TIDM32SS
RNS Number : 1278I
National Bank of Canada
30 November 2022
Regulatory Announcement
National Bank of Canada
November 30, 2022
2022 Annual Financial Statements (Part 2)
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/1278I_1-2022-11-30.pdf
Note 8 - Financial Assets Transferred But Not Derecognized
In the normal course of its business, the Bank enters into
transactions in which it transfers financial assets such as
securities or loans directly to third parties, in particular
structured entities. According to the terms of some of those
transactions, the Bank retains substantially all of the risks and
rewards related to those financial assets. The risks include credit
risk, interest rate risk, foreign exchange risk, prepayment risk,
and other price risks, whereas the rewards include the income
streams associated with the financial assets. As such, those
financial assets are not derecognized and the transactions are
treated as collateralized or secured borrowings. The nature of
those transactions is described below.
Securities Sold Under Repurchase Agreements and Securities
Loaned
When securities are sold under repurchase agreements and
securities loaned under securities lending agreements, the Bank
transfers financial assets to third parties in accordance with the
standard terms for such transactions. These third parties may have
an unlimited right to resell or repledge the financial assets
received. If cash collateral is received, the Bank records the cash
along with an obligation to return the cash, which is included in
Obligations related to securities sold under repurchase agreements
and securities loaned on the Consolidated Balance Sheet. Where
securities are received as collateral, the Bank does not record the
collateral on the Consolidated Balance Sheet.
Financial Assets Transferred to Structured Entities
Under the Canada Mortgage Bond (CMB) program, the Bank sells
securities backed by insured residential mortgages and other
securities to Canada Housing Trust (CHT), which finances the
purchase through the issuance of insured mortgage bonds.
Third-party CMB investors have legal recourse only to the
transferred assets. The cash received for these transferred assets
is treated as a secured borrowing, and a corresponding liability is
recorded in Liabilities related to transferred receivables on the
Consolidated Balance Sheet.
The following table provides additional information about the
nature of the transferred financial assets that do not qualify for
derecognition and the associated liabilities.
As at October 31 2022 2021
===================================================== ======= ======
Carrying value of financial assets transferred but
not derecognized
Securities(1) 76,551 68,296
Residential mortgages 24,102 22,413
---------------------------------------------------- ------- ------
100,653 90,709
----------------------------------------------------- ------- ------
Carrying value of associated liabilities (2) 56,555 40,779
----------------------------------------------------- ------- ------
Fair value of financial assets transferred but not
derecognized
Securities(1) 76,551 68,296
Residential mortgages 22,954 22,249
---------------------------------------------------- ------- ------
99,505 90,545
----------------------------------------------------- ------- ------
Fair value of associated liabilities (2) 55,767 40,731
===================================================== ======= ======
(1) The amount related to the securities loaned is the maximum
amount of Bank securities that can be lent. For obligations related
to securities sold under repurchase agreements, the amount includes
the Bank's own financial assets as well as those of third parties
and excludes covered bonds issued by the Bank.
(2) Associated liabilities include liabilities related to
transferred receivables and obligations related to securities sold
under repurchase agreements before the offsetting impact of $3,606
million as at October 31, 2022 ($3,367 million as at October 31,
2021) excluding repurchase agreements guaranteed by covered bonds
issued by the Bank. Liabilities related to securities loaned are
not included, as the Bank can lend its own financial assets and
those of third parties. The carrying value and fair value of
liabilities related to securities loaned stood at $8,843 million
before the offsetting impact of $2,043 million as at October 31,
2022 ($7,993 million before the offsetting impact of $4,333 million
as at October 31, 2021).
The following table specifies the nature of the transactions
related to financial assets transferred but not derecognized.
As at October 31 2022 2021
==================================================== ======= ======
Carrying value of financial assets transferred but
not derecognized
Securities backed by insured residential mortgages
and other securities sold to CHT 25,468 24,034
Securities sold under repurchase agreements 33,880 17,553
Securities loaned 41,305 49,122
100,653 90,709
==================================================== ======= ======
Note 9 - Investments in Associates and Joint Ventures
As at October 31 2022 2021
====================== ========= ======== ========
Business Carrying Carrying
segment value value
====================== ========= ======== ========
Listed associate
TMX Group Limited(1) Other 96 184
Unlisted associates 44 41
140 225
====================== ========= ======== ========
(1) The Bank exercises significant influence over TMX Group
Limited (TMX) mainly through its equity interest, debt financing,
and presence on TMX's board of directors. As at October 31, 2022,
the Bank's ownership interest in TMX was 2.5% (5.2% as at October
31, 2021), and the fair value of this investment based on quoted
prices in active markets was $178 million ($390 million as at
October 31, 2021).
As at October 31, 2022 and 2021, there were no significant
restrictions limiting the ability of associates to transfer funds
to the Bank in the form of dividends or to repay any loans or
advances. Furthermore, the Bank has not made any specific
commitment or contracted any contingent liability with respect to
associates.
TMX Group Limited
TMX is a Canadian corporation that directly or indirectly
controls a number of entities that operate stock exchanges and
clearing houses and provide clearing and settlement services.
During the year ended October 31, 2022 , TMX paid $7 million in
dividends to the Bank ($12 million for the year ended October 31,
2021). The following table provides summarized financial
information on TMX.
As at October 31 or for the year ended October 31(1) 2022 2021
====================================================== ====== ======
Balance sheet
Current assets 56,811 36,077
Non-current assets 5,671 5,387
Current liabilities 56,382 35,817
Non-current liabilities 1,992 1,971
------------------------------------------------------ ------ ------
Income statement
Total revenues 1,095 948
Net income 559 322
Other comprehensive income (49) (1)
Comprehensive income 510 321
====================================================== ====== ======
(1) The balance sheet amounts are the balances reported in the
unaudited financial statements as at September 30, 2022 and 2021,
i.e., the most recent available, and the income statement amounts
are based on the cumulative balances for the 12-month periods ended
September 30, 2022 and 2021.
The table below provides summarized financial information
related to the Bank's proportionate share in all unlisted
associates that are not individually significant.
Year ended October 31(1) 2022 2021
============================ ===== ====
Net income 5 1
Other comprehensive income - -
Comprehensive income 5 1
============================ ====== ====
(1) The amounts are based on the cumulative balances for the
12-month periods ended September 30, 2022 and 2021.
Note 10 - Premises and Equipment
Right-of-use
Owned assets held assets Total
-------------- ------------------------------------------------------------------------ ------------ -----
Head
office
building
under Equipment
construction Computer and Leasehold Real
Land (1) Buildings equipment furniture improvements Total estate
=============== ==== ============ ========= ========= ========= ============ ===== ============ =====
Cost
As at October
31,
2020 71 120 71 340 112 331 1,045 698 1,743
Additions and
modifications - 128 6 44 13 32 223 48 271
Disposals - - (3) (3) (2) (4) (12) (12)
Impairment
losses - - - - - - - (5) (5)
Fully
depreciated
assets (6) (124) (10) (18) (158) (3) (161)
Impact of
foreign
currency
translation - - - (2) (3) (3) (8) (6) (14)
-------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ -----
As at October
31,
2021 71 248 68 255 110 338 1,090 732 1,822
Additions and
modifications 3 183 2 53 14 46 301 69 370
Disposals - - (7) - (3) (2) (12) (12)
Fully
depreciated
assets (7) (38) (7) (10) (62) (8) (70)
Impact of
foreign
currency
translation - - - 6 3 5 14 12 26
-------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ -----
As at October
31,
2022 74 431 56 276 117 377 1,331 805 2,136
--------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ -----
Accumulated
amortization
As at October
31,
2020 54 230 56 149 489 99 588
Depreciation
for
the year 2 48 12 30 92 103 195
Disposals (3) (3) (2) (4) (12) (12)
Impairment
losses - - - - - (1) (1)
Fully
depreciated
assets (6) (124) (10) (18) (158) (3) (161)
Impact of
foreign
currency
translation - (1) (1) (1) (3) - (3)
-------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ -----
As at October
31,
2021 47 150 55 156 408 198 606
Depreciation
for
the year 2 48 15 32 97 105 202
Disposals (4) - (3) (2) (9) (9)
Fully
depreciated
assets (7) (38) (7) (10) (62) (8) (70)
Impact of
foreign
currency
translation - 2 1 3 6 4 10
-------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ -----
As at October
31,
2022 38 162 61 179 440 299 739
--------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ -----
Carrying value
as
at October 31,
2021 71 248 21 105 55 182 682 534 1,216
--------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ -----
Carrying value
as
at October 31,
2022 74 431 18 114 56 198 891 506 1,397
=============== ==== ============ ========= ========= ========= ============ ===== ============ =====
(1) As at October 31, 2022, contractual commitments related to
the head office building under construction stood at $197 million,
covering a period up to 2023.
Assets Leased Under Operating Leases
The Bank is a lessor under operating lease agreements for
certain buildings. These leases have terms varying from one year to
five years and do not contain any bargain purchase options or
contingent rent.
The following table breaks down the future minimum payments
receivable under these operating leases. These amounts include
sublease revenues of $6 million related to real estate right-of-use
assets.
As at October
31, 2022
======================= =============
1 year or less 2
Over 1 year to 2 years 2
Over 2 years to 3 years 1
Over 3 years to 4 years 1
Over 4 years to 5 years 1
Over 5 years -
----------------------- -------------
7
======================= =============
Note 10 - Premises and Equipment (cont.)
Leases Recognized in the Consolidated Statement of Income
As at October
31, 2022
============================================ =============
Interest expense 16
Expense for leases of low-value assets(1) 9
Expense relating to variable lease payments 94
Income from leasing and subleasing(2) 4
============================================= =============
(1) The expense relates to lease payments for low-value assets
that are part of the exemptions permitted by the practical
expedients of IFRS 16.
(2) This amount includes variable lease payments of $2 million.
For the year ended October 31, 2022, the cash outflows for
leases amounted to $218 million (2021: $214 million).
Note 11 - Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying amounts of
goodwill by cash-generating unit (CGU) and by business segment for
the years ended October 31, 2022 and 2021.
Personal
and Financial
Commercial Wealth Markets
(1) Management (1) USSF&I Other Total
------------ ---------- ----------------------------------------- ---------- ------------------------ ---------- ------
Advanced
Bank Flinks
Third-Party Securities Managed Credigy of Asia Technology
Solutions Brokerage Solutions Ltd. Limited Inc.
(1) (1) (1) Total (1) (1) Total (1)
============ ========== =========== ========== ========= ===== ========== ======= ======== ===== ========== ======
Balance as at
October 31,
2020 54 256 434 269 959 235 33 133 166 - 1,414
Acquisition
of
Flinks(2) 101 101
Impact of
foreign
currency
translation - - - - - - (2) (9) (11) - (11)
------------- ---------- ----------- ---------- --------- ----- ---------- ------- -------- ----- ---------- ------
Balance as at
October 31,
2021 54 256 434 269 959 235 31 124 155 101 1,504
Impact of
foreign
currency
translation - - - - - - 3 12 15 - 15
------------- ---------- ----------- ---------- --------- ----- ---------- ------- -------- ----- ---------- ------
Balance as at
October 31,
2022 54 256 434 269 959 235 34 136 170 101 1,519
============== ========== =========== ========== ========= ===== ========== ======= ======== ===== ========== ======
(1) Constitutes a CGU.
(2) On September 8, 2021, the Bank finalized the acquisition of
Flinks. For additional information, see Note 31 to these
consolidated financial statements.
Goodwill Impairment Testing and Significant Assumptions
For impairment testing purposes, goodwill resulting from a
business combination must be allocated, as of the acquisition date,
to a CGU or group of CGUs expected to benefit from the synergies of
the business combination. Goodwill is tested for impairment
annually or more frequently if events or circumstances indicate
that the recoverable value of the CGU or group of CGUs may have
fallen below its carrying amount.
Goodwill was tested for impairment during the years ended
October 31, 2022 and 2021, and no impairment loss was
recognized.
The recoverable value of a CGU or group of CGUs is based on the
value in use that is calculated based on discounted pre-tax cash
flows. Future pre-tax cash flows are estimated based on a five-year
period, which is the reference period used for the most recent
financial forecasts approved by management. Cash flows beyond that
period are extrapolated using a long-term growth rate.
The discount rate used for each CGU or group of CGUs is
calculated using the cost of debt financing and the cost related to
the Bank's equity. This rate corresponds to the Bank's weighted
average cost of capital and reflects the risk specific to the CGU.
The long-term growth rate used in calculating discounted cash flow
estimates is based on the forecasted growth rate plus a risk
premium. The rate is constant over the entire five-year period for
which the cash flows were determined. Growth rates are determined,
among other factors, based on past growth rates, economic trends,
inflation, competition and the impact of the Bank's strategic
initiatives. As at October 31, 2022, for each CGU or CGU group, the
discount rate used was 12.9% (13.2% as at October 31, 2021), and
the long-term growth rate varied between 2% and 5%, depending on
the CGU, as at October 31, 2022 and 2021.
Estimating a CGU's value in use requires significant judgment
regarding the inputs used in applying the discounted cash flow
method. The Bank conducts sensitivity analyses by varying the
after-tax discount rate upward by 1% and the terminal growth rates
downward by 1%. Such sensitivity analyses demonstrate that a
reasonable change in assumptions would not result in a CGU's
carrying value exceeding its value in use.
Intangible Assets
Indefinite useful
life Finite useful life Total
------------------ ---------------------------- ----------- ----------------------------- -----
Internally-
Management generated Other
contracts software Other intangible
(1) Trademark Total (2) software assets Total
=================== ========== ========= ===== =========== ========= =========== ===== =====
Cost
As at October 31,
2020 161 11 172 1,922 169 69 2,160 2,332
Impact of an
accounting
policy change
as at November 1,
2020(3) (192) (192) (192)
Acquisitions - - - 354 20 - 374 374
Impact of an
accounting
policy change
for the fiscal
year(3) (75) (75) (75)
Impairment
losses(4) (1) (2) (3) (9) - - (9) (12)
Fully amortized
intangible
assets (92) (69) (5) (166) (166)
------------------ ---------- --------- ----- ----------- --------- ----------- ----- -----
As at October 31,
2021 160 9 169 1,908 120 64 2,092 2,261
Acquisitions - - - 346 28 - 374 374
Impairment
losses(4) (1) (1) (2) (7) - (2) (9) (11)
Fully amortized
intangible
assets (138) (21) (2) (161) (161)
Impact of foreign
currency
translation - - - - 1 - 1 1
------------------ ---------- --------- ----- ----------- --------- ----------- ----- -----
As at October 31,
2022 159 8 167 2,109 128 60 2,297 2,464
------------------- ---------- --------- ----- ----------- --------- ----------- ----- -----
Accumulated
amortization
As at October 31,
2020 724 125 49 898 898
Impact of an
accounting
policy change
as at November 1,
2020(3) (6) (6) (6)
Amortization for
the
fiscal year 260 19 7 286 286
Impact of an
accounting
policy change
for the fiscal
year(3) (25) (25) (25)
Fully amortized
intangible
assets (92) (69) (5) (166) (166)
------------------ ---------- --------- ----- ----------- --------- ----------- ----- -----
As at October 31,
2021 861 75 51 987 987
Amortization for
the
fiscal year 253 20 6 279 279
Impairment
losses(4) (2) - (1) (3) (3)
Fully amortized
intangible
assets (138) (21) (2) (161) (161)
Impact of foreign
currency
translation - 2 - 2 2
------------------ ---------- --------- ----- ----------- --------- ----------- ----- -----
As at October 31,
2022 974 76 54 1,104 1,104
------------------- ---------- --------- ----- ----------- --------- ----------- ----- -----
Carrying value as
at
October 31, 2021 160 9 169 1,047 45 13 1,105 1,274
------------------- ---------- --------- ----- ----------- --------- ----------- ----- -----
Carrying value as
at
October 31, 2022 159 8 167 1,135 52 6 1,193 1,360
=================== ========== ========= ===== =========== ========= =========== ===== =====
(1) For annual impairment testing purposes, management contracts
are allocated to the Managed Solutions CGU.
(2) The remaining amortization period for significant
internally-generated software is four years.
(3) Certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements. For
additional information, see Note 1 to these consolidated financial
statements.
(4) During the year ended October 31, 2022, the Bank recorded $2
million in impairment losses resulting from the impairment test
carried out on indefinite-life intangible assets ($3 million during
the year ended October 31, 2021) as well as an amount of $5 million
related to internally-generated software for which the Bank has
decided to cease its use or development ($9 million during the year
ended October 31, 2021). These impairment losses were recognized in
the Non--interest expenses - Technology item of the Consolidated
Statement of Income and reported in the Other heading of segment
results.
Note 12 - Other Assets
As at October 31 2022 2021(1)
============================================== ===== =======
Receivables, prepaid expenses and other items 2,591 1,228
Interest and dividends receivable 1,057 696
Due from clients, dealers and brokers 842 988
Defined benefit asset (Note 23) 498 691
Deferred tax assets (Notes 1 and 24) 389 416
Current tax assets 471 445
Reinsurance assets 6 28
Insurance assets 104 38
----------------------------------------------- ----- -------
5,958 4,530
============================================== ===== =======
(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 consolidated financial
statements.
Note 13 - Deposits
As at October 31 2022 2021
============================ ========= ============ =================== =======
On demand After notice Fixed term
(1) (2) (3) Total Total
============================ ========= ============ ========== ======= =======
Personal 5,539 36,576 36,696 78,811 70,076
Business and government 60,579 32,061 91,590 184,230 167,870
Deposit-taking institutions 1,557 199 1,597 3,353 2,992
----------------------------- --------- ------------ ---------- ------- -------
67,675 68,836 129,883 266,394 240,938
============================ ========= ============ ========== ======= =======
(1) Demand deposits are deposits for which the Bank does not
have the right to require notice of withdrawal and consist
essentially of deposits in chequing accounts.
(2) Notice deposits are deposits for which the Bank may legally
require a notice of withdrawal and consist mainly of deposits in
savings accounts.
(3) Fixed-term deposits are deposits that can be withdrawn by
the holder on a specified date and include term deposits,
guaranteed investment certificates, savings accounts and plans,
covered bonds, and other similar instruments.
The Deposits - Business and government item includes, among
other items, covered bonds, as described below, and a $ 13.9
billion amount of deposits as at October 31, 2022 ($ 11.9 billion
as at October 31, 2021) that are subject to the bank bail-in
conversion regulations issued by the Government of Canada. These
regulations provide certain powers to the Canada Deposit Insurance
Corporation (CDIC), notably the power to convert certain eligible
Bank shares and liabilities into common shares should the Bank
become non-viable.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond
legislative program under which covered bonds are issued. It
therefore created NBC Covered Bond Guarantor (Legislative) Limited
Partnership (the Guarantor) to guarantee payment of the principal
and interest owed to the bondholders. The Bank sold uninsured
residential mortgages to the Guarantor and granted it loans to
facilitate the acquisition of these assets. During the year ended
October 31, 2022, an amount of 1.0 billion euros and US$1.0 billion
in covered bonds reached maturity, and the Bank issued 1.3 billion
euros, US$1.5 billion, and 750 million pounds sterling in covered
bonds (US$470 million, 1.0 billion euros, and 250 million pounds
sterling in covered bonds reached maturity, and the Bank issued
1.25 billion euros in covered bonds during the year ended October
31, 2021). The covered bonds totalled $10.4 billion as at October
31, 2022 ($8.8 billion as at October 31, 2021). For additional
information, see Note 27 to these consolidated financial
statements.
