TIDM32SS
RNS Number : 1247I
National Bank of Canada
30 November 2022
Regulatory Announcement
National Bank of Canada
November 30, 2022
2022 Management's Discussion and Analysis (Part 2)
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/1247I_1-2022-11-30.pdf
Risk Management
Risk-taking is intrinsic to a financial institution's business.
The Bank views risk as an integral part of its development and the
diversification of its activities . It advocates a risk management
approach that is consistent with its business strategy. The Bank
voluntarily exposes itself to certain risk categories, particularly
credit and market risk, in order to generate revenue. It also
assumes certain risks that are inherent to its activities-to which
it does not choose to expose itself-and that do not generate
revenue, i.e., mainly operational risks. The purpose of sound and
effective risk management is to provide reasonable assurance that
incurred risks do not exceed acceptable thresholds, to control the
volatility in the Bank's results, and to ensure that risk-taking
contributes to the creation of shareholder value.
Risk Management Framework
Risk is rigorously managed. Risks are identified, measured, and
controlled to achieve an appropriate balance between returns
obtained and risks assumed. Decision-making is therefore guided by
risk assessments that align with the Bank's risk appetite and by
prudent levels of capital and liquidity. Despite the exercise of
stringent risk management and existing mitigation measures, risk
cannot be eliminated entirely, and residual risks may occasionally
cause significant losses.
The Bank has developed guidelines that support sound and
effective risk management and that help preserve its reputation,
brand, and long-term viability.
-- risk is everyone's business: the business units, the risk
management and oversight functions, and Internal Audit all play an
important role in ensuring a risk management framework is in place;
operational transformations and simplifications are conducted
without compromising rigorous risk management;
-- client-centric: having quality information is key to
understanding clients, effectively managing risk, and delivering
excellent client service;
-- enterprise-wide: an integrated view of risk is the basis for
sound and effective risk management and decision-making by
management;
-- human capital: the Bank's employees are engaged, experienced
and have a high level of expertise; their curiosity supports
continuous development and their rigour ensures that risk
management is built into the corporate culture; incentive-based
compensation programs are designed to adhere to the Bank's risk
tolerance;
-- fact-based: good risk management relies heavily on common
sense and good judgment and on advanced systems and models.
Risk Appetite
Risk appetite represents how much risk an organization is
willing to assume to achieve its business strategy. The Bank
defines its risk appetite by setting tolerance thresholds , by
aligning those thresholds with its business strategy, and by
integrating risk management throughout its corporate culture. Risk
appetite is built into decision-making processes as well as into
strategic, financial, and capital planning .
The Bank's risk appetite framework consists of principles,
statements, metrics as well as targets and is reinforced by
policies and limits. When setting its risk appetite targets, the
Bank considers regulatory constraints and the expectations of
stakeholders, in particular customers, employees, the community,
shareholders, regulatory agencies, governments, and rating agencies
. The risk appetite framework is defined by the following
principles and statements:
The Bank's reputation, brand and long-term viability are at the
centre of our decisions, which demand:
-- a strong credit rating to be maintained;
-- a strong capital and cash position;
-- rigorous management of regulatory compliance risk, including sales practices;
-- zero tolerance for negligence in information security.
The Bank understands the risks taken; they are aligned with our
business strategy and translate into:
-- a risk-reward balance;
-- a stable risk profile;
-- a strategic level of concentration aligned with approved targets.
The Bank's transformation and simplification plan is being
carried out without compromising rigorous risk management, which is
reflected in:
-- a low tolerance to operational and reputation risk;
-- operational and information systems stability, both under
normal circumstances and in times of crisis .
The Bank's management and business units are involved in the
risk appetite setting process and are responsible for adequately
monitoring the chosen risk indicators. These needs are assessed by
means of the enterprise strategic planning process. The risk
indicators are reported on a regular basis to ensure an effective
alignment between the Bank's risk profile and its risk appetite,
failing which appropriate actions might be taken. Additional
information on the key credit, market and liquidity risk indicators
monitored by the Bank's management is presented on the following
pages .
Enterprise-Wide Stress Testing
An enterprise-wide stress testing program is in place at the
Bank. It is part of a more extensive process aimed at ensuring that
the Bank maintains adequate capital levels commensurate with its
business strategy and risk appetite. Stress testing can be defined
as a risk management method that assesses the potential effects-on
the Bank's financial position, capital and liquidity-of a series of
specified changes in risk factors, corresponding to exceptional but
plausible events. The program supports management's decision-making
process by identifying potential vulnerabilities for the Bank as a
whole and that are considered in setting limits as well as in
longer term business planning. The scenarios and stress test
results are approved by the Stress Testing Oversight Committee and
are reviewed by the Global Risk Committee (GRC) and the Risk
Management Committee (RMC). For additional information, see the
Stress Testing section of this MD&A applicable to credit risk,
market risk, and liquidity risk.
Incorporation of Risk Management Into the Corporate Culture
Risk management is supported by the Bank's cultural evolution
through, notably, the following pillars:
-- Tone set by management: The Bank's management continually
promotes risk management through internal communications. The
Bank's risk appetite is therefore known to all.
-- Shared accountability: A balanced approach is advocated,
whereby business development initiatives are combined with a
constant focus on sound and effective risk management. In
particular, risk is taken into consideration when preparing the
business plans of the business segments, when analyzing strategic
initiatives, and when launching new products.
-- Transparency: A foundation of the business's values,
transparency lets us communicate our concerns quickly without fear
of reprisal. We are a learning--focused organization where
employees are allowed to make mistakes.
-- Behaviour: The Bank's risk management is strengthened by
incentive compensation programs that are structured to reflect the
Bank's risk appetite.
-- Continuous development: All employees must complete mandatory
annual regulatory compliance training focused on the Bank's Code of
Conduct and on anti-money laundering and anti-terrorist financing
(AML/ATF) efforts as well as cybersecurity training. Risk
management training is also offered across all of the Bank's
business units.
In addition to these five pillars, Internal Audit carries out an
evaluation of the corporate culture as part of its mandate.
Furthermore, to ensure the effectiveness of the existing risk
management framework, the Bank has defined clear roles and
responsibilities by reinforcing the concept of the three lines of
defence. The Governance Structure section presented on the
following pages defines this concept as well as the roles and
responsibilities of the three lines of defence.
First Line of Defence Second Line of Defence Third Line of Defence
Risk Owner Independent Oversight Independent Assurance
Business Units Risk Management Internal Audit
and Oversight Functions
------------------------------------------------------------------------ -----------------------------------------------------------
* Identify, manage, assess and mitigate risks in * Oversee risk management by setting policies and * Provide the Board and management with independent
day-to-day activities. standards. assurance as to the effectiveness of the main
governance, risk management, and internal control
processes and systems.
* Ensure activities are in alignment with the Bank's * Provide independent oversight of management practices
risk appetite and risk management policies. and an independent challenge of the first line of
defence. * Provide recommendations and advice to promote the
Bank's long-term financial strength.
* Promote sound and effective risk management at the
Bank.
* Monitor and report on risk.
------------------------------------------------------------------------ -----------------------------------------------------------
Governance Structure *
The following chart shows the Bank's overall governance
architecture and the governance relationships established for risk
management.
The Board of Directors (Board) (1)
The Board is responsible for approving and overseeing management
of the Bank's internal and commercial affairs, and it establishes
strategic directions together with management. It also approves and
oversees the Bank's overall risk philosophy and risk appetite,
acknowledges and understands the main risks faced by the Bank, and
makes sure appropriate systems are in place to effectively manage
and control those risks. In addition, the Board ensures that the
Bank operates in accordance with environmental, social and
governance (ESG) practices and strategies. It carries out its
mandate both directly and through its committees: the Audit
Committee, the Risk Management Committee, the Human Resources
Committee , the Conduct Review and Corporate Governance Committee,
and the Technology Committee. In addition, the various oversight
functions, the Global Risk Committee and the working groups report
to the Board and advise it.
The Audit Committee (1)
The Audit Committee oversees the work of the Bank's internal
auditor and independent auditor ; ensures the Bank's financial
strength; establishes the Bank's financial reporting framework,
analysis processes and internal controls ; and reviews any reports
of irregularities in accounting, internal controls , or audit .
The Risk Management Committee (RMC) (1)
The Risk Management Committee examines the risk appetite
framework and recommends it to the Board for approval. It approves
the main risk management policies and risk tolerance limits. It
ensures that appropriate resources, processes, and procedures are
in place to properly and effectively manage risk on an ongoing
basis. Finally, it monitors the risk profile and risk trends of the
Bank's activities and ensures alignment with the risk appetite.
The Human Resources Committee (1)
The Human Resources Committee examines and approves the Bank's
total compensation policies and programs, taking into consideration
the risk management framework and ESG strategies, and recommends
their approval to the Board. It recommends, for Board approval, the
compensation of the President and Chief Executive Officer, of the
members of the Senior Leadership Team, and of the heads of the
oversight functions. This committee oversees all human resources
practices, including employee health and well-being, talent
management matters such as succession planning for management and
oversight functions, as well as inclusion and diversity.
The Conduct Review and Corporate Governance Committee (1)
The Conduct Review and Corporate Governance Committee ensures
that the Bank maintains sound practices that comply with
legislation and best practices, particularly in the area of ESG
responsibilities, and that they align with the Bank's One Mission.
It periodically reviews and approves professional conduct and
ethical behaviour standards, including the Code of Conduct. The
committee oversees the application of complaint review mechanisms
and implements mechanisms that ensure compliance with consumer
protection provisions, including the Whistleblower Protection
Policy, and that prevent prohibited financial transactions between
the Bank and related parties. Lastly, it ensures that the directors
are qualified by evaluating the performance and effectiveness of
the Board and its members and by planning director succession and
the composition of the Board .
The Technology Committee (1)
The Technology Committee oversees the various components of the
Bank's technology program . It reviews, among other things, the
Bank's technology strategy and monitors technology risks, including
cyberrisks, cybercrime, and protection of personal information. The
IT Risk Management Strategic Committee and the Privacy Office
report to the Technology Committee.
(1) Additional information about the Bank's governance
architecture can be found in the Management Proxy Circular for the
2023 Annual Meeting of Holders of Common Shares, which will soon be
available on the Bank's website at nbc.ca and on SEDAR's website at
sedar.com. The mandates of the Board and of its committees are
available in their entirety at nbc.ca.
Senior Leadership Team of the Bank
Composed of the President and Chief Executive Officer and the
officers responsible for the Bank's main functions and business
units, the Bank's Senior Leadership Team ensures that risk
management is sound and effective and aligned with the Bank's
pursuit of its objectives and strategies. The Senior Leadership
Team promotes the integration of risk management into its corporate
culture and manages the primary risks facing the Bank.
The Internal Audit Oversight Function
The Internal Audit Oversight Function is the third line of
defence in the risk management framework. It is responsible for
providing the Bank's Board and management with objective,
independent assurance on the effectiveness of the main governance,
risk management, and internal control processes and systems and for
making recommendations and providing advice to promote the Bank's
long-term strength.
The Finance Oversight Function
The Finance Oversight Function is responsible for optimizing
management of financial resources and ensuring sound governance of
financial information. It helps the business segments and support
functions with their financial performance, ensures compliance with
regulatory requirements, and carries out the Bank's reporting to
shareholders and the external reporting of the various units,
entities, and subsidiaries of the Bank. It is responsible for
capital management and actively participates in the activities of
the Asset/Liability Management Committee.
The Risk Management Oversight Function
The Risk Management service is responsible for identifying,
assessing and monitoring-independently and using an integrated
approach-the various risks to which the Bank and its subsidiaries
are exposed and for promoting a risk management culture throughout
the Bank. The Risk Management team helps the Board and management
understand and monitor the main risks. This service also develops,
maintains, and communicates the risk appetite framework while
overseeing the integrity and reliability of risk measures.
The Compliance Oversight Function
The Compliance Oversight Function is responsible for
implementing a Bank-wide regulatory compliance risk management
framework by relying on an organizational structure that includes
functional links to the main business segments. It also exercises
independent oversight and conducts assessments of the compliance of
the Bank and its subsidiaries with regulatory compliance risk
standards and policies.
The Global Risk Committee (GRC)
The Global Risk Committee is the overriding governing entity of
all the Bank's risk committees, and it oversees every aspect of the
overall management of the Bank's risk. It sets the parameters of
the policies that determine risk tolerance and the overall risk
strategy, for the Bank and its subsidiaries as a whole, and sets
limits as well as tolerance and intervention thresholds enabling
the Bank to properly manage the main risks to which it is exposed.
The committee approves and monitors all large credit facilities. It
reports to the Board, and recommends for Board approval, the Bank's
risk philosophy, risk appetite, and risk profile management. The
Operational Risk Management Committee, the Financial Markets Risk
Committee, and the Enterprise-Wide Risk Management Committee
presented in the governance structure chart are the primary
committees reporting to the Global Risk Committee. The Global Risk
Committee also carries out its mandate through the Senior Complex
Valuation Committee, the Models Oversight Committee, and the
Product and Activity Review Committees.
The Compensation Risk Oversight Working Group
The working group that monitors compensation-related risks
supports the Human Resources Committee in its compensation risk
oversight role. It is made up of at least three members, namely,
the Executive Vice-President, Risk Management; the Chief Financial
Officer and Executive Vice-President, Finance; and the Executive
Vice-President, Employee Experience. The working group helps to
ensure that compensation policies and programs do not unduly
encourage senior management members, officers, material risk
takers, or bank employees to take risks beyond the Bank's risk
tolerance thresholds. As part of that role, it ensures that the
Bank is adhering to the Corporate Governance Guidelines issued by
OSFI and to the Principles for Sound Compensation Practices issued
by the Financial Stability Board, for which the Canadian
implementation and monitoring is conducted by OSFI. The RMC also
reviews the reports presented by this working group.
The ESG Working Group
Under the leadership of the Chief Financial Officer and
Executive Vice-President, Finance, and made up of several officers
from different areas of the Bank, the ESG Working Group's main role
is to develop and support the Bank's environmental, social and
governance initiatives and strategies. Its members meet on a
monthly basis. The ESG Working Group is responsible for
implementing the recommendations made by the Task Force on
Climate-related Financial Disclosures (TCFD) and by the UN
Principles for Responsible Banking as well as for implementing the
Bank's climate commitments. At least twice a year, the ESG Working
Group reports to the Conduct Review and Governance Committee on the
progress made and on ongoing and upcoming ESG projects. In
addition, and in a timely fashion, the ESG Working Group makes
presentations on topics of particular interest, such as the TCFD
report, to the Audit Committee and the RMC.
The IT Risk Management Strategic Committee (ITRMSC)
The Bank's management has entrusted the ITRMSC with
responsibility for the governance of technology-related risk and
cyberrisk. Under the leadership of the Executive Vice-President,
Risk Management and the Executive Vice-President, Technology and
Operations, this committee approves the technology and cyberrisk
management policy as well as other policies related to technology
risk management. Among other responsibilities, it reviews the
technology risk and cyberrisk posture as well as any matter
requiring an alignment between the technology strategy and the
associated risks.
The Privacy Office
The Privacy Office develops and implements the personal
information privacy program and the Bank's strategy for ensuring
privacy and protecting personal information. It oversees the
development, updating, and application of appropriate documentation
in support of the Bank's personal information privacy program,
including policies, standards, and procedures. It also oversees the
risk governance framework and the implementation of appropriate
controls designed to mitigate privacy risk. Lastly, it supports the
business units in their execution of the Bank's strategic
directions and ensures adherence to privacy best practices.
The Business Units
As the first line of defence, the business units manage risks
related to their operations within established limits and in
accordance with risk management policies by identifying, analyzing,
managing, and understanding the risks to which they are exposed and
implementing risk mitigation mechanisms. The management of these
units must ensure that employees are adhering to current policies
and limits.
Risk Management Policies
The risk management policies and related standards and
procedures set out responsibilities, define and describe the main
business-related risks, specify the requirements that business
units must fulfill when assessing and managing these risks,
stipulate the authorization process for risk-taking, and set the
risk limits to be adhered to. They also establish the
accountability reporting that must be provided to the various
risk-related bodies, including the RMC. The policies cover the
Bank's main risks, are reviewed regularly to ensure they are still
relevant given market changes, regulatory changes and changes in
the business plans of the Bank's business units, and they apply to
the entire Bank and its subsidiaries, when applicable. Other
policies, standards, and procedures complement the main policies
and cover more specific aspects of risk management such as business
continuity; the launch of new products, initiatives, or activities;
or financial instrument measurement.
Governance of Model Risk Management
The Bank uses several models to guide enterprise-wide risk
management, financial markets strategy, economic and regulatory
capital allocation, global credit risk management, wealth
management, and profitability measures. The model risk management
policies as well as a rigorous model management process ensure that
model usage is appropriate and effective .
The key components of the Bank's model risk management
governance framework are as follows: the model risk management
policies and standards, the model validation group, and the Models
Oversight Committee. The policies and standards set the rules and
principles applicable to the development and independent validation
of models . The scope of models covered is wide, ranging from
market risk pricing models and automated credit decision-making
models to the business risk capital models, including models used
for regulatory capital and stressed capital purposes, expected
credit losses models, and financial-crime models. The framework
also includes more advanced artificial intelligence models.
One of the cornerstones of the Bank's policies is the general
principle that all models deemed important for the Bank or used for
regulatory capital purposes require heightened lifecycle monitoring
and independent validation. All models used by the Bank are
therefore classified in terms of risk level (low, medium , or
high). Based on this classification , the Bank applies strict
guidelines regarding the requirements for model development and
documentation, independent review thereof , performance monitoring
thereof, and minimum review frequency. The Bank believes that the
best defence against "model risk" is the implementation of a robust
development and validation framework .
Independent Oversight by the Compliance Service
Compliance is an independent oversight function within the Bank.
Its Senior Vice-President, Chief Compliance Officer and Chief
Anti-Money Laundering Officer has direct access to the RMC and to
the President and Chief Executive Officer and can communicate
directly with officers and directors of the Bank and of its
subsidiaries and foreign centres. The Senior Vice-President, Chief
Compliance Officer and Chief Anti-Money Laundering Officer
regularly meets with the Chair of the RMC, in the absence of
management, to review matters on the relationship between the
Compliance Service and the Bank's management and on access to the
information required.
Business unit managers must oversee the implementation of
mechanisms for the daily control of regulatory compliance risks
arising from the operations under their responsibility. Compliance
exercises independent oversight in order to assist managers in
effectively managing these risks and to obtain reasonable assurance
that the Bank is compliant with the regulatory requirements in
effect where it does business, both in Canada and
internationally.
Independent Assessment by Internal Audit
Internal Audit is an independent oversight function created by
the Audit Committee. Its Senior Vice-President has direct access to
the Chair of the Audit Committee and to the Bank's President and
Chief Executive Officer and can communicate directly with officers
and directors of the Bank and of its subsidiaries and foreign
centres. The Senior Vice-President, Internal Audit, regularly meets
with the Chair of the Audit Committee, in the absence of
management, to review matters on the relationship between Internal
Audit and the Bank's management.
Internal Audit provides reasonable assurance that the main
governance, risk management, and internal control processes and
systems are ensuring that, in all material respects, the Bank's key
control procedures are effective and compliant. Internal Audit also
provides recommendations and advice on how to strengthen these key
control procedures. Business unit managers and senior management
must ensure the effectiveness of the main governance, risk
management, and internal control processes and systems, and they
must implement corrective measures if needed.
Top and Emerging Risks
Managing risk requires a solid understanding of every type of
risk found across the Bank, as they could have a material adverse
effect on the Bank's business, results of operations, financial
position, and reputation. As part of its approach to risk
management, the Bank identifies, assesses, reviews and monitors the
range of top and emerging risks to which it is exposed in order to
proactively manage them and implement appropriate mitigation
strategies. Identified top and emerging risks are presented to
senior management and communicated to the RMC.
The Bank applies a risk taxonomy that categorizes, into two
groups, the top risks to which the Bank is exposed in the normal
course of business:
-- Financial risks: Directly tied to the Bank's key business
activities and are generally more quantifiable or predictable;
-- Non-financial risks: Inherent to the Bank's activities and to
which it does not choose to expose itself .
The Bank separately qualifies the risks to which it is exposed:
a "top risk" is a risk that has been identified, is clearly
defined, and could have a significant impact on the Bank's
business, results of operations, financial position, and
reputation, whereas an "emerging risk" is a risk that, while it may
also have an impact on the Bank, is not yet well understood in
terms of its likelihood, consequences, timing, or the magnitude of
its potential impact.
In the normal course of business, the Bank is exposed to the
following top risks.
Financial risks Non-financial risks
Operational Regulatory Reputation Strategic Environmental
risk compliance risk risk and social
risk risk
---------------- ------------ ------------ ----------- ---------- --------------
The Bank is also exposed to other new, so-called emerging or
significant risks, which are defined as follows.
Government decisions and international relations can have a significant
impact on the environment in which the Bank operates. Geopolitical
events can lead to volatility, have a negative impact on at-risk
assets, and cause financial conditions to deteriorate. They could
also directly or indirectly affect banking activities by having
repercussions on clients. The war in Ukraine, which has disrupted
Geopolitical energy and agricultural supply chains, is a good example. The
risk economic sanctions taken against Russia for its invasion of Ukraine
and the steps taken by Russia to significantly reduce natural
gas supply to Europe have led to soaring energy costs. This situation
has triggered the negative economic headwinds now facing Europe
and heightened the risk of a political reaction in the form of
new governments taking power and social unrest. Even if the war
was expected to end relatively quickly, the shattered trust suggests
that Europe and Russia will continue to take measures to become
less dependant on one another, notably regarding energy matters.
While new risks could arise at any time, certain concerns are
compelling us to monitor other situations at this time. The geopolitical
power struggle that for years has pitted the U.S. against China
is one such concern. Businesses, in particular those operating
in sectors deemed strategic, run an increasing risk of finding
themselves in a maze of contradictory regulations, where complying
with U.S. regulations means violating Chinese law, and vice versa.
These tensions could also partially undo some of the ties forged
between these two superpowers in the financial markets, and Canada
might get caught in the crosshairs of the two countries. A recent
escalation in tensions between China and the United States on
the subject of Taiwan is a new source of disagreement between
the two superpowers. While we do not believe an invasion is imminent,
China will continue to exert pressure on Taiwan through a combination
of unprecedented military exercises and economic sanctions. Taiwan's
importance is highlighted by the fact that it is by far the leading
global producer of advanced microchips (over 90% of the market
share). But the potential for confrontation is not limited to
the China-U.S. relationship, as protectionism is gaining popularity,
and a growing number of countries are implementing measures to
both financially support domestic businesses in key sectors (high
tech, health care, and food) and to protect them against global
competition through business restrictions. The combined effects
of supply shortages and geopolitical tensions have shifted the
focus from efficiency to supply security. We will continue to
monitor all of these developments, analyze any new risks that
arise, and assess the impacts that they may have on our organization
.
--------------- ---------------------------------------------------------------------------
Although the economy recovered quickly during the pandemic, a
number of risks still remain and others are emerging. Most countries
Economic are now dealing with variants, but we are not immune to the emergence
risk of new, more infectious strains that could once again destabilize
the economy. For its part, China is going it alone with its zero-COVID
policy. Given China's importance to the global economy and supply
chain, such a policy, which involves repeated lockdowns, has
repercussions not only on growth but also on inflationary pressure.
With this in mind, the inflationary outlook remains uncertain
insofar as supply chain bottlenecks could stop improving or worse,
deteriorate once again.
The war in Ukraine and extreme weather events have proven just
how vulnerable the global economy is to such shocks. The sharp
rise in inflation in 2022 is presenting another risk, i.e., the
risk of spiralling inflation created by higher wages. In fact,
the inflationary shock has prompted employees to demand compensation
for their lost buying power, which could subsequently compel
businesses to raise prices in order to maintain margins, thus
creating a vicious cycle. If this scenario of unchecked inflation
above central bank targets were to occur, the central banks could
move towards a much tighter monetary policy by hiking interest
rates even higher. Given that interest rates have remained quite
low over the past few years, market participants seeking additional
returns may have engaged in excessive risk-taking strategies
and would not be immune from negative repercussions should interest
rates suddenly spike higher. This would serve as a major headwind
for the real estate sector and Canadian households, which have
seen their debt levels rise sharply over the past few years.
Lastly, climate issues are an added risk in the current context.
If too few measures are adopted on the climate front, severe
weather events will intensify and result in economic woes over
the long term. Conversely, a too-swift transition could result
in other risks, particularly short- and medium-term costs and
rising pressure on production costs. In short, given the ongoing
uncertainties in this environment, the Bank remains vigilant
in the face of numerous factors and is continuing to rely on
its strong risk management framework to identify, assess, and
mitigate the negative impacts while also remaining within its
risk appetite limits.
-------- ----------------------------------------------------------------------------
Climate
change In accordance with the TCFD's recommendations, the Bank has identified
two types of direct climate-change-related risks (climate risk),
i.e., physical risks and transition risks. Physical risks refer
to the potential impacts of more frequent and more intense extreme
weather events and/ or of chronic changes in weather conditions
on physical assets, infrastructures, the value chain , productivity
, and other physical aspects. Transition risks refer to the potential
impacts of moving toward a low-carbon economy (such as technological
changes , behavioural changes by consumers, or political or public
policy shifts designed to reduce GHG emissions through taxes
or incentives) as well as to regulatory changes made to manage
and support such an economy. In addition to these two risks are
indirect risks, such as the risk of lawsuits, reputation risk,
and regulatory compliance risk in an environment that is constantly
changing due to ongoing and upcoming initiatives enacted by governments
and regulators. Climate risk could have an impact on the traditional
risks that are inherent to a financial institution's operations,
including credit risk, market risk, liquidity and funding risk,
and operational risk , among others.
Managing climate risk has become increasingly important, as evidenced
by the interest level in this risk, aligned over a societal,
political, and regulatory landscape in constant flux, shown by
the Bank's stakeholders, in particular clients, shareholders,
governments, and regulators. This past year, several initiatives
and public consultations were announced, including OSFI's guideline
B-15, Climate Risk Management, the International Sustainability
Standards Board's initiative to establish a financial disclosure
framework addressing sustainability and climate; and the CSA's
proposed National Instrument 51-107 - Disclosure of Climate-related
matters. Other announcements include the Government of Canada's
2030 Emissions Reduction Plan and the Government of Quebec's
Plan for a Green Economy .
It is possible that the Bank's or its clients' business models
fail to align with a low-carbon economy or that their responses
to government strategies and regulatory changes prove inadequate
or fail to achieve the target objectives. Another possibility
is that events caused by physical risks prove catastrophic (extreme
episodes) or that there are adaptability issues (chronic episodes).
As such, these risks could result in financial losses for the
Bank, affect its business activities and how they are conducted,
harm its reputation and increase its regulatory compliance risk,
or even affect the activities and financial position of the clients
to whom it offers financial services .
The actual impact of climate risk will depend on future events
that are beyond the Bank's control. The Bank must therefore devote
special attention to reducing its exposure to these negative
outside factors and, at the same time, to seizing new growth
opportunities. Its strategies and policies have therefore been
designed to consider climate risks while also supporting the
transition to a low-carbon economy. The Bank constantly strives
to remain apprised of best practices and to support and advise
its clients in their move to a low-carbon economy. From this
perspective, we will continue to deliver climate risk management
training across the organization, in particular among front-line
employees who have direct contact with clients. To better understand
and mitigate climate change risks, the Bank also takes part in
major national and international financial initiatives, including
TCFD, the United Nations Principles for Responsible Banking (UNPRB),
the United Nations Principles for Responsible Investing (UNPRI),
and others. However , it cannot predict the effectiveness of
government-led climate strategies or of regulatory changes enacted,
nor can it assume responsibility for achieving the objectives
set out in these strategies and changes .
The Bank continues to closely monitor developments on this topic
and to deploy its climate change risk management framework.
For additional information, see the Environmental and Social
Risk section of this MD&A.
-------- ----------------------------------------------------------------------------
Information
security Technology, which is now omnipresent in our daily lives, is at
and cybersecurity the heart of banking services and has become the main driver
of innovation in the financial sector. While this digital transformation
meets the growing needs of customers by enhancing the operational
efficiency of institutions, it nevertheless comes with information
security and cybersecurity risks. The personal information and
financial data of financial institution customers are prime targets
for criminals. These criminals, who are increasingly well organized
and employing ever more sophisticated schemes, try to use technology
to steal information .
Faced with a resurgence of cyberthreats and the sophistication
of cybercriminals, the Bank is exposed to the risks associated
with data breaches, malicious software, unauthorized access,
hacking, phishing, identity theft, intellectual property theft,
asset theft, industrial espionage, and possible denial of service
due to activities causing network failures and service interruptions.
