32 recommendations.
The FSB recommendations seek to enhance the transparency and
measurement of certain exposures, in particular structured
entities, subprime and Alt-A exposures, collateralized debt
obligations, residential and commercial mortgage-backed securities,
and leveraged financing structures . The Bank does not market any
specific mortgage financing program to subprime or Alt-A clients.
The Bank does not have any significant direct position in
residential and commercial mortgage-backed securities that are not
insured by the CMHC. Credit derivative positions are presented in
the Supplementary Regulatory Capital and Pillar 3 Disclosure
report, which is available on the Bank's website at nbc.ca.
Leveraged finance is commonly employed to achieve a specific
objective, for example, to make an acquisition, complete a buy-out,
or repurchase shares. Leveraged finance risk exposure takes the
form of both funded and unfunded commitments. As at October 31,
2022, total commitments for this type of loan stood at $5,285
million ($4,048 million as at October 31, 2021). Details about
other exposures are provided in the table concerning structured
entities in Note 27 to the consolidated financial statements.
Related Party Transactions
In the normal course of business, the Bank provides various
banking services and enters into contractual agreements and other
transactions with associates, joint ventures, directors, key
officers and other related parties. These agreements and
transactions are entered into under conditions similar to those
offered to non-related third parties.
In accordance with the Bank Act (Canada), the aggregate of loans
granted to key officers of the Bank, excluding mortgage loans
granted on their principal residence, cannot exceed twice the
officer's annual salary.
Loans to eligible key officers are granted under the same
conditions as those granted to any other employee of the Bank. The
main conditions are as follows:
-- the employee must meet the same credit requirements as a client;
-- mortgage loans are offered at the preferential employee rate;
-- home equity lines of credit bear interest at Canadian prime
less 0.5%, but never lower than Canadian prime divided by two;
-- personal loans bear interest at a risk-based regular client rate;
-- credit card advances bear interest at a prescribed fixed rate
in accordance with Bank policy;
-- personal lines of credit bear interest at Canadian prime less
0.5%, but never lower than Canadian prime divided by two.
The Bank also offers a deferred stock unit plan to directors who
are not Bank employees. For additional information, see Note 22 to
the consolidated financial statements. Additional information about
related parties is presented in Notes 9 , 27 and 28 to the
consolidated financial statements.
Income Taxes
Notice of Assessment
In September 2022, the Bank was reassessed by the Canada Revenue
Agency (CRA) for additional income tax and interest of
approximately $150 million (including estimated provincial tax and
interest) in respect of certain Canadian dividends received by the
Bank during the 2017 taxation year.
In prior fiscal years, the Bank had been reassessed for
additional income tax and interest of approximately $725 million
(including provincial tax and interest) in respect of certain
Canadian dividends received by the Bank during the 2012-2016
taxation years.
In the reassessments, the CRA alleges that the dividends were
received as part of a "dividend rental arrangement".
The CRA may issue reassessments to the Bank for taxation years
subsequent to 2017 in regard to activities similar to those that
were the subject of the above-mentioned reassessments. The Bank
remains confident that its tax position was appropriate and intends
to vigorously defend its position. As a result, no amount has
been
recognized in the consolidated financial statements as at October 31, 2022.
Proposed Legislation
On November 4, 2022, the Government of Canada introduced Bill
C-32 - An Act to implement certain provisions of the fall economic
statement table in Parliament on November 3, 2022 and certain
provisions of the budget tabled in Parliament on April 7, 2022 to
implement tax measures applicable to certain entities of banking
and life insurer groups, as presented in its budget of April 7,
2022. These tax measures include the Canada Recovery Dividend
(CRD), which is a one-time 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, and also include a 1.5%
increase in the statutory tax rate. The amount of CRD for the Bank
is estimated at $32 million. Since these tax measures were not
substantively enacted at the reporting date, no amount has been
recognized in the Bank's consolidated financial statements as at
October 31, 2022.
Event After the Consolidated Balance Sheet
Repurchase of Common Shares
On November 29, 2022, the Bank's Board of Directors approved a
normal course issuer bid, beginning December 12, 2022, to
repurchase for cancellation up to 7,000,000 common shares
(representing approximately 2.08% of its outstanding common shares)
over the 12-month period ending December 11, 2023. Any repurchase
through the Toronto Stock Exchange will be done at market prices.
The common shares may also be repurchased through other means
authorized by the Toronto Stock Exchange and applicable
regulations, including private agreements or share repurchase
programs under issuer bid exemption orders issued by the securities
regulators. A private purchase made under an exemption order issued
by a securities regulator will be done at a discount to the
prevailing market price. The amounts that are paid above the
average book value of the common shares are charged to Retained
earnings. This normal course issuer bid is subject to the approval
of OSFI and the Toronto Stock Exchange (TSX).
Securitization and Off-Balance-Sheet Arrangements
In the normal course of business, the Bank is party to various
financial arrangements that, under IFRS, are not required to be
recorded on the Consolidated Balance Sheet or are recorded under
amounts other than their notional or contractual values. These
arrangements include, among others, transactions with structured
entities, derivative financial instruments, the issuance of
guarantees, credit instruments, and financial assets received as
collateral.
Structured Entities
The Bank uses structured entities, among other means, to
diversify its funding sources and to offer services to clients, in
particular to help them securitize their financial assets or
provide them with investment opportunities. Under IFRS, a
structured entity must be consolidated if the Bank controls the
entity. Note 1 to the consolidated financial statements describes
the accounting policy and criteria used for consolidating
structured entities. Additional information on consolidated and
non-consolidated structured entities is provided in Note 27 to the
consolidated financial statements.
Securitization of the Bank's Financial Assets
Mortgage Loans
The Bank participates in two Canada Mortgage and Housing
Corporation (CMHC) securitization programs: the Mortgage-Backed
Securities (MBS) Program under the National Housing Act (Canada)
(NHA) and the Canada Mortgage Bond (CMB) Program. Under the first
program, the Bank issues NHA securities backed by insured
residential mortgage loans and, under the second, the Bank sells
NHA securities to Canada Housing Trust (CHT), which finances the
purchase through the issuance of mortgage bonds insured by CMHC.