The Bank has limited access to the assets owned by this
structured entity according to the terms of the agreements that
apply to this transaction. The assets owned by this entity totalled
$18.2 billion as at October 31, 2022 ($16.0 billion as at October
31, 2021), of which $17.9 billion ($15.7 billion as at October 31,
2021) is presented in Residential mortgage loans on the Bank's
Consolidated Balance Sheet.
Note 14 - Other Liabilities
As at October 31 2022 2021
============================================================= ===== =====
Accounts payable and accrued expenses 2,582 2,469
Subsidiaries ' debts to third parties 156 437
Interest and dividends payable 1,063 552
Lease liabilities 552 575
Due to clients, dealers and brokers 730 735
Defined benefit liability (Note 23) 111 143
Allowances for credit losses - Off-balance-sheet commitments
(Note 7) 162 162
Deferred tax liabilities (Note 24) 14 10
Current tax liabilities 67 478
Insurance liabilities 10 11
Other items(1)(2)(3) 914 729
-------------------------------------------------------------- ----- -----
6,361 6,301
============================================================= ===== =====
(1) As at October 31, 2022, Other items included $11 million in
litigation provisions ($12 million as at October 31, 2021).
(2) As at October 31, 2022, Other items included $33 million in
provisions for onerous contracts ($33 million as at October 31,
2021).
(3) As at October 31, 2022, Other items included the financial
liability resulting from put options written to non-controlling
interests of Flinks for an amount of $33 million ($25 million as at
October 31, 2021).
Note 15 - Subordinated Debt
The subordinated debt represents direct unsecured obligations,
in the form of notes and debentures, to the Bank's debt holders.
The rights of the Bank's note and debenture holders are subordinate
to the claims of depositors and certain other creditors. Approval
from OSFI is required before the Bank can redeem its subordinated
notes and debentures in whole or in part.
On August 31, 2022, the Bank redeemed debentures denominated in
a foreign currency and maturing on February 28, 2087 in an amount
of US$7 million at their nominal value plus accrued interest.
On July 25, 2022, the Bank issued medium-term notes for an
amount of $750 million, bearing interest at 5.426% and maturing on
August 16, 2032. The interest on these notes will be payable
semi-annually at 5.426% per annum until August 16, 2027 and,
thereafter, at a floating rate equal to the Canadian Overnight Repo
Rate (CORRA) compounded daily plus 2.32% and payable quarterly.
With the prior approval of OSFI, the Bank may, at its option,
redeem these notes as of August 16, 2027, in whole or in part, at
their nominal value plus accrued and unpaid interest. Since the
medium-term notes satisfy the non--viability contingent capital
requirements, they qualify for the purposes of calculating
regulatory capital under Basel III.
As at October
31 2022 2021
=============== ========= =============================== ===== ====
Interest
Maturity date rate Redemption date
================ ========= =============================== ===== ====
February
2028(1) 3.183%(2) February 1, 2023(3) 750 750
August 2032(1) 5.426%(4) August 16, 2027(3) 750 -
February Redeemable at the Bank's option
2087 Variable since February 28, 1993 - 9
---------------- --------- ------------------------------- ----- ----
1,500 759
Fair value hedge adjustment(5) 2 10
Unamortized issuance costs(6) (3) (1)
------------------------------------------------------------ ----- ----
Total 1,499 768
================ ========= =============================== ===== ====
(1) These notes contain non-viability contingent capital (NVCC)
provisions and qualify for the purposes of calculating regulatory
capital under Basel III. In the case of a trigger event as defined
by OSFI, each note will be automatically and immediately converted,
on a full and permanent basis, without the consent of the holder,
into a specified number of common shares of the Bank as determined
using an automatic conversion formula with a multiplier of 1.5 and
a conversion price based on the greater of: (i) a floor price of
$5.00; (ii) the current market price of common shares, which
represents the volume weighted average price of common shares for
the ten trading days ending on the trading day preceding the date
of the trigger event. If the common shares are not listed on an
exchange when this price is being established, the price will be
the fair value reasonably determined by the Bank's Board. The
number of shares issued is determined by dividing the par value of
the note (plus accrued and unpaid interest on such note) by the
conversion price and then applying the multiplier.
(2) Bearing interest at a rate of 3.183%, payable semi-annually
until February 1, 2023, and thereafter bearing interest at a
floating rate equal to three-month CDOR plus 0.72%, payable
quarterly.
(3) With the prior approval of OSFI, the Bank may, at its
option, redeem these notes in whole or in part, at their nominal
value plus accrued and unpaid interest.
(4) Bearing interest at a rate of 5.426%, payable semi-annually
until August 16, 2027, and thereafter bearing interest at a
floating rate equal to CORRA compounded daily plus 2.32%, payable
quarterly.
(5) The fair value hedge adjustment represents the impact of the
hedging transactions applied to hedge changes in the fair value of
subordinated debt caused by interest rate fluctuations.
(6) The unamortized costs related to the issuance of the
subordinated debt represent the initial cost, net of accumulated
amortization, calculated using the effective interest rate
method.
Note 16 - Derivative Financial Instruments
Derivative financial instruments are financial contracts whose
value is derived from an underlying interest rate, exchange rate,
equity price, commodity price, credit spread, or index.
The main types of derivative financial instruments used are
presented below.
Forwards and Futures
Forwards and futures are contractual obligations to buy or sell
a specified amount of currency, interest rate, commodity, or
financial instrument on a specified future date at a specified
price. Forwards are tailor-made agreements transacted in the
over-the-counter market. Futures are traded on organized exchanges
and are subject to cash margining calculated daily by clearing
houses.
Swaps
Swaps are over-the-counter contracts in which two parties agree
to exchange cash flows. The Bank uses the following types of swap
contracts:
-- Cross-currency swaps are transactions in which counterparties
exchange fixed-rate interest payments and principal payments in
different currencies.
-- Interest rate swaps are transactions in which counterparties
exchange fixed- and floating-rate interest payments based on the
notional principal value in the same currency.
-- Commodity swaps are transactions in which counterparties
exchange fixed- and floating-rate payments based on the notional
principal value of a commodity.
-- Equity swaps are transactions in which counterparties agree
to exchange the return on one equity or group of equities for a
payment based on an interest rate benchmark.
-- Credit default swaps are transactions in which one of the
parties agrees to pay returns to the other party so that the latter
can make a payment if a credit event occurs.
Options
Options are agreements between two parties in which the writer
of the option grants the buyer the right, but not the obligation,
to buy or sell, either at a specified date or dates or at any time
prior to a predetermined expiry date, a specific amount of
currency, commodity, or financial instrument at an agreed-upon
price upon the sale of the option. The writer receives a premium
for the sale of this instrument.
Notional Amounts (1)
As at October 31 2022 2021
================= ======================================================================= =========
Term to maturity
---------------- ------------------------------------------------ ========= ==========
Over
3 Over
months 1 Contracts
to year held for Contracts
3 months 12 to Over Total trading designated Total
or less months 5 years 5 years contracts purposes as hedges contracts
================ ======== ======= ======== ======== ========= ========= ========== =========
Interest rate
contracts
OTC contracts
Forward rate
agreements
Not settled by
central
counterparties 7,873 632 - - 8,505 8,505 - 6,058
Settled by
central
counterparties - - - - - - - 495
Swaps
Not settled by
central
counterparties 4,665 10,513 56,972 49,234 121,384 119,504 1,880 119,380
Settled by
central
counterparties 314,872 168,685 316,246 121,854 921,657 868,393 53,264 690,197
Options purchased 150 513 3,961 1,295 5,919 5,824 95 4,833
Options written 652 1,804 5,167 1,387 9,010 8,116 894 6,471
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
328,212 182,147 382,346 173,770 1,066,475 1,010,342 56,133 827,434
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Exchange-traded
contracts
Futures
Long positions 10,758 12,115 5,599 - 28,472 28,472 - 56,893
Short positions 42,455 15,160 4,590 - 62,205 62,205 - 49,631
Options purchased 3,000 - - - 3,000 3,000 - 15,974
Options written 1,362 - - - 1,362 1,362 - 8,882
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
57,575 27,275 10,189 - 95,039 95,039 - 131,380
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Foreign exchange
contracts
OTC contracts
Forwards 58,344 14,829 8,412 587 82,172 82,172 - 78,401
Swaps 301,820 82,772 98,472 32,620 515,684 502,392 13,292 447,547
Options purchased 12,875 17,441 4,515 - 34,831 34,831 - 17,295
Options written 13,351 23,013 3,113 - 39,477 39,477 - 18,924
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
386,390 138,055 114,512 33,207 672,164 658,872 13,292 562,167
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Exchange-traded
contracts
Futures
Long positions 72 - - - 72 72 - 54
Short positions 42 13 - - 55 55 - 83
114 13 - - 127 127 - 137
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Equity, commodity
and
credit
derivative
contracts (2)
OTC contracts
Forwards - 3 3,471 261 3,735 3,735 - 4,288
Swaps
Not settled by
central
counterparties 20,331 19,572 17,298 8,368 65,569 65,433 136 80,067
Settled by
central
counterparties 310 258 3,250 815 4,633 4,633 - 3,713
Options purchased 549 404 869 - 1,822 1,822 - 1,625
Options written 443 240 1,425 263 2,371 2,371 - 1,966
21,633 20,477 26,313 9,707 78,130 77,994 136 91,659
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Exchange-traded
contracts
Futures
Long positions 3,650 697 403 39 4,789 4,789 - 7,173
Short positions 10,121 2,686 645 - 13,452 13,452 - 13,659
Options purchased 6,255 1,906 981 - 9,142 9,142 - 23,110
Options written 6,332 2,866 2,292 - 11,490 11,490 - 24,522
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
26,358 8,155 4,321 39 38,873 38,873 - 68,464
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
820,282 376,122 537,681 216,723 1,950,808 1,881,247 69,561 1,681,241
================= ======== ======= ======== ======== ========= ========= ========== =========
(1) Notional amounts are not presented in assets or liabilities
on the Consolidated Balance Sheet. They represent the reference
amount of the contract to which a rate or price is applied to
determine the amount of cash flows to be exchanged.
(2) Includes precious metal contracts.
Note 16 - Derivative Financial Instruments (cont.)
Credit Risk
Credit risk on derivative financial instruments is the risk of
financial loss that the Bank will have to assume if a counterparty
fails to honour its contractual obligations. Credit risk related to
derivative financial instruments is subject to the same credit
approval, credit limit, and credit monitoring standards as those
applied to the Bank's other credit transactions. Consequently, the
Bank evaluates the creditworthiness of counterparties and manages
the size of the portfolios as well as the diversification and
maturity profiles of these financial instruments.
The Bank limits the credit risk of over-the-counter contracts by
dealing with creditworthy counterparties and entering into
contracts that provide for the exchange of collateral between
parties where the fair value of the outstanding transactions
exceeds an agreed threshold. The Bank also negotiates master
netting agreements that provide for the simultaneous close-out and
settling of all transactions with a given counterparty on a net
basis in the event of default, insolvency, or bankruptcy. However,
overall exposure to credit risk, reduced through master netting
agreements, may change substantially after the balance sheet date
because it is affected by all transactions subject to a contract as
well as by changes in the market rates of the underlying
instruments.
The Bank also uses financial intermediaries to have access to
established clearing houses in order to minimize the settlement
risk arising from financial derivative transactions. In some cases,
the Bank has direct access to clearing houses for settling
derivative financial instruments. In addition, certain derivative
financial instruments traded over the counter are settled directly
or indirectly by central counterparties.
In the case of exchange-traded contracts, exposure to credit
risk is limited because these transactions are standardized
contracts executed on established exchanges, each of which is
associated with a well-capitalized clearing house that assumes the
obligations of both counterparties and guarantees their performance
obligations. All exchange-traded contracts are subject to initial
margins and daily settlement.
Terms Used
Replacement Cost
Replacement cost is the Bank's maximum credit risk associated
with derivative financial instruments as at the Consolidated
Balance Sheet date. This amount is the positive fair value of all
derivative financial instruments, before all master netting
agreements and collateral held.
Credit Risk Equivalent
The credit risk equivalent amount is the total replacement cost
plus an amount representing the potential future credit risk
exposure, as outlined in OSFI's Capital Adequacy Requirements
Guideline.
Risk-Weighted Amount
The risk-weighted amount is determined by applying the OSFI
guidance to the credit risk equivalent.
Credit Risk Exposure of the Derivative Financial Instrument
Portfolio
As at October 31 2022 2021
======================= =================================== =======================================
Credit Risk-
risk weighted Credit Risk-
Replacement equivalent amount Replacement risk weighted
cost (1) (1) cost equivalent(1) amount(1)
====================== =========== =========== ========= =========== ============== ==========
Interest rate contracts 5,490 2,639 508 1,975 3,239 814
Foreign exchange
contracts 8,775 5,926 1,847 6,453 4,361 1,405
Equity, commodity and
credit
derivative contracts 4,282 6,569 1,797 8,056 12,113 3,316
----------------------- ----------- ----------- --------- ----------- -------------- ----------
18,547 15,134 4,152 16,484 19,713 5,535
Impact of master
netting
agreements (9,583) (9,398)
----------------------- ----------- ----------- --------- ----------- -------------- ----------
8,964 15,134 4,152 7,086 19,713 5,535
====================== =========== =========== ========= =========== ============== ==========
(1) The amounts are presented net of the Impact of master netting agreements.
Credit Risk Exposure of the Derivative Financial Instrument
Portfolio by Counterparty
As at October 31 2022 2021
==================================== ======================== ========================
Credit
Replacement risk Replacement Credit risk
cost equivalent cost equivalent
=================================== =========== =========== =========== ===========
OECD(1) member-country governments 1,342 2,700 771 2,604
Banks of OECD member countries 589 3,292 714 3,492
Other 7,033 9,142 5,601 13,617
----------- ----------- ----------- -----------
8,964 15,134 7,086 19,713
=================================== =========== =========== =========== ===========
(1) Organisation for Economic Co-operation and Development.
Fair Value of Derivative Financial Instruments
As at October 31 2022 2021
===================================== =========================== ===========================
Positive Negative Net Positive Negative Net
==================================== ======== ======== ======= ======== ======== =======
Contracts held for trading
purposes
Interest rate contracts
Forwards 125 85 40 30 54 (24)
Swaps 3,267 3,620 (353) 909 1,316 (407)
Options 168 166 2 74 68 6
------------------------------------- -------- -------- ------- -------- -------- -------
3,560 3,871 (311) 1,013 1,438 (425)
------------------------------------- -------- -------- ------- -------- -------- -------
Foreign exchange contracts
Forwards 1,426 919 507 2,190 2,365 (175)
Swaps 6,461 7,140 (679) 4,026 3,601 425
Options 707 597 110 234 250 (16)
------------------------------------- -------- -------- ------- -------- -------- -------
8,594 8,656 (62) 6,450 6,216 234
------------------------------------- -------- -------- ------- -------- -------- -------
Equity, commodity and credit
derivative contracts
Forwards 911 314 597 1,369 886 483
Swaps 1,926 3,717 (1,791) 2,375 5,198 (2,823)
Options 1,440 1,793 (353) 4,305 4,922 (617)
------------------------------------- -------- -------- ------- -------- -------- -------
4,277 5,824 (1,547) 8,049 11,006 (2,957)
------------------------------------- -------- -------- ------- -------- -------- -------
Total - Contracts held for
trading purposes 16,431 18,351 (1,920) 15,512 18,660 (3,148)
------------------------------------- -------- -------- ------- -------- -------- -------
Contracts designated as hedges
Interest rate contracts
Swaps 1,930 1,137 793 962 268 694
Options - 35 (35) - 207 (207)
------------------------------------- -------- -------- ------- -------- -------- -------
1,930 1,172 758 962 475 487
------------------------------------- -------- -------- ------- -------- -------- -------
Foreign exchange contracts
Swaps 182 109 73 3 232 (229)
Options - - - - - -
------------------------------------ -------- -------- ------- -------- -------- -------
182 109 73 3 232 (229)
------------------------------------- -------- -------- ------- -------- -------- -------
Equity, commodity and credit
derivative contracts
Swaps 4 - 4 7 - 7
Options - - - - - -
------------------------------------ -------- -------- ------- -------- -------- -------
4 - 4 7 - 7
------------------------------------- -------- -------- ------- -------- -------- -------
Total - Contracts designated
as hedges 2,116 1,281 835 972 707 265
------------------------------------- -------- -------- ------- -------- -------- -------
Designated as fair value
hedges 1,186 586 600 644 272 372
Designated as cash flow hedges 930 695 235 328 435 (107)
Designated as a hedge of
a net investment in a
foreign operation - - - - - -
------------------------------------ -------- -------- ------- -------- -------- -------
Total fair value 18,547 19,632 (1,085) 16,484 19,367 (2,883)
Impact of master netting agreements (9,583) (9,583) - (9,398) (9,398) -
------------------------------------- -------- -------- ------- -------- -------- -------
8,964 10,049 (1,085) 7,086 9,969 (2,883)
==================================== ======== ======== ======= ======== ======== =======
Note 17 - Hedging Activities
The Bank's market risk exposure, risk management objectives,
policies and procedures, and risk measurement methods are presented
in the Risk Management section of the MD&A for the year ended
October 31, 2022.
The Bank has elected, as permitted under IFRS 9, to continue
applying the hedge accounting requirements of IAS 39. Some of the
tables present information on currencies, specifically, the U.S.
dollar (USD), the Australian dollar (AUD), the Canadian dollar
(CAD), the Hong Kong dollar (HKD), the euro (EUR), and the pound
sterling (GBP).
Note 17 - Hedging Activities (cont.)
The following table shows the notional amounts and the weighted
average rates by term to maturity of the designated derivative
instruments and their fair value by type of hedging
relationship.