Cyberattacks, as with breaches or interruptions of systems that
support the Bank and its customers, could cause client attrition;
financial loss; an inability of clients to do their banking;
non-compliance with privacy legislation or any other current
laws; legal disputes; fines; penalties or regulatory action;
reputational damage; compliance costs, corrective measures, investigative,
or restoration costs; cost hikes to maintain and upgrade technological
infrastructures and systems, all of which could affect the Bank's
operating results or financial position , in addition to having
an impact on its reputation.
It is also possible for the Bank to be unable to prevent or implement
effective preventive measures against every potential cyberthreat,
as the tactics used are multiplying, change frequently, come
from a wide range of sources, and are increasingly sophisticated.
Within this context, the Bank works to ensure the integrity and
protection of its systems and the information they contain. The
Bank reaffirms its commitment to continuous improvement in the
area of information security, the ultimate goal being to protect
its customers and maintain their trust. Along with its partners
in the financial sector and with the regulatory authorities,
the Bank is committed to making a sustained effort to mitigate
technology risks. Measures specifically directed at anticipating
this type of threat include the formation of multidisciplinary
teams comprising cybersecurity and fraud prevention specialists.
The Bank is also pursuing initiatives under its own cybersecurity
program aimed at adapting its protection, surveillance, detection,
and response capabilities according to changing threats, the
aim being to continue to reduce delays in detecting any anomalies
or cybersecurity incidents and limiting the impact thereof as
much as possible. A governance and accountability structure has
also been established to support decision-making based on sound
risk management . The Technology Committee is regularly informed
of the cybersecurity posture, of cybersecurity trends and developments,
and of lessons learned from operational incidents that have occurred
in other large organizations such that it can gain a better understanding
of risks, particularly risks related to cybersecurity and the
protection of personal information.
------------------- ----------------------------------------------------------------------------------
Protection
of personal Risks related to protecting personal information exist through
information the entire lifecycle of information and arise, in particular,
from inadequate control measures and weak processes. Such risks
could also arise from information being improperly created, collected,
used, communicated, stored, or destroyed. Greater attention will
be paid to the collection, use, and communication of personal
information as well as the management and governance applied
to such information as the Bank continues to invest in technological
solutions and innovations and according to the evolution of its
commercial activities.
Risks related to the protection of personal information could
cause client attrition; financial loss; non-compliance with legislation;
legal disputes; fines; penalties; punitive damages; regulatory
action; reputational damage; compliance, remediation, investigative,
or restoration costs; cost hikes to maintain and upgrade technological
infrastructures and systems, all of which could affect the Bank's
operating results or financial position, in addition to having
an impact on its reputation.
In recent years, innovations and the proliferation of technological
solutions that collect, use, and communicate personal information
such as cloud computing, artificial intelligence, automated learning
and open banking, have given rise to significant legislative
changes in many jurisdictions, including Canada and Quebec. For
example, in September 2021, the Quebec government passed An Act
to modernize legislative provisions as regards the protection
of personal information, which will gradually come into effect
over the next three years. And on June 16, 2022, the federal
government tabled Bill C-27 entitled Digital Charter Implementation
Act, 2022, which aims to enhance and modernize the personal information
protection framework.
The Bank continues to monitor relevant legislative developments
and has bolstered its governance structure by updating its policies
, standards and practices and by deploying a personal information
privacy program that reflects its determination to maintain the
trust of its clients .
------------------- ----------------------------------------------------------------------------------
Reliance
on technology The Bank's clients have high expectations regarding the accessibility
and to products and services that are offered on various platforms
third-party that house substantial amounts of data. In response to those heightened
providers client expectations, to the rapid pace of technological change,
and to the growing presence of new actors in the banking sector,
the Bank diligently makes significant and ongoing investments
in its technology while maintaining the operational resilience
and robustness of its controls. Inadequate implementation of technological
improvements or new products or services could significantly affect
the Bank's ability to serve and retain clients.
Third parties provide essential components of the Bank's technological
infrastructure such as Internet connections and access to network
and other communications services. The Bank also relies on the
services of third parties to support certain business processes
and to handle certain IT activities. An interruption of these
services or a breach of security could have an unfavourable impact
on the Bank's ability to provide products and services to its
customers and to conduct business, not to mention the impact that
such events would have on the Bank's reputation. To mitigate this
risk, the Bank has a third-party risk management framework wherein
information security, financial health, and performance are validated
before any agreements are reached and throughout the life of the
agreements. It also includes business continuity plans, which
are tested periodically to ensure their effectiveness in times
of crisis. A governance and accountability structure has also
been established to support decision-making based on sound risk
management. Despite these preventive measures and the efforts
deployed by the Bank to manage third parties, there remains a
possibility that certain risks will materialize. In such cases,
the Bank would rely on mitigation mechanisms developed in collaboration
with the various agreement owners and third parties concerned.
Aware of the significance of third-party risk, the Bank makes
sure that its practices evolve in collaboration with its financial
sector partners and with regulatory authorities.
----------------- ------------------------------------------------------------------------------
Technological
innovation On the one hand, the Bank's financial performance depends on its
and competition ability to develop and market new and innovative products and
services, adopt and develop new technologies that help differentiate
its product and services and generate cost savings, and market
these new products and services at the right time and at competitive
prices. On the other hand, failure to properly review critical
changes within the business before and during the implementation
and deployment of key technological systems or failure to align
client expectations with the Bank's client commitments and operating
capabilities could adversely affect the Bank's business, operating
results, financial position, and reputation.
The transition toward new digital channels and solutions has accelerated
greatly following the COVID-19 pandemic, where demand for digital
banking services grew to the detriment of traditional banking
services. The arrival of new, non-conventional players in the
market has intensified competitive pressure, as they are proposing
to enhance client experience with new technologies, data analysis
tools, and customized solutions in a simplified and more cost-effective
manner. These businesses are not necessarily subject to the same
regulatory requirements as financial institutions and may sometimes
be able to react more quickly to new consumer habits.
As such, to mitigate disintermediation risk and help make innovative
technologies accessible to its clients, the Bank continues to
incorporate artificial intelligence into its business processes
and remains highly committed to innovation by making strategic
investments in emerging technologies through its specialized venture
capital arm, NAventures.
----------------- ------------------------------------------------------------------------------
Ability The Bank's future performance depends greatly on its ability to
to recruit recruit, develop, and retain key resources. There is strong competition,
and retain partly supported by a relatively low unemployment rate, in the
key resources financial services sector in terms of attracting and retaining
the most qualified people, notably with the arrival of new players
in certain sectors and the emergence of the global workforce concept.
As a result, reports are periodically presented to the Board through
the governance mechanisms of the Human Resources Committee, the
aim being to deploy appropriate strategies to implement conditions
favourable to the Bank's competitiveness as an employer. There
is no assurance that the Bank or a business acquired by the Bank
will be able to continue recruiting or retaining talented people.
----------------- ------------------------------------------------------------------------------
Other Factors That Can Affect the Bank's Business, Operating
Results, Financial Position, and Reputation
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic continues to have disruptive and adverse
effects in the countries where the Bank operates and, more broadly,
on the global economy, supply chains, and financial markets. The
pandemic has also had, and could continue to have, repercussions on
the Bank, notably on the way in which it carries out its business
activities as well as on its operating results, financial position,
regulatory capital and liquidity ratios, reputation, and ability to
satisfy regulatory requirements, as well as on its clients, which
could exacerbate certain top and emerging risks to which the Bank
is exposed. Since a large part of the Bank's activities consist of
granting loans or providing various liquidity channels to clients,
namely, to individuals, businesses in various sectors, and
governments, the impacts of the pandemic on these parties could
also significantly influence the provisions for credit losses
recorded by the Bank. As the pandemic evolves, certain industries
and geographic sectors have been facing more persistent
consequences thereof. The Bank has therefore continued to closely
monitor the situation and, given the considerable degree of
uncertainty surrounding the post-pandemic landscape, additional
mitigation measures may be needed. The actual impacts will depend
on future events that are highly uncertain, including the extent,
severity, and duration of the COVID-19 pandemic, and on the
effectiveness of actions and measures taken by governments,
monetary authorities, and regulators over the long term .
International Risks
Through the operations of some of the Bank's units (mainly its
New York and London offices) and subsidiaries in Canada and abroad
(in particular, Credigy Ltd., NBC Global Finance Limited, and
Advanced Bank of Asia Limited), the Bank is exposed to risks
arising from its presence in international markets and foreign
jurisdictions. While these risks do not affect a significant
proportion of the Bank's portfolios, their impact must not be
overlooked, especially those that are of a legal or regulatory
nature. International risks can be particularly high in territories
where the enforceability of agreements signed by the Bank is
uncertain, in countries and regions facing political or
socio-economic disturbances, or in countries that may be subject to
international sanctions. Generally speaking, there are many ways in
which the Bank may be exposed to the risks posed by other
countries, not the least of which being foreign laws and
regulations. In all such situations, it is important to consider
what is referred to as "country risk." Country risk affects not
only the activities that the Bank carries out abroad but also the
business that it conducts with non-resident clients as well as the
services it provides to clients doing business abroad, such as
electronic funds transfers, international products, and
transactions made from Canada in foreign currencies.
As part of its activities, the Bank must adhere to anti-money
laundering and anti-terrorist financing (AML/ATF) regulatory
requirements in effect in each jurisdiction where it conducts
business. It must also comply with the requirements pertaining to
current international sanctions in these various jurisdictions.
Money laundering and terrorist financing is a financial,
regulatory, and reputation risk. For additional information, see
the Regulatory Compliance Risk Management section of this MD&A
.
The Bank is exposed to financial risks outside Canada and the
United States, primarily through its interbank transactions on
international financial markets or through international trade
finance activities. This geographic exposure represents a moderate
proportion of the Bank's total risk. The geographic exposure of
loans is disclosed in the quarterly Supplementary Financial
Information report available on the Bank's website at nbc.ca. To
control country risk, the Bank sets credit concentration limits by
country and reviews and submits them to the Board for approval upon
renewal of the Credit Risk Management Policy. These limits are
based on a percentage of the Bank's regulatory capital, in line
with the level of risk represented by each country, particularly
emerging countries. The risk is rated using a classification
mechanism similar to the one used for credit default risk. In
addition to the country limits, authorization caps and limits are
established, as a percentage of capital, for the world's high-risk
regions, i.e., essentially all regions except for North America,
Western European countries, and the developed countries of
Asia.
Acquisitions
The Bank's ability to successfully complete an acquisition is
often conditional on regulatory approval, and the Bank cannot be
certain of the timing or conditions of regulatory decisions.
Acquisitions could affect future results should the Bank experience
difficulty integrating the acquired business. If the Bank does
encounter difficulty integrating an acquired business, maintaining
an appropriate governance level over the acquired business, or
retaining key officers within the acquired business, these factors
could prevent the Bank from realizing expected revenue growth, cost
savings, market share gains, and other projected benefits of the
acquisition.
Intellectual Property
The Bank protects the intellectual property developed by its
employees in connection with their duties. However, in some cases,
the Bank's ability to acquire intellectual property rights may be
more limited. In addition, the intellectual property rights
acquired by the Bank provide no guarantees that they will be
effective in deterring or preventing a third party from
misappropriating intellectual property or providing a defense
against the misappropriation of intellectual property. Moreover,
the goods and services developed by the Bank are provided in a
competitive market where third parties could hold intellectual
property rights prior to those held by the Bank. In such
circumstances, there is no guarantee that the Bank will
successfully provide a defense against an infringement claim, that
it will be able to modify its goods and services to avoid
infringing upon third party rights, or that it will obtain a
licence with commercially acceptable conditions.
Judicial and Regulatory Proceedings
The Bank takes reasonable measures to comply with the laws and
regulations in effect in the jurisdictions where it operates.
Still, the Bank could be subject to judicial or regulatory
decisions resulting in fines, damages, or other costs or to
restrictions likely to adversely affect its operating results or
its reputation. The Bank may also be subject to litigation in the
normal course of business. Although the Bank establishes provisions
for the measures it is subject to under accounting requirements,
actual losses resulting from such litigation could differ
significantly from the recognized amounts, and unfavourable
outcomes in such cases could have a significant adverse effect on
the Bank's operating results. The resulting reputational damage
could also affect the Bank's future business prospects. For
additional information, see Note 26 to the consolidated financial
statements.
Tax Risk
The tax laws applicable to the Bank are numerous, complex, and
subject to amendment at any time. This complexity can result in
differing legal interpretations between the Bank and the respective
tax authorities with which it deals. In addition, legislative
changes and changes in tax policy, including the interpretation
thereof by tax authorities and courts, could affect the Bank's
earnings. International and domestic initiatives may also result in
changes to tax laws and policies, including international efforts
by the G20 and the Organisation for Economic Co-operation and
Development to broaden the tax base and domestic proposals to
increase the taxes payable by banks and insurance companies. For
additional information on income taxes, see the Income Taxes
section on page 52 of this MD&A, the Critical Accounting
Policies and Estimates section on page 110 of this MD&A, and
Note 24 to the consolidated financial statements.
Accounting Policies, Methods and Estimates Used by the Bank
The accounting policies and methods used by the Bank determine
how the Bank reports its financial position and operating results
and require management to make estimates or rely on assumptions
about matters that are inherently uncertain. Any changes to these
estimates and assumptions may have a significant impact on the
Bank's operating results and financial position.
Additional Factors
Other factors that could affect the Bank's business, operating
results, and reputation include unexpected changes in consumer
spending and saving habits; the timely development and launch of
new products and services; the ability to successfully align its
organizational structure, resources and processes; the ability to
activate a business continuity plan within a reasonable time; the
potential impact of international conflicts, natural disasters or
public health emergencies such as COVID-19; and the Bank's ability
to foresee and effectively manage the risks resulting from these
factors through rigorous risk management.
Credit Risk
Credit risk is the risk of incurring a financial loss if an
obligor does not fully honour its contractual commitments to the
Bank. Obligors may be debtors, issuers, counterparties, or
guarantors. Credit risk is the most significant risk facing the
Bank in the normal course of its business. The Bank is exposed to
credit risk not only through its direct lending activities and
transactions but also through commitments to extend credit and
through letters of guarantee, letters of credit, over-the-counter
derivatives trading, debt securities, securities purchased under
reverse repurchase agreements, deposits with financial
institutions, brokerage activities, and transactions carrying a
settlement risk for the Bank such as irrevocable fund transfers to
third parties via electronic payment systems.
Governance
A policy framework centralizes the governance of activities that
generate credit risk for the Bank and its subsidiaries and is
supplemented by a series of subordinate internal policies and
standards. These policies and standards address specific management
issues such as concentration limits by borrower group and sector,
credit limits, collateral requirements, and risk quantification or
issues that provide more thorough guidance for given business
segments.
For example, the institutional activities of the Bank and its
subsidiaries on financial markets and international commercial
transactions are governed by business unit directives that set out
standards adapted to the specific environment of these activities.
This also applies to retail brokerage subsidiaries. In isolated
cases, a business unit or subsidiary may have its own credit
policy, and that policy must always fall within the spirit of the
Bank's policy framework. Risk Management's leadership team defines
the scope of the universe of subsidiaries carrying significant
credit risks and the magnitude of the risks incurred.
Credit risk is controlled through a rigorous process that
comprises the following elements:
-- credit risk rating and assessment;
-- economic capital assessment;
-- stress testing;
-- credit granting process;
-- revision and renewal process;
-- risk mitigation;
-- follow-up of monitored accounts and recovery;
-- counterparty risk assessment;
-- settlement risk assessment;
-- environmental risk assessment.
Concentration Limits
The Bank sets credit concentration and settlement limits by
obligor group, by industry sector, by country, and by region. These
limits are subject to the approval of the RMC. Certain types of
financing or financing programs are also subject to specific
limits. Breaches of concentration limits by obligor group or by
region are reported to the RMC each quarter. Furthermore, every
industry sector, country, and region whose exposure equals a
predetermined percentage of the corresponding authorized limit are
reported to the Bank's Risk Management leadership team. At least
once a year, the Bank revises these exposures by industry sector,
by country, and by region in order to determine the appropriateness
of the corresponding concentration limits.
Reporting
Every quarter, an integrated risk management report is presented
to senior management and the RMC. It presents changes in the credit
portfolio and highlights on the following matters:
-- credit portfolio volume growth by business segment;
-- a breakdown of the credit portfolio according to various
criteria for which concentration limits have been set;
-- changes in provisions and allowances for credit losses;
-- changes in impaired loans;
-- follow-up of monitored accounts.
Credit Risk Rating and Assessment
Before a sound and prudent credit decision can be made, an
obligor's or counterparty's credit risk must be accurately
assessed. This is the first step in processing credit applications.
Using a credit rating system developed by the Bank, each
application is analyzed and assigned one of 19 grades on a scale of
1 to 10 for all portfolios exposed to credit risk. As each grade
corresponds to a debtor ' s, counterparty's, or third party's
probability of default, the Bank can estimate the credit risk. The
credit risk assessment method varies according to portfolio type.
There are two main methods for assessing credit risk, i.e., the
Advanced Internal Ratings-Based (AIRB) Approach and the
Standardized Approach, as defined by the Basel Accord, to determine
minimum regulatory capital requirements for most of its
portfolios.
The main parameters used to measure the credit risk of loans
outstanding and undrawn amounts under the AIRB Approach are as
follows:
-- probability of default (PD), which is the probability of
through-the-cycle 12-month default by the obligor , calibrated on a
long-run average PD throughout a full economic cycle ;
-- loss given default (LGD), which represents the magnitude of
the loss from the obligor's default that would be expected in an
economic downturn and subject to certain regulatory floors ,
expressed as a percentage of exposure at default;
-- exposure at default (EAD), which is an estimate of the amount
drawn and of the expected use of any undrawn portion prior to
default, and cannot be lower than the current balance.
The methodology as well as the data and the downturn periods
used to estimate LGD are described below.
AIRB APPROACH DATA (1) DOWNTURN PERIOD METHODOLOGY FOR
(1) CALCULATING LGD
------------------------------------------------------------- ------------------
Retail The Bank's internal historical 1996-1998 and LGD based on the
data from 1996 to 2021 2008-2009 Bank's
historical
internal data on
recoveries and
losses
-------------- ------------------------------------------------------------- ------------------ -----------------
Corporate 2000-2003, LGD based on the
The Bank's internal historical 2008-2009 Bank's
data from 2000 to 2021 and 2020 historical
recoveries and
Benchmarking results using: losses
* Moody's observed default price of bonds, internal data
and
on Moody's data
from 1983 to 2021
* Global Credit Data Consortium historical loss and
recovery database from 1998 to 2021
-------------- ------------------------------------------------------------- ------------------ -----------------
Sovereign Moody's observed default 1999-2001 and Based on implied
price of bonds, from 1983 2008-2012 market LGD using
to 2015 observed bond
price
S&P rating history from decreases
1975 to 2016 following
the issuer's
default
-------------- ------------------------------------------------------------- ------------------ -----------------
Financial Global Credit Data Consortium 1991-1992, 1994, Model for
institutions historical loss and recovery 1997-1998, predicting
database from 1991 to 2013 2001--2002, LGD based on
and 2008-2009 different
issue- and
issuer-related
risk drivers
-------------- ------------------------------------------------------------- ------------------ -----------------
(1) The performance of the models resulting from the AIRB
Approach is measured quarterly, and the methodologies are validated
by an independent third party annually. A report on model
performance under the AIRB Approach is presented annually to the
RMC. According to the most recent performance report, the models
continue to perform well and do not require the addition of new
data.
Personal Credit Portfolios
This category comprises portfolios of residential mortgage
loans, consumer loans, and loans to certain small businesses. To
assess credit risk, AIRB models are in place for the main
portfolios, particularly mortgage loans, home equity lines of
credit, credit cards, budget loans, lines of credit, and SME
retail. A risk analysis based on loan grouping in pools of
homogeneous obligor and product profiles is used for overall
management of personal credit portfolios. This personal credit
assessment approach, which has proven particularly effective for
estimating credit defaults and losses, takes a number of factors
into account, namely:
-- Attributes from credit rating agencies (scoring) related to behaviour;
-- loan product characteristics;
-- collateral provided;
-- the length of time on the Bank's balance sheet;
-- loan status (active, delinquent, or defaulted).
This mechanism provides adequate risk measurement inasmuch as it
effectively differentiates risk levels by pool. Therefore, the
results are periodically reviewed and, if necessary, adjustments
are made to the models. Obligor migrations between pools are among
the factors considered when assessing credit risk.
Loan pools are also established based on PD, LGD, and EAD, which
are measured based on the characteristics of the obligor and the
transaction itself. The credit risk of these portfolios is
estimated using credit scoring models that determine the obligor's
PD. LGD is estimated based on transaction-specific factors such as
loan product characteristics (for example, a line of credit versus
a term loan), loan-to-value ratio, and types of collateral.
Credit scoring models are also used to grant credit. These
models use proven statistical methods that measure an obligor's
demand characteristics and history based on internal and external
historical information to estimate the obligor's future credit
behaviour and assign a probability of default. The underlying data
include obligor information such as current and past employment,
historical loan data in the Bank's management systems, and
information from external sources such as credit rating
agencies.
The Bank also uses behaviour scoring models to manage and
monitor current commitments. The risk assessment is based on
statistical analyses of the past behaviour of obligors with which
the Bank has a long-term relationship in an effort to predict their
future behaviour. The underlying information includes the obligor's
cash flows and borrowing trends. Information on characteristics
that determine behaviour in these models also comes from both
internal sources on current commitments and external sources. The
table on the following page presents the PD categories and credit
quality of the associated personal credit portfolio.
Mortgage Loan Underwriting
To mitigate the impact of an economic slowdown and ensure the
long-term quality of its portfolio, the Bank uses sound risk
management when granting residential mortgages to confirm: (i) the
obligor's intention to meet its financial obligations, (ii) the
obligor's ability to repay its debts, and (iii) the quality of the
collateral. In addition, in accordance with the applicable rules,
the Bank takes a prudent approach to client qualification by using,
for example, a higher interest rate to mitigate the risk of short-
or medium-term rate hikes.
Nonetheless, the risk of economic slowdown could adversely
affect the profitability of the mortgage portfolio. In stress test
analyses, the Bank considers a variety of scenarios to measure the
impact of adverse market conditions. In such circumstances, our
analyses show significantly higher credit losses, which would
decrease profitability and reduce the Bank's capital ratios.
New Regulatory Developments
On December 17, 2021, OSFI confirmed the qualifying rate for
uninsured mortgages (i.e., residential mortgages with a down
payment of 20% or more) will remain as the greater of the mortgage
contract interest rate plus 2% and a minimum floor of 5.25%. OSFI
is well aware that the country's post-pandemic economic recovery
must be backed by a strong financial system capable of supporting
the Canadian population in the current environment and that real
estate market conditions in Canada could heighten the financial
risk weighing on lenders. The minimum qualifying interest rate
provides an additional level of safety to ensure that borrowers
would have the ability to make mortgage payments should
circumstances change, e.g., in the case of reduced income or a rise
in interest rates.
On June 28, 2022, OSFI published an Advisory entitled
Clarification on the Treatment of Innovative Real Estate Secured
Lending Products Under Guideline B-20. The Advisory complements the
existing expectations set out in Guideline B-20 - Residential
Mortgage Underwriting Practices and Procedures. The Advisory
specifies OSFI's expectations concerning underwriting practices and
procedures for reverse residential mortgages, residential mortgages
with shared equity features, and combined loan plans (CLPs),
notably for CLPs and the re-advanceability of credit above the 65%
loan-to-value (LTV) limit. For loans that exceed the 65% LTV limit,
there will be a transition period where a portion of the principal
payments will go towards repaying the overall mortgage amount until
it is below 65% of the original LTV ratio and not re-advanceable.
The implementation date for this change is October 31, 2023.
On August 1, 2022, Quebec's consumer protection organization,
the Office de la protection du consommateur, increased the monthly
minimum payment percentage to 3.5% of the balance for credit
cardholders in Quebec whose contract was issued before August 1,
2019. Annual increases of 0.5% until 2025 are planned in order to
raise the monthly minimum payment percentage to the 5% minimum
currently applicable to contracts issued in Quebec after August 1,
2019. The purpose of these measures is to help households avoid
debt issues and to reduce the risk of loss among lenders.
The objective of Bill 53 is to tighten the regulatory framework
governing credit assessment agents and ensure that Quebec consumers
can access protection measures, including security freezes of their
credit files, which would limit access to lenders for credit
authorization purposes. This measure is expected to come into force
on February 1, 2023 .
Business and Government Credit Portfolios
This category comprises business (other than some small
businesses that are classified in personal credit portfolios),
government, and financial institution credit portfolios.
These credit portfolios are assigned a risk rating that is based
on a detailed individual analysis of the financial and
non-financial aspects of the obligor, including the obligor's
financial strength, sector of economic activity, competitive
ability, access to capital management quality, and number of years
in business. The Bank uses risk-rating tools and models to
specifically assess the risk represented by an obligor in relation
to its industry and peers. The models used are adapted to the
obligor's broad sector of activity. Models are in place for ten
sectors: business/commercial, large business, financial
institutions, sovereigns, investment funds, energy, real estate,
agriculture, insurance, and public-private partnership project
financing.
This risk assessment method assigns a default risk rating to an
obligor that reflects its credit quality. To each default credit
risk rating corresponds a PD (see the table below). Using this
classification of obligor credit risk, the Bank can differentiate
appropriately between the various assessments of an obligor's
capacity to meet its contractual obligations. Default risk ratings
are assigned according to an assessment of an obligor's commercial
and financial risks based on a solvency review. Various risk
quantification models, described below, are used to perform this
assessment.
The business and government default risk rating scale used by
the Bank is similar to the systems used by major external rating
agencies. The following table presents a grouping of the ratings by
major risk category and compares them with the ratings of two major
rating agencies.
Internal Default Risk Ratings*
Personal
credit Business and government
Description(1) portfolios credit portfolios
---------------- ----------- -----------------------------------------------------------------
PD (%) -
Corporate
and
PD (%) - financial PD (%) - Standard
Retail Ratings institutions Sovereign & Poor's Moody's
================ =========== ======= ============= ============= ============ ============
Excellent 0.000-0.144 1-2.5 0.000-0.112 0.000-0.060 AAA to A- Aaa to A3
Good 0.145-0.506 3-4 0.112-0.384 0.060-0.331 BBB+ to BBB- Baa1 to Baa3
Satisfactory 0.507-2.681 4.5-6.5 0.384-4.235 0.331-5.738 BB+ to B Ba1 to B2
Special mention 2.682-9.348 7-7.5 4.235-10.182 5.738-17.964 B- to CCC+ B3 to Caa1
Substandard 9.349-9.999 8-8.5 10.182-99.999 17.964-99.999 CCC & CCC- Caa2 & Caa3
Default 1 9-10 100 100 CC, C & D Ca, C & D
================= =========== ======= ============= ============= ============ ============
(1) Additional information is provided in Note 7 - Loans and
Allowances for Credit Losses to the consolidated financial
statements.
The Bank also uses individual assessment models by industry to
assign a risk rating to the credit facility based on the collateral
that the obligor is able to provide and, in some cases, based on
other factors. The Bank consequently has a bi-dimensional
risk-rating system that, using models and internal and external
historical data, establishes a default risk rating for each
obligor. In addition, the models assign, to each credit facility,
an LGD risk rating that is independent of the default risk rating
assigned to the obligor.
The Bank's default risk ratings and LGD risk ratings as well as
the related risk parameters contribute directly to informed
credit-granting, renewal, and monitoring decisions. They are also
used to determine and analyze risk-based pricing. In addition, from
a credit portfolio management perspective, they are used to
establish counterparty credit concentration limits and segment
concentration limits as well as limits to decision-making power and
to determine the credit risk appetite of these portfolios.
Moreover, they represent an important component in estimating
expected and unexpected losses, measuring minimum required economic
capital, and measuring the minimum level of capital required, as
prescribed by the regulatory authorities.
The credit risk of obligors and of their facilities is assessed
with the PD and LGD parameters at least once a year or more often
if significant changes (triggers) are observed when updating
financial information or if another qualitative indicator of a
deterioration in the obligor's solvency or in the collateral
associated with the obligor's facilities is noted. The Bank also
uses a watchlist to more actively monitor the financial position of
obligors whose default-risk rating is greater than or equal to 7.0.
This process seeks to minimize an obligor's default risk and allows
for proactive credit risk management.
Validation
The Risk Management Group monitors the effectiveness of the
risk-rating systems and associated parameters, which are also
reviewed regularly in accordance with the Bank's policies.
