TIDM32SS
RNS Number : 1273I
National Bank of Canada
30 November 2022
Regulatory Announcement
National Bank of Canada
November 30, 2022
2022 Annual Financial Statements (Part 1)
National Bank of Canada (the "Bank") announces publication of
its 2022 Annual Report, including the audited consolidated
financial statements for the years ended 31 October 2022 and 2021,
together with the notes thereto and independent auditor's report
thereon (the "2022 Financial Statements"). The 2022 Financial
Statements have been uploaded to the National Storage Mechanism and
will shortly be available at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism and are
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 Financial Statements, the 2022
Annual Report and the 2022 Annual CEO and CFO Certifications,
please click on the following links:
http://www.rns-pdf.londonstockexchange.com/rns/1273I_1-2022-11-30.pdf
Financial Statements
Management's Responsibility for
Financial Reporting 128
Independent Auditor's Report 129
Consolidated Balance Sheets 132
Consolidated Statements of Income 133
Consolidated Statements of Comprehensive
Income 134
Consolidated Statements of Changes
in Equity 136
Consolidated Statements of Cash
Flows 137
Notes to the Audited Consolidated Financial
Statements 138
Management's Responsibility for Financial Reporting
The consolidated financial statements of National Bank of Canada
(the Bank) have been prepared in accordance with section 308(4) of
the Bank Act (Canada), which states that, except as otherwise
specified by the Office of the Superintendent of Financial
Institutions (Canada) (OSFI), the financial statements are to be
prepared in accordance with International Financial Reporting
Standards (IFRS), as issued by the International Accounting
Standards Board (IASB). IFRS represent Canadian generally accepted
accounting principles (GAAP). None of the OSFI accounting
requirements are exceptions to IFRS.
Management maintains the accounting and internal control systems
needed to discharge its responsibility, which is to provide
reasonable assurance that the financial accounts are accurate and
complete and that the Bank's assets are adequately safeguarded.
Controls that are currently in place include quality standards on
staff hiring and training; the implementation of organizational
structures with clear divisions of responsibility and
accountability for performance; the Code of Professional Conduct;
and the communication of operating policies and procedures.
As Chief Executive Officer and as Chief Financial Officer, we
have overseen the evaluation of the design and operation of the
Bank's internal control over financial reporting in accordance with
National Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings released by the Canadian Securities
Administrators. Based on the evaluation work performed, we have
concluded that the internal control over financial reporting and
the disclosure controls and procedures were effective as at October
31, 2022 and that they provide reasonable assurance that the Bank's
financial information is reliable and that its consolidated
financial statements have been prepared in accordance with
IFRS.
The Board of Directors (the Board) is responsible for reviewing
and approving the financial information contained in the Annual
Report. Acting through the Audit Committee, the Board also oversees
the presentation of the consolidated financial statements and
ensures that accounting and control systems are maintained.
Composed of directors who are neither officers nor employees of the
Bank, the Audit Committee is responsible, through Internal Audit,
for performing an independent and objective review of the Bank's
internal control effectiveness, i.e., governance processes, risk
management processes and control measures. Furthermore, the Audit
Committee reviews the consolidated financial statements and
recommends their approval to the Board.
The control systems are further supported by the presence of the
Compliance Service, which exercises independent oversight and
evaluation in order to assist managers in effectively managing
regulatory compliance risk and to obtain reasonable assurance that
the Bank is compliant with regulatory requirements.
Both the Senior Vice-President, Internal Audit and the Senior
Vice-President, Chief Compliance Officer and Chief Anti-Money
Laundering Officer have a direct functional link to the Chair of
the Audit Committee and to the Chair of the Risk Management
Committee. They both also have direct access to the President and
Chief Executive Officer.
In accordance with the Bank Act (Canada), OSFI is mandated to
protect the rights and interests of depositors. Accordingly, OSFI
examines and enquires into the business and affairs of the Bank, as
deemed necessary, to ensure that the provisions of the Bank Act
(Canada) are being satisfied and that the Bank is in sound
financial condition.
The independent auditor, Deloitte LLP, whose report follows, was
appointed by the shareholders at the recommendation of the Board.
The auditor has full and unrestricted access to the Audit Committee
to discuss audit and financial reporting matters.
Laurent Ferreira Marie Chantal Gingras
President and Chief Executive Officer Chief Financial Officer and Executive
Vice-President, Finance
Montreal, Canada, November 29, 2022
Independent Auditor's Report
To the Shareholders of National Bank of Canada
Opinion
We have audited the consolidated financial statements of
National Bank of Canada (the Bank), which comprise the consolidated
balance sheets as at October 31, 2022 and 2021, and the
consolidated statements of income, the consolidated statements of
comprehensive income, the consolidated statements of changes in
equity and the consolidated statements of cash flows for the years
then ended, and notes to the consolidated financial statements,
including a summary of significant accounting policies
(collectively referred to as the "financial statements").
In our opinion, the accompanying financial statements present
fairly, in all material respects, the financial position of the
Bank as at October 31, 2022 and 2021, and its financial performance
and its cash flows for the years then ended in accordance with
International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally
accepted auditing standards (Canadian GAAS). Our responsibilities
under those standards are further described in the Auditor's
Responsibilities for the Audit of the Financial Statements section
of our report. We are independent of the Bank in accordance with
the ethical requirements that are relevant to our audit of the
financial statements in Canada, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the financial
statements for the year ended October 31, 2022. These matters were
addressed in the context of our audit of the financial statements
as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
Allowances for Credit Losses - Refer to Notes 1 and 7 to the
Financial Statements
Key Audit Matter Description
The allowances for credit losses represent management's estimate
of expected credit losses (ECL) on financial assets calculated
under the IFRS 9 - Financial Instruments ECL framework. The
calculation of ECL is based on the probability of default (PD),
loss given default (LGD), and exposure at default (EAD) of the
underlying assets and represents an unbiased and
probability-weighted estimate of losses expected to occur in the
future based on forecasts of macroeconomic variables for three
scenarios. Lifetime ECL is recorded for financial assets that have
experienced significant increases in credit risk (SICR) since
initial recognition or that are impaired; otherwise, 12-month ECL
is recorded. Given uncertainty surrounding the key inputs used to
measure credit losses, the Bank has applied expert credit judgment
to adjust the modelled ECL results.
We have identified the allowances for credit losses as a key
audit matter due to the inherent complexity of the ECL models used
and the significant judgment required by management in relation to
the forward-looking nature of some key assumptions, including the
impact of a possible recession on the economy. Significant auditor
judgment was required in evaluating: (i) the models and
methodologies used to measure ECL; (ii) the forecasts of
macroeconomic scenarios and their probability weighting; (iii) the
determination of SICR; and (iv) the adjustments to the modelled ECL
results representing management's expert credit judgment. Auditing
the ECL models and the key judgments and assumptions required a
high degree of auditor judgment and an increased extent of audit
effort, including the involvement of professionals with specialized
skills in credit risk and economics.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to the models and the key judgments
and assumptions used by management to estimate the ECL included the
following, among others:
-- With the assistance of professionals with specialized skills in credit risk or economics:
o For a selection of ECL models, evaluated the appropriateness
of the models used to estimate ECL;
o Evaluated the forecasts of macroeconomic scenarios and their
probability weighting by comparing them against independently
developed forecasts and publicly available industry data, including
the impact of a possible recession;
o Assessed management's determination of SICR and the
appropriateness of the related model's programming;
o Assessed the adjustments to the modelled ECL results by
evaluating management's expert credit judgment.
Independent Auditor's Report (cont.)
Income Taxes - Uncertain Tax Positions - Refer to Notes 1 and 24
to the Financial Statements
Key Audit Matter Description
In the normal course of its business, the Bank is involved in a
number of transactions for which the tax impacts are uncertain. The
Bank accounts for provisions for uncertain tax positions that
adequately represent the risk stemming from tax matters under
discussion or being audited by tax authorities or from other
matters involving uncertainty. These provisions reflect
management's best possible estimate of the amounts that may have to
be paid based on qualitative assessments of all relevant factors.
As disclosed in Note 24, the Bank was reassessed by the tax
authorities for additional income taxes and interest in respect of
certain Canadian dividends received by the Bank for certain
taxation years and may be reassessed for subsequent taxation years
in regard to similar activities. The Bank has not recognized any
tax liability related to these uncertain tax positions.
We have identified the assessment of the accounting of the
uncertain tax positions related to certain Canadian dividends as a
key audit matter given the significant judgment made by management
when evaluating the probability of acceptance of the Bank's tax
positions and when interpreting relevant tax and case law and
administrative positions. Auditing these judgments required a high
degree of auditor judgment and resulted in an increased extent of
audit effort, including the involvement of tax specialists.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures pertaining to the assessment of the
accounting of the uncertain tax positions related to certain
Canadian dividends included the following, among others:
-- With the assistance of tax specialists, evaluated
management's assessment of the probability of acceptance of the
Bank's tax positions by assessing:
o The Bank's interpretations of relevant tax and case law and
administrative positions;
o The correspondence with the relevant tax authorities; and
o The advice and legal opinions obtained by the Bank's external
tax advisors.
Other Information
Management is responsible for the other information. The other
information comprises:
-- Management's Discussion and Analysis; and
-- The information, other than the financial statements and our
auditor's report thereon, in the Annual Report.
Our opinion on the financial statements does not cover the other
information and we do not and will not express any form of
assurance conclusion thereon. In connection with our audit of the
financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other
information is materially inconsistent with the financial
statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated.
We obtained Management's Discussion and Analysis and the Annual
Report prior to the date of this auditor's report. If, based on the
work we have performed on this other information, we conclude that
there is a material misstatement of this other information, we are
required to report that fact in this auditor's report. We have
nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance
for the Financial Statements
Management is responsible for the preparation and fair
presentation of the financial statements in accordance with IFRS,
and for such internal control as management determines is necessary
to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible
for assessing the Bank's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless management
either intends to liquidate the Bank or to cease operations, or has
no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the
Bank's financial reporting process.
Auditor's Responsibilities for the Audit of the Financial
Statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian GAAS will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
As part of an audit in accordance with Canadian GAAS, we
exercise professional judgment and maintain professional skepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Bank's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by management.
-- Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Bank's ability
to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our
auditor's report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor's report. However, future events or
conditions may cause the Bank to cease to continue as a going
concern.
-- Evaluate the overall presentation, structure and content of
the financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the Bank to express an opinion on the financial statements. We are
responsible for the direction, supervision and performance of the
group audit. We remain solely responsible for our audit
opinion.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the financial statements of the
current period and are therefore the key audit matters. We describe
these matters in our auditor's report unless law or regulation
precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The engagement partner on the audit resulting in this
independent auditor's report is Carl Magnan.
/s/ Deloitte LLP(1)
November 29, 2022
Montreal, Quebec
(1) CPA auditor, public accountancy permit No. A121501
Consolidated Balance Sheets
As at October 31 2022 2021(1)
============================================================ ========= ======= =======
Assets
Cash and deposits with financial institutions 31,870 33,879
------------------------------------------------------------ --------- ------- -------
Notes 3,
Securities 4 and 6
At fair value through profit or loss 87,375 84,811
At fair value through other comprehensive income 8,828 9,583
At amortized cost 13,516 11,910
------------------------------------------------------------ --------- ------- -------
109,719 106,304
--------------------------------------------------------------------- ------- -------
Securities purchased under reverse repurchase
agreements
and securities borrowed 26,486 7,516
------------------------------------------------------------------------ ------- -------
Loans Note 7
Residential mortgage 80,129 72,542
Personal 45,323 41,053
Credit card 2,389 2,150
Business and government 73,317 61,106
------------------------------------------------------------ --------- ------- -------
201,158 176,851
Customers' liability under acceptances 6,541 6,836
Allowances for credit losses (955) (998)
------------------------------------------------------------ --------- ------- -------
206,744 182,689
--------------------------------------------------------------------- ------- -------
Other
Derivative financial instruments Note 16 18,547 16,484
Investments in associates and joint ventures Note 9 140 225
Premises and equipment Note 10 1,397 1,216
Goodwill Note 11 1,519 1,504
Notes 1
Intangible assets and 11 1,360 1,274
Notes 1
Other assets and 12 5,958 4,530
------------------------------------------------------------ ---------- ------- -------
28,921 25,233
--------------------------------------------------------------------- ------- -------
403,740 355,621
--------------------------------------------------------------------- ------- -------
Liabilities and equity
Notes 4
Deposits and 13 266,394 240,938
------------------------------------------------------------ ---------- ------- -------
Other
Acceptances 6,541 6,836
Obligations related to securities sold short 21,817 20,266
Obligations related to securities sold under repurchase
agreements
and securities loaned Note 8 33,473 17,293
Derivative financial instruments Note 16 19,632 19,367
Notes 4
Liabilities related to transferred receivables and 8 26,277 25,170
Other liabilities Note 14 6,361 6,301
------------------------------------------------------------ ---------- ------- -------
114,101 95,233
--------------------------------------------------------------------- ------- -------
Subordinated debt Note 15 1,499 768
------------------------------------------------------------ ---------- ------- -------
Equity
Equity attributable to the Bank's shareholders Notes 18
and holders of other equity instruments and 22
Preferred shares and other equity instruments 3,150 2,650
Common shares 3,196 3,160
Contributed surplus 56 47
Retained earnings Note 1 15,140 12,854
Accumulated other comprehensive income 202 (32)
------------------------------------------------------------ --------- ------- -------
21,744 18,679
Non-controlling interests Note 19 2 3
------------------------------------------------------------ ---------- ------- -------
21,746 18,682
--------------------------------------------------------------------- ------- -------
403,740 355,621
===================================================================== ======= =======
The accompanying notes are an integral part of these audited consolidated
financial statements.
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to these audited consolidated
financial statements.
Laurent Ferreira Karen Kinsley
President and Chief Executive Director
Officer
Consolidated Statements of Income
Year ended October 31 2022 2021(1)
====================================================== =========== ===== =======
Interest income
Loans 7,136 5,460
Securities at fair value through profit or loss 1,548 1,092
Securities at fair value through other comprehensive
income 163 181
Securities at amortized cost 263 178
Deposits with financial institutions 435 76
------------------------------------------------------ ----------- ----- -------
9,545 6,987
----------------------------------------------------------------- ----- -------
Interest expense
Deposits 3,291 1,635
Liabilities related to transferred receivables 472 372
Subordinated debt 28 17
Other 483 180
------------------------------------------------------ ----------- ----- -------
4,274 2,204
----------------------------------------------------------------- ----- -------
Net interest income (2) 5,271 4,783
------------------------------------------------------ ----------- ----- -------
Non-interest income
Underwriting and advisory fees 324 415
Securities brokerage commissions 204 238
Mutual fund revenues 587 563
Investment management and trust service fees 997 900
Credit fees 490 506
Card revenues 186 148
Deposit and payment service charges 298 274
Trading revenues (losses) Note 21 543 268
Gains (losses) on non-trading securities, net 113 151
Insurance revenues, net 158 131
Foreign exchange revenues, other than trading 211 202
Share in the net income of associates and joint
ventures Note 9 28 23
Other 242 325
------------------------------------------------------ ----------- ----- -------
4,381 4,144
----------------------------------------------------------------- ----- -------
Total revenues 9,652 8,927
------------------------------------------------------ ----------- ----- -------
Non-interest expenses
Compensation and employee benefits 3,284 3,027
Occupancy 312 299
Notes 1,
Technology 10 and 11 915 871
Communications 57 53
Professional fees 249 246
Other 413 407
------------------------------------------------------ ----------- ----- -------
5,230 4,903
----------------------------------------------------------------- ----- -------
Income before provisions for credit losses and
income taxes 4,422 4,024
Provisions for credit losses Note 7 145 2
------------------------------------------------------ ------------ ----- -------
Income before income taxes 4,277 4,022
Notes 1
Income taxes and 24 894 882
------------------------------------------------------ ------------ ----- -------
Net income Note 1 3,383 3,140
------------------------------------------------------ ------------ ----- -------
Net income attributable to
Preferred shareholders and holders of other equity
instruments 107 123
Common shareholders Note 1 3,277 3,017
------------------------------------------------------ ------------ ----- -------
Bank shareholders and holders of other equity
instruments 3,384 3,140
Non-controlling interests (1) -
------------------------------------------------------ ----------- ----- -------
3,383 3,140
----------------------------------------------------------------- ----- -------
Notes 1
Earnings per share (dollars) and 25
Basic 9.72 8.95
Diluted 9.61 8.85
Dividends per common share (dollars) Note 18 3.58 2.84
====================================================== ============ ===== =======
The accompanying notes are an integral part of these audited consolidated
financial statements.
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to these audited consolidated
financial statements.
(2) Net interest income includes dividend income. For additional
information, see Note 1 to these audited consolidated financial
statements.
Consolidated Statements of Comprehensive Income
Year ended October 31 2022 2021(1)
================================================================= ====== =======
Net income 3,383 3,140
----------------------------------------------------------------- ------ -------
Other comprehensive income, net of income taxes
Items that may be subsequently reclassified to net
income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses)
on investments in foreign operations 471 (314)
Net foreign currency translation (gains) losses on
investments in foreign operations reclassified to net
income - 16
Impact of hedging net foreign currency translation
gains (losses) (138) 95
333 (203)
--------------------------------------------------------------- ------ -------
Net change in debt securities at fair value through
other comprehensive income
Net unrealized gains (losses) on debt securities at
fair value through other comprehensive income (197) 6
Net (gains) losses on debt securities at fair value
through other comprehensive income
reclassified to net income 91 (34)
Change in allowances for credit losses on debt securities
at fair value through
other comprehensive income reclassified to net income 1 (2)
-------------------------------------------------------------- ------ -------
(105) (30)
------------------------------------------------------------- ------ -------
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments
designated as cash flow hedges (25) 280
Net (gains) losses on designated derivative financial
instruments reclassified to net income 33 26
-------------------------------------------------------------- ------ -------
8 306
------------------------------------------------------------- ------ -------
Share in the other comprehensive income of associates
and joint ventures (2) -
--------------------------------------------------------------- ------ -------
Items that will not be subsequently reclassified to
net income
Remeasurements of pension plans and other post-employment
benefit plans (126) 475
Net gains (losses) on equity securities designated
at fair value through other comprehensive income (27) 64
Net fair value change attributable to credit risk on
financial liabilities designated at
fair value through profit or loss 601 (12)
-------------------------------------------------------------- ------ -------
448 527
-------------------------------------------------------------- ------ -------
Total other comprehensive income, net of income taxes 682 600
----------------------------------------------------------------- ------ -------
Comprehensive income 4,065 3,740
----------------------------------------------------------------- ------ -------
Comprehensive income attributable to
Bank shareholders and holders of other equity instruments 4,066 3,753
Non-controlling interests (1) (13)
---------------------------------------------------------------- ------ -------
4,065 3,740
============================================================= ====== =======
The accompanying notes are an integral part of these audited consolidated
financial statements.
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to these audited consolidated
financial statements.
Consolidated Statements of Comprehensive Income (cont.)
Income Taxes - Other Comprehensive Income
The following table presents the income tax expense or recovery
for each component of other comprehensive income.
Year ended October 31 2022 2021
================================================================== ==== ====
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses)
on investments in foreign operations (13) 10
Net foreign currency translation (gains) losses on investments
in foreign operations reclassified to net income - 2
Impact of hedging net foreign currency translation gains
(losses) (28) 24
(41) 36
--------------------------------------------------------------- ---- ----
Net change in debt securities at fair value through
other comprehensive income
Net unrealized gains (losses) on debt securities at fair
value through other comprehensive income (71) 2
Net (gains) losses on debt securities at fair value through
other comprehensive income
reclassified to net income 32 (12)
Change in allowances for credit losses on debt securities
at fair value through
other comprehensive income reclassified to net income - -
--------------------------------------------------------------- ---- ----
(39) (10)
--------------------------------------------------------------- ---- ----
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments
designated as cash flow hedges (9) 100
Net (gains) losses on designated derivative financial
instruments reclassified to net income 12 9
---------------------------------------------------------------- ---- ----
3 109
--------------------------------------------------------------- ---- ----
Share in the other comprehensive income of associates
and joint ventures - -
----------------------------------------------------------------- ---- ----
Items that will not be subsequently reclassified to net
income
Remeasurements of pension plans and other post-employment
benefit plans (45) 170
Net gains (losses) on equity securities designated at
fair value through other
comprehensive income (10) 24
Net fair value change attributable to credit risk on
financial liabilities designated at
fair value through profit or loss 216 (5)
---------------------------------------------------------------- ---- ----
161 189
------------------------------------------------------------------ ---- ----
84 324
================================================================== ==== ====
The accompanying notes are an integral part of these audited
consolidated financial statements.