Moreover, these mortgage bonds feature an interest rate swap
agreement under which a CMHC-certified counterparty pays CHT the
interest due to investors and receives the interest on the NHA
securities. As at October 31, 2022, the outstanding amount of NHA
securities issued by the Bank and sold to CHT was $24.1 billion.
The mortgage loans sold consist of fixed- or variable-rate
residential loans that are insured against potential losses by a
loan insurer. In accordance with the NHA-MBS Program, the Bank
advances the funds required to cover late payments and, if
necessary, obtains reimbursement from the insurer that insured the
loan. The NHA-MBS and CMB programs do not use liquidity guarantee
arrangements. The Bank uses these securitization programs mainly to
diversify its funding sources. In accordance with IFRS, because the
Bank retains substantially all of the risks and rewards of
ownership of the mortgage loans transferred to CHT, the
derecognition criteria are not met. Therefore, the insured mortgage
loans securitized under the CMB Program continue to be recognized
in Loans on the Bank's Consolidated Balance Sheet, and the
liabilities for the considerations received from the transfer are
recognized in Liabilities related to transferred receivables on the
Consolidated Balance Sheet. For additional information, see Note 8
to the consolidated financial statements.
Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II
(CCCT II) to continue its program of securitizing credit card
receivables on a revolving basis . The Bank uses this entity for
capital management and funding purposes. The Bank acts as the
servicer of the receivables sold and maintains the client
relationship. Furthermore, it administers the securitization
program and ensures that all related procedures are stringently
followed and that investors are paid according to the provisions of
the program.
As at October 31, 2022, the credit card receivables portfolio
held by CCCT II represented an amount outstanding of $2.1 billion.
CCCT II issued notes to investors, $0.1 billion of which is held by
third parties and $1.3 billion is held by the Bank. CCCT II also
issued a bank certificate held by the Bank that stood at $0.7
billion as at October 31, 2022. New receivables are periodically
sold to the structure on a revolving basis to replace the
receivables reimbursed by clients.
The different series of notes are rated by the Fitch and DBRS
Morningstar (DBRS) rating agencies. From this portfolio of sold
receivables, the Bank retains the excess spread, i.e., the residual
net interest income after all the expenses related to this
structure have been paid, and thus provides first-loss protection.
Furthermore, second-loss protection for issued series is provided
by notes subordinated to the senior notes, representing 5.8% of the
total amount of the series issued. The Bank controls CCCT II and
thus consolidates it.
Securitization of Third-Party Financial Assets
The Bank administers multi-seller conduits that purchase
financial assets from clients and finance those purchases by
issuing commercial paper backed by the acquired assets. Clients use
these multi-seller conduits to diversify their funding sources and
reduce borrowing costs while continuing to service the financial
assets and providing some amount of first-loss protection. Notes
issued by the conduits and held by third parties provide additional
credit loss protection. The Bank acts as a financial agent and
provides administrative and transaction structuring services to
these conduits. The Bank provides backstop liquidity and credit
enhancement facilities under the commercial paper program. These
facilities are presented and described in Notes 26 and 27 to the
consolidated financial statements. The Bank has concluded
derivative financial instrument contracts with these conduits, the
fair value of which is presented on the Bank's Consolidated Balance
Sheet. The Bank is not required to consolidate these conduits, as
it does not control them.
Derivative Financial Instruments
The Bank uses various types of derivative financial instruments
to meet its clients' needs, generate trading activity revenues, and
manage its exposure to interest rate, foreign exchange and credit
risk as well as other market risks. All derivative financial
instruments are accounted for at fair value on the Consolidated
Balance Sheet. Transactions in derivative financial instruments are
expressed as notional amounts. These amounts are not presented as
assets or liabilities on the Consolidated Balance Sheet. They
represent the face amount of the contract to which a rate or price
is applied to determine the amount of cash flows to be exchanged.
Notes 1 and 16 to the consolidated financial statements provide
additional information on the types of derivative financial
instruments used by the Bank and their accounting basis.
Guarantees
In the normal course of business, the Bank enters into various
guarantee contracts. The principal types of guarantees are letters
of guarantee, backstop liquidity and credit enhancement facilities,
certain securities lending activities, and certain indemnification
agreements. Note 26 to the consolidated financial statements
provides detailed information on these guarantees.
Credit Instruments
In the normal course of business, the Bank enters into various
off-balance-sheet credit commitments. The credit instruments used
to meet the financing needs of its clients represent the maximum
amount of additional credit that the Bank could be required to
extend if the commitments were fully drawn. For additional
information on these off-balance-sheet credit instruments and other
items, see Note 26 to the consolidated financial statements.
Financial Assets Received as Collateral
In the normal course of business, the Bank receives financial
assets as collateral as a result of transactions involving
securities purchased under reverse repurchase agreements,
securities borrowing and lending agreements, and derivative
financial instrument transactions. For additional information on
financial assets received as collateral, see Note 26 to the
consolidated financial statements.
Capital Management
Capital management has a dual role of ensuring a competitive
return to the Bank's shareholders while maintaining a solid capital
foundation that covers the risks inherent to the Bank's business
activities, supports its business segments, and protects its
clients.
Capital Management Framework
The Bank's capital management policy defines the guiding
principles as well as the roles and responsibilities of its
internal capital adequacy assessment process. This process aims to
determine the capital level that the Bank needs to maintain to
pursue its business activities and accommodate unexpected losses
arising from extremely adverse economic and operational conditions.
The Bank has implemented a rigorous internal capital adequacy
assessment process that comprises the following procedures:
-- conducting an overall risk assessment;
-- measuring significant risks and the capital requirements
related to the Bank's financial budget for the next fiscal year and
current and prospective risk profiles;
-- integrating stress tests across the organization and
executing sensitivity analyses to determine the capital buffer
above minimum regulatory levels (for additional information on
enterprise-wide stress testing, see the Risk Management section of
this MD&A);
-- aggregating capital and monitoring the reasonableness of
internal capital compared with regulatory capital;
-- comparing projected internal capital against regulatory
capital levels, internal operating targets, and competing
banks;
-- attesting to the adequacy of the Bank's capital levels.
