TIDM32SS
RNS Number : 4436V
National Bank of Canada
01 December 2023
Regulatory Announcement
2023 Management's Discussion and Analysis (Part 1)
National Bank of Canada (the "Bank") announces publication of
its 2023 Annual Report, including the Management's Discussion and
Analysis thereon (the "2023 MD&A"). The 2023 MD&A has been
uploaded to the National Storage Mechanism and will shortly be
available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
and is available on the Bank's website as part of the 2023 Annual
Report at: https://www.nbc.ca/about-us/investors.html .
To view the full PDF of the 2023 MD&A, the 2023 Annual
Report and the 2023 Annual CEO and CFO Certifications please click
on the following link:
http://www.rns-pdf.londonstockexchange.com/rns/4436V_1-2023-12-1.pdf
http://www.rns-pdf.londonstockexchange.com/rns/4436V_2-2023-12-1.pdf
http://www.rns-pdf.londonstockexchange.com/rns/4436V_3-2023-12-1.pdf
Management's Discussion
and Analysis
November 30, 2023
The following Management's Discussion and Analysis (MD&A)
presents the financial condition and operating results of National
Bank of Canada (the Bank). This analysis was prepared in accordance
with the requirements set out in National Instrument 51-102
Continuous Disclosure Obligations, released by the Canadian
Securities Administrators (CSA). It is based on the audited annual
consolidated financial statements for the year ended October 31,
2023 (the consolidated financial statements) and prepared in
accordance with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB),
unless otherwise indicated. IFRS represent Canadian generally
accepted accounting principles (GAAP). This MD&A should be read
in conjunction with the consolidated financial statements and
accompanying notes for the year ended October 31, 2023. All amounts
are presented in Canadian dollars. Additional information about the
Bank, including the Annual Information Form, can be obtained from
the Bank's website at nbc.ca and SEDAR+'s website at sedarplus.ca.
The information found in the various documents and reports
published by the Bank or the information available on the Bank's
website and mentioned herein is not and should not be considered
incorporated by reference into the 2023 Annual Report, the
Management's Discussion and Analysis, or the Consolidated Financial
Statements, unless expressly stated otherwise.
Financial Reporting Method 14 Quarterly Financial Information 47
Analysis of the Consolidated
Financial Disclosure 20 Balance Sheet 48
Securitization and Off-Balance-Sheet
Overview 21 Arrangements 51
Financial Analysis 25 Capital Management 53
Business Segment Analysis 28 Risk Management 62
Critical Accounting Policies
Personal and Commercial 29 and Estimates 107
Wealth Management 33 Accounting Policy Changes 113
Financial Markets 36 Future Accounting Policy Changes 113
U.S. Specialty Finance
and International (USSF&I) 41 Additional Financial Information 114
Other 46 Glossary 124
Caution Regarding Forward-Looking Statements
Certain statements in this document are forward-looking
statements. All such statements are made in accordance with
applicable securities legislation in Canada and the United States.
The forward-looking statements in this document may include, but
are not limited to, statements made in the Message From the
President and Chief Executive Officer and other statements about
the economy, market changes, the Bank's objectives, outlook, and
priorities for fiscal year 2024 and beyond, the strategies or
actions that will be taken to achieve them, expectations for the
Bank's financial condition, its activities, the regulatory
environment in which it operates, its environmental, social, and
governance targets and commitments, and certain risks to which the
Bank is exposed. These forward-looking statements are typically
identified by verbs or words such as "outlook", "believe",
"foresee", "forecast", "anticipate", "estimate", "project",
"expect", "intend" and "plan", in their future or conditional
forms, notably verbs such as "will", "may", "should", "could" or
"would" as well as similar terms and expressions.
Such forward-looking statements are made for the purpose of
assisting the holders of the Bank's securities in understanding the
Bank's financial position and results of operations as at and for
the periods ended on the dates presented, as well as the Bank's
vision, strategic objectives, and performance targets, and may not
be appropriate for other purposes. These forward-looking statements
are based on current expectations, estimates, assumptions and
intentions and are subject to uncertainty and inherent risks, many
of which are beyond the Bank's control. There is a strong
possibility that the Bank's express or implied predictions,
forecasts, projections, expectations, or conclusions will not prove
to be accurate, that its assumptions may not be confirmed and that
its vision, strategic objectives, and performance targets will not
be achieved. The Bank cautions investors that these forward-looking
statements are not guarantees of future performance and that actual
events or results may differ significantly from these statements
due to a number of factors. Thus, the Bank recommends that readers
not place undue reliance on these forward-looking statements, as a
number of factors could cause actual results to differ
significantly from the expectations, estimates, or intentions
expressed in these forward-looking statements. Investors and others
who rely on the Bank's forward-looking statements should carefully
consider the factors listed below as well as the uncertainties they
represent and the risk they entail. Except as required by law, the
Bank does not undertake to update any forward-looking statements,
whether written or oral, that may be made from time to time, by it
or on its behalf.
Assumptions about the performance of the Canadian and U.S.
economies in 2024 and how that performance will affect the Bank's
business are among the factors considered in setting the Bank's
strategic priorities and objectives, including provisions for
credit losses. These assumptions appear in the Economic Review and
Outlook section and, for each business segment, in the Economic and
Market Review sections, and may be updated in the quarterly reports
to shareholders.
The forward-looking statements made in this document are based
on a number of assumptions and are subject to risk factors, many of
which are beyond the Bank's control and the impacts of which are
difficult to predict. These risk factors include, among others, the
general economic environment and financial market conditions in
Canada, the United States, and the other countries where the Bank
operates; the impact of upheavals in the U.S. banking industry;
exchange rate and interest rate fluctuations; inflation; global
supply chain disruptions; higher funding costs and greater market
volatility; changes made to fiscal, monetary, and other public
policies; changes made to regulations that affect the Bank's
business; geopolitical and sociopolitical uncertainty; climate
change, including physical risks and those related to the
transition to a low-carbon economy, and the Bank's ability to
satisfy stakeholder expectations on environmental and social
issues; significant changes in consumer behaviour; the housing
situation, real estate market, and household indebtedness in
Canada; the Bank's ability to achieve its key short-term priorities
and long-term strategies; the timely development and launch of new
products and services; the Bank's ability to recruit and retain key
personnel; technological innovation, including advances in
artificial intelligence and the open banking system, and heightened
competition from established companies and from competitors
offering non-traditional services; changes in the performance and
creditworthiness of the Bank's clients and counterparties; the
Bank's exposure to significant regulatory matters or litigation;
changes made to the accounting policies used by the Bank to report
financial information, including the uncertainty inherent to
assumptions and critical accounting estimates; changes to tax
legislation in the countries where the Bank operates; changes made
to capital and liquidity guidelines as well as to the presentation
and interpretation thereof; changes to the credit ratings assigned
to the Bank by financial and extra-financial rating agencies;
potential disruptions to key suppliers of goods and services to the
Bank; the potential impacts of disruptions to the Bank's
information technology systems, including cyberattacks as well as
identity theft and theft of personal information; the risk of
fraudulent activity; and possible impacts of major events affecting
the economy, market conditions, or the Bank's outlook, including
international conflicts, natural disasters, public health crises,
and the measures taken in response to these events.
The foregoing list of risk factors is not exhaustive, and the
forward-looking statements made in this document are also subject
to credit risk, market risk, liquidity and funding risk,
operational risk, regulatory compliance risk, reputation risk,
strategic risk, and social and environmental risk as well as
certain emerging risks or risks deemed significant. Additional
information about these risk factors is provided in the Risk
Management section beginning on page 62 of the 2023 Annual Report
and may be updated in the quarterly shareholder's reports
subsequently published.
Financial Reporting Method
The Bank's consolidated financial statements are prepared in
accordance with IFRS, as issued by the IASB. The financial
statements also comply with section 308(4) of the Bank Act
(Canada), which states that, except as otherwise specified by the
Office of the Superintendent of Financial Institutions (Canada)
(OSFI), the consolidated financial statements are to be prepared in
accordance with IFRS, which represent Canadian GAAP. None of the
OSFI accounting requirements are exceptions to IFRS.
The presentation of segment disclosures is consistent with the
presentation adopted by the Bank for the fiscal year beginning
November 1, 2022. This presentation reflects a revision to the
method used for the sectoral allocation of technology investment
expenses, which are now immediately allocated to the various
business segments, whereas certain expenses, notably costs incurred
during the research phase of projects, had previously been recorded
in the Other heading of segment results. This revision is
consistent with the accounting policy change related to cloud
computing arrangements applied in fiscal 2022. For fiscal 2022,
certain amounts in the Business Segment Analysis section were
adjusted to reflect this revision.
Non-GAAP and Other Financial Measures
The Bank uses a number of financial measures when assessing its
results and measuring overall performance. Some of these financial
measures are not calculated in accordance with GAAP. Regulation
52-112 Respecting Non-GAAP and Other Financial Measures Disclosure
(Regulation 52-112) prescribes disclosure requirements that apply
to the following measures used by the Bank:
-- non-GAAP financial measures;
-- non-GAAP ratios;
-- supplementary financial measures;
-- capital management measures.
Non-GAAP Financial Measures
The Bank uses non-GAAP financial measures that do not have
standardized meanings under GAAP and that therefore may not be
comparable to similar measures used by other companies. Presenting
non-GAAP financial measures helps readers to better understand how
management analyzes results, shows the impacts of specified items
on the results of the reported periods, and allows readers to
better assess results without the specified items if they consider
such items not to be reflective of the underlying performance of
the Bank's operations. In addition, like many other financial
institutions, the Bank uses the taxable equivalent basis to
calculate net interest income, non-interest income, and income
taxes. This calculation method consists of grossing up certain
revenues taxed at lower rates (notably dividends) by the income tax
to a level that would make it comparable to revenues from taxable
sources in Canada. An equivalent amount is added to income taxes.
This adjustment is necessary in order to perform a uniform
comparison of the return on different assets irrespective of their
tax treatment.
The key non-GAAP financial measures used by the Bank to analyze
its results are described below, and a quantitative reconciliation
of these measures is presented in the tables in the Reconciliation
of Non-GAAP Financial Measures section on pages 18 and 19 and in
the Consolidated Results table on page 25. Note that, for the year
ended October 31, 2023, the following items were excluded from
results: a $91 million gain ($67 million net of income taxes)
related to the fair value remeasurement of an equity interest, $86
million in impairment losses ($62 million net of income taxes) on
intangible assets and premises and equipment, $35 million in
litigation expenses ($26 million net of income taxes), a $25
million expense ($18 million net of income taxes) related to the
retroactive impact of changes to the Excise Tax Act, $15 million in
provisions for contracts ($11 million net of income taxes), and a
$24 million income tax expense related to the Canadian government's
2022 tax measures. No specified items had been excluded from
results for the year ended October 31, 2022.