As at October 31 2022 2021
=================== ================================ ====================================== ====== ====== ===========
Term to maturity Fair value Fair value
--------------- ---------------------------------------------- ====== ------------------- ====== -------------------
Over Over
1 2
1 year years
year to to Over
or 2 5 5
less years years years Total Assets Liabilities Total Assets Liabilities
=============== ====== ====== ====== ====== ====== ====== =========== ====== ====== ===========
Fair value hedges
Interest rate risk
Interest rate
swaps 1,176 527 642 63
Notional amount -
LIBOR reform(1) - - 509 903 1,412 2,025
Notional amount -
CDOR reform(2) - 815 8,246 1,669 10,730 -
Notional amount -
Other 1,053 1,860 5,770 1,464 10,147 16,572
Average fixed
interest
rate - Pay fixed 1.6 % 1.0 % 1.7 % 2.2% 1.7% 1.2%
Average fixed
interest
rate - Receive
fixed 0.9 % 3.3 % 1.1 % 2.7% 2.0% 2.0%
Cross-currency
swaps 10 24 2 2
Notional amount -
LIBOR reform(1) - - - 32 32 22
Notional amount -
Other 120 - - 40 160 110
Average USD-AUD
exchange
rate - - - $0.7381 $0.7381 $0.7351
Average CAD-HKD
exchange
rate $0.1621 - - - $0.1621 $0.1621
Average USD-EUR
exchange
rate - - - $1.0513 $1.0513 -
Options - 35 - 207
Notional amount -
LIBOR reform(1) - - - 409 409 372
Notional amount -
CDOR reform(2) - - - 30 30 -
Notional amount -
Other 52 - 74 424 550 541
Average fixed
interest
rate - Purchased (0.8) % - (1.3) % - (1.2)% (0.8)%
Average fixed
interest
rate - Written 2.9 % - - 2.8% 2.8% 2.8%
----------------- ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
1,225 2,675 14,599 4,971 23,470 1,186 586 19,642 644 272
--------------- ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
Cash flow hedges
Interest rate risk
Interest rate
swaps 754 610 320 205
Notional amount -
CDOR reform(2) - 526 8,414 3,460 12,400 -
Notional amount -
Other 13,702 2,909 2,790 1,054 20,455 31,223
Average fixed
interest
rate - Pay fixed 1.8 % 1.9 % 1.7% 2.6% 1.9% 1.6%
Average fixed
interest
rate - Receive
fixed 2.1 % 0.7 % 1.5% 2.2% 1.9% 0.6%
Cross-currency
swaps 172 85 1 230
Notional amount -
LIBOR reform(1) 2,014 1,010 2,020 673 5,717 13,324
Notional amount -
CDOR reform(2) - 399 2,357 1,132 3,888 -
Notional amount -
Other 2,238 1,120 127 - 3,485 3,512
Average CAD-USD
exchange
rate $1.3179 $1.3069 $1.2749 $1.2907 $1.2972 $1.2945
Average USD-EUR
exchange
rate $1.1397 $1.1534 $1.1995 $1.1889 $1.1691 $1.1587
Average USD-GBP
exchange
rate - - $1.2375 - $1.2375 -
Equity price risk
Equity swaps
Notional amount -
CDOR reform(2) 136 - - - 136 4 - 131 7 -
Average price $ 86.36 - - - $ 86.36 $ 97.54
----------------- ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
18,090 5,964 15,708 6,319 46,081 930 695 48,190 328 435
--------------- ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
Hedges of net
investments
in foreign
operations
(3)
Foreign exchange
risk
Cross-currency
swaps
Notional amount 10 - - - 10 - - 5 - -
Average CAD-USD
exchange
rate $1.3802 - - - $1.3802 $1.2378
Average USD-HKD
exchange
rate $0.1275 - - - $0.1275 -
------
10 - - - 10 - - 5 - -
----------------- ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
19,325 8,639 30,307 11,290 69,561 2,116 1,281 67,837 972 707
=============== ====== ====== ====== ====== ====== ====== =========== ====== ====== ===========
(1) Includes only contracts that reference USD LIBOR and that mature after June 30, 2023.
(2) Includes only contracts that reference CDOR and that mature after June 28, 2024.
(3) As at October 31, 2022, the Bank also designated $1,410
million in foreign currency deposits denominated in U.S. dollars as
net investment hedging instruments ($1,313 million as at October
31, 2021).
Fair Value Hedges
Fair value hedge transactions consist of using derivative
financial instruments (interest rate swaps and options) to hedge
changes in the fair value of a financial asset or financial
liability caused by interest rate fluctuations. Changes in the fair
values of derivative financial instruments used as hedging
instruments offset changes in the fair value of the hedged items.
The Bank applies this strategy mainly to portfolios of securities
measured at fair value through other comprehensive income,
fixed-rate mortgage loans, fixed-rate deposits, liabilities related
to transferred receivables, and subordinated debt.
In addition, when a fixed-rate asset or liability is denominated
in a foreign currency, the Bank sometimes uses cross-currency swaps
to hedge the associated foreign exchange risk. The Bank may
designate a cross-currency swap to exchange the fixed-rate foreign
currency for the functional currency at a floating rate in a single
hedging relationship addressing both interest rate risk and foreign
exchange risk. In certain cases, given that interest rate risk and
foreign exchange risk are hedged in a single hedging relationship,
the information below does not distinguish between interest rate
risk and the combination of interest rate risk and foreign exchange
risk as two separate risk categories. The Bank applies this
strategy mainly to foreign currency fixed-rate deposits.
Regression analysis is used to test hedge effectiveness and
determine the hedge ratio. For fair value hedges, the main source
of potential hedge ineffectiveness is a circumstance where the
critical terms of the hedging instrument and the hedged item are
not closely aligned.
The following tables show amounts related to hedged items as
well as the results of the fair value hedges.
As at October Year ended October 31,
31, 2022 2022
================= ======== ========================= =================================================
Gains Gains
(losses) (losses)
on the on the
hedged hedging
Carrying Cumulative Cumulative items instruments
value hedge adjustments for for
of adjustments from ineffectiveness ineffectiveness Hedge
hedged from active discontinued measurement measurement ineffectiveness
items hedges hedges (1) (1) (1)
============== ======== =========== ============ =============== =============== ===============
Securities at
fair value
through
other
comprehensive
income 6,805 (529) (53) (588) 589 1
Mortgages 6,488 (332) (231) (415) 453 38
Deposits 5,803 (595) 9 682 (677) 5
Liabilities
related to
transferred
receivables 682 (3) 68 3 (3) -
Subordinated debt 2 - 2 - - -
----------------- -------- ----------- ------------ --------------- --------------- ---------------
(318) 362 44
============== ======== =========== ============ =============== =============== ===============
As at October Year ended October 31,
31, 2021 2021
================= ======== ========================= ====================================================
Gains Gains
(losses) (losses)
on the on the
Carrying Cumulative Cumulative hedged hedging
value hedge adjustments items instruments
of adjustments from for for
hedged from active discontinued ineffectiveness ineffectiveness Hedge
items hedges hedges measurement(1) measurement(1) ineffectiveness(1)
============== ======== =========== ============ =============== =============== ==================
Securities at
fair value
through
other
comprehensive
income 7,471 (183) 27 (309) 310 1
Mortgages 7,609 (192) (17) (222) 234 12
Deposits 3,190 42 70 121 (123) (2)
Liabilities
related to
transferred
receivables 105 - 105 23 (23) -
Subordinated debt 10 - 10 - - -
----------------- -------- ----------- ------------ --------------- --------------- ------------------
(387) 398 11
============== ======== =========== ============ =============== =============== ==================
(1) Amounts are presented on a pre-tax basis.
Note 17 - Hedging Activities (cont.)
Cash Flow Hedges
Cash flow hedge transactions consist of using interest rate
swaps to hedge the risk of changes in future cash flows caused by
floating-rate assets or liabilities. In addition, the Bank
sometimes uses cross-currency swaps to hedge the foreign exchange
risk caused by assets or liabilities denominated in foreign
currencies. In certain cases, given that interest rate risk and
foreign exchange risk are hedged in a single hedging relationship,
the information below does not distinguish between interest rate
risk and the combination of interest rate risk and foreign exchange
risk as two separate risk categories. The Bank applies this
strategy mainly to its loan, personal credit line, acceptance, and
deposit portfolios as well as liabilities related to transferred
receivables.
The Bank also uses total return swaps to hedge the risk of
changes in future cash flows related to the Restricted Stock Unit
(RSU) Plan. Some of these swaps are designated as part of a cash
flow hedge against a portion of the unrecognized obligation of the
RSU Plan. In cash flow hedges, the derivative financial instruments
used as hedging instruments reduce the variability of the future
cash flows related to the hedged items.
Regression analysis is used to assess hedge effectiveness and to
determine the hedge ratio. For cash flow hedges, the main source of
potential hedge ineffectiveness is a circumstance where the
critical terms of the hedging instrument and the hedged item are
not closely aligned.
The following tables show the amounts related to hedged items as
well as the results of the cash flow hedges.
As at October Year ended October 31,
31, 2022 2022
============== ============================ =============== =============== ============================================
Unrealized
gains
(losses)
included
in Other
comprehensive
Gains income
Accumulated Gains (losses) as the Losses
Accumulated other (losses) on hedging effective (gains)
other comprehensive on hedged instruments portion reclassified
comprehensive income items for for of the to Net
income from ineffectiveness ineffectiveness Hedge hedging interest
from active discontinued measurement measurement ineffectiveness instrument income
hedges hedges (1) (1) (1) (1) (1)
============ ============= ============= =============== =============== =============== ============= ============
Interest rate
risk
Loans (169) (241) 357 (356) - (356) 33
Deposits 28 10 257 (253) - 62 -
Acceptances 210 115 (253) 255 2 253 23
Liabilities
related
to
transferred
receivables 64 27 (54) 55 1 54 (11)
------------- ------------- ------------- --------------- --------------- --------------- ------------- ------------
133 (89) 307 (299) 3 13 45
------------ ------------- ------------- --------------- --------------- --------------- ------------- ------------
Equity price
risk
Other
liabilities - - 47 (47) - (47) -
------------- ------------- ------------- --------------- --------------- --------------- ------------- ------------
133 (89) 354 (346) 3 (34) 45
============ ============= ============= =============== =============== =============== ============= ============
As at October 31, Year ended October 31,
2021 2021
============== ============================ =============== =============== ===============================================
Unrealized
gains
(losses)
included
in Other
comprehensive
Accumulated income Losses
Accumulated other Gains (losses) as the (gains)
other comprehensive Gains (losses) on hedging effective reclassified
comprehensive income on hedged instruments portion to Net
income from items for for of the interest
from active discontinued ineffectiveness ineffectiveness Hedge hedging income
hedges hedges measurement(1) measurement(1) ineffectiveness(1) instrument(1) (1)
============ ============= ============= =============== =============== ================== ============= ============
Interest rate
risk
Loans (76) (10) 87 (85) - (84) (2)
Deposits (15) (8) 488 (487) - 163 (5)
Acceptances 161 (113) (208) 214 6 208 46
Liabilities
related
to
transferred
receivables 48 - (54) 56 2 54 -
------------- ------------- ------------- --------------- --------------- ------------------ ------------- ------------
118 (131) 313 (302) 8 341 39
------------ ------------- ------------- --------------- --------------- ------------------ ------------- ------------
Equity price
risk
Other
liabilities 47 - (35) 35 - 39 (4)
------------- ------------- ------------- --------------- --------------- ------------------ ------------- ------------
165 (131) 278 (267) 8 380 35
============ ============= ============= =============== =============== ================== ============= ============
(1) Amounts are presented on a pre-tax basis.
Hedges of Net Investments in Foreign Operations
The Bank's structural foreign exchange risk arises from
investments in foreign operations denominated in currencies other
than the Canadian dollar. The Bank measures this risk by assessing
the impact of foreign currency fluctuations and hedges it using
derivative and non-derivative financial instruments (cross-currency
swaps and deposits). In a hedge of a net investment in a foreign
operation (net investment hedge), the financial instruments used
offset the foreign exchange gains and losses on the investments.
When non-derivative financial instruments are designated as foreign
exchange risk hedges, only the changes in fair value that are
attributable to foreign exchange risk are taken into account when
assessing and calculating the effectiveness of the hedge.
Assessing the effectiveness of net investment hedges consists of
comparing changes in the carrying value of the deposits or the fair
value of the derivative attributable to exchange rate fluctuations
with changes in the net investment in a foreign operation
attributable to exchange rate fluctuations. Inasmuch as the
notional amount of the hedging instruments and the hedged net
investments are aligned, no ineffectiveness is expected.
The following tables present the amounts related to hedged items
as well as the results of the net investment hedges.
As at October Year ended October 31,
31, 2022 2022
============= ============================ =============== =============== ============================================
Unrealized
gains
(losses)
included
in Other
comprehensive
Gains income
Accumulated Gains (losses) as the Losses
Accumulated other (losses) on hedging effective (gains)
other comprehensive on hedged instruments portion reclassified
comprehensive income items for for of the to the
income from ineffectiveness ineffectiveness Hedge hedging Non-interest
from active discontinued measurement measurement ineffectiveness instrument income
hedges hedges (1) (1) (1) (1) item (1)
============ ============= ============= =============== =============== =============== ============= ============
Net
investments
in foreign
operations
denominated
in:
USD 26 (276) 166 (166) - (166) -
============= ============= ============= =============== =============== =============== ============= ============
As at October 31, Year ended October 31,
2021 2021
============= ============================ =============== =============== ===============================================
Unrealized
gains
(losses)
included
in Other
comprehensive
Accumulated income Losses
Accumulated other Gains (losses) as the (gains)
other comprehensive Gains (losses) on hedging effective reclassified
comprehensive income on hedged instruments portion to the
income from items for for of the Non-interest
from active discontinued ineffectiveness ineffectiveness Hedge hedging income
hedges hedges measurement(1) measurement(1) ineffectiveness(1) instrument(1) item(1)
============ ============= ============= =============== =============== ================== ============= ============
Net
investments
in foreign
operations
denominated
in:
USD 35 (120) (119) 119 - 119 -
============= ============= ============= =============== =============== ================== ============= ============
(1) Amounts are presented on a pre-tax basis.
Note 17 - Hedging Activities (cont.)
Reconciliation of Equity Components
The following table presents a reconciliation by risk category
of Accumulated other comprehensive income attributable to hedge
accounting.
As at October 31 2022 2021
============================================== ========================== ==========================
Net gains Net foreign Net gains Net foreign
(losses) currency (losses) currency
on cash translation on cash translation
flow hedges adjustments flow hedges adjustments
============================================ ============ ============ ============ ============
Balance at beginning 23 (129) (283) 61
Hedges of net investments in foreign
operations (1)
Gains (losses) included as the effective
portion (166) 119
Losses (gains) reclassified to Non-interest
income - -
Net foreign currency translation gains
(losses) on investments
in foreign operations 458 (286)
Cash flow hedges (1)
Gains (losses) included as the effective
portion
Interest rate risk 13 341
Equity price risk (47) 39
Losses (gains) reclassified to Net
interest income
Interest rate risk 45 39
Equity price risk - (4)
Other comprehensive income attributable
to non-controlling interests - - - 13
Income taxes (3) 41 (109) (36)
---------------------------------------------- ------------ ------------ ------------ ------------
Balance at end 31 204 23 (129)
============================================== ============ ============ ============ ============
(1) Amounts are presented on a pre-tax basis.
Note 18 - Share Capital and Other Equity Instruments
Authorized
Common Shares
An unlimited number of shares without par value.
First Preferred Shares
An unlimited number of shares, without par value, issuable for a
maximum aggregate consideration of $5 billion.
First Preferred Shares and Other Equity Instruments
As at October 31, 2022
============ =========== ======= ========== ===== =========== ==== ============================
Dividend Reset
Redemption per premium
price share of the
Redemption per Convertible ($) or dividend
and share or into interest rate or
conversion LRCN preferred rate per interest
date(1)(2) ($)(1) shares(2) LRCN(3) rate
============ =========== ======= ========== ===== =========== ==== ======== ===== ===========
First
preferred
shares
issued and
outstanding
May 15,
Series 30(4) 2024 (5)(6) 25.00 Series 31 0.25156 (7) 2.40%
February
Series 32(4) 15, 2025 (5)(6) 25.00 Series 33 0.23994 (7) 2.25%
November
Series 38(4) 15, 2022 (5)(6) 25.00 Series 39 0.27813 (8) 3.43%
May 15,
Series 40(4) 2023 (5)(6) 25.00 Series 41 0.28750 (8) 2.58%
November
Series 42(4) 15, 2023 (5)(6) 25.00 Series 43 0.30938 (8) 2.77%
Other equity
instruments
issued and
outstanding
Limited
Recourse
Capital
Notes (LRCN)
Series 1
(LRCN
- Series October
1)(9)(10) 15, 2025 (5) 1,000.00 Series 44 (9) 4.30 %(11) 3.943%
Series 2
(LRCN
- Series July 15,
2)(9)(10) 2026 (5) 1,000.00 Series 45 (9) 4.05 %(11) 3.045%
Series 3
(LRCN
- Series October
3)(9)(10) 16, 2027 (5) 1,000.00 Series 46 (9) 7.50 %(11) 4.281%
First
preferred
shares
authorized
but not
issued
May 15, Floating
Series 31(4) 2024 (5) 25.00 (12) n.a. rate (13) 2.40%
February Floating
Series 33(4) 15, 2025 (5) 25.00 (12) n.a. rate (13) 2.25%
November Floating
Series 39(4) 15, 2022 (5) 25.50 (14) n.a. rate (13) 3.43%
May 15, Floating
Series 41(4) 2023 (5) 25.50 (14) n.a. rate (13) 2.58%
November Floating
Series 43(4) 15, 2023 (5) 25.50 (14) n.a. rate (13) 2.77%
============= ========== ======= ========== ===== =========== ==== ======== ===== ===== ===
n.a. Not applicable
(1) Redeemable in cash at the Bank's option, in whole or in
part, subject to the provisions of the Bank Act (Canada) and to
OSFI approval. For the preferred shares, the redemption prices are
increased by all the declared and unpaid dividends on the preferred
shares to the date fixed for redemption. In the case of LRCN , the
redemption prices are increased by interest accrued and unpaid up
to the redemption date .
(2) Convertible at the option of the holders of first preferred
shares issued and outstanding, subject to certain conditions.
(3) The dividends are non-cumulative and payable quarterly,
whereas interest on the LRCN is payable semi-annually.
(4) Upon the occurrence of a trigger event, as defined by OSFI,
each outstanding preferred share will be automatically and
immediately converted, on a full and permanent basis, without the
consent of the holder, into a number of Bank common shares
determined pursuant to an automatic conversion formula. This
conversion will be calculated by dividing the value of the
preferred shares, i.e., $25.00 per share, plus all declared and
unpaid dividends as at the date of the trigger event, by the value
of the common shares. The value of the common shares will be the
greater of a $5.00 floor price or the current market price of the
common shares. Current market price means the volume weighted
average trading price of common shares for the ten consecutive
trading days ending on the trading day preceding the date of the
trigger event. If the common shares are not listed on an exchange
when this price is being established, the price will be the fair
value reasonably determined by the Bank's Board.
(5) For the preferred shares, redeemable at the date fixed for
redemption and on the same date every five years thereafter. In the
case of LRCN , the redemption occurs automatically upon the
redemption of the preferred shares issued by the Bank in
conjunction with the LRCN and held in a limited recourse trust. The
preferred shares issued and held in a limited recourse trust are
redeemable for a period of one month from the date fixed for
redemption and on the same dates every five years thereafter.
(6) Convertible on the date fixed for conversion and on the same
date every five years thereafter, subject to certain
conditions.
(7) The dividend amount is set for the five-year period
commencing on May 16, 2019 for Series 30 and on February 16, 2020
for Series 32 and ending on the redemption date. Thereafter, these
shares carry a non-cumulative quarterly fixed dividend in an amount
per share determined by multiplying the rate of interest equal to
the sum of the five-year Government of Canada bond yield on the
applicable fixed-rate calculation date by $25.00, plus the reset
premium.
(8) The dividend amount is set for the initial period ending on
the date fixed for redemption. Thereafter, these shares carry a
non-cumulative quarterly fixed dividend in an amount per share
determined by multiplying the rate of interest equal to the sum of
the five-year Government of Canada bond yield on the applicable
fixed-rate calculation date by $25.00, plus the reset premium.
Note 18 - Share Capital and Other Equity Instruments (cont.)
(9) The LRCN - Series 1, LRCN - Series 2 and LRCN - Series 3 are
notes for which recourse is limited to the assets held by an
independent trustee in a consolidated limited recourse trust. The
trust assets consist of Series 44, Series 45 and Series 46
preferred shares issued by the Bank in conjunction with the LRCN -
Series 1, LRCN - Series 2 and LRCN - Series 3. In the event of (i)
non-payment of interest on any of the interest payment dates, (ii)
non-payment of the redemption amount upon redemption of the LRCN,
(iii) non-payment of the principal amount upon maturity of the
LRCN, or (iv) an event of default in respect of the LRCN, the
noteholders will have recourse only to the assets of the trust, and
each noteholder will be entitled to its pro rata share of the
assets of the trust. In such circumstances, delivery of the assets
of the trust will eliminate all of the Bank's obligations with
respect to the LRCN. The LRCN - Series 1, LRCN - Series 2 and LRCN
- Series 3 are redeemable at maturity or earlier to the extent that
the Bank redeems the Series 44, Series 45 and Series 46 preferred
shares from the date fixed for redemption, and subject to OSFI's
consent and approval.