Assessing capital adequacy is an integral part of capital
planning and strategy. The Bank sets internal operating targets
that include a discretionary cushion in excess of the minimum
regulatory requirements, which provides a solid financial structure
and sufficient capital to meet management's business needs in
accordance with its risk appetite, along with competitive returns
to shareholders, under both normal market conditions and a range of
severe but plausible stress testing scenarios. The internal capital
adequacy assessment process is a key tool in establishing the
Bank's capital strategy and is subject to quarterly reviews and
periodic amendments.
Risk-adjusted return on capital and shareholder value added
(SVA), which are obtained from an assessment of required economic
capital, are calculated quarterly for each of the Bank's business
segments. The results are then used to guide management in
allocating capital among the various business segments.
Structure and Governance
Along with its partners from Risk Management, the Global Funding
and Treasury Group, and Finance, the Capital Management team is
responsible for maintaining integrated control methods and
processes so that an overall assessment of capital adequacy may be
performed.
The Board oversees the structure and development of the Bank's
capital management policy and ensures that the Bank maintains
sufficient capital in accordance with regulatory requirements and
in consideration of market conditions. The Board delegates certain
responsibilities to the Risk Management Committee (RMC), which in
turn recommends capital management policies and oversees
application thereof. The Board, on the recommendation of the RMC,
assumes the following responsibilities:
-- reviewing and approving the capital management policy;
-- reviewing and approving the Bank's risk appetite, including
the main capital and risk targets and the corresponding limits;
-- reviewing and approving the capital plan and strategy on an
annual basis, including the Bank's internal capital adequacy
assessment process;
-- reviewing and approving the implementation of significant
measures respecting capital, including contingency measures;
-- reviewing significant capital disclosures, including Basel capital adequacy ratios;
-- ensuring the appropriateness of the regulatory capital adequacy assessment.
The Senior Leadership Team is responsible for defining the
Bank's strategy and plays a key role in guiding measures and
decisions regarding capital. The Enterprise--Wide Risk Management
Committee oversees capital management, which consists of reviewing
the capital plan and strategy and implementing significant measures
respecting capital, including contingency measures, and making
recommendations with respect to these measures.
Basel Accord and Regulatory Environment
Basel Accord
The Basel Accord proposes a range of approaches of varying
complexity, the choice of which determines the sensitivity of
capital to risks. A less complex approach, such as the Standardized
Approach, uses regulatory weightings, while a more complex approach
uses the Bank's internal estimates of risk components to establish
risk-weighted assets and calculate regulatory capital.
As required under Basel, risk-weighted assets (RWA) are
calculated for each credit risk, market risk, and operational risk.
The Bank uses the Advanced Internal Ratings-Based (AIRB) Approach
for credit risk to determine minimum regulatory capital
requirements for a majority of its portfolios. The credit risk of
certain portfolios considered to be less significant is weighted
according to the Basel Standardized Approach. The simple
risk-weighted method is used to calculate the charge related to
banking book equity securities. This method requires proactive
management of the capital allocated to portfolios with banking book
equity securities, since, beyond a certain investment threshold,
the cost of regulatory capital becomes prohibitive. As for
operational risk, the Bank uses the Standardized Approach. Market
risk-weighted assets are primarily determined using the Internal
Model-Based Approach, while the Standardized Approach is used to
assess interest-rate specific risk.
With respect to the risk related to securitization operations,
the capital treatment depends on the type of underlying exposures
and on the information available about the exposures. The Bank must
use the Securitization: Internal Ratings-Based Approach (SEC-IRBA)
if it is able to apply an approved internal ratings-based model and
has sufficient information to calculate the capital requirements
for all underlying exposures in the securitization pool. Under this
approach, RWA is derived from a combination of supervisory inputs
and inputs specific to the securitization exposure, such as the
implicit capital charge related to the underlying exposures, the
credit enhancement level, the effective maturity, the number of
exposures, and the weighted average loss given default (LGD).
If the Bank cannot use the SEC-IRBA, it must use the
Securitization: External Ratings-Based Approach (SEC-ERBA) for the
securitization exposures that are externally rated. This approach
assigns risk weights to exposures using external ratings. The Bank
uses the ratings assigned by Moody's, Standard & Poor's
(S&P), Fitch, Kroll Bond Rating Agency, or DBRS or a
combination of these ratings. The Bank uses the Securitization:
Internal Assessment Approach (SEC-IAA) for unrated securitization
exposures relating to the asset-backed commercial paper conduits it
sponsors. The SEC-IAA rating methodologies used are mainly based on
criteria published by the above-mentioned credit rating agencies
and consider risk factors that the Bank deems relevant to assessing
the credit quality of the exposures. The Bank's SEC-IAA includes an
assessment of the extent by which the credit enhancement available
for loss protection provides coverage of expected losses. The
levels of stressed coverage the Bank requires for each internal
risk rating are consistent with the requirements published by the
rating agencies for equivalent external ratings by asset class. If
the Bank cannot apply the SEC-ERBA or the SEC-IAA, it must use the
supervisory formula under the Securitization Standardized Approach
(SEC-SA). Under this approach, RWA is derived from inputs specific
to the securitization exposure, such as the implicit capital charge
related to the underlying exposures calculated under the
standardized credit risk approach as well as credit enhancement and
delinquency levels.
If none of the above approaches can be used, the securitization
exposure must be assigned a risk weight of 1,250%. The Bank can
apply a reduced capital charge for securitization exposures that
meet the criteria of the Simple, Transparent and Comparable (STC)
framework.
Capital ratios are calculated by dividing capital by
risk-weighted assets. Credit, market, and operational risks are
factored into the risk-weighted assets calculation for regulatory
purposes. Basel rules apply at the consolidated level of the Bank.