Consolidated Statements of Changes in Equity
Year ended October 31 2022 2021(1)
============================================================ ======== ======= =======
Preferred shares and other equity instruments
at beginning Note 18 2,650 2,950
Issuances of preferred shares and other equity
instruments 500 500
Redemptions of preferred shares and other equity
instruments for cancellation - (800)
------------------------------------------------------------ -------- ------- -------
Preferred shares and other equity instruments
at end 3,150 2,650
------------------------------------------------------------ -------- ------- -------
Common shares at beginning Note 18 3,160 3,057
Issuances of common shares pursuant to the Stock
Option Plan 61 104
Repurchases of common shares for cancellation (24) -
Impact of shares purchased or sold for trading (1) (1)
------------------------------------------------------------ -------- ------- -------
Common shares at end 3,196 3,160
------------------------------------------------------------ -------- ------- -------
Contributed surplus at beginning 47 47
Stock option expense Note 22 17 11
Stock options exercised (7) (11)
Other (1) -
------------------------------------------------------------ -------- ------- -------
Contributed surplus at end 56 47
------------------------------------------------------------ -------- ------- -------
Retained earnings at beginning 12,854 10,444
Impact of an accounting policy change as at November
1, 2020 Note 1 - (137)
Net income attributable to the Bank's shareholders
and holders of other equity instruments Note 1 3,384 3,140
Dividends on preferred shares and distributions
on other equity instruments Note 18 (119) (131)
Dividends on common shares Note 18 (1,206) (958)
Premium paid on common shares repurchased for cancellation Note 18 (221) -
Issuance expenses for shares and other equity instruments,
net of income taxes (4) (4)
Remeasurements of pension plans and other post-employment
benefit plans (126) 475
Net gains (losses) on equity securities designated
at fair value through other comprehensive income (27) 64
Net fair value change attributable to the credit
risk on financial liabilities designated at fair
value
through profit or loss 601 (12)
Impact of a financial liability resulting from
put options written to non-controlling interests Note 14 (8) (25)
Other 12 (2)
------------------------------------------------------------ -------- ------- -------
Retained earnings at end 15,140 12,854
------------------------------------------------------------ -------- ------- -------
Accumulated other comprehensive income at beginning (32) (118)
Net foreign currency translation adjustments 333 (190)
Net change in unrealized gains (losses) on debt
securities at fair value through other comprehensive
income (105) (30)
Net change in gains (losses) on cash flow hedges 8 306
Share in the other comprehensive income of associates
and joint ventures (2) -
------------------------------------------------------------ -------- ------- -------
Accumulated other comprehensive income at end 202 (32)
------------------------------------------------------------ -------- ------- -------
Equity attributable to the Bank's shareholders
and holders of other equity instruments 21,744 18,679
------------------------------------------------------------ -------- ------- -------
Non-controlling interests at beginning Note 19 3 3
Non-controlling interest from the acquisition of
Flinks Technology Inc. Note 31 - 3
Purchase of the non-controlling interest of the
Credigy Ltd. subsidiary - 10
Net income attributable to non-controlling interests (1) -
Other comprehensive income attributable to non-controlling
interests - (13)
Non-controlling interests at end 2 3
------------------------------------------------------------ -------- ------- -------
Equity 21,746 18,682
============================================================ ======== ======= =======
Accumulated Other Comprehensive Income
As at October 31 2022 2021
======================================================= ==== =====
Accumulated other comprehensive income
Net foreign currency translation adjustments 204 (129)
Net unrealized gains (losses) on debt securities
at fair value through other comprehensive income (34) 71
Net gains (losses) on instruments designated as
cash flow hedges 31 23
Share in the other comprehensive income of associates
and joint ventures 1 3
------------------------------------------------------- ---- -----
202 (32)
====================================================== ==== =====
The accompanying notes are an integral part of
these audited consolidated financial statements.
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to these audited consolidated
financial statements.
Consolidated Statements of Cash Flows
Year ended October 31 2022 2021(1)
===================================================== ========= ======== ========
Cash flows from operating activities
Net income Note 1 3,383 3,140
Adjustments for
Provisions for credit losses 145 2
Depreciation of premises and equipment, including
right-of-use assets 202 195
Amortization of intangible assets Note 1 279 261
Impairment losses on premises and equipment Notes 10
and on intangible assets and 11 8 16
Gain on remeasurement of the previously held
equity interest in Flinks Technology Inc. Note 31 - (33)
Remeasurement at fair value of an investment Note 6 - 30
Deferred taxes Note 1 110 106
Losses (gains) on sales of non-trading securities,
net (113) (151)
Share in the net income of associates and joint
ventures (28) (23)
Stock option expense 17 11
Change in operating assets and liabilities
Securities at fair value through profit or loss (2,564) (6,485)
Securities purchased under reverse repurchase
agreements and securities borrowed (18,970) 6,996
Loans and acceptances, net of securitization (23,354) (15,661)
Deposits 25,456 25,060
Obligations related to securities sold short 1,551 3,898
Obligations related to securities sold under
repurchase agreements and securities loaned 16,180 (16,566)
Derivative financial instruments, net (1,798) 3,382
Securitization - Credit cards (37) 49
Interest and dividends receivable and interest
payable 150 (186)
Current tax assets and liabilities (437) 272
Other items (2,102) 1,725
----------------------------------------------------------------- -------- --------
(1,922) 6,038
-------------------------------------------------------------- -------- --------
Cash flows from financing activities
Issuances of preferred shares and other equity
instruments 500 500
Redemptions of preferred shares and other equity
instruments for cancellation - (800)
Issuances of common shares (including the impact
of shares purchased for trading) 53 92
Repurchases of common shares for cancellation (245) -
Issuance of subordinated debt 739 -
Purchase of the non-controlling interest of the
Credigy Ltd. subsidiary - (300)
Investment in the Flinks Technology Inc. subsidiary Note 31 - (30)
Issuance expenses for shares and other equity
instruments (4) (4)
Repayments of lease liabilities (99) (96)
Dividends paid on shares and distributions on
other equity instruments (1,325) (1,101)
----------------------------------------------------- --------- -------- --------
(381) (1,739)
-------------------------------------------------------------- -------- --------
Cash flows from investing activities
Acquisition of Flinks Technology Inc. Note 31 - (73)
Net change in investments in associates and joint
ventures 202 225
Purchases of non-trading securities (9,307) (7,348)
Maturities of non-trading securities 2,050 2,500
Sales of non-trading securities 6,269 6,655
Net change in premises and equipment, excluding
right-of-use assets (296) (217)
Net change in intangible assets Note 1 (374) (275)
----------------------------------------------------- ---------- -------- --------
(1,456) 1,467
-------------------------------------------------------------- -------- --------
- -
Impact of currency rate movements on cash and
cash equivalents 1,750 (1,029)
----------------------------------------------------- --------- -------- --------
Increase (decrease) in cash and cash equivalents (2,009) 4,737
Cash and cash equivalents at beginning 33,879 29,142
----------------------------------------------------- --------- -------- --------
Cash and cash equivalents at end (2) 31,870 33,879
----------------------------------------------------- --------- -------- --------
Supplementary information about cash flows from
operating activities
Interest paid 3,763 2,261
Interest and dividends received 9,184 6,858
Income taxes paid 1,118 542
===================================================== ========= ======== ========
The accompanying notes are an integral part of
these audited consolidated financial statements.
(1) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to these audited consolidated
financial statements.
(2) This item is the equivalent of Consolidated Balance Sheet
item Cash and deposits with financial institutions. It includes an
amount of $7.7 billion as at October 31, 2022 ($6.8 billion as at
October 31, 2021) for which there are restrictions and of which
$5.3 billion ($4.9 billion as at October 31, 2021) represent the
balances that the Bank must maintain with central banks, other
regulatory agencies, and certain counterparties.
Notes to the Audited Consolidated Financial Statements
Basis of Presentation and
Note Summary of Significant Accounting Note Share Capital and Other Equity
1 Policies 138 18 Instruments 199
Note Future Accounting Policy Note
2 Changes 155 19 Non-Controlling Interests 202
Note Note
3 Fair Value of Financial Instruments 156 20 Capital Disclosure 203
Financial Instruments Designated
Note at Fair Value Through Profit Note
4 or Loss 167 21 Trading Activity Revenues 204
Note Offsetting Financial Assets Note
5 and Financial Liabilities 168 22 Share-Based Payments 205
Note Securities Note Employee Benefits - Pension
6 169 23 Plans and Other
Note Loans and Allowances for Post-Employment Benefit
7 Credit Losses 171 Plans 208
Note Financial Assets Transferred Note
8 But Not Derecognized 183 24 Income Taxes 212
Note Investments in Associates Note
9 and Joint Ventures 184 25 Earnings Per Share 215
Note Note Guarantees, Commitments and
10 Premises and Equipment 185 26 Contingent Liabilities 215
Note Note
11 Goodwill and Intangible Assets 186 27 Structured Entities 218
Note Note
12 Other Assets 188 28 Related Party Disclosures 221
Note Note Management of the Risks Associated
13 Deposits 188 29 With Financial Instruments 222
Note Note
14 Other Liabilities 189 30 Segment Disclosures 227
Note Note
15 Subordinated Debt 189 31 Acquisition 229
Note Note Event After the Consolidated
16 Derivative Financial Instruments 190 32 Balance Sheet Date 229
Note
17 Hedging Activities 193
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies
National Bank of Canada (the Bank) is a financial institution
incorporated and domiciled in Canada and whose shares are listed on
the Toronto Stock Exchange. Its head office is located at 600 De La
Gauchetière Street West in Montreal, Quebec, Canada. The Bank is a
chartered bank under Schedule 1 of the Bank Act (Canada) and is
regulated by the Office of the Superintendent of Financial
Institutions (Canada) (OSFI). The Bank offers financial services to
individuals, businesses, institutional clients, and governments
throughout Canada as well as specialized services at the
international level. It operates four business segments: the
Personal and Commercial segment, the Wealth Management segment, the
Financial Markets segment, and the U.S. Specialty Finance and
International (USSF&I) segment. Its full line of services
includes banking and investing solutions for individuals and
businesses, corporate banking and investment banking services,
securities brokerage, insurance, and wealth management.
On November 29, 2022, the Board of Directors (the Board)
authorized the publication of the Bank's audited annual
consolidated financial statements (the consolidated financial
statements) for the year ended October 31, 2022.
Basis of Presentation
The Bank's consolidated financial statements are prepared in
accordance with International Financial Reporting Standards (IFRS),
as issued by the International Accounting Standards Board (IASB).
The financial statements also comply with section 308(4) of the
Bank Act (Canada), which states that, except as otherwise specified
by OSFI, the consolidated financial statements are to be prepared
in accordance with IFRS. IFRS represent Canadian generally accepted
accounting principles (GAAP). None of the OSFI accounting
requirements are exceptions to IFRS. The accounting policies
described in the Summary of Significant Accounting Policies section
have been applied consistently to all periods presented, except for
the change described hereafter in the Accounting Policy Changes
section, which were applied retrospectively during the year ended
October 31, 2022 as a result of a final agenda decision made by the
International Financial Reporting Interpretations Committee (IFRIC)
regarding the costs of configuring or customizing a supplier's
software application as part of a cloud computing arrangement. To
reflect this change in accounting policy, figures from the year
ended October 31, 2021 have been adjusted.
Unless otherwise indicated, all amounts are expressed in
Canadian dollars, which is the Bank's functional and presentation
currency.
Interest Rate Benchmark Reform
The reform of interbank offered rates (IBORs) and other interest
rate benchmarks is a global initiative being coordinated and led by
central banks and governments around the world, including those in
Canada. This reform has been unfolding for several years, with the
IASB monitoring developments. To minimize the financial statement
impacts arising from replacing current interest rate benchmarks
with alternative benchmarks, the IASB amended certain IFRS
standards and allowed for some temporary exemptions, notably in the
area of hedge accounting.
During fiscal 2022, the Bank transitioned its LIBOR-related
(London Interbank Offered Rates) contracts that involve pound
sterling (GBP), the euro (EUR), the Japanese yen (JPY), and the
Swiss franc (CHF), for which the cessation or loss of
representativeness was December 31, 2021. As for USD LIBOR, for
which the cessation or loss of representativeness is planned for
June 30, 2023, the Bank included rate replacement clauses in
contracts negotiated during 2021 and, since January 1, 2022, the
Bank has no longer been using USD LIBOR in new contracts except in
circumstances compliant with regulatory guidance. On December 16,
2021, the Bank of Canada announced that a white paper published by
the Canadian Alternative Reference Rate (CARR) Working Group was
recommending that CDOR ( Canadian Dollar Offered Rate ) be declared
unrepresentative by its administrator, namely, Refinitiv Benchmark
Services (UK) Limited (Refinitiv) and that CDOR cease to exist as
of June 30, 2024 (including a recommendation to cease using CDOR on
the derivative financial instrument market as of June 30,
2023).
On January 31, 2022, Refinitiv launched a public consultation on
the future of CDOR. The consultation ended on March 2, 2022, after
which Refinitiv published an update to the consultation on April
14, 2022 . On May 16, 2022, Refinitiv published the consultation
conclusions and announced that the publication of CDOR would cease
as of June 28, 2024. Following this announcement, the CARR Working
Group welcomed Refinitiv's decision and, at the same time, OSFI
published its prudential expectations regarding the cessation of
CDOR. First, OSFI expects all new derivative contracts and
securities to transition to alternative reference rates by June 30,
2023, with no new CDOR exposure being recorded after that date,
with limited exceptions for risk mitigation requirements.
Thereafter, by June 28, 2024, OSFI expects federally regulated
financial institutions to have transitioned all loan agreements
referencing CDOR to alternative reference rates.
To prepare for the interest rate benchmark reform, the Bank
developed an enterprise-wide project, put together a dedicated team
of experts, established a formal governance structure, and prepared
a training plan, and several committees were created to ensure the
success of the project. The project team is made up of qualified
resources from various fields of expertise to ensure a
comprehensive analysis of all aspects of the changes as well as the
financial, legal, operational, and technological impacts. Many of
these experts, who have in-depth knowledge of accounting standards
and reform-related activities, are involved in various working
groups and participate in meetings with OSFI. The project team
regularly reports on the project's progress to the project steering
committee and the Financial Markets Risk Committee. As at October
31, 2022, the project was progressing according to schedule. The
Bank is exposed to several risks, including interest rate risk and
operational risk, which arise from non-derivative financial assets,
non-derivative financial liabilities, and derivative financial
instruments. The project team ensures that risks are mitigated
while ensuring a positive experience for its clients. The Bank is
taking all necessary steps to identify, measure, and control all of
the risks to ensure a smooth transition throughout the interest
rate benchmark reform.
The following table discloses the non-derivative financial
assets, non-derivative financial liabilities, and derivative
financial instruments subject to the interest rate benchmark reform
as at October 31, 2022 that have not yet transitioned to
alternative benchmark rates.
As at October 31,
2022
==================================================== ========================
CDOR USD LIBOR
---------------------------------------------------- ----------- -----------
Maturing Maturing
after June after June
28, 2024 30, 2023
==================================================== =========== ===========
Non-derivative financial assets(1) 13,989 5,565
Non-derivative financial liabilities(2) 11,107 36
Notional amount of derivative financial instruments 379,539 175,489
====================================================== =========== ===========
(1) Non-derivative financial assets include the carrying value
of securities as well as the outstanding balances on loans and the
customers' liability under acceptances.
(2) Non-derivative financial liabilities include the nominal
amounts of deposits and subordinated debt as well as the carrying
value of acceptances.
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.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Summary of Significant Accounting Policies
Judgments, Estimates and Assumptions
In preparing consolidated financial statements in accordance
with IFRS, management must exercise judgment and make estimates and
assumptions that affect the reporting date carrying amounts of
assets and liabilities, net income, and related information.
Furthermore, certain accounting policies require complex judgments
and estimates because they apply to matters that are inherently
uncertain, in particular accounting policies applicable to the
following: the fair value determination of financial instruments,
the impairment of financial assets, the impairment of non-financial
assets, pension plans and other post-employment benefits, income
taxes, provisions, the consolidation of structured entities, and
the classification of debt instruments. Descriptions of these
judgments and estimates are provided in each of the notes related
thereto in the consolidated financial statements. Actual results
could therefore differ from these estimates, in which case the
impacts are recognized in the consolidated financial statements of
future fiscal periods. The accounting policies described in this
note provide greater detail about the use of estimates and
assumptions and reliance on judgment.
The effects of the COVID-19 pandemic, the geopolitical context,
disrupted supply chains, and rising inflation are persisting and
creating uncertainty. Therefore, developing reliable estimates and
applying judgment continue to be substantially complex. The
uncertainty surrounding certain key inputs used in measuring
expected credit losses is described in Note 7 to these consolidated
financial statements.
Basis of Consolidation
Subsidiaries
These consolidated financial statements include all the assets,
liabilities, operating results and cash flows of the Bank and its
subsidiaries, after elimination of intercompany transactions and
balances. Subsidiaries are entities, including structured entities,
controlled by the Bank. 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 voting rights relate
solely to administrative tasks and the relevant activities are
directed by means of contractual arrangements.
Management must exercise judgment in determining whether the
Bank must consolidate an entity. The Bank controls an entity only
if the following three conditions are met:
-- it has decision-making authority regarding the entity's relevant activities;
-- it has exposure or rights to variable returns from its involvement with the entity;
-- it has the ability to use its power to affect the amount of the returns.
When determining decision-making authority, the Bank considers
many factors, including the existence and effect of actual and
potential voting rights held by the Bank that can be exercised as
well as the holding of instruments that are convertible into voting
shares. In addition, the Bank must determine whether, as an
investor with decision-making rights, it acts as a principal or
agent.
Based on these principles, an assessment of control is performed
at the inception of a relationship between any entity and the Bank.
When performing this assessment, the Bank considers all facts and
circumstances, and it must reassess whether it still controls an
investee if facts and circumstances indicate that one or more of
the three conditions of control have changed.
The Bank consolidates the entities it controls from the date on
which control is obtained and ceases to consolidate them from the
date control ceases. The Bank uses the acquisition method to
account for the acquisition of a subsidiary from a third party on
the date control is obtained.
Non-Controlling Interests
Non-controlling interests in subsidiaries represent the equity
interests held by third parties in the Bank's subsidiaries and are
presented in total Equity, separately from Equity attributable to
the Bank's shareholders and holders of other equity instruments .
The non-controlling interests' proportionate shares of the net
income and other comprehensive income of the Bank's subsidiaries
are presented separately in the Consolidated Statement of Income
and in the Consolidated Statement of Comprehensive Income,
respectively.
With respect to units issued to third parties by mutual funds
and certain other funds that are consolidated, they are presented
at fair value in Other liabilities on the Consolidated Balance
Sheet. Lastly, changes in ownership interests in subsidiaries that
do not result in a loss of control are recognized as equity
transactions. The difference between the adjustment in the carrying
value of the non-controlling interest and the fair value of the
consideration paid or received is recognized directly in Equity
attributable to the Bank's shareholders and holders of other equity
instruments .
Investments in Associates and Joint Ventures
The Bank exercises significant influence over an entity when it
has the power to participate in the financial and operating policy
decisions of the investee. The Bank has joint control when there is
a contractually agreed sharing of control of an entity, and joint
control exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control.
Investments in associates, i.e., entities over which the Bank
exercises significant influence, and investments in joint ventures,
i.e., entities over which the Bank has rights to the net assets and
exercises joint control, are accounted for using the equity method.
Under the equity method, the investment is initially recorded at
cost and, following acquisition, the Bank's proportionate shares in
the net income and in the other comprehensive income are
recognized, respectively, in Non-interest income in the
Consolidated Statement of Income and in Other comprehensive income
in the Consolidated Statement of Comprehensive Income. The carrying
value of the investment is adjusted by an equivalent amount on the
Consolidated Balance Sheet and reduced by distributions
received.
Translation of Foreign Currencies
The consolidated financial statements are presented in Canadian
dollars, which is the Bank's functional and presentation currency.
Each foreign operation within the Bank's scope of consolidation
determines its own functional currency, and the items reported in
the financial statements of each foreign operation are measured
using that currency.
Monetary items and non-monetary items measured at fair value and
denominated in foreign currencies are translated into the
functional currency at exchange rates prevailing at the
Consolidated Balance Sheet date. Non-monetary items not measured at
fair value are translated into the functional currency at
historical rates. Revenues and expenses denominated in foreign
currencies are translated at the average exchange rates for the
period. Translation gains and losses are recognized in Non-interest
income in the Consolidated Statement of Income, except for equity
instruments designated at fair value through other comprehensive
income, for which unrealized gains and losses are recorded in Other
comprehensive income and will not be subsequently reclassified to
net income.
In the consolidated financial statements, the assets and
liabilities of all foreign operations are translated into the
Bank's functional currency at the exchange rates prevailing at the
Consolidated Balance Sheet date, whereas the revenues and expenses
of such foreign operations are translated into the Bank's
functional currency at the average exchange rates for the period.
Any goodwill resulting from the acquisition of a foreign operation
that does not have the same functional currency as the parent
company, and any fair value adjustments to the carrying amounts of
assets and liabilities resulting from the acquisition, are treated
as assets and liabilities of the foreign operation and translated
at the exchange rates prevailing at the Consolidated Balance Sheet
date. Unrealized translation gains and losses related to foreign
operations, including the impact of hedges and income taxes on the
related results, are presented in Other comprehensive income. Upon
disposal of a foreign operation, any accumulated translation gains
and losses, along with the related hedges, recorded in the
Accumulated other comprehensive income item of this foreign
operation, are reclassified to Non-interest income in the
Consolidated Statement of Income.
Classification and Measurement 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.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
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.