Adjusted Net Interest Income
This item represents net interest income on a taxable equivalent
basis and excluding specified items, if any. A taxable equivalent
is added to net interest income so that the performance of the
various assets can be compared irrespective of their tax treatment,
and specified items, if any, are excluded so that net interest
income can be better evaluated by excluding items that management
believes do not reflect the underlying financial performance of the
Bank's operations.
Adjusted Non-Interest Income
This item represents non -interest income on a taxable
equivalent basis and excluding specified items, if any. A taxable
equivalent is added to non-interest income so that the performance
of the various assets can be compared irrespective of their tax
treatment, and specified items, if any, are excluded so that
non--interest income can be better evaluated by excluding items
that management believes do not reflect the underlying financial
performance of the Bank's operations.
Adjusted Total Revenues
This item represents total revenues on a taxable equivalent
basis and excluding specified items, if any. It consists of
adjusted net interest income and adjusted non-interest income. A
taxable equivalent is added to total revenues so that the
performance of the various assets can be compared irrespective of
their tax treatment, and specified items, if any, are excluded so
that total revenues can be better evaluated by excluding items that
management believes do not reflect the underlying financial
performance of the Bank's operations.
Adjusted Non -Interest Expenses
This item represents non-interest expenses excluding specified
items, if any. Specified items, if any, are excluded so that
non-interest expenses can be better evaluated by excluding items
that management believes do not reflect the underlying financial
performance of the Bank's operations.
Adjusted Income Before Provisions for Credit Losses and Income
Taxes
This item represents income before provisions for credit losses
and income taxes on a taxable equivalent basis and excluding
specified items, if any. It also represents the difference between
adjusted total revenues and adjusted non-interest expenses. A
taxable equivalent is added to income before provisions for credit
losses and income taxes so that the performance of the various
assets can be compared irrespective of their tax treatment, and
specified items, if any, are excluded so that income before
provisions for credit losses and income taxes can be better
evaluated by excluding items that management believes do not
reflect the underlying financial performance of the Bank's
operations.
Adjusted Income Taxes
This item represents income taxes on a taxable equivalent basis
and excluding income taxes on specified items, if any.
Adjusted Net Income
This item represents net income excluding specified items, if
any. Specified items, if any, are excluded so that net income can
be better evaluated by excluding items that management believes do
not reflect the underlying financial performance of the Bank's
operations.
Adjusted Net income Attributable to Common Shareholders
This item represents net income attributable to common
shareholders excluding specified items, if any. Specified items, if
any, are excluded so that net income attributable to common
shareholders can be better evaluated by excluding items that
management believes do not reflect the underlying financial
performance of the Bank's operations.
Adjusted Basic Earnings Per Share
This item represents basic earnings per share excluding
specified items, if any. Specified items, if any, are excluded so
that basic earnings per share can be better evaluated by excluding
items that management believes do not reflect the underlying
financial performance of the Bank's operations.
Adjusted Diluted Earnings Per Share
This item represents diluted earnings per share excluding
specified items, if any. Specified items, if any, are excluded so
that diluted earnings per share can be better evaluated by
excluding items that management believes do not reflect the
underlying financial performance of the Bank's operations.
The Bank also uses the below-described measures to assess its
results. A quantitative reconciliation of these non-GAAP financial
measures is presented in the Reconciliation of Non-GAAP Financial
Measures section on page 19 and in Table 5 on page 117.
Adjusted Non-Trading Net Interest Income
This item represents non-trading net interest income on a
taxable equivalent basis. It includes revenues related to financial
assets and financial liabilities associated with non-trading
activities, net of interest expenses and interest income related to
the financing of these financial assets and liabilities, and is
used to calculate adjusted non-trading net interest margin. A
taxable equivalent is added to non-trading net interest income so
that the performance of the various assets can be compared
irrespective of their tax treatment .
Net Interest Income From Trading Activities on a Taxable
Equivalent Basis
This item represents net interest income from trading activities
plus a taxable equivalent. It comprises dividends related to
financial assets and liabilities associated with trading activities
and certain interest income related to the financing of these
financial assets and liabilities, net of interest expenses. A
taxable equivalent is added to net interest income from trading
activities so that the performance of the various assets can be
compared irrespective of their tax treatment.
Non-Interest Income Related to Trading Activities on a Taxable
Equivalent Basis
This item represents non-interest income related to trading
activities to which a taxable equivalent amount is added. It
consists of realized and unrealized gains and losses as well as
interest income on securities measured at fair value through profit
or loss, income from held-for-trading derivative financial
instruments, changes in the fair value of loans at fair value
through profit or loss, changes in the fair value of financial
instruments designated at fair value through profit or loss,
realized and unrealized gains and losses as well as interest
expense on obligations related to securities sold short, certain
commission income as well as other trading activity revenues, and
any applicable transaction costs. A taxable equivalent amount is
added to the non-interest income related to trading activities such
that the returns of different assets can be compared irrespective
of their tax treatment.
Trading Activity Revenues on a Taxable Equivalent Basis
This item represents trading activity revenues plus a taxable
equivalent. These revenues comprise dividends related to financial
assets and liabilities associated with trading activities; certain
interest income related to the financing of these financial assets
and liabilities, net of interest expenses; 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; realized and unrealized gains and losses as well as
interest expense on obligations related to securities sold short;
certain commission income as well as other trading activity
revenues, and any applicable transaction costs. A taxable
equivalent is added to trading activity revenues so that the
performance of the various assets can be compared irrespective of
their tax treatment.
Non-GAAP Ratios
The Bank uses non-GAAP ratios that do not have standardized
meanings under GAAP and that may therefore not be comparable to
similar measures used by other companies. A non-GAAP ratio is a
ratio in which at least one component is a non-GAAP financial
measure. The Bank uses non-GAAP ratios to present aspects of its
financial performance or financial position .
The key non-GAAP ratios used by the Bank are described
below.
Adjusted Return on Common Shareholders' Equity (ROE)
This item represents ROE excluding specified items, if any. It
is adjusted net income attributable to common shareholders
expressed as a percentage of average equity attributable to common
shareholders. It is a general measure of the Bank's efficiency in
using equity. Specified items, if any, are excluded so that ROE can
be better evaluated by excluding items that management believes do
not reflect the underlying financial performance of the Bank's
operations.
Adjusted Dividend Payout Ratio
This item represents the dividend payout ratio excluding
specified items, if any. It is dividends on common shares (per
share amount) expressed as a percentage of adjusted basic earnings
per share. This ratio is a measure of the proportion of earnings
that is paid out to shareholders in the form of dividends.
Specified items, if any, are excluded so that the dividend payout
ratio can be better evaluated by excluding items that management
believes do not reflect the underlying financial performance of the
Bank's operations.
Adjusted Operating Leverage
This item represents operating leverage on a taxable equivalent
basis and excluding specified items, if any. It is the difference
between the growth rate of adjusted total revenues and the growth
rate of adjusted non-interest expenses, and it measures the
sensitivity of the Bank's results to changes in its revenues.
Adjusted operating leverage is presented on a taxable equivalent
basis so that the performance of the various assets can be compared
irrespective of their tax treatment, and specified items, if any,
are excluded so that the efficiency ratio can be better evaluated
by excluding items that management believes do not reflect the
underlying financial performance of the Bank's operations.
Adjusted Efficiency Ratio
This item represents the efficiency ratio on a taxable
equivalent basis and excluding specified items, if any. The ratio
represents adjusted non-interest expenses expressed as a percentage
of adjusted total revenues. It measures the efficiency of the
Bank's operations. The adjusted efficiency ratio is presented on a
taxable equivalent basis so that the performance of the various
assets can be compared irrespective of their tax treatment, and
specified items, if any, are excluded so that the efficiency ratio
can be better evaluated by excluding items that management believes
do not reflect the underlying financial performance of the Bank's
operations.
Adjusted Net Interest Margin, Non-Trading
This item represents the non-trading net interest margin on a
taxable equivalent basis. It is calculated by dividing net interest
income related to adjusted non-trading activities by average
non-trading interest-bearing assets. This ratio is a measure of the
profitability of non-trading activities. The adjusted non-trading
net interest margin includes adjusted non-trading net interest
income, which includes a taxable equivalent amount so that the
performance of the various assets can be compared irrespective of
their tax treatment.
Supplementary Financial Measures
A supplementary financial measure is a financial measure that:
(a) is not reported in the Bank's consolidated financial
statements, and (b) is, or is intended to be, reported periodically
to represent historical or expected financial performance,
financial position, or cash flows. The composition of these
supplementary financial measures is presented in table footnotes or
in the Glossary section on pages 124 to 127 of this MD&A.
Capital Management Measures
The financial reporting framework used to prepare the financial
statements requires disclosure that helps readers assess the Bank's
capital management objectives, policies, and processes, as set out
in IFRS in IAS 1 - Presentation of Financial Statements. The Bank
has its own methods for managing capital and liquidity, and IFRS
does not prescribe any particular calculation method. These
measures are calculated using various guidelines and advisories
issued by OSFI, which are based on the standards, recommendations,
and best practices of the Basel Committee on Banking Supervision
(BCBS), as presented in the following table.