Assets of non-consolidated entities for regulatory purposes are
therefore excluded from the risk-weighted assets calculation.
The definition adopted by the Basel Committee on Banking
Supervision (BCBS) distinguishes between three types of capital.
Common Equity Tier 1 (CET1) capital consists of common
shareholders' equity less goodwill, intangible assets, and other
CET1 capital deductions. Additional Tier 1 (AT1) capital consists
of eligible non-cumulative preferred shares, limited recourse
capital notes (LRCN), and other AT1 capital adjustments. The sum of
CET1 and AT1 capital forms what is known as Tier 1 capital. Tier 2
capital consists of eligible subordinated debts and certain
allowances for credit losses. Total regulatory capital is the sum
of Tier 1 and Tier 2 capital.
OSFI is responsible for applying the Basel Accord in Canada. As
required under the Basel Accord, OSFI requires that recognized
regulatory capital instruments other than common equity must have a
non-viability contingent capital (NVCC) clause to ensure that
investors bear losses before taxpayers should the government
determine that it is in the public interest to rescue a non-viable
financial institution. As at October 31, 2022, all of the Bank's
regulatory capital instruments, other than common shares, have an
NVCC clause. Furthermore, in the regulations of the Canada Deposit
Insurance Corporation (CDIC) Act and the Bank Act (Canada), the
Government of Canada has provided detailed information on
conversion, issuance, and compensation regimes for bail-in
instruments issued by Domestic Systemically Important Banks
(D-SIBs) (collectively the Bail-In Regulations) . Pursuant to the
CDIC Act, in circumstances where OSFI has determined that the Bank
has ceased, or is about to cease, to be viable, the Governor in
Council may, upon a Minister of Finance recommendation indicating
that he or she believes that it is in the public interest to do so,
grant an order directing CDIC to convert all or a portion of
certain shares and liabilities of the Bank into common shares (a
"Bail-In Conversion").
The Bail-In Regulations governing the conversion and issuance of
bail-in instruments came into force on September 23, 2018, and
those governing compensation for holders of converted instruments
came into force on March 27, 2018. Any shares and liabilities
issued before the date that the Bail-In Regulations came into force
are not subject to a Bail-In Conversion, unless, in the case of a
liability, the terms of said liability are, on or after that day,
amended to increase its principal amount or to extend its term to
maturity, and the liability, as amended, meets the requirements to
be subject to a Bail-In Conversion.
The Bail-In Regulations prescribe the types of shares and
liabilities that are subject to a Bail-In Conversion. In general,
any senior debt securities with an initial or amended
term-to-maturity greater than 400 days that are unsecured or
partially secured and have been assigned a Committee on Uniform
Securities Identification Procedures (CUSIP), an International
Securities Identification Number (ISIN), or similar identification
number are subject to a Bail-In Conversion. However, certain other
debt obligations of the Bank, such as structured notes (as defined
in the Bail-In Regulations), covered bonds, deposits and certain
derivative financial instruments, are not subject to a bail-in
conversion.
The Bank and all other major Canadian banks have to maintain the
following minimum capital ratios established by OSFI: a CET1
capital ratio of at least 10.5%, a Tier 1 capital ratio of at least
12.0%, and a Total capital ratio of at least 14.0%. All of these
ratios are to include a capital conservation buffer of 2.5%
established by the BCBS and OSFI, a 1.0% surcharge applicable
solely to D-SIBs, and a 2.5% domestic stability buffer established
by OSFI. The domestic stability buffer, which varies from 0% to
2.5% of risk-weighted assets, consists exclusively of CET1 capital.
A D-SIB that fails to meet this buffer requirement is not subject
to automatic constraints to reduce capital distributions but must
provide a remediation plan to OSFI. The banks also have to meet the
capital floor that sets the regulatory capital level according to
the Basel II Standardized Approach. If the capital requirement
under Basel III is less than 70% of the capital requirement as
calculated under Basel II, the difference is added to risk-weighted
assets. OSFI requires Canadian banks to meet a Basel III leverage
ratio of at least 3.0%. The leverage ratio is a measure independent
of risk that is calculated by dividing the amount of Tier 1 capital
by total exposure. Total exposure is defined as the sum of
on-balance-sheet assets (including derivative financial instruments
exposures and securities financing transaction exposures) and
off--balance-sheet items. The assets deducted from Tier 1 capital
are also deducted from total exposure.
OSFI's Total Loss Absorbing Capacity (TLAC) Guideline, which
applies to all D-SIBs under the federal government's bail-in
regulations, is to ensure that a D-SIB has sufficient
loss-absorbing capacity to support its recapitalization in the
unlikely event it becomes non-viable. Available TLAC includes total
capital as well as certain senior unsecured debts that satisfy all
of the eligibility criteria of OSFI's TLAC guideline. Since
November 1, 2021, OSFI has been requiring D-SIBs to maintain a
risk-based TLAC ratio of at least 24.0% (including the domestic
stability buffer) of risk-weighted assets and a TLAC leverage ratio
of at least 6.75%. The TLAC ratio is calculated by dividing
available TLAC by risk--weighted assets, and the TLAC leverage
ratio is calculated by dividing available TLAC by total exposure.
As at October 31, 2022, outstanding liabilities of $13.9 billion
($11.9 billion as at October 31, 2021) were subject to conversion
under the Bail-In Regulations.