(10) The Series 44, Series 45 and Series 46 preferred shares
issued by the Bank in conjunction with the LRCN - Series 1, LRCN -
Series 2 and LRCN - Series 3 are held by a consolidated limited
recourse trust on the Bank's balance sheet and are therefore
eliminated for financial reporting purposes. Upon the occurrence of
a trigger event, as defined by OSFI; (i) each LRCN will be
automatically redeemed and the redemption price will be covered by
delivery of the trust's assets that consist of Series 44, Series 45
and Series 46 preferred shares; (ii) each outstanding preferred
share will be automatically and immediately converted on a full and
permanent basis, without the consent of the holder, into a number
of Bank common shares determined pursuant to an automatic
conversion formula. This conversion will be calculated by dividing
the value of the preferred shares, i.e., $1,000 per share, plus all
accrued and unpaid interest as at the date of the trigger event, by
the value of the common shares. The value of the common shares will
be the greater of a $5.00 floor price or the current market price
of the common shares. Current market price means the volume
weighted average trading price of common shares for the ten
consecutive trading days ending on the trading day preceding the
date of the trigger event. If the common shares are not listed on
an exchange when this price is being established, the price will be
the fair value reasonably determined by the Bank's Board.
(11) The interest rate is set for the initial period ending on
the date fixed for redemption. Every five years thereafter until
November 15, 2075 for the LRCN - Series 1 , until August 15, 2076
for the LRCN - Series 2 and until November 16, 2077 for the LRCN -
Series 3 , the interest rate on the notes will be adjusted and will
be an annual interest rate equal to the five-year Government of
Canada bond yield on the applicable interest rate calculation date,
plus the interest rate reset premium.
(12) As of the date fixed for redemption, and every five years
thereafter, the redemption price will be $25.00 per share.
(13) The dividend period begins as of the date fixed for
redemption. The amount of the floating quarterly non-cumulative
dividend is determined by multiplying by $25.00 the rate of
interest equal to the sum of the 90-day Government of Canada
treasury bill yield on the floating rate calculation date, plus the
reset premium.
(14) As of the date fixed for redemption, the redemption price
will be $25.50 per share. Thereafter, on the same date every five
years, the redemption price will be $25.00 per share.
Second Preferred Shares
15 million shares without par value, issuable for a maximum
aggregate consideration of $300 million. As at October 31, 2022, no
shares had been issued or traded.
Shares and Other Equity Instruments Outstanding
As at October 31 2022 2021
====================================== ===================== ======================
Number Shares Number Shares or
of shares or LRCN of shares LRCN
or LRCN $ or LRCN $
==================================== =========== ======== =========== =========
First Preferred Shares
Series 30 14,000,000 350 14,000,000 350
Series 32 12,000,000 300 12,000,000 300
Series 38 16,000,000 400 16,000,000 400
Series 40 12,000,000 300 12,000,000 300
Series 42 12,000,000 300 12,000,000 300
------------------------------------- ----------- -------- ----------- ---------
66,000,000 1,650 66,000,000 1,650
------------------------------------ ----------- -------- ----------- ---------
Other equity instruments
LRCN - Series 1 500,000 500 500,000 500
LRCN - Series 2 500,000 500 500,000 500
LRCN - Series 3 500,000 500 - -
------------------------------------- ----------- -------- ----------- ---------
1,500,000 1,500 1,000,000 1,000
------------------------------------ ----------- -------- ----------- ---------
Preferred shares and other equity
instruments 67,500,000 3,150 67,000,000 2,650
-------------------------------------- ----------- -------- ----------- ---------
Common shares at beginning of year 337,912,283 3,160 335,997,660 3,057
Issued pursuant to the Stock Option
Plan 1,193,663 61 1,930,033 104
Repurchase of common shares for
cancellation (2,500,000) (24) - -
Impact of shares purchased or sold
for trading(1) (18,295) (1) (14,432) (1)
Other (5,527) - (978) -
-------------------------------------- ----------- -------- ----------- ---------
Common shares at end of year 336,582,124 3,196 337,912,283 3,160
====================================== =========== ======== =========== =========
(1) As at October 31, 2022, a total of 5,250 shares were sold
short for trading, representing a negligible amount (as at October
31, 2021, a total of 13,045 shares were sold short for trading,
representing $1 million).
Dividends Declared and Distributions on Other Equity
Instruments
Year ended October 31 2022 2021
==================================== ======================== ========================
Dividends Dividends
or interest Dividends or interest Dividends
$ per share $ per share
================================== ============ ========== ============ ==========
First Preferred Shares
Series 30 14 1.0063 14 1.0063
Series 32 12 0.9598 12 0.9598
Series 34 - - 11 0.7000
Series 36 - - 16 1.0125
Series 38 18 1.1125 18 1.1125
Series 40 14 1.1500 14 1.1500
Series 42 14 1.2375 14 1.2375
----------------------------------- ------------ ---------- ------------ ----------
72 99
---------------------------------- ------------ ---------- ------------ ----------
Other equity instruments
LRCN - Series 1(1) 21 21
LRCN - Series 2(2) 20 11
LRCN - Series 3(3) 6 -
---------------------------------- ------------ ---------- ------------ ----------
47 32
---------------------------------- ------------ ---------- ------------ ----------
Preferred shares and other equity
instruments 119 131
------------------------------------ ------------ ---------- ------------ ----------
Common shares 1,206 3.5800 958 2.8400
------------------------------------ ------------ ---------- ------------ ----------
1,325 1,089
================================== ============ ========== ============ ==========
(1) The LRCN - Series 1 bear interest at a fixed rate of 4.30% per annum.
(2) The LRCN - Series 2 bear interest at a fixed rate of 4.05% per annum.
(3) The LRCN - Series 3 bear interest at a fixed rate of 7.50% per annum.
Issuances of Other Equity Instruments
On September 8, 2022, the Bank issued $500 million of LRCN -
Series 3 for which recourse of the noteholders is limited to the
assets held by an independent trustee in a consolidated limited
recourse trust. The trust's assets consist of $500 million of
Series 46 f irst preferred shares issued by the Bank in conjunction
with the LRCN - Series 3. The LRCN - Series 3 sell for $1 ,000 each
and bear interest at a fixed rate of 7.50% per annum until November
16, 2027 exclusively and, thereafter, at an annual rate equal to
the five -year Government of Canada bond yield plus 4.281% until
November 16, 2077. The LRCN - Series 3 mature on November 16,
2082.
On April 21, 2021, the Bank had issued $500 million of LRCN -
Series 2 for which recourse of the noteholders is limited to the
assets held by an independent trustee in a consolidated limited
recourse trust. The trust's assets consist of $500 million of
Series 45 f irst preferred shares issued by the Bank in conjunction
with the LRCN - Series 2. The LRCN - Series 2 sell for $1 ,000 each
and bear interest at a fixed rate of 4.05% per annum until August
15, 2026 exclusively and, thereafter, at an annual rate equal to
the five -year Government of Canada bond yield plus 3.045% until
August 15, 2076. The LRCN - Series 2 mature on August 15, 2081.
In the event of (i) non-payment of interest on any of the
interest payment dates, (ii) non-payment of the redemption amount
upon redemption of the LRCN, (iii) non-payment of the principal
amount upon maturity of the LRCN, or (iv) an event of default in
respect of the notes, the noteholders will have recourse only to
the assets of the trust, and each noteholder will be entitled to
its pro rata share of the assets of the trust. In such
circumstances, delivery of the trust's assets will eliminate all of
the Bank's obligations with respect to the LRCN. The LRCN - Series
2 and LRCN - Series 3 are redeemable at maturity or earlier to the
extent that the Bank redeems the Series 45 and Series 46 preferred
shares on certain redemption dates specified in the terms and
conditions of said preferred shares, and subject to OSFI's consent
and approval.
Given that the LRCN - Series 2 and LRCN - Series 3 satisfy the
non-viability contingent capital requirements, they qualify for the
purposes of calculating regulatory capital under Basel III.
Redemptions of Preferred Shares
On August 16, 2021, i.e., the first business day after the
August 15, 2021 redemption date, the Bank redeemed all the issued
and outstanding Non-Cumulative 5-Year Rate-Reset Series 36 First
Preferred Shares. Pursuant to the share conditions, the redemption
price was $25.00 per share plus the periodic dividend declared and
unpaid. The Bank redeemed 16,000,000 Series 36 preferred shares for
a total amount of $400 million, which reduced Preferred share
capital.
On May 17, 2021, i.e., the first business day after the May 15,
2021 redemption date, the Bank redeemed all the issued and
outstanding Non-Cumulative 5--Year Rate-Reset Series 34 First
Preferred Shares. Pursuant to the share conditions, the redemption
price was $25.00 per share plus the periodic dividend declared and
unpaid. The Bank redeemed 16,000,000 Series 34 preferred shares for
a total amount of $400 million, which reduced Preferred share
capital.
Note 18 - Share Capital and Other Equity Instruments (cont.)
Repurchases of Common Shares
On December 10, 2021, the Bank began a normal course issuer bid
to repurchase for cancellation up to 7,000,000 common shares
(representing approximately 2% of its outstanding common shares)
over the 12-month period ending no later than December 9, 2022. Any
repurchase through the Toronto Stock Exchange will be done at
market price. The common shares may also be repurchased through
other means authorized by the Toronto Stock Exchange and applicable
regulations, including private agreements or share repurchase
programs under issuer bid exemption orders issued by the securities
regulators. A private purchase made under an exemption order issued
by a securities regulator will be done at a discount to the
prevailing market price. The amounts that are paid above the
average book value of the common shares are charged to Retained
earnings. During the year ended October 31, 2022, the Bank
repurchased 2,500,000 common shares for $245 million, which reduced
Common share capital by $24 million and Retained earnings by $221
million.
Reserved Common Shares
As at October 31, 2022 and 2021, there were 15,507,568 common
shares reserved under the Dividend Reinvestment and Share Purchase
Plan. As at October 31, 2022, there were 21,742,009 common shares
(22,935,672 as at October 31, 2021) reserved under the Stock Option
Plan.
Restriction on the Payment of Dividends
The Bank is prohibited from declaring dividends on its common or
preferred shares if there are reasonable grounds for believing that
the Bank would, by so doing, be in contravention of the regulations
of the Bank Act (Canada) or OSFI's capital adequacy and liquidity
guidelines. In addition, the ability to pay common share dividends
is restricted by the terms of the outstanding preferred shares
pursuant to which the Bank may not pay dividends on its common
shares without the approval of the holders of the outstanding
preferred shares, unless all preferred share dividends have been
declared and paid or set aside for payment.
Dividend Reinvestment and Share Purchase Plan
The Bank has a Dividend Reinvestment and Share Purchase Plan for
holders of its common and preferred shares under which they can
acquire common shares of the Bank without paying commissions or
administration fees. Participants acquire common shares through the
reinvestment of cash dividends paid on the shares they hold or
through optional cash payments of at least $1 per payment, up to a
maximum of $5,000 per quarter. Common shares subscribed by
participants are purchased on their behalf in the secondary market
through the Bank's transfer agent, Computershare Trust Company of
Canada, at a price equal to the average purchase price of the
common shares during the three business days immediately following
the dividend payment date.
Note 19 - Non-Controlling Interests
As at October 31 2022 2021
=========================== ===== ====
Flinks Technology Inc.(1) 2 3
=========================== ====== ====
(1) As at October 31, 2022, the non-controlling interest in
Flinks stood at 14.1% (14.1% as at October 31, 2021). For
additional information, see Note 31 to these consolidated financial
statements.
Note 20 - Capital Disclosure
Capital Management Objectives, Policies and Procedures
Capital management has a dual role of ensuring a competitive
return to the Bank's shareholders while maintaining a solid capital
foundation that covers the risks inherent to the Bank's business,
supports its business segments, and protects its clients.
The Bank's capital management policy defines the guiding
principles as well as the roles and responsibilities regarding its
internal capital adequacy assessment process. This process is a key
tool in establishing the Bank's capital strategy and is subject to
quarterly reviews and periodic amendments.
Capital Management
Capital ratios are obtained by dividing capital (as defined by
OSFI's Capital Adequacy Requirements Guideline) by risk-weighted
assets and are expressed as percentages. Risk-weighted assets are
calculated in accordance with the rules established by OSFI for on-
and off-balance-sheet risks. Credit, market, and operational risks
are factored into the risk-weighted assets calculation for
regulatory purposes. The definition adopted by the Basel Committee
on Banking Supervision (BCBS) distinguishes between three types of
capital. Common Equity Tier 1 (CET1) capital consists of common
shareholders' equity less goodwill, intangible assets, and other
CET1 capital deductions. Additional Tier 1 (AT1) capital consists
of eligible non-cumulative preferred shares, limited recourse
capital notes, and other AT1 capital adjustments . The sum of CET1
and AT1 capital forms what is known as Tier 1 capital. Tier 2
capital consists of the eligible portion of subordinated debt and
certain allowances for credit losses. Total regulatory capital is
the sum of Tier 1 and Tier 2 capital.
The Bank and all other major Canadian banks have to maintain the
following minimum capital ratios established by OSFI: a CET1
capital ratio of at least 10.5%, a Tier 1 capital ratio of at least
12.0%, and a Total capital ratio of at least 14.0%. All of these
ratios include a capital conservation buffer of 2.5% established by
the BCBS and OSFI as well as a 1.0% surcharge applicable solely to
Domestic Systemically Important Banks (D-SIBs) and a 2.5% domestic
stability buffer. The domestic stability buffer, which can vary
from 0% to 2.5% of risk-weighted assets, consists exclusively of
CET1 capital. A D--SIB that fails to meet this buffer requirement
will not be subject to automatic constraints to reduce capital
distributions but will have to provide a remediation plan to OSFI.
On June 22, 2022, OSFI confirmed that the domestic stability buffer
was being maintained at 2.5%. Banks also have to meet the capital
floor that sets the regulatory capital level according to the Basel
II Standardized Approach. If the capital requirement under Basel
III is less than 70% of the capital requirements as calculated
under Basel II, the difference is added to risk-weighted assets.
Lastly, OSFI requires Canadian banks to meet a Basel III leverage
ratio of at least 3.0%. The leverage ratio is a measure independent
of risk that is calculated by dividing the amount of Tier 1 capital
by total exposure. Total exposure is defined as the sum of
on-balance-sheet assets (including derivative exposures and
securities financing transaction exposures) and off-balance-sheet
items. The assets deducted from Tier 1 capital are also deducted
from total exposure.
Since November 1, 2021, OSFI has also been requiring D-SIBs to
maintain a risk-based total loss-absorbing capacity (TLAC) ratio of
at least 24.0% (including the domestic stability buffer) of
risk-weighted assets and a TLAC leverage ratio of at least 6.75%.
The purpose of TLAC is to ensure that a D-SIB has sufficient
loss-absorbing capacity to support its recapitalization in the
unlikely event it becomes non-viable.
During the years ended October 31, 2022 and 2021, the Bank was
in compliance with all of OSFI's regulatory capital, leverage, and
TLAC requirements.
Note 20 - Capital Disclosure (cont.)
Regulatory Capital (1) , Leverage Ratio(1) and TLAC(2)
As at October 31 2022 2021
========================= ======== ======= =========== =======
Adjusted
(3) Adjusted(3)
======================== ======== ======= =========== =======
Capital
CET1 14,763 14,818 12,866 12,973
Tier 1 17,906 17,961 15,515 15,622
Total 19,727 19,727 16,643 16,643
-------- ------- ----------- -------
Risk-weighted assets 116,840 116,840 104,358 104,358
-------- ------- ----------- -------
Total exposure 401,780 401,780 351,160 351,160
Capital ratios
CET1 12.6 % 12.7 % 12.3% 12.4%
Tier 1 15.3 % 15.4 % 14.9% 15.0%
Total 16.9 % 16.9 % 15.9% 15.9%
-------- ------- ----------- -------
Leverage ratio 4.5 % 4.5 % 4.4% 4.4%
-------- ------- ----------- -------
Available TLAC (2) 32,351 32,351 27,492 27,492
TLAC ratio (2) 27.7 % 27.7 % 26.3% 26.3%
TLAC leverage ratio (2) 8.1 % 8.1 % 7.8% 7.8%
======== =======
(1) Capital, risk-weighted assets, total exposure, the capital
ratios, and the leverage ratio are calculated in accordance with
the Basel III rules, as set out in OSFI's Capital Adequacy
Requirements Guideline and Leverage Requirements Guideline.
(2) Available TLAC, the TLAC ratio, and the TLAC leverage ratio
are calculated in accordance with OSFI's Total Loss Absorbing
Capacity Guideline.
(3) Adjusted amounts are calculated in accordance with the Basel
III rules, as set out in OSFI's Capital Adequacy Requirements
Guideline, and exclude the transitional measure for provisioning
expected credit losses. For additional information, see the section
entitled COVID-19 Relief Measures Still in Effect as at October 31,
2022 on page 58 of the MD&A.
Note 21 - Trading Activity Revenues
Trading activity revenues consist of the net interest income and
the non-interest income related to trading activities.
Net interest income comprises dividends related to financial
assets and liabilities associated with trading activities, net of
interest expenses and interest income related to the financing of
these financial assets and liabilities.
Non-interest income consists of realized and unrealized gains
and losses as well as interest income on securities measured at
fair value through profit or loss, income from held-for-trading
derivative financial instruments, changes in the fair value of
loans at fair value through profit or loss, changes in the fair
value of financial instruments designated at fair value through
profit or loss, certain commission income as well as other income
related to trading activities, and any applicable transaction
costs.
Year ended October 31 2022 2021
Net interest income 682 777
Non-interest income
Trading revenues (losses) 543 268
Other revenues 5 14
548 282
---------------------------
1,230 1,059
Note 22 - Share-Based Payments
The compensation expense information provided below excludes the
impact of hedging.
Stock Option Plan
The Bank's Stock Option Plan is for officers and other
designated persons of the Bank and its subsidiaries. Under this
plan, options are awarded annually and provide participants with
the right to purchase common shares at an exercise price equal to
the closing price of the Bank's common share on the Toronto Stock
Exchange on the day preceding the award. The options vest evenly
over a four-year period and expire ten years from the award date
or, in certain circumstances set out in the plan, within specified
time limits. The Stock Option Plan contains provisions for retiring
employees that allow the participant's rights to continue vesting
in accordance with the stated terms of the award agreement. The
maximum number of common shares that may be issued under the Stock
Option Plan was 21,742,009 as at October 31, 2022 (22,935,672 as at
October 31, 2021). The number of common shares reserved for a
participant may not exceed 5% of the total number of Bank shares
issued and outstanding.
As at October 31 2022 2021
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
=========== ===========
Stock Option Plan
Outstanding at beginning 11,348,680 $ 57.93 11,425,403 $ 53.96
Awarded 1,771,588 $ 96.35 2,043,196 $ 71.55
Exercised (1,193,663) $ 45.73 (1,930,033) $ 47.96
Cancelled(1) (64,856) $ 76.10 (189,886) $ 67.02
Outstanding at end 11,861,749 $ 64.80 11,348,680 $ 57.93
Exercisable at end 7,344,536 $ 55.50 6,737,850 $ 50.81
(1) Includes 27,714 expired options during the year ended
October 31, 2022 (35,342 expired options during the year ended
October 31, 2021).