Financial Instruments Designated at Fair Value Through Profit or
Loss
A financial asset may be irrevocably designated at fair value
through profit or loss at initial recognition if certain conditions
are met. The Bank may apply this option if, consistent with a
documented risk management strategy, doing so eliminates or
significantly reduces a measurement or recognition inconsistency
that would otherwise arise from measuring financial assets or
liabilities or recognizing gains and losses on them on different
bases, and if the fair values are reliable. Financial assets thus
designated are recognized at fair value, and any change in fair
value is recorded in Non-interest income in the Consolidated
Statement of Income. Interest income arising from these financial
instruments designated at fair value through profit or loss is
recorded in Net interest income in the Consolidated Statement of
Income.
A financial liability may be irrevocably designated at fair
value through profit or loss when it is initially recognized.
Financial liabilities thus designated are recognized at fair value,
and any changes in fair value attributable to changes in the Bank's
own credit risk are recognized in Other comprehensive income unless
these changes create or enlarge an accounting mismatch in Net
income. Fair value changes not attributable to the Bank's own
credit risk are recognized in Non--interest income in the
Consolidated Statement of Income. The amounts recognized in Other
comprehensive income will not be subsequently reclassified to Net
income. Interest expense arising from these financial liabilities
designated at fair value through profit or loss is recorded in the
Net interest income item of the Consolidated Statement of Income.
The Bank may use this option in the following cases:
-- i f, consistent with a documented risk management strategy,
using this option allows the Bank to eliminate or significantly
reduce a measurement or recognition inconsistency that would
otherwise arise from measuring financial assets or liabilities on
different bases, and if the fair values are reliable;
-- if a group of financial assets and financial liabilities to
which an instrument belongs is managed and its performance is
evaluated on a fair value basis, in accordance with the Bank's
documented risk management or investment strategy, and information
is provided on that basis to senior management. Consequently, the
Bank may use this option if it has implemented a documented risk
management strategy to manage a group of financial instruments
together on the fair value basis, if it can demonstrate that
significant financial risks are eliminated or significantly
reduced, and if the fair values are reliable;
-- for hybrid financial instruments with one or more embedded
derivatives that would significantly modify the cash flows of the
financial instruments and that would otherwise be bifurcated and
accounted for separately.
Financial Instruments Designated at Fair Value Through Other
Comprehensive Income
At initial recognition, an investment in an equity instrument
that is neither held for trading nor a contingent consideration
recognized in a business combination may be irrevocably designated
as being at fair value through other comprehensive income. In
accordance with this designation, any change in fair value is
recognized in Other comprehensive income with no subsequent
reclassification to net income. Dividend income is recorded in
Interest income in the Consolidated Statement of Income.
Securities Measured at Fair Value Through Other Comprehensive
Income
Securities measured at fair value through other comprehensive
income include: (i) debt securities for which the contractual terms
of the financial asset give rise, on specified dates, to cash flows
that are solely payments of principal and interest on the principal
amount outstanding and that fall within a "hold to collect and
sell" business model and (ii) equity securities designated at fair
value through other comprehensive income with no subsequent
reclassification of gains and losses to net income.
The Bank recognizes securities transactions at fair value
through other comprehensive income on the trade date, and the
transaction costs are capitalized. Interest income and dividend
income are recognized in Interest income in the Consolidated
Statement of Income.
Debt Securities Measured at Fair Value Through Other
Comprehensive Income
Debt securities measured at fair value through other
comprehensive income are recognized at fair value. Unrealized gains
and losses are recognized, net of expected credit losses and income
taxes, and provided that they are not hedged by derivative
financial instruments in a fair value hedging relationship, in
Other comprehensive income. When the securities are sold, realized
gains or losses, determined on an average cost basis, are
reclassified to Non-interest income - Gains (losses) on non-trading
securities, net in the Consolidated Statement of Income. Premiums,
discounts and related transaction costs are amortized to interest
income over the expected life of the instrument using the effective
interest rate method.
Equity Securities Designated at Fair Value Through Other
Comprehensive Income
Equity securities designated at fair value through other
comprehensive income are recognized at fair value. Unrealized gains
and losses are presented, net of income taxes, in Other
comprehensive income with no subsequent reclassification of
realized gains and losses to net income. Transaction costs incurred
upon the purchase of such equity securities are not reclassified to
net income upon the sale of the securities.
Securities Measured at Amortized Cost
Securities measured at amortized cost include debt securities
for which the contractual terms give rise, on specified dates, to
cash flows that are solely payments of principal and interest on
the principal amount outstanding and that fall within a "hold to
collect" business model.
The Bank recognizes these securities transactions at fair value
on the trade date, and the transaction costs are capitalized. After
initial recognition, debt securities in this category are recorded
at amortized cost. Interest income is recognized in Interest income
in the Consolidated Statement of Income. Premiums, discounts and
related transaction costs are amortized to interest income over the
expected life of the instrument using the effective interest rate
method. Securities measured at amortized cost are presented net of
allowances for credit losses on the Consolidated Balance Sheet.
Securities Measured at Fair Value Through Profit or Loss
Securities not classified or designated as measured at fair
value through other comprehensive income or at amortized cost are
classified as measured at fair value through profit or loss.
Securities measured at fair value through profit or loss include
(i) securities held for trading, (ii) securities designated at fair
value through profit or loss, (iii) all equity securities other
than those designated as measured at fair value through other
comprehensive income with no subsequent reclassifications of gains
and losses to net income, and (iv) debt securities for which the
contractual cash flows are not solely payments of principal and any
interest on any principal amount outstanding.
The Bank recognizes securities transactions at fair value
through profit or loss on the settlement date on the Consolidated
Balance Sheet. Changes in fair value between the trade date and the
settlement date are recognized in Non-interest income in the
Consolidated Statement of Income.
Securities at fair value through profit or loss are recognized
at fair value. Interest income, any transaction costs, as well as
realized and unrealized gains or losses on securities held for
trading are recognized in Non-interest income - Trading revenues
(losses) in the Consolidated Statement of Income. Dividend income
is recorded in Interest income in the Consolidated Statement of
Income. Interest income on securities designated at fair value
through profit or loss is recorded in Interest income in the
Consolidated Statement of Income. Realized and unrealized gains or
losses on these securities are recognized in Non--interest income -
Trading revenues (losses) in the Consolidated Statement of
Income.
Realized and unrealized gains or losses on equity securities at
fair value through profit or loss, other than those held for
trading, as well as debt securities for which the contractual cash
flows are not solely payments of principal and interest on the
principal amount outstanding, are recognized in Non-interest income
- Gains (losses) on non-trading securities, net in the Consolidated
Statement of Income. The dividend income and interest income on
these financial assets are recognized in Interest income in the
Consolidated Statement of Income.
Securities Purchased Under Reverse Repurchase Agreements,
Obligations Related to Securities Sold
Under Repurchase Agreements, and Securities Borrowed and
Loaned
The Bank recognizes these transactions at amortized cost using
the effective interest rate method, except when they are designated
at fair value through profit or loss and are recorded at fair
value. These transactions are held within a business model whose
objective is to collect contractual cash flows, i.e., cash flows
that are solely payments of principal and interest on the principal
amount outstanding. Securities sold under repurchase agreements
remain on the Consolidated Balance Sheet, whereas securities
purchased under reverse repurchase agreements are not recognized.
Reverse repurchase agreements and repurchase agreements are treated
as collateralized lending and borrowing transactions.
The Bank also borrows and lends securities. Securities loaned
remain on the Consolidated Balance Sheet, while securities borrowed
are not recognized. As part of these transactions, the Bank pledges
or receives collateral in the form of cash or securities.
Collateral pledged in the form of securities remains on the
Consolidated Balance Sheet. Collateral received in the form of
securities is not recognized on the Consolidated Balance Sheet.
Collateral pledged or received in the form of cash is recognized in
financial assets or liabilities on the Consolidated Balance
Sheet.
When the collateral is pledged or received in the form of cash,
the interest income and expense are recorded in Net interest income
in the Consolidated Statement of Income.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Loans
Loans Measured at Amortized Cost
Loans classified as measured at amortized cost include loans
originated or purchased by the Bank that are not classified as
measured at fair value through profit or loss or designated at fair
value through profit or loss. These loans are held within a
business model whose objective is to collect contractual cash
flows, i.e., cash flows that are solely payments of principal and
interest on the principal amount outstanding. All loans originated
by the Bank are recognized when cash is advanced to a borrower.
Purchased loans are recognized when the cash consideration is paid
by the Bank.
All loans are initially recognized at fair value plus directly
attributable costs and are subsequently measured at amortized cost
using the effective interest rate method, net of allowances for
expected credit losses. For purchased performing loans, the
acquisition date fair value adjustment on each loan is amortized to
interest income over the expected remaining life of the loan using
the effective interest rate method. For purchased credit-impaired
loans, the acquisition date fair value adjustment on each loan
consists of management's estimate of the shortfall of principal and
interest cash flows that the Bank expects to collect and of the
time value of money. The time value of money component of the fair
value adjustment is amortized to interest income over the remaining
life of the loan using the effective interest rate method. Loans
are presented net of allowances for credit losses on the
Consolidated Balance Sheet.
Loans Measured at Fair Value Through Profit or Loss
Loans classified as measured at fair value through profit or
loss, loans designated at fair value through profit or loss, and
loans for which the contractual cash flows are not solely payments
of principal and interest on the principal amount outstanding are
recognized at fair value on the Consolidated Balance Sheet. The
interest income on loans at fair value through profit or loss is
recorded in Interest income in the Consolidated Statement of
Income.
Changes in the fair value of loans classified as at fair value
through profit or loss and loans designated at fair value through
profit or loss are recognized in Non-interest income - Trading
revenues (losses) in the Consolidated Statement of Income. With
respect to loans whose contractual cash flows are not solely
payments of principal and interest on the principal amount
outstanding, changes in fair value are recognized in Non-interest
income - Other in the Consolidated Statement of Income.
Reclassification of Financial Assets
A financial asset, other than a derivative financial instrument
or a financial asset that, at initial recognition, was designated
as measured at fair value through profit or loss, is reclassified
only in rare situations, i.e., when there is a change in the
business model used to manage the financial asset. The
reclassification is applied prospectively from the reclassification
date.
Establishing Fair Value
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 valuation 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 measurement techniques due to system limitations or
uncertainty surrounding the measure. These factors include, but are
not limited to, the unobservable nature of the 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 that is 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.
As permitted when certain criteria are met, the Bank has elected
to determine fair value based on net exposure to credit risk or
market risk for certain portfolios of financial instruments, mainly
derivative financial instruments.
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. 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 future economic conditions.
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 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.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
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.
Derecognition of Financial Assets and Securitization
A financial asset is considered for derecognition when the Bank
has transferred contractual rights to receive the cash flows or
assumed an obligation to transfer these cash flows to a third
party. The Bank derecognizes a financial asset when it considers
that substantially all the risks and rewards of ownership of the
asset have been transferred or when the contractual rights to the
cash flows of the financial asset expire. When the Bank considers
that it has retained substantially all the risks and rewards of
ownership of the transferred asset, it continues to recognize the
financial asset and, if applicable, recognizes a financial
liability on the Consolidated Balance Sheet. If, due to a
derivative financial instrument, the transfer of a financial asset
does not result in derecognition, the derivative financial
instrument is not recognized on the Consolidated Balance Sheet.
When the Bank has neither transferred nor retained substantially
all the risks and rewards of ownership of the financial asset, it
derecognizes the financial asset it no longer controls. Any rights
and obligations retained following the asset transfer are
recognized separately as an asset or liability. If the Bank retains
control of the financial asset, it continues to recognize the asset
to the extent of its continuing involvement in that asset, i.e.,
the extent to which it is exposed to changes in the value of the
transferred asset.
To diversify its funding sources, the Bank participates in two
Canada Mortgage and Housing Corporation (CMHC) securitization
programs: the Mortgage-Backed Securities Program under the National
Housing Act (Canada) (NHA) and Canada Mortgage Bond (CMB) program.
Under the first program, the Bank issues NHA securities backed by
insured residential mortgages and, under the second, the Bank sells
NHA securities to Canada Housing Trust (CHT). As part of these
transactions, the Bank retains substantially all the risks and
rewards related to ownership of the mortgage loans sold. Therefore,
the insured mortgage loans securitized under the CMB program
continue to be recognized in the Loans item of the Bank's
Consolidated Balance Sheet, and the liabilities for the
considerations received from the transfer are recognized in
Liabilities related to transferred receivables on the Consolidated
Balance Sheet. Moreover, insured mortgage loans securitized and
retained by the Bank continue to be recognized in Loans on the
Consolidated Balance Sheet.
Derecognition of Financial Liabilities
A financial liability is derecognized when the obligation is
discharged, cancelled, or expires. The difference between the
carrying value of the financial liability transferred and the
consideration paid is recognized in the Consolidated Statement of
Income.
Cash and Deposits With Financial Institutions
Cash and deposits with financial institutions consist of cash
and cash equivalents, amounts pledged as collateral as well as
amounts placed in escrow. Cash and cash equivalents consist of
cash, bank notes, deposits with the Bank of Canada and other
financial institutions, including net receivables related to
cheques, and other items in the clearing process.
Acceptances and Customers' Liability Under Acceptances
The potential liability of the Bank under acceptances is
recorded as a customer commitment liability on the Consolidated
Balance Sheet. The Bank's potential recourse vis à vis clients is
recorded as an equivalent offsetting asset. Fees are recorded in
Non-interest income in the Consolidated Statement of Income.
Obligations Related to Securities Sold Short
This financial liability represents the Bank's obligation to
deliver the securities it sold but did not own at the time of sale.
Obligations related to securities sold short are recorded at fair
value and presented as liabilities on the Consolidated Balance
Sheet. Realized and unrealized gains and losses are recognized in
Non-interest income in the Consolidated Statement of Income.
Derivative Financial Instruments
In the normal course of business, the Bank uses derivative
financial instruments to meet the needs of its clients, to generate
trading activity revenues, and to manage its exposure to interest
rate risk, foreign exchange risk, credit risk, and other market
risks.
All derivative financial instruments are measured at fair value
on the Consolidated Balance Sheet. Derivative financial instruments
with a positive fair value are included in assets, whereas
derivative financial instruments with a negative fair value are
included in liabilities on the Consolidated Balance Sheet. Where
there are offsetting financial assets and financial liabilities,
the net fair value of certain derivative financial instruments is
reported either as an asset or as a liability, depending on the
circumstance.
Embedded Derivative Financial Instruments
An embedded derivative is a component of a hybrid contract that
also includes a non-derivative host, the effect being that some of
the cash flows of the combined instrument vary in a way similar to
a stand-alone derivative. An embedded derivative causes some or all
of the cash flows that otherwise would be required by the contract
to be modified according to a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of
prices or rates, credit rating or credit index, or other variable,
provided, in the case of a non-financial variable, that the
variable is not specific to one of the parties to the contract.
A derivative embedded in a financial liability is separated from
the host contract and treated as a separate derivative if, and only
if, the following three conditions are met: the economic
characteristics and risks of the embedded derivative are not
closely related to those of the host contract, the embedded
derivative is a separate instrument that meets the definition of a
derivative financial instrument, and the hybrid contract is not
measured at fair value through profit or loss.
Embedded derivatives that are separately accounted for are
measured at fair value on the Consolidated Balance Sheet, and
subsequent changes in fair value are recognized in Non-interest
income in the Consolidated Statement of Income. In general, all
embedded derivatives are presented on a combined basis with the
host contract. However, certain embedded derivatives that are
separated from the host contract are presented in Derivative
financial instruments on the Consolidated Balance Sheet.
Held-for-Trading Derivative Financial Instruments
Derivative financial instruments are recognized at fair value,
and the realized and unrealized gains and losses (including
interest income and expense) are recorded in Non-interest income in
the Consolidated Statement of Income.
Derivative Financial Instruments Designated as Hedging
Instruments
Policy
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. Hedge accounting ensures that
offsetting gains, losses, revenues and expenses are recognized in
the Consolidated Statement of Income in the same period or
periods.
Documenting and Assessing Effectiveness
The Bank designates and formally documents each hedging
relationship, at its inception, by detailing the risk management
objective and the hedging strategy. The documentation identifies
the specific asset, liability, or cash flows being hedged, the
related hedging instrument, the nature of the specific risk
exposure or exposures being hedged, the intended term of the
hedging relationship, and the method for assessing the
effectiveness or ineffectiveness of the hedging relationship. At
the inception of the hedging relationship, and for every financial
reporting period for which the hedge has been designated, the Bank
ensures that the hedging relationship is highly effective and
consistent with its originally documented risk management objective
and strategy. When a hedging relationship meets the hedge
accounting requirements, it is designated as either a fair value
hedge, a cash flow hedge or a foreign exchange hedge of a net
investment in a foreign operation.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Interest Rate Benchmark Reform
A hedging relationship is directly affected by interest rate
benchmark reform such as Interbank Offered Rates (IBORs) only if
the reform gives rise to uncertainties about (a) the interest rate
benchmark (contractually or non-contractually specified) designated
as a hedged risk; and/or (b) the timing or the amount of the
interest-rate-benchmark-based cash flows of the hedged item or of
the hedging instrument.
For such hedging relationships, the following temporary
exceptions apply during the period of uncertainty:
-- when determining whether a forecast transaction is highly
probable or expected to occur, it is assumed that the interest rate
benchmark on which the hedged cash flows (contractually or
non-contractually specified) are based is not altered as a result
of interest rate benchmark reform;
-- when assessing whether a hedge is expected to be highly
effective, it is assumed that the interest rate benchmark on which
the hedged cash flows and/or the hedged risk (contractually or
non-contractually specified) are based, or the interest rate
benchmark on which the cash flows of the hedging instrument are
based, is not altered as a result of interest rate benchmark
reform;
-- a hedge is not required to be discontinued if the actual
results of the hedge are outside an effectiveness range of 80% to
125% as a result of interest rate benchmark reform;
-- for a hedge of a non-contractually specified benchmark
portion of interest rate risk, the requirement that the designated
portion be separately identifiable need only be met at the
inception of the hedging relationship.
Fair Value Hedges
For fair value hedges, the Bank mainly uses interest rate swaps
to hedge changes in the fair value of a hedged item. The carrying
amount of the hedged item is adjusted based on the effective
portion of the gains or losses attributable to the hedged risk,
which are recognized in the Consolidated Statement of Income, as
well as the change in the fair value of the hedging instrument. The
resulting ineffective portion is recognized in Non-interest income
in the Consolidated Statement of Income.
The Bank prospectively discontinues hedge accounting if the
hedging instrument is sold or expires or if the hedging
relationship no longer qualifies for hedge accounting or if the
Bank revokes the designation. When the designation is revoked, the
hedged item is no longer adjusted to reflect changes in fair value,
and the amounts previously recorded as cumulative adjustments with
respect to the effective portion of gains and losses attributable
to the hedged risk are amortized using the effective interest rate
method and recognized in the Consolidated Statement of Income over
the remaining useful life of the hedged item. If the hedged item is
sold or terminated before maturity, the cumulative adjustments with
respect to the effective portion of gains and losses attributable
to the hedged risk are immediately recorded in the Consolidated
Statement of Income.
Cash Flow Hedges
For cash flow hedges, the Bank mainly uses interest rate swaps
and total return swaps to hedge variable cash flows attributable to
the hedged risk related to a financial asset or liability (or to a
group of financial assets or liabilities). The effective portion of
changes in fair value of the hedging instrument is recognized in
Other comprehensive income, whereas the ineffective portion is
recognized in Non-interest income in the Consolidated Statement of
Income.
The amounts previously recorded in Accumulated other
comprehensive income are reclassified to the Consolidated Statement
of Income of the period or periods during which the cash flows of
the hedged item affect the Consolidated Statement of Income. If the
hedging instrument is sold or expires or if the hedging
relationship no longer qualifies for hedge accounting or if the
Bank cancels that designation, then the amounts previously
recognized in Accumulated other comprehensive income are
reclassified to the Consolidated Statement of Income in the period
or periods during which the cash flows of the hedged item affect
the Consolidated Statement of Income.
Hedges of Net Investments in Foreign Operations
Derivative and non-derivative financial instruments are used to
hedge foreign exchange risk related to investments made in foreign
operations whose functional currency is not the Canadian dollar.
The effective portion of the gains and losses on the hedging
instrument is recognized in Other comprehensive income, whereas the
ineffective portion is recognized in Non-interest income in the
Consolidated Statement of Income. Upon the total or partial sale of
a net investment in a foreign operation, amounts reported in
Accumulated other comprehensive income are reclassified, in whole
or in part, to Non-interest income in the Consolidated Statement of
Income.
Offsetting of Financial Assets and Liabilities
Financial assets and liabilities are offset, and the net amount
is presented on the Consolidated Balance Sheet when the Bank has a
legally enforceable right to set off the recognized amounts and
intends to settle on a net basis or to realize the asset and settle
the liability simultaneously.
Premises and Equipment
Premises and equipment, except for land and the head office
building under construction, are recognized at cost less
accumulated depreciation and accumulated impairment losses, if any.
Land and the head office building under construction are recorded
at cost less any accumulated impairment losses. Right-of-use assets
are presented in Premises and equipment on the Consolidated Balance
Sheet. For additional information about the accounting treatment of
right-of-use assets, see the Leases section presented below.
Buildings, computer equipment, and equipment and furniture are
systematically depreciated over their estimated useful lives. The
depreciation period for leasehold improvements is the lesser of the
estimated useful life of the leasehold improvements or the
non-cancellable period of the lease. Depreciation methods and
estimated useful lives are reviewed on an annual basis. The
depreciation expense is recorded in Non-interest expenses in the
Consolidated Statement of Income.