Requirements - Regulatory Capital, Leverage, and TLAC Ratios
As at October 31, 2022
========= ======= ============ ======= ========= =================================
Minimum
set by
OSFI (1)
, including
Minimum Domestic the
Capital Minimum set by stability domestic
conservation set by D-SIB OSFI buffer stability
Minimum buffer BCBS surcharge (1) (2) buffer
---------- ------- ------------ ------- --------- ------- --------- -----------
Capital
ratios
CET1 4.5 % 2.5 % 7.0 % 1.0 % 8.0 % 2.5 % 10.5 %
Tier 1 6.0 % 2.5 % 8.5 % 1.0 % 9.5 % 2.5 % 12.0 %
Total 8.0 % 2.5 % 10.5 % 1.0 % 11.5 % 2.5 % 14.0 %
--------- ------- ------------ ------- --------- ------- --------- ----- ----
Leverage
ratio 3.0 % n.a. 3.0 % n.a. 3.0 % n.a. 3.0 %
---------- ------- ------------ ------- --------- ------- --------- ----- ----
TLAC ratio 21.5 % n.a. 21.5 % n.a. 21.5 % 2.5 % 24.0 %
---------- ------- ------------ ------- --------- ------- --------- ----- ----
TLAC
leverage
ratio 6.75 % n.a. 6.75 % n.a. 6.75 % n.a. 6.75 %
========== ======= ============ ======= ========= ======= ========= ===== ====
n.a. Not applicable
(1) The capital ratios and the TLAC ratio include the capital
conservation buffer and the D-SIB surcharge.
(2) On June 22, 2022, OSFI confirmed that the domestic stability
buffer was being maintained at 2.5%.
The Bank ensures that its capital levels are always above the
minimum capital requirements set by OSFI, including the domestic
stability buffer. By maintaining a strong capital structure, the
Bank can cover the risks inherent to its business activities,
support its business segments, and protect its clients.
Other disclosure requirements pursuant to Pillar 3 of the Basel
Accord and a set of recommendations defined by the EDTF are
presented in the Supplementary Regulatory Capital and Pillar 3
Disclosure report published quarterly and available on the Bank's
website at nbc.ca. Furthermore, a complete list of capital
instruments and their main features is also available on the Bank's
website.
Regulatory Context
The Bank closely monitors regulatory developments and
participates actively in various consultative processes. In
response to the impact of the COVID--19 pandemic, on March 27, 2020
OSFI had announced a series of regulatory adjustments to support
the financial and operational resilience of banks. The measures
announced by OSFI that have continued to have an impact on the Bank
for the year ended October 31, 2022 are described below. Also
presented below are brief descriptions of ongoing regulatory
projects.
COVID-19 relief measures still in effect as at October 31,
2022:
-- Treatment of regulatory capital for expected credit loss
accounting purposes: OSFI introduced transitional arrangements
applicable to the ECL provisioning method set out in the Basel
framework. Under the arrangements, a portion of allowances that
would otherwise have been included in Tier 2 capital is included in
CET1 capital. The increased amount is adjusted for tax effects and
multiplied by a scaling factor that decreases over time. The
scaling factor was set at 70% for fiscal 2020, at 50% for fiscal
2021, and at 25% for fiscal 2022. These arrangements ceased to
apply on November 1, 2022.
-- Capital floor: OSFI lowered the floor factor from 75% to 70%,
which will stay in place until the domestic implementation of the
Basel III capital floor comes into effect in the second quarter of
2023.
-- Leverage ratio: OSFI is continuing to allow banks to
temporarily exclude exposures from central bank reserves for
leverage ratio purposes. On September 13, 2022, OSFI announced that
this temporary exclusion will cease to apply on April 1, 2023.
Basel III Reform
In December 2017, the Group of Central Bank Governors and Heads
of Supervision (GHOS), which oversees the BCBS, endorsed the
outstanding Basel III post-crisis regulatory reforms. The purpose
of the approved reforms, set out in Basel III: Finalising
Post-Crisis Reforms, is to reduce excessive variability in
risk-weighted assets and improve comparability and transparency
among bank capital ratios.
On March 27, 2020, in response to the impact of the COVID-19
pandemic , GHOS announced a postponement to the implementation of
the Basel III international capital standard reform. OSFI therefore
postponed, until the first quarter of 2023, the implementation of
the Standardized Approach and Advanced IRB Approach to credit risk,
the revision of the operational risk framework and of the leverage
ratio framework, and the introduction of a more risk-sensitive
capital floor. Implementation of the Pillar 3 financial disclosure
requirements finalized by the BCBS in December 2018 was also
postponed until at least the first quarter of 2023. On November 29,
2021, OSFI postponed the implementation of the above-mentioned
Basel III reform items to the second quarter of 2023. Lastly,
implementation of the final set of revisions to the new market risk
framework, entitled Fundamental Review of the Trading Book and
published in January 2019, and implementation of the revised credit
valuation adjustment (CVA) risk framework are being postponed to
the first quarter of 2024.
On January 31, 2022, OSFI released its final capital and
liquidity rules that incorporate the final Basel III reforms, and o
n February 7, 2022, OSFI published corresponding changes to the
regulatory returns, i.e., the Basel Capital Adequacy Return (BCAR)
and the Leverage Requirements Return (LRR).
Other Projects
On March 31, 2022, OSFI released, for consultation purposes, a
draft guideline entitled Assurance on Capital, Leverage and
Liquidity Returns. OSFI relies largely on the regulatory returns
produced by financial institutions when assessing their safety and
soundness. The purpose of this draft guideline is to better inform
auditors and institutions on the work to be performed on regulatory
returns in order to clarify and align OSFI's assurance expectations
across all financial institutions. On November 7, 2022, OSFI
released the final version of this guideline, which notably
addresses the assurance that must be provided by external auditors,
senior management attestation, the assurance that must be provided
by internal auditors, and the effective dates, which will range
from fiscal 2023 to fiscal 2025.
On June 30, 2022, the BCBS published its second public
consultation on the prudential treatment of cryptoasset risk
exposures faced by banks. This consultation builds on preliminary
proposals from the first consultation published in June 2021 and
the responses received. The BCBS plans to finalize the standards by
the end of 2022. The Bank is actively participating in this
consultation. On August 18, 2022, OSFI released an advisory on
interim arrangements for dealing with cryptoassets held by
federally regulated financial institutions, which outlines its
prudential expectations on cryptoasset holdings and sets exposure
limits. OSFI also provided guidance on the regulatory capital and
liquidity treatment of cryptoasset exposures. These interim
arrangements will take effect in the second quarter of 2023.
Capital Management in 2022
Management Activities
On November 4, 2021, OSFI amended its capital distribution
expectations, namely, by permitting financial institutions to
increase regular dividends and, subject to OSFI approval, to buy
back shares.