Options Options
Exercise price outstanding exercisable Expiry date
$38.36 470,324 470,324 December 2022
$44.96 697,207 697,207 December 2023
$47.93 963,282 963,282 December 2024
$42.17 790,312 790,312 December 2025
$54.69 868,437 868,437 December 2026
$64.14 1,240,493 1,240,493 December 2027
$58.79 1,577,166 1,108,204 December 2028
$71.86 1,566,934 746,474 December 2029
$71.55 1,933,226 459,803 December 2030
$96.35 1,754,368 - December 2031
11,861,749 7,344,536
During the year ended October 31, 2022, the Bank awarded
1,771,588 stock options (2,043,196 stock options during the year
ended October 31, 2021) with an average fair value of $ 13.24 per
option ($8.24 for the year ended October 31, 2021).
The average fair value of options awarded was estimated on the
award date using the Black-Scholes model as well as the following
assumptions.
Year ended October 31 2022 2021
Risk-free interest rate 1.79% 1.02%
Expected life of options 7 years 7 years
Expected volatility 22.68% 22.59%
Expected dividend yield 3.88% 4.24%
=======
Note 22 - Share-Based Payments (cont.)
The expected life of the options is based on historical data and
is not necessarily representative of how the options will be
exercised in the future. Expected volatility is extrapolated from
the implied volatility of the Bank's share price and observable
market inputs, which are not necessarily representative of actual
results. The expected dividend yield represents the annualized
dividend divided by the Bank's share price at the award date. The
risk-free interest rate is based on the Canadian dollar swap curve
at the award date. The exercise price is equal to the Bank's share
price at the award date. No other market parameter has been
included in the fair value measurement of the options.
For the year ended October 31, 2022, a $17 million compensation
expense related to this plan was recognized in the Consolidated
Statement of Income ($11 million for the year ended October 31,
2021).
Stock Appreciation Rights (SAR) Plan
The SAR Plan is for officers and other designated persons of the
Bank and its subsidiaries. Under this plan, participants receive,
upon exercising the right, a cash amount equal to the difference
between the closing price of the Bank's common share on the Toronto
Stock Exchange on the day preceding the exercise date and the
closing price on the day preceding the award date. SARs vest evenly
over a four-year period and expire ten years after the award date
or, in certain circumstances set out in the plan, within specified
time limits. The SAR Plan contains provisions for retiring
employees that allow the participant's rights to continue vesting
in accordance with the stated terms of the award agreement. For the
year ended October 31, 2022, a compensation expense in a negligible
amount related to this plan was recognized in the Consolidated
Statement of Income ($7 million for the year ended October 31,
2021).
As at October 31 2022 2021
======================
Weighted Weighted
average average
Number exercise Number exercise
of SARs price of SARs price
=========== ========= ===========
SAR Plan (1)
Outstanding at beginning 266,075 $ 57.61 292,896 $ 53.66
Awarded 21,464 $ 96.35 30,504 $ 71.55
Exercised (79,698) $ 59.89 (57,325) $ 44.88
------- -------
Outstanding at end 207,841 $ 60.73 266,075 $ 57.61
Exercisable at end 130,319 $ 51.31 164,225 $ 51.43
=======
(1) No SARs cancelled or expired during the years ended October 31, 2022 and 2021.
SARs SARs
Exercise price outstanding exercisable Expiry date
$38.36 7,904 7,904 December 2022
$44.96 21,136 21,136 December 2023
$47.93 28,824 28,824 December 2024
$42.17 19,748 19,748 December 2025
$54.69 16,320 16,320 December 2026
$64.14 16,236 16,236 December 2027
$58.79 24,195 12,453 December 2028
$71.86 29,136 7,698 December 2029
$71.55 22,878 - December 2030
$96.35 21,464 - December 2031
------------ ------------
207,841 130,319
============ ============
Deferred Stock Unit (DSU) Plans
The DSU Plans are for officers and other designated persons of
the Bank and its subsidiaries as well as for directors. These plans
allow the Bank to tie a portion of the value of the compensation of
participants to the future value of the Bank's common shares. A DSU
is a right that has a value equal to the closing price of a common
share of the Bank on the Toronto Stock Exchange on the day
preceding the award. DSUs generally vest evenly over four years.
Additional DSUs are credited to the accounts of participants in an
amount equal to the dividends declared on Bank common shares and
vest evenly over the same period as the reference DSUs. DSUs may be
cashed only when participants retire or leave the Bank or, for
directors, when their term ends. The DSU Plans contain provisions
for retiring employees whereby participants may continue vesting
units in accordance with the stated terms of the award
agreement.
During the year ended October 31, 2022, the Bank awarded 39,227
DSUs at a weighted average price of $97.10 (55,545 DSUs at a
weighted average price of $75.55 for the year ended October 31,
2021). A total of 551,539 DSUs were outstanding as at October 31,
2022 (514,841 DSUs as at October 31, 2021). For the year ended
October 31, 2022, a $1 million compensation expense related to
these plans was recognized in the Consolidated Statement of Income
($23 million for the year ended October 31, 2021).
Restricted Stock Unit (RSU) Plan
The RSU Plan is for certain officers and other designated
persons of the Bank and its subsidiaries. The objective of this
plan is to ensure that the compensation of certain officers and
other designated persons is competitive and to foster retention. An
RSU represents a right that has a value equal to the average
closing price of the Bank's common share, as published by the
Toronto Stock Exchange, over the ten trading days preceding the
sixth business day in December . RSUs generally vest evenly over
three years, although some RSUs vest on the sixth business day of
December of the third year following the award date, i.e., the date
on which all RSUs expire. Additional RSUs are credited to the
accounts of participants in an amount equal to the dividends
declared on the Bank's common shares and vest over the same period
as the reference RSUs. The RSU Plan contains provisions for
retiring employees whereby participants may continue vesting units
in accordance with the stated terms of the award agreement.
During the year ended October 31, 2022, the Bank awarded
1,895,489 RSUs at a weighted average price of $99.59 (1,960,326
RSUs at a weighted average price of $72.76 for the year ended
October 31, 2021). As at October 31, 2022, a total of 4,203,383
RSUs were outstanding (4,398,019 RSUs as at October 31, 2021). For
the year ended October 31, 2022, a $172 million compensation
expense related to this plan was recognized in the Consolidated
Statement of Income ($256 million for the year ended October 31,
2021).
Performance Stock Unit (PSU) Plan
The PSU Plan is for officers and other designated persons of the
Bank . The objective of this plan is to tie a portion of the value
of the compensation of these officers and other designated persons
to the future value of the Bank's common shares. A PSU represents a
right that has a value equal to the average closing price of the
Bank's common share, as published by the Toronto Stock Exchange,
over the ten trading days preceding the sixth business day in
December , adjusted upward or downward according to performance
criteria, which is based on the Bank's total shareholder return
(TSR) growth index over three years compared to the average TSR
growth index of the comparator group composed of Canadian banks
over three years. PSUs vest on the sixth business day of December
of the third year following the award date, i.e. , the date on
which all PSUs expire. Additional PSUs are credited to the accounts
of participants in an amount equal to the dividends declared on the
Bank's common shares and vest over the same period as the reference
PSUs. The PSU Plan contains provisions for retiring employees
whereby participants may continue vesting units in accordance with
the stated terms of the award agreement.
During the year ended October 31, 2022, the Bank awarded 238,082
PSUs at a weighted average price of $99.59 (235,949 PSUs at a
weighted average price of $72.76 for the year ended October 31,
2021). As at October 31, 2022, a total of 739,359 PSUs were
outstanding (794,440 PSUs as at October 31, 2021). For the year
ended October 31, 2022, a $30 million compensation expense related
to this plan was recognized in the Consolidated Statement of Income
($42 million for the year ended October 31, 2021).
Deferred Compensation Plan
This plan is exclusively for key employees of the Wealth
Management segment. The purpose of this plan is to foster the
retention of key employees and promote revenue growth and
continuous profitability improvement within the Wealth Management
segment. Under this plan, participants can defer a portion of their
annual compensation, and the Bank may pay a contribution to key
employees when certain financial objectives are met. Amounts
awarded by the Bank and the compensation deferred by participants
are invested in, among other items, Bank common share units. These
share units represent a right that has a value equal to the closing
price of the Bank's common share on the Toronto Stock Exchange on
the award date. Additional units are credited to the accounts of
participants in an amount equal to the dividends declared on the
Bank's common shares. Share units representing the amounts awarded
by the Bank vest evenly over four years. When a participant
retires, or in certain cases when the participant's employment
ceases, the participant receives a cash amount representing the
value of the vested share units.
During the year ended October 31, 2022, the Bank awarded 129,464
share units at a weighted average price of $94.87 (124,981 share
units at a weighted average price of $80.23 for the year ended
October 31, 2021). As at October 31, 2022, a total of 2,036,524
share units were outstanding (2,038,003 share units as at October
31, 2021). For the year ended October 31, 2022, a $19 million
reversal of the compensation expense related to this plan was
recognized in the Consolidated Statement of Income (compensation
expense of $83 million for the year ended October 31, 2021).
Employee Share Ownership Plan
Under the Bank's Employee Share Ownership Plan, employees who
meet the eligibility criteria can contribute up to 8% of their
annual gross salary by way of payroll deductions. The Bank matches
25% of the employee contribution up to a maximum of $1,500 per
annum. Bank contributions vest to the employee after one year of
uninterrupted participation in the plan. Subsequent contributions
vest immediately. The Bank's contributions, amounting to $15
million for the year ended October 31, 2022 ($14 million for the
year ended October 31, 2021), were recognized when paid in the
Compensation and employee benefits item of the Consolidated
Statement of Income. As at October 31, 2022, a total of 6,304,689
common shares were held for this plan (6,149,769 common shares as
at October 31, 2021).
Plan shares are purchased on the open market and are considered
to be outstanding for earnings per share calculations. Dividends
paid on the Bank's common shares held for the Employee Share
Ownership Plan are used to purchase other common shares on the open
market.
Plan Liabilities and Intrinsic Value
Total liabilities arising from the Bank's share-based
compensation plans amounted to $716 million as at October 31, 2022
($816 million as at October 31, 2021). The intrinsic value of these
liabilities that had vested as at October 31, 2022 was $359 million
($364 million as at October 31, 2021).
Note 23 - 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 defined benefit component of the pension plans provides
benefits based on years of plan participation and average earnings
at retirement. The other post-employment benefits include
post-employment medical, dental, and life insurance coverage. Since
September 19, 2022, the Bank has been offering a new defined
contribution component that is available to all new employees upon
hiring as well as to current participants of the defined benefit
component. Therefore, as of that date, the defined benefit
component is no longer offered to new employees. For the defined
contribution component, the Bank's base contribution equals a
percentage of annual salary and the Bank's additional contribution
varies according to the employee's contributions, and the sum of
the employee's age and years of continuous service. The defined
benefit component of the pension plans is funded, whereas the
defined contribution component and the other post-employment
benefit plans are not funded. The fair value of the defined benefit
component and the present value of the defined benefit obligations
were measured as at October 31.
The Bank's most significant pension plan is the Employee Pension
Plan of the National Bank of Canada; it is registered with OSFI and
the Canada Revenue Agency and subject to the Pension Benefits
Standards Act, 1985 and the Income Tax Act.
The defined benefit component of the pension plans and the other
post-employment benefit plans exposes the Bank to specific risks
such as investment performance, changes to the discount rate used
to calculate the obligation, the longevity of plan participants,
and future inflation. While management believes that the
assumptions used in the actuarial valuation process are reasonable,
there remains a degree of risk and uncertainty that may cause
future results to differ significantly from these assumptions,
which could give rise to gains or losses.
According to the Bank's governance rules, the policies and risk
management related to the defined benefit component of the pension
plans are overseen at different levels by the pension committees,
the Bank's management, and the Board's Human Resources Committee.
The defined benefit component of the pension plans are examined on
an ongoing basis in order to monitor the funding and investment
policies, the financial status of the plans, and the Bank's funding
requirements.
The Bank's funding policy for the defined benefit component of
the pension plans is to make at least the minimum annual
contributions required by pension regulators.
For funded plans, the Bank determines whether an economic
benefit exists in the form of potential reductions in future
contributions and in the form of refunds from the plan surplus,
where permitted by applicable regulations and plan provisions.
Defined Benefit Obligation, Assets of the Plans, and Funded
Status
As at October 31
Pension plans - Defined Other post-employment
benefit component benefit plans
2022 2021 2022 2021
========================================== ============== ========= =========== ==========
Defined benefit obligation
Balance at beginning 4,745 5,027 143 156
Current service cost 129 146 1 1
Interest cost 171 149 5 4
Remeasurements
Actuarial (gains) losses arising from
changes in demographic assumptions 55 9 1 1
Actuarial (gains) losses arising from
changes in financial assumptions (1,063) (538) (24) (14)
Actuarial (gains) losses arising from
experience adjustments 95 107 (6) 4
Employee contributions 65 58
Benefits paid (226) (213) (9) (9)
Balance at end 3,971 4,745 111 143
-------------- --------- ----------- ----------
Plan assets
Fair value at beginning 5,436 5,153
Interest income 191 148
Administration cost (3) (4)
Remeasurements
Return on plan assets (excluding interest
income) (1,113) 214
Bank contributions(1) 119 80
Employee contributions 65 58
Benefits paid (226) (213)
Fair value at end 4,469 5,436
-------------- ---------
Defined benefit asset (liability)
at end 498 691 (111) (143)
============== ========= =========== ==========
(1) For fiscal 2023, the Bank expects to pay an employer
contribution of $123 million to the defined benefit component of
the pension plans.
Defined Benefit Asset (Liability)
As at October 31
Pension plans -
Defined Other post-employment
benefit component benefit plans
2022 2021 2022 2021
======================================== ========= =========== ==========
Defined benefit asset included in Other
assets 498 691
Defined benefit liability included
in Other liabilities - - (111) (143)
---------
498 691 (111) (143)
========= =========== ==========
Cost for Pension Plans and Other Post-Employment Benefit
Plans
Year ended October 31
Other post-employment
Pension plans benefit plans
2022 2021 2022 2021
====== =========== ==========
Current service cost(1) 129 146 1 1
Interest expense (income), net (20) 1 5 4
Administration costs 3 4
------
Expense recognized in Net income 112 151 6 5
------ ----------- ----------
Remeasurements (2)
Actuarial (gains) losses on the defined
benefit obligation (913) (422) (29) (9)
Return on plan assets(3) 1,113 (214)
Remeasurements recognized in Other
comprehensive income 200 (636) (29) (9)
312 (485) (23) (4)
====== =========== ==========
(1) For the year ended October 31, 2022, the amount of the
contributions made by the Bank to the defined contribution
component of the pension plans was not significant.
(2) Changes related to the discount rate and to the return on
plan assets are reviewed and updated on a quarterly basis. All
other assumptions are updated annually.
(3) Excludes interest income.
Allocation of the Fair Value of the Assets of the Defined
Benefit Component of the Pensions Plans
As at October 31 2022 2021
Quoted
in an Not quoted Quoted Not quoted
active in an in an in an
market active active active
(1) market Total market(1) market Total
======= ========== ===== ========== ========== =====
Asset classes
Cash and cash equivalents - 273 273 - 171 171
Equity securities 988 1,150 2,138 1,290 935 2,225
Debt securities
Canadian government 114 - 114 175 - 175
Canadian provincial and municipal
governments - 1,769 1,769 - 1,593 1,593
Other issuers - 264 264 - 1,248 1,248
Other - (89) (89) - 24 24
------- ---------- ---------- -----
1,102 3,367 4,469 1,465 3,971 5,436
================================== ======= ========== ===== =====
(1) Unadjusted quoted prices in active markets for identical
assets that the Bank can access at the measurement date.
The Bank's investment strategy for plan assets considers several
factors, including the time horizon of pension plan obligations and
investment risk. For each plan, an allocation range per asset class
is defined using a mix of equity and debt securities to optimize
the risk-return profile of plan assets and minimize asset/liability
mismatching.
The assets of the pension plans may include investment
securities issued by the Bank. As at October 31, 2022 and 2021, the
assets of the pension plans do not include any securities issued by
the Bank.
For fiscal 2022, the Bank and its related entities received $21
million ($15 million in fiscal 2021) in fees from the pension plans
for related management, administration and custodial services.
N ote 23 - Employee Benefits - Pension Plans and Other
Post-Employment Benefit Plans (cont.)
Allocation of the Defined Benefit Obligation by the Status of
the Participants in the Defined Benefit Component of the Pension
Plans
As at October 31
==== ====
Pension plans - Defined Other post-employment
benefit component benefit plans
2022 2021 2022 2021
================================== ========= ========
Active employees 41 % 42% 7 % 13%
Retirees 53 % 51% 93 % 87%
Participants with deferred vested
benefits 6 % 7%
100 % 100% 100 % 100%
Weighted average duration of
the
defined benefit obligation (in
years) 14 16 10 12
Significant Actuarial Assumptions (Weighted Average)
Discount Rate
The discount rate assumption is based on an interest rate curve
that represents the yields on corporate AA bonds. Short-term
maturities are obtained using a curve based on observed data from
corporate AA bonds. Long-term maturities are obtained using a curve
based on actual data and extrapolated data.
To measure the obligation related to the defined benefit
component of the pension plans and related to the other
post-employment benefit plans, the vested benefits that the Bank
expects to pay in each future period are discounted to the
measurement date using the spot rate associated with each of the
respective periods based on the yield curve derived using the above
methodology. The sum of discounted benefit amounts represents the
defined benefit obligation. An average discount rate that
replicates this obligation is then computed.
To better reflect current service cost, a separate discount rate
was determined to account for the timing of future benefit payments
associated with the additional year of service to be earned by the
plan's active participants. Since these benefits are, on average,
being paid at a later date than the benefits already earned by
participants as a whole (i.e., longer duration), this method
results in the use of a generally higher discount rate for
calculating current service cost than that used to measure
obligations where the yield curve is positively sloped. The
methodology used to determine this discount rate is the same as the
one used to establish the discount rate for measuring the
obligation.
Other Assumptions
For measurement purposes, the estimated annual growth rate for
health care costs was 4.77% as at October 31, 2022 (4.52% as at
October 31, 2021). Based on the assumption retained, this rate is
expected to increase to 5.42% in 2025, then remain at 5.30% from
2026 to 2030, then decrease gradually to 4.05% in 2040 and remain
steady thereafter.
Mortality assumptions are a determining factor when measuring
the defined benefit obligation. Determining the expected benefit
payout period is based on best estimate assumptions regarding
mortality. Mortality tables are reviewed at least once a year, and
the assumptions made are in accordance with accepted actuarial
practice. New results regarding the plans are reviewed and used in
calculating best estimates of future mortality.