Method Useful life
======================== ===================== ===========
Buildings 5% declining balance
Computer equipment Straight-line 3-7 years
Equipment and furniture Straight-line 8 years
Leasehold improvements Straight-line (1)
========================= ====================== ===========
(1) The depreciation period is the lesser of the estimated useful life or the lease term.
Leases
At the inception date of a contract, the Bank assesses whether
the contract is, or contains, a lease. A contract is, or contains,
a lease if it conveys the right to control the use of an identified
asset for a period of time in exchange for consideration. When the
Bank is a lessee, it recognizes a right-of-use asset and a
corresponding lease liability at the lease commencement date except
for short-term leases (defined as leases with terms of 12 months or
less) other than real estate leases and leases for which the
underlying asset is of low value. For such leases, the Bank
recognizes the lease payments as a non-interest expense on a
straight-line basis over the lease term. As a practical expedient,
the Bank elected, for real estate leases, not to separate non-lease
components from lease components and instead account for them as a
single lease component. When the Bank is the lessor, the leased
assets remain on the Consolidated Balance Sheet and are reported in
Premises and equipment, and the rental income is recognized net of
related expenses in Non-interest income in the Consolidated
Statement of Income.
Right-of-use assets are initially measured at cost and
subsequently measured at cost less accumulated depreciation and
accumulated impairment losses, if any, and adjusted for certain
remeasurements of lease liabilities. The cost of a right-of-use
asset comprises the amount of the initial measurement of the lease
liability, any lease payments made at or before the commencement
date, any initial direct costs incurred when entering into the
lease, and an estimate of costs to dismantle the asset or restore
the site, less any lease incentives received. Right-of-use assets
are depreciated on a straight-line basis over the lesser of the
lease term and the estimated useful life of the asset. Right-of-use
assets are presented in Premises and equipment on the Consolidated
Balance Sheet. The depreciation expense and impairment losses, if
any, are recorded in Non-interest expenses in the Consolidated
Statement of Income.
The lease liability is initially measured at the present value
of future lease payments net of lease incentives not yet received.
The present value of lease payments is determined using the Bank's
incremental borrowing rate. The lease liability is subsequently
measured at amortized cost using the effective interest method. In
determining the lease term, the Bank considers all the facts and
circumstances that create an economic incentive to exercise an
extension option or not to exercise a termination option. The lease
term determined by the Bank comprises the non-cancellable period of
lease contracts, the periods covered by an option to extend the
lease if the Bank is reasonably certain to exercise that option,
and the periods covered by an option to terminate the lease if the
Bank is reasonably certain not to exercise that option. The Bank
reassesses the lease term if a significant event or change in
circumstances occurs and that is within its control. The Bank
applies judgment to determine the lease term when the lease
contains extension and termination options. Lease liabilities are
presented in Other liabilities on the Consolidated Balance Sheet,
and the interest expense is presented in the Interest expense -
Other item of the Consolidated Statement of Income.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Goodwill
The Bank uses the acquisition method to account for business
combinations. The consideration transferred in a business
combination is measured at the acquisition-date fair value, and the
transaction costs related to the acquisition are expensed as
incurred. When the Bank acquires control of a business, all of the
identifiable assets and liabilities of the acquiree, including
intangible assets, are recorded at fair value. The interests
previously held in the acquiree are also measured at fair value.
Goodwill represents the excess of the purchase consideration and
all previously held interests over the fair value of the
identifiable net assets of the acquiree. If the fair value of the
identifiable net assets exceeds the purchase consideration and all
previously held interests, the difference is immediately recognized
in income as a gain on a bargain purchase.
Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the Bank's ownership
interest and can be initially measured at either fair value or at
the non-controlling interest's proportionate share of the
acquiree's identifiable net assets. The measurement basis is
selected on a case-by-case basis. Following an acquisition,
non-controlling interests consist of the value assigned to those
interests at initial recognition plus the non-controlling
interests' share of changes in equity since the date of the
acquisition.
Intangible Assets
Intangible Assets With Finite Useful Lives
Software that is not part of a cloud computing arrangement and
certain other intangible assets are recognized at cost less
accumulated amortization and accumulated impairment losses. These
intangible assets are systematically amortized on a straight-line
basis over their useful lives, which vary between four and ten
years. The amortization expense is recorded in Non-interest
expenses in the Consolidated Statement of Income.
Intangible Assets With Indefinite Useful Lives
The Bank's intangible assets with indefinite useful lives come
from the acquisition of subsidiaries or groups of assets and
consist of management contracts and a trademark. They are
recognized at the acquisition-date fair value. The management
contracts are for the management of open-ended funds. At the end of
each reporting period, the Bank reviews the useful lives to
determine whether facts and circumstances continue to support an
indefinite useful life assessment. Intangible assets are deemed to
have an indefinite useful life following an examination of all
relevant factors, in particular: (a) t he contracts do not have
contractual maturities; (b ) the stability of the business segment
to which the intangible assets belong; (c) the Bank's capacity to
control the future economic benefits of the intangible assets; and
(d) the continued economic benefits generated by the intangible
assets.
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 asset is tested for impairment by comparing its carrying
amount 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. 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.
Corporate assets, such as the head office building and computer
equipment, do not generate cash inflows that are largely
independent of the cash inflows generated by other assets or groups
of assets. Therefore, the recoverable amount of an individual
corporate asset cannot be determined unless management has decided
to dispose of the asset. However, if there is an indication that a
corporate asset may be impaired, the recoverable amount is
determined for the CGU or group of CGUs to which the corporate
asset belongs, and that recoverable amount is compared with the
carrying amount of this CGU or group of CGUs.
Goodwill is always tested for impairment at the level of a CGU
or group of CGUs. For impairment testing purposes, from the
acquisition date, goodwill resulting from a business combination
must be allocated to the CGU or group of CGUs expected to benefit
from the synergies of the business combination. Each CGU or group
of CGUs to which goodwill is allocated must represent the lowest
level for which the goodwill is monitored internally at the Bank
and must not be larger than an operating segment. The allocation of
goodwill to a CGU or group of CGUs involves management's judgment.
If an impairment loss is to be recognized, the Bank does so by
first reducing the carrying amount of goodwill allocated to the CGU
or group of CGUs and then reducing the carrying amounts of the
other assets of the CGU or group of CGUs in proportion to the
carrying amount of each asset in the CGU or group of CGUs.
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. An impairment
loss recognized in prior periods for an asset other than goodwill
must be reversed if, and only if, there has been a change in the
estimates used to determine the asset's recoverable amount since
the last impairment was recognized . If this is the case, the
carrying amount of the asset is increased, given that the
impairment loss was reversed, but shall not exceed the carrying
amount that would have been determined, net of amortization, had no
impairment loss been recognized for this asset in previous
years.
Provisions
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.
Provisions are reviewed at the end of each reporting period.
Provisions are presented in Other liabilities on the Consolidated
Balance Sheet.
Interest Income and Expense
Interest income and expense, except for the interest income on
securities classified as at fair value through profit or loss, are
recognized in Net interest income and calculated using the
effective interest rate method.
The effective interest rate is the rate that exactly discounts
estimated future cash inflows and outflows through the expected
life of a financial asset or financial liability to the gross
carrying amount of a financial asset or to the amortized cost of a
financial liability. When calculating the effective interest rate,
the Bank estimates expected cash flows by considering all the
contractual terms of the financial instrument but does not consider
expected credit losses. The calculation includes all fees and
points paid or received between the parties to the contract that
are an integral part of the effective interest rate, transaction
costs, and all other premiums or discounts. Interest income is
calculated by applying the effective interest rate to the gross
carrying amount of a financial asset except for purchased or
originated credit-impaired financial assets and financial assets
that were not impaired upon their purchase or origination but
became impaired thereafter. For purchased or originated
credit-impaired financial assets, the Bank applies the
credit-adjusted effective interest rate to the amortized cost of
the financial asset from initial recognition. The credit-adjusted
effective interest rate reflects expected credit losses. As for
loans that have subsequently become credit-impaired, interest
income is calculated by applying the effective interest rate to the
net carrying amount (net of allowances for credit losses) rather
than to the carrying amount.
Loan origination fees, including commitment, restructuring, and
renegotiation fees, are considered an integral part of the yield
earned on the loan. They are deferred and amortized using the
effective interest rate method, and the amortization is recognized
in Interest income over the term of the loan. Direct costs for
originating a loan are netted against the loan origination fees. If
it is likely that a commitment will result in a loan, commitment
fees receive the same accounting treatment, i.e., they are deferred
and amortized using the effective interest rate method and the
amortization is recognized in Interest income over the term of the
loan. Otherwise, they are recorded in Non-interest income over the
term of the commitment.
Loan syndication fees are recorded in Non-interest income unless
the yield on the loan retained by the Bank is less than that of
other comparable lenders involved in the financing. In such cases,
an appropriate portion of the fees is deferred and amortized using
the effective interest rate method, and the amortization is
recognized in Interest income over the term of the loan. Certain
mortgage loan prepayment fees are recognized in Interest income in
the Consolidated Statement of Income when earned.
Dividend Income
Dividends from an equity instrument are recognized in Net
interest income in the Consolidated Statement of Income when the
Bank's right to receive payment is established.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Fee and Commission Income
Fee and commission income is recognized when, or as, a
performance obligation is satisfied, i.e., when control of a
promised service is transferred to a customer and in an amount that
reflects the consideration that the entity expects to be entitled
to receive in exchange for the service. The revenue may therefore
be recognized at a point in time, upon completion of the service,
or over time as services are provided.
The Bank must also determine whether its performance obligation
is to provide the service itself or to arrange for another party to
provide the service (in other words, whether the Bank is acting as
a principal or agent). A principal may itself satisfy its
performance obligation to provide the specified good or service or
it may engage another party to satisfy some or all of the
performance obligation on its behalf. A principal also has the
primary responsibility for fulfilling the promise to provide the
good or service to the customer and has discretion in establishing
the price for the service. If the Bank is acting as a principal,
revenue is recognized on a gross basis in an amount corresponding
to the consideration to which the Bank expects to be entitled. If
the Bank is acting as an agent, then revenue is recognized net of
the service fees and other costs incurred in relation to the
commission and fees earned.
Underwriting and Advisory Fees
Underwriting and advisory fees include underwriting fees,
financial advisory fees, and loan syndication fees. These fees are
mainly earned in the Financial Markets segment and are recognized
at a point in time as revenue upon successful completion of the
engagement. Financial advisory fees are fees earned for assisting
customers with transactions related to mergers and acquisitions and
financial restructurings. Loan syndication fees represent fees
earned as the agent or lead lender responsible for structuring,
arranging, and administering a loan syndication and are recorded in
Non-interest income unless the yield on the loan retained by the
Bank is less than that of other comparable lenders involved in the
financing. In such cases, an appropriate portion of the fees is
deferred and amortized using the effective interest rate method,
and the amortization is recognized in Interest income over the term
of the loan.
Securities Brokerage Commissions
Securities brokerage commissions are earned in the Wealth
Management segment and are recognized when the transaction is
executed.
Mutual Fund Revenues
Mutual fund revenues include management fees earned in the
Wealth Management segment. Management fees are primarily calculated
based on a fund's net asset value and are recorded in the period
the services are performed.
Investment Management and Trust Service Fees
Investment management and trust service fees include management
fees, trust service fees, and fees for other investment services
provided to clients and earned in the Wealth Management segment.
Generally, these fees are calculated using the balances of assets
under administration and assets under management. Such fees are
recognized in the period the service is performed.
Card Revenues
Card revenues are earned in the Personal and Commercial segment
and include card fees such as annual and transactional fees as well
as interchange fees. Interchange fees are recognized when a card
transaction is settled. Card fees are recognized on the transaction
date except for annual fees, which are recorded evenly throughout
the year. Reward costs are recorded as a reduction to interchange
fees.
Credit Fees and Deposit and Payment Service Charges
Credit fees and deposit and payment service charges are earned
in the Personal and Commercial, Financial Markets, and U.S.
Specialty Finance and International segments. Credit fees include
commissions earned by providing services for loan commitments,
financial guarantee contracts, bankers' acceptances, and letters of
credit and guarantee, and they are generally recognized in income
over the period the services are provided. Deposit and payment
service charges include fees related to account maintenance
activities and transaction-based service charges. Fees related to
account maintenance activities are recognized in the period the
services are provided, whereas transaction-based service charges
are recognized when the transaction is executed.
Insurance Revenues
Insurance contracts, including reinsurance contracts, are
arrangements under which one party accepts significant insurance
risk by agreeing to compensate the policyholder if a specified
uncertain future event was to occur. Gross premiums, net of
premiums transferred under reinsurance contracts, are recognized
when they become due. Royalties received from reinsurers are
recognized when earned. Claims are recognized when received and an
amount is estimated as they are being processed. All these amounts
are recognized on a net basis in Non-interest income in the
Consolidated Statement of Income.
Upon recognition of a premium, a reinsurance asset and insurance
liability are recognized, respectively, in Other assets and in
Other liabilities on the Consolidated Balance Sheet. Subsequent
changes in the carrying values of the reinsurance asset and
insurance liability are recognized on a net basis in Non--interest
income in the Consolidated Statement of Income.
Income Taxes
Income taxes include current taxes and deferred taxes and are
recorded in net income except for income taxes generated by items
recognized in Other comprehensive income or directly in equity.
Current tax is the amount of income tax payable on the taxable
income for a period. It is calculated using the enacted or
substantively enacted tax rates prevailing on the reporting date,
and any adjustments recognized in the period for the current tax of
prior periods. Current tax assets and liabilities are offset, and
the net balance is presented in either Other assets or Other
liabilities on the Consolidated Balance Sheet when the Bank has a
legally enforceable right to set off the recognized amounts and
intends to settle on a net basis or to simultaneously realize the
asset and settle the liability.
Deferred tax is established based on temporary differences
between the carrying values and the tax bases of assets and
liabilities, in accordance with enacted or substantively enacted
income tax laws and rates that will apply on the date the
differences reverse. Deferred tax is not recognized for temporary
differences related to the following:
-- the initial accounting of goodwill;
-- the initial accounting of an asset or liability in a
transaction that is not a business combination and that, at the
time of the transaction, affects neither accounting income nor
taxable income;
-- investments in subsidiaries, associates and joint ventures
when it is probable that the temporary difference will not reverse
in the foreseeable future and that the Bank controls the timing of
the reversal of the temporary difference;
-- investments in subsidiaries, associates and joint ventures
when it is probable that the temporary difference will not reverse
in the foreseeable future and that there will not be taxable income
to which the temporary difference can be recognized.
Deferred tax assets are tax benefits in the form of deductions
that the Bank may claim to reduce its taxable income in future
years. At the end of each reporting period, the carrying amount of
deferred tax assets is revised, and it is reduced to the extent
that it is no longer probable that sufficient taxable income will
be available to allow the benefit of the deferred tax asset to be
utilized.
Deferred tax assets and liabilities are offset, and the net
balance is presented in either Other assets or Other liabilities on
the Consolidated Balance Sheet when the Bank has a legally
enforceable right to set off the current tax assets and liabilities
and if the deferred tax assets and liabilities relate to taxes
levied by the same taxation authority on the same taxable entity or
on different taxable entities that intend to settle current tax
assets and liabilities based on their net amount.
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 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 is subject to the jurisdictions of various tax
authorities. In the normal course of its business, the Bank is
involved in a number of transactions for which the tax impacts are
uncertain. As a result, the Bank accounts for provisions for
uncertain tax positions that adequately represent the tax risk
stemming from tax matters under discussion or being audited by tax
authorities or from other matters involving uncertainty. The
amounts of these provisions reflect the best possible estimates of
the amounts that may have to be paid based on qualitative
assessments of all relevant factors. The provisions are estimated
at the end of each reporting period. However, it is possible that,
at a future date, a provision might need to be adjusted following
an audit by the tax authorities. When the final assessment differs
from the initially provisioned amounts, the difference will impact
the income taxes of the period in which the assessment was
made.
Financial Guarantee Contracts
A financial guarantee contract is a contract or indemnification
agreement that could require the Bank to make specified payments
(in cash, financial instruments, other assets, Bank shares, or
provisions of services) to reimburse a beneficiary in the event of
a loss resulting from a debtor defaulting on the original or
amended terms of a debt instrument.
To reflect the fair value of an obligation assumed at the
inception of a financial guarantee, a liability is recorded in
Other liabilities on the Consolidated Balance Sheet. After initial
recognition, the Bank must measure financial guarantee contracts at
the higher of the allowance for credit losses, determined using the
ECL model, and of the initially recognized amount less, where
applicable, the cumulative amount of revenue recognized. This
revenue is recognized in Credit fees in the Consolidated Statement
of Income.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Employee Benefits - Pension Plans and Other Post-Employment
Benefit Plans
The Bank offers pension plans that have a defined benefit
component and a defined contribution component. The Bank also
offers other post-employment benefit plans to eligible employees.
The other post-employment benefit plans include post-employment
medical, dental, and life insurance coverage. The defined benefit
component of the pension plans is funded, whereas the defined
contribution component of the pension plans and of the other
post-employment benefit plans are not funded.
Defined Benefit Component of the Pension Plans and Other
Post-Employment Benefit Plans
Plan expenses and obligations are actuarially determined based
on 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.
The net asset or net liability related to these plans are
calculated separately for each plan as the difference between the
present value of the future benefits earned by employees for
current and prior-period service and the fair value of plan assets.
The net asset or net liability is included in either the Other
assets or Other liabilities item of the Consolidated Balance
Sheet.
The expense related to these plans consists of the following
items: current service cost, net interest on the net plan asset or
liability, administration costs, and past service cost, if any,
recognized when a plan is amended. This expense is recognized in
Compensation and employee benefits in the Consolidated Statement of
Income. The net amount of interest income and expense is determined
by applying a discount rate to the net plan asset or liability
amount.
Remeasurements of defined benefit pension plans and other
post-employment benefit plans represent actuarial gains and losses
related to the defined benefit obligation and the actual return on
plan assets, excluding net interest determined by applying a
discount rate to the net plan asset or liability amount.
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.
Defined Contribution Component of the Pension Plans
The expense for these plans is equivalent to the Bank's
contributions during the period and is recognized in Compensation
and employee benefits in the Consolidated Statement of Income.
Share-Based Payments
The Bank has several share-based compensation plans: the Stock
Option Plan, the Stock Appreciation Rights (SAR) Plan, the Deferred
Stock Unit (DSU) Plan, the Restricted Stock Unit (RSU) Plan, the
Performance Stock Unit (PSU) Plan, the Deferred Compensation Plan
(DCP) of National Bank Financial, and the Employee Share Ownership
Plan.
Compensation expense is recognized over the service period
required for employees to become fully entitled to the award. This
period is generally the same as the vesting period, except where
the required service period begins before the award date.
Compensation expense related to awards granted to employees
eligible to retire on the award date is immediately recognized on
the award date. Compensation expense related to awards granted to
employees who will become eligible to retire during the vesting
period is recognized over the period from the award date to the
date the employee becomes eligible to retire. For all of these
plans, as of the first year of recognition, the expense includes
cancellation and forfeiture estimates. These estimates are
subsequently revised, as necessary. The Bank uses derivative
financial instruments to hedge the risks associated with some of
these plans. The compensation expense for these plans, net of
related hedges, is recognized in the Consolidated Statement of
Income.
Under the Stock Option Plan, the Bank uses the fair value method
to account for stock options awarded. The options vest at 25% per
year, and each tranche is treated as though it was a separate
award. The fair value of each of the tranches is measured on the
award date using the Black-Scholes model, and this fair value is
recognized in Compensation and employee benefits and Contributed
surplus. When the options are exercised, the Contributed surplus
amount is credited to Equity - Common shares on the Consolidated
Balance Sheet. The proceeds received from the employees when these
options are exercised are also credited to Equity - Common shares
on the Consolidated Balance Sheet.
SARs are recorded at fair value when awarded, and their fair
value is remeasured at the end of each reporting period until they
are exercised. The cost is recognized in Compensation and employee
benefits in the Consolidated Statement of Income and in Other
liabilities on the Consolidated Balance Sheet. The obligation that
results from the change in fair value at each period is recognized
in net income gradually over the vesting period, and periodically
thereafter, until the SARs are exercised. When a SAR is exercised,
the Bank makes a cash payment equal to the increase in the stock
price since the date of the award.
The obligation that results from the award of a DSU, RSU, PSU
and DCP unit is recognized in net income, and the corresponding
amount is included in Other liabilities on the Consolidated Balance
Sheet. For the DSU, RSU and DCP plans, the change in the obligation
attributable to changes in the share price and dividends paid on
the common shares of these plans is recognized in Compensation and
employee benefits in the Consolidated Statement of Income for the
period in which the changes occur. On the redemption date, the Bank
makes a cash payment equal to the value of the common shares on
that date. For the PSU Plan, the change in the obligation
attributable to changes in the share price, adjusted upward or
downward depending on the relative result of the performance
criteria, and the change in the obligation attributable to
dividends paid on the shares awarded under the plan, are recognized
in Compensation and employee benefits in the Consolidated Statement
of Income for the period in which the changes occur. On the
redemption date, the Bank makes a cash payment equal to the value
of the common shares on that date, adjusted upward or downward
according to the performance criteria.