On November 30, 2021, the Bank's Board of Directors approved a
normal course issuer bid, which began on December 10, 2021, to
repurchase for cancellation up to 7,000,000 common shares
(representing approximately 2% of its common shares outstanding)
over a 12-month period ending no later than December 9, 2022. This
normal course issuer bid was approved by OSFI and the Toronto Stock
Exchange (TSX) on December 8, 2021. During the year ended October
31, 2022, the Bank repurchased 2,500,000 common shares under this
program for $245 million, which reduced Common share capital by $24
million and Retained earnings by $221 million.
On July 25, 2022, the Bank issued medium-term notes for an
amount of $750 million, bearing interest at 5.426% and maturing on
August 16, 2032. As these medium-term notes satisfy the NVCC
requirements, they qualify for the purposes of calculating
regulatory capital under Basel III.
On August 31, 2022, the Bank redeemed the US$7 million non-NVCC
debentures denominated in foreign currency and maturing on February
28, 2087 at a price equal to their nominal value plus accrued
interest.
On September 8, 2022, the Bank issued $500 million of LRCN -
Series 3 for which noteholder recourse is limited to the assets
held by an independent trustee in a consolidated limited recourse
trust. The trust's assets consist of $500 million of Series 46
First Preferred Shares issued by the Bank in conjunction with the
LRCN - Series 3. The LRCN - Series 3 sell for $1,000 each and bear
interest at a fixed rate of 7.50% per annum until November 16, 2027
exclusively and, thereafter, at an annual rate equal to the yield
on five-year Government of Canada bonds plus 4.281% until November
16, 2077. Since the LRCN - Series 3 satisfy the NVCC requirements,
they qualify for the purposes of calculating regulatory capital
under Basel III.
As at October 31, 2022, the Bank had 336,582,124 issued and
outstanding common shares compared to 337,912,283 a year earlier.
It also had 66,000,000 issued and outstanding preferred shares,
unchanged from October 31, 2021. In addition, as at October 31,
2022, the Bank had 1,500,000 LRCN compared to 1,000,000 a year
earlier. For additional information on capital instruments, see
Notes 15 and 18 to the consolidated financial statements.
Dividends
The Bank's strategy for common share dividends is to aim for a
dividend payout ratio of between 40% and 50% of net income
attributable to common shareholders, taking into account such
factors as financial position, cash needs, regulatory requirements,
and any other factor deemed relevant by the Board.
For fiscal 2022, the Bank declared $1,206 million in dividends
to common shareholders, which represents 36.8% of net income
attributable to common shareholders (2021: 31.7%). The declared
dividends are below the target payout range given the interruption
to dividend increases prescribed by OSFI at the onset of the
COVID-19 pandemic. OSFI has only been allowing Canadian banks to
make capital distribution decisions, i.e., dividend increases and
share buybacks, since November 4, 2021. Given the economic
conditions during fiscal 2022, the Bank has taken a prudent
approach to managing regulatory capital and remains confident in
its ability to increase earnings going forward.
Shares , Other Equity Instruments, and Stock Options
As at October 31, 2022
========================== ==========================
Number of
shares or LRCN $ million
========================== =============== =========
First preferred shares
Series 30 14,000,000 350
Series 32 12,000,000 300
Series 38 16,000,000 400
Series 40 12,000,000 300
Series 42 12,000,000 300
-------------------------- --------------- ---------
66,000,000 1,650
------------------------- --------------- ---------
Other equity instruments
LRCN - Series 1 500,000 500
LRCN - Series 2 500,000 500
LRCN - Series 3 500,000 500
-------------------------- --------------- ---------
1,500,000 1,500
------------------------- --------------- ---------
67,500,000 3,150
------------------------- --------------- ---------
Common shares 336,582,124 3,196
-------------------------- --------------- ---------
Stock options 11,861,749
========================== =============== =========
As at November 25, 2022, there were 336,734,809 common shares
and 11,714,314 stock options outstanding. NVCC provisions require
the conversion of capital instruments into a variable number of
common shares should OSFI deem a bank to be non-viable or should
the government publicly announce that a bank has accepted or agreed
to accept an injection of capital. If an NVCC trigger event were to
occur, all of the Bank's preferred shares, LRCNs, and medium-term
notes maturing on February 1, 2028 and August 16, 2032, which are
NVCC capital instruments, would be converted into common shares of
the Bank according to an automatic conversion formula at a
conversion price corresponding to the greater of the following
amounts: (i) a $5.00 contractual floor price; or (ii) the market
price of the Bank's common shares on the date of the trigger event
(10-day weighted average price). Based on a $5.00 floor price and
including an estimate for accrued dividends and interest, these
NVCC capital instruments would be converted into a maximum of 1,093
million Bank common shares, which would have a 76.5% dilutive
effect based on the number of Bank common shares outstanding as at
October 31, 2022.
Regulatory Capital Ratios, Leverage Ratio and TLAC Ratios
As at October 31, 2022, the Bank's CET1, Tier 1, and Total
capital ratios were, respectively, 12.7 %, 15.4 % and 16.9 %,
compared to ratios of, respectively, 12.4%, 15.0% and 15.9% as at
October 31, 2021. All of the capital ratios have therefore
increased since October 31, 2021, essentially due to net income net
of dividends and to common share issuances under the Stock Option
Plan. These factors were partly offset by growth in RWA, common
share repurchases, and the impact of the transitional measures
applicable to ECL provisioning, of which the scaling factor
decreased from 50% to 25%. The increase in the Tier 1 capital ratio
was also due to the $500 million issuance of limited recourse
capital notes, i.e., Limited Recourse Capital Notes (LRCN) - Series
3, on September 8, 2022. The increase in the Total capital ratio
was also due to the $750 million issuance of medium-term notes on
July 25, 2022. As at October 31, 2022, the leverage ratio was 4.5 %
compared to 4.4 % as at October 31, 2021. The growth in Tier 1
capital was partly offset by growth in total exposure, which will
continue to benefit, until April 1, 2023, from the temporary
measure permitted by OSFI with respect to the exclusion of
exposures from central bank reserves.