OSFI guideline or advisory Measure
----------------------------------------------- ------------------------------------------------------------
Capital Adequacy Requirements Common Equity Tier 1 (CET1) capital ratio
Tier 1 capital ratio
Total capital ratio
CET1 capital
Tier 1 capital
Tier 2 capital
Total capital
Risk-weighted assets
Maximum credit risk exposure under the Basel asset classes
----------------------------------------------- ------------------------------------------------------------
Leverage Requirements Leverage ratio
Total exposure
----------------------------------------------- ------------------------------------------------------------
Total Loss Absorbing Capacity (TLAC) Key indicators - TLAC requirements
Available TLAC
TLAC ratio
TLAC leverage ratio
----------------------------------------------- ------------------------------------------------------------
Liquidity Adequacy Requirements Liquid asset portfolio
Encumbered assets and unencumbered assets
Liquidity coverage ratio (LCR)
High-quality liquid assets (HQLA)
Cash inflows/outflows and net cash outflows
Net stable funding ratio (NSFR)
Available stable funding items
Required stable funding items
----------------------------------------------- ------------------------------------------------------------
Global Systemically Important Banks (G-SIBs) - G-SIB indicators
Public Disclosure Requirements
----------------------------------------------- ------------------------------------------------------------
Reconciliation of Non-GAAP Financial Measures
Presentation of Results - Adjusted
Year ended October 31
(millions of Canadian dollars) 2023 2022
=============================== =============== =========== ========= ====== ===== ====== =====
Personal Wealth Financial
and Commercial Management Markets USSF&I Other
============================== =============== =========== ========= ====== ===== ====== =====
Net interest income 3,321 778 (1,378) 1,132 (267) 3,586 5,271
Taxable equivalent - - 324 - 8 332 234
Net interest income - Adjusted 3,321 778 (1,054) 1,132 (259) 3,918 5,505
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Non-interest income 1,195 1,743 3,463 77 106 6,584 4,381
Taxable equivalent - - 247 - - 247 48
Gain on the fair value
remeasurement
of an equity interest(1) - - - - (91) (91) -
Non-interest income - Adjusted 1,195 1,743 3,710 77 15 6,740 4,429
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Total revenues - Adjusted 4,516 2,521 2,656 1,209 (244) 10,658 9,934
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Non-interest expenses 2,510 1,534 1,161 402 194 5,801 5,230
Impairment losses on intangible
assets and premises and
equipment(2) (59) (8) (7) - (12) (86) -
Litigation expenses(3) - (35) - - - (35) -
Expense related to changes to
the
Excise Tax Act (4) - - - - (25) (25) -
Provisions for contracts(5) (9) - - - (6) (15) -
Non-interest expenses -
Adjusted 2,442 1,491 1,154 402 151 5,640 5,230
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Income before provisions for
credit
losses and income taxes -
Adjusted 2,074 1,030 1,502 807 (395) 5,018 4,704
Provisions for credit losses 238 2 39 113 5 397 145
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Income before income taxes -
Adjusted 1,836 1,028 1,463 694 (400) 4,621 4,559
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Income taxes 486 271 (170) 146 (96) 637 894
Taxable equivalent - - 571 - 8 579 282
Income taxes on the gain on the
fair value remeasurement
of an equity interest(1) - - - - (24) (24) -
Income taxes on the impairment
losses on intangible assets
and
premises and equipment(2) 17 2 2 - 3 24 -
Income taxes on the litigation - 9 - - - 9 -
expenses(3)
Income taxes on the expense
related
to changes to the Excise Tax
Act
(4) - - - - 7 7 -
Income taxes on the provisions
for contracts(5) 2 - - - 2 4 -
Income taxes related to the
Canadian
government's 2022 tax
measures(6) - - - - (24) (24) -
Income taxes - Adjusted 505 282 403 146 (124) 1,212 1,176
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Net income - Adjusted 1,331 746 1,060 548 (276) 3,409 3,383
Specified items after income
taxes (49) (32) (5) - 12 (74) -
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Net income 1,282 714 1,055 548 (264) 3,335 3,383
Non-controlling interests - - - - (2) (2) (1)
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Net income attributable to the
Bank ' s shareholders
and holders of other equity
instruments 1,282 714 1,055 548 (262) 3,337 3,384
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Net income attributable to the
Bank ' s shareholders
and holders of other equity
instruments
- Adjusted 1,331 746 1,060 548 (274) 3,411 3,384
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Dividends on preferred shares
and
distributions on
limited recourse capital notes 141 107
------------------------------- --------------- ----------- --------- ------ ----- ------ -----
Net income attributable to
common
shareholders - Adjusted 3,270 3,277
=============================== =============== =========== ========= ====== ===== ====== =====
(1) During the year ended October 31, 2023 , the Bank concluded
that it had lost significant influence over TMX Group Limited (TMX)
and therefore ceased using the equity method to account for this
investment. The Bank designated its investment in TMX as a
financial asset measured at fair value through other comprehensive
income in an amount of $191 million. Upon the fair value
measurement, a gain of $91 million ($67 million net of income
taxes) was recorded.
(2) During the year ended October 31, 2023, the Bank recorded
$75 million in intangible asset impairment losses ($54 million net
of income taxes) on technology development for which the Bank has
decided to cease its use or development, and it recorded $11
million in premises and equipment impairment losses ($8 million net
of income taxes) related to right-of-use assets.
(3) During the year ended October 31, 2023, the Bank recorded
$35 million in litigation expenses ($26 million net of income
taxes) to resolve litigations and other disputes arising from
ongoing or potential claims against the Bank.
(4) During the year ended October 31, 2023, the Bank recorded a
$25 million expense ($18 million net of income taxes) related to
the retroactive impact of changes to the Excise Tax Act, indicating
that payment card clearing services rendered by a payment card
network operator are subject to the goods and services tax (GST)
and the harmonized sales tax (HST).
(5) During the year ended October 31, 2023, the Bank recorded
$15 million in charges ($11 million net of income taxes) for
contract termination penalties and for provisions for onerous
contracts.
(6) During the year ended October 31, 2023, the Bank recorded a
$32 million tax expense with respect to the Canada Recovery
Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million
tax recovery related to the 1.5% increase in the statutory tax
rate, which includes the impact related to current and deferred
taxes for fiscal 2022. For additional information on these tax
measures, see the Income Taxes section on page 50.
Presentation of Basic and Diluted Earnings per Share -
Adjusted
Year ended October 31
(Canadian dollars) 2023 2022
============================================================== ====== ====
Basic earnings per share $ 9.47 $9.72
Gain on the fair value remeasurement of an equity interest(1) (0.20) -
Impairment losses on intangible assets and premises
and equipment(2) 0.19 -
Litigation expenses(3) 0.08 -
Expense related to changes to the Excise Tax Act (4) 0.05 -
Provisions for contracts(5) 0.03 -
Income taxes related to the Canadian government's 2022
tax measures(6) 0.07 -
Basic earnings per share - Adjusted $ 9.69 $9.72
---------------------------------------------------------------- ------ ----
Diluted earnings per share $ 9.38 $9.61
Gain on the fair value remeasurement of an equity interest(1) (0.20) -
Impairment losses on intangible assets and premises
and equipment(2) 0.19 -
Litigation expenses(3) 0.08 -
Expense related to changes to the Excise Tax Act (4) 0.05 -
Provisions for contracts(5) 0.03 -
Income taxes related to the Canadian government's 2022
tax measures(6) 0.07 -
Diluted earnings per share - Adjusted $ 9.60 $9.61
================================================================ ====== ====
(1) During the year ended October 31, 2023, the Bank concluded
that it had lost significant influence over TMX and therefore
ceased using the equity method to account for this investment. The
Bank designated its investment in TMX as a financial asset measured
at fair value through other comprehensive income in an amount of
$191 million. Upon the fair value measurement, a gain of $91
million ($67 million net of income taxes) was recorded.
(2) During the year ended October 31, 2023, the Bank recorded
$75 million in intangible asset impairment losses ($54 million net
of income taxes) on technology development for which the Bank has
decided to cease its use or development, and it recorded $11
million in premises and equipment impairment losses ($8 million net
of income taxes) related to right-of-use assets.
(3) During the year ended October 31, 2023, the Bank recorded
$35 million in litigation expenses ($26 million net of income
taxes) to resolve litigations and other disputes arising from
ongoing or potential claims against the Bank.
(4) During the year ended October 31, 2023, the Bank recorded a
$25 million expense ($18 million net of income taxes) related to
the retroactive impact of changes to the Excise Tax Act, indicating
that payment card clearing services rendered by a payment card
network operator are subject to the goods and services tax (GST)
and the harmonized sales tax (HST).
(5) During the year ended October 31, 2023, the Bank recorded
$15 million in charges ($11 million net of income taxes) for
contract termination penalties and for provisions for onerous
contracts.
(6) During the year ended October 31, 2023, the Bank recorded a
$32 million tax expense with respect to the Canada Recovery
Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million
tax recovery related to the 1.5% increase in the statutory tax
rate, which includes the impact related to current and deferred
taxes for fiscal 2022. For additional information on these tax
measures, see the Income Taxes section on page 50.
Presentation of Non-Trading Net Interest Income - Adjusted
Year ended October 31
(millions of Canadian dollars) 2023 2022
==================================================== ======= =====
Net interest income - Adjusted 3,918 5,505
Less: Net interest (loss) income related to trading
activities on a taxable equivalent basis (1,495) 911
----------------------------------------------------- ------- -----
Net interest income, non-trading - Adjusted 5,413 4,594
===================================================== ======= =====
Financial Disclosure
Disclosure Controls and Procedures
The Bank's financial information is prepared with the support of
a set of disclosure controls and procedures (DC&P) that are
implemented by the President and Chief Executive Officer (CEO) and
by the Chief Financial Officer and Executive Vice-President,
Finance (CFO). During the year ended October 31, 2023, in
accordance with National Instrument 52-109 Certification of
Disclosure in Issuers' Annual and Interim Filings (National
Instrument 52-109) released by the CSA, the design and operation of
these controls and procedures were evaluated to determine their
effectiveness.
As at October 31, 2023, the CEO and the CFO confirmed the
effectiveness of the DC&P. These controls are designed to
provide reasonable assurance that the information disclosed in
annual and interim filings and in other reports filed or submitted
under securities legislation is recorded, processed, summarized,
and reported within the time periods specified by that legislation.
These controls and procedures are also designed to ensure that such
information is accumulated and communicated to the Bank's
management, including its signing officers, as appropriate, to
allow for timely decisions regarding disclosure.
This Annual Report was reviewed by the Bank's Disclosure
Committee, Audit Committee, and the Board of Directors (the Board),
which approved it prior to publication.
Internal Control Over Financial Reporting
The internal control over financial reporting (ICFR) is designed
to provide reasonable assurance that the financial information
presented is reliable and that the consolidated financial
statements were prepared in accordance with GAAP, which are based
on IFRS, unless indicated otherwise as explained on pages 14 to 19
of this MD&A. Due to inherent limitations of internal controls,
the ICFR may not prevent or detect all misstatements in a timely
manner.
The CEO and the CFO oversaw the evaluation work performed on the
design and operation of the Bank's ICFR in accordance with National
Instrument 52--109. The ICFR was evaluated in accordance with the
control framework of the Committee of Sponsoring Organizations of
the Treadway Commission (COSO - 2013) for financial controls and in
accordance with the control framework of the Control Objectives for
Information and Related Technologies (COBIT) for information
technology general controls.
Based on the evaluation results, the CEO and CFO concluded, as
at October 31, 2023 , that there are no material weaknesses, that
the ICFR is effective and provides reasonable assurance that the
financial reporting is reliable, and that the Bank's consolidated
financial statements were prepared in accordance with GAAP.
Changes to Internal Control Over Financial Reporting
The CEO and CFO also undertook work that enabled them to
conclude that, during the year ended October 31, 2023, no changes
were made to the ICFR that have materially affected, or are
reasonably likely to materially affect, the design or operation of
the ICFR.
Disclosure Committee
The Bank's Disclosure Committee assists the CEO and CFO by
ensuring the design, implementation, and operation of the DC&P
and ICFR. In so doing, the committee ensures that the Bank is
meeting its disclosure obligations under current regulations and
that the CEO and CFO are producing the requisite
certifications.