As at October 31
==== ====
Pension plans - Defined Other post-employment
benefit component benefit plans
2022 2021 2022 2021
=================================
Defined benefit obligation
Discount rate 5.45 % 3.55% 5.45 % 3.55%
Rate of compensation increase 3.00 % 3.00% 3.00 % 3.00%
Health care cost trend rate 4.77 % 4.52%
Life expectancy (in years) at
65 for a participant currently
at
Age 65
Men 22.4 21.4 22.4 21.4
Women 24.7 23.7 24.7 23.7
Age 45
Men 23.4 22.4 23.4 22.4
Women 25.6 24.7 25.6 24.7
Year ended October 31
==== ====
Pension plans - Defined Other post-employment
benefit component benefit plans
2022 2021 2022 2021
========
Pension plan expense
Discount rate - Current service 3.70 % 3.10% 3.70 % 3.10%
Discount rate - Interest expense
(income), net 3.55 % 2.90% 3.55 % 2.90%
Rate of compensation increase 3.00 % 3.00% 3.00 % 3.00%
Health care cost trend rate 4.52 % 4.64%
Life expectancy (in years) at
65 for a participant currently
at
Age 65
Men 21.4 21.3 21.4 21.3
Women 23.7 23.7 23.7 23.7
Age 45
Men 22.4 22.4 22.4 22.4
Women 24.7 24.6 24.7 24.6
S ensitivity of Significant Assumptions for 2022
The following table shows the potential impacts of changes to
key assumptions on the defined benefit obligation of the pension
plans and other post--employment benefit plans as at October 31,
2022. These impacts are hypothetical and should be interpreted with
caution, as changes in each significant assumption may not be
linear. The Bank has decided to adjust the table by varying the
discount rate by 1.00% instead of the 0.25% used in the previous
fiscal year to reflect the current economic environment.
As at October 31, 2022
Pension plans
- Defined benefit Other post-employment
component benefit plans
Change in the Change in the
obligation obligation
Impact of a 1.00% increase in the discount rate (401) (11)
Impact of a 1.00% decrease in the discount rate 513 13
Impact of a 0.25% increase in the rate of compensation
increase 23
Impact of a 0.25% decrease in the rate of compensation
increase (25)
Impact of a 1.00% increase in the health care
cost trend rate 5
Impact of a 1.00% decrease in the health care
cost trend rate (4)
Impact of an increase in the age of participants
by one year (82) (1)
Impact of a decrease in the age of participants
by one year 76 1
Projected Benefit Payments
Year ended October 31
Pension plans
- Defined benefit Other post-employment
component benefit plans
2023 235 9
2024 244 8
2025 254 8
2026 264 8
2027 272 7
2028 to 2032 1,489 36
Note 24 - Income Taxes
The Bank's income tax expense reported in the consolidated
financial statements is as follows.
Year ended October 31 2022 2021(1)
==== =======
Consolidated Statement of Income
Current taxes
Current year 803 779
Prior period adjustments (19) (3)
784 776
---------------------------------------------------------- ---- -------
Deferred taxes
Origination and reversal of temporary differences 110 96
Prior period adjustments - 10
---- -------
110 106
---------------------------------------------------------- ---- -------
894 882
---------------------------------------------------------- ---- -------
Consolidated Statement of Changes in Equity
Share issuance expenses, other equity instruments and
other (14) (10)
Impact of an accounting policy change(2) (49)
(14) (59)
----------------------------------------------------------
Consolidated Statement of Comprehensive Income
Remeasurements of pension plans and other post-employment
benefit plans (45) 170
Net change in cash flow hedges 3 109
Net fair value change attributable to credit risk on
financial liabilities designated at fair value through
profit or loss 216 (5)
Other (90) 50
-------
84 324
---------------------------------------------------------- ---- -------
Income taxes 964 1,147
==== =======
(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 consolidated financial
statements.
(2) As at October 31, 2021, a $49 million deferred tax liability
arising from an accounting policy change was reversed to Retained
earnings in the Consolidated Statement of Changes in Equity. For
additional information , see Note 1 to these consolidated financial
statements.
The breakdown of the income tax expense is as follows.
Year ended October 31 2022 2021(1)
==== =======
Current taxes 933 916
Deferred taxes 31 231
---- -------
964 1,147
====================== ==== =======
(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 consolidated financial
statements.
The temporary differences and tax loss carryforwards resulting
in deferred tax assets and liabilities are as follows.
As at October Year ended October Year ended October
31 31 31
Consolidated Consolidated Statement Consolidated Statement
Balance Sheet of Income of Comprehensive
Income
2022 2021(1) 2022 2021(1) 2022 2021
====== ======== ========== ============ ========== ============
Deferred tax assets
Allowances for credit losses 235 225 10 (101) - -
Deferred charges 317 354 (37) 89 - -
Defined benefit liability
- Other post-employment
benefit plans 38 47 (1) (3) (8) (2)
Investments in associates 23 57 (34) (41) - -
Leases liabilities 118 132 (14) (13) - -
Deferred revenue 62 51 11 4 - -
Tax loss carryforwards 35 33 2 (7) - -
Other items(2) 32 29 1 (31) - -
860 928 (62) (103) (8) (2)
Deferred tax liabilities
Premises and equipment and
intangible assets(3) (312) (299) (13) (16) - -
Defined benefit asset -
Pension plans (127) (178) (2) 16 53 (168)
Investments in associates (2) - (2) 4 - -
Other items(4) (44) (45) (31) (7) 32 (5)
(485) (522) (48) (3) 85 (173)
Net deferred tax assets
(liabilities) 375 406 (110) (106) 77 (175)
(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 consolidated financial
statements.
(2) As at October 31, 2022, the Consolidated Balance Sheet
included a $2 million deferred tax asset related to share issuance
costs ($1 million as at October 31, 2021) reported in Retained
earnings on the Consolidated Statement of Changes in Equity.
(3) As at October 31, 2021, a $62 million deferred tax liability
arising from an accounting policy change was reversed, of which $49
million was to Retained earnings in the Consolidated Statement of
Changes in Equity and $13 million to Income taxes in the
Consolidated Statement of Income. For additional information, see
Note 1 to these consolidated financial statements.
(4) As at October 31, 2021, the Consolidated Balance Sheet
included a $6 million deferred tax liability related to intangible
assets acquired during the Flinks acquisition that had no impact on
the Consolidated Statement of Comprehensive Income. For additional
information, see Note 31 to these consolidated financial
statements.
Net deferred tax assets are included in Other assets and net
deferred tax liabilities are included in Other liabilities.
As at October 31 2022 2021(1)
==== =======
Deferred tax assets 389 416
Deferred tax liabilities (14) (10)
---- -------
375 406
=========================
(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 consolidated financial
statements.
Note 24 - Income Taxes (cont.)
According to forecasts, which are based on information available
as at October 31, 2022, the Bank believes that the results of
future operations will likely generate sufficient taxable income to
utilize all the deferred tax assets before they expire.
As at October 31, 2022, the total amount of temporary
differences, unused tax loss carryforwards, and unused tax credits
for which no deferred tax asset has been recognized was $561
million ($424 million as at October 31, 2021).
As at October 31, 2022, the total amount of temporary
differences related to investments in subsidiaries, associates, and
joint ventures for which no deferred tax liability has been
recognized was $5,636 million ($4,383 million as at October 31,
2021).
The following table provides a reconciliation of the Bank's
income tax rate.
Year ended October 31 2022 2021(1)
============
$ % $ %
===== ===== ===== =====
Income before income taxes 4,277 100.0 4,022 100.0
----- ----- ----- -----
Income taxes at Canadian statutory
income tax rate 1,133 26.5 1,066 26.5
----- ----- ----- -----
Reduction in income tax rate due to
Tax-exempt income from securities (191) (4.5) (151) (3.8)
Non-taxable portion of capital gains (1) - - -
Tax rates of subsidiaries, foreign
entities and associates (71) (1.7) (51) (1.3)
Other items 24 0.6 18 0.5
------------------------------------------- ----- ----- ----- -----
(239) (5.6) (184) (4.6)
------------------------------------------
Income taxes reported in the Consolidated
Statement of Income and
effective income tax rate 894 20.9 882 21.9
=========================================== ===== ===== ===== =====
(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 consolidated financial
statements.
Notice of Assessment
In September 2022, the Bank was reassessed by the Canada Revenue
Agency (CRA) for additional income tax and interest of
approximately $150 million (including estimated provincial tax and
interest) in respect of certain Canadian dividends received by the
Bank during the 2017 taxation year.
In prior fiscal years, the Bank had been reassessed for
additional income tax and interest of approximately $725 million
(including provincial tax and interest) in respect of certain
Canadian dividends received by the Bank during the 2012-2016
taxation years.
In the reassessments, the CRA alleges that the dividends were
received as part of a "dividend rental arrangement".
The CRA may issue reassessments to the Bank for taxation years
subsequent to 2017 in regard to activities similar to those that
were the subject of the above-mentioned reassessments. The Bank
remains confident that its tax position was appropriate and intends
to vigorously defend its position. As a result, no amount has
been
recognized in the consolidated financial statements as at October 31, 2022.
Proposed Legislation
On November 4, 2022, the Government of Canada introduced Bill
C-32 - An Act to implement certain provisions of the fall economic
statement table in Parliament on November 3, 2022 and certain
provisions of the budget tabled in Parliament on April 7, 2022 to
implement tax measures applicable to certain entities of banking
and life insurer groups, as presented in its budget of April 7,
2022. These tax measures include the Canada Recovery Dividend
(CRD), which is a one-time 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, and also include a 1.5%
increase in the statutory tax rate. The amount of CRD for the Bank
is estimated at $32 million. Since these tax measures were not
substantively enacted at the reporting date, no amount has been
recognized in the Bank's consolidated financial statements as at
October 31, 2022.
Note 25 - Earnings Per Share
Diluted earnings per share is calculated by dividing net income
attributable to common shareholders by the weighted average number
of common shares outstanding after taking into account the dilution
effect of stock options using the treasury stock method and any
gain (loss) on the redemption of preferred shares.
Year ended October 31 2022 2021(1)
=======
Basic earnings per share
Net income attributable to the Bank's shareholders and
holders of other equity instruments 3,384 3,140
Dividends on preferred shares and distributions on other
equity instruments 107 123
Net income attributable to common shareholders 3,277 3,017
Weighted average basic number of common shares outstanding
(thousands) 337,099 337,212
Basic earnings per share (dollars) 9.72 8.95
Diluted earnings per share
Net income attributable to common shareholders 3,277 3,017
Weighted average basic number of common shares outstanding
(thousands) 337,099 337,212
Adjustment to average number of common shares (thousands)
Stock options(2) 3,738 3,649
Weighted average diluted number of common shares outstanding
(thousands) 340,837 340,861
Diluted earnings per share (dollars) 9.61 8.85
==============================================================
(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 consolidated financial
statements.
(2) For the year ended October 31, 2022, the calculation of
diluted earnings per share excluded an average number of 1,575,093
options outstanding with a weighted average exercise price of
$96.35, given that the exercise price of these options was greater
than the average price of the Bank's common shares. For the year
ended October 31, 2021, given that the exercise price of the
options was lower than the average price of the Bank's common
shares, no options were excluded from the diluted earnings per
share calculation.
Note 26 - Guarantees, Commitments and Contingent Liabilities
Guarantees
The maximum potential amount of future payments represents the
maximum risk of loss if there were a total default by the
guaranteed parties, without consideration of recoveries under
recourse provisions or insurance policies or from collateral held
or pledged. The maximum potential amount of future payments under
significant guarantees issued by the Bank is presented in the
following table.
As at October 31 2022 2021
Letters of guarantee(1) 6,618 6,083
Backstop liquidity, credit enhancement facilities and
other(1) 8,707 7,264
Securities lending 180 -
===== =====
(1) For additional information on allowances for credit losses
related to off-balance-sheet commitments, see Note 7 to these
consolidated financial statements.
Letters of Guarantee
In the normal course of business, the Bank issues letters of
guarantee. These letters of guarantee represent irrevocable
commitments that the Bank will make payments in the event that a
client cannot meet its obligations to third parties. The Bank's
policy for requiring collateral security with respect to letters of
guarantee is similar to that for loans. Generally, the term of
these letters of guarantee is less than two years.
Backstop Liquidity and Credit Enhancement Facilities
Facilities to Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase
financial assets from clients and finance those purchases by
issuing asset-backed commercial paper. The Bank provides backstop
liquidity facilities to these multi-seller conduits. As at October
31, 2022, the notional amount of the global-style backstop
liquidity facilities totalled $3.2 billion ($2.8 billion as at
October 31, 2021), representing the total amount of commercial
paper outstanding.
These backstop liquidity facilities can be drawn if the conduits
are unable to access the commercial paper market, even if there is
no general market disruption. These facilities have terms of less
than one year and can be periodically renewed. The terms and
conditions of these backstop liquidity facilities do not require
the Bank to advance money to the conduits if the conduits are
insolvent or involved in bankruptcy proceedings or to fund
non-performing assets beyond the amount of the available credit
enhancements. The backstop liquidity facilities provided by the
Bank have not been drawn to date.
Note 26 - Guarantees, Commitments and Contingent Liabilities
(cont.)
The Bank also provides credit enhancement facilities to these
multi-seller conduits. These facilities have terms of less than one
year and are automatically renewable unless the Bank sends a
non-renewal notice. As at October 31, 2022 and 2021, the committed
notional value for these facilities was $30 million. To date, the
credit enhancement facilities provided by the Bank have not been
drawn.
The maximum risk of loss for the Bank cannot exceed the total
amount of commercial paper outstanding, i.e., $3.2 billion as at
October 31, 2022 ($2.8 billion as at October 31, 2021). As at
October 31, 2022, the Bank held $35 million ($22 million as at
October 31, 2021) of this commercial paper and, consequently, the
maximum potential amount of future payments, taking into account
the credit enhancement facilities, was $3.2 billion ($2.7 billion
as at October 31, 2021).
CDCC Overnight Liquidity Facility
Canadian Derivatives Clearing Corporation (CDCC) acts as a
central clearing counterparty for multiple financial instrument
transactions in Canada. Certain fixed-income clearing members of
CDCC have provided an equally shared committed and uncommitted
global overnight liquidity facility for the purpose of supporting
CDCC in its clearing activities of securities purchased under
reverse repurchase agreements or sold under repurchase agreements.
The objective of this facility is to maintain sufficient liquidity
in the event of a clearing member's default. As a fixed-income
clearing member providing support to CDCC, the Bank provides a
liquidity facility. As at October 31, 2022, the notional amount of
the overnight uncommitted liquidity facility amounted to $5.6
billion ($4.5 billion as at October 31, 2021). As at October 31,
2022 and 2021, no amount had been drawn.
Securities Lending
Under securities lending agreements that the Bank has entered
into with certain clients who have entrusted it with the
safekeeping of their securities, the Bank lends the securities to
third parties and indemnifies its clients in the event of loss. To
protect itself against any contingent loss, the Bank obtains, as
security from the borrower, a cash amount or extremely liquid
marketable securities with a fair value greater than that of the
securities loaned. No amount has been recognized on the
Consolidated Balance Sheet with respect to potential indemnities
resulting from securities lending agreements.
Other Indemnification Agreements
In the normal course of business, including securitization
transactions and discontinuances of businesses and operations, the
Bank enters into numerous contractual agreements under which it
undertakes to compensate the counterparty for costs incurred as a
result of litigation, changes in laws and regulations (including
tax legislation), claims with respect to past performance,
incorrect representations or the non-performance of certain
restrictive covenants. The Bank also undertakes to indemnify any
person acting as a director or officer or performing a similar
function within the Bank or one of its subsidiaries or another
entity, at the request of the Bank, for all expenses incurred by
that person in proceedings or investigations to which he or she is
party in that capacity. Moreover, as a member of a securities
transfer network and pursuant to the membership agreement and the
regulations governing the operation of the network, the Bank
granted collateral in favour of the Bank of Canada to guarantee any
obligation of the Bank towards the Bank of Canada that could result
from the Bank's participation in the securities transfer network.
The durations of the indemnification agreements vary according to
circumstance; as at October 31, 2022 and 2021, given the nature of
the agreements, the Bank is unable to make a reasonable estimate of
the maximum potential liability it could be required to pay to
counterparties. No amount related to these agreements has been
recognized on the Consolidated Balance Sheet.
Commitments
Credit Instruments
In the normal course of business, the Bank enters into various
off-balance-sheet commitments. The credit instruments used to meet
the financing needs of its clients represent the maximum amount of
additional credit that the Bank could be obligated to extend if the
commitments were fully drawn.
As at October 31 2022 2021
======
Letters of guarantee(1) 6,618 6,083
Documentary letters of credit(2) 161 160
Credit card receivables(3) 9,337 9,081
Commitments to extend credit(3) 82,117 77,983
====== ======
(1) See the Letters of Guarantee item on page 215.
(2) Documentary letters of credit are documents issued by the
Bank and used in international trade to enable a third party to
present a payment request to the Bank for up to an amount
established under specific terms and conditions; these instruments
are collateralized by the delivery of the goods to which they are
related.
(3) Credit card receivables and commitments to extend credit
represent unused portions of authorizations to extend credit, under
certain conditions, in the form of loans or bankers'
acceptances.
Financial Assets Received as Collateral
As at October 31, 2022, the fair value of financial assets
received as collateral that the Bank was authorized to sell or
repledge was $92.3 billion ($74.1 billion as at October 31, 2021).
These financial assets received as collateral consist of securities
related to securities financing and derivative transactions as well
as securities purchased under reverse repurchase agreements and
securities borrowed.
Other Commitments
The Bank acts as an investor in investment banking activities
whereby it enters into agreements to finance external private
equity funds and investments in equity and debt securities at
market value at the time the agreements are signed. In connection
with these activities, the Bank had commitments to invest up to
$102 million as at October 31, 2022 ($124 million as at October 31,
2021). In addition, through one of its subsidiaries, the Bank
purchases retail loans originated by other financial institutions
at market value at the time of purchase. As at October 31, 2022,
the Bank had commitments to purchase loans of up to $60 million
($77 million as at October 31, 2021).
Pledged Assets
In the normal course of business, the Bank pledges securities
and other assets as collateral. A breakdown of encumbered assets
pledged as collateral is provided in the following table. These
transactions are concluded in accordance with standard terms and
conditions.
As at October 31 2022 2021
=======
Assets pledged to
Bank of Canada 325 502
Direct clearing organizations(1) 1,634 4,158
Assets pledged in relation to
Derivative financial instrument transactions 5,368 6,339
Borrowing, securities lending and securities sold under
reverse repurchase agreements 68,458 72,038
Securitization transactions 26,361 25,173
Covered bonds(2) 11,590 9,542
Other 159 4
--------------------------------------------------------- ------- -------
Total 113,895 117,756
======= =======
(1) Includes assets pledged as collateral for activities in the
systemically important payment system (designated as Lynx) as at
October 31, 2022 and 2021.
(2) The Bank has a covered bond program. For additional
information, see Notes 13 and 27 to these consolidated financial
statements.
Contingent Liabilities
Litigation
In the normal course of business, the Bank and its subsidiaries
are involved in various claims relating, among other matters, to
loan portfolios, investment portfolios, and supplier agreements,
including court proceedings, investigations or claims of a
regulatory nature, class actions, or other legal remedies of varied
natures.
More specifically, the Bank is involved as a defendant in class
actions instituted by consumers contesting, inter alia, certain
transaction fees or who wish to avail themselves of certain
legislative provisions relating to consumer protection. The recent
developments in the main legal proceeding involving the Bank are as
follows:
Defrance
On January 21, 2019, the Quebec Superior Court authorized a
class action against the National Bank and several other Canadian
financial institutions. The originating application was served to
the Bank on April 23, 2019. The class action was initiated on
behalf of consumers residing in Quebec. The plaintiffs allege that
non-sufficient funds charges, billed by all of the defendants when
a payment order is refused due to non-sufficient funds, are illegal
and prohibited by the Consumer Protection Act. The plaintiffs are
claiming, in the form of damages, the repayment of these charges as
well as punitive damages.