The Bank's contributions to the employee share ownership plan
are expensed as incurred.
Note 2 - 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.
Note 3 - Fair Value of Financial Instruments
Fair Value and Carrying Value of Financial Instruments by
Category
Financial assets and financial liabilities are recognized on the
Consolidated Balance Sheet at fair value or at amortized cost in
accordance with the categories set out in the accounting framework
for financial instruments.
As at October
31, 2022
================ =========== =========== ============= ============= =========== ==============================
Carrying value Carrying Fair
and fair value value value
------------- ------------------------------------------------------ ----------- ----------- ======== =======
Financial Debt Equity
instruments Financial securities securities
classified instruments classified designated
as designated as at at Financial Financial
at fair at fair fair value fair value instruments instruments
value value through through at at
through through other other amortized amortized Total Total
profit profit comprehensive comprehensive cost, cost, carrying fair
or loss or loss income income net net value value
============= =========== =========== ============= ============= =========== =========== ======== =======
Financial assets
Cash and
deposits
with financial
institutions - - - - 31,870 31,870 31,870 31,870
- -
Securities 86,338 1,037 8,272 556 13,516 13,007 109,719 109,210
Securities
purchased
under reverse
repurchase
agreements
and securities
borrowed - - - - 26,486 26,486 26,486 26,486
Loans and
acceptances,
net of
allowances 10,516 - - - 196,228 190,955 206,744 201,471
Other
Derivative
financial
instruments 18,547 - - - - - 18,547 18,547
Other assets 87 - - - 3,221 3,221 3,308 3,308
--------------- ----------- ----------- ------------- ------------- ----------- ----------- -------- -------
Financial
liabilities
Deposits (1) - 15,355 251,039 249,937 266,394 265,292
Other
Acceptances - - 6,541 6,541 6,541 6,541
Obligations
related
to securities
sold
short 21,817 - - - 21,817 21,817
Obligations
related
to securities
sold
under
repurchase
agreements
and
securities
loaned - - 33,473 33,473 33,473 33,473
Derivative
financial
instruments 19,632 - - - 19,632 19,632
Liabilities
related
to transferred
receivables - 11,352 14,925 14,137 26,277 25,489
Other
liabilities - - 2,632 2,627 2,632 2,627
Subordinated
debt - - 1,499 1,478 1,499 1,478
=============== =========== =========== ============= ============= =========== =========== ======== =======
(1) Includes embedded derivative financial instruments.
As at October 31,
2021
================ =========== =========== ============= ============= =========== ==============================
Carrying value Carrying Fair
and fair value value value
------------- ------------------------------------------------------ ----------- ----------- ======== =======
Financial Debt Equity
instruments Financial securities securities
classified instruments classified designated
as designated as at at Financial Financial
at fair at fair fair value fair value instruments instruments
value value through through at at
through through other other amortized amortized Total Total
profit profit comprehensive comprehensive cost, cost, carrying fair
or loss or loss income income net net value value
============= =========== =========== ============= ============= =========== =========== ======== =======
Financial assets
Cash and
deposits
with financial
institutions - - - - 33,879 33,879 33,879 33,879
Securities 83,464 1,347 8,966 617 11,910 11,897 106,304 106,291
Securities
purchased
under reverse
repurchase
agreements
and
securities
borrowed - - - - 7,516 7,516 7,516 7,516
Loans and
acceptances,
net of
allowances 8,539 - - - 174,150 173,769 182,689 182,308
Other
Derivative
financial
instruments 16,484 - - - - - 16,484 16,484
Other assets - - - - 2,244 2,244 2,244 2,244
--------------- ----------- ----------- ------------- ------------- ----------- ----------- -------- -------
Financial
liabilities
Deposits (1) - 14,018 226,920 227,054 240,938 241,072
Other
Acceptances - - 6,836 6,836 6,836 6,836
Obligations
related
to securities
sold
short 20,266 - - - 20,266 20,266
Obligations
related
to securities
sold
under
repurchase
agreements
and
securities
loaned - - 17,293 17,293 17,293 17,293
Derivative
financial
instruments 19,367 - - - 19,367 19,367
Liabilities
related
to transferred
receivables - 11,398 13,772 13,724 25,170 25,122
Other
liabilities - - 2,101 2,101 2,101 2,101
Subordinated
debt - - 768 773 768 773
=============== =========== =========== ============= ============= =========== =========== ======== =======
(1) Includes embedded derivative financial instruments.
Establishing Fair Value
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 provide the best
evidence of fair value. When there is no quoted price in an active
market, the Bank applies other valuation techniques that maximize
the use of relevant observable inputs and that minimize the use of
unobservable inputs. Such valuation techniques include the
following: using information available from recent market
transactions, referring to the current fair value of a comparable
financial instrument, applying discounted cash flow analysis,
applying option pricing models, or relying on any other valuation
technique that is commonly used by market participants and has
proven to yield reliable estimates. Judgment is required when
applying many of the valuation techniques. The Bank's valuation was
based on its assessment of the conditions prevailing as at October
31, 2022 and may change in the future. Furthermore, there may be
measurement uncertainty resulting from the choice of valuation
model used.
Note 3 - Fair Value of Financial Instruments (cont.)
Valuation Governance
Fair value is established in accordance with a rigorous control
framework. The Bank has policies and procedures that govern the
process for determining fair value. These policies are documented
and periodically reviewed by the Risk Management Group. All
valuation models are validated, and controls have been implemented
to ensure that they are applied.
The fair value of existing or new products is determined and
validated by functions independent of the risk-taking team. Complex
fair value matters are reviewed by valuation committees made up of
experts from various specialized functions.
For financial instruments classified in Level 3 of the fair
value hierarchy, the Bank has documented the hierarchy
classification policies, and controls are in place to ensure that
fair value is measured appropriately, reliably, and consistently.
Valuation methods and the underlying assumptions are regularly
reviewed.
Valuation Methods and Assumptions
Financial Instruments Whose Fair Value Equals Carrying Value
The carrying value of the following financial instruments is a
reasonable approximation of fair value:
-- cash and deposits with financial institutions;
-- securities purchased under reverse repurchase agreements and securities borrowed;
-- obligations related to securities sold under repurchase agreements and securities loaned;
-- customers' liability under acceptances;
-- acceptances;
-- certain items of other assets and other liabilities.
Securities and Obligations Related to Securities Sold Short
These financial instruments, except for securities at amortized
cost, are recognized at fair value on the Consolidated Balance
Sheet. Their fair value is based on quoted prices in active
markets, i.e., bid prices for financial assets and offered prices
for financial liabilities. If there are no quoted prices in an
active market, fair value is estimated using prices for securities
that are substantially the same. If such prices are not available,
fair value is determined using valuation techniques that
incorporate assumptions based primarily on observable market inputs
such as current market prices, the contractual prices of the
underlying instruments, the time value of money, credit risk,
interest rate yield curves, and currency rates.
When one or more significant inputs are not observable in the
markets, fair value is established primarily using internal
estimates and data that consider the valuation policies in effect
at the Bank, economic conditions, the characteristics specific to
the financial asset or liability, and other relevant factors.
Securities Issued or Guaranteed by Governments
Securities issued or guaranteed by governments include
government debt securities of the governments of Canada (federal,
provincial and municipal) as well as debt securities of the U.S.
government (U.S. Treasury), of other U.S. agencies, and of other
foreign governments. The fair value of these securities is based on
unadjusted quoted prices in active markets. For those classified in
Level 2, quoted prices for identical or similar instruments in
active markets are used to determine fair value. In the absence of
an observable market, a valuation technique such as the discounted
cash flow method could be used, incorporating assumptions on
benchmark yields (CDOR, LIBOR and other) and the risk spreads of
similar securities.
Equity Securities and Other Debt Securities
The fair value of equity securities is determined primarily by
using quoted prices in active markets. For equity securities and
other debt securities classified in Level 2, a valuation technique
based on quoted prices of identical and similar instruments in an
active market is used to determine fair value. In the absence of
observable inputs, a valuation technique such as the discounted
cash flow method could be used, incorporating assumptions on
benchmark yields (CDOR, LIBOR and other) and the risk spreads of
similar securities. For those classified in Level 3, fair value can
be determined based on net asset value, which represents the
estimated value of a security based on valuations received from
investment or fund managers or the general partners of limited
partnerships. Fair value can also be determined using internal
valuation techniques adjusted to reflect financial instrument risk
factors and economic conditions.
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on
the Consolidated Balance Sheet. For exchange-traded derivative
financial instruments, fair value is based on quoted prices in an
active market.
For over-the-counter (OTC) derivative financial instruments,
fair value is determined using well established valuation
techniques that incorporate assumptions based primarily on
observable market inputs such as current market prices and the
contractual prices of the underlying instruments, the time value of
money, interest rate yield curves, credit curves, currency rates as
well as price and rate volatility factors. In establishing the fair
value of OTC derivative financial instruments, the Bank also
incorporates the following factors:
Credit Valuation Adjustment (CVA)
The CVA is a valuation adjustment applied to derivative
financial instruments to reflect the credit risk of the
counterparty. For each counterparty, the CVA is based on the
expected positive exposure and probabilities of default through
time. The exposures are determined by using relevant factors such
as current and potential future market values, master netting
agreements, collateral agreements, and expected recovery rates. The
default probabilities are inferred using credit default swap (CDS)
spreads. When such information is unavailable, relevant proxies are
used. While the general methodology currently assumes independence
between expected positive exposures and probabilities of default,
adjustments are applied to certain types of transactions where
there is a direct link between the exposure at default and the
default probabilities.
Funding Valuation Adjustment (FVA)
The FVA is a valuation adjustment applied to derivative
financial instruments to reflect the market-implied cost or
benefits of funding collateral for uncollateralized or partly
collateralized transactions. The expected exposures are determined
using methodologies consistent with the CVA framework. The funding
level used to determine the FVA is based on the average funding
level of relevant market participants.
When the valuation techniques incorporate one or more
significant inputs that are not observable in the markets, the fair
value of OTC derivative financial instruments is established
primarily on the basis of internal estimates and data that consider
the valuation policies in effect at the Bank, economic conditions,
the characteristics specific to the financial asset or financial
liability, and other relevant factors .
Loans
The fair value of fixed-rate mortgage loans is determined by
discounting expected future contractual cash flows, adjusted for
several factors, including prepayment options, current market
interest rates for similar loans, and other relevant variables
where applicable. The fair value of variable-rate mortgage loans is
deemed to equal carrying value.
The fair value of other fixed-rate loans is determined by
discounting expected future contractual cash flows using current
market interest rates charged for similar new loans. The fair value
of other variable-rate loans is deemed to equal carrying value.
Deposits
The fair value of fixed-term deposits is determined primarily by
discounting expected future contractual cash flows and considering
several factors such as redemption options and market interest
rates currently offered for financial instruments with similar
conditions. For certain term funding instruments, fair value is
determined using market prices for similar instruments. The fair
value of demand deposits and notice deposits is deemed to equal
carrying value.
The fair value of structured deposit notes is established using
valuation models that maximize the use of observable inputs when
available, such as benchmark indices, and also incorporates the
Bank's own credit risk. In calculating the Bank's own credit risk,
the market implied spreads of the Bank are used to infer its
probabilities of default. Lastly, when fair value is determined
using option pricing models, the valuation techniques are similar
to those described for derivative financial instruments.
Liabilities Related to Transferred Receivables
These liabilities arise from sale transactions to Canada Housing
Trust (CHT) of securities backed by insured residential mortgages
and other securities under the Canada Mortgage Bond (CMB) program.
These transactions do not qualify for derecognition. They are
recorded as guaranteed borrowings, which results in the recording
of liabilities on the Consolidated Balance Sheet. The fair value of
these liabilities is established using valuation techniques based
on observable market inputs such as Canada Mortgage Bond
prices.
Note 3 - Fair Value of Financial Instruments (cont.)
Other Liabilities and Subordinated Debt
The fair value of these financial liabilities is based on quoted
market prices in an active market. If there is no active market,
fair value is determined by discounting contractual cash flows
using the current market interest rates offered for similar
financial instruments that have the same term to maturity.
Hierarchy of Fair Value Measurements
Determining the Levels of the Fair Value Measurement
Hierarchy
IFRS establishes a fair value measurement hierarchy that
classifies the inputs used in financial instrument fair value
measurement techniques according to three levels. This fair value
hierarchy requires observable market inputs to be used whenever
such inputs exist. According to the hierarchy, the highest level of
inputs are unadjusted quoted prices in active markets for identical
instruments and the lowest level of inputs are unobservable inputs.
If inputs from different levels of the hierarchy are used, the
financial instrument is classified in the same level as the lowest
level input that is significant to the fair value measurement. The
fair value measurement hierarchy has the following levels:
Level 1
Inputs 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 the following:
-- financial instruments measured at fair value through profit
or loss: investments in hedge funds for which there are certain
restrictions on unit or security redemptions, equity securities and
debt securities of private companies, as well as certain derivative
financial instruments whose fair value is established using
internal valuation models that are based on significant
unobservable market inputs;
-- securities at fair value through other comprehensive income:
equity and debt securities of private companies;
-- certain loans and certain deposits (structured deposit notes)
whose fair value is established using internal valuation models
that are based on significant unobservable market inputs;
-- certain other assets for which fair value is established
using internal valuation models that are based on significant
unobservable market inputs.
Transfers Between the Fair Value Hierarchy Levels
Transfers of financial instruments between Levels 1 and 2 and
transfers to (or from) Level 3 are deemed to have taken place at
the beginning of the quarter in which the transfer occurred.
Significant transfers can occur between the fair value hierarchy
levels due to new information on inputs used to determine fair
value and the observable nature of those inputs.
During fiscal 2022, $41 million in securities classified as at
fair value through profit or loss and $3 million in obligations
related to securities sold short were transferred from Level 2 to
Level 1 as a result of changing market conditions ($31 million in
securities classified as at fair value through profit or loss and
$2 million in obligations related to securities sold short in
fiscal 2021). In addition, during fiscal 2022, $26 million in
securities classified as at fair value through profit or loss and
$2 million in obligations related to securities sold short were
transferred from Level 1 to Level 2 as a result of changing market
conditions (for fiscal 2021, $30 million in securities classified
as at fair value through profit or loss).
During fiscal years 2022 and 2021, financial instruments were
transferred to (or from) Level 3 due to changes in the availability
of observable market inputs as a result of changing market
conditions.
Financial Instruments Recorded at Fair Value on the Consolidated
Balance Sheet
The following tables show financial instruments recorded at fair
value on the Consolidated Balance Sheet according to the fair value
hierarchy.
As at October 31, 2022
=============================================== ====== ==================================
Total
financial
assets/liabilities
Level Level Level at fair
1 2 3 value
=============================================== ====== ====== ===== ===================
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government 4,736 8,186 - 12,922
Canadian provincial and municipal governments - 9,260 - 9,260
U.S. Treasury, other U.S. agencies and
other foreign governments 10,639 4,445 - 15,084
Other debt securities - 3,324 60 3,384
Equity securities 45,805 504 416 46,725
------------------------------------------------ ------ ------ ----- -------------------
61,180 25,719 476 87,375
----------------------------------------------- ------ ------ ----- -------------------
At fair value through other comprehensive
income
Securities issued or guaranteed by
Canadian government 21 3,191 - 3,212
Canadian provincial and municipal governments - 1,970 - 1,970
U.S. Treasury, other U.S. agencies and
other foreign governments 1,687 191 - 1,878
Other debt securities - 1,212 - 1,212
Equity securities - 236 320 556
------------------------------------------------ ------ ------ ----- -------------------
1,708 6,800 320 8,828
----------------------------------------------- ------ ------ ----- -------------------
Loans - 10,272 244 10,516
Other
Derivative financial instruments 342 18,204 1 18,547
Other assets - Other items - - 87 87
------------------------------------------------- ------ ------ ----- -------------------
63,230 60,995 1,128 125,353
--------------------------------------------------- ------ ------ ----- -------------------
Financial liabilities
Deposits - 15,424 8 15,432
Other
Obligations related to securities sold
short 15,213 6,604 - 21,817
Derivative financial instruments 625 18,989 18 19,632
Liabilities related to transferred receivables - 11,352 - 11,352
15,838 52,369 26 68,233
=================================================== ====== ====== ===== ===================
Note 3 - Fair Value of Financial Instruments (cont.)
As at October 31, 2021
=============================================== ======= =====================================
Total financial
assets/liabilities
at fair
Level 1 Level 2 Level 3 value
=============================================== ======= ======= ======= ===================
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government 2,661 6,716 - 9,377
Canadian provincial and municipal governments - 8,998 - 8,998
U.S. Treasury, other U.S. agencies and
other foreign governments 2,547 1,878 - 4,425
Other debt securities - 2,484 47 2,531
Equity securities 58,539 517 424 59,480
------------------------------------------------ ------- ------- ------- -------------------
63,747 20,593 471 84,811
----------------------------------------------- ------- ------- ------- -------------------
At fair value through other comprehensive
income
Securities issued or guaranteed by
Canadian government 19 4,214 - 4,233
Canadian provincial and municipal governments - 2,313 - 2,313
U.S. Treasury, other U.S. agencies and
other foreign governments 1,384 252 - 1,636
Other debt securities - 784 - 784
Equity securities - 311 306 617
------------------------------------------------ ------- ------- ------- -------------------
1,403 7,874 306 9,583
----------------------------------------------- ------- ------- ------- -------------------
Loans - 8,242 297 8,539
Other
Derivative financial instruments 203 16,278 3 16,484
------------------------------------------------- ------- ------- ------- -------------------
65,353 52,987 1,077 119,417
------------------------------------------------ ------- ------- ------- -------------------
Financial liabilities
Deposits - 14,215 - 14,215
Other
Obligations related to securities sold
short 15,546 4,720 - 20,266
Derivative financial instruments 693 18,673 1 19,367
Liabilities related to transferred receivables - 11,398 - 11,398
16,239 49,006 1 65,246
================================================ ======= ======= ======= ===================
Financial Instruments Classified in Level 3
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 based, in part, on observable market inputs. The following table
shows the significant unobservable inputs used for the fair value
measurements of financial instruments classified in Level 3 of the
hierarchy.
As at October
31, 2022
=================== ===== ============= =============== =====================================
Range of input
values
===== ============= =============== -------------------------------------
Primary Significant
Fair valuation unobservable
value techniques inputs Low High
====================== ===== ============= =============== ========= ====== ========== ======
Financial assets
Securities
Equity securities and
other debt Net asset
securities 796 value Net asset value 100 % 100 %
Market EV/EBITDA(1)
comparable multiple 18 x 21 x
Discounted
cash
flows Discount rate 4.50 % 19.00 %
Loans
Loans at fair value Discounted
through profit or cash
loss 244 flows Discount rate 7.06 % 15.09 %
Discounted
cash Liquidity
flows premium 2.62 % 10.49 %
Other
Derivative financial
instruments
Option
pricing Long-term
Equity contracts 1 model volatility 21 % 54 %
Market
correlation 38 % 95 %
Discounted
Other assets - Other cash
items 87 flows Discount rate 9 % 9 %
--------------------- ----- ------------- --------------- --------- ------ ---------- ------
1,128
------------------- ----- ------------- --------------- --------- ------ ---------- ------
Financial liabilities
Deposits
Option
Structured deposit pricing Long-term
notes(2) 8 model volatility 10 % 35 %
Market
correlation (3) % 94 %
Other
Derivative financial
instruments
Discounted
Interest rate cash
contracts 8 flows Discount rate 2.20 % 2.20 %
Option
pricing Long-term
Equity contracts 10 model volatility 9 % 51 %
Market
correlation 1 % 95 %
------------------- ----- ------------- --------------- --------- ------ ---------- ------
26
==================== ===== ============= =============== ========= ====== ========== ======
As at October 31,
2021
=================== ===== ============= =============== =======================================
Range of input
values
===== ============= =============== ---------------------------------------
Primary Significant
Fair valuation unobservable
value techniques inputs Low High
====================== ===== ============= =============== ========= ====== ========== ========
Financial assets
Securities
Equity securities and
other debt Net asset
securities 777 value Net asset value 100 % 100 %
Market EV/EBITDA(1)
comparable multiple 18 x 20 x
Discounted
cash
flows Credit spread 560 Bps(3) 560 Bps(3)
Discounted
cash
flows Discount rate 4.50 % 19.00 %
Loans
Loans at fair value Discounted
through profit or cash
loss 297 flows Discount rate 3.25 % 7.09 %
Discounted
cash Liquidity
flows premium 1.98 % 6.27 %
Other
Derivative financial
instruments
Discounted
Interest rate cash
contracts 3 flows Discount rate 2.20 % 2.20 %
1,077
------------------- ----- ------------- --------------- --------- ------ ---------- --------
Financial liabilities
Other
Derivative financial
instruments
Option
pricing Long-term
Equity contracts 1 model volatility 6 % 86 %
Market
correlation (5) % 90 %
------------------- ----- ------------- --------------- --------- ------ ---------- --------
1
==================== ===== ============= =============== ========= ====== ========== ========
(1) EV/EBITDA means Enterprise Value/Earnings Before Interest,
Taxes, Depreciation and Amortization.
(2) Includes embedded derivative financial instruments .
(3) Bps or basis point is a unit of measure equal to 0.01%.