Overview
Highlights
As at October 31 or for the year ended October
31
(millions of Canadian dollars, except per
share amounts) 2023 2022 % change
===================================================== === ======= ======= ========
Operating results
Total revenues 10,170 9,652 5
Income before provisions for credit losses
and income taxes 4,369 4,422 (1)
Net income 3,335 3,383 (1)
Net income attributable to the Bank's shareholders
and holders of other equity instruments 3,337 3,384 (1)
Return on common shareholders' equity(1) 16.5 % 18.8%
Dividend payout ratio(1) 42.0 % 36.8%
Earnings per share
Basic $ 9.47 $ 9.72 (3)
Diluted 9.38 9.61 (2)
---------------------------------------------------------- ------- ------- --------
Operating results - Adjusted (2)
Total revenues - Adjusted(2) 10,658 9,934 7
Income before provisions for credit losses
and income taxes - Adjusted(2) 5,018 4,704 7
Net income - Adjusted(2) 3,409 3,383 1
Return on common shareholders' equity - Adjusted(3) 16.8 % 18.8%
Dividend payout ratio - Adjusted(3) 41.1 % 36.8%
Operating leverage - Adjusted(3) (0.5) % 2.1%
Efficiency ratio - Adjusted(3) 52.9 % 52.6%
Earnings per share - Adjusted (2)
Basic $ 9.69 $ 9.72 -
Diluted 9.60 9.61 -
---------------------------------------------------------- ------- ------- --------
Common share information
Dividends declared $ 3.98 $ 3.58 11
Book value(1) 60.68 55.24
Share price
High 103.58 105.44
Low 84.97 83.12
Close 86.22 92.76
Number of common shares (thousands) 338,285 336,582
Market capitalization 29,167 31,221
----------------------------------------------------- --- ------- ------- --------
Balance sheet and off-balance-sheet
Total assets 423,578 403,740 5
Loans and acceptances, net of allowances 225,443 206,744 9
Deposits 288,173 266,394 8
Equity attributable to common shareholders 20,526 18,594 10
Assets under administration(1) 652,631 616,165 6
Assets under management(1) 120,858 112,346 8
----------------------------------------------------- --- ------- ------- --------
Regulatory ratios under Basel III (4)
Capital ratios
Common Equity Tier 1 (CET1) capital ratio 13.5 % 12.7%
Tier 1 16.0 % 15.4%
Total 16.8 % 16.9%
Leverage ratio 4.4 % 4.5%
----------------------------------------------------- --- ------- ------- --------
TLAC ratio(4) 29.2 % 27.7%
TLAC leverage ratio(4) 8.0 % 8.1%
----------------------------------------------------- --- ------- ------- --------
Liquidity coverage ratio (LCR)(4) 155 % 140%
Net stable funding ratio (NSFR)(4) 118 % 117%
----------------------------------------------------- --- ------- ------- --------
Other information
Number of employees - Worldwide (full-time
equivalent) 28,916 27,103 7
Number of branches in Canada 368 378 (3)
Number of banking machines in Canada 944 939 1
===================================================== === ======= ======= ========
(1) See the Glossary section on pages 124 to 127 for details on
the composition of these measures.
(2) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP financial measures.
(3) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP ratios.
(4) See the Financial Reporting Method section on pages 14 to 19
for additional information on capital management measures.
About National Bank
The Bank carries out its activities in four business segments:
Personal and Commercial, Wealth Management, Financial Markets as
well as U.S. Specialty Finance and International (USSF&I),
which comprises the activities of the Credigy Ltd. (Credigy) and
Advanced Bank of Asia Limited (ABA Bank) subsidiaries. Other
operating activities, certain specified items, Treasury activities,
and the operations of the Flinks Technology Inc. (Flinks)
subsidiary are grouped in the Other heading of segment results.
Each reportable segment is distinguished by services offered, type
of clientele, and marketing strategy. For additional information,
see the Business Segment Analysis section of this MD&A.
Objectives and 2023 Results
When setting its objectives, the Bank aims for a realistic
challenge in the prevailing business environment by considering
such factors as changes in banking industry financial results as
well as the Bank's business development plan. When the Bank sets
its medium-term objectives, it does not take into consideration
specified items, if any, which are not reflective of the underlying
financial performance of the Bank's operations. Management
therefore excludes specified items when assessing the Bank's
performance against its objectives.
For fiscal 2023, the Bank recorded $3,335 million in net income
compared to $3,383 million in fiscal 2022, and its diluted earnings
per share stood at $9.38 compared to $9.61 in fiscal 2022. The
Bank's return on common shareholders' equity (ROE) was 16.5% in
fiscal 2023 versus 18.8% in fiscal 2022. As for its adjusted
diluted earnings per share, it stood at $9.60 in fiscal 2023,
relatively stable compared to the $9.61 posted in fiscal 2022.
Furthermore, adjusted ROE was 16.8% in fiscal 2023 compared to
18.8% in fiscal 2022.
The following table compares the Bank's medium-term objectives
with its fiscal 2023 results.
Medium-Term 2023
Objectives (%) Results
Growth in diluted earnings per share - Adjusted(1) 5 - 10 (0.1)%
ROE - Adjusted(2) 15 - 20 16.8%
Dividend payout ratio - Adjusted(2) 40 - 50 41.1%
CET1 capital ratio(3) Strong capital level 13.5%
Leverage ratio(3) Strong capital level 4.4%
The Bank's financial results met all of its medium-term
objectives, except for growth in adjusted diluted earnings per
share. Adjusted diluted earnings per share for fiscal 2023 did not
increase year over year and is below target due to higher
provisions for credit losses, which more than offset the strong
performance by all the business segments. For fiscal 2023, adjusted
ROE was in the lower range of the target. The adjusted dividend
payout ratio fell within the target distribution range as a result
of higher dividends paid during the fiscal year. The CET1 capital
ratio and the leverage ratio, at 13.5% and 4.4%, respectively, also
met the objectives.
The Bank also examines its performance using the efficiency
ratio and operating leverage. For fiscal 2023, the efficiency ratio
was 57.0% compared to 54.2% in fiscal 2022, a deterioration that
was notably due to the adverse effect of the specified items
reported in Non-interest expenses in 2023. As for the adjusted
efficiency ratio, it stood at 52.9% in fiscal 2023 compared to
52.6% in fiscal 2022, demonstrating disciplined expense management
by all the Bank's segments in a more difficult economic
environment. Also for fiscal 2023, operating leverage and adjusted
operating leverage were (5.5)% and (0.5)%, respectively .
Net Income Diluted Earnings Per Efficiency Ratio (4)
Share
Year ended October Year ended October Year ended October
31 31 31
(millions of Canadian (Canadian dollars) (%)
dollars)
2022 2023 2022 2023 2019 2020 2021 2022 2023
Reported as per IFRS Reported as per IFRS Reported as per IFRS
Adjusted (1) Adjusted (1) Adjusted (2)
(1) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP financial measures.
(2) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP ratios.
(3) See the Financial Reporting Method section on pages 14 to 19
for additional information on capital management measures.
(4) See the Glossary section on pages 124 to 127 for details on
the composition of these measures.
Dividends
For fiscal 2023, the Bank declared $1,344 million in dividends
to common shareholders (2022: $1,206 million), representing 42.0%
of net income attributable to common shareholders (2022: 36.8%) and
representing 41.1% of adjusted net income attributable to common
shareholders (2022: 36.8%).
Solid Capital Levels(1)
As at October 31, 2023, the Bank's CET1, Tier 1, and Total
capital ratios were, respectively, 13.5%, 16.0% and 16.8%, compared
to ratios of, respectively, 12.7%, 15.4% and 16.9% as at October
31, 2022. The CET1 and Tier 1 capital ratios increased since
October 31, 2022, essentially due to the contribution from net
income net of dividends, to common share issuances under the Stock
Option Plan, and to the positive impact from the implementation of
the Basel III reforms related to the credit and operational risk
frameworks. These factors were partly offset by growth in RWA and
by the end of the transitional measures applicable to expected
credit loss provisioning implemented by OSFI at the beginning of
the COVID-19 pandemic. The Total capital ratio increased due to the
same factors mentioned above, but the increase was more than offset
by the $750 million redemption of medium-term notes on February 1,
2023.
As at October 31, 2023, the leverage ratio was 4.4% compared to
4.5% as at October 31, 2022. The decrease in the leverage ratio was
essentially due to the growth in total exposure and to the end of
the temporary measure permitted by OSFI with respect to the
exclusion of central bank reserves from the leverage exposure
calculation. These factors were partly offset by the growth in Tier
1 capital.
High-Quality Loan Portfolio
Loans and acceptances, net of allowances for credit losses,
accounted for 53% of the Bank's total assets and amounted to $225.4
billion as at October 31, 2023. For fiscal 2023, the Bank recorded
$397 million in provisions for credit losses compared to $145
million in fiscal 2022. This increase was due to higher provisions
for credit losses on non-impaired loans resulting from loan
portfolio growth, from the migration of credit risk, and from
updates and revisions to the probability weightings of scenarios,
reflecting uncertainty in the macroeconomic outlook, uncertainties
such as high inflationary pressure, high interest rates, and
geopolitical instability. As for provisions for credit losses on
impaired loans excluding POCI(1) loans, they increased year over
year; these increases came from Personal Banking (including credit
card receivables) and Commercial Banking, reflecting a
normalization of credit risk, and from the USSF&I segment,
essentially attributable to the Credigy subsidiary. Provisions for
credit losses on POCI loans were down year over year due to
favourable remeasurements of certain Credigy portfolios as well as
to recoveries of credit losses following repayments of Commercial
Banking POCI loans. Gross impaired loans totalled $1,584 million as
at October 31, 2023 compared to $1,271
million as at October 31, 2022 and represented 0.70% of total
loans and acceptances.
Risk Profile
As at October 31 or for the year ended October 31
(millions of Canadian dollars) 2023 2022
============================================================== ===== =====
Provisions for credit losses 397 145
Provisions for credit losses as a % of average loans
and acceptances(2) 0.18 % 0.07%
Provisions for credit losses on impaired loans excluding
POCI loans as a % of average loans and acceptances(2) 0.11 % 0.07%
Net write-offs excluding POCI loans as a % of average
loans and acceptances(2) 0.07 % 0.10%
Gross impaired loans as a % of total loans and acceptances(2) 0.70 % 0.61%
Gross impaired loans 1,584 1,271
Net impaired loans 1,276 1,030
=============================================================== ===== =====
Annual Dividend Per Evolution of Regulatory Gross Impaired Loans
Common Share Ratios Under Basel As at October 31
Year ended October 31 III (1) (millions of Canadian
(Canadian dollars) As at October 31 dollars)
2019 2020 2021 2022 2023 2022 2023 2019 2020 2021 2022 2023
CET1 Impaired loans - Stage
Tier 1 3
Total Impaired loans - POCI
Leverage Gross impaired loans
ratio as a % of total loans
and acceptances (bps)(2)
Gross impaired loans
exlcuding POCI as a
% of total loans and
acceptances (bps)(2)
(1) See the Financial Reporting Method section on pages 14 to 19
for additional information on capital management measures.