As at October 31, 2022, the Bank's TLAC ratio and TLAC leverage
ratio were, respectively, 27.7% and 8.1%, compared with 26.3% and
7.8%, respectively, as at October 31, 2021. The increase in the
TLAC ratio was due to the same factors as those provided for the
Total capital ratio and to the net TLAC instrument issuances during
the period. The increase in the TLAC leverage ratio was due to the
same factors as those provided for the leverage ratio and to the
net TLAC instrument issuances.
During the year ended October 31, 2022, the Bank was in
compliance with all of OSFI's regulatory capital, leverage, and
TLAC requirements.
Regulatory Capital (1) , Leverage Ratio (1) and TLAC (2)
As at October 31
(millions of Canadian dollars) 2022 2021
================================= ======== ======= =========== =======
Adjusted
(3) Adjusted(3)
================================ ======== ======= =========== =======
Capital
CET1 14,763 14,818 12,866 12,973
Tier 1 17,906 17,961 15,515 15,622
Total 19,727 19,727 16,643 16,643
------------------------------------ -------- ------- ----------- -------
Risk-weighted assets 116,840 116,840 104,358 104,358
-------- ------- ----------- -------
Total exposure 401,780 401,780 351,160 351,160
--------------------------------- -------- ------- ----------- -------
Capital ratios
CET1 12.6 % 12.7 % 12.3% 12.4%
Tier 1 15.3 % 15.4 % 14.9% 15.0%
Total 16.9 % 16.9 % 15.9% 15.9%
------------------------------------ -------- ------- ----------- -------
Leverage ratio 4.5 % 4.5 % 4.4% 4.4%
--------------------------------- -------- ------- ----------- -------
Available TLAC (2) 32,351 32,351 27,492 27,492
TLAC ratio (2) 27.7 % 27.7 % 26.3% 26.3%
TLAC leverage ratio (2) 8.1 % 8.1 % 7.8% 7.8%
================================= ======== ======= =========== =======
(1) Capital, risk-weighted assets, total exposure, the capital
ratios, and the leverage ratio are calculated in accordance with
the Basel III rules, as set out in OSFI's Capital Adequacy
Requirements Guideline and Leverage Requirements Guideline.
(2) Available TLAC, the TLAC ratio, and the TLAC leverage ratio
are calculated in accordance with OSFI's Total Loss Absorbing
Capacity Guideline.
(3) Adjusted amounts are calculated in accordance with the Basel
III rules, as set out in OSFI's Capital Adequacy Requirements
Guideline, and exclude the transitional measure for provisioning
expected credit losses.
Movement in Regulatory Capital (1)
Year ended October 31
(millions of Canadian dollars) 2022 2021
============================================================= ======= =======
Common Equity Tier 1 (CET1) capital
Balance at beginning 12,973 11,167
Issuance of common shares (including Stock Option Plan) 54 93
Impact of shares purchased or sold for trading (1) (1)
Repurchase of common shares (245) -
Other contributed surplus 16 11
Dividends on preferred and common shares and distributions
on other equity instruments (1,325) (1,089)
Net income attributable to the Bank's shareholders and
holders of other equity instruments 3,384 3,140
Common share capital issued by subsidiaries and held
by third parties - -
Removal of own credit spread net of income taxes (733) (20)
Other 448 496
Movements in accumulated other comprehensive income
Translation adjustments 333 (190)
Debt securities at fair value through other comprehensive
income (105) (30)
Other (2) -
Change in goodwill and intangible assets (net of related
tax liability) (67) (73)
Other, including regulatory adjustments and transitional
arrangements
Change in defined benefit pension plan asset (net of
related tax liability) 145 (402)
Change in amount exceeding 15% threshold
Deferred tax assets - -
Significant investment in common shares of financial
institutions - -
Deferred tax assets, unless they result from temporary
differences (net of related tax liability) (5) 7
Other deductions of regulatory adjustments to CET1
implemented by OSFI(2) (52) (136)
Change in other regulatory adjustments - -
----------------------------------------------------------- ------- -------
Balance at end 14,818 12,973
------------------------------------------------------------- ------- -------
Additional Tier 1 capital
Balance at beginning 2,649 2,945
New Tier 1 eligible capital issuances 500 500
Redeemed capital - (800)
Change in non-qualifying Additional Tier 1 capital subject
to phase-out - -
Other, including regulatory adjustments and transitional
arrangements (6) 4
------------------------------------------------------------ ------- -------
Balance at end 3,143 2,649
------------------------------------------------------------- ------- -------
Total Tier 1 capital 17,961 15,622
------------------------------------------------------------- ------- -------
Tier 2 capital
Balance at beginning 1,021 1,055
New Tier 2 eligible capital issuances 750 -
Redeemed capital - -
Change in non-qualifying Tier 2 subject to phase-out - -
Tier 2 instruments issued by subsidiaries and held by
third parties - -
Change in certain allowances for credit losses 21 20
Other, including regulatory adjustments and transitional
arrangements (26) (54)
------------------------------------------------------------ ------- -------
Balance at end 1,766 1,021
------------------------------------------------------------- ------- -------
Total regulatory capital 19,727 16,643
============================================================= ======= =======
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
(2) This item includes the transitional measure applicable to
expected credit loss provisioning implemented during the second
quarter of 2020.
RWA by Key Risk Drivers
Risk-weighted assets (RWA) amounted to $116.8 billion as at
October 31, 2022 compared to $104.4 billion as at October 31, 2021,
a $12.4 billion increase resulting mainly from organic growth in
RWA and from foreign exchange movements, partly offset by
improvement in the credit quality of the loan portfolio and of
exposures to derivative financial instruments, and by model updates
and methodology and policy changes. Changes in the Bank's RWA by
risk type are presented in the following table.