Note 3 - Fair Value of Financial Instruments (cont.)
Significant Unobservable Inputs Used for Fair Value Measurements
of Financial Instruments Classified in Level 3
Net Asset Value
Net asset value is the estimated value of a security based on
valuations received from the investment or fund managers, the
administrators of the conduits, or the general partners of limited
partnerships. The net asset value of a fund is the total fair value
of assets less liabilities.
EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes,
Depreciation and Amortization) Multiple and Price Equivalent
Private equity valuation inputs include earnings multiples,
which are determined based on comparable companies, and a higher
multiple will translate into a higher fair value. Price equivalent
is a percentage of the market price based on the liquidity of the
security.
Discount Rate
The discount rate is the input used to bring future cash flows
to their present value. A higher discount rate will translate into
a lower fair value.
Liquidity Premium
A liquidity premium may be applied when few or no transactions
exist to support the valuations. A higher liquidity premium will
result in a lower value.
Long-Term Volatility
Volatility is a measure of the expected future variability of
market prices. Volatility is generally observable in the market
through options prices. However, the long-term volatility of
options with a longer maturity might not be observable. An increase
(decrease) in long-term volatility is generally associated with an
increase (decrease) in long-term correlation. Higher long-term
volatility may increase or decrease an instrument's fair value
depending on its terms.
Market Correlation
Correlation is a measure of the inter-relationship between two
different variables. A positive correlation means that the
variables tend to move in the same direction; a negative
correlation means that the variables tend to move in opposite
directions. Correlation is used to measure financial instruments
whose future returns depend on several variables. Changes in
correlation will either increase or decrease a financial
instrument's fair value depending on the terms of its contractual
payout.
Credit Spread
A credit spread (yield) is the difference between the
instrument's yield and a benchmark yield. Benchmark instruments
have high credit quality ratings with similar maturities. The
credit spread therefore represents the discount rate used to
determine the present value of future cash flows of an asset to
reflect the market return required for credit quality in the
estimated cash flows. A higher credit spread will result in a lower
value.
Sensitivity Analysis of Financial Instruments Classified in
Level 3
The Bank performs sensitivity analyses for the fair value
measurements of Level 3 financial instruments, substituting
unobservable inputs with one or more reasonably possible
alternative assumptions.
For equity securities and other debt securities , the Bank
varies significant unobservable inputs such as net asset values,
EV/EBITDA multiples, or price equivalents and establishes a
reasonable fair value range that could result in a $126 million
increase or decrease in the fair value recorded as at October 31,
2022 (a $115 million increase or decrease as at October 31, 2021
).
For loans, the Bank varies unobservable inputs such as a
liquidity premium and establishes a reasonable fair value range
that could result in a $31 million increase or decrease in the fair
value recorded as at October 31, 2022 (a $28 million increase or
decrease as at October 31, 2021).
For derivative financial instruments and embedded derivative
financial instruments related to structured deposit notes, the Bank
varies long-term volatility and market correlation inputs and
establishes a reasonable fair value range. As at October 31, 2022 ,
for derivative financial instruments, the net fair value could
result in a $5 million increase or decrease (a $1 million increase
or decrease as at October 31, 2021 ), whereas for structured
deposit notes, the net fair value could result in a $1 million
increase or decrease (no sensitivity analysis as at October 31,
2021 since there were no structured deposit notes classified in
Level 3).
For other assets, the Bank varies unobservable inputs such as
discount rates and establishes a reasonable fair value range that
could result in a $10 million increase or decrease in the fair
value recorded as at October 31, 2022 (no sensitivity analysis as
at October 31, 2021 since there were no other assets classified in
Level 3) .
For all Level 3 financial instruments, the reasonable fair value
ranges could result in a 5% increase or decrease in net income as
at October 31, 2022 (a 5% increase or decrease in net income as at
October 31, 2021 ).
Change in the Fair Value of Financial Instruments Classified in
Level 3
The Bank may hedge the fair value of financial instruments
classified in the various levels through offsetting hedge
positions. Gains and losses for financial instruments classified in
Level 3 presented in the following tables do not reflect the
inverse gains and losses on financial instruments used for economic
hedging purposes that may have been classified in Level 1 or 2 by
the Bank. In addition, the Bank may hedge the fair value of
financial instruments classified in Level 3 using other financial
instruments classified in Level 3. The effect of these hedges is
not included in the net amount presented in the following tables. T
he gains and losses presented hereafter may comprise changes in
fair value based on observable and unobservable inputs.
Year ended October
31, 2022
======================================= ========== ============== ======= ======================
Securities
Securities at fair
at fair value
value through Loans Derivative
through other and financial
profit comprehensive other instruments Deposits
or loss income assets (1) (2)
====================================== ========== ============== ======= ============ ========
Fair value as at October 31, 2021 471 306 297 2 -
Total realized and unrealized gains
(losses) included in Net income
(3) 21 - (50) (19) 3
Total realized and unrealized gains
(losses) included in
Other comprehensive income - 7 - - -
Purchases 60 7 71 - -
Sales (64) - - - -
Issuances - - 22 - (3)
Settlements and other - - (9) (1) -
Financial instruments transferred
into Level 3 - - - 1 (8)
Financial instruments transferred
out of Level 3 (12) - - - -
--------------------------------------- ---------- -------------- ------- ------------ --------
Fair value as at October 31, 2022 476 320 331 (17) (8)
--------------------------------------- ---------- -------------- ------- ------------ --------
Change in unrealized gains and losses
included in Net income with respect
to financial assets and financial
liabilities held as at October 31,
2022(4) 3 - (50) (19) 3
======================================= ========== ============== ======= ============ ========
Year ended October
31, 2021
==================================== ========== ============== ======= ============================
Securities
Securities at fair
at fair value
value through Loans
through other and Derivative
profit comprehensive other financial
or loss income assets instruments(1) Deposits(2)
=================================== ========== ============== ======= =============== ===========
Fair value as at October 31, 2020 457 373 372 29 2
Total realized and unrealized gains
(losses) included in Net income
(5) 13 - 24 (28) -
Total realized and unrealized gains
(losses) included in
Other comprehensive income - (10) - - -
Purchases 43 - - - -
Sales (42) (113) - - -
Issuances - - 12 - -
Settlements and other(6) - 56 (111) (1) -
Financial instruments transferred
into Level 3 - - - (1) -
Financial instruments transferred
out of Level 3 - - - 3 (2)
------------------------------------ ---------- -------------- ------- --------------- -----------
Fair value as at October 31, 2021 471 306 297 2 -
------------------------------------ ---------- -------------- ------- --------------- -----------
Change in unrealized gains and
losses
included in Net income with respect
to financial assets and financial
liabilities held as at October 31,
2021(7) 14 - 24 (28) -
==================================== ========== ============== ======= =============== ===========
(1) The derivative financial instruments include assets and
liabilities presented on a net basis.
(2) The amounts include the fair value of embedded derivative
financial instruments in deposits.
(3) Total gains (losses) included in Non-interest income was a loss of $ 45 million.
(4) Total unrealized gains (losses) included in Non-interest
income was an unrealized loss of $ 63 million.
(5) Total gains (losses) included in Non-interest income was a gain of $ 9 million.
(6) On October 31, 2021, the Bank concluded that it had lost
significant influence over AfrAsia Bank Limited (AfrAsia) and
therefore ceased using the equity method to account for this
investment. The Bank designated its investment in AfrAsia as a
financial asset measured at fair value through other comprehensive
income in an amount of $56 million.
(7) Total unrealized gains (losses) included in Non-interest
income was an unrealized gain of $ 10 million.
Note 3 - Fair Value of Financial Instruments (cont.)
Financial Instruments Not Recorded at Fair Value on the
Consolidated Balance Sheet
The following tables show the financial instruments that have
not been recorded at fair value on the Consolidated Balance Sheet
according to the fair value hierarchy, except for those whose
carrying value is a reasonable approximation of fair value.
As at October 31, 2022
=========================================== ========= === =============================
Level Level Level
1 2 3 Total
======================================= ========= === ======= ======= =======
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government - 5,439 - 5,439
Canadian provincial and municipal
governments - 1,708 - 1,708
U.S. Treasury, other U.S. agencies and
other foreign governments - 140 - 140
Other debt securities - 5,720 - 5,720
----------------------------------------- --------- --- ------- ------- -------
- 13,007 - 13,007
------------------------------------------- --------- --- ------- ------- -------
Loans, net of allowances - 81,828 102,640 184,468
------------------------------------------ --------- --- ------- ------- -------
Financial liabilities
Deposits - 249,937 - 249,937
Other
Liabilities related to transferred
receivables - 14,137 - 14,137
Other liabilities - 73 - 73
Subordinated debt - 1,478 - 1,478
------------------------------------------ --------- --- ------- ------- -------
- 265,625 - 265,625
=========================================== ========= === ======= ======= =======
As at October 31, 2021
========================================== ========= === ==============================
Level 1 Level 2 Level 3 Total
====================================== ========= === ======== ======== ========
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government - 5,793 - 5,793
Canadian provincial and municipal
governments - 2,227 - 2,227
U.S. Treasury, other U.S. agencies and
other foreign governments - - - -
Other debt securities - 3,877 - 3,877
---------------------------------------- --------- --- -------- -------- --------
- 11,897 - 11,897
--------- --- -------- -------- --------
Loans, net of allowances - 67,149 99,872 167,021
----------------------------------------- --------- --- -------- -------- --------
Financial liabilities
Deposits - 227,054 - 227,054
Other
Liabilities related to transferred
receivables - 13,724 - 13,724
Other liabilities - 114 - 114
Subordinated debt - 773 - 773
----------------------------------------- --------- --- -------- -------- --------
- 241,665 - 241,665
========================================== ========= === ======== ======== ========
Note 4 - Financial Instruments Designated at Fair Value Through
Profit or Loss
The Bank chose to designate certain financial instruments at
fair value through profit or loss according to the criteria
presented in Note 1 to these consolidated financial statements .
Consistent with its risk management strategy and in accordance with
the fair value option, which permits the designation if it
eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring financial
assets and liabilities or recognizing the gains and losses thereon
on different bases, the Bank designated certain securities and
certain liabilities related to transferred receivables at fair
value through profit or loss. The fair value of liabilities related
to transferred receivables does not include credit risk, as the
holders of these liabilities are not exposed to the Bank's credit
risk. The Bank also designated certain deposits that include
embedded derivative financial instruments at fair value through
profit or loss.
To determine a change in fair value arising from a change in the
credit risk of deposits designated at fair value through profit or
loss, the Bank calculates, at the beginning of the period, the
present value of the instrument's contractual cash flows using the
following rates: first, an observed discount rate for similar
securities that reflects the Bank's credit spread and, then, a rate
that excludes the Bank's credit spread. The difference obtained
between the two values is then compared to the difference obtained
using the same rates at the end of the period.
Information about the financial assets and financial liabilities
designated at fair value through profit or loss is provided in the
following tables.
Unrealized
Unrealized gains (losses)
Carrying gains (losses) since the
value as for the initial
at year ended recognition
October October of
31, 2022 31, 2022 the instrument
=============================================== ========= =============== ===============
Financial assets designated at fair value
through profit or loss
Securities 1,037 (21) (7)
1,037 (21) (7)
------------------------------------------------ --------- --------------- ---------------
Financial liabilities designated at fair
value through profit or loss
Deposits(1)(2) 15,355 2,888 3,062
Liabilities related to transferred receivables 11,352 513 533
------------------------------------------------ --------- --------------- ---------------
26,707 3,401 3,595
================================================ ========= =============== ===============
Unrealized
Unrealized gains (losses)
Carrying gains (losses) since the
value as for the initial
at year ended recognition
October October of
31, 2021 31, 2021 the instrument
=============================================== ========= =============== ===============
Financial assets designated at fair value
through profit or loss
Securities 1,347 (55) 27
1,347 (55) 27
------------------------------------------------ --------- --------------- ---------------
Financial liabilities designated at fair
value through profit or loss
Deposits(1)(2) 14,018 (636) (316)
Liabilities related to transferred receivables 11,398 253 27
------------------------------------------------ --------- --------------- ---------------
25,416 (383) (289)
================================================ ========= =============== ===============
(1) For the year ended October 31, 2022, the change in the fair
value of deposits designated at fair value through profit or loss
attributable to credit risk, and recorded in Other comprehensive
income, resulted in a gain of $ 817 million ($ 17 million loss for
the year ended October 31, 2021).
(2) The amount at maturity that the Bank will be contractually
required to pay to the holders of these deposits varies and will
differ from the reporting date fair value.
Note 5 - Offsetting Financial Assets and Financial
Liabilities
Financial assets and liabilities are offset, and the net amount
is presented on the Consolidated Balance Sheet when the Bank has a
legally enforceable right to set off the recognized amounts and
intends to settle on a net basis or to realize the asset and settle
the liability simultaneously.
Generally, over-the-counter derivatives financial instruments
subject to master netting agreements of the International Swaps
& Derivatives Association, Inc. or other similar agreements do
not meet the offsetting criteria on the Consolidated Balance Sheet,
because the right of set-off is legally enforceable only in the
event of default, insolvency, or bankruptcy.
Generally, securities purchased under reverse repurchase
agreements and securities borrowed as well as obligations related
to securities sold under repurchase agreements and securities
loaned, subject to master agreements, do not meet the offsetting
criteria if they confer only a right of set-off that is enforceable
only in the event of default, insolvency, or bankruptcy.
However, the above-mentioned transactions may be subject to
contractual netting agreements concluded with clearing houses. If
the offsetting criteria are met, these transactions are netted on
the Consolidated Balance Sheet. In addition, as part of these
transactions, the Bank may pledge or receive cash or other
financial instruments used as collateral.
The following tables present information on financial assets and
financial liabilities that are netted on the Consolidated Balance
Sheet, because they meet the offsetting criteria as well as
information on those that are not netted and are subject to an
enforceable master netting agreement or similar agreement.
As at October
31, 2022
=============== ========== ============ ============ ============== =========================
Associated amounts
not set off on
the
Consolidated
Balance Sheet
========== ============ ============ --------------------------------
Amounts Net amounts
set off reported Financial
on the on the assets
Gross Consolidated Consolidated Financial received/pledged
amounts Balance Balance instruments as collateral Net
recognized Sheet Sheet (1) (2) amounts
============ ========== ============ ============ ============== ================ =======
Financial
assets
Securities
purchased
under
reverse
repurchase
agreements
and
securities
borrowed 32,134 5,648 26,486 1,887 24,459 140
Derivative
financial
instruments 33,112 14,565 18,547 9,583 6,062 2,902
-------------- ---------- ------------ ------------ -------------- ---------------- -------
65,246 20,213 45,033 11,470 30,521 3,042
------------ ---------- ------------ ------------ -------------- ---------------- -------
Financial
liabilities
Obligations
related to
securities
sold under
repurchase
agreements
and
securities
loaned 39,121 5,648 33,473 1,887 31,440 146
Derivative
financial
instruments 34,197 14,565 19,632 9,583 4,089 5,960
-------------- ---------- ------------ ------------ -------------- ---------------- -------
73,318 20,213 53,105 11,470 35,529 6,106
============ ========== ============ ============ ============== ================ =======
As at October
31, 2021
=============== ========== ============ ============ ============== =========================
Associated amounts
not set off on
the
Consolidated Balance
Sheet
========== ============ ============ --------------------------------
Amounts Net amounts
set off reported Financial
on the on the assets
Gross Consolidated Consolidated received/pledged
amounts Balance Balance Financial as Net
recognized Sheet Sheet instruments(1) collateral(2)(3) amounts
============ ========== ============ ============ ============== ================ =======
Financial
assets
Securities
purchased
under
reverse
repurchase
agreements
and
securities
borrowed 15,216 7,700 7,516 1,413 6,042 61
Derivative
financial
instruments 20,936 4,452 16,484 9,398 2,475 4,611
-------------- ---------- ------------ ------------ -------------- ---------------- -------
36,152 12,152 24,000 10,811 8,517 4,672
------------ ---------- ------------ ------------ -------------- ---------------- -------
Financial
liabilities
Obligations
related to
securities
sold under
repurchase
agreements
and
securities
loaned 24,993 7,700 17,293 1,413 15,759 121
Derivative
financial
instruments 23,819 4,452 19,367 9,398 4,015 5,954
-------------- ---------- ------------ ------------ -------------- ---------------- -------
48,812 12,152 36,660 10,811 19,774 6,075
============ ========== ============ ============ ============== ================ =======
(1) Carrying amount of financial instruments that are subject to
an enforceable master netting agreement or similar agreement but
that do not satisfy offsetting criteria.
(2) Excludes collateral in the form of non-financial instruments.
(3) The financial assets pledged as collateral to the Bank of
Canada included covered bonds issued by the Bank.
Note 6 - Securities
Residual Contractual Maturities of Securities
As at October 31 2022 2021
====================================== ================================================= ======
Over
1
year No
1 year to Over specified
or less 5 years 5 years maturity Total Total
=================================== ========= ======== ======== ========== ====== ======
Securities at fair value through
profit or loss
Securities issued or guaranteed
by
Canadian government 2,563 7,609 2,750 - 12,922 9,377
Canadian provincial and municipal
governments 1,126 1,725 6,409 - 9,260 8,998
U.S. Treasury, other U.S. agencies
and other foreign governments 13,927 848 309 - 15,084 4,425
Other debt securities 370 1,821 1,193 - 3,384 2,531
Equity securities - - - 46,725 46,725 59,480
-------------------------------------- --------- -------- -------- ---------- ------ ------
17,986 12,003 10,661 46,725 87,375 84,811
-------------------------------------- --------- -------- -------- ---------- ------ ------
Securities at fair value through
other comprehensive income
Securities issued or guaranteed
by
Canadian government 106 3,071 35 - 3,212 4,233
Canadian provincial and municipal
governments 2 569 1,399 - 1,970 2,313
U.S. Treasury, other U.S. agencies
and other foreign governments - 1,597 281 - 1,878 1,636
Other debt securities 6 625 581 - 1,212 784
Equity securities - - - 556 556 617
-------------------------------------- --------- -------- -------- ---------- ------ ------
114 5,862 2,296 556 8,828 9,583
-------------------------------------- --------- -------- -------- ---------- ------ ------
Securities at amortized cost (1)
Securities issued or guaranteed
by
Canadian government 670 5,037 30 - 5,737 5,811
Canadian provincial and municipal
governments 279 643 904 - 1,826 2,225
U.S. Treasury, other U.S. agencies
and other foreign governments 2 148 - - 150 -
Other debt securities 2,850 2,814 139 - 5,803 3,874
-------------------------------------- --------- -------- -------- ---------- ------ ------
3,801 8,642 1,073 - 13,516 11,910
=================================== ========= ======== ======== ========== ====== ======
(1) As at October 31, 2022, securities at amortized cost are
presented net of $7 million in allowances for credit losses ($3
million as at October 31, 2021).
Credit Quality
As at October 31, 2022 and 2021, securities at fair value
through other comprehensive income and securities at amortized cost
were mainly classified in Stage 1, with their credit quality
falling mostly in the "Excellent" category according to the Bank's
internal risk-rating categories. For additional information on the
reconciliation of allowances for credit losses, see Note 7 to these
consolidated financial statements.
Note 6 - Securities (cont.)
Unrealized Gross Gains (Losses) on Securities at Fair Value
Through
Other Comprehensive Income
As at October 31, 2022
=============================================== =============================================
Gross Gross Carrying
Amortized unrealized unrealized value
cost gains losses (1)
============================================== ========= =========== =========== ========
Securities issued or guaranteed by
Canadian government 3,386 1 (175) 3,212
Canadian provincial and municipal governments 2,129 1 (160) 1,970
U.S. Treasury, other U.S. agencies and
other foreign governments 2,022 - (144) 1,878
Other debt securities 1,355 - (143) 1,212
Equity securities 570 21 (35) 556
----------------------------------------------- --------
9,462 23 (657) 8,828
=============================================== ========= =========== =========== ========
As at October 31, 2021
=============================================== ========================================================
Amortized Gross unrealized Gross unrealized Carrying
cost gains losses value(1)
============================================== ========= ================ ================ =========
Securities issued or guaranteed by
Canadian government 4,241 30 (38) 4,233
Canadian provincial and municipal governments 2,345 27 (59) 2,313
U.S. Treasury, other U.S. agencies and
other foreign governments 1,648 - (12) 1,636
Other debt securities 782 9 (7) 784
Equity securities 569 57 (9) 617
----------------------------------------------- ---------
9,585 123 (125) 9,583
=============================================== ========= ================ ================ =========
(1) The allowances for credit losses on securities at fair value
through other comprehensive income (excluding equity securities),
representing $ 2 million as at October 31, 2022 ($1 million as at
October 31, 2021), are reported in Other comprehensive income. For
additional information, see Note 7 to these consolidated financial
statements.
Equity Securities Designated at Fair Value Through Other
Comprehensive Income
The Bank designated certain equity securities, the main business
objective of which is to generate dividend income, at fair value
through other comprehensive income without subsequent
reclassification of gains and losses to net income. During the year
ended October 31, 2022, a dividend income amount of $14 million was
recognized for these investments ($34 million for the year ended
October 31, 2021), including an amount of $4 million in dividend
income for investments that were sold during the year ended October
31, 2022 ($17 million for investments sold during the year ended
October 31, 2021).