(2) See the Glossary section on pages 124 to 127 for details on
the composition of these measures.
Economic Review and Outlook
Global Economy
Global manufacturing activity has slowed considerably of late,
which appears to be impacting European plants in particular.
Unfortunately, this weakness has been exacerbated by the European
Central Bank's efforts to bring inflation down to the targeted
level. These combined factors explain why the eurozone's GDP
contracted during the third quarter of 2023. However, given that
the non-annualized decrease of 0.1% came on the heels of mediocre
results in previous quarters, it led to zero annual growth. In the
past, such lacklustre growth over a 12-month period tended to
herald a recession. This is what we expect to see again. Meanwhile,
China continues to suffer setbacks due to a real estate crisis
although it would appear that the Chinese government has finally
decided to take the necessary steps to boost demand and avoid a
deflationary spiral. On October 24, 2023, the authorities approved
the issuance of an additional one thousand billion yuan (0.8% of
GDP) of central government bonds to fund various recovery
initiatives. Despite these announcements, we remain prudent and
believe that after barely achieving its 5.0%(1) growth objective
this year, China will see somewhat weaker growth in 2024. The
global economy, for its part, is expected to grow by 3.0%(1) this
year, followed by only 2.2%(1) growth next year.
U.S. GDP figures for the third quarter of 2023 point to 4.9%
annualized growth-the best result in two years. While we recognize
that the U.S. economy is showing surprising resilience in the face
of the significant U.S. Federal Reserve (the Fed) monetary
tightening, we still have some reservations regarding how long the
current growth trend will last. Our doubts are largely attributable
to the fact that higher household spending in the third quarter was
not accompanied by an equivalent increase in disposable income,
instead resulting from the sharp decline in the savings rate-which
is counterintuitive in an environment with higher interest rates.
This decline suggests that consumers have been forced to live
beyond their means in the third quarter. The most recent credit
data confirm this assumption, with a significant increase in the
percentage of consumer loans that fell into serious delinquency in
the third quarter, even before the resumption of student loan
payments in the fourth quarter. A slowdown in consumer spending
therefore seems inevitable, although the extent will depend on the
resilience of the labour market. While the labour market has
remained quite solid until now, a number of leading indicators
point to a slowdown in the months to come, with sharp declines in
hours worked and the job vacancy rate. We have some reservations
regarding the scenario presented by the Fed, in which a mere
slowdown would rebalance supply and demand. While the previous
interest rate hikes will continue to impact the U.S. economy, we
expect U.S. GDP to contract in the first half of 2024-a scenario
that would result in only 0.3%(1) growth next year.
Canadian Economy
In Canada, it appears that the rate hikes announced since the
start of the monetary tightening cycle are starting to produce
results. Preliminary data published by Statistics Canada suggest
zero growth in the third quarter of 2023-a particularly weak
performance when soaring demographic growth is taken into
consideration. In the past four quarters, per capita GDP decreased
by 2.4%, something which, historically, was only seen in a
recession. A slowing labour market is also evident, with hiring not
keeping pace with demographic growth. As a result, after reaching a
cyclical low of 4.9%, the unemployment rate jumped eight-tenths of
a percentage point to 5.7% in October. An increase of such
magnitude, other than in a recessionary period in Canada, has been
seen once since the early 1980s, that is, when the tech bubble
burst in 2001. This is even more concerning in a broader context
where the rate hikes announced until now have not produced their
full impact on the economy. According to our calculations, no less
than 42% of the impacts of interest rate hikes have yet to be felt
in terms of consumption. Moreover, with no apparent signs of an
economic recovery in the months to come, the level of confidence
among consumers and small and medium-sized businesses will be more
akin to levels seen during a recession. In this broader context, a
contraction in GDP cannot be ruled out in the months to come, which
would lead to a stagnant economy in 2024(1) .
Quebec Economy
The Quebec economy experienced a difficult second quarter
compared to the rest of the country in terms of economic growth,
which declined by 1.9% compared to a slight decline for Canada as a
whole (-0.2%). In the next few quarters, weaker demographic growth
than in the rest of Canada and the growing impact of interest rate
hikes will continue to temper growth. We nonetheless remain
confident that this sluggish performance is temporary and believe
that Quebec's economy could be more resilient relatively speaking.
Quebec households are carrying less debt than in the rest of Canada
and, therefore, are less susceptible to interest payment shock.
Moreover, housing is more accessible in Quebec compared to
elsewhere in Canada, and the predominant use of hydroelectricity
means that households are less exposed to soaring electricity
costs. Quebec also has a highly diversified economy and the
government provides a series of fiscal support measures. Finally,
Quebec's real policy rate (defined as the policy rate minus
inflation and not including groceries and energy) was the lowest
among all provinces in September, indicating that Quebec's monetary
policy is less restrictive. When all these factors are taken into
account, we predict that Quebec's economy will not grow in 2024(1)
, which is consistent with the rest of Canada in spite of less
favourable demographic growth. According to these same predictions,
Quebec's unemployment rate should remain among the lowest of all
ten provinces.
(1) Real GDP growth forecasts, National Bank Financial's Economics and Strategy group
Financial Analysis
Consolidated Results
Year ended October 31
(millions of Canadian dollars) 2023 2022 % change
================================================== ======= ======= ========
Operating results
Net interest income 3,586 5,271 (32)
Non-interest income 6,584 4,381 50
--------------------------------------------------- ------- ------- --------
Total revenues 10,170 9,652 5
Non-interest expenses 5,801 5,230 11
--------------------------------------------------- ------- ------- --------
Income before provisions for credit losses
and income taxes 4,369 4,422 (1)
Provisions for credit losses 397 145
--------------------------------------------------- ------- ------- --------
Income before income taxes 3,972 4,277 (7)
Income taxes 637 894 (29)
--------------------------------------------------- ------- ------- --------
Net income 3,335 3,383 (1)
Diluted earnings per share (dollars) 9.38 9.61 (2)
--------------------------------------------------- ------- ------- --------
Taxable equivalent basis (1)
Net interest income 332 234
Non-interest income 247 48
Income taxes 579 282
--------------------------------------------------- ------- ------- --------
Impact of taxable equivalent basis on net
income - -
-------------------------------------------------- ------- ------- --------
Specified items (1)
Gain on the fair value remeasurement of an
equity interest 91 -
Impairment losses on premises and equipment
and intangible assets (86) -
Litigation expenses (35) -
Expense related to changes to the Excise Tax
Act (25) -
Provisions for contracts (15) -
-------
Specified items before income taxes (70) -
Income taxes related to the Canadian government's
2022 tax measures 24 -
Income taxes on specified items (20) -
--------------------------------------------------- ------- ------- --------
Specified items after income taxes (74) -
--------------------------------------------------- ------- ------- --------
Operating results - Adjusted (1)
Net interest income - Adjusted 3,918 5,505 (29)
Non-interest income - Adjusted 6,740 4,429 52
--------------------------------------------------- ------- ------- --------
Total revenues - Adjusted 10,658 9,934 7
Non-interest expenses - Adjusted 5,640 5,230 8
--------------------------------------------------- ------- ------- --------
Income before provisions for credit losses
and income taxes - Adjusted 5,018 4,704 7
Provisions for credit losses 397 145
--------------------------------------------------- ------- ------- --------
Income before income taxes - Adjusted 4,621 4,559 1
Income taxes - Adjusted 1,212 1,176 3
--------------------------------------------------- ------- ------- --------
Net income - Adjusted 3,409 3,383 1
--------------------------------------------------- ------- ------- --------
Diluted earnings per share - Adjusted (dollars) 9.60 9.61 -
--------------------------------------------------- ------- ------- --------
Average assets(2) 430,646 393,847 9
Average loans and acceptances(2) 215,976 194,340 11
Average deposits(2) 284,570 258,929 10
Operating leverage(3) (5.5) % 1.4%
Operating leverage - Adjusted(4) (0.5) % 2.1%
Efficiency ratio(3) 57.0 % 54.2%
Efficiency ratio - Adjusted(4) 52.9 % 52.6%
Net interest margin, non-trading - Adjusted(4) 2.15 % 1.96%
=================================================== ======= ======= ========
(1) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP financial measures.
(2) Represents an average of the daily balances for the period.
(3) See the Glossary section on pages 124 to 127 for details on
the composition of these measures.
(4) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP ratios.
Analysis of Consolidated Results
Financial Results
For fiscal 2023, the Bank's net income totalled $3,335 million,
down 1% from $3,383 million in fiscal 2022. Revenue growth in all
of the business segments was more than offset by higher
non-interest expenses (partly due to the specified items(1)
recorded during fiscal 2023) and by significantly higher provisions
for credit losses. The fiscal 2023 income before provisions for
credit losses and income taxes was down 1% compared to fiscal
2022.
As for adjusted net income, it totalled $3,409 million in fiscal
2023, up 1% from $3,383 million in fiscal 2022. The fiscal 2023
specified items had a $74 million unfavourable impact on net income
in fiscal 2023. Revenue growth in all of the business segments was
offset by higher non-interest expenses and higher provisions for
credit losses. As for adjusted income before provisions for credit
losses and income taxes, it rose 7% year over year.
Total Revenues
For fiscal 2023, the Bank's total revenues amounted to $10,170
million versus $9,652 million in fiscal 2022, a $518 million or 5%
increase that was driven by total revenue growth in all of the
Bank's business segments. For additional information on total
revenues, see Table 2 on page 116. As for adjusted total revenues,
they amounted to $10,658 million in fiscal 2023, up $724 million or
7% from $9,934 million in fiscal 2022.
Net Interest Income
For fiscal 2023, the Bank's net interest income totalled $3,586
million, down 32% from $5,271 million in fiscal 2022 (see Table 3,
page 116). Adjusted net interest income was $3,918 million in
fiscal 2023, down 29% from $5,505 million in fiscal 2022.
In the Personal and Commercial segment, net interest income
totalled $3,321 million in fiscal 2023, a $456 million or 16%
year-over-year increase that was essentially driven by a higher net
interest margin (owing to interest rate hikes), which was 2.35% in
2023 versus 2.15% in 2022 and mainly due to the deposit margin. The
increase was also driven by year-over-year growth in loans and
deposits, which rose 6% and 5%, respectively. The loan growth came
mainly from mortgage credit and business and government lending. In
the Wealth Management segment, net interest income totalled $778
million, a 31% year-over-year increase that was attributable to the
interest rate hikes that occurred in fiscal years 2023 and
2022.