Backtesting is performed at regular intervals to validate the
effectiveness of the models used to estimate PD, LGD, and EAD. For
PD in particular, this backtesting takes the form of sequentially
applied measures designed to assess the following criteria:
-- the model's discriminatory power;
-- the proportion of overrides;
-- model calibration;
-- the stability of the model's inputs and outputs.
The credit risk quantification models are developed and tested
by a team of specialists with model performance being monitored by
the applicable business units and related credit risk management
services. Models are validated by a unit that is independent of
both the specialists who developed the model and the concerned
business units. Approvals of new models or changes to existing
models are subject to an escalation process established by the
model risk management policy. Furthermore, new models or changes to
existing models that markedly impact regulatory capital must be
approved by the Board before being submitted to the regulatory
agencies.
The facility and default risk-rating systems, methods, and
models are also subject to periodic independent validation, the
frequency of which depends on the model's risk level. Models that
have a significant impact on regulatory capital must be reviewed
regularly, thereby further raising the certainty that these
quantification mechanisms are working as expected.
The key aspects to be validated are risk factors allowing for
accurate classification of default risk by level, adequate
quantification of exposure, use of assessment techniques that
consider external factors such as economic conditions and credit
status and, lastly, compliance with internal policies and
regulatory provisions.
The Bank's credit risk assessment and rating systems are
overseen by the Models Oversight Committee, the GRC, and the RMC,
and these systems constitute an integral part of a comprehensive
Bank-wide credit risk oversight framework. Along with the
above-mentioned elements, the Bank documents and periodically
reviews the policies, definitions of responsibilities, resource
allocation, and existing processes.
Assessment of Economic Capital
The assessment of the Bank's minimum required economic capital
is based on the credit risk assessments of obligors. These two
activities are therefore interlinked. The different models used to
assess the credit risk of a given portfolio type also enable the
Bank to determine the default correlation among obligors. This
information is a critical component in the evaluation of potential
losses for all portfolios carrying credit risk. Estimates of
potential losses, whether expected or not, are based on historical
loss experience, portfolio monitoring, market data, and statistical
modelling. Expected and unexpected losses are factors used in
assessing the minimum required economic capital for all of the
Bank's credit portfolios. The assessment of economic capital also
considers the anticipated potential migrations of the default risk
ratings of obligors during the remaining term of their credit
commitments. The main risk factors that have an impact on economic
capital are as follows:
-- the obligor's PD ;
-- the obligor's EAD;
-- the obligor's LGD;
-- the default correlation among various obligors;
-- the residual term of credit commitments;
-- the impact of economic and sector-based cycles on asset quality.
Stress Testing
The Bank carries out stress tests to evaluate its sensitivity to
crisis situations in certain activity sectors and key portfolios. A
global stress test methodology covers most business, government,
and personal credit portfolios to provide the Bank with an overview
of the situation. By simulating specific scenarios, these tests
enable the Bank to measure allowances for credit losses according
to IFRS 9 - Financial Instruments (IFRS 9), to assess the level of
regulatory capital needed to absorb potential losses, and to
determine the impact on its solvency. In addition, these tests
contribute to portfolio management as they influence the
determination of concentration limits by obligor, product, or
business sector.
Credit-Granting Process
Credit-granting decisions are based first and foremost on the
results of the risk assessment. Aside from an obligor's solvency,
credit-granting decisions are also influenced by factors such as
available collateral and guarantees, transaction compliance with
policies, standards and procedures, and the Bank's overall
risk-adjusted return objective. Each credit-granting decision is
made by authorities within the risk management teams and
management, who are independent of the business units and are at a
reporting level commensurate with the size of the proposed credit
transaction and the associated risk. Decision-making authority is
determined in compliance with the delegation of authority set out
in the Credit Risk Management Policy. A person in a senior position
in the organization approves credit facilities that are substantial
or carry a higher risk for the Bank. The GRC approves and monitors
all substantial credit facilities. Credit applications that exceed
management's latitudes are submitted to the Board for approval. The
credit-granting process demands a high level of accountability from
managers, who must proactively manage the credit portfolio.
Review and Renewal Processes
The Bank periodically reviews credit files. The review process
enables the Bank to update information on the quality of the
facilities and covers, among other things, risk ratings, compliance
with credit conditions, and obligor behaviour. In the specific case
of business credit portfolios, the credit risk of all obligors is
reviewed at least once per year. After this periodic review, for
on-demand or unused credit, the Bank decides whether to pursue its
business relationship with the obligor and, if so, revises the
credit conditions. For personal credit portfolios, the credit risk
of all obligors is reviewed on a continual basis.
Risk Mitigation
The Bank also controls credit risk using various risk mitigation
techniques. In addition to the standard practice of requiring
collateral to guarantee repayment of the credit it grants, the Bank
also uses protection mechanisms such as credit derivative financial
instruments, syndication, and loan assignments as well as an
orderly reduction in the amount of credit granted.
The most common method used to mitigate credit risk is obtaining
quality collateral from obligors. Obtaining collateral cannot
replace a rigorous assessment of an obligor ' s ability to meet its
financial obligations, but, beyond a certain risk threshold, it is
an essential complement. The obtaining of collateral depends on the
level of risk presented by the obligor and the type of loan
granted. The legal validity and enforceability of any collateral
obtained and the Bank's ability to regularly and correctly measure
the collateral's value are critical for this mechanism to play its
proper role in risk mitigation.
In its internal policies and standards, the Bank has established
specific requirements regarding the appropriate legal documentation
and assessment for the kinds of collateral that business units may
require to guarantee the loans granted. The categories of eligible
collateral and the lending value of the collateralized assets have
also been defined by the Bank. For the most part, they include the
following asset categories as well as guarantees (whether secured
by collateral or unsecured) and government and bank guarantees:
-- accounts receivable;
-- inventories;
-- machinery and equipment and rolling stock;
-- residential and commercial real estate, office buildings and industrial facilities;
-- cash and marketable securities.
Portfolio Diversification and Management
The Bank is exposed to credit risk, not only through outstanding
loans and undrawn amounts of commitments to a particular obligor
but also through the sectoral distribution of the outstanding loans
and undrawn amounts and through the exposure of its various credit
portfolios to geographical, concentration, and settlement
risks.
The Bank's approach to controlling these diverse risks begins
with a diversification of exposures. Measures designed to maintain
a healthy degree of credit risk diversification in its portfolios
are set out in the Bank's policies, standards, and procedures.
These instructions are mainly reflected in the application of
various exposure limits: credit concentration limits by
counterparty and credit concentration limits by business sector,
country, region, product, and type of financial instrument. These
limits are determined based on the Bank's credit risk appetite
framework and are reviewed periodically. Compliance with these
limits, particularly exceptions, is monitored through periodic
reports submitted by the Risk Management Group's officers to the
Board.
Continuous analyses are performed in order to anticipate
problems with a sector or obligor before they materialize, notably
as defaulted payments.
Other Risk Mitigation Methods
Credit risk mitigation measures for transactions in derivative
financial instruments, which are regularly used by the Bank, are
described in detail in the Counterparty Risk section.
Credit Derivative Financial Instruments and Financial Guarantee
Contracts
The Bank also reduces credit risk by using the protection
provided by credit derivative financial instruments such as credit
default swaps. When the Bank acquires credit protection, it pays a
premium on the swap to the counterparty in exchange for the
counterparty's commitment to pay if the underlying entity defaults
or another event involving the counterparty and covered by the
legal agreement occurs. Since, like obligors, providers of credit
protection must receive a default risk rating, the Bank's standards
set out all the criteria under which a counterparty may be judged
eligible to mitigate the Bank's credit risk. The Bank may also
reduce its credit risk by entering into financial guarantee
contracts whereby a guarantor indemnifies the Bank for a loss
resulting from an obligor failing to make a payment when due in
accordance with the contractual terms of a debt instrument.
Loan Syndication
The Bank has developed specific instructions on the appropriate
objectives, responsibilities, and documentation requirements for
loan syndication.
Follow-Up of Monitored Accounts and Recovery
Credit granted and obligors are monitored on an ongoing basis
and in a manner commensurate with the degree of risk. Loan
portfolio managers use an array of intervention methods to conduct
a particularly rigorous follow-up on files that show a high risk of
default, and they submit comments to credit risk management groups
about each identified borrower on the watchlist for whom they are
responsible. When loans continue to deteriorate and there is an
increase in risk to the point where monitoring has to be increased,
a group specialized in managing problem accounts (Work Out units)
steps in to maximize collection of the disbursed amounts and tailor
strategies to these accounts.
Each quarter, the Work Out units submit a monitoring report
(called a watchlist) to a monitoring committee that tracks the
status of at-risk obligors and the corrective measures undertaken.
In addition, files in which the authorized amount is $5 million and
up are presented to the Watchlist Committee, which in turn reviews
the action plans and watchlist reports. The authority to approve
allowances for credit losses is attributed using limits delegated
on the basis of hierarchical level presented in the Credit Risk
Management Policy.
Information on the recognition of impaired loans and allowances
for credit losses is presented in Notes 1 and 7 to the consolidated
financial statements.
Forbearance and Restructuring
Situations where a business or retail obligor begins showing
clear signs of potential insolvency are managed on a case-by-case
basis and require the use of judgment. The Loan Work Out Policy
sets out the principles applicable in such situations to guide loan
restructuring decisions and identify situations where distressed
restructuring applies. A distressed restructuring situation occurs
when the Bank, for economic or legal reasons related to the
obligor's financial difficulties, grants the obligor a special
concession that is contrary to the Bank's policies. Such
concessions could include a lower interest rate, waiver of
principal, and extension of the maturity date.
The Bank has established a management framework for commercial
and corporate obligors that represent higher-than-normal risk of
default. It outlines the roles and responsibilities of loan
portfolio managers with respect to managing high-risk accounts and
the responsibilities of the Work Out units and other participants
in the process. Lastly, the Credit Risk Management Policy and a
management framework are used to determine the authorization limits
for distressed restructuring situations. During fiscal years 2022
and 2021, the amount of distressed loan restructurings was not
significant.
Counterparty Risk Assessment
Counterparty risk is a credit risk that the Bank incurs on
various types of transactions involving financial instruments. The
most significant risks are those it faces when it trades derivative
financial instruments with counterparties on the over-the-counter
market or when it purchases securities under reverse repurchase
agreements or sells securities under repurchase agreements.
Securities lending transactions and securities brokerage activities
involving derivative financial instruments are also sources of
counterparty risk. Note 16 to the consolidated financial statements
provides a complete description of the credit risk for derivative
financial instruments by type of traded product.
The Risk Management Group has developed models by type of
counterparty through which it applies an advanced methodology for
calculating the Bank's credit risk exposure and economic capital.
The exposures are subject to limits. These limits are established
based on the counterparty's internal default risk rating and on the
potential volatility of the underlying assets until expiration of
the contract.
Counterparty obligations related to the trading of contracts on
derivative financial instruments, securities lending transactions,
and reverse repurchase agreements are frequently subject to credit
risk mitigation measures. The mitigation techniques are somewhat
different from those used for loans and advances and depend on the
nature of the instrument or the type of contract traded. The most
widely used measure is the signing of master agreements: the
International Swaps & Derivatives Association, Inc. (ISDA)
master agreement, the Global Master Repurchase Agreement (GMRA),
and the Global Master Securities Lending Agreement (GMSLA). These
agreements make it possible, in the event of default, insolvency,
or bankruptcy of one of the contracting parties, to apply full
netting of the gross amounts of the market values for each of the
transactions covered by the agreement in force at the time of
default. The amount of the final settlement is therefore the net
balance of gains and losses on each transaction, which reduces
exposure when a counterparty defaults. The Bank's policies require
that an ISDA, GMRA, or GMSLA agreement be signed with its trading
counterparties to derivatives, foreign exchange forward contracts,
securities lending transactions, and reverse repurchase
agreements.
Another mechanism for reducing credit risk on derivatives and
foreign exchange forward contracts complements the ISDA master
agreement in many cases and provides the Bank and its counterparty
(or either of the parties, if need be) with the right to request
collateral from the counterparty when the net balance of gains and
losses on each transaction exceeds a threshold defined in the
agreement. These agreements, also known as Credit Support Annexes
(CSA), are mandatory when financial institutions trade between each
other in international financial markets since they limit credit
risk while providing traders with additional flexibility to
continue negotiating with the counterparty. When required by
regulation, the Bank always uses this type of legal documentation
in transactions with financial institutions and governments. For
business transactions, the Bank prefers to use internal mechanisms,
notably involving collateral and mortgages, set out in the credit
agreements. The Bank's internal policies set the conditions
governing the implementation of such mitigation methods.
Requiring collateral as part of a securities lending transaction
or reverse repurchase agreement is not solely the result of an
internal credit decision. In fact, it is a mandatory market
practice imposed by self-regulating organizations in the financial
services sector such as the Investment Industry Regulatory
Organization of Canada (IIROC).
The Bank has identified circumstances in which it is likely to
be exposed to wrong-way risk. There are two types of wrong-way
risk: general wrong-way risk and specific wrong-way risk. General
wrong-way risk occurs when the probability of default of the
counterparties is positively correlated to general market risk
factors. Specific wrong-way risk occurs when the exposure to a
specific counterparty is positively correlated to the probability
of default of the counterparty due to the nature of the
transactions with this counterparty.
Assessment of Settlement Risk
Settlement risk potentially arises from transactions that
feature reciprocal delivery of cash or securities between the Bank
and a counterparty. Foreign exchange contracts are an example of
transactions that can generate significant levels of settlement
risk. However, the implementation of multilateral settlement
systems that allow settlement netting among participating
institutions has contributed greatly to reducing the risks
associated with the settlement of foreign exchange transactions
among banks. The Bank also uses financial intermediaries to gain
access to established clearing houses in order to minimize
settlement risk for certain financial derivative transactions. In
some cases, the Bank may have direct access to established clearing
houses for settling financial transactions such as repurchase
agreements or reverse repurchase agreements. In addition, certain
derivative financial instruments traded over the counter are
settled directly or indirectly by central counterparties. For
additional information, see the table that presents notional
amounts in Note 16 to the consolidated financial statements.
There are several other types of transactions that may generate
settlement risk, in particular the use of certain electronic fund
transfer services. This risk refers to the possibility that the
Bank may make a payment or settlement on a transaction without
receiving the amount owed by the counterparty, and with no
opportunity to recover the funds delivered (irrevocable
settlement).
The ultimate means for completely eliminating such a risk is for
the Bank to complete no payments or settlements before receiving
the funds due from the counterparty. Such an approach cannot,
however, be used systematically. For several electronic payment
services, the Bank is able to implement mechanisms that allow it to
make its transfers revocable or to debit the counterparty in the
amount of the settlements before it makes its own transfer. On the
other hand, the nature of transactions in financial instruments
makes it impossible for such practices to be widely used. For
example, on foreign exchange transactions involving a currency
other than the U.S. dollar, time zone differentials impose strict
payment schedules on the parties. The Bank cannot unduly postpone a
settlement without facing penalties, due to the large size of the
amounts involved.
The most effective way for the Bank to control settlement risks,
both for financial market transactions and irrevocable transfers,
is to impose internal risk limits based on the counterparty's
ability to pay.
Assessment of Environmental Risk
Environmental risk can affect credit risk in that the energy
transition movement and extreme weather events could result in a
decreased ability to make repayments or in a decrease in the value
of assets pledged as collateral. Ultimately, environmental risk can
lead to both a higher probability of default and higher loss given
default among counterparties. In response, the risk management
framework has been expanded to include new measures that identify,
assess, control, and monitor environmental risk. In addition, the
Bank has developed and is gradually deploying a process used to
assess and quantify the impacts of climate changes on its strategy
and results. Furthermore, for clients in specific industries, the
impacts of climate changes are discussed at least once a year as
part of the credit granting or renewal process.
The Bank also assesses its exposure to environment-related
credit risk using a variety of control and monitoring mechanisms.
For example, analyses are performed on vulnerabilities to physical
risks and on loan portfolio transition risks. These analyses are
applied to all financing activities and provide greater visibility
of the Bank's exposure to environmental risk. In addition, the Bank
periodically assesses loan portfolio concentration risk to ensure
that such risk is not being significantly affected by environmental
risk. Furthermore, an industry sector matrix has been developed to
provide the Risk Management Group with a clearer vision of the loan
portfolio sectors that are most affected by climate-related risks.
Thanks to these initiatives, the Bank can take concrete steps in
the process used to review sectoral limits, as each business sector
or industry now has an ESG section describing its environmental
risk. As well, to help the Bank achieve its business objectives,
the Risk Management Group created the position of Vice-President,
Credit Analytics and Climate Risk, whose responsibilities consist
of increasing the Bank's ability to extract business intelligence,
to integrate climate risk into its decision-making processes, and
to develop its climate risk analysis capacities. Regarding this
latter point, the Bank has begun climate risk impact analyses using
the climate scenarios recommended by the Network for Greening the
Financial System (NGFS).
This year also saw the emergence of a new environmental risk
issue, i.e., the potential financial repercussions of climate
change on biodiversity. Financial system participants were called
upon by the PRB Biodiversity Community initiative of the United
Nations Environment Programme Finance Initiative (UNEP-FI), of
which the Bank is a member. Similarly, as part of a Fondaction
initiative the Bank took part in a one-day brainstorming exercise
on biodiversity indicators for investors. As this environmental
risk issue begins to emerge, the Bank will continue to closely
monitor the various initiatives and contribute to deliberations
about potentially incorporating this issue into both investment and
credit-granting decisions . The Risk Management Group closely
monitors changes in trends and calculation methods and actively
participates in various industry discussion groups.
Maximum Credit Risk Exposure
The amounts in the following tables represent the Bank's maximum
exposure to credit risk as at the financial reporting date without
considering any collateral held or any other credit enhancements.
These amounts do not include allowances for credit losses nor
amounts pledged as collateral. The tables also exclude equity
securities.
Maximum Credit Risk Exposure Under the Basel Asset Categories
(1) *
(millions of
Canadian
dollars) As at October 31, 2022
================ ================================================================================================
Other
off-balance-
Repo-style Derivative sheet Standardized
Drawn Undrawn transactions financial items Approach AIRB
(2) commitments (3) instruments (4) Total (5) Approach
=============== ======= =========== ============ =========== ============ ======= ============ ========
Retail
Residential
mortgage 73,324 8,616 - - - 81,940 12% 88%
Qualifying
revolving
retail 2,483 6,920 - - - 9,403 -% 100%
Other retail 17,526 2,688 - - 35 20,249 25% 75%
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
93,333 18,224 - - 35 111,592
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Non-retail
Corporate 81,763 29,811 36,194 322 5,538 153,628 13% 87%
Sovereign 56,253 5,821 68,906 - 326 131,306 2% 98%
Financial
institutions 7,200 166 76,856 1,150 754 86,126 19% 81%
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
145,216 35,798 181,956 1,472 6,618 371,060
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Trading
portfolio - - - 13,662 - 13,662 2% 98%
Securitization 4,409 - - - 4,373 8,782 80% 20%
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Total - Gross
credit risk 242,958 54,022 181,956 15,134 11,026 505,096 12% 88%
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Standardized
Approach (5) 30,704 311 24,783 1,308 4,610 61,716
AIRB Approach 212,254 53,711 157,173 13,826 6,416 443,380
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Total - Gross
credit risk 242,958 54,022 181,956 15,134 11,026 505,096 12% 88%
================ ======= =========== ============ =========== ============ ======= ============ ========
(millions of
Canadian
dollars) As at October 31, 2021
================ ==========================================================================================================
Other
Derivative off-balance-
Undrawn Repo-style financial sheet Standardized AIRB
Drawn(2) commitments transactions(3) instruments items(4) Total Approach(5) Approach
=============== ======== =========== =============== =========== ============ ======= ============ ========
Retail
Residential
mortgage 66,791 10,578 - - - 77,369 9% 91%
Qualifying
revolving
retail 2,270 6,282 - - - 8,552 -% 100%
Other retail 15,519 2,481 - - 31 18,031 29% 71%
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
84,580 19,341 - - 31 103,952
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
Non-retail
Corporate 70,589 27,783 26,190 161 5,415 130,138 11% 89%
Sovereign 55,323 6,217 58,452 294 83 120,369 2% 98%
Financial
institutions 7,228 126 72,122 2,248 619 82,343 28% 72%
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
133,140 34,126 156,764 2,703 6,117 332,850
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
Trading
portfolio - - - 17,010 - 17,010 -% 100%
Securitization 3,269 - - - 4,206 7,475 68% 32%
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
Total - Gross
credit risk 220,989 53,467 156,764 19,713 10,354 461,287 13% 87%
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
Standardized
Approach (5) 25,009 258 26,385 2,203 3,955 57,810
AIRB Approach 195,980 53,209 130,379 17,510 6,399 403,477
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
Total - Gross
credit risk 220,989 53,467 156,764 19,713 10,354 461,287 13% 87%
================ ======== =========== =============== =========== ============ ======= ============ ========
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
(2) Excludes equity securities and certain other assets such as
investments in deconsolidated subsidiaries and joint ventures,
right-of-use properties and assets, goodwill, deferred tax assets,
and intangible assets.
(3) Securities purchased under reverse repurchase agreements and
sold under repurchase agreements as well as securities loaned and
borrowed.
(4) Letters of guarantee, documentary letters of credit, and
securitized assets that represent the Bank's commitment to make
payments in the event that an obligor cannot meet its financial
obligations to third parties.
(5) Includes exposures to qualifying central counterparties (QCCP).
Market Risk
Market risk is the risk of losses arising from movements in
market prices. Market risk comes from a number of factors,
particularly changes to market variables such as interest rates,
credit spreads, exchange rates, equity prices, commodity prices,
and implied volatilities . The Bank is exposed to market risk
through its participation in trading, investment, and
asset/liability management activities. Trading activities involve
taking positions on various instruments such as bonds, shares,
currencies, commodities, or derivative financial instruments. The
Bank is exposed to non-trading market risk through its
asset/liability management and investment portfolios.
The trading portfolios include positions in financial
instruments and commodities held either with trading intent or to
hedge other elements of the trading book. Positions held with
trading intent are those held for short-term resale and/or with the
intent of taking advantage of actual or expected short-term price
movements or to lock in arbitrage profits. These portfolios target
one of the following objectives: market making, liquidating
positions for clients, or selling financial products to
clients.
Non-trading portfolios include financial instruments intended to
be held to maturity as well as those held for daily cash management
or for the purpose of maintaining targeted returns or ensuring
asset and liability management .
Governance
A market risk management policy governs global market risk
management across the Bank's units and subsidiaries that are
exposed to this type of risk. It is approved by the GRC. The policy
sets out the principles for managing market risk and the framework
that defines risk measures, control and monitoring activities; sets
market risk limits; and reports on breaches .
The Financial Markets Risk Committee oversees all Financial
Markets segment risks that could adversely affect the Bank's
results, liquidity, or capital. This committee also oversees the
Financial Markets segment's risk framework to ensure that controls
are in place to contain risk in accordance with the Bank's risk
appetite framework .
Market risk limits ensure the link and coherence between the
Bank's market risk appetite targets and the day-to-day market risk
management by all parties involved, notably senior management, the
business units, and the market risk sector in its independent
control function. The Bank's monitoring and reporting process
consists of comparing market risk exposure to alert levels and to
the market risk limits established for all limit authorization and
approval levels .
Assessment of Market Risk
The Risk Management Group uses a variety of risk measures to
estimate the size of potential losses under more or less severe
scenarios, and using both short-term and long-term time horizons.
For short-term horizons, the Bank's risk measures include
Value-at-Risk (VaR), Stressed VaR (SVaR), and sensitivity metrics.
For long-term horizons or sudden significant market moves,
including those due to a lack of market liquidity, the risk
measures include stress testing across an extensive range of
scenarios.
VaR and SVaR Models
VaR is a statistical measure of risk that is used to quantify
market risks by activity and by risk type. VaR is defined as the
maximum loss at a specific confidence level over a certain horizon
under normal market conditions. The VaR method has the advantage of
providing a uniform measurement of financial-instrument-related
market risks based on a single statistical confidence level and
time horizon.
For VaR, the Bank uses a historical price distribution to
compute the probable loss levels at a 99% confidence level, using a
two-year history of daily time series of risk factor changes. VaR
is the maximum daily loss that the Bank could incur, in 99 out of
100 cases, in a given portfolio. In other words, the loss could
exceed that amount in only one out of 100 cases.
The trading VaR is measured by assuming a holding period of one
day for ongoing market risk management and a 10-day holding period
for regulatory capital purposes. VaR is calculated on a daily basis
both for major classes of financial instruments (including
derivative financial instruments) and for all trading portfolios in
the Financial Markets segment and the Bank's Global Funding and
Treasury Group.
In addition to the one-day trading VaR, the Bank calculates a
trading SVaR, which is a statistical measure of risk that
replicates the VaR calculation method but uses, instead of a
two-year history of risk factor changes, a 12-month data period
corresponding to a continuous period of significant financial
stress that is relevant in terms of the Bank's portfolios.
VaR methodology techniques are well suited to measuring risks
under normal market conditions. VaR metrics are most appropriate as
a risk measure for trading positions in liquid financial markets.
However, there are limitations in measuring risks with this method
when extreme and sudden market risk events occur, since they are
likely to underestimate the Bank's market risk. VaR methodology
limitations include the following:
-- past changes in market risk factors may not always produce
accurate predictions of the distribution and correlations of future
market movements;
-- a VaR with a daily time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged within
one day;
-- the market risk factor historical database used for VaR
calculation may not reflect potential losses that could occur under
unusual market conditions (e.g., periods of extreme illiquidity)
relative to the historical period used for VaR estimates;
-- the use of a 99% VaR confidence level does not reflect the
extent of potential losses beyond that percentile.
Given the limitations of VaR, this measure represents only one
component of the Bank's risk management oversight, which also
incorporates, among other measures, stress testing, sensitivity
analysis, and concentration and liquidity limits and analysis.
The Bank also conducts backtesting of the VaR model. It consists
of comparing the profits and losses to the statistical VaR measure.
Backtesting is essential to verifying the VaR model's capacity to
adequately forecast the maximum risk of market losses and thus
validate, retroactively, the quality and accuracy of the results
obtained using the model. If the backtesting results present
material discrepancies, the VaR model could be revised in
accordance with the Bank's model risk management framework. All
market risk models and their performance are subject to periodic
independent validation by the model validation group.
Controlling Market Risk
A comprehensive set of limits is applied to market risk
measures, and these limits are monitored and reported on a regular
basis. Instances when limits are exceeded are reported to the
appropriate management level. The risk profiles of the Bank's
operations remain consistent with its risk appetite and the
resulting limits, and are monitored and reported to traders,
management of the applicable business unit, senior executives, and
Board committees.
The Bank also uses economic capital for market risk as an
indicator for risk appetite and limit setting. This indicator
measures the amount of capital that is required to absorb
unexpected losses due to market risk events over a one-year horizon
and with a determined confidence level. For additional information
on economic capital, see the Capital Management section of this
MD&A.
The following tables provide a breakdown of the Bank's
Consolidated Balance Sheet into assets and liabilities by those
that carry market risk and those that do not carry market risk,
distinguishing between trading positions whose main risk measures
are VaR and SVaR and non-trading positions that use other risk
measures.
Reconciliation of Market Risk With Consolidated Balance Sheet
Items
(millions of Canadian dollars) As at October 31, 2022
=============================== =======================================================================
Market risk measures
------------------------------ ------- ---------------------- ----------- -------------------------
Not subject
Balance Trading Non-Trading to market Non-traded risk
sheet (1) (2) risk primary risk sensitivity
============================= ======= ======== ============ =========== =========================
Assets
Cash and deposits with
financial Interest rate
institutions 31,870 837 20,269 10,764 (3)
Securities
Interest rate
At fair value through profit (3) and equity
or loss 87,375 85,805 1,570 - (4)
Interest rate
At fair value through other (3) and equity
comprehensive income 8,828 - 8,828 - (5)
Interest rate
At amortized cost 13,516 - 13,516 - (3)
Securities purchased under
reverse repurchase
agreements and securities Interest rate
borrowed 26,486 - 26,486 - (3)(6)
Loans and acceptances, net Interest rate
of allowances 206,744 9,914 196,830 - (3)
Interest rate
Derivative financial (7) and exchange
instruments 18,547 16,968 1,579 - rate (7)
Defined benefit asset 498 - 498 - Other (8)
Other 9,876 - - 9,876
------------------------------ ------- -------- ------------ ----------- -------------------------
403,740 113,524 269,576 20,640
----------------------------- ------- -------- ------------ ----------- -------------------------
Liabilities
Interest rate
Deposits 266,394 15,422 250,972 - (3)
Interest rate
Acceptances 6,541 - 6,541 - (3)
Obligations related to
securities
sold short 21,817 21,817 - -
Obligations related to
securities
sold under repurchase
agreements and securities Interest rate
loaned 33,473 - 33,473 - (3)(6)
Interest rate
Derivative financial (7) and exchange
instruments 19,632 18,909 723 - rate (7)
Liabilities related to
transferred Interest rate
receivables 26,277 9,927 16,350 - (3)
Defined benefit liability 111 - 111 - Other (8)
Interest rate
Other 6,250 - 77 6,173 (3)
Interest rate
Subordinated debt 1,499 - 1,499 - (3)
------------------------------ ------- -------- ------------ ----------- -------------------------
381,994 66,075 309,746 6,173
============================== ======= ======== ============ =========== =========================
(1) Trading positions whose risk measures are VaR as well as
total SVaR. For additional information, see the table in the pages
ahead that shows the VaR distribution of the trading portfolios by
risk category, their diversification effect, and total trading
SVaR.