It is impossible to determine the outcome of the claims
instituted or which may be instituted against the Bank and its
subsidiaries. The Bank estimates, based on the information at its
disposal, that while the amount of contingent liabilities
pertaining to these claims, taken individually or in the aggregate,
could have a material impact on the Bank's consolidated results of
operations for a particular period, it would not have a material
adverse impact on the Bank's consolidated financial position.
Note 27 - Structured Entities
A structured entity is an entity created to accomplish a narrow
and well-defined objective and is designed so that voting or
similar rights are not the dominant factor in deciding who controls
the entity, such as when any voting rights relate solely to
administrative tasks and the relevant activities are directed by
means of contractual arrangements. Structured entities are assessed
for consolidation in accordance with the accounting treatment
described in Note 1 to these consolidated financial statements. The
Bank's maximum exposure to loss resulting from its interests in
these structured entities consists primarily of the investments in
these entities, the fair value of derivative financial instrument
contracts entered into with them, and the backstop liquidity and
credit enhancement facilities granted to certain structured
entities.
In the normal course of business, the Bank may enter into
financing transactions with third-party structured entities,
including commercial loans, reverse repurchase agreements, prime
brokerage margin lending, and similar collateralized lending
transactions. While such transactions expose the Bank to the
counterparty credit risk of the structured entities, this exposure
is mitigated by the collateral related to these transactions. The
Bank typically has neither power nor significant variable returns
resulting from financing transactions with structured entities and
does not consolidate such entities. Financing transactions with
third-party-sponsored structured entities are included in the
Bank's consolidated financial statements and are not included in
the table accompanying this note on page 219.
Non-Consolidated Structured Entities
Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase
financial assets from clients and finance those purchases by
issuing commercial paper backed by the assets acquired. Clients use
these multi-seller conduits to diversify their funding sources and
reduce borrowing costs, while continuing to manage the financial
assets and providing some amount of first-loss protection. Notes
issued by the conduits and held by third parties provide additional
credit loss protection. The Bank acts as a financial agent and
provides these conduits with administrative and transaction
structuring services as well as backstop liquidity and credit
enhancement facilities under the commercial paper program. These
facilities are presented and described in Note 26. The Bank has
concluded derivative financial instrument contracts with these
conduits, the fair value of which is presented on the Bank's
Consolidated Balance Sheet. Although the Bank has the ability to
direct the relevant activities of these conduits, it cannot use its
power to affect the amount of the returns it obtains, as it acts as
an agent. Consequently, the Bank does not control these conduits
and does not consolidate them.
Investment Funds
The Bank enters into derivative or other financial instrument
contracts with third parties to provide them with the desired
exposure to certain investment funds. The Bank economically hedges
the risks related to these derivatives by investing in those
investment funds. The Bank can also hold economic interests in
certain investment funds as part of its investing activities. In
addition, t he Bank is sponsor and investment manager of mutual
funds in which it has insignificant or no interest. The Bank does
not control the funds where its holdings are not significant given
that, in these circumstances, the Bank either acts only as an agent
or does not have any power over the relevant activities. In both
cases, it does not have significant exposure to the variable
returns of the funds. Therefore, the Bank does not consolidate
these funds.
Private Investments
As part of its investment banking operations, the Bank invests
in several limited liability partnerships and other incorporated
entities. These investment companies in turn invest in operating
companies with a view to reselling these investments at a profit
over the medium or long term. The Bank does not intervene in the
operations of these entities; its only role is that of an investor.
Consequently, it does not control these companies and does not
consolidate them.
Third-Party Structured Entities
The Bank has invested in third-party structured entities, some
of which are asset-backed. The underlying assets consist of
residential mortgages, consumer loans, equipment loans, leases, and
securities. The Bank does not have the ability to direct the
relevant activities of these structured entities and has no
exposure to their variable returns, other than the right to receive
interest income and dividend income from its investments.
Consequently, the Bank does not control these structured entities
and does not consolidate them.
The following table presents the carrying amounts of the assets
and liabilities relating to the Bank's interests in
non-consolidated structured entities, the Bank's maximum exposure
to loss from these interests, as well as the total assets of these
structured entities. The structured entity Canada Housing Trust is
not presented. For additional information, see Note 8 to these
consolidated financial statements.
As at October 31, 2022
Third-party
Multi-seller Investment Private structured
conduits funds investments entities
(1) (2) (3) (4)
Assets on the Consolidated Balance Sheet
Securities at fair value through profit
or loss 35 335 77 -
Securities at amortized cost - - - 5,163
Derivative financial instruments - - - 38
35 335 77 5,201
As at October 31, 2021 22 197 54 2,942
Liabilities on the Consolidated Balance
Sheet
Derivative financial instruments (71) - - (91)
(71) - - (91)
As at October 31, 2021 (12) - - (8)
Maximum exposure to loss
Securities 35 335 77 5,201
Liquidity, credit enhancement facilities
and commitments 3,155 - - 468
3,190 335 77 5,669
-----------------------------------------
As at October 31, 2021 2,754 197 54 3,896
Total assets of the structured entities 3,183 1,772 535 11,197
As at October 31, 2021 2,782 1,791 400 16,883
(1) The main underlying assets, located in Canada, are
residential mortgages, automobile loans, automobile inventory
financings, and other receivables. As at October 31, 2022, the
notional committed amount of the global-style liquidity facilities
totalled $3.2 billion ($2.8 billion as at October 31, 2021 ),
representing the total amount of commercial paper outstanding. The
Bank also provides series-wide credit enhancement facilities for a
notional committed amount of $30 million ($30 million as at October
31, 2021 ). The maximum exposure to loss cannot exceed the amount
of commercial paper outstanding. As at October 31, 2022, the Bank
held $35 million in commercial paper ($22 million as at October 31,
2021 ) and, consequently, the maximum potential amount of future
payments as at October 31, 2022 was limited to $3.2 billion ($2.7
billion as at October 31, 2021 ), which represents the undrawn
liquidity and credit enhancement facilities.
(2) The underlying assets are various financial instruments and
are presented on a net asset basis. Certain investment funds are i
n a trading portfolio.
(3) The underlying assets are private investments. The amount of
total assets of the structured entities corresponds to the amount
for the most recent available period.
(4) The underlying assets are residential mortgages, consumer
loans, equipment loans, leases, and securities.
Consolidated Structured Entities
Securitization Entity for the Bank's Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II
(CCCT II) to continue its credit card securitization program on a
revolving basis and to use the entity for capital management and
funding purposes.
The Bank provides first-loss protection against the losses,
since it retains the excess spread from the portfolio of sold
receivables. The excess spread represents the residual net interest
income after all the expenses related to this structure have been
paid. The Bank also provides second-loss protection as it holds
subordinated notes issued by CCCT II. In addition, the Bank acts as
an administrative agent and servicer and as such is responsible for
the daily administration and management of CCCT II's credit card
receivables. The Bank therefore has the ability to direct the
relevant activities of CCCT II and can exercise its power to affect
the amount of returns it obtains. Consequently, the Bank controls
CCCT II and consolidates it.
Multi-Seller Conduit
The Bank administers a multi-seller conduit that purchases
various financial assets from clients and finances those purchases
by issuing debt securities (including commercial paper) backed by
the assets acquired. The clients use this multi-seller conduit to
diversify their funding sources and reduce borrowing costs, while
continuing to manage the financial assets and providing some amount
of first-loss protection. The Bank holds the sole note issued by
the conduit and has concluded a derivative financial instrument
contract with the conduit. The Bank controls the relevant
activities of this conduit through its involvement as a financial
agent, agent for administrative and transaction structuring
services as well as investor in the conduit's sole note. The Bank's
functions and investment in the conduit confer to it
decision-making power over the composition of assets acquired by
the conduit and the selection of the seller as well as some
exposure to the conduit's variable returns. Therefore, the Bank
consolidates this conduit.
Note 27 - Structured Entities (cont.)
Investment Funds
The Bank enters into derivative or other financial instrument
contracts with third parties to provide them with the desired
exposure to certain investment funds. The Bank economically hedges
the risks related to these derivatives by investing in those
investment funds. The Bank can also hold economic interests in
certain investment funds as part of its investing activities. The
Bank controls the relevant activities of certain funds through its
involvement as an investor and its significant exposure to their
variable returns. Therefore, the Bank consolidates these funds.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond
legislative program under which covered bonds are issued. It
therefore created NBC Covered Bond Guarantor (Legislative) Limited
Partnership (the Guarantor) to guarantee payment of the principal
and interest owed to the bondholders. The Bank sold uninsured
residential mortgages to the Guarantor and granted it loans to
facilitate the acquisition of these assets. The Bank acts as
manager of the partnership and has decision-making authority over
its relevant activities in accordance with the contractual terms
governing the covered bond legislative program. In addition, the
Bank is able, in accordance with the contractual terms governing
the covered bond legislative program, to affect the variable
returns of the partnership, which are directly related to the
return on the mortgage loan portfolio and the interest on the loans
from the Bank. Consequently, the Bank controls the partnership and
consolidates it.
Third-Party Structured Entities
In 2018, the Bank, through one of its subsidiaries, provided
financing to a third-party structured entity in exchange for a 100%
interest in a loan portfolio, the sole asset held by that entity.
The Bank controls and therefore consolidates the structured entity,
as it has the ability to direct the entity's relevant activities
through its involvement in the decision-making process. The Bank is
also exposed to the entity's variable returns.
The following table presents the Bank's investments and other
assets in the consolidated structured entities as well as the total
assets of these entities.
As at October 31 2022 2021
Investments Total Investments
and other assets and other Total
assets (1) assets assets(1)
Consolidated structured entities
Securitization entity for the Bank
' s credit card receivables(2)(3) 1,916 2,073 2,410 2,544
Multiseller conduit(4) 802 802 256 256
Investment funds(5) 56 56 121 121
Covered bonds(6) 17,900 18,237 15,663 16,048
Third-party structured entities(7) 166 166 169 169
----------- ----------- ----------
20,840 21,334 18,619 19,138
=================================== =========== =========== ==========
(1) There are restrictions, arising essentially from regulatory
requirements, corporate or securities laws, and contractual
arrangements, that limit the ability of some of the Bank's
consolidated structured entities to transfer funds to the Bank.
(2) The underlying assets are credit card receivables.
(3) The Bank's investment is presented net of third-party holdings.
(4) The underlying assets, located in Canada, are residential mortgages.
(5) The underlying assets are various financial instruments and
are presented on a net asset basis. Certain investment funds are in
a trading portfolio.
(6) T he underlying assets are uninsured residential mortgage
loans of the Bank. The average maturity of these underlying assets
is two years. As at October 31, 2022, the total amount of
transferred mortgage loans was $17.9 billion ($15.7 billion as at
October 31, 2021 ), and the total amount of covered bonds of $10.4
billion was recognized in Deposits on the Consolidated Balance
Sheet ($8.8 billion as at October 31, 2021 ). For additional
information, see Note 13 to these consolidated financial
statements.
(7) The underlying assets consist of a loan portfolio.
Note 28 - Related Party Disclosures
In the normal course of business, the Bank provides various
banking services to related parties and enters into contractual
agreements and other operations with related parties. The Bank
considers the following to be related parties:
-- its key officers and directors and members of their immediate
family, i.e., spouses and children under 18 living in the same
household;
-- entities over which its key officers and directors and their
immediate family have control or significant influence through
their significant voting power;
-- the Bank's associates and joint ventures;
-- the Bank's pension plans (for additional information, see
Note 23 to these consolidated financial statements ).
According to the established definition, the Bank's key officers
are those persons having authority and responsibility for planning,
directing, and controlling the Bank's activities, directly or
indirectly.
Related Party Transactions
As at October 31
====== ===== ===== ====
Key officers
and directors(1) Related entities
2022 2021 2022 2021
=============================== ========= ======== ===== =====
Assets
Mortgage loans and other loans 22 21 449 (2) 143 (2)
--------- -------- ------ -----
Liabilities
Deposits 58 115 80 (3) 126 (3)
Other - - 6 38
========= ======== ====== ===== ====
(1) As at October 31, 2022, key officers and directors and their
immediate family members were holding $68 million of the Bank's
common and preferred shares ($95 million as at October 31,
2021).
(2) As at October 31, 2022, mortgage loans and other loans
consisted of: (i) $1 million in loans to the Bank's associates ($1
million as at October 31, 2021) and (ii) $448 million in loans to
entities over which the Bank's key officers or directors or their
immediate family members exercise control or significant influence
through significant voting power ($142 million as at October 31,
2021).
(3) As at October 31, 2022, deposits consisted of: (i) no amount
in deposits from the Bank's associates ($1 million as at October
31, 2021) and (ii) $80 million in deposits from entities over which
the Bank's key officers or directors and their immediate family
members exercise control or significant influence through
significant voting power ($125 million as at October 31, 2021).
The contractual agreements and other transactions with related
entities as well as with directors and key officers are entered
into under conditions similar to those offered to non-related third
parties. These agreements did not have a significant impact on the
Bank's results. The Bank also offers a deferred stock unit plan to
directors who are not Bank employees. For additional information,
see Notes 9, 22 and 27 to these consolidated financial
statements.
Compensation of Key Officers and Directors
Year ended October 31 2022 2021
====
Compensation and other short-term and long-term benefits 24 23
Share-based payments 21 22
==== ====
Note 28 - Related Party Disclosures (cont.)
Principal Subsidiaries of the Bank (1)
As at October
31, 2022
Principal office Voting Investment
Name Business activity address shares(2) at cost
Canada and United States
National Bank Acquisition
Holding Inc. Holding company Montreal, Canada 100% 1,785
National Bank Financial
Inc. Investment dealer Montreal, Canada 100%
NBF International
Holdings
Inc. Holding company Montreal, Canada 100%
National Bank of Canada
Financial New York, NY,
Group Inc. Holding company United States 100%
Atlanta, GA, United
Credigy Ltd. Holding company States 100%
National Bank of
Canada New York, NY,
Financial Inc. Investment dealer United States 100%
National Bank Investments Mutual funds
Inc. dealer Montreal, Canada 100% 441
National Bank Life
Insurance
Company Insurance Montreal, Canada 100%
Natcan Trust Company Trustee Montreal, Canada 100% 238
National Bank Trust Inc. Trustee Montreal, Canada 100% 195
National Bank Realty Inc. Real estate Montreal, Canada 100% 80
Hollywood, FL,
NatBC Holding Corporation Holding company United States 100% 31
Natbank, National Hollywood, FL,
Association Commercial bank United States 100%
Information
Flinks Technology Inc. technology Montreal, Canada 86% 144
Other countries
Natcan Global Holdings
Ltd. Holding company Sliema, Malta 100% 22
NBC Global Finance
Limited Investment services Dublin, Ireland 100%
NBC Financial Markets Asia
Limited Investment dealer Hong Kong, China 100% 5
Advanced Bank of Asia
Limited Commercial bank Phnom Penh, Cambodia 100% 621
Information
ATA IT Ltd. technology Bangkok, Thailand 100% 3
========== ==========
(1) Excludes consolidated structured entities. For additional
information, see Note 27 to these consolidated financial
statements.
(2) The Bank's percentage of voting rights in these subsidiaries.
Note 29 - Management of the Risks Associated With Financial
Instruments
The Bank is exposed to credit risk, market risk, and liquidity
and funding risk. The Bank's objectives, policies, and procedures
for managing risk and the risk measurement methods are presented in
the Risk Management section of the MD&A for the year ended
October 31, 2022. Text in grey shading and tables identified with
an asterisk (*) in the Risk Management section of the MD&A for
the year ended October 31, 2022 are integral parts of these
consolidated financial statements.
Residual Contractual Maturities of Balance Sheet Items and
Off-Balance-Sheet Commitments
The following tables present balance sheet items and
off-balance-sheet commitments by residual contractual maturity as
at October 31, 2022 and 2021. The information gathered from this
maturity analysis is a component of liquidity and funding
management. However, this maturity profile does not represent how
the Bank manages its interest rate risk nor its liquidity risk and
funding needs. The Bank considers factors other than contractual
maturity when assessing liquid assets or determining expected
future cash flows.
In the normal course of business, the Bank enters into various
off-balance-sheet commitments. The credit instruments used to meet
the funding needs of its clients represent the maximum amount of
additional credit that the Bank could be obligated to extend if the
commitments were fully drawn.
The Bank also has future minimum commitments under leases for
premises as well as under other contracts, mainly commitments to
purchase loans and contracts for outsourced information technology
services. Most of the lease commitments are related to operating
leases.
As at October 31, 2022
Over Over Over Over Over
1 3 6 9 1 Over
1 month months months months year 2
month to to to to to years Over No
or 3 6 9 12 2 to 5 specified
less months months months months years 5 years years maturity Total
Assets
Cash and deposits
with financial
institutions 13,084 142 311 18 685 - - - 17,630 31,870
------ ------ ------ ------ ------ ------ ------- --------- -------
Securities
At fair value
through
profit or loss 1,527 6,450 5,405 2,267 2,337 3,369 8,634 10,661 46,725 87,375
At fair value
through
other
comprehensive
income 5 30 13 20 46 952 4,910 2,296 556 8,828
At amortized cost 602 196 1,876 1,032 95 2,840 5,802 1,073 - 13,516
------ ------ ------ ------ ------ ------ ------- --------- -------
2,134 6,676 7,294 3,319 2,478 7,161 19,346 14,030 47,281 109,719
------ ------ ------ ------ ------ ------ ------- --------- -------
Securities
purchased
under
reverse
repurchase
agreements and
securities
borrowed 12,489 1,231 890 - 409 1,044 - - 10,423 26,486
------ ------ ------ ------ ------ ------ ------- --------- -------
Loans (1)
Residential
mortgage 1,155 1,124 1,899 2,716 2,364 8,910 53,335 8,059 567 80,129
Personal 423 449 878 1,208 1,036 3,701 17,792 5,085 14,751 45,323
Credit card 2,389 2,389
Business and
government 19,980 3,491 3,971 3,586 2,604 6,167 11,452 2,985 19,081 73,317
Customers'
liability
under
acceptances 5,967 554 20 - - - - - - 6,541
Allowances for
credit
losses (955) (955)
------ ------ ------ ------ ------ ------ -------
27,525 5,618 6,768 7,510 6,004 18,778 82,579 16,129 35,833 206,744
------ ------ ------ ------ ------ ------ ------- --------- -------
Other
Derivative
financial
instruments 2,046 2,804 1,853 1,190 698 1,742 5,182 3,032 - 18,547
Investments in
associates
and
joint ventures 140 140
Premises and
equipment 1,397 1,397
Goodwill 1,519 1,519
Intangible assets 1,360 1,360
Other assets(1) 2,633 527 472 161 94 502 107 86 1,376 5,958
------ ------ ------ ------ ------ ------ ------- --------- -------
4,679 3,331 2,325 1,351 792 2,244 5,289 3,118 5,792 28,921
------ ------ ------ ------ ------ ------ ------- --------- -------
59,911 16,998 17,588 12,198 10,368 29,227 107,214 33,277 116,959 403,740
============== ====== ====== ====== ====== ====== ====== ======= ========= =======
(1) Amounts collectible on demand are considered to have no specified maturity.
Note 29 - Management of the Risks Associated With Financial
Instruments (cont.)