In the Financial Markets segment, net interest income on a
taxable equivalent basis was down considerably from fiscal 2022,
mainly due to trading activities, and should be examined together
with the other items of trading activity revenues. In the
USSF&I segment, net interest income rose $42 million or 4% year
over year, essentially due to business growth at the ABA Bank
subsidiary, notably sustained growth in loans.
Non-Interest Income
For fiscal 2023, the Bank's non-interest income totalled $6,584
million, up 50% from $4,381 million in fiscal 2022. For additional
information on non-interest income, see Table 4 on page 117. As for
adjusted non-interest income, it totalled $6,740 million in fiscal
2023, up 52% year over year.
The fiscal 2023 revenues from underwriting and advisory fees
were up 17% year over year, notably due to capital markets
activities and merger and acquisition activity in the Financial
Markets segment. Revenues from securities brokerage commissions
were down 15% year over year, essentially due to a decrease in
commissions on transactions in the Wealth Management segment.
Combined, mutual fund revenues and revenues from investment
management and trust service fees totalled $1,583 million, down $1
million year over year.
Combined, the fiscal 2023 credit fee revenues and revenues from
acceptances and letters of credit and guarantee rose $84 million
year over year owing to growth in credit lending at Commercial
Banking, in the Financial Markets segment, and at Credigy. In
addition, card revenues grew 9% year over year due to a notable
increase in purchasing volume, and revenues from deposit and
payment service charges rose 1%.
(1) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP financial measures.
Non-interest income related to trading activity on a taxable
equivalent basis totalled $2,943 million in fiscal 2023, up from
$596 million in fiscal 2022 (Table 5, page 117). Including the
portion recorded in net interest income, trading activity revenues
on a taxable equivalent basis amounted to $1,448 million in fiscal
2023, a $59 million year-over-year decrease that was attributable
to equity securities revenues, whereas there were increases in
revenues from fixed-income securities and revenues from commodities
and foreign exchange activities in the Financial Markets segment.
The trading activity revenues on a taxable equivalent basis from
the Bank's other business segments decreased year over year.
The fiscal 2023 gains on non-trading securities were down $43
million year over year, mainly due to business activity at
Financial Markets and to Treasury activities. Insurance revenues
were up $13 million year over year, reflecting revisions to
actuarial reserves. Foreign exchange revenues and the share in the
net income of associates and joint ventures decreased by $28
million and $17 million, respectively, year over year. Lastly,
other revenues amounted to $261 million in fiscal 2023, a $19
million year-over-year increase that was notably due to a $91
million gain recorded upon the fair value remeasurement of an
equity interest, partly offset by a higher unfavourable impact of a
fair value remeasurement of certain Credigy portfolios during
fiscal 2022.
Non-Interest Expenses
For fiscal 2023, the Bank's non-interest expenses stood at
$5,801 million, up $571 million or 11% from fiscal 2022 (Table 6,
page 118). They included the following specified items: $86 million
in impairment losses on premises and equipment and intangible
assets, $35 million in litigation expenses, a $25 million expense
related to changes to the Excise Tax Act, and $15 million in
provisions for contracts. As for adjusted non-interest expenses,
they stood at $5,640 million in fiscal 2023, up $410 million or 8%
from non-interest expenses of $5,230 million in fiscal 2022.
Compensation and employee benefits stood at $3,452 million in
fiscal 2023, a 5% year-over-year increase that was mainly due to
wage growth and a greater number of employees. Occupancy expense,
including amortization expense on premises and equipment, was also
up, partly due to the expanding banking network at ABA Bank, to
expenses related to the Bank's new head office building, and to
impairment losses on premises and equipment. An increase in
technology expenses, including amortization, came from the
significant investments made to support the Bank's technological
evolution and business development plan as well as from the
intangible asset impairment losses recorded in fiscal 2023. The
fiscal 2023 communication expenses remained relatively stable year
over year, whereas professional fees were up slightly. In addition,
higher advertising and business development expenses came from
travel expenses, as activities with clients resumed, and from an
increase in advertising expenses. Other expenses were also up year
over year due in part to litigation expenses, an expense related to
changes to the Excise Tax Act, and provisions for contracts
recorded during fiscal 2023.
Provisions for Credit Losses
For fiscal 2023, the Bank recorded $397 million in provisions
for credit losses compared to $145 million in fiscal 2022 (Table 7,
page 119). The increase came mainly from a $174 million increase in
provisions for credit losses on non-impaired loans resulting from
growth in the loan portfolios, a migration of credit risk, a
recalibration of certain risk parameters, and updates and revisions
to the probability weightings of scenarios, reflecting the
uncertainties in the macroeconomic outlook, uncertainties such as
rising inflationary pressure, high interest rates, and geopolitical
instability. As for provisions for credit losses on impaired loans
excluding POCI(1) loans, they stood at $245 million, rising $107
million year over year; these increases came from Personal Banking
(including credit card receivables) and Commercial Banking, which
rose $44 million and $35 million, respectively, reflecting a
normalization of credit risk, and from the USSF&I segment,
which rose $28 million, essentially attributable to the Credigy
subsidiary. Provisions for credit losses on POCI loans were down
$29 million year over year due to favourable remeasurements of
certain Credigy portfolios during fiscal 2023 as well as to
recoveries of credit losses following repayments of POCI loans at
Commercial Banking. For fiscal 2023, the provisions for credit
losses on impaired loans excluding POCI loans(1) represented 0.11%
of average loans and acceptances compared to 0.07% in fiscal
2022.
Income Taxes
Detailed information about the Bank's income taxes is provided
in Note 24 to the consolidated financial statements. For fiscal
2023, income taxes stood at $637 million, representing an effective
income tax rate of 16%, which compares to income taxes of $894
million and a 21% effective income tax rate in fiscal 2022. The
change in effective income tax rate stems mainly from a higher
level and proportion of tax-exempt dividend income and from higher
income in lower tax-rate jurisdictions during fiscal 2023. These
factors were partly offset by the impact of the Canadian
government's 2022 tax measures recorded in the first quarter of
2023, namely, the Canada Recovery Dividend and the additional 1.5%
tax on banks and life insurers.
(1) See the Glossary section on pages 124 to 127 for details on
the composition of these measures.
Business Segment Analysis
The Bank carries out its activities in four business segments,
which are defined below. For presentation purposes, other
activities are grouped in the Other heading of segment results.
Each reportable segment is distinguished by services offered, type
of clientele, and marketing strategy.
National Bank of Canada
Business Personal and Wealth Financial U.S. Specialty
Segments Commercial Management Markets Finance and
International
Core
Activities * Banking services * Full-service brokerage * Equities, fixed-inco * U.S. Specialty Finance
me, commodities and foreig
n
* Credit services * Private banking exchange * Credigy
* Financing * Direct brokerage * Corporate banking * International
* Investment solutions * Investment solutions * Investment banking * ABA Bank (Cambodia)
* Insurance * Administrative and trade execution services * Minority interests in emerging markets
* Transaction products
* Trust and estate services
Other: Treasury activities, liquidity management, Bank funding, asset/liability
management, Flinks Technology Inc. subsidiary activities (a fintech specialized
in financial data aggregation and distribution), and corporate units.
Total Revenues by Income Before Provisions Net Income by Business
Business Segment (1) for Segment (1)
Year ended October 31, Credit Losses and Income Year ended October 31,
2023 Taxes by Business Segment 2023
(1)
Year ended October 31,
2023
Personal and Commercial Personal and Commercial Personal and Commercial
(2022: 40%) (2022: 36%) (2022: 35%)
Wealth Mangement (2022 Wealth Mangement (2022: Wealth Management (2022:
: 24%) 20%) 20%)
Financial Markets (2022: Financial Markets (2022: Financial Markets (2022:
25%) 29%) 30%)
USSF&I ( 2022: 11%) USSF&I (2022: 15%) USSF&I ( 2022: 15%)
(1) Excluding the Other heading.
Personal and Commercial
The Personal and Commercial segment meets the financial needs of
close to 2.7 million individuals and over 147,000 businesses across
Canada. These clients entrust the Bank to manage, invest, and
safeguard their assets and to finance their projects. Clients turn
to the Bank's experienced advisors who take the time to understand
their specific needs and help them reach their financial goals.
Thanks to the Bank's convenient self-banking channels, 368
branches, and 944 banking machines across Canada, clients can do
their daily banking whenever and wherever they wish.
Total Revenues by Category Total Revenues by Geographic
Year ended October Distribution
31, 2023 Year ended October 31,
2023
Retail (2022: 42%) Province of Quebec (2022:
Payment Solutions (2022: 76%)
11%) Other provinces (2022:
Insurance (2022: 5%) 24%)
Commercial Banking
(2022: 42%)
Personal Banking
Personal Banking provides a complete range of financing and
investment
products and services to help clients reach their financial
goals throughout
every stage in their lives. It offers everyday transaction
solutions, mortgage loans and home equity lines of credit, consumer
loans, payment solutions, savings and investment solutions as well
as a range of insurance products.
Commercial Banking
Commercial Banking serves the financial needs of small- and
medium-sized enterprises (SMEs) and large corporations, helping
them to achieve growth. It offers a full line of financial products
and services, including credit, deposit, and investment solutions
as well as international trade, foreign exchange transaction,
payroll, cash management, insurance, electronic transaction, and
complementary services. With deep roots in the entrepreneur
community for over 160 years, Commercial Banking is the leading
bank in the Quebec market.
Economic and Market Review
In Canada, signs of an economic slowdown in response to rapidly
rising interest rates are evident, with GDP essentially stagnating
in recent months. Against a backdrop of galloping population
growth, this is a major setback, reflected in a seven-tenths rise
in the unemployment rate since April 2023. The impact of
restrictive monetary policy has been particularly visible in the
housing market, where sales are contracting due to deteriorating
affordability despite strong population growth. In this context,
and with purchasing power reduced by the recent surge in inflation,
household confidence is at a lower level than in the last two
recessions. According to surveys, businesses also share this
pessimism, with a large proportion reporting weak domestic demand
and a less optimistic sales outlook for the year ahead. This
situation is reflected in a rapid slowdown in investment and hiring
intentions. Given the lags in monetary policy transmission, the
economy is set to weaken further in 2024. In Quebec, economic
growth is also expected to be sluggish in 2024, but the province
has the strengths to weather the current headwinds, including
households with lower debt levels and a greater proportion of
dual-income households.
The economic environment in 2023 and the outlook for 2024 are
discussed in more detail in the Economic Review and Outlook section
on page 24.