(2) Non-trading positions that use other risk measures.
(3) For additional information, see the tables in the pages
ahead, namely, the table that shows the VaR distribution of the
trading portfolios by risk category, their diversification effect,
and total trading SVaR as well as the table that shows the interest
rate sensitivity.
(4) For additional information, see Note 6 to the consolidated financial statements.
(5) The fair value of equity securities designated at fair value
through other comprehensive income is presented in Notes 3 and 6 to
the consolidated financial statements.
(6) These instruments are recorded at amortized cost and are
subject to credit risk for capital management purposes. For
trading-related transactions with maturities of more than one day,
interest rate risk is included in the VaR and SVaR measures.
(7) For additional information, see Notes 16 and 17 to the consolidated financial statements.
(8) For additional information, see Note 23 to the consolidated financial statements.
(millions of Canadian dollars) As at October 31, 2021
=============================== =======================================================================
Market risk measures
------------------------------ ------- -------------------------- ----------- ---------------------
Not subject Non-traded risk
Balance to market primary
sheet Trading(1) Non-trading(2) risk risk sensitivity
============================= ======= ========== ============== =========== =====================
Assets
Cash and deposits with
financial
institutions 33,879 401 16,518 16,960 Interest rate(3)
Securities
At fair value through profit Interest rate(3)
or loss 84,811 82,995 1,816 - and equity(4)
At fair value through other Interest rate(3)
comprehensive income 9,583 - 9,583 - and equity(5)
At amortized cost 11,910 - 11,910 - Interest rate(3)
Securities purchased under
reverse repurchase
agreements and securities
borrowed 7,516 - 7,516 - Interest rate(3)(6)
Loans and acceptances, net
of allowances 182,689 7,827 174,862 - Interest rate(3)
Derivative financial Interest rate(7)
instruments 16,484 16,033 451 - and exchange rate(7)
Defined benefit asset 691 - 691 - Other(8)
Other(9) 8,058 - - 8,058
------------------------------ ------- ---------- -------------- ----------- ---------------------
355,621 107,256 223,347 25,018
----------------------------- ------- ---------- -------------- ----------- ---------------------
Liabilities
Deposits 240,938 14,215 226,723 - Interest rate(3)
Acceptances 6,836 - 6,836 - Interest rate(3)
Obligations related to
securities
sold short 20,266 20,266 - -
Obligations related to
securities
sold under repurchase
agreements and securities
loaned 17,293 - 17,293 - Interest rate(3)(6)
Derivative financial Interest rate(7)
instruments 19,367 18,999 368 - and exchange rate(7)
Liabilities related to
transferred
receivables 25,170 9,058 16,112 - Interest rate(3)
Defined benefit liability 143 - 143 - Other(8)
Other 6,158 - 113 6,045 Interest rate(3)
Subordinated debt 768 - 768 - Interest rate(3)
------------------------------ ------- ---------- -------------- ----------- ---------------------
336,939 62,538 268,356 6,045
============================== ======= ========== ============== =========== =====================
(1) Trading positions whose risk measures are VaR as well as
total SVaR. For additional information, see the table on the
following page that shows the VaR distribution of the trading
portfolios by risk category, their diversification effect, and
total trading SVaR.
(2) Non-trading positions that use other risk measures.
(3) For additional information, see the tables in the pages
ahead, namely, the table that shows the VaR distribution of the
trading portfolios by risk category, their diversification effect,
and total trading SVaR as well as the table that shows the interest
rate sensitivity.
(4) For additional information, see Note 6 to the consolidated financial statements.
(5) The fair value of equity securities designated at fair value
through other comprehensive income is presented in Notes 3 and 6 to
the consolidated financial statements.
(6) These instruments are recorded at amortized cost and are
subject to credit risk for capital management purposes. For
trading-related transactions with maturities of more than one day,
interest rate risk is included in the VaR and SVaR measures.
(7) For additional information, see Notes 16 and 17 to the consolidated financial statements.
(8) For additional information, see Note 23 to the consolidated financial statements.
(9) 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.
Trading Activities
The table below shows the VaR distribution of trading portfolios
by risk category and their diversification effect as well as total
trading SVaR, i.e., the VaR of the Bank ' s current portfolios
obtained following the calibration of risk factors over a 12-month
stress period.
VaR and SVaR of Trading Portfolios (1)(2) *
Year ended October
31
(millions of Canadian
dollars) 2022 2021
========================== ===== ======================= ===== =======================
Period Period
Low High Average end Low High Average end
========================== ===== ====== ======= ====== ===== ====== ======= ======
Interest rate (3.9) (11.3) (5.8) (5.2) (4.5) (11.0) (7.2) (8.2)
Foreign exchange (0.4) (6.9) (2.1) (2.1) (0.3) (2.3) (0.9) (0.9)
Equity (4.0) (10.6) (7.2) (7.1) (4.4) (10.2) (6.2) (6.0)
Commodity (0.5) (1.6) (0.9) (1.2) (0.4) (1.9) (0.9) (1.4)
Diversification effect(3) n.m. n.m. 8.1 7.3 n.m. n.m. 7.8 11.3
--------------------------- ----- ------ ------- ------ ----- ------ ------- ------
Total trading VaR (4.6) (11.4) (7.9) (8.3) (4.8) (12.3) (7.4) (5.2)
--------------------------- ----- ------ ------- ------ ----- ------ ------- ------
Total trading SVaR (5.1) (26.2) (14.6) (18.8) (6.5) (23.1) (13.8) (9.5)
=========================== ===== ====== ======= ====== ===== ====== ======= ======
n.m. Computation of a diversification effect for the high and
low is not meaningful, as highs and lows may occur on different
days and be attributable to different types of risk.
(1) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
(2) Amounts are presented on a pre-tax basis and represent
one-day VaR and SVaR using a 99% confidence level.
(3) The total trading VaR is less than the sum of the individual
risk factor VaR results due to the diversification effect.
The average total trading VaR stood at $7.9 million for fiscal
2022, up slightly from $7.4 million in fiscal 2021. The average
total trading SVaR was also up slightly, increasing from $13.8
million in fiscal 2021 to $ 14.6 million in fiscal 2022 . These
increases were mainly driven by higher equity risk, largely offset
by a lower interest rate risk.
The revenues generated by trading activities are compared with
VaR as a backtesting assessment of the appropriateness of this risk
measure as well as the financial performance of trading activities
relative to the risk undertaken.
The table below shows daily trading and underwriting revenues
and VaR. Daily trading and underwriting revenues were positive on
92% of the days for the year ended October 31, 2022. Daily trading
and underwriting losses in excess of $1 million were recorded on 17
days, and on one of those days, the losses exceeded the VaR.
Daily Trading and Underwriting Revenues
(millions of Canadian dollars)
Stress Testing
Stress testing is a risk management technique that consists of
estimating potential losses under abnormal market conditions and
risk factor movements. This technique enhances transparency by
exploring a range of severe but plausible scenarios.
These stress tests simulate the results that the portfolios
would generate if the extreme scenarios in question were to occur.
The Bank's stress testing framework, which is applied to all
positions generating market risk, currently comprises the following
categories of stress test scenarios:
-- Historical scenarios based on past major disruption situations;
-- Hypothetical scenarios designed to be forward-looking in the
face of potential market stresses;
-- Scenarios specific to asset classes, including:
o sharp parallel increases/decreases in interest rates;
non-parallel movements of interest rates (flattening and
steepening) and increases/decreases in credit spreads;
o sharp stock market crash coupled with a significant increase
in volatility of the term structure; increase in stock prices
combined with less volatility;
o significant increases/decreases in commodity prices coupled
with increases/decreases in volatility; short-term and long-term
increases/decreases in commodity prices;
o depreciation/appreciation of the U.S. dollar and of other
currencies relative to the Canadian dollar.
Structural Interest Rate Risk
As part of its core banking activities, such as lending and
deposit taking, the Bank is exposed to interest rate risk. Interest
rate risk is the potential negative impact of interest rate
fluctuations on the Bank's annual net interest income and the
economic value of its equity. Activities related to hedging,
investments, and term funding are also exposed to structural
interest rate risk. The Bank's main exposure to interest rate risk
stems from a variety of sources:
-- yield curve risk, which refers to changes in the level, slope, and shape of the yield curve;
-- repricing risk, which arises from timing differences in the
maturity and repricing of on- and off-balance-sheet items;
-- options risk, either implicit (e.g., prepayment of mortgage
loans) or explicit (e.g., capped mortgages and rate guarantees) in
balance sheet products;
-- basis risk that is caused by imperfect correlation between different yield curves.
The Bank's exposure to structural interest rate risk is assessed
and controlled mostly through the impact of stress scenarios and
market shocks on the economic value of the Bank's equity and on
12-month net interest income projections. These metrics are based
on cash flow projections prepared using a number of assumptions.
Specifically, the Bank has developed key assumptions on loan
prepayment levels, deposit redemptions, and the behaviour of
customers that were granted rate guarantees. These specific
assumptions were developed based on historical analyses and are
reviewed frequently.
Funds transfer pricing is a process by which the Bank's business
units are charged or paid according to their use or supply of
funding. Through this mechanism, all funding activities as well as
the interest rate risk and liquidity risk associated with those
activities are centralized in the Global Funding and Treasury
Group.
Active management of structural interest rate risk can
significantly enhance the Bank's profitability and add to
shareholder value. The Bank's goal is to maximize the economic
value of its equity and its annual net interest income considering
its risk appetite. This goal must be achieved within prescribed
risk limits and is accomplished primarily by implementing a policy
framework, approved by the GRC and submitted for information
purposes to the RMC, that sets a risk tolerance threshold,
monitoring structures controlled by the various committees, risk
indicators, reporting procedures, delegation of responsibilities,
and segregation of duties. The Bank also prepares an annual funding
plan that includes the expected growth of assets and
liabilities.
Governance
Management of the Bank's structural interest rate risk is
mandated to the Global Funding and Treasury Group . In this role,
the executives and personnel of this group are responsible for the
day-to-day management of the risks inherent to structural interest
rate risk hedging decisions and operations. They act as the primary
effective challenge function with respect to the execution of these
activities. The GRC approves and endorses the structural interest
rate exposure and strategies on the recommendation of the Global
Funding and Treasury Group. The Risk Management Group is
responsible for assessing structural interest rate risk, monitoring
activities, and ensuring compliance with the interest rate risk in
the banking book policy. The Risk Management Group ensures that an
appropriate risk management framework is in place and ensures
compliance with the risk appetite framework and policy. Structural
interest rate risk supervision is mainly provided by the Financial
Markets Risk Committee. This committee reviews exposure to
structural interest rate risk, the use of limits, and changes made
to assumptions .
Stress Testing
Stress tests are performed on a regular basis to assess the
impact of various scenarios on annual net interest income and on
the economic value of equity in order to guide the management of
structural interest rate risk. Stress test scenarios are performed
where the yield curve level, slope, and shape are shocked. Yield
curve basis and volatility scenarios are also performed. All risk
factors mentioned above are covered by specific scenarios and have
Board-approved or GRC--approved risk limits.
Dynamic simulation is also used to project the Bank's future net
interest income, future economic value, and future exposure to
structural interest rate risk. These simulations project cash flows
of assets, liabilities, and off-balance-sheet products over a given
investment horizon. Given their dynamic nature, they encompass
assumptions pertaining to changes in volume, client term
preference, prepayments of deposits and loans, and the yield
curve.
The following table presents the potential before-tax impact of
an immediate and sustained 100-basis-point increase or of an
immediate and sustained 100 basis-point decrease in interest rates
on the economic value of equity and on the net interest income of
the Bank's non-trading portfolios for the next 12 months, assuming
no further hedging is undertaken.
Interest Rate Sensitivity - Non-Trading Activities (Before
Tax)*
As at October 31
(millions of Canadian dollars) 2022 2021
================================= ============================= ======== ==================
Canadian Other Canadian Other
dollar currencies Total dollar currencies Total
================================ ======== =========== ===== ======== =========== =====
Impact on equity
100-basis-point increase in the
interest rate (191) (24) (215) (277) 39 (238)
100-basis-point decrease in the
interest rate 179 27 206 253 (34) 219
--------------------------------- -------- ----------- ----- -------- ----------- -----
Impact on net interest income
100-basis-point increase in the
interest rate 128 2 130 91 17 108
100-basis-point decrease in the
interest rate (141) (2) (143) (67) (17) (84)
================================= ======== =========== ===== ======== =========== =====
Investment Governance
The Bank has created securities portfolios in liquid and less
liquid securities for strategic, long-term investment, and
liquidity management purposes. These investments carry market risk,
credit risk, liquidity risk, and concentration risk.
The investment governance framework sets out the guiding
principles and general management standards that must be followed
by all those who manage portfolios of these securities included in
the portfolios of the Bank and its subsidiaries. Under this
investment governance framework, business units that are active in
managing these types of portfolios adopt internal investment
policies that set, among other things, targets and limits for the
allocation of assets in the portfolios concerned and internal
approval mechanisms. The primary objective is to reduce
concentration risk by industry, issuer, country, type of financial
instrument, and credit quality.
Overall limits in value and in proportion to the Bank's equity
are set on the outstanding amount of liquid preferred shares,
liquid equity securities excluding preferred shares, and
instruments classified as illiquid securities in the securities
portfolios. The overall exposure to common shares with respect to
an individual issuer and the total outstanding amount invested in
private equity funds, for investment banking services, are also
subject to limits. Restrictions are also set on investments defined
as special. Lastly, the Bank has a specific policy, approved by the
RMC, applicable to investments in debt and equity securities,
including strategic investments. Strategic investments are defined
as purchases of business assets or acquisitions of significant
interests in an entity for purposes of acquiring control or
creating a long-term relationship.
Structural Foreign Exchange Risk
The Bank's structural foreign exchange risk arises from
investments in foreign operations denominated in currencies other
than the Canadian dollar. This risk, predominantly in U.S. dollars,
is measured by assessing the impact of currency fluctuations on
retained earnings. The Bank uses financial instruments (derivative
and non-derivative) to hedge this risk. An adverse change in
foreign exchange rates can also impact the Bank's capital ratios
due to the amount of RWA denominated in a foreign currency. When
the Canadian dollar depreciates relative to other currencies,
unrealized translation gains on the Bank's net investments in
foreign operations, as well as the impact on hedging transactions,
are reported in other comprehensive income in shareholders' equity.
In addition, the Canadian-dollar equivalent of
U.S.-dollar-denominated RWA and regulatory capital deductions
increases. The reverse is true when the Canadian dollar appreciates
relative to the U.S. dollar. The structural foreign exchange risk
is managed to ensure that the potential impacts on the capital
ratios and net income are within tolerable limits set by risk
policies.
Liquidity and Funding Risk
Liquidity and funding risk is the risk that the Bank will be
unable to honour daily cash and financial obligations without
resorting to costly and untimely measures. Liquidity and funding
risk arises when sources of funds become insufficient to meet
scheduled payments under the Bank's commitments. Liquidity risk
stems from mismatched cash flows related to assets and liabilities
as well as the characteristics of certain products such as credit
commitments and non-fixed-term deposits.
The Bank's primary objective as a financial institution is to
manage liquidity such that it supports the Bank's business strategy
and allows it to honour its commitments when they come due, even in
extreme conditions. This is done primarily by implementing a policy
framework approved by the RMC, which establishes a risk appetite,
monitoring structures controlled by various committees, risk
indicators, reporting procedures, delegation of responsibilities,
and segregation of duties. The Bank also prepares an annual funding
plan that incorporates the expected growth of assets and
liabilities.
Regulatory Environment
The Bank works closely with national and international
regulators to implement regulatory liquidity standards. The Bank
adapts its processes and policies to reflect its liquidity risk
appetite towards these new requirements.
The Liquidity Adequacy Requirements (LAR) are reviewed annually
to reflect domestic and international regulatory changes. They
constitute OSFI's proposed liquidity framework and include six
chapters :
-- overview;
-- liquidity coverage ratio (LCR);
-- net stable funding ratio (NSFR);
-- net cumulative cash flow (NCCF);
-- liquidity monitoring tools;
-- intraday liquidity monitoring tools.
LCR is used to ensure that banks can overcome severe short-term
stress, while the NSFR is a structural ratio over a one-year
horizon. The NCCF metric is defined as a monitoring tool that
calculates a survival period. It is based on the assumptions of a
stress scenario prescribed by OSFI that aims to represent a
combined systemic and bank-specific crisis. The Bank publishes LCR
and NSFR on a quarterly basis, whereas NCCF is produced monthly and
communicated to OSFI.
On March 11, 2021, OSFI released, for public consultation,
revisions to its LAR guideline, which was to take effect in the
first quarter of 2023. OSFI is making changes that will improve the
sensitivity to risk and that will ensure that financial
institutions hold sufficient cash or other liquid investments to
meet potential liquidity needs and to support the continued lending
of credit, in particular during periods of financial stress. On
November 29, 2021, OSFI postponed the implementation of the
revisions to its LAR guideline to April 1, 2023.
On January 31, 2022, OSFI published a final version of the
liquidity rules, which reflects the most recent Basel III reforms
and, on February 16, 2022, OSFI published the corresponding changes
to the regulatory return, i.e., the Net Cumulative Cash Flow (NCCF)
return.
On March 31, 2022, OSFI published, 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. In particular, the draft
guideline addresses the assurance that must be provided by an
external audit, attestation by senior management, the assurance
that must be provided by an internal audit, and the proposed
effective dates. The Bank is actively participating in this
consultation.
The Bank continues to closely monitor regulatory developments
and actively participates in various consultation processes.
Governance
The Global Funding and Treasury Group is responsible for
managing liquidity and funding risk . Although the day-to-day and
strategic management of risks associated with liquidity, funding,
and pledging activities is assumed by the Global Funding and
Treasury Group, the Risk Management Group is responsible for
assessing liquidity risk and overseeing compliance with the
resulting policy. The Risk Management Group ensures that an
appropriate risk management framework is in place and ensures
compliance with the risk appetite framework. This structure
provides an independent oversight and effective challenge for
liquidity , funding, and pledging decisions, strategy, and exposure
.
The Bank's Liquidity, Funding and Pledging Governance Policy
requires review and approval by the RMC, based on recommendations
from the GRC. The Bank has established three levels of limits. The
first two levels involve the Bank's overall cash position and are
respectively approved by the Board and the GRC, whereas the third
level of limits focuses more on specific aspects of liquidity risk
and is approved by the Financial Markets Risk Committee. The Board
not only approves the supervision of day-to-day risk management and
governance but also backup plans in anticipation of emergency and
liquidity crisis situations. If a limit has to be revised, the Risk
Management Group with the support of the Global Funding and
Treasury Group, submits the proposed revision to the approving
committee.
Oversight of liquidity risk is entrusted mainly to the Financial
Markets Risk Committee, whose members include representatives of
the Financial Markets segment, the Global Funding and Treasury
Group, and the Risk Management Group .
The Bank also has policies and guidelines governing its own
collateral pledged to counterparties, given the potential impact of
such asset transfers on its liquidity. In accordance with its
Liquidity, Funding and Pledging Governance Policy, the Bank
conducts simulations of potential counterparty collateral claims
under the CSAs in effect in the event of a Bank downgrade or other
unlikely occurrences. The simulations are based on various Bank
downgrading scenarios or market value fluctuations of transactions
covered by CSAs.
Through the Financial Markets Risk Committee, the Risk
Management Group regularly reports changes in liquidity, funding,
and pledging indicators and compliance with regulatory-, Board-,
and GRC-approved limits. If control reports indicate non-compliance
with the limits and a general deterioration of liquidity
indicators, the Global Funding and Treasury Group takes remedial
action. According to an escalation process, problematic situations
are reported to management and to the GRC and the RMC. An executive
report on the Bank's liquidity and funding risk management is
submitted quarterly to the RMC; this report describes the Bank's
liquidity position and informs the Board of non-compliance with the
limits and other rules observed during the reference period as well
as remedial action taken.
Liquidity Management
The Bank performs liquidity management, funding, and pledging
operations not only from its head office and regional offices in
Canada, but also through certain foreign centres. Although the
volume of such operations abroad represents a sizable portion of
global liquidity management, the Bank's liquidity management is
centralized. By organizing liquidity management, funding, and
pledging activities within the Global Funding and Treasury Group ,
the Bank can better coordinate enterprise-wide funding and risk
monitoring activities. All internal funding transactions between
Bank entities are controlled by the Global Funding and Treasury
Group .
This centralized structure streamlines the allocation and
control of liquidity management, funding, and pledging limits.
Nonetheless, the Liquidity, Funding and Pledging Governance Policy
contains special provisions for financial centres whose size and/or
strategic importance makes them more likely to contribute to the
Bank's liquidity risk. Consequently, a liquidity and funding risk
management structure exists at each financial centre. This
structure imposes a set of limits of varying levels, up to the
limits approved by the RMC, on diverse liquidity parameters,
including liquidity stress tests as well as simple concentration
measures .
The Bank's funds transfer pricing system prices liquidity by
allocating the cost or income to the various business segments.
Liquidity costs are allocated to liquidity-intensive activities,
mainly long-term loans, and commitments to extend credit and less
liquid securities as well as strategic investments. The liquidity
compensation is credited to the suppliers of funds, primarily
funding in the form of stable deposits from the Bank's distribution
network.
Short-term day-to-day funding decisions are based on a daily
cumulative net cash position, which is controlled using liquidity
ratio limits. Among these ratios and parameters, the Bank pays
particular attention to the funds obtained on the wholesale market
and to cumulative cash flows over various time horizons.
Moreover, the Bank's collateral pledging activities are
monitored in relation to the different limits set by the Bank and
are subject to monthly stress tests using various scenarios. In
particular, the Bank uses various scenarios to estimate the
potential amounts of additional collateral that would be required
in the event of a downgrade to the Bank's credit rating.
Liquidity risk can be assessed in many different ways using
different liquidity indicators. One of the key liquidity risk
monitoring tools is the Bank's survival period, which is based on
contractual maturity and behavioural assumptions applied to balance
sheet items as well as off-balance-sheet commitments.
Stress Testing
Using various simulations, survival period measures the number
of months it would take to completely utilize the Bank's liquid
assets if the Bank were to lose deposits prematurely or if funds
from wholesale markets were not renewed at maturity. It is measured
monthly using three scenarios, which were developed to assess
sensitivity to a Bank-specific and/or systemic crisis. Deposit loss
simulations are carried out based on their degree of stability,
while the value of certain assets is encumbered by an amount
reflecting their readiness for liquidation in a crisis. Appropriate
scenarios and limits are included in the Bank's Liquidity, Funding
and Pledging Governance Policy .
The Bank maintains an up-to-date, comprehensive financial
contingency and crisis recovery plan that describes the measures to
be taken in the event of a critical liquidity situation. This plan
is reviewed and approved annually by the Board as part of business
continuity and recovery planning. For additional information, see
the Regulatory Compliance Risk section of this MD&A.
Liquidity Risk Appetite
The Bank monitors and manages its risk appetite through
liquidity limits, ratios, and stress tests. The Bank's liquidity
risk appetite is based on the following three principles:
-- ensure the Bank has a sufficient amount of unencumbered
liquid assets to cover its financial requirements, in both normal
and stressed conditions;
-- ensure the Bank keeps a liquidity buffer above the minimum regulatory requirement;
-- ensure the Bank maintains diversified and stable sources of funding.
Liquid Assets
To protect depositors and creditors from unexpected crisis
situations, the Bank holds a portfolio of unencumbered liquid
assets that can be readily liquidated to meet financial
obligations. The majority of the unencumbered liquid assets are
held in Canadian or U.S. dollars. Moreover, all assets that can be
quickly monetized are considered liquid assets. The Bank's
liquidity reserves do not factor in the availability of the
emergency liquidity facilities of central banks. The following
tables provide information on the Bank's encumbered and
unencumbered assets.
Liquid Asset Portfolio (1)
As at October 31
(millions of Canadian
dollars) 2022 2021
======================== ========== ========= ======= ======================== ============
Bank-owned Liquid Encumbered
liquid assets Total liquid Unencumbered Unencumbered
assets received liquid assets liquid liquid
(2) (3) assets (4) assets assets
====================== ========== ========= ======= ========== ============ ============
Cash and deposits with
financial
institutions 31,870 - 31,870 7,690 24,180 27,098
Securities
Issued or guaranteed by
the
Canadian government,
U.S. Treasury, other
U.S.
agencies and
other foreign
governments 38,983 35,996 74,979 49,085 25,894 29,002
Issued or guaranteed by
Canadian
provincial
and municipal
governments 13,056 8,864 21,920 13,499 8,421 4,678
Other debt securities 10,399 2,342 12,741 2,932 9,809 7,201
Equity securities 47,281 45,055 92,336 65,045 27,291 26,824
Loans
Securities backed by
insured
residential mortgages 11,795 - 11,795 6,213 5,582 3,545
----------------------- ---------- --------- ------- ---------- ------------ ------------
As at October 31, 2022 153,384 92,257 245,641 144,464 101,177
------------------------ ---------- --------- ------- ---------- ------------ ------------
As at October 31, 2021 149,431 74,070 223,501 125,153 98,348
======================== ========== ========= ======= ========== ============ ============
As at October 31
(millions of Canadian dollars) 2022 2021
========================================================= ========== ==========================
Unencumbered liquid assets by entity
National Bank (parent) 52,544 62,438
Domestic subsidiaries 14,576 12,471
Foreign subsidiaries and branches 34,057 23,439
-------------------------------------------------------- ---------- --------------------------
101,177 98,348
======================================================= ========== ==========================
As at October 31
(millions of Canadian dollars) 2022 2021
========================================================= ========== ==========================
Unencumbered liquid assets by currency
Canadian dollar 49,466 47,293
U.S. dollar 24,871 40,999
Other currencies 26,840 10,056
-------------------------------------------------------- ---------- --------------------------
101,177 98,348
======================================================= ========== ==========================
Liquid Asset Portfolio (1) - Average (5)
Year ended October 31
(millions of Canadian
dollars) 2022 2021
=========================== ========== ========= ======= ======================== ============
Bank-owned Liquid Encumbered
liquid assets Total liquid Unencumbered Unencumbered
assets received liquid assets liquid liquid
(2) (3) assets (4) assets assets
========================= ========== ========= ======= ========== ============ ============
Cash and deposits with
financial
institutions 39,431 - 39,431 8,062 31,369 32,238
Securities
Issued or guaranteed by
the
Canadian government,
U.S. Treasury, other U.S.
agencies and
other foreign governments 33,167 32,546 65,713 42,012 23,701 20,349
Issued or guaranteed by
Canadian
provincial
and municipal governments 13,093 7,283 20,376 14,100 6,276 5,895
Other debt securities 8,772 2,408 11,180 2,409 8,771 6,413
Equity securities 55,020 43,610 98,630 74,203 24,427 34,351
Loans
Securities backed by
insured
residential mortgages 10,980 - 10,980 6,762 4,218 3,693
-------------------------- ---------- --------- ------- ---------- ------------ ------------
As at October 31, 2022 160,463 85,847 246,310 147,548 98,762
--------------------------- ---------- --------- ------- ---------- ------------ ------------
As at October 31, 2021 161,650 75,626 237,276 134,337 102,939
=========================== ========== ========= ======= ========== ============ ============
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
(2) Bank-owned liquid assets include assets for which there are
no legal or geographic restrictions.
(3) Securities received as collateral with respect to securities
financing and derivative transactions and securities purchased
under reverse repurchase agreements and securities borrowed.
(4) In the normal course of its funding activities, the Bank
pledges assets as collateral in accordance with standard terms.
Encumbered liquid assets include assets used to cover short sales,
obligations related to securities sold under repurchase agreements
and securities loaned, guarantees related to security-backed loans
and borrowings, collateral related to derivative financial
instrument transactions, asset-backed securities, and liquid assets
legally restricted from transfers.
(5) The average is based on the sum of the end-of-period
balances of the 12 months of the year divided by 12.