Year ended October 31, 2022 Year ended October 31, 2021
=============== ======================================= =======================================
Equity Equity Equity Equity
securities securities securities securities
of private of public of private of public
companies companies Total companies companies Total
=============== =============== =============== ===== =============== =============== =====
Fair value at
beginning 306 311 617 373 246 619
Change in fair
value 7 (44) (37) (10) 98 88
Designated at
fair
value through
other
comprehensive
income(1) 7 143 150 56 71 127
Sales(2) - (174) (174) (113) (104) (217)
---------------- --------------- --------------- ----- --------------- --------------- -----
Fair value at end 320 236 556 306 311 617
================= =============== =============== ===== =============== =============== =====
(1) On October 31, 2021, the Bank concluded that it had lost
significant influence over AfrAsia Bank Limited (AfrAsia) and
therefore ceased using the equity method to account for this
investment. The Bank designated its investment in AfrAsia as a
financial asset measured at fair value through other comprehensive
income in an amount of $56 million. Following the fair value
measurement, a $30 million loss was recorded in the Non-interest
income - Other item of the Consolidated Statement of Income and
reported in the Other heading of segment results.
(2) The Bank disposed of private and public company equity securities for economic reasons.
Gains (Losses) on Disposals of Securities at Amortized Cost
During the years ended October 31, 2022 and 2021, the Bank sold
certain debt securities measured at amortized cost. The carrying
value of these securities upon disposal was $337 million for the
year ended October 31, 2022 ($179 million for the year ended
October 31, 2021), and the Bank recognized gains of $4 million for
the year ended October 31, 2022 (negligible amount for the year
ended October 31, 2021) in Non-interest income - Gains (losses) on
non--trading securities, net in the Consolidated Statement of
Income.
Note 7 - Loans and Allowances for Credit Losses
Loans are recognized either at fair value through profit or loss
or at amortized cost using the financial asset classification
criteria defined in IFRS 9.
Determining and Measuring Expected Credit Losses (ECL)
Determining Expected Credit Losses
Expected credit losses are determined using a three-stage
impairment approach that is based on the change in the credit
quality of financial assets since initial recognition.
Non-impaired loans
Stage 1
Financial assets that have experienced no significant increase
in credit risk between initial recognition and the reporting date,
and for which 12--month expected credit losses are recorded at the
reporting date, are classified in Stage 1.
Stage 2
Financial assets that have experienced a significant increase in
credit risk between initial recognition and the reporting date, and
for which lifetime expected credit losses are recorded at the
reporting date , are classified in Stage 2.
Impaired loans
Stage 3
Financial assets for which there is objective evidence of
impairment, for which one or more events have had a detrimental
impact on the estimated future cash flows of these financial assets
at the reporting date, and for which lifetime expected credit
losses are recorded, are classified in Stage 3.
POCI
Financial assets that are credit-impaired when purchased or
originated (POCI) are classified in the POCI category.
Impairment Governance
A rigorous control framework is applied to the determination of
expected credit losses. The Bank has policies and procedures that
govern impairments arising from credit risk. These policies are
documented and periodically reviewed by the Risk Management Group.
All models used to calculate expected credit losses are validated,
and controls are in place to ensure they are applied.
These models are validated by groups that are independent of the
team that prepares the calculations. Complex questions on
measurement methodologies and assumptions are reviewed by a group
of experts from various functions. Furthermore, the inputs and
assumptions used to determine expected credit losses are regularly
reviewed.
Measurement of Expected Credit Losses (ECL)
Expected credit losses are estimated using three main variables:
(1) probability of default (PD), (2) loss given default (LGD) and
(3) exposure at default (EAD). For accounting purposes, 12-month PD
and lifetime PD are the probabilities of a default occurring over
the next 12 months or over the life of a financial instrument,
respectively, based on conditions existing at the balance sheet
date and on future economic conditions that have, or will have, an
impact on credit risk. LGD reflects the losses expected should
default occur and considers such factors as the mitigating effects
of collateral, the realizable value thereof, and the time value of
money. EAD is the expected balance owing at default and considers
such factors as repayments of principal and interest between the
balance sheet date and the time of default as well as any amounts
expected to be drawn on a committed facility. Twelve-month expected
credit losses are estimated by multiplying 12-month PD by LGD and
by EAD. Lifetime expected credit losses are estimated using the
lifetime PD.
For most financial instruments, expected credit losses are
measured on an individual basis. Financial instruments that have
credit losses measured on a collective basis are grouped according
to similar credit risk characteristics such as type of instrument,
geographic location, comparable risk level, and business sector or
industry.
Inputs, Assumptions and Estimation Techniques
The Bank's approach to calculating expected credit losses
consists essentially of leveraging existing regulatory models and
then adjusting their parameters for IFRS 9 purposes. These models
have the advantage of having been thoroughly tested and validated.
In addition, using the same base models, regardless of the purpose,
provides consistency across risk assessments. These models use
inputs, assumptions and estimation techniques that require a high
degree of management judgment. The main factors that contribute to
changes in ECL that are subject to significant judgment include the
following:
-- calibration of regulatory parameters in order to obtain
point-in-time and forward-looking parameters;
-- forecasts of macroeconomic variables for multiple scenarios
and the probability weighting of the scenarios;
-- determination of the significant increases in credit risk (SICR) of a loan.
Note 7 - Loans and Allowances for Credit Losses (cont.)
Main Parameters
PD Estimates
Since the objective of the regulatory calibration of PD is to
align historical data to the long-run default rate, adjustments are
required to obtain a point-in-time, forward-looking PD, as required
by IFRS 9. The Bank performs the following: (1) A point-in-time
calibration, where the PD of the portfolio is aligned with the
appropriate default rate. The resulting PD estimate generally
equals the prior-year default rate. The prior-year default rate is
selected for the calibration performed at this stage, as it often
reflects one of the most accurate and appropriate estimates of the
current-year default rate; (2) Forward-looking adjustments are
incorporated through, among other measures, a calibration factor
based on forecasts produced by the stress testing team's analyses.
The team considers three macroeconomic scenarios, and, for each
scenario, produces a forward-looking assessment covering the three
upcoming years.
LGD Estimates
The LGD estimation method consists of using, for each of the
three macroeconomic scenarios, expected LGD based on the LGD values
observed using backtesting, the economic LGD estimated and used to
calculate economic capital, and lastly, the estimated downturn LGD
used to calculate regulatory capital.
EAD Estimates
For term loans, the Bank uses expected EAD, which is the
outstanding balance anticipated at each point in time. Expected EAD
decreases over time according to contractual repayments and to
prepayments. For revolving loans, the EAD percentage is based on
the percentage estimated by the corresponding regulatory model and,
thereafter, is converted to dollars according to the authorized
balance.
Expected Life
For most financial instruments, the expected life used when
measuring expected credit losses is the remaining contractual life.
For revolving financial instruments where there is no contractual
maturity, such as credit cards or lines of credit, the expected
life is based on the behavioural life of clients who have defaulted
or closed their account.
Incorporation of Forward-Looking Information
The Bank's Economy and Strategy Group is responsible for
developing three macroeconomic scenarios and for recommending
probability weights for each scenario. Macroeconomic scenarios are
not developed for specific portfolios, as the Economy and Strategy
Group provides a set of variables for each of the defined scenarios
for the next three years. The PDs are also adjusted to incorporate
economic assumptions (interest rates, unemployment rates, GDP
forecasts, oil prices, housing price indices, etc.) that can be
statistically tied to PD changes that will have an impact beyond
the next 12 months. These statistical relationships are determined
using the processes developed for stress testing. In addition, the
group considers other relevant factors that may not be adequately
reflected in the information used to calculate the PDs (including
late payments and whether the financial asset is subject to
additional monitoring within the watchlist process for business and
government loan portfolios).
Determination of a Significant Increase in the Credit Risk of a
Financial Instrument
At each reporting period, the Bank determines whether credit
risk has increased significantly since initial recognition by
examining the change in the risk of default occurring over the
remaining life of the financial instrument. First, the Bank
compares the point-in-time forward-looking remaining lifetime PD at
the reporting date with the expected point-in-time forward-looking
remaining lifetime PD established at initial recognition. Based on
this comparison, the Bank determines whether the loan has
deteriorated when compared to the initial conditions. Because the
comparison includes an adjustment based on origination--date
forward-looking information and reporting-date forward-looking
information, the deterioration may be caused by the following
factors: (i) deterioration of the economic outlook used in the
forward-looking assessment; (ii) deterioration of the borrower's
conditions (payment defaults, worsening financial ratios, etc.); or
(iii) a combination of both factors. The quantitative criteria used
to determine a significant increase in credit risk are a series of
relative and absolute thresholds, and a backstop is also applied.
All financial instruments that are over 30 days past due but below
90 days past due are migrated to Stage 2, even if the other
criteria do not indicate a significant increase in credit risk.
Credit Quality of Loans
The following tables present the gross carrying amounts of loans
as at October 31, 2022 and 2021, according to credit quality and
ECL impairment stage of each loan category at amortized cost, and
according to credit quality for loans at fair value through profit
or loss. For additional information on credit quality according to
the Advanced Internal Ratings-Based (AIRB) categories, see the
Internal Default Risk Ratings table on page 78 in the Credit Risk
section of the MD&A for the year ended October 31, 2022.
As at October 31, 2022
============================ ========== ======== ======== ============================
Non-impaired loans Impaired loans
---------------------------- -------------------- ---------------- =========== =======
Loans at
fair value
through
Stage Stage Stage profit or
1 2 3 POCI loss (1) Total
============================ ========== ======== ======== ====== =========== =======
Residential mortgage
Excellent 30,465 - - - - 30,465
Good 16,351 12 - - - 16,363
Satisfactory 10,765 3,269 - - - 14,034
Special mention 609 394 - - - 1,003
Substandard 76 140 - - - 216
Default - - 49 - - 49
----------------------------- ---------- -------- -------- ------ ----------- -------
AIRB Approach 58,266 3,815 49 - - 62,130
Standardized Approach 7,266 179 211 384 9,959 17,999
----------------------------- ---------- -------- -------- ------ ----------- -------
Gross carrying amount 65,532 3,994 260 384 9,959 80,129
Allowances for credit
losses(2) 53 80 61 (76) - 118
----------------------------- ---------- -------- -------- ------ ----------- -------
Carrying amount 65,479 3,914 199 460 9,959 80,011
----------------------------- ---------- -------- -------- ------ ----------- -------
Personal
Excellent 22,190 22 - - - 22,212
Good 8,792 479 - - - 9,271
Satisfactory 6,928 1,394 - - - 8,322
Special mention 358 775 - - - 1,133
Substandard 26 203 - - - 229
Default - - 130 - - 130
----------------------------- ---------- -------- -------- ------ ----------- -------
AIRB Approach 38,294 2,873 130 - - 41,297
Standardized Approach 3,837 78 36 75 - 4,026
----------------------------- ---------- -------- -------- ------ ----------- -------
Gross carrying amount 42,131 2,951 166 75 - 45,323
Allowances for credit
losses(2) 67 113 75 (16) - 239
----------------------------- ---------- -------- -------- ------ ----------- -------
Carrying amount 42,064 2,838 91 91 - 45,084
----------------------------- ---------- -------- -------- ------ ----------- -------
Credit card
Excellent 600 - - - - 600
Good 359 - - - - 359
Satisfactory 689 51 - - - 740
Special mention 287 178 - - - 465
Substandard 37 71 - - - 108
Default - - - - - -
---------------------------- ---------- -------- -------- ------ ----------- -------
AIRB Approach 1,972 300 - - - 2,272
Standardized Approach 117 - - - - 117
----------------------------- ---------- -------- -------- ------ ----------- -------
Gross carrying amount 2,089 300 - - - 2,389
Allowances for credit
losses(2) 31 95 - - - 126
----------------------------- ---------- -------- -------- ------ ----------- -------
Carrying amount 2,058 205 - - - 2,263
----------------------------- ---------- -------- -------- ------ ----------- -------
Business and government
(3)
Excellent 6,140 2 - - 147 6,289
Good 27,607 112 - - 53 27,772
Satisfactory 26,567 8,803 - - 145 35,515
Special mention 75 1,172 - - - 1,247
Substandard 41 272 - - - 313
Default - - 367 - - 367
----------------------------- ---------- -------- -------- ------ ----------- -------
AIRB Approach 60,430 10,361 367 - 345 71,503
Standardized Approach 8,096 28 19 - 212 8,355
----------------------------- ---------- -------- -------- ------ ----------- -------
Gross carrying amount 68,526 10,389 386 - 557 79,858
Allowances for credit
losses(2) 115 160 197 - - 472
----------------------------- ---------- -------- -------- ------ ----------- -------
Carrying amount 68,411 10,229 189 - 557 79,386
----------------------------- ---------- -------- -------- ------ ----------- -------
Total loans and acceptances
Gross carrying amount 178,278 17,634 812 459 10,516 207,699
Allowances for credit
losses(2) 266 448 333 (92) - 955
----------------------------- ---------- -------- -------- ------ ----------- -------
Carrying amount 178,012 17,186 479 551 10,516 206,744
============================= ========== ======== ======== ====== =========== =======
(1) Not subject to expected credit losses.
(2) The allowances for credit losses do not include the amounts
related to undrawn commitments reported in the Other liabilities
item of the Consolidated Balance Sheet.
(3) Includes customers' liability under acceptances.
Note 7 - Loans and Allowances for Credit Losses (cont.)
As at October 31, 2021
============================ ========= ========= ========= ===============================
Non-impaired loans Impaired loans
---------------------------- -------------------- ---------------- =============== =======
Loans at
fair value
through profit
Stage 1 Stage 2 Stage 3 POCI or loss(1) Total
============================ ========= ========= ========= ===== =============== =======
Residential mortgage
Excellent 28,911 1 - - - 28,912
Good 17,083 53 - - - 17,136
Satisfactory 9,165 2,318 - - - 11,483
Special mention 314 266 - - - 580
Substandard 83 128 - - - 211
Default - - 82 - - 82
----------------------------- --------- --------- --------- ----- --------------- -------
AIRB Approach 55,556 2,766 82 - - 58,404
Standardized Approach 5,803 129 57 332 7,817 14,138
----------------------------- --------- --------- --------- ----- --------------- -------
Gross carrying amount 61,359 2,895 139 332 7,817 72,542
Allowances for credit
losses(2) 50 52 29 (60) - 71
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 61,309 2,843 110 392 7,817 72,471
----------------------------- --------- --------- --------- ----- --------------- -------
Personal
Excellent 16,211 57 - - - 16,268
Good 11,439 1,041 - - - 12,480
Satisfactory 4,665 1,580 - - - 6,245
Special mention 336 483 - - - 819
Substandard 121 129 - - - 250
Default - - 101 - - 101
----------------------------- --------- --------- --------- ----- --------------- -------
AIRB Approach 32,772 3,290 101 - - 36,163
Standardized Approach 4,692 51 15 132 - 4,890
----------------------------- --------- --------- --------- ----- --------------- -------
Gross carrying amount 37,464 3,341 116 132 - 41,053
Allowances for credit
losses(2) 70 98 63 (29) - 202
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 37,394 3,243 53 161 - 40,851
----------------------------- --------- --------- --------- ----- --------------- -------
Credit card
Excellent 559 - - - - 559
Good 322 - - - - 322
Satisfactory 623 38 - - - 661
Special mention 294 149 - - - 443
Substandard 38 62 - - - 100
Default - - - - - -
---------------------------- --------- --------- --------- ----- --------------- -------
AIRB Approach 1,836 249 - - - 2,085
Standardized Approach 65 - - - - 65
----------------------------- --------- --------- --------- ----- --------------- -------
Gross carrying amount 1,901 249 - - - 2,150
Allowances for credit
losses(2) 33 89 - - - 122
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 1,868 160 - - - 2,028
----------------------------- --------- --------- --------- ----- --------------- -------
Business and government
(3)
Excellent 5,086 - - - 269 5,355
Good 24,395 131 - - 53 24,579
Satisfactory 22,808 6,254 - - 140 29,202
Special mention 128 1,509 - - - 1,637
Substandard 45 194 - - - 239
Default - - 326 - - 326
----------------------------- --------- --------- --------- ----- --------------- -------
AIRB Approach 52,462 8,088 326 - 462 61,338
Standardized Approach 6,179 84 81 - 260 6,604
----------------------------- --------- --------- --------- ----- --------------- -------
Gross carrying amount 58,641 8,172 407 - 722 67,942
Allowances for credit
losses(2) 111 205 287 - - 603
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 58,530 7,967 120 - 722 67,339
----------------------------- --------- --------- --------- ----- --------------- -------
Total loans and acceptances
Gross carrying amount 159,365 14,657 662 464 8,539 183,687
Allowances for credit
losses(2) 264 444 379 (89) - 998
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 159,101 14,213 283 553 8,539 182,689
============================= ========= ========= ========= ===== =============== =======
(1) Not subject to expected credit losses.
(2) The allowances for credit losses do not include the amounts
related to undrawn commitments reported in the Other liabilities
item of the Consolidated Balance Sheet.
(3) Includes customers' liability under acceptances.
The following table presents the credit risk exposures of
off-balance-sheet commitments as at October 31, 2022 and 2021
according to credit quality and ECL impairment stage.
As at October 31 2022 2021
====================== ====== ==================== ====== ====================
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
====================== ====== ===== ===== ====== ====== ===== ===== ======
Off-balance-sheet
commitments (1)
Retail
Excellent 15,292 13 - 15,305 17,053 72 - 17,125
Good 3,316 165 - 3,481 3,750 323 - 4,073
Satisfactory 1,170 180 - 1,350 1,085 229 - 1,314
Special mention 193 68 - 261 197 57 - 254
Substandard 15 15 - 30 16 13 - 29
Default - - 1 1 - - 3 3
Non-retail
Excellent 13,136 - - 13,136 14,097 - - 14,097
Good 18,723 24 - 18,747 17,497 2 - 17,499
Satisfactory 7,894 3,488 - 11,382 7,575 2,377 - 9,952
Special mention 12 246 - 258 14 336 - 350
Substandard 4 24 - 28 5 38 - 43
Default - - 18 18 - - 3 3
---------------------- ------ ----- ----- ------ ------ ----- ----- ------
AIRB Approach 59,755 4,223 19 63,997 61,289 3,447 6 64,742
Standardized Approach 15,432 - - 15,432 14,872 - 1 14,873
---------------------- ------ ----- ----- ------ ------ ----- ----- ------
Total exposure 75,187 4,223 19 79,429 76,161 3,447 7 79,615
Allowances for credit
losses 99 63 - 162 104 58 - 162
---------------------- ------ ----- ----- ------ ------ ----- ----- ------
Total exposure, net
of allowances 75,088 4,160 19 79,267 76,057 3,389 7 79,453
======================
(1) Represent letters of guarantee and documentary letters of
credit, undrawn commitments, and backstop liquidity and credit
enhancement facilities.
Loans Past Due But Not Impaired (1)
As at
October
31 2022 2021
===========
Business
and Business
Residential Credit government Residential Credit and
mortgage Personal card (2) mortgage Personal card government(2)
=========== ===========
Past due
but
not
impaired
31 to 60
days 106 105 23 23 48 71 20 24
61 to 90
days 38 30 11 9 18 21 9 13
Over 90
days(3) - - 22 - - - 21 -
----------- -----------
144 135 56 32 66 92 50 37
=========== ===========
(1) Loans less than 31 days past due are not presented as they
are not considered past due from an administrative standpoint.
(2) Includes customers' liability under acceptances.
(3) All loans more than 90 days past due, except for credit card
receivables, are considered impaired (Stage 3).
Note 7 - Loans and Allowances for Credit Losses (cont.)
Impaired Loans
As at October 31 2022 2021
==================
Allowances Allowances
for credit for credit
Gross losses Net Gross losses Net
===== =========== ===== ===== =========== ===
Loans - Stage 3
Residential mortgage 260 61 199 139 29 110
Personal 166 75 91 116 63 53
Credit card(1) - - - - - -
Business and government(2) 386 197 189 407 287 120
----- ----------- ----- ----- ----------- ---
812 333 479 662 379 283
Loans - POCI 459 (92) 551 464 (89) 553
----- ----------- ----- ----- ----------- ---
1,271 241 1,030 1,126 290 836
===== =========== ===== ===== =========== ===
(1) Credit card receivables are considered impaired, at the
latest, when payment is 180 days past due, and they are written off
at that time.
(2) Includes customers' liability under acceptances.
Maximum Exposure to Credit Risk of Impaired Loans
The following table presents the maximum exposure to credit risk
of impaired loans, the percentage of exposure covered by
guarantees, and the main types of collateral and guarantees held
for each loan category.
As at October 31 2022 2021
========= =================
Percentage
Gross covered Gross Percentage
impaired by guarantees impaired covered Types of collateral
loans (1) loans by guarantees(1) and guarantees
Loans - Stage 3
Residential mortgage 260 100 % 139 100 % Residential buildings
Buildings, land
Personal 166 56 % 116 47 % and automobiles
Business and Buildings, land,
government(2) 386 59 % 407 62 % equipment,
government and
bank guarantees
Buildings and
Loans - POCI 459 52 % 464 36 % automobiles
========= ========= =================
(1) For gross impaired loans, the ratio is calculated on a
weighted average basis using the estimated value of the collateral
and guarantees held for each loan category presented. The value of
the collateral and guarantees held for a specific loan may exceed
the balance of the loan; when this is the case, the ratio is capped
at 100%.