As at October 31, 2022
Over Over Over Over Over Over
1 3 6 9 1 2
1 month months months months year years
month to to to to to to Over No
or 3 6 9 12 2 5 5 specified
less months months months months years years years maturity Total
==================
Liabilities and
equity
Deposits (1)(2)
Personal 1,482 1,493 2,955 6,013 6,141 6,418 7,942 4,252 42,115 78,811
Business and
government 36,864 11,605 10,644 4,875 3,728 5,988 13,659 4,227 92,640 184,230
Deposit-taking
institutions 724 624 54 122 30 - 7 36 1,756 3,353
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
39,070 13,722 13,653 11,010 9,899 12,406 21,608 8,515 136,511 266,394
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Other
Acceptances 5,967 554 20 - - - - - - 6,541
Obligations related
to securities sold
short(3) 428 394 634 74 920 1,493 3,948 6,386 7,540 21,817
Obligations related
to
securities sold
under
repurchase
agreements
and
securities loaned 16,233 5,445 1,567 3,406 - 22 - - 6,800 33,473
Derivative financial
instruments 2,584 2,302 1,640 1,009 595 2,047 3,570 5,885 - 19,632
Liabilities related
to transferred
receivables(4) - 2,672 422 1,329 2,288 4,558 9,612 5,396 - 26,277
Securitization -
Credit card(5) - - - 29 - - 49 - - 78
Lease liabilities(5) 8 16 23 23 24 87 219 152 - 552
Other liabilities
- Other items(1)(5) 1,076 46 99 23 39 27 42 92 4,287 5,731
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
26,296 11,429 4,405 5,893 3,866 8,234 17,440 17,911 18,627 114,101
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Subordinated debt - - - - - - - 1,499 - 1,499
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Equity 21,746 21,746
65,366 25,151 18,058 16,903 13,765 20,640 39,048 27,925 176,884 403,740
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Off-balance-sheet
commitments
Letters of guarantee
and
documentary letters
of credit 180 1,451 1,338 982 1,398 1,292 138 - - 6,779
Credit card
receivables(6) 9,337 9,337
Backstop liquidity
and credit
enhancement
facilities(7) - 15 5,552 15 - - - - 3,125 8,707
Commitments to extend
credit(8) 3,126 9,205 6,179 6,678 3,270 4,066 3,186 39 46,368 82,117
Obligations related
to:
Lease commitments(9) 1 1 2 2 2 6 9 8 - 31
Other contracts(10) 38 42 47 46 47 21 34 - 102 377
====== ====== ====== ====== ====== ====== ====== ====== ========= =======
(1) Amounts payable upon demand or notice are considered to have no specified maturity.
(2) The Deposits item is presented in greater detail than it is
on the Consolidated Balance Sheet.
(3) Amounts are disclosed according to the residual contractual
maturity of the underlying security.
(4) These amounts mainly include liabilities related to the securitization of mortgage loans.
(5) The Other liabilities item is presented in greater detail
than it is on the Consolidated Balance Sheet.
(6) These amounts are unconditionally revocable at the Bank's discretion at any time.
(7) In the event of payment on one of the backstop liquidity
facilities, the Bank will receive as collateral government bonds in
an amount up to $5.6 billion.
(8) These amounts include $44.8 billion that is unconditionally
revocable at the Bank's discretion at any time.
(9) These amounts include leases for which the underlying asset
is of low value and leases other than for real estate of less than
one year.
(10) These amounts include $0.2 billion in contractual
commitments related to the head office building under
construction.
As at October 31, 2021(1)
Over Over Over Over Over Over
1 3 6 9 1 2
1 month months months months year years
month to to to to to to Over No
or 3 6 9 12 2 5 5 specified
less months months months months years years years maturity Total
Assets
Cash and deposits
with financial
institutions 7,510 334 374 146 368 - - - 25,147 33,879
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Securities
At fair value
through
profit or loss 1,946 1,929 1,061 702 792 3,037 6,454 9,410 59,480 84,811
At fair value
through
other
comprehensive
income 1 - 1 624 63 227 4,867 3,183 617 9,583
At amortized cost 1 181 213 425 804 3,589 5,865 832 - 11,910
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
1,948 2,110 1,275 1,751 1,659 6,853 17,186 13,425 60,097 106,304
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Securities
purchased
under
reverse
repurchase
agreements and
securities
borrowed 1,113 1,199 59 - 371 619 - - 4,155 7,516
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Loans (2)
Residential
mortgage 702 965 1,581 2,587 2,320 8,850 48,455 6,504 578 72,542
Personal 214 315 512 877 843 3,527 16,056 4,308 14,401 41,053
Credit card 2,150 2,150
Business and
government 16,842 3,986 2,614 3,508 3,253 6,290 10,180 3,605 10,828 61,106
Customers '
liability
under
acceptances 6,200 618 18 - - - - - - 6,836
Allowances for
credit
losses (998) (998)
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
23,958 5,884 4,725 6,972 6,416 18,667 74,691 14,417 26,959 182,689
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Other
Derivative
financial
instruments 1,868 3,678 1,019 2,190 823 1,865 2,491 2,550 - 16,484
Investments in
associates
and
joint ventures 225 225
Premises and
equipment 1,216 1,216
Goodwill 1,504 1,504
Intangible assets 1,274 1,274
Other assets(2) 1,829 137 148 129 56 727 88 17 1,399 4,530
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
3,697 3,815 1,167 2,319 879 2,592 2,579 2,567 5,618 25,233
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
38,226 13,342 7,600 11,188 9,693 28,731 94,456 30,409 121,976 355,621
==============
(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) Amounts collectible on demand are considered to have no specified maturity.
Note 29 - Management of the Risks Associated With Financial
Instruments (cont.)
As at October 31, 2021
Over Over Over Over Over Over
1 3 6 9 1 2
1 month months months months year years
month to to to to to to Over No
or 3 6 9 12 2 5 5 specified
less months months months months years years years maturity Total
================== ====== ====== ====== ====== ====== ====== ====== ====== ========= =======
Liabilities and
equity
Deposits (1)(2)
Personal 1,396 3,433 4,596 2,194 1,945 4,157 6,468 4,914 40,973 70,076
Business and
government 24,814 12,796 10,782 5,785 2,691 5,453 10,054 4,765 90,730 167,870
Deposit-taking
institutions 1,011 128 38 66 23 1 - 36 1,689 2,992
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
27,221 16,357 15,416 8,045 4,659 9,611 16,522 9,715 133,392 240,938
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Other
Acceptances 6,200 618 18 - - - - - - 6,836
Obligations related
to securities sold
short(3) 186 123 182 175 22 3,099 3,743 4,797 7,939 20,266
Obligations related
to
securities sold
under
repurchase
agreements
and
securities loaned 7,330 2,668 3,633 246 - - - - 3,416 17,293
Derivative financial
instruments 3,048 3,061 1,171 1,921 880 1,485 3,273 4,528 - 19,367
Liabilities related
to transferred
receivables(4) - 1,688 1,523 1,054 411 5,501 10,771 4,222 - 25,170
Securitization -
Credit card(5) 36 - - - - 28 48 - - 112
Lease liabilities(5) 7 15 21 22 22 88 214 186 - 575
Other liabilities
- Other items(1)(5) 640 477 117 125 100 41 25 75 4,014 5,614
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
17,447 8,650 6,665 3,543 1,435 10,242 18,074 13,808 15,369 95,233
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Subordinated debt - - - - - - - 768 - 768
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Equity (6) 18,682 18,682
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
44,668 25,007 22,081 11,588 6,094 19,853 34,596 24,291 167,443 355,621
Off-balance-sheet
commitments
Letters of guarantee
and
documentary letters
of credit 320 1,561 828 2,092 793 575 74 - - 6,243
Credit card
receivables(7) 9,081 9,081
Backstop liquidity
and credit
enhancement
facilities(8) 15 - 4,502 15 - - - - 2,732 7,264
Commitments to extend
credit(9) 2,848 9,139 6,195 6,737 3,872 3,105 3,667 48 42,372 77,983
Obligations related
to:
Lease
commitments(10) 1 1 1 1 1 1 3 3 - 12
Other contracts(11) 54 58 50 48 46 152 19 - 124 551
(1) Amounts payable upon demand or notice are considered to have no specified maturity.
(2) The Deposits item is presented in greater detail than it is
on the Consolidated Balance Sheet.
(3) Amounts have been disclosed according to the residual
contractual maturity of the underlying security.
(4) These amounts mainly include liabilities related to the securitization of mortgage loans.
(5) The Other liabilities item is presented in greater detail
than it is on the Consolidated Balance Sheet.
(6) 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.
(7) These amounts are unconditionally revocable at the Bank's discretion at any time.
(8) In the event of payment on one of the backstop liquidity
facilities, the Bank will receive as collateral government bonds in
an amount up to $4.5 billion.
(9) These amounts include $40.8 billion that is unconditionally
revocable at the Bank's discretion at any time.
(10) These amounts include leases for which the underlying asset
is of low value and leases other than for real estate of less than
one year.
(11) These amounts include $0.3 billion in contractual
commitments related to the head office building under
construction.
Note 30 - Segment Disclosures
The Bank carries out its activities in four business segments,
which are defined below. For presentation purposes, other
activities are grouped in the Other heading. Each reportable
segment is distinguished by services offered, type of clientele,
and marketing strategy. The presentation of segment disclosures is
consistent with the presentation adopted by the Bank for the fiscal
year beginning November 1, 2021. This presentation reflects the
fact that the loan portfolio of borrowers in the Oil and gas and
Pipelines sectors as well as related activities, which had
previously been reported in the Personal and Commercial segment, is
now reported in the Financial Markets segment. The Bank made this
change to better align the monitoring of its activities with its
management structure.
Personal and Commercial
The Personal and Commercial segment encompasses the banking,
financing, and investing services offered to individuals, advisors
and businesses as well as insurance operations.
Wealth Management
The Wealth Management segment comprises investment solutions,
trust services, banking services, lending services and other wealth
management solutions offered through internal and third-party
distribution networks.
Financial Markets
The Financial Markets segment encompasses corporate banking and
investment banking and financial solutions for large and mid-size
corporations, public sector organizations, and institutional
investors.
U.S. Specialty Finance and International (USSF&I)
The USSF&I segment encompasses the specialty finance
expertise provided by the Credigy subsidiary; the activities of the
ABA Bank subsidiary, which offers financial products and services
to individuals and businesses in Cambodia; and the activities of
targeted investments in certain emerging markets.
Other
This heading encompasses treasury activities; liquidity
management; Bank funding; asset/liability management activities;
the activities of the Flinks subsidiary, a fintech company
specialized in financial data aggregation and distribution ;
certain specified items; and the unallocated portion of corporate
units.
The segment disclosures are prepared in accordance with the
accounting policies described in Note 1 to these consolidated
financial statements, except for the net interest income,
non-interest income, and income taxes (recovery) of the operating
segments, which are presented on a taxable equivalent basis.
Taxable equivalent basis is a calculation method that consists in
grossing up certain tax-exempt income by the amount of income tax
that would have otherwise been payable. The effect of these
adjustments is reversed under the Other heading. Operations support
charges are allocated to each operating segment presented in the
business segment results. The Bank assesses performance based on
the net income attributable to the Bank's shareholders and holders
of other equity instruments . Intersegment revenues are recognized
at the exchange amount.
Note 30 - Segment Disclosures (cont.)
Results by Business Segment
Year ended
October
31(1)
Personal Wealth Financial
and Commercial Management Markets USSF&I Other Total
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
Net interest
income(2) 2,865 2,547 594 446 1,258 1,262 1,090 907 (536) (379) 5,271 4,783
Non-interest
income(2)(3) 1,169 1,068 1,781 1,720 1,210 956 20 94 201 306 4,381 4,144
------- ------- ----- ----- ------- ------- ------ ------ ------ ------ ------- -------
Total revenues 4,034 3,615 2,375 2,166 2,468 2,218 1,110 1,001 (335) (73) 9,652 8,927
Non-interest
expenses 2,149 2,008 1,391 1,293 1,022 906 344 315 324 381 5,230 4,903
------- ------- ----- ----- ------- ------- ------ ------ ------ ------ ------- -------
Income before
provisions for
credit losses
and income taxes 1,885 1,607 984 873 1,446 1,312 766 686 (659) (454) 4,422 4,024
Provisions for
credit losses 97 40 3 1 (23) (24) 66 (15) 2 - 145 2
------- ------- ----- ----- ------- ------ ------ ------ ------ ------- -------
Income before
income taxes
(recovery) 1,788 1,567 981 872 1,469 1,336 700 701 (661) (454) 4,277 4,022
Income taxes
(recovery)(2) 474 416 260 231 389 353 143 146 (372) (264) 894 882
------- ------- ----- ----- ------- ------- ------ ------ ------ ------- -------
Net income 1,314 1,151 721 641 1,080 983 557 555 (289) (190) 3,383 3,140
Non-controlling
interests - - - - - - - - (1) - (1) -
------- ------- ----- ----- ------- ------- ------ ------ ------ -------
Net income
attributable
to the
Bank's
shareholders
and
holders of other
equity
instruments 1,314 1,151 721 641 1,080 983 557 555 (288) (190) 3,384 3,140
------- ------- ----- ----- ------- ------- ------ ------ ------ ------- -------
Average assets(4) 140,514 126,637 8,226 7,146 154,349 151,240 18,890 16,150 71,868 62,333 393,847 363,506
------- ------- ----- ----- ------- ------- ------ ------ ------ ------ ------- -------
Total assets 146,915 135,209 8,363 7,914 157,803 141,007 21,217 17,393 69,442 54,098 403,740 355,621
(1) For the year ended October 31, 2021, certain amounts were
reclassified, in particular amounts of the loan portfolio of
borrowers in the Oil and gas and Pipelines sectors as well as
related activities, which were transferred from the Personal and
Commercial segment to the Financial Markets segment. Moreover,
certain amounts have been adjusted to reflect an accounting policy
change applicable to cloud computing arrangements (for additional
information, see Note 1 to these consolidated financial
statements).
(2) For the year ended October 31, 2022, Net interest income was
grossed up by $ 234 million ($ 181 million in 2021), Non-interest
income was grossed up by $ 48 million ($ 8 million in 2021), and an
equivalent amount was recognized in Income taxes (recovery). The
effects of these adjustments have been reversed under the Other
heading.
(3) For the Other heading of segment results, for the year ended
October 31, 2021, the Non-interest income item had included a $33
million gain following a remeasurement of the previously held
equity interest in Flinks and a $30 million loss related to the
fair value measurement of the Bank's equity interest in
AfrAsia.
(4) Represents an average of the daily balances for the period,
which is also the basis on which segment assets are reported in the
business segments.
Results by Geographic Segment
Year ended October 31 (1)
======= ======= ====== ====== ====== =======
Canada United States Other Total
2022 2021 2022 2021 2022 2021 2022 2021
======= ======= ====== =======
Net interest income 3,758 3,592 773 623 740 568 5,271 4,783
Non-interest income(2) 4,299 3,992 18 106 64 46 4,381 4,144
------- ------- ------ ------ ------ -------
Total revenues 8,057 7,584 791 729 804 614 9,652 8,927
Non-interest expenses 4,760 4,478 209 203 261 222 5,230 4,903
------- ------- ------ ------ ------ -------
Income before provisions for
credit losses and income
taxes 3,297 3,106 582 526 543 392 4,422 4,024
Provisions for credit losses 79 17 35 (41) 31 26 145 2
------- ------- ------ ------ ------ -------
Income before income taxes 3,218 3,089 547 567 512 366 4,277 4,022
Income taxes 723 674 67 133 104 75 894 882
------- ------- ------ ------ ------ -------
Net income 2,495 2,415 480 434 408 291 3,383 3,140
Non-controlling interests (1) - - - - - (1) -
------- ------ ------ ------
Net income attributable to
the Bank's shareholders and
holders of other equity
instruments 2,496 2,415 480 434 408 291 3,384 3,140
------- ------- ------ ------ ------ -------
Average assets(3) 324,415 300,964 29,988 27,301 39,444 35,241 393,847 363,506
------- ------- ------ ------ ------ -------
Total assets 336,215 300,833 27,986 23,834 39,539 30,954 403,740 355,621
======= ======= ====== =======
(1) For the year ended October 31, 2021, certain amounts have
been adjusted to reflect an accounting policy change applicable to
cloud computing arrangements. For additional information, see Note
1 to these consolidated financial statements.
(2) For the year ended October 31, 2021, the Non-interest income
item recorded in Canada included a $33 million gain following a
remeasurement of the previously held equity interest in Flinks and
a $30 million loss related to the fair value measurement of the
Bank's equity interest in AfrAsia.
(3) Represents an average of the daily balances for the period.
Note 31 - Acquisition
Acquisition of Flinks Technology Inc .
On September 8, 2021, the Bank finalized the acquisition of
Flinks Technology Inc. (Flinks), a leading fintech company
specialized in financial data aggregation and distribution, in
which the Bank had already been holding a 30.2% equity interest.
Flinks provides services to a wide North American fintech ecosystem
and offers attractive data technology solutions. The acquisition
strategically positions the Bank in a high-growth market so that it
can continue enhancing customer experiences and benefitting from
future technology-driven innovations . At the time of acquisition,
the amount of which was $73 million in cash for voting preferred
shares, the Bank was holding an 82.9% equity interest in Flinks,
thereby giving it control thereover. Immediately after the
acquisition, the Bank made an additional $30 million investment in
voting preferred shares, giving the Bank an 85.9% equity interest
in Flinks. The amount of the $73 million purchase price, of the
fair value of the previously held equity interest, and of the
estimated value of the non-controlling interest established on the
acquisition date, exceeded the fair value of the net assets
acquired by $101 million. This excess amount was recorded on the
Consolidated Balance Sheet as goodwill and mainly represents the
future profits expected from Flinks given its favourable position
in this growth market. The goodwill is not deductible for tax
purposes. The previously held equity interest, accounted for as an
associate, was remeasured at fair value, generating a $33 million
non-taxable remeasurement gain that was reported in the
Non-interest income - Other item of the Consolidated Statement of
Income for the year ended October 31, 2021. With respect to the
presentation of financial results according to business segment,
the gain on remeasurement of the previously held equity interest as
well as the financial results of Flinks are being reported in the
Other heading of segment results. The financial results of Flinks
have been consolidated into the Bank's financial statements since
September 8, 2021.
During the measurement period ended September 8, 2022, the final
measurement of Flinks's net assets and the final calculation of
working capital adjustments had no significant impact on
goodwill.
Note 32 - Event After the Consolidated Balance Sheet Date
Repurchase of Common Shares
On November 29, 2022, the Bank's Board of Directors approved a
normal course issuer bid, beginning December 12, 2022, to
repurchase for cancellation up to 7,000,000 common shares
(representing approximately 2.08% of its outstanding common shares)
over the 12-month period ending December 11, 2023. Any repurchase
through the Toronto Stock Exchange will be done at market prices.
The common shares may also be repurchased through other means
authorized by the Toronto Stock Exchange and applicable
regulations, including private agreements or share repurchase
programs under issuer bid exemption orders issued by the securities
regulators. A private purchase made under an exemption order issued
by a securities regulator will be done at a discount to the
prevailing market price. The amounts that are paid above the
average book value of the common shares are charged to Retained
earnings. This normal course issuer bid is subject to the approval
of OSFI and the Toronto Stock Exchange (TSX).
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END
FR FLFFELDLIVIF
(END) Dow Jones Newswires
November 30, 2022 11:13 ET (16:13 GMT)
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