Summary of Encumbered and Unencumbered Assets (1)
As at October
(millions of Canadian dollars) 31, 2022
================================== =========== ======== =========== ======== ===================
Encumbered
assets
as %
Encumbered Unencumbered of total
assets (2) assets Total assets
--------------------------------- --------------------- --------------------- ------- ----------
Pledged Available
as Other as Other
collateral (3) collateral (4)
================================= =========== ======== =========== ======== ======= ==========
Cash and deposits with financial
institutions 295 7,395 24,180 - 31,870 1.9
Securities 42,972 - 66,747 - 109,719 10.6
Securities purchased under
reverse repurchase
agreements and securities
borrowed - 21,818 4,668 - 26,486 5.4
Loans and acceptances, net
of allowances 37,426 - 5,582 163,736 206,744 9.3
Derivative financial instruments - - - 18,547 18,547 -
Investments in associates
and joint ventures - - - 140 140 -
Premises and equipment - - - 1,397 1,397 -
Goodwill - - - 1,519 1,519 -
Intangible assets - - - 1,360 1,360 -
Other assets - - - 5,958 5,958 -
---------------------------------- ----------- -------- ----------- -------- ------- ----------
80,693 29,213 101,177 192,657 403,740 27.2
================================== =========== ======== =========== ======== ======= ==========
As at October
(millions of Canadian dollars) 31, 2021(5)
================================== =========== ======== =========== ======== ===================
Encumbered
assets
as %
Encumbered Unencumbered of total
assets(2) assets Total assets
--------------------------------- --------------------- --------------------- ------- ----------
Pledged Available
as as
collateral Other(3) collateral Other(4)
================================= =========== ======== =========== ======== ======= ==========
Cash and deposits with financial
institutions 275 6,506 27,098 - 33,879 1.9
Securities 38,599 - 67,705 - 106,304 10.9
Securities purchased under
reverse repurchase
agreements and securities
borrowed - 7,516 - - 7,516 2.1
Loans and acceptances, net
of allowances 37,307 - 3,545 141,837 182,689 10.5
Derivative financial instruments - - - 16,484 16,484 -
Investments in associates
and joint ventures - - - 225 225 -
Premises and equipment - - - 1,216 1,216 -
Goodwill - - - 1,504 1,504 -
Intangible assets - - - 1,274 1,274 -
Other assets - - - 4,530 4,530 -
---------------------------------- ----------- -------- ----------- -------- ------- ----------
76,181 14,022 98,348 167,070 355,621 25.4
================================== =========== ======== =========== ======== ======= ==========
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
(2) In the normal course of its funding activities, the Bank
pledges assets as collateral in accordance with standard terms.
Encumbered assets include assets used to cover short sales,
obligations related to securities sold under repurchase agreements
and securities loaned, guarantees related to security-backed loans
and borrowings, collateral related to derivative financial
instrument transactions, asset-backed securities, residential
mortgage loans securitized and transferred under the Canada
Mortgage Bond program, assets held in consolidated trusts
supporting the Bank's funding activities, and mortgage loans
transferred under the covered bond program.
(3) Other encumbered assets include assets for which there are
restrictions and that cannot therefore be used for collateral or
funding purposes as well as assets used to cover short sales.
(4) Other unencumbered assets are assets that cannot be used for
collateral or funding purposes in their current form. This category
includes assets that are potentially eligible as funding program
collateral (e.g., mortgages insured by the Canada Mortgage and
Housing Corporation that can be securitized into mortgage-backed
securities under the National Housing Act (Canada)).
(5) 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.
Liquidity Coverage Ratio
The liquidity coverage ratio (LCR) was introduced primarily to
ensure that banks could withstand periods of severe short-term
stress. LCR is calculated by dividing the total amount of
high-quality liquid assets (HQLA) by the total amount of net cash
outflows. OSFI has been requiring Canadian banks to maintain a
minimum LCR of 100%. An LCR above 100% ensures that banks are
holding sufficient high-quality liquid assets to cover net cash
outflows given a severe, 30-day liquidity crisis. The assumptions
underlying the LCR scenario were established by the BCBS and OSFI's
Liquidity Adequacy Requirements Guideline.
The following table provides average LCR data calculated using
the daily figures in the quarter. For the quarter ended October 31,
2022, the Bank's average LCR was 140%, well above the 100%
regulatory requirement and demonstrating the Bank's solid liquidity
position.
LCR Disclosure Requirements (1)(2)
For the quarter
(millions of Canadian dollars) ended
============================================= ================ ============== ==================
July 31,
October 31, 2022 2022
--------------------------------------------- -------------------------------- --------------
Total unweighted Total weighted Total weighted
value (3) value (4) value(4)
(average) (average) (average)
============================================ ================ ============== ==============
High-quality liquid assets (HQLA)
Total HQLA n.a. 76,469 71,388
Cash outflows
Retail deposits and deposits from small
business
customers, of which: 67,086 6,953 5,281
Stable deposits 28,709 861 876
Less stable deposits(5) 38,377 6,092 4,405
Unsecured wholesale funding, of which: 102,020 55,770 56,563
Operational deposits(5) (all
counterparties)
and deposits in networks of cooperative
banks 27,635 6,738 5,715
Non-operational deposits (all
counterparties) 62,319 36,966 39,620
Unsecured debt 12,066 12,066 11,228
Secured wholesale funding n.a. 20,465 15,955
Additional requirements, of which: 53,259 14,231 12,559
Outflows related to derivative exposures
and other collateral requirements 15,872 7,381 5,718
Outflows related to loss of funding on
secured
debt securities 1,580 1,580 1,864
Backstop liquidity and credit enhancement
facilities and commitments to extend
credit 35,807 5,270 4,977
Other contractual commitments to extend
credit 1,830 1,040 758
Other contingent commitments to extend
credit 121,558 1,788 1,771
-------------------------------------------- ---------------- -------------- --------------
Total cash outflows n.a. 100,247 92,887
-------------------------------------------- ---------------- -------------- --------------
Cash inflows
Secured lending (e.g., reverse repos) 106,713 22,562 20,976
Inflows from fully performing exposures 10,737 6,673 5,910
Other cash inflows 15,966 15,966 17,496
-------------------------------------------- ---------------- -------------- --------------
Total cash inflows 133,416 45,201 44,382
============================================ ================ ============== ==============
Total adjusted Total adjusted
value (6) value(6)
========================================== ================ ============== ==============
Total HQLA 76,469 71,388
Total net cash outflows 55,046 48,505
Liquidity coverage ratio (%) (7) 140 % 148 %
============================================= ================ ============== ==============
n.a. Not applicable
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
(2) OSFI prescribed a table format in order to standardize
disclosure throughout the banking industry.
(3) Unweighted values are calculated as outstanding balances
maturing or callable within 30 days (for inflows and outflows).
(4) Weighted values are calculated after the application of
respective haircuts (for HQLA) or inflow and outflow rates.
(5) During the quarter ended October 31, 2022, the Bank refined
its method for classifying less stable retail deposits and deposits
from small business customers as well as unsecured wholesale
funding operational deposits.
(6) Total adjusted values are calculated after the application
of both haircuts and inflow and outflow rates and any applicable
caps.
(7) The data in this table has been calculated using averages of
the daily figures in the quarter.
As at October 31, 2022, Level 1 liquid assets represented 84% of
the Bank's HQLA, which includes cash, central bank deposits, and
bonds issued or guaranteed by the Canadian government and Canadian
provincial governments. Cash outflows arise from the application of
OSFI-prescribed assumptions on deposits, debt, secured funding,
commitments and additional collateral requirements. The cash
outflows are partly offset by cash inflows, which come mainly from
secured loans and performing loans. The Bank expects some
quarter-over-quarter variation between reported LCRs without such
variation being necessarily indicative of a trend. The variation
between the quarter ended October 31, 2022 and the preceding
quarter is a result of normal business operations . The Bank's
liquid asset buffer is well in excess of its total net cash
outflows. The LCR assumptions differ from the assumptions used for
the liquidity disclosures presented in the tables on the previous
pages or those used for internal liquidity management rules. While
the liquidity disclosure framework is prescribed by the EDTF, the
Bank's internal liquidity metrics use assumptions that are
calibrated according to its business model and experience.
Intraday Liquidity
The Bank manages its intraday liquidity in such a way that the
amount of available liquidity exceeds its maximum intraday
liquidity requirements. The Bank monitors its intraday liquidity on
an hourly basis, and the evolution thereof is presented monthly to
the Financial Markets Risk Committee.
Net Stable Funding Ratio
The BCBS has developed the Net Stable Funding Ratio (NSFR) to
promote a more resilient banking sector. The NSFR requires
institutions to maintain a stable funding profile in relation to
the composition of their assets and off-balance-sheet activities. A
viable funding structure is intended to reduce the likelihood that
disruptions to an institution's regular sources of funding would
erode its liquidity position in a way that would increase the risk
of its failure and potentially lead to broader systemic stress.
NSFR is calculated by dividing available stable funding by required
stable funding. OSFI has been requiring Canadian banks to maintain
a minimum NSFR of 100%.
The following table provides the available stable funding and
the required stable funding in accordance with OSFI's Liquidity
Adequacy Requirements Guideline . As at October 31, 2022, the
Bank's NSFR was 117%, well above the 100% regulatory requirement
and demonstrating the Bank's solid liquidity in a long-term
position.
NSFR Disclosure Requirements (1)(2)
As at October As at
31, July 31,
(millions of Canadian dollars) 2022 2022
================================= ======== ====== ======= ================= ========
Unweighted value by residual
maturity
------------------------------- ------------------------------------- ========
Over
6 6
months months Weighted
No or to 1 Over value Weighted
maturity less year 1 year (3) value(3)
=============================== ======== ====== ======= ======= ======== ========
Available Stable Funding (ASF)
Items
Capital: 21,746 - - 1,499 23,245 22,607
Regulatory capital 21,746 - - 1,499 23,245 22,607
Other capital instruments - - - - - -
Retail deposits and deposits from
small business customers: 63,232 11,080 9,025 17,447 90,866 83,433
Stable deposits 26,500 3,102 4,065 5,866 37,850 37,750
Less stable deposits(4) 36,732 7,978 4,960 11,581 53,016 45,683
Wholesale funding: 62,829 85,492 10,832 37,405 91,959 96,027
Operational deposits(4) 31,076 - - - 15,538 10,600
Other wholesale funding 31,753 85,492 10,832 37,405 76,421 85,427
Liabilities with matching
interdependent
assets(5) - 3,271 3,553 19,453 - -
------ ------- -------
Other liabilities(6) : 25,445 21,711 710 704
------ ------- -------
NSFR derivative liabilities(6) n.a. 19,055 n.a. n.a.
------ ------- -------
All other liabilities and equity
not included in the above
categories 25,445 1,820 253 583 710 704
-------------------------------- -------- ------ ------- ------- -------- --------
Total ASF n.a. n.a. n.a. n.a. 206,780 202,771
--------------------------------- -------- ------ ------- ------- -------- --------
Required Stable Funding (RSF)
Items
Total NSFR high-quality liquid
assets (HQLA) n.a. n.a. n.a. n.a. 8,845 7,235
Deposits held at other financial
institutions for operational
purposes - - - - - -
Performing loans and securities: 58,799 61,316 22,183 98,980 145,555 140,975
Performing loans to financial
institutions secured by Level
1 HQLA 2,595 3,932 - 9 343 83
Performing loans to financial
institutions secured by
non-Level
1
HQLA and unsecured performing
loans to financial institutions 8,325 22,222 1,650 365 5,426 5,383
Performing loans to
non-financial
corporate clients, loans to
retail
and small business customers,
and loans to sovereigns,
central
banks and public sector
entities,
of which: 25,149 27,048 13,868 36,478 70,494 67,324
With a risk weight of less than
or equal to 35% under the
Basel
II
Standardized Approach for
credit
risk 816 2,867 431 279 2,360 1,965
Performing residential
mortgages,
of which: 9,624 5,166 5,928 57,933 52,743 52,236
With a risk weight of less than
or equal to 35% under the
Basel
II
Standardized Approach for
credit
risk 9,624 5,166 5,928 57,933 52,743 52,236
Securities that are not in
default
and do not qualify as HQLA,
including
exchange-traded equities 13,106 2,948 737 4,195 16,549 15,949
Assets with matching
interdependent
liabilities(5) - 3,271 3,553 19,453 - -
------ ------- -------
Other assets(6) : 3,810 58,136 18,455 18,428
------ ------- -------
Physical traded commodities,
including
gold 294 n.a. n.a. n.a. 294 292
------ ------- -------
Assets posted as initial margin
for derivative contracts and
contributions to default funds
of central counterparties(5) n.a. 8,413 7,151 7,581
------ ------- -------
NSFR derivative assets(6) n.a. 16,985 - -
------ ------- -------
NSFR derivative liabilities
before
deduction of the variation
margin posted(6) n.a. 25,686 1,284 949
------ ------- -------
All other assets not included
in the above categories 3,516 5,733 645 674 9,726 9,606
------ ------- -------
Off-balance-sheet items(6) n.a. 101,010 3,787 3,677
--------------------------------- -------- ------ ------- ------- -------- --------
Total RSF n.a. n.a. n.a. n.a. 176,642 170,315
--------------------------------- -------- ------ ------- ------- -------- --------
Net Stable Funding Ratio (%) n.a. n.a. n.a. n.a. 117% 119%
================================= ======== ====== ======= ======= ======== ========
n.a. Not applicable
(1) See the Financial Reporting Method section on pages 16 to 21
for additional information on capital management measures.
(2) OSFI prescribed a table format in order to standardize
disclosure throughout the banking industry.
(3) Weighted values are calculated after application of the
weightings set out in OSFI's Liquidity Adequacy Requirements
Guideline.
(4) During the quarter ended October 31, 2022, the Bank refined
its method for classifying less stable retail deposits and deposits
from small business customers as well as wholesale funding
operational deposits.
(5) As per OSFI's specifications, liabilities arising from
transactions involving the Canada Mortgage Bond program and their
corresponding encumbered mortgages are given ASF and RSF weights of
0%, respectively.
(6) As per OSFI's specifications, there is no need to differentiate by maturity.
The NSFR represents the amount of ASF relative to the amount of
RSF. ASF is defined as the portion of capital and liabilities
expected to be reliable over the time horizon considered by the
NSFR, which extends to one year. The amount of RSF of a specific
institution is a function of the liquidity characteristics and
residual maturities of the various assets held by that institution
as well as those of its off-balance-sheet exposures. The amounts of
ASF and RSF are calibrated to reflect the degree of stability of
liabilities and liquidity of assets. The Bank expects some
quarter-over-quarter variation between reported NSFRs without such
variation being necessarily indicative of a trend.
The NSFR assumptions differ from the assumptions used for the
liquidity disclosures provided in the tables on the preceding pages
or those used for internal liquidity management rules. While the
liquidity disclosure framework is prescribed by the EDTF, the
Bank's internal liquidity metrics use assumptions that are
calibrated according to its business model and experience.
Funding Risk
Funding risk is defined as the risk to the Bank's ongoing
ability to raise sufficient funds to finance actual or proposed
business activities on an unsecured or secured basis at an
acceptable price. The Bank maintains a good balance of its funding
through appropriate diversification of its unsecured funding
vehicles, securitization programs, and secured funding. The Bank
also diversifies its funding by currency, geography, and maturity.
The funding management priority is to achieve an optimal balance
between deposits, securitization, secured funding, and unsecured
funding. This brings optimal stability to the funding and reduces
vulnerability to unpredictable events.
Liquidity and funding levels remained sound and robust over the
year, and the Bank does not foresee any event, commitment, or
demand that might have a significant impact on its liquidity and
funding risk position. For additional information, see the table
entitled Residual Contractual Maturities of Balance Sheet Items and
Off-Balance-Sheet Commitments in Note 29 to the consolidated
financial statements.
Credit Ratings
The credit ratings assigned by ratings agencies represent their
assessment of the Bank's credit quality based on qualitative and
quantitative information provided to them. Credit ratings may be
revised at any time based on various factors, including
macroeconomic factors, the methodologies used by ratings agencies,
or the current and projected financial condition of the Bank.
Credit ratings are one of the main factors that influence the
Bank's ability to access financial markets at a reasonable cost. A
downgrade in the Bank's credit ratings could adversely affect the
cost, size, and term of future funding and could also result in
increased requirement to pledge collateral or decreased capacity to
engage in certain collateralized business activities at a
reasonable cost, including hedging and derivative transactions.
Liquidity and funding levels remain sound and robust, and the
Bank continues to enjoy excellent access to the market for its
funding needs. The Bank received favourable credit ratings from all
the agencies, reflecting the high quality of its debt instruments,
and the Bank's objective is to maintain these strong credit
ratings. On April 29, 2022, DBRS Morningstar (DBRS) raised the
ratings of the Bank and its related entities, including the rating
for long-term deposits and for long-term non-bail-inable senior
debt to AA from AA(low), and it raised the rating for short-term
senior debt to R-1(high) from R-1(mid). In addition, DBRS changed
the trends of all the ratings to "Stable" from "Positive". This
change reflects DBRS's recognition of the Bank's solid performance
in recent years. For Moody's, S&P, and Fitch, the outlook
remains unchanged at "Stable." The following table presents the
Bank's credit ratings according to four rating agencies as at
October 31, 2022.
The Bank's Credit Ratings
As at October 31,
2022
======================================== ========== ========== =====================
Moody's S&P DBRS Fitch
======================================== ========== ========== =========== ======
Short-term senior debt P-1 A-1 R-1 (high) F1+
Canadian commercial paper A-1 (mid)
Long-term deposits Aa3 AA AA-
Long-term non-bail-inable senior debt(1) Aa3 A AA AA-
Long term senior debt(2) A3 BBB+ AA (low) A+
NVCC subordinated debt Baa2 (hyb) BBB A (low)
NVCC limited recourse capital notes Ba1 (hyb) BB+ BBB (high)
NVCC preferred shares Ba1 (hyb) P-3 (high) Pfd-2
Counterparty risk(3) Aa3/P-1 AA-
Covered bonds program Aaa AAA AAA
------------------------------------------ ---------- ---------- ----------- ------
Rating outlook Stable Stable Stable Stable
========================================== ========== ========== =========== ======
(1) Includes senior debt issued before September 23, 2018 and
senior debt issued on or after September 23, 2018, which is
excluded from the Bank Recapitalization (Bail-In) Regime.
(2) Subject to conversion under the Bank Recapitalization (Bail-In) Regime.
(3) Moody's uses the term Counterparty Risk Rating while Fitch
uses the term Derivative Counterparty Rating.
Guarantees
As part of a comprehensive liquidity management framework, the
Bank regularly reviews its contracts that stipulate that additional
collateral could be required in the event of a downgrade of the
Bank's credit rating. The Bank's liquidity position management
approach already incorporates additional collateral requirements in
the event of a one-notch to three-notch downgrade. These additional
collateral requirements are presented in the table below.
(millions of Canadian dollars) As at October 31, 2022
================================ ========================
One-notch Three-notch
downgrade downgrade
=============================== =========== ===========
Derivatives(1) 30 98
================================ =========== ===========
(1) Contractual requirements related to agreements known as Credit Support Annexes.
Funding Strategy
The main objective of the funding strategy is to support the
Bank's organic growth while also enabling it to survive potentially
severe and prolonged crises and to meet its regulatory obligations
and financial targets.
The Bank's funding framework is summarized as follows:
-- pursue a diversified deposit strategy to fund core banking
activities through stable deposits coming from the networks of each
of the Bank's major business segments;
-- maintain sound liquidity risk management through centralized
expertise and management of liquidity metrics within a predefined
risk appetite;
-- maintain active access to various markets to ensure a
diversification of institutional funding in terms of source,
geographic location, currency, instrument, and maturity, whether or
not funding is secured.
The funding strategy is implemented in support of the Bank's
overall objectives of strengthening its franchise among market
participants and reinforcing its excellent reputation. The Bank
continuously monitors and analyzes market trends as well as
possibilities for accessing less expensive and more flexible
funding, considering both the risks and opportunities observed. The
deposit strategy remains a priority for the Bank, which continues
to prefer deposits to institutional funding .
The Bank actively monitors and controls liquidity risk exposures
and funding needs within and across entities, business segments ,
and currencies. The process involves evaluating the liquidity
position of individual business segments in addition to that of the
Bank as a whole as well as the liquidity risk from raising
unsecured and secured funding in foreign currencies. The funding
strategy is implemented through the funding plan and deposit
strategy, which are monitored, updated to reflect actual results,
and regularly evaluated.
Diversified Funding Sources
The primary purpose of diversifying by source, geographic
location, currency, instrument, maturity, and depositor is to
mitigate liquidity and funding risk by ensuring that the Bank
maintains alternative sources of funds that strengthen its capacity
to withstand a variety of severe yet plausible institution-specific
and market-wide shocks. To meet this objective, the Bank:
-- takes funding diversification into account in the business planning process;
-- maintains a variety of funding programs to access different markets;
-- sets limits on funding concentration;
-- maintains strong relationships with fund providers;
-- is active in various funding markets of all tenors and for various instruments;
-- identifies and monitors the main factors that affect the ability to raise funds.
The Bank is active in the following funding and securitization
platforms:
-- Canadian dollar Senior Unsecured Debt;
-- U.S. dollar Senior Unsecured Debt programs;
-- Canadian Medium-Term Note Shelf;
-- U.S. dollar Commercial Paper programs;
-- U.S. dollar Certificates of Deposit;
-- Euro Medium-Term Note program;
-- Canada Mortgage and Housing Corporation securitization programs;
-- Canadian Credit Card Trust II;
-- Legislative Covered Bond program.
The table below presents the residual contractual maturities of
the Bank's wholesale funding. The information has been presented in
accordance with the categories recommended by the EDTF for
comparison purposes with other banks.
Residual Contractual Maturities of Wholesale Funding (1)
(millions of Canadian As at October
dollars) 31, 2022
======================= ======== ======= ======= ======= ======== ======== ===============
Over Over Over
1 3 6 Over
month months months 1
to to to Subtotal year Over
1 month 3 6 12 1 year to 2
or less months months months or less 2 years years Total
====================== ======== ======= ======= ======= ======== ======== ======= ======
Deposits from banks(2) 484 - - - 484 - - 484
Certificates of deposit
and commercial
paper(3) 5,560 4,230 4,788 793 15,371 - - 15,371
Senior unsecured
medium-term
notes(4)(5) 78 1,348 3,000 587 5,013 3,771 6,423 15,207
Senior unsecured
structured
notes - 140 183 70 393 - 2,387 2,780
Covered bonds and
asset-backed
securities
Mortgage securitization - 2,672 422 3,617 6,711 4,558 15,008 26,277
Covered bonds - - - 2,017 2,017 1,009 7,386 10,412
Securitization of
credit
card receivables - - - 29 29 - 49 78
Subordinated
liabilities(6) - - - - - - 1,499 1,499
6,122 8,390 8,393 7,113 30,018 9,338 32,752 72,108
----------------------- -------- ------- ------- ------- -------- -------- ------- ------
Secured funding - 2,672 422 5,663 8,757 5,567 22,443 36,767
Unsecured funding 6,122 5,718 7,971 1,450 21,261 3,771 10,309 35,341
----------------------- -------- ------- ------- ------- -------- -------- ------- ------
6,122 8,390 8,393 7,113 30,018 9,338 32,752 72,108
----------------------- -------- ------- ------- ------- -------- -------- ------- ------
As at October 31, 2021 2,643 8,872 9,802 7,390 28,707 10,400 29,331 68,438
======================= ======== ======= ======= ======= ======== ======== ======= ======
(1) Bankers' acceptances are not included in this table.
(2) Deposits from banks include all non-negotiable term deposits from banks.
(3) Includes bearer deposit notes.
(4) Certificates of deposit denominated in euros are included in
senior unsecured medium-term notes.
(5) Includes deposits subject to bank recapitalization (Bail-In) conversion regulations.
(6) Subordinated debt is presented in this table, but the Bank
does not consider it as part of its wholesale funding.
Operational Risk
Operational risk is the risk of loss resulting from an
inadequacy or a failure ascribable to human resources, equipment,
processes, technology, or external events. Operational risk exists
for every Bank activity. Theft, fraud, cyberattacks, unauthorized
transactions, system errors, human error, amendments to or
misinterpretation of laws and regulations, litigation or disputes
with clients, inappropriate sales practice behaviour, or property
damage are just a few examples of events likely to cause financial
loss, harm the Bank's reputation, or lead to regulatory penalties
or sanctions.
Although operational risk cannot be eliminated entirely, it can
be managed in a thorough and transparent manner to keep it at an
acceptable level. The Bank's operational risk management framework
is built on the concept of three lines of defence and provides a
clear allocation of responsibilities to all levels of the
organization, as mentioned below.
Operational Risk Management Framework
The operational risk management framework is described in the
Operational Risk Management Policy, which is derived from the Risk
Management Policy. The operational risk management framework is
aligned with the Bank's risk appetite and is made up of policies,
standards, and procedures specific to each operational risk, which
fall under the responsibility of specialized groups.
The Operational Risk Management Committee (ORMC), a subcommittee
of the GRC, is the main governance committee overseeing operational
risk matters. Its mission is to provide oversight of the
operational risk level across the organization to ensure it aligns
with the Bank's risk appetite targets. It implements effective
frameworks for managing operational risk, including policies and
standards, and monitors the application thereof .
The segments use several operational risk management tools and
methods to identify, assess, and manage their operational risks and
control measures. With these tools and methods, the segments can
:
-- recognize and understand the inherent and residual risks to
which their activities and operations are exposed;
-- identify how to manage and monitor the identified risks to keep them at an acceptable level;
-- proactively and continuously manage risks.
Operational Risk Management Tools and Methods
Collection and Analysis of Data on Operational Events
The Operational Risk Unit applies a process, across the Bank and
its subsidiaries, for identifying, collecting, and analyzing data
on internal operational events. This process helps determine the
Bank's exposure to the operational risks and operational losses
incurred and assess the effectiveness of internal controls. It also
helps limit operational events, keep losses at an acceptable level
and, as a result, reduce potential capital charges and lower the
likelihood of damage to the Bank's reputation . These data are
processed and saved in a centralized database and are periodically
the subject of a quality assurance exercise.
Analysis and Lessons Learned From Operational Incidents Observed
in Other Large Businesses
By collecting and analyzing media-reported information about
significant operational incidents, in particular incidents related
to fraud, information security, and theft of personal information
experienced by other organizations, the Bank can assess the
effectiveness of its own operational risk management practices and
reinforce them, if necessary.
Operational Risk Self-Assessment Program
The operational risk self-assessment program gives each business
unit and corporate unit the means to proactively identify and
assess the new or major operational risks to which they are
exposed, evaluate the effectiveness of mitigating controls, and
develop action plans to keep such risks at acceptable levels. As
such, the program helps in anticipating factors that could hinder
performance or the achievement of objectives.
Key Risk Indicators
Key risk indicators are used to monitor the main operational
risk exposure factors and track how risks are evolving in order to
proactively manage them. The business units and corporate units
define the key indicators associated with their main operational
risks and assign tolerance thresholds to them. These indicators are
monitored periodically and, when they show a significant increase
in risk or when a tolerance threshold is exceeded, they are sent to
an appropriate level in the hierarchy and action plans are
implemented as required.
Scenario Analysis
Scenario analysis, which is part of a Bank-wide stress testing
program, is an important and useful tool for assessing the impacts
related to potentially serious events. It is used to define the
risk appetite, set risk exposure limits, and engage in business
planning. More specifically, scenario analysis provides management
with a better understanding of the risks faced by the Bank and
helps it make appropriate management decisions to mitigate
potential operational risks that are inconsistent with the Bank's
risk appetite .
Insurance Program
To protect itself against any material losses arising from
unforeseeable operational risk exposure, the Bank also has adequate
insurance, the nature and amount of which meet its coverage
requirements.
Operational Risk Reports and Disclosures
Operational events for which the financial impact exceeds
tolerance thresholds or that have a significant regulatory or
reputation impact are submitted to appropriate decision-making
levels. Management is obligated to report on its management process
and to remain alert to current and future issues. Reports on the
Bank's risk profile, highlights, and emerging risks are
periodically submitted, on a timely basis, to the ORMC, the GRC,
and the RMC . This reporting enhances the transparency and
proactive management of the main operational risk factors.
Regulatory Compliance Risk
Regulatory compliance risk is the risk of the Bank or of one of
its employees or business partners failing to comply with the
regulatory requirements in effect where it does business, both in
Canada and internationally. Regulatory compliance risk is present
in all of the daily operations of each Bank segment. A situation of
regulatory non-compliance can adversely affect the Bank's
reputation and result in penalties and sanctions or increased
oversight by regulators.