(2) Includes customers' liability under acceptances.
Allowances for Credit Losses
The following tables present a reconciliation of the allowances
for credit losses by Consolidated Balance Sheet item and by type of
off-balance-sheet commitment.
Year ended October
31, 2022
========== ============= ========= ==========================
Allowances
for Allowances
credit for
losses Provisions credit
as at for losses as
October credit Write-offs Recoveries at October
31, 2021 losses (1) Disposals and other 31, 2022
========== ========== ============= ========= ==========
Balance sheet
Cash and deposits with
financial institutions
(2)(3) 5 - - - - 5
Securities (3)
At fair value through
other
comprehensive income(4) 1 1 - - - 2
At amortized cost(2) 3 4 - - - 7
Securities purchased under
reverse repurchase
agreements and securities
borrowed (2)(3) - - - - - -
Loans (5)
Residential mortgage 71 46 (3) - 4 118
Personal 202 69 (52) - 20 239
Credit card 122 49 (62) - 17 126
Business and government 515 10 (116) - 9 418
Customers' liability
under
acceptances 88 (34) - - - 54
----------
998 140 (233) - 50 955
Other assets (2)(3) - - - - - -
Off-balance-sheet
commitments
(6)
Letters of guarantee and
documentary letters of
credit 13 - - - - 13
Undrawn commitments 143 - - - - 143
Backstop liquidity and
credit
enhancement facilities 6 - - - - 6
162 - - - - 162
1,169 145 (233) - 50 1,131
Year ended October
31, 2021
========== ========== ============= =========
Allowances
for Allowances
credit for
losses Provisions credit losses
as at for as
October credit Recoveries at October
31, 2020 losses Write-offs(1) Disposals and other 31, 2021
========== ========== ============= ========= ========== ==============
Balance sheet
Cash and deposits with
financial institutions
(2)(3) 5 - - - - 5
---------- -------------
Securities (3)
At fair value through
other
comprehensive income(4) 3 (2) - - - 1
At amortized cost(2) 1 2 - - - 3
---------- -------------
Securities purchased under
reverse repurchase
agreements and securities
borrowed (2)(3) - - - - - -
---------- -------------
Loans (5)
Residential mortgage 65 12 (6) - - 71
Personal 298 (29) (69) (14) 16 202
Credit card 169 (5) (59) - 17 122
Business and government 533 43 (58) - (3) 515
Customers' liability
under
acceptances 93 (5) - - - 88
---------- ---------- -------------
1,158 16 (192) (14) 30 998
Other assets (2)(3) - - - - - -
---------- -------------
Off-balance-sheet
commitments
(6)
Letters of guarantee and
documentary letters of
credit 15 (2) - - - 13
Undrawn commitments 157 (14) - - - 143
Backstop liquidity and
credit
enhancement facilities 4 2 - - - 6
---------- -------------
176 (14) - - - 162
---------- ---------- -------------
1,343 2 (192) (14) 30 1,169
(1) The contractual amount outstanding on financial assets that
were written off during the year ended October 31, 2022 and that
are still subject to enforcement activity was $91 million ($105
million for the year ended October 31, 2021).
(2) These financial assets are presented net of the allowances
for credit losses on the Consolidated Balance Sheet.
(3) As at October 31, 2022 and 2021, these financial assets were
mainly classified in Stage 1 and their credit quality fell mostly
within the Excellent category.
(4) The allowances for credit losses are reported in the
Accumulated other comprehensive income item of the Consolidated
Balance Sheet.
(5) The allowances for credit losses are reported in the
Allowances for credit losses item of the Consolidated Balance
Sheet.
(6) The allowances for credit losses are reported in the Other
liabilities item of the Consolidated Balance Sheet.
Note 7 - Loans and Allowances for Credit Losses (cont.)
The following tables present the reconciliation of allowances
for credit losses for each loan category at amortized cost
according to ECL impairment stage.
Year ended October
31 2022 2021
Allowances Allowances Allowances
for for for Allowances
credit losses credit losses credit losses for
on on on credit losses
non-impaired impaired non-impaired on
loans loans loans impaired loans
Stage Stage Stage POCI Stage Stage Stage
1 2 3 (1) Total 1 2 3 POCI(1) Total
Residential mortgage
Balance at beginning 50 52 29 (60) 71 63 23 35 (56) 65
------ ------ -----
Originations or
purchases 19 - - - 19 12 - - - 12
Transfers(2) :
to Stage 1 19 (17) (2) - - 18 (13) (5) - -
to Stage 2 (10) 13 (3) - - (4) 5 (1) - -
to Stage 3 (1) (7) 8 - - - (1) 1 - -
Net remeasurement
of loss
allowances(3) (24) 39 29 (9) 35 (33) 39 6 (7) 5
Derecognitions(4) (3) (3) (3) - (9) (3) (1) (1) - (5)
Changes to models - 1 - - 1 - - - - -
Provisions for
credit
losses - 26 29 (9) 46 (10) 29 - (7) 12
Write-offs - - (3) - (3) - - (6) - (6)
Disposals - - - - - - - - - -
Recoveries - - 3 - 3 - - 2 - 2
Foreign exchange
movements
and other 3 2 3 (7) 1 (3) - (2) 3 (2)
------ ------ -----
Balance at end 53 80 61 (76) 118 50 52 29 (60) 71
------ ------ -----
Includes:
Amounts drawn 53 80 61 (76) 118 50 52 29 (60) 71
Undrawn
commitments(5) - - - - - - - - - -
------ ------ ----- ------ ------ ------- ------ --------
Personal
Balance at beginning 73 103 63 (29) 210 89 148 76 (10) 303
------ ------ -----
Originations or
purchases 45 - - - 45 41 - - - 41
Transfers(2) :
to Stage 1 61 (56) (5) - - 73 (66) (7) - -
to Stage 2 (21) 23 (2) - - (12) 14 (2) - -
to Stage 3 - (31) 31 - - - (27) 27 - -
Net remeasurement
of loss
allowances(3) (72) 85 28 15 56 (96) 58 19 (19) (38)
Derecognitions(4) (9) (15) (5) - (29) (12) (15) (2) - (29)
Changes to models (10) 6 - - (4) - - - - -
Provisions for
credit
losses (6) 12 47 15 68 (6) (36) 35 (19) (26)
Write-offs - - (52) - (52) - - (69) - (69)
Disposals - - - - - (8) (6) - - (14)
Recoveries - - 17 - 17 - - 21 - 21
Foreign exchange
movements
and other 3 2 - (2) 3 (2) (3) - - (5)
------ ------ -----
Balance at end 70 117 75 (16) 246 73 103 63 (29) 210
------ ------ -----
Includes:
Amounts drawn 67 113 75 (16) 239 70 98 63 (29) 202
Undrawn
commitments(5) 3 4 - - 7 3 5 - - 8
====== ====== ===== ====== ====== ======= ====== ========
(1) The total amount of undiscounted initially expected credit
losses on the POCI loans acquired during the year ended October 31,
2022 was $15 million ($11 million for the year ended October 31,
2021). The expected credit losses reflected in the purchase price
have been discounted.
(2) Represent stage transfers deemed to have taken place at the
beginning of the quarter in which the transfer occurred.
(3) Includes the net remeasurement of loss allowances (after
transfers) attributable mainly to changes in volumes and in the
credit quality of existing loans as well as to changes in risk
parameters.
(4) Represent reversals to loss allowances arising from full
loan repayments (excluding write-offs and disposals).
(5) The allowances for credit losses on undrawn commitments are
reported in the Other liabilities item of the Consolidated Balance
Sheet.
Year ended October
31 2022 2021
Allowances Allowances Allowances
for for for Allowances
credit losses credit losses credit losses for
on on on credit losses
non-impaired impaired non-impaired on
loans loans loans impaired loans
Stage Stage Stage POCI Stage Stage Stage
1 2 3 (1) Total 1 2 3 POCI(1) Total
Credit card
Balance at beginning 57 101 - - 158 68 137 - - 205
------ ------ ----- ------
Originations or
purchases 12 - - - 12 10 - - - 10
Transfers(2) :
to Stage 1 84 (84) - - - 100 (100) - - -
to Stage 2 (16) 16 - - - (15) 15 - - -
to Stage 3 (1) (23) 24 - - (1) (29) 30 - -
Net remeasurement
of
loss allowances(3) (80) 104 21 - 45 (100) 84 12 - (4)
Derecognitions(4) (2) (1) - - (3) (2) (2) - - (4)
Changes to models (1) (1) - - (2) (3) (4) - - (7)
Provisions for
credit
losses (4) 11 45 - 52 (11) (36) 42 - (5)
Write-offs - - (62) - (62) - - (59) - (59)
Disposals - - - - - - - - - -
Recoveries - - 17 - 17 - - 17 - 17
Foreign exchange
movements
and other - - - - - - - - - -
------ ------ ----- ------
Balance at end 53 112 - - 165 57 101 - - 158
------ ------ ----- ------
Includes:
Amounts drawn 31 95 - - 126 33 89 - - 122
Undrawn
commitments(5) 22 17 - - 39 24 12 - - 36
------ ------ ----- ------ ------ ------- ------ --------
Business and
government
(6)
Balance at beginning 177 238 287 - 702 214 287 241 - 742
------ ------ ----- ------
Originations or
purchases 82 - - - 82 116 - - - 116
Transfers(2) :
to Stage 1 67 (65) (2) - - 60 (58) (2) - -
to Stage 2 (27) 31 (4) - - (43) 48 (5) - -
to Stage 3 - (3) 3 - - - (21) 21 - -
Net remeasurement
of
loss allowances(3) (93) 21 24 - (48) (131) 24 98 - (9)
Derecognitions(4) (29) (27) (4) - (60) (38) (42) (6) - (86)
Changes to models - - - - - - - - - -
Provisions for
credit
losses - (43) 17 - (26) (36) (49) 106 - 21
Write-offs - - (116) - (116) - - (58) - (58)
Disposals - - - - - - - - - -
Recoveries - - 3 - 3 - - 4 - 4
Foreign exchange
movements
and other - - 6 - 6 (1) - (6) - (7)
------ ------ ----- ------
Balance at end 177 195 197 - 569 177 238 287 - 702
------ ------ ----- ------
Includes:
Amounts drawn 115 160 197 - 472 111 205 287 - 603
Undrawn
commitments(5) 62 35 - - 97 66 33 - - 99
------ ------ ----- ------ ------ ------- ------ --------
Total allowances for
credit losses at
end
(7) 353 504 333 (92) 1,098 357 494 379 (89) 1,141
Includes:
Amounts drawn 266 448 333 (92) 955 264 444 379 (89) 998
Undrawn
commitments(5) 87 56 - - 143 93 50 - - 143
====== ====== ===== ====== ====== ======= ====== ========
(1) The total amount of undiscounted initially expected credit
losses on the POCI loans acquired during the year ended October 31,
2022 was $15 million ($11 million for the year ended October 31,
2021). The expected credit losses reflected in the purchase price
have been discounted.
(2) Represent stage transfers deemed to have taken place at the
beginning of the quarter in which the transfer occurred.
(3) Includes the net remeasurement of loss allowances (after
transfers) attributable mainly to changes in volumes and in the
credit quality of existing loans as well as to changes in risk
parameters.
(4) Represent reversals to loss allowances arising from full
loan repayments (excluding write-offs and disposals).
(5) The allowances for credit losses on undrawn commitments are
reported in the Other liabilities item of the Consolidated Balance
Sheet.
(6) Includes customers' liability under acceptances.
(7) Excludes allowances for credit losses on other financial assets at amortized cost and on off-balance-sheet commitments other than undrawn commitments.
Note 7 - Loans and Allowances for Credit Losses (cont.)
Distribution of Gross and Impaired Loans by Borrower
Category
Under the Basel Asset Classes
2022 2021
========== ========== ======== =========== ==========
Year ended Year ended
As at October 31 October 31 As at October 31 October 31
Allowances
for credit
losses Allowances
on Provisions for credit Provisions
Gross Impaired impaired for losses for
loans loans loans credit Gross Impaired on impaired credit
(1) (1) (1)(2) losses Write-offs loans(1) loans(1) loans(1)(2) losses Write-offs
========== ========== ========== ===========
Retail
Residential
mortgage(3) 95,575 299 64 31 4 89,035 153 31 (2) 6
Qualifying
revolving
retail(4) 3,801 16 12 54 72 3,589 12 10 48 77
Other retail(5) 14,899 102 58 36 41 12,949 67 49 32 51
----------
114,275 417 134 121 117 105,573 232 90 78 134
----------
Non-retail
Agriculture 8,109 31 2 (1) - 7,357 30 4 (5) 1
Oil and gas(6) 1,435 6 6 (19) 26 1,807 55 49 3 9
Mining 1,049 11 4 4 - 529 - - - -
Utilities(6) 9,682 35 35 (2) 59 7,687 102 93 73 -
Non-real-estate
construction(7) 1,935 38 32 5 - 1,541 37 27 11 -
Manufacturing(6) 7,374 21 10 (4) 14 5,720 40 25 3 2
Wholesale 3,241 35 26 2 - 2,598 29 23 10 3
Retail 3,494 30 19 2 - 2,978 27 18 2 1
Transportation 2,209 8 7 - - 1,811 8 7 - -
Communications 1,830 11 10 2 - 1,441 19 8 2 10
Financial
services(6) 10,777 5 3 - - 8,870 7 2 1 -
Real estate
services
and
real estate
construction(8) 22,382 26 6 1 12 18,195 36 16 1 2
Professional
services 2,338 9 4 - 1 1,872 8 4 - 5
Education and
health care 3,412 108 25 25 2 4,073 5 3 5 4
Other services 6,247 20 9 2 2 5,875 26 9 (1) 21
Government 1,661 - - - - 1,159 - - - -
Other(6) 5,790 1 1 - - 4,137 1 1 - -
----------
92,965 395 199 17 116 77,650 430 289 105 58
----------
Excluding POCI
loans 207,240 812 333 138 233 183,223 662 379 183 192
POCI 459 459 (92) 6 464 464 (89) (26)
207,699 1,271 241 144 233 183,687 1,126 290 157 192
----------
Stages 1 and
2 (9) 1 (155)
-------- ----------
145 233 2 192
========== ========== ========== ======== =========== ========== ==========
(1) Includes customers' liability under acceptances.
(2) Allowances for credit losses on drawn amounts.
(3) Includes residential mortgages on one-to-four-unit dwellings
(Basel definition) and home equity lines of credit.
(4) Includes lines of credit and credit card receivables.
(5) Includes consumer loans and other retail loans but excludes SME loans.
(6) In fiscal 2022, the presentation was changed to better align
borrower categories with their definitions. Comparative figures
have been reclassified.
(7) Includes civil engineering loans, public-private partnership
loans, and project finance loans.
(8) Includes residential mortgages on dwellings of five or more units and SME loans.
(9) Includes provisions for credit losses on other financial assets at amortized cost and on off-balance-sheet commitments.
Main Macroeconomic Factors
The following tables show the main macroeconomic factors used to
estimate the allowances for credit losses on loans. For each
scenario, namely, the base scenario, upside scenario, and downside
scenario, the average values of the macroeconomic factors over the
next 12 months (used for Stage 1 credit loss calculations) and over
the remaining forecast period (used for Stage 2 credit loss
calculations) are presented.
As at October 31,
2022
======== ====== ========= ======
Base scenario Upside scenario Downside scenario
Next Remaining Remaining Remaining
12 forecast Next forecast Next forecast
months period 12 months period 12 months period
======== ========= =========
Macroeconomic
factors
(1)
GDP growth(2) 0.6 % 1.7 % 1.1 % 1.6 % (5.2) % 2.9 %
Unemployment rate 6.0 % 6.1 % 5.4 % 5.4 % 7.4 % 6.4 %
Housing price
index
growth(2) (11.2) % 0.7 % - % 0.2 % (13.9) % 0.3 %
BBB spread(3) 2.4 % 2.1 % 2.0 % 1.9 % 3.4 % 2.6 %
S&P/TSX
growth(2)(4) (4.3) % 2.4 % 5.1 % 2.6 % (25.6) % 5.5 %
WTI oil price(5)
(US$ per barrel) 78 77 102 97 44 51
======== ====== ========= ====== ========= ======
As at October 31,
2021
======== ====== === ========= ====== ===
Base scenario Upside scenario Downside scenario
Next Remaining Remaining Remaining
12 forecast Next forecast Next forecast
months period 12 months period 12 months period
======== =========== ========= =========== ========= ===========
Macroeconomic
factors
(1)
GDP growth(2) 4.2% 1.6% 4.7% 1.9% (5.5)% 3.7%
Unemployment rate 6.6% 6.3% 6.3% 5.6% 9.5% 7.8%
Housing price
index
growth(2) 2.0% 0.2% 4.0% 1.9% (11.5)% 1.2%
BBB spread(3) 1.7% 1.9% 1.6% 1.7% 3.1% 2.2%
S&P/TSX
growth(2)(4) 4.8% 2.1% 8.6% 3.1% (25.6)% 5.5%
WTI oil price(5)
(US$ per barrel) 70 65 77 77 35 34
======== ====== === ========= ====== === ========= ====== ===
(1) All macroeconomic factors are based on the Canadian economy unless otherwise indicated.
(2) Growth rate is annualized.
(3) Yield on corporate BBB bonds less yield on Canadian federal
government bonds with a 10-year maturity.
(4) Main stock index in Canada.
(5) The West Texas Intermediate (WTI) index is commonly used as
a benchmark for the price of oil.
The main macroeconomic factors used for the personal credit
portfolio are unemployment rate and growth in the housing price
index, based on the economy of Canada or Quebec. The main
macroeconomic factors used for the business and government credit
portfolio are unemployment rate, spread on corporate BBB bonds,
S&P/TSX growth, and WTI oil price.
An increase in unemployment rate or BBB spread will generally
lead to higher allowances for credit losses, whereas an increase in
the other macroeconomic factors (GDP, S&P/TSX, housing price
index, and WTI oil price) will generally lead to lower allowances
for credit losses.
Note 7 - Loans and Allowances for Credit Losses (cont.)
During the year ended October 31, 2022, the macroeconomic
outlook generally deteriorated.
In the base scenario, the global economy faces a cycle of
synchronized monetary tightening designed to curb inflation in a
still uncertain geopolitical environment. The Canadian economy is
relatively well positioned thanks to a resource sector that is
benefitting from higher commodity prices. However, as is the case
in other countries, higher interest rates slow the economy. The
labour market already shows signs of cooling, and lower hiring
intentions do not point to a short-term turnaround. In the housing
resale market, a noticeable downtrend persists and home prices
continue to decline. In such a scenario, inflation decelerates
significantly, enabling the central bank to cease raising its
policy rate. All in all, a significant economic slowdown occurs in
the coming quarters, as consumers simultaneously deal with a loss
in purchasing power, a negative wealth effect, and interest payment
shock. After 12 months, the unemployment rate rises a full
percentage point to 6.2%. Housing prices slide 11.2% year over
year, the S&P/TSX is at 18,500 points after one year, and the
price of oil hovers around US$77.
In the upside scenario, the economy surprises slightly in a
positive direction owing to a resilient labour market. Governments
continue to support the Canadian and U.S. economies. Consumer
spending also surprises to the upside given the excess savings
accumulated since the start of the pandemic. While the economy
remains solid, the central bank does not need to significantly
tighten monetary policy as inflation stabilizes given a
normalization of supply chains and easing geopolitical tensions.
After one year, the unemployment rate is more favourable than that
of the base scenario (seven-tenths lower). Housing prices remain
unchanged, the S&P/TSX is at 20,300 points after one year, and
the price of oil hovers around US$102.
In the downside scenario, supply chain issues persist and the
geopolitical landscape remains highly uncertain. The global economy
stagnates with several countries seeing a drop in economic
activity. In addition, central banks underestimated the impact of
rising interest rates in a context of persistent supply shock.
Given budgetary constraints, governments have a limited capacity to
support households and businesses. After 12 months, the economic
contraction pushes the unemployment rate to 8.2%. Housing prices
decrease considerably, the S&P/TSX slides to 14,380 points
after one year, and the price of oil falls to US$36.
Given uncertainty surrounding the key inputs used to measure
credit losses, the Bank has applied expert credit judgment to
adjust the modelled ECL results.
Sensitivity Analysis of Allowances for Credit Losses on
Non-Impaired Loans
Scenarios
The following table shows a comparison of the Bank's allowances
for credit losses on non-impaired loans (Stages 1 and 2) as at
October 31, 2022 based on the probability weightings of three
scenarios with allowances for credit losses resulting from
simulations of each scenario weighted at 100%.
Allowances
for credit
losses on non-impaired
loans
Balance as at October 31, 2022 857
Simulations
100% upside scenario 603
100% base scenario 693
100% downside scenario 1,123
Migration
The following table shows a comparison of the Bank's allowances
for credit losses on non-impaired loans (Stages 1 and 2) as at
October 31, 2022 with the estimated allowances for credit losses
that would result if all these non-impaired loans were in Stage
1.
Allowances
for credit
losses on non-impaired
loans
Balance as at October 31, 2022 857
Simulations
Non-impaired loans if they were all in Stage 1 664
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