Objectives and Strategic Priorities
The Personal and Commercial segment is targeting growth by
becoming a more simple, efficient bank focused on constantly
improving the client experience.
2023 Achievements and Highlights 2024 Priorities
================================================================ ================================================================
Accelerate
net client * Delivered unparalleled performance in terms of total * Enhance the visibility of our brand image across
acquisition client acquisition, notably through: Canada by accentuating our distinguishing
characteristics.
* Targeted strategies aimed at priority markets and our
differentiated offerings to the professional, * Focus on our priority clientele and high-potential
newcomer and young client segments. niche markets outside Quebec by developing our
digital acquisition capabilities and by building on
our personalized advice.
* Greater contact frequency and more joint meetings
with clients by our Commercial Banking and Private
Banking 1859 (PB1859) sales forces to better serve * Expand our sales and sales support teams in Western
entrepreneur clients and meet their business, family, Canada for key sectors.
and personal needs.
* Continue developing our offerings and joint
* Adopted more competitive pricing following a review Commercial Banking and PB1859 advice to generate
of banking packages, the purpose being to meet our business and market opportunities.
clients' digital needs.
* Expand client support by improving the customer
* Launched a unique, digital appointment-booking journey through innovative technological
capability free of any geographical constraints. capabilities.
* Acquired the loan portfolio of the Canadian branch of * Maintain a good proportion of our growth in CMHC
the Silicon Valley Bank, thereby enhancing our insured loans in the Commercial Banking segment and
Technology Activities and Health Sciences sector of maintain our mix of business activities.
activity.
* Strengthen the ESG culture and performance of our own
* Enhanced our ESG impact by taking concrete action to activities in order to leverage client acquisition.
promote the transition of clients to a sustainable
environment and social inclusion.
------------ ================================================================ ================================================================
Improve
client * Accelerated our shift to advice and synergy * Continue to improve our advisory services by focusing
engagement initiatives, resulting in more core clients and more on learning and skills development for all our
clients conducting business with more than one banking advisors.
segment of the Bank.
* Develop new, modernized technological interfaces to
* Promoted savings among our clients by being the first provide our Commercial Banking clients with an
bank to offer them a first home savings account enhanced, high-performance digital experience.
(FHSA).
* Engage clients by relying on our conversational
* Deployed significantly enhanced client interaction capabilities, personalized customer journeys, and
capabilities, enabling us to offer proactive advice proactive advice.
through customer journeys and personalized advice
banners.
* Finalize the deployment of the New Experience across
all our branches, supporting our experts and
* Enhanced our digital capabilities in order to improve promoting digital engagement.
the ability of clients to independently manage their
personal finances, transactions, and personal
profiles. * Enhance our payment offering by modernizing our
digital payment ecosystem.
* Enhanced user experience and autonomy by modernizing
the cash management features most used by our
clients.
* Implemented a series of initiatives to ensure
accessibility to our Client Contact Centres, in
particular by setting up a dedicated, no-wait
telephone line for joint Commercial Banking and
PB1859 clients .
* Implemented a strategy of proactive support and
advice for our clients most affected by the market
fluctuations caused by rapidly rising rates, in
particular to help them meet their mortgage
obligations.
============ ================================================================ ================================================================
2023 Achievements and Highlights 2024 Priorities
================ ================================================================ ================================================================
Leverage our
simplification, * Continuously improved our customer journey, notably * Operate closer to clients by reviewing our branch
and enhance by: operational support structure and maximize sales
operational force activities.
efficiency
* Simplifying the experience when opening a bank
account 100% remotely, thereby providing greater * Modify our support model to better serve our
flexibility to clients. Commercial Banking and PB1859 clients according to
their needs.
* Reducing disbursement times for commercial financing
thanks to a reorganization of our work, streamlined * Capitalize on our acceleration of digital services to
business processes, and simplified support models. simplify the transactional offering across all our
channels.
* Modernized our more sophisticated cash management
product line to suit the needs of large Corporate * Emphasize our high-potential investments in terms of
Banking clients . operational efficiency and effectiveness .
* Simplified our support to clients in Western Canada * Focus on the modernization and transformation of our
with self-service solutions, flexible advisory Client Contact Centres to improve accessibility and
services integrated into our virtual branch, and client experience .
cashless branches.
* Continue automating our business processes and
thereby enhance operational efficiency.
================ ================================================================ ================================================================
Segment Results - Personal and Commercial
Year ended October 31
(millions of Canadian dollars) 2023 2022(1) % change
============================================= ======= ======= ========
Net interest income 3,321 2,865 16
Non-interest income 1,195 1,169 2
---------------------------------------------- ------- ------- --------
Total revenues 4,516 4,034 12
Non-interest expenses 2,510 2,241 12
---------------------------------------------- ------- ------- --------
Income before provisions for credit losses
and income taxes 2,006 1,793 12
Provisions for credit losses 238 97
---------------------------------------------- ------- ------- --------
Income before income taxes 1,768 1,696 4
Income taxes 486 449 8
---------------------------------------------- ------- ------- --------
Net income 1,282 1,247 3
---------------------------------------------- ------- ------- --------
Less: Specified items after income taxes (2) (49) -
---------------------------------------------- ------- ------- --------
Net income - Adjusted (2) 1,331 1,247 7
---------------------------------------------- ------- ------- --------
Net interest margin(3) 2.35 % 2.15%
Average interest-bearing assets(3) 141,458 133,543 6
Average assets(4) 148,511 140,300 6
Average loans and acceptances(4) 147,716 139,538 6
Net impaired loans(3) 285 193 48
Net impaired loans as a % of total loans and
acceptances(3) 0.2 % 0.1%
Average deposits(4) 85,955 81,996 5
Efficiency ratio(3) 55.6 % 55.6%
Efficiency ratio - Adjusted(5) 54.1 % 55.6%
============================================== ======= ======= ========
(1) For the year ended October 31 , 2022, certain amounts were
reclassified, notably due to a revised method for the sectoral
allocation of technology investment expenses.
(2) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP financial measures. During
fiscal 2023, the segment recorded, in the Non-interest expenses
item, $59 million in intangible asset impairment losses ($42
million net of income taxes) on technology development as well as
charges of $9 million ($7 million net of income taxes) for contract
termination penalties.
(3) See the Glossary section on pages 124 to 127 for details on
the composition of these measures.
(4) Represents an average of the daily balances for the period.
(5) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP ratios.
Financial Results
In the Personal and Commercial segment, net income totalled
$1,282 million in fiscal 2023, a 3% increase from $1,247 million in
fiscal 2022 that was due to growth of $482 million in the segment's
total revenues, partly offset by higher non-interest expenses
(including the fiscal 2023 specified items) and by significantly
higher provisions for credit losses. As for the segment's adjusted
net income in fiscal 2023, it totalled $1,331 million, up 7% year
over year. For fiscal 2023, the segment's income before provisions
for credit losses and income taxes amounted to $2,006 million, up
12% year over year, while its adjusted income before provisions for
credit losses and income taxes rose 16%. The segment's total
revenues grew year over year, essentially due to a $456 million
increase in net interest income that was driven mainly by a higher
deposit margin (partly offset by a lower loan margin) given the
interest rate hikes that occurred during fiscal 2023. This increase
had a favourable impact on the segment's net interest margin, which
stood at 2.35% in fiscal 2023 versus 2.15% in fiscal 2022. The
increase in net interest income also came from growth in personal
and commercial loans and deposits.
For fiscal 2023, the Personal and Commercial segment's
non-interest expenses stood at $2,510 million, a 12% year-over-year
increase that was mainly due to $68 million in specified items
recorded during fiscal 2023 as well as to higher compensation and
employee benefits (resulting from wage growth), to greater
investments made as part of the segment's technological evolution,
and to increases in operations support charges. At 55.6%, the
segment's efficiency ratio remained stable compared to October 31,
2022. As for the segment's adjusted non-interest expenses for
fiscal 2023, they stood at $2,442 million, up 9% year over year. At
54.1%, the segment's 2023 adjusted efficiency ratio improved by 1.5
percentage points from 55.6% in 2022.
The segment recorded $238 million in provisions for credit
losses in fiscal 2023, which is $141 million more than the $97
million recorded in fiscal 2022. This increase was mainly due to
higher provisions for credit losses on impaired Personal Banking
loans (including credit card receivables) and impaired Commercial
Banking loans, reflecting a normalization of credit performance. As
for the segment's provisions for credit losses on non-impaired
loans, they were up due to growth in the loan portfolios, to the
migration of credit risk, and to a less favourable macroeconomic
outlook during fiscal 2023. Also during fiscal 2023, the segment
recorded recoveries of credit losses on Commercial Banking's POCI
loans as a result of loan repayments.
Personal Banking
Personal Banking's total revenues amounted to $2,539 million in
fiscal 2023, an 8% increase from $2,360 million in fiscal 2022. Its
net interest income increased, as there was 3% growth in loan
volumes, 5% growth in deposit volumes, and a higher deposit margin
that was partly offset by a lower loan margin. Non-interest income
was also up, rising $17 million year over year, essentially due to
higher credit card revenues given a notable increase in purchasing
volume and higher insurance revenues (reflecting revisions to
actuarial reserves). Personal Banking's non-interest expenses rose
$188 million in fiscal 2023, mainly due to the fiscal 2023
specified items as well as to higher compensation and employee
benefits (resulting from wage growth), to greater investments made
as part of the segment's technological evolution, and to an
increase in operations support charges.
Commercial Banking
Commercial Banking's total revenues amounted to $1,977 million
in fiscal 2023, rising 18% from $1,674 million in fiscal 2022. Net
interest income was up, essentially due to an improved net interest
margin on deposits given the interest rate hikes that occurred in
fiscal 2023 as well as to 11% growth in loans and 5% growth in
deposits. Non-interest income was also up, rising $9 million
compared to fiscal 2022, mainly due to increases in revenues from
bankers' acceptances, partly offset by a decrease in revenues from
foreign exchange activities. Commercial Banking's non-interest
expenses rose $81 million in fiscal 2023, mainly due to higher
compensation and employee benefits (resulting from wage growth), to
the fiscal 2023 specified items, and to an increase in operations
support charges.
Average Loans and Acceptances Average Deposits
Year ended October 31 Year ended October 31
(millions of Canadian dollars) (millions of Canadian Dollars)
2022 2023 2022 2023
Total - Personal and Commercial Total - Personal and Commercial
Banking Banking
Personal Banking Personal Banking
Commercial Banking Commercial Banking
Wealth Management
As a leader in Quebec and firmly established across Canada, the
Wealth Management segment serves all market segments by emphasizing
advisory-based service and close client relationships. It delivers
a full range of wealth management products and solutions through an
omnichannel distribution network and a differentiated business
model. Wealth Management also provides services to independent
advisors and institutional clients.