Organizational Structure of Compliance
Compliance is an independent oversight function within the Bank.
The Senior Vice-President, Chief Compliance Officer and Chief
Anti-Money Laundering Officer serves as both chief compliance
officer (CCO) and chief anti-money laundering officer (CAMLO) for
the Bank and its subsidiaries and foreign centres. She is
responsible for implementing and updating the Bank's programs for
regulatory compliance management, regulatory requirements related
to AML/ATF, international sanctions, and the fight against
corruption . The CCO and CAMLO has a direct relationship with the
Chair of the RMC and meets with him at least once every quarter.
She can also communicate directly with senior management, officers,
and directors of the Bank and of its subsidiaries and foreign
centres.
Regulatory Compliance Framework
The Bank operates in a highly regulated industry. To ensure
sound management of regulatory compliance, the Bank favours
proactive approaches and incorporates regulatory requirements into
its day-to-day operations.
Such proactive management also provides reasonable assurance
that the Bank is in compliance, in all material respects, with the
regulatory requirements in effect where it does business, both in
Canada and internationally.
The implementation of a regulatory compliance risk management
framework across the Bank is entrusted to the Compliance Service,
which has the following mandate:
-- implement policies and standards that ensure compliance with
current regulatory requirements, including those related to
AML/ATF, to international sanctions, and to the fight against
corruption;
-- develop compliance and AML/ATF training programs for Bank
employees, officers, and directors;
-- exercise independent oversight and monitoring of the
programs, policies, and procedures implemented by the management of
the Bank, its subsidiaries, and its foreign centres to ensure that
the control mechanisms are sufficient, respected, and effective
;
-- report relevant compliance and AML/ATF matters to the Bank's
Board and inform it of any significant changes in the effectiveness
of the risk management framework.
The Bank holds itself to high regulatory compliance risk
management standards in order to earn the trust of its clients, its
shareholders, the market, and the general public.
Described below are the main regulatory developments that have
been monitored over the past year.
Reform of the Official Languages Act (federal law)
Bill C-13, An Act to amend the Official Languages Act , to enact
the Use of French in Federally Regulated Private Businesses Act and
to make related amendments to other Acts, proposes to modernize the
Official Languages Act by granting new powers to the Commissioner
of Official Languages (entering into compliance agreements, issuing
orders, and imposing penalties). The bill also proposes enactment
of a new act, namely, the Use of French in Federally Regulated
Private Businesses Act , which addresses the language of service
for consumers and the language of work in Quebec and in regions
with a strong francophone presence.
Bill 96: An Act respecting French, the official and common
language of Quebec (Quebec law)
Bill 96 makes amendments to the Charter of the French Language
and other laws. The objectives are to strengthen the presence and
use of the French language in Quebec, to establish a new Charter of
the French Language, and to affirm that French is the only official
language of Quebec. Key aspects of Bill 96 notably include
francization committees, work and employment rights, contracts and
consumer rights, litigation and the publication of rights, and
public signs and commercial advertising. Bill 96 was assented to on
June 1, 2022.
Bill 18 - Protection of Vulnerable Persons
Bill 18, An Act to amend the Civil Code, the Code of Civil
Procedure, the Public Curator Act and various provisions as regards
the protection of persons, has abolished curatorships and
adviserships to persons of full age. Tutorships to persons of full
age will remain in place, but it will be possible to modulate them
based on the incapacity level of the person of full age. The new
law will create temporary representation of persons of full age and
assistants to persons of full age . The effective date, initially
expected in June, was postponed to November 2022.
Consumer Protection (Bank Act)
A new Financial Consumer Protection Framework (C-86) took effect
on June 30, 2022. It modernized certain provisions of the Bank Act
and related regulations in order to strengthen consumer
protections, notably through additional communications to
customers, assessments of product and service appropriateness,
employee training, reporting of wrongdoings (whistleblowing), and
complaint handling processes .
Bill C-30 Addressing Unclaimed Bank Balances, Among Other
Matters
Bill C-30 makes an amendment to the Bank Act. Unclaimed balances
refer in particular to a deposit in an inactive bank account and
will now include deposits and instruments in foreign currencies.
This plan requires financial institutions to send letters to
clients to inform them of the existence of unclaimed balances. An
electronic notice must also be sent when the financial institution
possesses the electronic contact information of the clients.
Additional information regarding clients who have an unclaimed
balance will also have to be sent to the Bank of Canada. The
effective date of the bill is anticipated to be June 30, 2023.
Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF)
Activities
Amendments made to the regulations set out in the Proceeds of
Crime (Money Laundering) and Terrorist Financing Act took effect on
June 1, 2021 . The new reporting requirements are expected to take
effect in 2023-2024 such that the Financial Transactions and
Reports Analysis Centre of Canada (FINTRAC) can prepare the new
reporting forms.
Protection of Personal Information
Given changing technologies and societal behaviours, privacy and
the protection of personal information is a topical issue in
Canada. Recent regulatory measures (such as the General Data
Protection Regulation (GDPR) in Europe in 2018 and the California
Consumer Privacy Act in the United States in 2020) reflect a desire
to implement a stronger legislative framework in the areas of
confidentiality and use of personal information. In Quebec, in
September 2021, the government adopted Bill 64, An Act to modernize
legislative provisions as regards the protection of personal
information , which has introduced substantial changes regarding
the protection of personal information. Essentially, the Act
promotes transparency, raises the confidentiality level of data,
and provides a framework for the collection, use, and sharing of
personal information. At the federal level, Bill C-27, tabled in
June 2022, enacts three new laws: the Consumer Privacy Protection
Act, the Personal Information and Data Protection Tribunal Act, the
Artificial Intelligence and Data Act. The latter act is the first
bill designed to regulate artificial intelligence in Canada.
Members of industry, regulatory agencies, and consumer advocates
were consulted to help design and establish the pillars of an open
banking system, which enable consumers to transfer their financial
data between financial institutions and accredited third parties in
a secure and user-friendly manner .
Canada Deposit Insurance Corporation (CDIC)
On April 30, 2022, separate coverage for registered education
savings plans and registered disability savings plans was granted
as part of changes to the Canada Deposit Insurance Corporation Act.
New requirements were established for the coverage of deposits in
trust, particularly nominee-brokered deposits and those of
professional trustees.
Recovery and Resolution Planning
As part of the regulatory measures used to manage systemic
risks, D-SIBs are required to prepare recovery and resolution
plans. A recovery plan is essentially a roadmap that guides the
recovery of a bank in the event of severe financial stress;
conversely, a resolution plan guides its orderly wind-down in the
event of failure when recovery is no longer an option. The Bank
improves and periodically updates its recovery and resolution plans
to prepare for these high-risk, but low-probability, events. In
addition, the Bank and other D-SIBs continue to work with the CDIC
to maintain a comprehensive settlement plan that would ensure an
orderly winding down of the Bank's operations. These plans are
approved by the Board and submitted to the national regulatory
agencies.
Section 871(m) - Dividend Equivalent Payments
Section 871(m) of the U.S. Internal Revenue Code (IRC) aims to
ensure that non-U.S. persons pay tax on payments that can be
considered dividends on U.S. shares, when these payments are made
on certain derivative instruments. The derivative instruments for
which the underlyings are U.S. shares (including U.S.
exchange-traded funds) or "non-qualified indices" concluded as of
January 1, 2017 are subject to the withholding and reporting
requirements. The effective date for certain components of this
regulation has been deferred to January 1, 2023. Some of the
obligations of a qualified derivatives dealer, established under
section 871(m) of the IRC and the qualified intermediary agreement,
have also been deferred to January 1, 2023. However, the U.S.
Internal Revenue Service has informed market participants that it
is working on a new notice that would again postpone these
obligations beyond 2023.
Foreign Account Tax Compliance Act and the Common Reporting
Standard
The U.S. law addressing foreign account tax compliance (Foreign
Account Tax Compliance Act or FATCA), and the Common Reporting
Standard (CRS), an international standard, the principles of which
have been incorporated into the Income Tax Act (Canada), are
intended to counter tax evasion by taxpayers through the
international exchange of tax information through financial
institutions. On March 10, 2022, clarifications were provided on
the application of some of the guidelines in these regulations.
Client-Centred Reforms - Amendments to Regulation 31-103
Pursuant to Regulation 31-103 respecting Registration
Requirements , Exemptions and Ongoing Registrant obligations ,
regulatory changes were made to the process for declaring conflicts
of interest and external activities and to the following topics:
KYC (know-your-client) and KYP (know-your-product), suitability
determination, misleading communications, relationship disclosure,
and training. The Bank is ensuring that it is compliant with these
changes as they are published.
Reform of Interest Rate Benchmarks
The reform of interest rate benchmarks is a global initiative
that is being coordinated and led by central banks and governments
around the world, including Canada. The objective is to improve
benchmarks by ensuring that they meet robust international
standards. LIBOR (London Interbank Offered Rates) in particular is
in the process of being discontinued, and risk-free rates such as
SOFR (Secured Overnight Financing Rate), ESTR (Euro Short-Term
Rate), SONIA (Sterling Over Night Index Average), SARON (Swiss
Average Rate Overnight), and TONAR (Tokyo Overnight Average Rate)
are recommended as replacements for LIBOR. On December 31, 2021,
all LIBOR rates in European, British, Swiss, and Japanese currency
as well as the one-week and two-month USD LIBOR rates were
discontinued, whereas the other USD LIBOR rates will be
discontinued after June 30, 2023. In Canada, publication of the
CDOR (Canadian Dollar Offered Rate) will be discontinued on June
28, 2024 and be replaced by the risk-free rate CORRA (Canadian
Overnight Repo Rate Average). For additional information, see the
Basis of Presentation section in Note 1 to the consolidated
financial statements.
One-Day Settlement Cycle
In February 2022, the CSA staff published a notice to inform
Canadian securities stakeholders about an initiative to shorten the
standard settlement cycle for most trades in securities from two
days to one day. This notice follows a report published in the U.S.
securities sector indicating that it has set March 31, 2024 as the
date for transitioning the standard settlement cycle in the U.S. to
one day from the current settlement time of two days. Aligning the
Canadian and U.S. settlement cycles is critical so as to avoid
inefficiencies and prevent any prejudicial impact on Canadian
investors and capital markets. The move towards a shortened
settlement cycle will result in changes to systems, regulations,
and procedures.
New Self-Regulatory Organization (SRO)
The CSA will create a new self-regulatory organization that
will, among other things, combine the functions of the Investment
Industry Regulatory Organization of Canada and the Mutual Fund
Dealers Association of Canada. This new organization is expected to
be operational by the end of 2022. A working committee was created
to assess the potential impacts and benefits of this new structure
for Wealth Management and the National Bank Investments
subsidiary.
Reputation Risk
Reputation risk is the risk that the Bank's operations or
practices will be judged negatively by the public, whether that
judgment is with or without basis, thereby adversely affecting the
perception, image, or trademarks of the Bank and potentially
resulting in costly litigation or loss of income. Reputation risk
generally arises from a deficiency in managing another risk. The
Bank's reputation may, for example, be adversely affected by
non-compliance with laws and regulations or by process failures.
All risks must therefore be managed effectively in order to protect
the Bank's reputation.
The Bank's corporate culture continually promotes the behaviours
and values to be adopted by employees. It creates an awareness
among all employees about the potential consequences of their
actions on the Bank's reputation and brand. In addition to the
above-mentioned operational risk management initiatives, the Bank
uses a variety of mechanisms to support sound management of
reputation risk . Our Code of Conduct outlines what is expected
from each employee in terms of ethical behaviour and rules to be
followed as they carry out their duties. Also supporting our
corporate culture are policies specifically addressing ethics and
corporate governance as well as appropriate training programs. The
Bank also has a crisis management framework featuring effective
intervention, communication, and behavioural parameters that help
to minimize any impact on business activities, clients, and
employees .
The Bank also has a reputation risk policy, approved by the RMC,
that covers all of the Bank's practices and activities . The policy
sets the reputation risk management principles and rules for
clients, employees, and communities, all of which are stakeholders
of the Bank. The policy is complemented by the special provisions
of the new products and activities policy, which determines the
approvals required by the various committees that assess risk
whenever new products or activities are introduced within the
business units. These provisions are intended, among other things,
to provide oversight for the management of reputation risk, which
may be material for such products or activities. The new products
and activities policy requires that any new product or activity for
which reputation risk is determined to be high be submitted to the
GRC for approval. The activities of the Compliance Service, Legal
Affairs Department, Communications and Corporate Social
Responsibility Department and Investor Relations Department
complete the reputation risk management framework.
Strategic Risk
Strategic risk is the risk of a financial loss or of
reputational harm arising from inappropriate strategic
orientations, improper execution, or ineffective response to
economic, financial, or regulatory changes. The corporate strategic
plan is developed by the Senior Leadership Team, in alignment with
the Bank's overall risk appetite, and approved by the Board. Once
approved, the initiatives of the strategic plan are monitored
regularly to ensure that they are progressing. If not, strategies
could be reviewed or adjusted if deemed appropriate.
In addition, the Bank has a specific Board-approved policy for
strategic investments, which are defined as purchases of business
assets or acquisitions of significant interests in an entity for
the purposes of acquiring control or creating a long-term
relationship. As such, acquisition projects and other strategic
investments are analyzed through a due diligence process to ensure
that these investments are aligned with the corporate strategic
plan and the Bank's risk appetite.
Environmental and Social Risk
Environmental and social risk is the possibility that
environmental and social matters would result in a financial loss
for the Bank or affect its business activities. The Bank is
directly exposed to such risk through its own activities and
indirectly exposed through the activities of its clients. This risk
encompasses many topics, in particular pollution and waste; the use
of energy, water, and other resources; climate change;
biodiversity; human rights; inclusion, diversity and equity; labour
standards and human capital management practices; community health;
occupational health and safety; the rights of Indigenous Peoples
and consultation thereof; as well as cultural heritage. The impact
of environmental and social risk could also increase exposure to
strategic, reputation, and regulatory compliance risks if the
Bank's response is deemed inadequate or non-compliant with
commitments. As such, it is possible that the Bank's predictions,
targets, projections, expectations or conclusions prove to be
inaccurate, that its assumptions may not be confirmed, and that its
strategic objectives and performance targets will not be
achieved.
Assessing and mitigating environmental and social risk are
integral parts of the Bank's risk management framework.
Environmental and social issues are now central to the Bank's
decision-making process and are becoming increasingly imperative to
the Bank. Addressing such risk may even prove to be a considerable
asset in certain financing or investment transactions, and doing so
also contributes to promoting exemplary practices to the Bank's
stakeholders.
The Bank has adopted environmental, social, and governance (ESG)
principles that show the importance it attaches to sustainable
development and to balancing the interests of societal
stakeholders. These ESG principles have been incorporated into the
organization's priorities, and ESG indicators have been added to
various monitoring dashboards and are gradually being integrated
into the Bank's risk appetite framework. Reports on these
indicators and on the Bank's ESG commitments are being periodically
presented to various internal committees and to Board committees.
In addition, the Bank's Code of Conduct outlines what is expected
from each employee in their professional, business, and community
interactions. It also provides guidance on adhering to the Bank's
values, on the day-to-day conduct of the Bank's affairs, and on
relationships with third parties, employees, and clients to create
an environment conducive to achieving the Bank's One Mission,
namely, to have a positive impact on people's lives.
The Bank has also implemented an environmental policy that
applies to all activities and decisions made across the Bank. This
policy clearly sets out principles for identifying and limiting
environmental risk and climate risk as well as the impacts
therefrom on the community and on the Bank's business segments. The
Bank is pursuing its commitment to carbon neutrality by reducing
the carbon footprint of its own activities and by offsetting its
greenhouse gas (GHG) emissions through various organizations. The
Bank is also prioritizing energy efficiency and has demonstrated
leadership in this regard by deploying an innovative system that
lets it regulate the energy consumption of 260 branches using
building control systems and a web interface. In addition,
responsible procurement criteria have been incorporated into the
purchasing and supplier selection practices for the construction of
the Bank's new head office building. The new head office is, in
fact, aiming to achieve LEED v4(1) Gold certification in addition
to WELL(2) certification. Furthermore, we are continuing to work on
the implementation of a global responsible procurement strategy
.
ESG factors continue to be integrated into the Bank's processes,
in line with its strategy and the guiding principles approved by
the Board. This integration is being conducted with due diligence,
particularly in the area of credit-granting, and starting with the
corporate credit portfolio. For this clientele, ESG risk is being
analyzed using a collection of carbon footprint information and a
climate risk classification (transition and physical risks) based
on industry as well as scores assigned by ESG-rating agencies.
Several other criteria are also being considered, notably waste
management, labour standards, corporate governance, product
liability, and human rights policies. The Bank plans to gradually
extend the collection of such information to clients in other
portfolios by adapting the current process.
The Bank collaborates with various industry partners to identify
and implement sound management practices to support the transition
to a low-carbon economy. Aware that it has a mobilizing role to
play, the Bank supports the recommendations of the TCFD and
continues to demonstrate its commitment to mitigating climate risk.
For example, it has become a signatory to the Partnership for
Carbon Accounting Financials (PCAF) as well as the United Nations'
Net-Zero Banking Alliance (NZBA). This year, the Bank also began
quantifying financed GHG emissions. Specifically, it quantified the
emissions of oil and gas producers in its loan portfolio, and it
has also set its first interim reduction targets under its PCAF and
NZBA commitments. These targets consist of a 31% reduction in the
intensity of the portfolio respectively for direct and indirect
energy-related emissions and for other indirect emissions. In the
next two years, the Bank plans to continue setting GHG emission
reduction targets for other portfolios. The Bank has also started
examining stress test scenarios to quantify the anticipated losses
in the loan portfolio. Also during the year, the Bank joined the
UNEP-FI's discussion group on biodiversity protection. This is an
initiative seeking to mobilize financial system stakeholders
towards biodiversity protection efforts, as the financial risk
arising from biodiversity loss may take the form of both physical
risk and transition risk. Given that this initiative is in its
early stages, the Bank will continue to closely monitor the
evolution thereof and take part in discussions. The Bank has also
started taking concrete action to meet its commitments and to move
its plan forward, notably by quantifying the financial impacts of
environmental and social risk. Furthermore, the Bank is committed
to transparently communicating information about its progress and
its signatory commitments by periodically publishing its own
performance reports .
To proactively ensure the strategic positioning of its entire
portfolio, the Bank continues to support the transition to a
low-carbon economy while closely monitoring the related
developments and implications. Doing so involves ongoing and
stronger adaptation efforts as well as additional mitigation
measures for instances of business interruptions or disruptions
caused by major incidents such as natural disasters or health
crises. Such measures include the business continuity plan, the
operational risk management program, and the disaster risk
management program.
(1) Criteria of the LEED (Leadership in Energy and Environmental
Design) certification system. LEED certification involves
satisfying climate criteria and adaptation characteristics that
will help limit potential physical climate risks.
(2) The WELL Standard, administered by the International WELL
Building Institute, recognizes environments that support the health
and well-being of the occupants .
Critical Accounting Policies and Estimates
A summary of the significant accounting policies used by the
Bank is presented in Note 1 to the consolidated financial
statements of this Annual Report. The accounting policies discussed
below are considered critical given their importance to the
presentation of the Bank's financial position and operating results
and require subjective and complex judgments and estimates on
matters that are inherently uncertain. Any change in these
judgments and estimates could have a significant impact on the
Bank's consolidated financial statements.
The impacts of COVID-19 and the geopolitical landscape, in
particular supply chain disruptions and rising inflation, are
persisting and creating uncertainty. As a result, establishing
reliable estimates and applying judgment continue to be
substantially complex. Some of the Bank's accounting policies, such
as measurement of expected credit losses (ECLs), require
particularly complex judgments and estimates. See Note 1 to the
consolidated financial statements for a summary of the most
significant estimation processes used to prepare the consolidated
financial statements in accordance with IFRS and the valuation
techniques used to determine carrying values and fair values of
assets and liabilities. The uncertainty regarding certain key
inputs used in measuring ECLs is described in Note 7 to the
consolidated financial statements.
Classification of Financial Instruments
At initial recognition, all financial instruments are recorded
at fair value on the Consolidated Balance Sheet. At initial
recognition, financial assets must be classified as subsequently
measured at fair value through other comprehensive income, at
amortized cost, or at fair value through profit or loss. The Bank
determines the classification based on the contractual cash flow
characteristics of the financial assets and on the business model
it uses to manage these financial assets. At initial recognition,
financial liabilities are classified as subsequently measured at
amortized cost or as at fair value through profit or loss.
For the purpose of classifying a financial asset, the Bank must
determine whether the contractual cash flows associated with the
financial asset are solely payments of principal and interest on
the principal amount outstanding. The principal is generally the
fair value of the financial asset at initial recognition. The
interest consists of consideration for the time value of money, for
the credit risk associated with the principal amount outstanding
during a particular period, and for other basic lending risks and
costs as well as of a profit margin. If the Bank determines that
the contractual cash flows associated with a financial asset are
not solely payments of principal and interest, the financial assets
must be classified as measured at fair value through profit or
loss.
When classifying financial assets, the Bank determines the
business model used for each portfolio of financial assets that are
managed together to achieve a same business objective. The business
model reflects how the Bank manages its financial assets and the
extent to which the financial asset cash flows are generated by the
collection of the contractual cash flows, the sale of the financial
assets, or both. The Bank determines the business model using
scenarios that it reasonably expects to occur. Consequently, the
business model determination is a matter of fact and requires the
use of judgment and consideration of all the relevant evidence
available to the Bank at the date of determination.
A financial asset portfolio falls within a "hold to collect"
business model when the Bank's primary objective is to hold these
financial assets in order to collect contractual cash flows from
them and not to sell them. When the Bank's objective is achieved
both by collecting contractual cash flows and by selling the
financial assets, the financial asset portfolio falls within a
"hold to collect and sell" business model. In this type of business
model, collecting contractual cash flows and selling financial
assets are both integral components to achieving the Bank's
objective for this financial asset portfolio. Financial assets are
mandatorily measured at fair value through profit or loss if they
do not fall within either a "hold to collect" business model or a
"hold to collect and sell" business model.
Fair Value of Financial Instruments
The fair value of a financial instrument is the price that would
be received to sell a financial asset or paid to transfer a
financial liability in an orderly transaction in the principal
market at the measurement date under current market conditions
(i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices
for financial assets and offered prices for financial liabilities,
provide the best evidence of fair value. A financial instrument is
considered quoted in an active market when prices in exchange,
dealer, broker or principal--to--principal markets are accessible
at the measurement date. An active market is one where transactions
occur with sufficient frequency and volume to provide quoted prices
on an ongoing basis.
When there is no quoted price in an active market, the Bank uses
another valuation technique that maximizes the use of relevant
observable inputs and minimizes the use of unobservable inputs. The
chosen valuation technique incorporates all the factors that market
participants would consider when pricing a transaction. Judgment is
required when applying a large number of acceptable valuation
techniques and estimates to determine fair value. The estimated
fair value reflects market conditions on the measurement date and,
consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at
initial recognition is the transaction price, i.e., the fair value
of the consideration received or paid. If there is a difference
between the fair value at initial recognition and the transaction
price, and the fair value is determined using a valuation technique
based on observable market inputs or, in the case of a derivative,
if the risks are fully offset by other contracts entered into with
third parties, this difference is recognized in the Consolidated
Statement of Income. In other cases, the difference between the
fair value at initial recognition and the transaction price is
deferred on the Consolidated Balance Sheet. The amount of the
deferred gain or loss is recognized over the term of the financial
instrument. The unamortized balance is immediately recognized in
net income when (i) observable market inputs can be obtained and
support the fair value of the transaction, (ii) the risks
associated with the initial contract are substantially offset by
other contracts entered into with third parties, (iii) the gain or
loss is realized through a cash receipt or payment, or (iv) the
transaction matures or is terminated before maturity.
In certain cases, measurement adjustments are recognized to
address factors that market participants would use at the
measurement date to determine fair value but that are not included
in the valuation technique due to system limitations or uncertainty
surrounding the measure. These factors include, but are not limited
to, the unobservable nature of inputs used in the valuation model,
assumptions about risk such as market risk, credit risk, or
valuation model risk and future administration costs. The Bank may
also consider market liquidity risk when determining the fair value
of financial instruments when it believes these instruments could
be disposed of for a consideration below the fair value otherwise
determined due to a lack of market liquidity or an insufficient
volume of transactions in a given market. The measurement
adjustments also include the funding valuation adjustment applied
to derivative financial instruments to reflect the market implied
cost or benefits of funding collateral for uncollateralized or
partly collateralized transactions.
IFRS establishes a fair value measurement hierarchy that
classifies the inputs used in financial instrument fair value
measurement techniques according to three levels . The fair value
measurement hierarchy has the following levels:
Level 1
I nputs corresponding to unadjusted quoted prices in active
markets for identical assets and liabilities and accessible to the
Bank at the measurement date. These instruments consist primarily
of equity securities, derivative financial instruments traded in
active markets, and certain highly liquid debt securities actively
traded in over-the-counter markets.
Level 2
Valuation techniques based on inputs, other than the quoted
prices included in Level 1 inputs, that are directly or indirectly
observable in the market for the asset or liability. These inputs
are quoted prices of similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not
active; inputs other than quoted prices used in a valuation model
that are observable for that instrument; and inputs that are
derived principally from or corroborated by observable market
inputs by correlation or other means. These instruments consist
primarily of certain loans, certain deposits, derivative financial
instruments traded in over-the-counter markets, certain debt
securities, certain equity securities whose value is not directly
observable in an active market, liabilities related to transferred
receivables, and certain other liabilities.
Level 3
Valuation techniques based on one or more significant inputs
that are not observable in the market for the asset or liability.
The Bank classifies financial instruments in Level 3 when the
valuation technique is based on at least one significant input that
is not observable in the markets. The valuation technique may also
be partly based on observable market inputs. Financial instruments
whose fair values are classified in Level 3 consist of investments
in hedge funds, certain derivative financial instruments, equity
and debt securities of private companies, certain loans, certain
deposits (structured deposit notes), and certain other assets .
Establishing fair value is an accounting estimate and has an
impact on the following items: Securities at fair value through
profit or loss, certain Loans, Securities at fair value through
other comprehensive income, Obligations related to securities sold
short, Derivative financial instruments, financial instruments
designated at fair value through profit or loss, and financial
instruments designated at fair value through other comprehensive
income on the Consolidated Balance Sheet . This estimate also has
an impact on Non-interest income in the Consolidated Statement of
Income of the Financial Markets segment and of the Other heading .
Lastly, this estimate has an impact on Other comprehensive income
in the Consolidated Statement of Comprehensive Income. For
additional information on the fair value determination of financial
instruments, see Notes 3 and 6 to the consolidated financial
statements.
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a
three-stage impairment approach to measure the expected credit
losses (ECL) on all debt instruments measured at amortized cost or
at fair value through other comprehensive income and on loan
commitments and financial guarantees that are not measured at fair
value. ECLs are a probability-weighted estimate of credit losses
over the remaining expected life of the financial instrument. The
ECL model is forward looking. Measurement of ECLs at each reporting
period reflects reasonable and supportable information about past
events, current conditions, and forecasts of future events and
economic conditions. Judgment is required in making assumptions and
estimates, determining movements between the three stages, and
applying forward-looking information. Any changes in assumptions
and estimates, as well as the use of different, but equally
reasonable, estimates and assumptions, could have an impact on the
allowances for credit losses and the provisions for credit losses
for the year. All business segments are affected by this accounting
estimate. For additional information, see Note 7 to the
consolidated financial statements.
Determining the Stage
The ECL three-stage impairment approach is based on the change
in the credit quality of financial assets since initial
recognition. If, at the reporting date, the credit risk of
non-impaired financial instruments has not increased significantly
since initial recognition, these financial instruments are
classified in Stage 1, and an allowance for credit losses that is
measured, at each reporting date, in an amount equal to 12-month
expected credit losses, is recorded. When there is a significant
increase in credit risk since initial recognition, these
non-impaired financial instruments are migrated to Stage 2, and an
allowance for credit losses that is measured, at each reporting
date, in an amount equal to lifetime expected credit losses, is
recorded. In subsequent reporting periods, if the credit risk of a
financial instrument improves such that there is no longer a
significant increase in credit risk since initial recognition, the
ECL model requires reverting to Stage 1, i.e., recognition of
12-month expected credit losses. When one or more events that have
a detrimental impact on the estimated future cash flows of a
financial asset occurs, the financial asset is considered
credit-impaired and is migrated to Stage 3, and an allowance for
credit losses equal to lifetime expected credit losses continues to
be recorded or the
financial asset is written off. Interest income is calculated on
the gross carrying amount for financial assets in Stages 1 and 2
and on the net carrying amount for financial assets in Stage 3.