Risk-Weighted Assets Movement by Key Drivers (1)
Quarter ended
October July 31, April January October
(millions of Canadian dollars) 31, 2022 2022 30, 2022 31, 2022 31, 2021
===================================== ========= ======== ========= ========= =========
Total Total Total Total Total
=================================== ========= ======== ========= ========= =========
Credit risk - Risk-weighted assets
at beginning 91,229 88,878 88,889 87,213 85,914
Book size 2,405 2,500 1,780 1,002 1,944
Book quality 93 (59) (1,397) (22) (430)
Model updates 300 13 (666) 29 (7)
Methodology and policy 339 - - - -
Acquisitions and disposals - - - - -
Foreign exchange movements 1,775 (103) 272 667 (208)
------------------------------------ --------- -------- --------- --------- ---------
Credit risk - Risk-weighted assets
at end 96,141 91,229 88,878 88,889 87,213
------------------------------------- --------- -------- --------- --------- ---------
Market risk - Risk-weighted assets
at beginning 5,696 4,453 3,498 3,770 4,072
Movement in risk levels (2) 329 1,243 542 (272) (302)
Model updates - - 413 - -
Methodology and policy - - - - -
Acquisitions and disposals - - - - -
------------------------------------ --------- -------- --------- --------- ---------
Market risk - Risk-weighted assets
at end 6,025 5,696 4,453 3,498 3,770
------------------------------------- --------- -------- --------- --------- ---------
Operational risk - Risk-weighted
assets at beginning 14,452 14,147 13,781 13,375 13,153
Movement in risk levels 222 305 366 406 222
Acquisitions and disposals - - - - -
------------------------------------ --------- -------- --------- --------- ---------
Operational risk - Risk-weighted
assets at end 14,674 14,452 14,147 13,781 13,375
------------------------------------- --------- -------- --------- --------- ---------
Risk-weighted assets at end 116,840 111,377 107,478 106,168 104,358
===================================== ========= ======== ========= ========= =========
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
(2) Also includes foreign exchange rate movements that are not considered material.
The table above provides the risk-weighted assets movements by
key drivers underlying the different risk categories.
The Book size item reflects organic changes in book size and
composition (including new loans and maturing loans). RWA movements
attributable to book size include increases or decreases in
exposures, measured by exposure at default, assuming a stable risk
profile.
The Book quality item is the Bank's best estimate of changes in
book quality related to experience, such as underlying customer
behaviour or demographics, including changes resulting from model
recalibrations or realignments and also including risk mitigation
factors.
The Model updates item is used to reflect implementations of new
models, changes in model scope, and any other change applied to
address model malfunctions. During the year ended October 31, 2022,
the Bank updated the models used for retail lines of credit,
mortgages, home equity lines of credit, and certain non-retail
exposures. It also changed the SVaR period of the 2008 Global
Financial Crisis (GFC) to the 2020 COVID-19 period at the start of
the second quarter of 2022 and then returned to the 2008 GFC period
towards the end of the same quarter. Lastly, the Bank transitioned
a retail loan portfolio from the Standardized Approach to the
Advanced Internal Ratings-Based (AIRB) Approach for measuring
credit risk.
The Methodology and policy item presents the impact of changes
in calculation methods resulting from changes in regulatory
policies or from new regulations. During the year ended October 31,
2022, the Bank decided to early adopt the Basel III reform
requirements related to risk parameter floors for certain exposures
calculated using the Internal Ratings-Based Approach for credit
risk.
Allocation of Economic Capital and Regulatory RWA
Economic capital is an internal measure that the Bank uses to
determine the capital it needs to remain solvent and to pursue its
business operations. Economic capital takes into consideration the
credit, market, operational, business, and other risks to which the
Bank is exposed as well as the risk diversification effect among
them and among the business segments. Economic capital thus helps
the Bank to determine the capital required to protect itself
against such risks and ensure its long-term viability. The
by-segment allocation of economic capital and regulatory RWA was
carried out on a stand-alone basis before attribution of goodwill
and intangible assets. The method used to assess economic capital
is reviewed regularly in order to accurately quantify these
risks.
The Risk Management section of this MD&A provides
comprehensive information about the main types of risk. The "Other
risks" presented below include risks such as business risk and
structural interest rate risk in addition to the benefit of
diversification among types of risk.
Allocation of Risks by Business Segment
As at October 31, 2022
(millions of Canadian dollars)
Business Personal Wealth Management Financial U.S. Specialty Other
segments and Commercial Markets Finance and
International
Major Banking services Full-service Equities, U.S. Specialty Treasury
activities Credit services brokerage fixed-income, Finance activities
Financing Private banking commodities * Credigy Liquidity
Investment Direct brokerage and foreign management
solutions Investment exchange Bank funding
Insurance solutions Corporate International Asset and
Administrative banking * ABA Bank (Cambodia) liability
and trade Investment management
execution banking Corporate
services * Minority interests in emerging markets units
Transaction Fintech services
products * Flinks
for advisors
Trust and
estate services
----------------------- ---------------------- ---------------------- ----------------------------------------------- --------------------------
Economic
capital
by type
of risk Credit 3,120 Credit 74 Credit 2,686 Credit 1,177 Credit 134
Market - Market - Market 324 Market - Market (91)
Operational 459 Operational 299 Operational 350 Operational 134 Operational (56)
Other Other Other Other Other
risks 282 risks 475 risks 765 risks 72 risks (557)
---------------------------------- ------------- ------------- ------------------------- -------------
Total 3,861 Total 848 Total 4,125 Total 1,383 Total (570)
---------------------------------- ------- ------------- ------- ------------- ------- ------------------------- -------------------- ------------- -----------
Credit 41,500 Credit 1,529 Credit 32,557 Credit 14,199 Credit 6,356
Market - Market - Market 5,891 Market - Market 134
Operational 5,661 Operational 3,711 Operational 4,321 Operational 1,677 Operational (696)
------------- ------------- ------------- ------------------------- -------------
Risk-weighted
assets
(1) Total 47,161 Total 5,240 Total 42,769 Total 15,876 Total 5,794
------------- ------- ------------- ------- ------------- ------- ------------------------- -------------------- ------------- -----------
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
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