Assessment of Significant Increase in Credit Risk
In determining whether credit risk has increased significantly,
the Bank uses an internal credit risk grading system, external risk
ratings, and forward-looking information to assess deterioration in
the credit quality of a financial instrument. To assess whether or
not the credit risk of a financial instrument has increased
significantly, the Bank compares the probability of default (PD)
occurring over its expected life as at the reporting date with the
PD occurring over its expected life on the date of initial
recognition and considers reasonable and supportable information
indicative of a significant increase in credit risk since initial
recognition. The Bank includes relative and absolute thresholds in
the definition of significant increase in credit risk and a
backstop of 30 days past due. All financial instruments that are 30
days past due are migrated to Stage 2 even if other metrics do not
indicate that a significant increase in credit risk has occurred.
The assessment of a significant increase in credit risk requires
significant judgment.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of
all expected cash shortfalls over the remaining expected life of
the financial instrument, and reasonable and supportable
information about past events, current conditions, and forecasts of
future events and economic conditions is considered. The estimation
and application of forward-looking information requires significant
judgment. Cash shortfalls represent the difference between all
contractual cash flows owed to the Bank and all cash flows that the
Bank expects to receive.
The measurement of ECLs is primarily based on the product of the
financial instrument's PD, loss given default (LGD) and exposure at
default (EAD). Forward-looking macroeconomic factors such as
unemployment rates, housing price indices, interest rates, and
gross domestic product (GDP) are incorporated into the risk
parameters. The estimate of expected credit losses reflects an
unbiased and probability-weighted amount that is determined by
evaluating a range of possible outcomes. The Bank incorporates
three forward-looking macroeconomic scenarios in its ECL
calculation process: a base scenario, an upside scenario, and a
downside scenario. Probability weights are assigned to each
scenario. The scenarios and probability weights are reassessed
quarterly and are subject to management review. The Bank applies
experienced credit judgment to adjust the modelled ECL results when
it becomes evident that known or expected risk factors and
information were not considered in the credit risk rating and
modelling process.
ECLs for all financial instruments are recognized in Provisions
for credit losses in the Consolidated Statement of Income. In the
case of debt instruments measured at fair value through other
comprehensive income, ECLs are recognized in Provisions for credit
losses in the Consolidated Statement of Income, and a corresponding
amount is recognized in Other comprehensive income with no
reduction in the carrying amount of the asset on the Consolidated
Balance Sheet. As for debt instruments measured at amortized cost,
they are presented net of the related allowances for credit losses
on the Consolidated Balance Sheet. Allowances for credit losses for
off-balance-sheet credit exposures that are not measured at fair
value are included in Other liabilities on the Consolidated Balance
Sheet.
Purchased or Originated Credit-Impaired Financial Assets
On initial recognition of a financial asset, the Bank determines
whether the asset is credit-impaired. For financial assets that are
credit-impaired upon purchase or origination, the lifetime expected
credit losses are reflected in the initial fair value. In
subsequent reporting periods, the Bank recognizes only the
cumulative changes in these lifetime ECLs since initial recognition
as an allowance for credit losses. The Bank recognizes changes in
ECLs in Provisions for credit losses in the Consolidated Statement
of Income, even if the lifetime ECLs are less than the ECLs that
were included in the estimated cash flows on initial
recognition.
Definition of Default
The definition of default used by the Bank to measure ECLs and
transfer financial instruments between stages is consistent with
the definition of default used for internal credit risk management
purposes. The Bank considers a financial asset, other than a credit
card receivable, to be credit-impaired when one or more events that
have a detrimental impact on the estimated future cash flows of the
financial asset have occurred or when contractual payments are 90
days past due. Credit card receivables are considered
credit-impaired and are fully written off at the earlier of the
following dates: when a notice of bankruptcy is received, a
settlement proposal is made, or contractual payments are 180 days
past due.
Write-Offs
A financial asset and its related allowance for credit losses
are normally written off in whole or in part when the Bank
considers the probability of recovery to be non-existent and when
all guarantees and other remedies available to the Bank have been
exhausted or if the borrower is bankrupt or winding up and balances
owing are not likely to be recovered.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful
lives are tested for impairment when events or changes in
circumstances indicate that their carrying value may not be
recoverable. At the end of each reporting period, the Bank
determines whether there is an indication that premises and
equipment or intangible assets with finite useful lives may be
impaired. Goodwill and intangible assets that are not available for
use or that have indefinite useful lives are tested for impairment
annually or more frequently if there is an indication that the
asset might be impaired.
An impairment test compares the carrying amount of an asset with
its recoverable amount. The recoverable amount must be estimated
for the individual asset. Where it is not possible to estimate the
recoverable amount of an individual asset, the recoverable amount
of the cash-generating unit (CGU) to which the asset belongs will
be determined. Goodwill is always tested for impairment at the
level of a CGU or a group of CGUs. A CGU is the smallest
identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups
of assets. The Bank uses judgment to identify CGUs.
An asset's recoverable amount is the higher of fair value less
costs to sell and the value in use of the asset or CGU . Value in
use is the present value of expected future cash flows from the
asset or CGU . The recoverable amount of the CGU is determined
using valuation models that consider various factors such as
projected future cash flows, discount rates, and growth rates. The
use of different estimates and assumptions in applying the
impairment tests could have a significant impact on income. If the
recoverable amount of an asset or a CGU is less than its carrying
amount, the carrying amount is reduced to its recoverable amount
and an impairment loss is recognized in Non-interest expenses in
the Consolidated Statement of Income.
Management exercises judgment when determining whether there is
objective evidence that premises and equipment or intangible assets
with finite useful lives may be impaired. It also uses judgment in
determining to which CGU or group of CGUs an asset or goodwill is
to be allocated. Moreover, for impairment assessment purposes,
management must make estimates and assumptions regarding the
recoverable amount of non-financial assets, CGUs, or a group of
CGUs. For additional information on the estimates and assumptions
used to calculate the recoverable amount of an asset or CGU, see
Note 11 to the consolidated financial statements.
Any changes to these estimates and assumptions may have an
impact on the recoverable amount of a non-financial asset and,
consequently, on impairment testing results. These accounting
estimates have an impact on Premises and equipment, Intangible
assets and Goodwill reported on the Consolidated Balance Sheet. The
aggregate impairment loss, if any, is recognized as a non-interest
expense for the corresponding segment and presented in the Other
item.
Employee Benefits - Pension Plans and Other Post-Employment
Benefit Plans
The expense and obligation of the defined benefit component of
the pension plans and other post-employment benefit plans are
actuarially determined using the projected benefit method prorated
on service. The calculations incorporate management's best
estimates of various actuarial assumptions such as discount rates,
rates of compensation increase, health care cost trend rates,
mortality rates, and retirement age.
Remeasurements of these plans represent the actuarial gains and
losses related to the defined benefit obligation and the actual
return on plan assets, excluding the net interest determined by
applying a discount rate to the net asset or net liability of the
plans. Remeasurements are immediately recognized in Other
comprehensive income and are not subsequently reclassified to net
income; these cumulative gains and losses are reclassified to
Retained earnings.
The use of different assumptions could have a significant impact
on the defined benefit asset (liability) presented in Other assets
(Other liabilities) on the Consolidated Balance Sheet, on the
pension plan and other post-employment benefit plan expenses
presented in Compensation and employee benefits in the Consolidated
Statement of Income, as well as on Remeasurements of pension plans
and other post-employment benefit plans presented in Other
comprehensive income. All business segments are affected by this
accounting estimate. For additional information, including the
significant assumptions used to determine the Bank's pension plan
and other post-employment benefit plan expenses and the sensitivity
analysis for significant plan assumptions, see Note 23 to the
consolidated financial statements.
Income Taxes
The Bank makes assumptions to estimate income taxes as well as
deferred tax assets and liabilities. This process involves
estimating the actual amount of current taxes and evaluating tax
loss carryforwards and temporary differences arising from
differences between the values of items reported for accounting and
for income tax purposes. Deferred tax assets and liabilities,
presented in Other assets and Other liabilities on the Consolidated
Balance Sheet, are calculated according to the tax rates to be
applied in future periods. Previously recorded deferred tax assets
and liabilities must be adjusted when the date of the future event
is revised based on current information. The Bank periodically
evaluates deferred tax assets to assess recoverability. In the
Bank's opinion, based on the information at its disposal, it is
probable that all deferred tax assets will be realized before they
expire.
This accounting estimate affects Income taxes in the
Consolidated Statement of Income for all business segments. For
additional information on income taxes, see Notes 1 and 24 to the
consolidated financial statements.
Litigation
In the normal course of business, the Bank and its subsidiaries
are involved in various claims relating, among other matters, to
loan portfolios, investment portfolios, and supplier agreements,
including court proceedings, investigations or claims of a
regulatory nature, class actions, or other legal remedies of varied
natures.
More specifically, the Bank is involved as a defendant in class
actions instituted by consumers contesting, inter alia, certain
transaction fees or who wish to avail themselves of certain
legislative provisions relating to consumer protection. The recent
developments in the main legal proceeding involving the Bank are as
follows:
Defrance
On January 21, 2019, the Quebec Superior Court authorized a
class action against the National Bank and several other Canadian
financial institutions. The originating application was served to
the Bank on April 23, 2019. The class action was initiated on
behalf of consumers residing in Quebec. The plaintiffs allege that
non-sufficient funds charges, billed by all of the defendants when
a payment order is refused due to non-sufficient funds, are illegal
and prohibited by the Consumer Protection Act. The plaintiffs are
claiming, in the form of damages, the repayment of these charges as
well as punitive damages.
It is impossible to determine the outcome of the claims
instituted or which may be instituted against the Bank and its
subsidiaries. The Bank estimates, based on the information at its
disposal, that while the amount of contingent liabilities
pertaining to these claims, taken individually or in the aggregate,
could have a material impact on the Bank's consolidated results of
operations for a particular period, it would not have a material
adverse impact on the Bank's consolidated financial position.
Provisions are liabilities of uncertain timing and amount. A
provision is recognized when the Bank has a present obligation
(legal or constructive) arising from a past event, when it is
probable that an outflow of economic resources will be required to
settle the obligation and when the amount of the obligation can be
reliably estimated. Provisions are based on the Bank's best
estimates of the economic resources required to settle the present
obligation, given all relevant risks and uncertainties, and, when
it is significant, the effect of the time value of money.
The recognition of a litigation provision requires the Bank's
management to assess the probability of loss and estimate any
potential monetary impact. The Bank examines each litigation
provision individually by considering the development of each case,
its past experience in similar transactions and the opinion of its
legal counsel. Each new piece of information can alter the Bank's
assessment as to the probability and estimated amount of the loss
and the extent to which it adjusts the recorded provision.
Moreover, the actual settlement cost of these litigations can be
significantly higher or lower than the amounts recognized.
Structured Entities
In the normal course of business, the Bank enters into
arrangements and transactions with structured entities . Structured
entities are entities designed so that voting or similar rights are
not the dominant factor in deciding who controls the entity, such
as when voting rights relate solely to administrative tasks and the
relevant activities are directed by means of contractual
arrangements. A structured entity is consolidated when the Bank
concludes, after evaluating the substance of the relationship and
its right or exposure to variable returns , that it controls that
entity. Management must exercise judgment in determining whether
the Bank controls an entity. Additional information is provided in
the Securitization and Off-Balance-Sheet Arrangements section of
this MD&A and in Note 27 to the consolidated financial
statements.
Accounting Policy Changes
Cloud Computing Arrangements - Final Agenda Decision by
IFRIC
In April 2021, IFRIC issued a final agenda decision on
accounting for the costs of configuring or customizing a supplier's
software as part of a cloud computing or SaaS (Software as a
Service) arrangement. The main conclusion was that, if the incurred
configuration or customization costs do not give rise to an
intangible asset that is separate from the software or if the
services received are distinct from the software, those costs are
expensed as incurred. IFRIC decided that the relevant accounting
standards (IAS 38 - Intangible Assets and IFRS 15 - Revenue From
Contracts With Customers) contain sufficient guidance and that the
conclusions, as indicated in the final agenda decision, are part of
the interpretation of IFRS. As such, any change arising from these
interpretations must be accounted for as a retrospectively applied
accounting policy change in accordance with IAS 8 - Accounting
Policies, Changes in Accounting Estimates and Errors.
During fiscal 2022, the Bank completed an assessment of the
impacts of this change in accounting policy. The change was applied
retrospectively and had the following impacts on the consolidated
financial statements:
-- As at November 1, 2020 : A $186 million decrease in
Intangible assets, a $49 million increase in Other assets -
Deferred tax assets, and a $137 million decrease in Retained
earnings;
-- As at October 31, 2021: A $50 million decrease in Intangible
assets and a $13 million increase in Other assets - Deferred tax
assets;
-- For the year ended October 31, 2021 : A $50 million increase
in Non-interest expenses - Technology, a $13 million decrease in
Income taxes, a $37 million decrease in Net income and Net income
attributable to common shareholders, and a $0.11 decrease in
Earnings per share - Basic and diluted .
For the year ended October 31, 2022, the impacts of this
accounting policy change on the Consolidated Statement of Income
consisted of a $10 million increase in Non-interest expenses -
Technology and a $3 million decrease in Income taxes.
Future Accounting Policy Changes
The Bank closely monitors both new accounting standards and
amendments to existing accounting standards issued by the IASB. The
following standard has been issued but is not yet in effect. The
Bank is currently assessing the impacts of applying this standard
on the consolidated financial statements.
Effective Date - November 1, 2023
IFRS 17 - Insurance Contracts
In May 2017, the IASB issued IFRS 17 - Insurance Contracts (IFRS
17), a new standard that replaces IFRS 4, the current insurance
contract accounting standard. IFRS 17 introduces a new accounting
framework that will improve the comparability and quality of
financial information. IFRS 17 provides guidance on the
recognition, measurement, presentation and disclosure of insurance
contracts. IFRS 17 will affect how an entity accounts for its
insurance contracts and how it reports financial performance in the
consolidated income statement, in particular the timing of revenue
recognition for insurance contracts. In June 2020, the IASB issued
amendments to IFRS 17 that included a two-year deferral of the
effective date along with other changes aimed at addressing
concerns and implementation challenges identified after IFRS 17 was
published in 2017. IFRS 17, as amended, is to be applied
retrospectively for annual periods beginning on or after January 1,
2023. If full retrospective application to a group of insurance
contracts is impracticable, the modified retrospective approach or
the fair value approach may be used.
To prepare for the application of IFRS 17, the Bank developed a
project, set up a specialized team, and established a formal
governance structure. It also started executing a detailed plan for
the project that defines key activities and the timing of those
activities. The project is progressing according to schedule. The
Bank is continuing to assess all of the impacts of applying IFRS 17
on its consolidated financial statements as well as on the
financial statements of its insurance subsidiary.
Additional Financial Information
Table 1 - Quarterly Results
(millions of Canadian dollars,
except
per share amounts) 2022 (1)
================================ ===============================================================
Total Q4 Q3 Q2 Q1
============================== ======= ======= ======= ======= =======
Statement of income data
Net interest income 5,271 1,207 1,419 1,313 1,332
Non-interest income(2) 4,381 1,127 994 1,126 1,134
-------------------------------- ------- ------- ------- ------- -------
Total revenues 9,652 2,334 2,413 2,439 2,466
Non-interest expenses(3) 5,230 1,346 1,305 1,299 1,280
-------------------------------- ------- ------- ------- ------- -------
Income before provisions for
credit
losses and income taxes 4,422 988 1,108 1,140 1,186
Provisions for credit losses 145 87 57 3 (2)
Income taxes 894 163 225 248 258
-------------------------------- ------- ------- ------- ------- -------
Net income 3,383 738 826 889 930
Non-controlling interests (1) - - (1) -
-------------------------------- ------- ------- ------- ------- -------
Net income attributable to the
Bank's
shareholders and
holders of other equity
instruments 3,384 738 826 890 930
-------------------------------- ------- ------- ------- ------- -------
Earnings per common share
Basic $ 9.72 $ 2.10 $ 2.38 $ 2.56 $ 2.67
Diluted 9.61 2.08 2.35 2.53 2.64
------------------------------- ------- ------- ------- ------- -------
Dividends (per share)
Common $ 3.58 $ 0.92 $ 0.92 $ 0.87 $ 0.87
Preferred
Series 30 1.0063 0.2516 0.2516 0.2515 0.2516
Series 32 0.9598 0.2400 0.2399 0.2400 0.2399
Series 34 - - - - -
Series 36 - - - - -
Series 38 1.1125 0.2781 0.2781 0.2782 0.2781
Series 40 1.1500 0.2875 0.2875 0.2875 0.2875
Series 42 1.2375 0.3094 0.3093 0.3094 0.3094
------------------------------- ------- ------- ------- ------- -------
Return on common shareholders'
equity
(4) 18.8 % 15.3 % 17.9 % 20.7 % 21.9 %
-------------------------------- ------- ------- ------- ------- -------
Total assets 403,740 386,833 369,570 366,680
-------------------------------- ------- ------- ------- ------- -------
Subordinated debt (5) 1,499 1,510 764 766
-------------------------------- ------- ------- ------- ------- -------
Net impaired loans excluding
POCI
loans (4) 479 301 293 287
-------------------------------- ------- ------- ------- ------- -------
Number of common shares
outstanding
(thousands)
Average - Basic 337,099 336,530 336,437 337,381 338,056
Average - Diluted 340,837 339,910 339,875 341,418 342,318
End of period 336,582 336,456 336,513 338,367
------------------------------- ------- ------- ------- ------- -------
Per common share
Book value(4) $ 55.24 $ 54.29 $ 52.28 $ 49.71
Share price
High $ 105.44 94.37 97.87 104.59 105.44
Low 83.12 83.12 83.33 89.33 94.37
Number of employees - Worldwide 29,509 28,903 28,189 27,804
Number of branches in Canada 378 384 385 385
================================ ======= ======= ======= ======= =======
(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) For fiscal 2020, the Non-interest income item had included a
foreign currency translation loss on a disposal of subsidiaries of
$24 million.
(3) For fiscal 2021, the Non-interest expenses item had included
$9 million in intangible asset impairment losses (2020: $71 million
impairment loss on premises and equipment and intangible assets).
For fiscal 2020, the Non-interest expenses item had included $48
million in severance pay and a $13 million charge related to Maple
Financial Group Inc. (Maple).
(4) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
(5) Long-term financial liabilities.
2021(1) 2020(1)
=========================================================== ===========================================================
Total Q4 Q3 Q2 Q1 Total Q4 Q3 Q2 Q1
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
4,783 1,190 1,230 1,156 1,207 4,255 1,124 1,096 1,105 930
4,144 1,021 1,024 1,082 1,017 3,672 876 872 931 993
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
8,927 2,211 2,254 2,238 2,224 7,927 2,000 1,968 2,036 1,923
4,903 1,268 1,224 1,217 1,194 4,616 1,267 1,096 1,144 1,109
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
4,024 943 1,030 1,021 1,030 3,311 733 872 892 814
2 (41) (43) 5 81 846 110 143 504 89
882 215 240 228 199 434 136 144 25 129
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
3,140 769 833 788 750 2,031 487 585 363 596
- - - - - 42 2 13 11 16
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
3,140 769 833 788 750 1,989 485 572 352 580
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 8.95 $ 2.20 $ 2.38 $ 2.24 $ 2.13 $ 5.57 $ 1.35 $ 1.62 $ 0.96 $ 1.65
8.85 2.17 2.35 2.21 2.12 5.54 1.34 1.61 0.96 1.63
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 2.84 $ 0.71 $ 0.71 $ 0.71 $ 0.71 $ 2.84 $ 0.71 $ 0.71 $ 0.71 $ 0.71
1.0063 0.2516 0.2516 0.2515 0.2516 1.0063 0.2516 0.2516 0.2515 0.2516
0.9598 0.2400 0.2399 0.2400 0.2399 0.9636 0.2400 0.2399 0.2399 0.2438
0.7000 - - 0.3500 0.3500 1.4000 0.3500 0.3500 0.3500 0.3500
1.0125 - 0.3375 0.3375 0.3375 1.3500 0.3375 0.3375 0.3375 0.3375
1.1125 0.2781 0.2781 0.2782 0.2781 1.1125 0.2781 0.2781 0.2782 0.2781
1.1500 0.2875 0.2875 0.2875 0.2875 1.1500 0.2875 0.2875 0.2875 0.2875
1.2375 0.3094 0.3093 0.3094 0.3094 1.2375 0.3094 0.3093 0.3094 0.3094
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
20.7 % 18.7 % 21.4 % 21.8 % 21.1% 14.6 % 13.7 % 16.7 % 10.3 % 17.7%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
355,621 353,873 350,581 343,489 331,488 322,321 316,835 289,092
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
768 769 771 773 775 777 779 774
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
283 312 349 400 465 453 479 436
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
337,212 337,779 337,517 337,142 336,408 335,508 335,859 335,552 335,603 335,020
340,861 342,400 341,818 340,614 338,617 337,580 338,264 337,231 337,317 338,111
337,912 337,587 337,372 336,770 335,998 335,666 335,400 335,818
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 47.44 $ 45.51 $ 43.11 $ 41.04 $ 39.56 $ 38.51 $ 38.40 $ 37.29
$ 104.32 104.32 96.97 89.42 73.81 $ 74.79 72.85 65.54 74.79 74.22
65.54 95.00 89.47 72.30 65.54 38.73 62.99 51.38 38.73 68.25
26,920 26,428 26,211 26,231 26,517 26,544 26,589 26,314
384 389 401 402 403 409 413 416
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Table 2 - Overview of Results
Year ended October 31(1)
(millions of Canadian dollars) 2022 2021 2020 2019 2018
================================= ===== ===== ===== ===== =====
Net interest income 5,271 4,783 4,255 3,596 3,382
Non-interest income(2) 4,381 4,144 3,672 3,836 3,784
--------------------------------- ----- ----- ----- ----- -----
Total revenues 9,652 8,927 7,927 7,432 7,166
Non-interest expenses(3) 5,230 4,903 4,616 4,375 4,100
--------------------------------- ----- ----- ----- ----- -----
Income before provisions for
credit losses and income taxes 4,422 4,024 3,311 3,057 3,066
Provisions for credit losses 145 2 846 347 327
--------------------------------- ----- ----- ----- ----- -----
Income before income taxes 4,277 4,022 2,465 2,710 2,739
Income taxes 894 882 434 443 534
--------------------------------- ----- ----- ----- ----- -----
Net income 3,383 3,140 2,031 2,267 2,205
Non-controlling interests (1) - 42 66 87
--------------------------------- ----- ----- ----- ----- -----
Net income attributable to
the Bank's
shareholders and holders of
other equity instruments 3,384 3,140 1,989 2,201 2,118
================================= ===== ===== ===== ===== =====
(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) For fiscal 2021, Non-interest income had included a $33
million gain following a 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
(2020: $24 million foreign currency translation loss on a disposal
of subsidiaries; 2019: $79 million gain on disposal of Fiera
Capital Corporation shares, $50 million gain on disposal of
premises and equipment, and $33 million loss resulting from the
fair value measurement of an investment).
(3) For fiscal 2021, Non-interest expenses had included $9
million in intangible asset impairment losses (2020: $71 million in
impairment losses on premises and equipment and intangible assets;
2019: $57 million). For fiscal 2020, Non-interest expenses had
included $48 million in severance pay (2019: $10 million) and a $13
million charge related to Maple (2019: $11 million). An amount of
$45 million in provisions for onerous contracts had been recorded
in 2019.
Table 3 - Changes in Net Interest Income
Year ended October 31
(millions of Canadian dollars) 2022 2021 2020 2019 2018
====================================== ======= ======= ======= ======= =======
Personal and Commercial (1)
Net interest income 2,865 2,547 2,420 2,360 2,256
Average assets(2) 140,514 126,637 115,716 111,140 105,460
Average interest-bearing assets(2)(3) 133,754 120,956 110,544 106,995 101,446
Net interest margin(3) 2.14 % 2.11% 2.19% 2.21% 2.22%
-------------------------------------- ------- ------- ------- ------- -------
Wealth Management
Net interest income on a taxable
equivalent basis(4) 594 446 442 455 426
Average assets(2) 8,226 7,146 5,917 6,219 6,167
-------------------------------------- ------- ------- ------- ------- -------
Financial Markets (1)
Net interest income on a taxable
equivalent basis(4) 1,258 1,262 971 498 429
Average assets(2) 154,349 151,240 125,565 114,151 102,118
-------------------------------------- ------- ------- ------- ------- -------
USSF&I
Net interest income 1,090 907 807 656 584
Average assets(2) 18,890 16,150 14,336 10,985 9,270
-------------------------------------- ------- ------- ------- ------- -------
Other
Net interest income(4) (536) (379) (385) (373) (313)
Average assets(2)(5) 71,868 62,333 56,553 43,667 42,925
-------------------------------------- ------- ------- ------- ------- -------
Total
Net interest income 5,271 4,783 4,255 3,596 3,382
Average assets(2)(5) 393,847 363,506 318,087 286,162 265,940
====================================== ======= ======= ======= ======= =======
(1) For fiscal years prior to 2022, 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.
(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.
(4) For fiscal 2022, the Net interest income of the Financial
Markets segment was grossed up by $229 million (2021: $175 million;
2020: $202 million; 2019: $191 million; 2018: $141 million), the
Net interest income of the Other heading was grossed up by $5
million (2021: $6 million; 2020: $6 million; 2019: $3 million;
2018: $3 million), the Net interest income of the Wealth Management
segment was grossed up by $1 million in 2019. The effect of these
adjustments is reversed under the Other heading.
(5) The 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), except for the fiscal 2019 and 2018 figures.
Table 4 - Non-Interest Income
Year ended October 31
(millions of Canadian dollars) 2022 2021 2020 2019 2018
================================== ===== ===== ===== ===== =====
Underwriting and advisory
fees 324 415 314 246 322
Securities brokerage commissions 204 238 204 166 169
Mutual fund revenues 587 563 477 449 438
Investment management and
trust service fees 997 900 735 677 665
Credit fees 155 164 147 134 126
Revenues from acceptances,
letters of
credit and guarantee 335 342 320 283 277
Card revenues 186 148 138 175 159
Deposit and payment service
charges 298 274 262 271 280
Trading revenues (losses) 543 268 544 788 801
Gains (losses) on non-trading
securities, net 113 151 93 77 77
Insurance revenues, net 158 131 128 136 121
Foreign exchange revenues,
other than trading 211 202 164 137 134
Share in the net income of
associates and
joint ventures 28 23 28 34 28
Other(1) 242 325 118 263 187
---------------------------------- ----- ----- ----- ----- -----
4,381 4,144 3,672 3,836 3,784
---------------------------------- ----- ----- ----- ----- -----
Canada 4,299 3,992 3,574 3,645 3,488
United States 18 106 5 85 108
Other countries 64 46 93 106 188
---------------------------------- ----- ----- ----- ----- -----
Non-interest income as a %
of total revenues 45.4 % 46.4% 46.3% 51.6% 52.8%
================================== ===== ===== ===== ===== =====
(1) For fiscal 2021, Other revenues had included a $33 million
gain following a 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 (2020: $24
million foreign currency translation loss on a disposal of
subsidiaries; 2019 : $79 million gain on disposal of Fiera Capital
Corporation shares, $50 million gain on disposal of premises and
equipment, and $33 million loss resulting from the fair value
measurement of an investment).
Table 5 - Trading Activity Revenues
Year ended October 31
(millions of Canadian dollars) 2022 2021 2020 2019 2018
================================ ===== ===== ===== ===== =====
Net interest income related
to trading activity(1) 682 777 522 28 44
Taxable equivalent basis(2) 229 171 202 188 138
-------------------------------- ----- ----- ----- ----- -----
Net interest income related
to trading activity on
a taxable equivalent basis
(2) 911 948 724 216 182
-------------------------------- ----- ----- ----- ----- -----
Non-interest income related
to trading activity(1) 548 282 625 800 822
Taxable equivalent basis(2) 48 8 57 135 101
-------------------------------- ----- ----- ----- ----- -----
Non-interest income related
to trading activity on
a taxable equivalent basis
(2) 596 290 682 935 923
-------------------------------- ----- ----- ----- ----- -----
Trading activity revenues(1) 1,230 1,059 1,147 828 866
Taxable equivalent basis(2) 277 179 259 323 239
-------------------------------- ----- ----- ----- ----- -----
Trading activity revenues
on a taxable equivalent basis
(2) 1,507 1,238 1,406 1,151 1,105
-------------------------------- ----- ----- ----- ----- -----
Trading activity revenues
by segment
on a taxable equivalent basis
(2)
Financial Markets
Equities 979 685 706 621 575
Fixed-income 367 357 430 285 263
Commodities and foreign
exchange 156 128 132 126 130
-------------------------------- ----- ----- ----- ----- -----
1,502 1,170 1,268 1,032 968
Other segments 5 68 138 119 137
-------------------------------- ----- ----- ----- ----- -----
1,507 1,238 1,406 1,151 1,105
================================ ===== ===== ===== ===== =====
(1) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
(2) See the Financial Reporting Method section on pages 16 to 21
for additional information on non-GAAP financial measures. The
taxable equivalent basis presented in this table is related to
trading portfolios. The Bank also uses the taxable equivalent basis
for certain investment portfolios, and the amounts stood at $5
million for fiscal 2022 (2021: $10 million; 2020: $6 million; 2019:
$7 million; 2018: $6 million).
Table 6 - Non-Interest Expenses
Year ended October 31 (1)
(millions of Canadian dollars) 2022 2021 2020 2019 2018
================================= ======= ======= ======= ======= =======
Compensation and employee
benefits(2) 3,284 3,027 2,713 2,532 2,466
Occupancy(3) 157 147 151 254 193
Amortization - Premises
and equipment 155 152 140 44 43
Technology 589 557 510 446 412
Amortization - Technology(4) 326 314 366 332 245
Communications 57 53 58 62 63
Professional fees 249 246 244 249 244
Travel and business development 144 109 103 128 128
Capital and payroll taxes 32 52 73 70 79
Other(5) 237 246 258 258 227
--------------------------------- ------- ------- ------- ------- -------
Total 5,230 4,903 4,616 4,375 4,100
--------------------------------- ------- ------- ------- ------- -------
Canada 4,760 4,478 4,195 4,005 3,787
United States 209 203 209 210 205
Other countries 261 222 212 160 108
--------------------------------- ------- ------- ------- ------- -------
Efficiency ratio(6) 54.2 % 54.9% 58.2% 58.9% 57.2%
--------------------------------- ------- ------- ------- ------- -------
(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) For fiscal 2020, Compensation and employee benefits had
included $48 million in severance pay (2019: $10 million).
(3) For fiscal 2019, Occupancy expense had included $45 million
in provisions for onerous contracts.
(4) For fiscal 2021, the Amortization - Technology expense had
included $9 million in intangible asset impairment losses (2020:
$71 million in impairment losses on premises and equipment and
intangible assets; 2019: $57 million).
(5) For fiscal 2020, Other expenses had included a $13 million
charge related to Maple (2019: $11 million).
(6) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
Table 7 - Provisions for Credit Losses (1)
Year ended October 31
(millions of Canadian dollars) 2022 2021 2020 2019 2018
==================================== ======= ======= ======= ======= =======
Personal Banking (2)
Impaired loans - Stage 3 75 65 147 166 158
Non-impaired loans - Stages
1 and 2 9 (77) 121 8 9
----------------------------------- ------- ------- ------- ------- -------
84 (12) 268 174 167
---------------------------------- ------- ------- ------- ------- -------
Commercial Banking (3)
Impaired loans - Stage 3 13 26 76 31 28
Non-impaired loans - Stages
1 and 2 - 26 103 19 14
----------------------------------- ------- ------- ------- ------- -------
13 52 179 50 42
---------------------------------- ------- ------- ------- ------- -------
Wealth Management
Impaired loans - Stage 3 1 1 4 - -
Non-impaired loans - Stages
1 and 2 2 - 3 - 1
----------------------------------- ------- ------- ------- ------- -------
3 1 7 - 1
---------------------------------- ------- ------- ------- ------- -------
Financial Markets (3)
Impaired loans - Stage 3 1 78 99 22 12
Non-impaired loans - Stages
1 and 2 (24) (102) 210 21 11
----------------------------------- ------- ------- ------- ------- -------
(23) (24) 309 43 23
---------------------------------- ------- ------- ------- ------- -------
USSF&I
Impaired loans - Stage 3 48 13 46 94 126
Non-impaired loans - Stages
1 and 2 12 (2) 41 (24) (3)
POCI loans 6 (26) (7) 10 (29)
----------------------------------- ------- ------- ------- ------- -------
66 (15) 80 80 94
---------------------------------- ------- ------- ------- ------- -------
Other
Impaired loans - Stage 3 - - - - -
Non-impaired loans - Stages
1 and 2 2 - 3 - -
----------------------------------- ------- ------- ------- ------- -------
2 - 3 - -
---------------------------------- ------- ------- ------- ------- -------
Total provisions for credit
losses
Impaired loans - Stage 3 138 183 372 313 324
Non-impaired loans - Stages
1 and 2 1 (155) 481 24 32
POCI loans 6 (26) (7) 10 (29)
------------------------------------ ------- ------- ------- ------- -------
145 2 846 347 327
------------------------------------ ------- ------- ------- ------- -------
Average loans and acceptances 194,340 172,323 159,275 148,765 139,603
------------------------------------ ------- ------- ------- ------- -------
Provisions for credit losses
on impaired loans
excluding POCI loans as a
% of average loans and
acceptances(4) 0.07 % 0.11% 0.23% 0.21% 0.23%
----------------------------------- ------- ------- ------- ------- -------
Provisions for credit losses
as a % of average loans and
acceptances(4) 0.07 % -% 0.53% 0.23% 0.23%
=================================== ======= ======= ======= ======= =======
(1) The Impaired loans - Stage 3 category presented in this
table reflects provisions for credit losses on loans classified in
Stage 3 of the expected credit loss model and excludes POCI
loans.
(2) Includes credit card receivables.
(3) For fiscal years prior to 2022, certain amounts have been
reclassified to reflect a transfer of the loan portfolio of
borrowers in the "Oil and gas" and "Pipelines" sectors from the
Personal and Commercial segment to the Financial Markets
segment.
(4) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
Table 8 - Change in Average Volumes (1)
Year ended October
31
(millions of Canadian
dollars) 2022 2021 2020 2019 2018
======================= ============== ============== ============== ============== ==============
Average Average Average Average Average
volume Rate volume Rate volume Rate volume Rate volume Rate
$ % $ % $ % $ % $ %
====================== ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Assets
Deposits with financial
institutions 42,042 1.55 40,294 0.31 24,966 0.44 13,172 1.64 16,322 1.27
Securities 111,863 1.77 116,023 1.25 97,025 1.63 85,772 1.74 75,923 1.45
Securities purchased
under reverse
repurchase agreements
and
securities borrowed 16,255 2.08 11,559 0.90 16,408 1.39 22,472 1.60 20,090 1.09
Residential mortgage
loans 75,712 2.90 68,297 2.93 59,801 3.13 54,493 3.30 51,509 3.07
Personal loans 42,723 3.82 38,434 3.16 36,273 3.68 35,816 4.25 35,041 3.98
Credit card receivables 2,133 12.81 1,864 13.47 1,995 14.62 2,221 14.06 2,165 13.69
Business and government
loans 58,947 3.63 51,229 3.06 47,272 4.13 42,922 5.34 38,204 5.06
POCI loans 493 32.68 686 22.64 1,073 16.45 1,386 13.37 1,486 13.12
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Average
interest-bearing
assets(1) 350,168 2.75 328,386 2.13 284,813 2.66 258,254 3.17 240,740 2.88
Other assets(2) 43,679 35,120 33,274 27,908 25,200
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
393,847 2.43 363,506 1.93 318,087 2.38 286,162 2.86 265,940 2.61
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Liabilities and equity
Personal deposits 72,927 0.67 68,334 0.42 63,634 0.87 58,680 1.22 53,179 1.08
Deposit-taking
institutions 5,695 0.88 6,522 0.09 6,494 0.63 5,987 1.80 5,985 1.45
Other deposits 180,307 1.28 161,373 0.68 137,253 1.26 119,793 2.06 108,012 1.66
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
258,929 1.10 236,229 0.58 207,381 1.12 184,460 1.79 167,176 1.47
Subordinated debt 960 3.70 758 3.22 759 3.25 758 3.25 564 3.20
Obligations other
than deposits(3) 81,659 1.13 80,808 0.67 70,973 1.12 67,638 1.67 67,220 1.57
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Average
interest-bearing
liabilities(1) 341,548 1.25 317,795 0.69 279,113 1.19 252,856 1.81 234,960 1.57
Other liabilities 30,209 28,195 23,400 18,593 17,034
Equity(2) 22,090 17,516 15,574 14,713 13,946
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
393,847 1.09 363,506 0.61 318,087 1.04 286,162 1.60 265,940 1.34
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net interest margin(4) 1.34 1.32 1.34 1.26 1.27
======================= ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
(1) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
(2) The 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 ), except for the fiscal 2019 and 2018 figures .
(3) Average obligations other than deposits represent the
average of the daily balances for the fiscal year of obligations
related to securities sold short, obligations related to securities
sold under repurchase agreements and securities loaned, and
liabilities related to transferred receivables.
(4) Calculated by dividing net interest income by average assets.
Table 9 - Distribution of Gross Loans and Acceptances by
Borrower Category Under
Basel Asset Classes
As at October 31
(millions of Canadian
dollars) 2022 2021 2020 2019 2018
============================= ============== ============== ============== ============== ==============
$ % $ % $ % $ % $ %
============================ ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Residential mortgage(1) 95,575 46.0 89,035 48.5 81,543 49.2 74,448 48.4 70,591 48.1
Qualifying revolving
retail 3,801 1.8 3,589 2.0 3,599 2.2 4,099 2.7 4,211 2.9
Other retail 14,899 7.2 12,949 7.0 11,569 7.0 11,606 7.5 12,246 8.3
Agriculture 8,109 3.9 7,357 4.0 6,696 4.0 6,308 4.1 5,759 3.9
Oil and gas(2) 1,435 0.7 1,807 1.0 2,506 1.5 2,742 1.8 2,506 1.7
Mining 1,049 0.5 529 0.3 756 0.5 758 0.5 1,032 0.7
Utilities(2) 9,682 4.6 7,687 4.2 6,640 4.0 4,713 3.0 4,033 2.7
Non-real-estate
construction(3) 1,935 0.9 1,541 0.8 1,079 0.7 1,168 0.8 1,006 0.7
Manufacturing(2) 7,374 3.6 5,720 3.1 5,803 3.5 6,549 4.3 5,535 3.8
Wholesale 3,241 1.6 2,598 1.4 2,206 1.3 2,221 1.4 2,163 1.5
Retail 3,494 1.7 2,978 1.6 2,955 1.8 3,289 2.1 3,069 2.1
Transportation 2,209 1.1 1,811 1.0 1,528 0.9 1,682 1.1 1,452 1.0
Communications 1,830 0.9 1,441 0.8 1,184 0.7 1,601 1.0 1,597 1.1
Financial services(2) 10,777 5.2 8,870 4.8 7,476 4.4 6,115 3.9 5,482 3.7
Real estate and
real-estate-construction(4) 22,382 10.8 18,195 9.9 14,171 8.6 11,635 7.6 11,671 8.0
Professional services 2,338 1.1 1,872 1.0 1,490 0.9 1,845 1.2 1,582 1.1
Education and health
care 3,412 1.6 4,073 2.2 3,800 2.3 3,520 2.3 3,284 2.2
Other services 6,247 3.0 5,875 3.2 5,296 3.2 4,937 3.2 4,715 3.2
Government 1,661 0.8 1,159 0.6 1,160 0.7 1,071 0.7 1,445 1.0
Other(2) 5,790 2.8 4,137 2.3 3,586 2.1 2,456 1.6 1,785 1.2
POCI loans 459 0.2 464 0.3 855 0.5 1,166 0.8 1,576 1.1
----------------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
207,699 100.0 183,687 100.0 165,898 100.0 153,929 100.0 146,740 100.0
============================= ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
(1) Includes residential mortgage loans on one- to four-unit
dwellings (Basel definition) and home equity lines of credit.
(2) In fiscal 2022, the presentation was changed to better align
borrower categories with their definitions. Comparative figures
have been reclassified.
(3) Includes civil engineering loans, public-private partnership
loans, and project finance loans.
(4) Includes residential mortgages on dwellings of five or more units and SME loans.
Table 10 - Impaired Loans
As at October 31
(millions of Canadian dollars) 2022 2021 2020 2019 2018
==================================== ===== ===== ===== ===== =====
Gross impaired loans
Personal Banking 176 169 287 256 266
Commercial Banking(1) 206 244 333 294 231
Wealth Management 21 23 8 5 5
Financial Markets(1) 167 162 134 93 92
USSF&I 242 64 55 36 36
Gross impaired loans excluding
POCI loans(2) 812 662 817 684 630
Gross POCI loans 459 464 855 1,166 1,576
------------------------------------ ----- ----- ----- ----- -----
1,271 1,126 1,672 1,850 2,206
----------------------------------- ----- ----- ----- ----- -----
Net impaired loans(3)
Personal Banking 104 106 206 187 199
Commercial Banking(1) 89 107 184 192 139
Wealth Management 15 16 2 3 3
Financial Markets(1) 91 14 43 53 48
USSF&I 180 40 30 15 15
Net impaired loans excluding
POCI loans(2) 479 283 465 450 404
Net POCI loans 551 553 921 1,223 1,642
------------------------------------ ----- ----- ----- ----- -----
1,030 836 1,386 1,673 2,046
----------------------------------- ----- ----- ----- ----- -----
Allowances for credit losses
on impaired loans
excluding POCI loans(2) 333 379 352 234 226
Allowances for credit losses
on POCI loans (92) (89) (66) (57) (66)
------------------------------------ ----- ----- ----- ----- -----
Allowances for credit losses
on impaired loans 241 290 286 177 160
------------------------------------ ----- ----- ----- ----- -----
Provisioning rate excluding
POCI loans(2) 41.0 % 57.3% 43.1% 34.2% 35.9%
Gross impaired loans excluding
POCI loans as a %
of total loans and acceptances(2) 0.39 % 0.36% 0.49% 0.45% 0.43%
Net impaired loans excluding
POCI loans as a %
of total loans and acceptances(2) 0.23 % 0.15% 0.28% 0.29% 0.28%
==================================== ===== ===== ===== ===== =====
(1) For fiscal years prior to 2022, certain amounts have been
reclassified to reflect a transfer of the loan portfolio of
borrowers in the "Oil and gas" and "Pipelines" sectors from the
Personal and Commercial segment to the Financial Markets
segment.
(2) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
(3) Net impaired loans are presented net of allowances for
credit losses on Stage 3 loan amounts drawn and on POCI loans.
Table 11 - Allowances for Credit Losses
Year ended October 31
(millions of Canadian dollars) 2022 2021 2020 2019 2018
================================= ===== ===== ===== ===== =====
Balance at beginning 1,169 1,343 755 714 735
Provisions for credit losses 145 2 846 347 327
Write-offs (233) (192) (294) (351) (367)
Disposals - (14) - (1) (24)
Recoveries 40 44 44 52 45
Exchange and other movements 10 (14) (8) (6) (2)
-------------------------------- ----- ----- ----- ----- -----
Balance at end 1,131 1,169 1,343 755 714
-------------------------------- ----- ----- ----- ----- -----
Composition of allowances:
Allowances for credit losses
on impaired loans excluding
POCI loans(1) 333 379 352 234 226
Allowances for credit losses
on POCI loans (92) (89) (66) (57) (66)
Allowances for credit losses
on non-impaired loans 714 708 872 501 498
Allowances for credit losses
on off-balance-sheet
commitments and other assets 176 171 185 77 56
-------------------------------- ----- ----- ----- ----- -----
(1) See the Glossary section on pages 122 to 125 for details on
the composition of these measures.
Table 12 - Deposits
As at October 31
(millions of Canadian
dollars) 2022 2021 2020 2019 2018
======================= ============== ============== ============== ============== ==============
$ % $ % $ % $ % $ %
====================== ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Personal 78,811 29.6 70,076 29.1 67,499 31.3 60,065 31.7 55,688 32.6
Business and government 184,230 69.1 167,870 69.7 143,787 66.6 125,266 66.1 110,321 64.6
Deposit-taking
institutions 3,353 1.3 2,992 1.2 4,592 2.1 4,235 2.2 4,821 2.8
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total 266,394 100.0 240,938 100.0 215,878 100.0 189,566 100.0 170,830 100.0
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Canada 238,239 89.5 216,906 90.0 195,730 90.7 172,764 91.1 156,054 91.4
United States 9,147 3.4 9,234 3.8 8,126 3.7 6,907 3.7 6,048 3.5
Other countries 19,008 7.1 14,798 6.2 12,022 5.6 9,895 5.2 8,728 5.1
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total 266,394 100.0 240,938 100.0 215,878 100.0 189,566 100.0 170,830 100.0
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Personal deposits
as a %
of total assets 19.5 19.7 20.4 21.3 21.2
======================= ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Glossary
Acceptances
Acceptances and the customers' liability under acceptances
constitute a guarantee of payment by a bank and can be traded in
the money market. The Bank earns a "stamping fee" for providing
this guarantee.
Allowances for credit losses
Allowances for credit losses represent management's unbiased
estimate of expected credit losses as at the balance sheet date.
These allowances are primarily related to loans and
off-balance-sheet items such as loan commitments and financial
guarantees.
Assets under administration
Assets in respect of which a financial institution provides
administrative services on behalf of the clients who own the
assets. Such services include custodial services, collection of
investment income, settlement of purchase and sale transactions,
and record-keeping. Assets under administration are not reported on
the balance sheet of the institution offering such services.
Assets under management
Assets managed by a financial institution and that are
beneficially owned by clients. Management services are more
comprehensive than administrative services and include selecting
investments or offering investment advice. Assets under management,
which may also be administered by the financial institution, are
not reported on the balance sheet of the institution offering such
services.
Available TLAC
Available TLAC includes total capital as well as certain senior
unsecured debt subject to the federal government's bail-in
regulations that satisfy all of the eligibility criteria in OSFI's
Total Loss Absorbing Capacity (TLAC) Guideline.
Average interest-bearing assets
Average interest-bearing assets include interest-bearing
deposits with financial institutions and certain cash items,
securities, securities purchased under reverse repurchase
agreements and securities borrowed, and loans, while excluding
customers' liability under acceptances and other assets. The
average is calculated based on the daily balances for the
period.
Average interest-bearing assets, non-trading
Average interest-bearing assets, non-trading, include
interest-bearing deposits with financial institutions and certain
cash items, securities purchased under reverse repurchase
agreements and securities borrowed, and loans, while excluding
other assets and assets related to trading activities. The average
is calculated based on the daily balances for the period.
Average volumes
Average volumes represent the average of the daily balances for
the period of the consolidated balance sheet items.
Basic earnings per share
Basic earnings per share is calculated by dividing net income
attributable to common shareholders by the weighted average basic
number of common shares outstanding.
Basis point (bps)
Unit of measure equal to one one-hundredth of a percentage point
(0.01%).
Book value of a common share
The book value of a common share is calculated by dividing
common shareholders' equity by the number of common shares on a
given date.
Common Equity Tier 1 (CET1) capital ratio
Common Equity CET1 capital consists of common shareholders'
equity less goodwill, intangible assets, and other capital
deductions. The CET1 capital ratio is calculated by dividing total
CET1 capital by the corresponding risk-weighted assets.
Compound annual growth rate (CAGR)
CAGR is a rate of growth that shows, for a period exceeding one
year, the annual change as though the growth had been constant
throughout the period.
Derivative financial instruments
Derivative financial instruments are financial contracts whose
value is derived from an underlying interest rate, exchange rate or
equity, commodity or credit instrument or index. Examples of
derivatives include swaps, options, forward rate agreements, and
futures. The notional amount of the derivative is the contract
amount used as a reference point to calculate the payments to be
exchanged between the two parties, and the notional amount itself
is generally not exchanged by the parties.
Diluted earnings per share
Diluted earnings per share is calculated by dividing net income
attributable to common shareholders by the weighted average number
of common shares outstanding after taking into account the dilution
effect of stock options using the treasury stock method and any
gain (loss) on the redemption of preferred shares.
Dividend payout ratio
The dividend payout ratio represents the dividends of common
shares (per share amount) expressed as a percentage of basic
earnings per share.
Economic capital
Economic capital is the internal measure used by the Bank to
determine the capital required for its solvency 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.
Efficiency ratio
The efficiency ratio represents non-interest expenses expressed
as a percentage of total revenues. It measures the efficiency of
the Bank's operations.
Fair value
The fair value of a financial instrument is the price that would
be received to sell an asset or paid to transfer a liability in an
orderly transaction in the principal market at the measurement date
under current market conditions (i.e., an exit price).
Gross impaired loans as a percentage of total loans and
acceptances
This measure represents gross impaired loans expressed as a
percentage of the balance of loans and acceptances.
Gross impaired loans excluding POCI loans
Gross impaired loans excluding POCI loans are all loans
classified in Stage 3 of the expected credit loss model excluding
POCI loans.
Gross impaired loans excluding POCI loans as a percentage of
total loans and acceptances
This measure represents gross impaired loans excluding POCI
loans expressed as a percentage of the balance of loans and
acceptances.
Hedging
The purpose of a hedging transaction is to modify the Bank's
exposure to one or more risks by creating an offset between changes
in the fair value of, or the cash flows attributable to, the hedged
item and the hedging instrument.
Impaired Loans
The Bank considers a financial asset, other than a credit card
receivable, to be credit-impaired when one or more events that have
a detrimental impact on the estimated future cash flows of the
financial asset have occurred or when contractual payments are 90
days past due. Credit card receivables are considered
credit-impaired and are fully written off at the earlier of the
following dates: when a notice of bankruptcy is received, a
settlement proposal is made, or contractual payments are 180 days
past due.
Leverage ratio
The leverage ratio is calculated by dividing 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.
Liquidity coverage ratio (LCR)
The LCR is a measure designed to ensure that the Bank has
sufficient high-quality liquid assets to cover net cash outflows
given a severe, 30-day liquidity crisis.
Loans and acceptances
Loans and acceptances represent the sum of loans and of the
customers' liability under acceptances.
Loan-to-value ratio
The loan-to-value ratio is calculated according to the total
facility amount for residential mortgages and home equity lines of
credit divided by the value of the related residential
property.
Master netting agreement
Legal agreement between two parties that have multiple
derivative contracts with each other that provides for the net
settlement of all contracts through a single payment, in the event
of default, insolvency or bankruptcy.
Net impaired loans
Net impaired loans are gross impaired loans presented net of
allowances for credit losses on Stage 3 loan amounts drawn.
Net impaired loans as a percentage of total loans and
acceptances
This measure represents net impaired loans as a percentage of
the balance of loans and acceptances.
Net impaired loans excluding POCI loans
Net impaired loans excluding POCI loans are gross impaired loans
excluding POCI loans presented net of allowances for credit losses
on amounts drawn on Stage 3 loans granted by the Bank.
Net interest income from trading activities
Net interest income from trading activities 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.
Net interest income, non-trading
Net interest income, non-trading, comprises revenues related to
financial assets and liabilities associated with non-trading
activities, net of interest expenses and interest income related to
the financing of these financial assets and liabilities.
Net interest margin
Net interest margin is calculated by dividing net interest
income by average interest-bearing assets.
Net stable funding ratio (NSFR)
The NSFR ratio is a measure that helps guarantee that a bank is
maintaining a stable funding profile to reduce the risk of funding
stress.
Net write-offs as a percentage of average loans and
acceptances
This measure represents the net write-offs (net of recoveries)
expressed as a percentage of average loans and acceptances.
Non-interest income related to trading activities
Non-interest income related to trading activities 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.
Office of the Superintendent of Financial Institutions (Canada)
(OSFI)
The mandate of OSFI is to regulate and supervise financial
institutions and private pension plans subject to federal
oversight, to help minimize undue losses to depositors and
policyholders and, thereby, to contribute to public confidence in
the Canadian financial system.
Operating leverage
Operating leverage is the difference between the growth rate for
total revenues and the growth rate for non-interest expenses.
Provisioning rate
This measure represents the allowances for credit losses on
impaired loans expressed as a percentage of gross impaired
loans.
Provisioning rate excluding POCI loans
This measure represents the allowances for credit losses on
impaired loans excluding POCI loans expressed as a percentage of
gross impaired loans excluding POCI loans.
Provisions for credit losses
Amount charged to income necessary to bring the allowances for
credit losses to a level deemed appropriate by management and is
comprised of provisions for credit losses on impaired and
non-impaired financial assets.
Provisions for credit losses as a percentage of average loans
and acceptances
This measure represents the provisions for credit losses
expressed as a percentage of average loans and acceptances.
Provisions for credit losses on impaired loans excluding POCI
loans as a percentage of average loans and acceptances or
provisions for credit losses on impaired loans excluding POCI loans
ratio
This measure represents the provisions for credit losses on
impaired loans excluding POCI loans expressed as a percentage of
average loans and acceptances.
Provisions for credit losses on impaired loans as a percentage
of average loans and acceptances
This measure represents the provisions for credit losses on
impaired loans expressed as a percentage of average loans and
acceptances.
Return on average assets
Return on average assets represents net income expressed as a
percentage of average assets.
Return on common shareholders' equity (ROE)
ROE represents 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.
Risk-weighted assets
Assets are risk weighted according to the guidelines established
by the Office of the Superintendent of Financial Institutions
(Canada). In the Standardized calculation approach, risk factors
are applied to the face value of certain assets in order to reflect
comparable risk levels. In the Advanced Internal Ratings-Based
(AIRB) Approach, risk-weighted assets are derived from the Bank's
internal models, which represent the Bank's own assessment of the
risks it incurs. Off-balance-sheet instruments are converted to
balance sheet (or credit) equivalents by adjusting the notional
values before applying the appropriate risk-weighting factors.
Securities purchased under reverse repurchase agreements
Securities purchased by the Bank from a client pursuant to an
agreement under which the securities will be resold to the same
client on a specified date and at a specified price. Such an
agreement is a form of short-term collateralized lending.
Securities sold under repurchase agreements
Financial obligations related to securities sold pursuant to an
agreement under which the securities will be repurchased on a
specified date and at a specified price. Such an agreement is a
form of short-term funding.
Stressed VaR (SVaR)
SVaR is a statistical measure of risk that replicates the VaR
calculation method but uses, instead of a two-year history of risk
factor changes, a 12--month data period corresponding to a
continuous period of significant financial stress that is relevant
in terms of the Bank's portfolios.
Structured entity
A structured entity is an entity created to accomplish a narrow
and well-defined objective and is designed so that voting or
similar rights are not the dominant factor in deciding who controls
the entity, such as when any voting rights relate solely to
administrative tasks and the relevant activities are directed by
means of contractual arrangements.
Taxable equivalent
Taxable equivalent basis is a calculation method that consists
in grossing up certain tax-exempt income (particularly dividends)
by the amount of income tax that would have otherwise been payable.
The Bank uses the taxable equivalent basis to calculate net
interest income, non-interest income and income taxes.
Tier 1 capital ratio
Tier 1 capital ratio consists of Common Equity Tier 1 capital
and Additional Tier 1 instruments, namely, qualifying
non-cumulative preferred shares and the eligible amount of
innovative instruments. Tier 1 capital ratio is calculated by
dividing Tier 1 capital, less regulatory adjustments, by the
corresponding risk-weighted assets.
TLAC leverage ratio
The TLAC leverage ratio is an independent risk measure that is
calculated by dividing available TLAC by total exposure, as set out
in OSFI's Total Loss Absorbing Capacity (TLAC) Guideline.
TLAC ratio
The TLAC ratio is a measure used to assess whether a non-viable
Domestic Systemically Important Bank (D-SIB) has sufficient
loss-absorbing capacity to support its recapitalization. It is
calculated by dividing available TLAC by risk weighted assets, as
set out in OSFI's Total Loss Absorbing Capacity (TLAC)
Guideline.
Total capital ratio
Total capital is the sum of Tier 1 and Tier 2 capital. Tier 2
capital consists of the eligible portion of subordinated debt and
certain allowances for credit losses. The Total capital ratio is
calculated by dividing total capital, less regulatory adjustments,
by the corresponding risk-weighted assets.
Total shareholder return (TSR)
TSR represents the average total return on an investment in the
Bank's common shares. The return includes changes in share price
and assumes that the dividends received were reinvested in
additional common shares of the Bank.
Trading activity revenues
Trading activity revenues consist of the net interest income and
the non-interest income related to trading activities. Net interest
income 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. Non-interest income 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.
Value-at-Risk (VaR)
VaR is a statistical measure of risk that is used to quantify
market risks across products, per types of risks, and aggregate
risk on a portfolio basis. VaR is defined as the maximum loss at a
specific confidence level over a certain horizon under normal
market conditions. The VaR method has the advantage of providing a
uniform measurement of financial-instrument-related market risks
based on a single statistical confidence level and time
horizon.
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END
FR ZBLFXLFLEFBV
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November 30, 2022 10:53 ET (15:53 GMT)
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