Total Revenues by Category Total Revenues by Geographic
Year ended October 31, Distribution
2023 Year ended October 31,
2023
Net interest income Province of Quebec (2022:
(2022: 25%) 63%)
Fee-based services (2022: Other provinces (2022:
60%) 37%)
Transaction-based and
other revenues (2022:
15%)
Full-Service Brokerage
Drawing on the largest network of investment advisors in Quebec,
National Bank Financial Wealth Management (NBFWM) provides wealth
management advisory services through 800-plus advisors at close to
100 service points across Canada. Its advisors serve their clients,
proposing portfolio management services, financial and succession
planning services, and insurance services while working in close
collaboration with other segments of the Bank.
Private Banking
Private Banking 1859 (PB1859) offers highly personalized wealth
management services and advice across Canada, helping affluent
clients benefit from comprehensive management of their personal and
family fortunes. As a true market leader in Quebec, PB1859 is
continuing to expand throughout Canada with its extensive range of
banking services, financial solutions and strategies for the
protection, growth, and transmission of wealth.
Direct Brokerage
National Bank Direct Brokerage (NBDB) offers a multitude of
financial products and investment tools to self-directed investors
across Canada through its online investment solution. NBDB helps
customers manage their investments through digital platforms or by
speaking directly to a representative on the phone.
Investment Solutions
National Bank Investments Inc. (NBI) manufactures and offers
mutual funds, exchange-traded funds (ETFs), investment solutions,
and services to consumers and institutional investors through the
Bank's extended network. Thanks to its open architecture model, NBI
is Canada's largest investment fund manager to entrust the
management of its investments exclusively to external portfolio
managers.
Administrative and Trade Execution Services
National Bank Independent Network (NBIN) is a Canadian leader in
providing administrative services such as trade execution,
custodial services, and brokerage solutions to many independent
financial services firms across Canada, in particular to
introducing brokers, portfolio managers, and investment fund
managers.
Transaction Products
The Wealth Management segment provides independent advisors
across Canada with a vast array of investment products, including
guaranteed investment certificates (GICs), mutual funds, notes,
structured products, and monetization, helping to support their own
business needs and client relationships.
Trust and Estate Services
Through National Bank Trust Inc. (NBT), Wealth Management
provides retail and institutional clients with turnkey services and
solutions. Its team of experts offers a full range of high
value-added services designed to consolidate, protect, and transfer
its customers' wealth and give them peace of mind. NBT also
provides integrated trustee and depository services as well as
securities custody services.
Economic and Market Review
While the U.S. Federal Reserve's aggressive tightening of
monetary policy appears to be coming to an end, the U.S. economy
has been surprisingly resilient. The confluence of good economic
growth and weakening price pressures has convinced proponents of
the "immaculate disinflation" scenario that it is materializing.
This has spurred gains in equity markets, notably the S&P 500,
which has risen sharply since the start of the year. In Canada, the
transmission of monetary policy to the economy has been more rapid,
and S&P/TSX performance has therefore been more modest.
However, it is premature to assert that the fight against inflation
is over and that there is no longer any risk of economic damage.
Given the lags in transmission and the low savings rate of U.S.
households, the risks of recession remain high for 2024. On the
housing front, signs of a slowdown are already noticeable on both
sides of the border, as high interest rates have caused a sharp
deterioration in affordability. Under the weight of declining
purchasing power caused by high interest rates and inflation,
consumer confidence has plummeted in recent months. Businesses
share this sentiment, forecasting fewer sales and hiring in the
months ahead.
The economic environment in 2023 and the outlook for 2024 are
discussed in more detail in the Economic Review and Outlook section
on page 24.
Objectives and Strategic Priorities
The Wealth Management segment will capitalize on the strength of
the Bank's brand by generating sustained earnings growth, further
improving client satisfaction, and maintaining high employee
engagement. Wealth Management distinguishes itself in the market
through its strategic positioning, offering an outstanding client
experience with its advisory services, innovative solutions, and
exceptional service delivered by agile and aligned multifunctional
teams. This segment aims to continue penetrating this market across
Canada through organic growth, targeted initiatives, and its unique
market positioning.
2023 Achievements and Highlights 2024 Priorities
======================== ======================================================================= ==================================================================
Create h ighly engaged
clients thanks to * Leveraged our growth strategies (intersegment * Apply client knowledge to help meet expectations and
an exceptional synergies, high-potential segments and markets). use data responsibly. Continue developing analytic
advisory--based foundations in order to put data (360-degree holistic
experience view) at the service of clients.
* Further developed a distinctive offering for clients
who are in both our PB1859 and Commercial Banking
sectors by adding differentiating revenue-generating * Foster strong client engagement with an
components. advisory-driven experience.
* Continued to see improved results from our client * Increase client acquisition activities in promising
satisfaction surveys. markets and rapidly growing segments.
* Increased net client acquisition, exceeding forecasts * Simplify our IT ecosystem and automate certain
in most areas of activity. operating processes more quickly.
* Developed new tools to help manage client
relationships.
------------------------ ========================================================================= ================================================================
Have best-in-class
investment and digital * Continued to develop new investment solutions to meet * Foster client engagement with enhanced digital
solutions client needs (with an emphasis on responsible capabilities.
investing, ETFs and alternative solutions).
* Improve the advisor experience by developing and
* Continually simplified and improved digital solutions improving available digital capabilities.
to reflect client needs, in particular brokerage
clients.
* Strengthen the client/advisor relationship through
responsible investing and meet the growing appetite
* Continued to improve our advisory solutions. among investors for this type of investment.
* Continue to develop fully integrated solutions to
support advisors and independent firms.
------------------------ ========================================================================= ================================================================
Encourage
entrepreneurial > Created a team composed * Leverage our culture of integration to attract and
culture and talent of members from all segments retain talent.
development to propose major Diversity
and Inclusion initiatives.
* Foster a culture of continuous professional
development.
======================== ========================================================================= ================================================================
Segment Results - Wealth Management
Year ended October 31
(millions of Canadian dollars) 2023 2022(1) % change
============================================= ======= ======= ========
Net interest income 778 594 31
Fee-based revenues 1,432 1,429 -
Transaction and other revenues 311 352 (12)
--------------------------------------------- ------- ------- --------
Total revenues 2,521 2,375 6
Non-interest expenses 1,534 1,417 8
--------------------------------------------- ------- ------- --------
Income before provisions for credit losses
and income taxes 987 958 3
Provisions for credit losses 2 3 (33)
--------------------------------------------- ------- ------- --------
Income before income taxes 985 955 3
Income taxes 271 254 7
--------------------------------------------- ------- ------- --------
Net income 714 701 2
--------------------------------------------- ------- ------- --------
Less: Specified items after income taxes(2) (32) -
--------------------------------------------- ------- ------- --------
Net income - Adjusted (2) 746 701 6
--------------------------------------------- ------- ------- --------
Average assets(3) 8,560 8,440 1
Average loans and acceptances(3) 7,582 7,343 3
Net impaired loans(4) 8 15 (47)
Average deposits(3) 40,216 35,334 14
Efficiency ratio(4) 60.8 % 59.7%
Efficiency ratio - Adjusted(5) 59.1 % 59.7%
============================================= ======= ======= ========
Assets under administration (4) 652,631 616,165 6
--------------------------------------------- ------- ------- --------
Assets under management (4)
Individual 72,245 65,214 11
Mutual funds 48,613 47,132 3
--------------------------------------------- ------- ------- --------
120,858 112,346 8
============================================= ======= ======= ========
(1) For the year ended October 31, 2022, certain amounts were
reclassified, notably due to a revised method for the sectoral
allocation of technology investment expenses.
(2) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP financial measures. During
fiscal 2023, the segment recorded, in the Non-interest expenses
item, $8 million in intangible asset impairment losses ($6 million
net of income taxes) on technology development as well as $35
million in litigation expenses ($26 million net of income taxes) to
resolve litigations and other disputes on various ongoing or
potential claims against the Bank.
(3) Represents an average of the daily balances for the period.
(4) See the Glossary section on pages 124 to 127 for details on
the composition of these measures.
(5) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP ratios.
Financial Results
In the Wealth Management segment, net income Assets Under Administration
totalled $714 million in fiscal 2023 compared and Assets Under Management
to $701 million in fiscal 2022, a 2% increase Year ended October 31
that was due to growth in the segment's total (millions of Canadian dollars)
revenues, partly offset by higher non-interest 2022 2023
expenses (including the specified items recorded Assets under administration
in fiscal 2023). As for the segment's adjusted Assets under management
net income in fiscal 2023, it totalled $746
million, up 6% from $701 million in fiscal 2022.
The segment's total revenues amounted to $2,521
million in fiscal 2023, up 6% from $2,375 million
in fiscal 2022. The segment's net interest income
was up, rising $184 million or 31% as a result
of the interest rate hikes that occurred during
fiscal years 2023 and 2022. The fiscal 2023
fee-based revenues remained relatively stable
compared to fiscal 2022. As for transaction
and other revenues, they were down 12% year
over year given a decrease in trading commissions
during fiscal 2023.
The segment's non-interest expenses stood at
$1,534 million in fiscal 2023 versus $1,417
million in fiscal 2022, for an 8% increase that
was due to higher compensation and employee
benefits, to higher technology expenses related
to the segment's initiatives, and to $43 million
in specified items recorded in fiscal 2023.
At 60.8% in fiscal 2023, the segment's efficiency
ratio deteriorated, essentially due to the fiscal
2023 specified items. As for the segment's adjusted
non-interest expenses, they stood at $1,491
million, up 5% from $1,417 million in fiscal
2022. At 59.1%, the adjusted efficiency ratio
improved by 0.6 percentage points from 59.7%
in fiscal 2022.
Wealth Management recorded $2 million in provisions
for credit losses in fiscal 2023 compared to
$3 million recorded in fiscal 2022.
Financial Markets
The Financial Markets segment offers a complete suite of
products and services to corporations, institutional clients, and
public-sector entities. Whether providing comprehensive advisory
services and research or capital markets products and services, the
segment focuses on relationships with clients and their growth.
Over 900 professionals serve clients through its offices in North
America, Europe, the UK, and Asia.
Total Revenues by Category Total Revenues by Geographic
Year ended October Distribution
31, 2023 Year ended October 31,
2023
Global Markets (2022: Province of Quebec (2022:
61 %) 31 %)
Corporate and Investment Other provinces (2022:
Banking (2022: 39 %) 52 %)
Outside of Canada (2022:
17 %)
Key Success Factors
* Pan-Canadian franchise with established leadership in
government debt underwriting and ETF market-making in
addition to securities lending and recognized
capabilities in risk management solutions, structured
products, and equity derivatives.
* Client-centric business with a differentiated and
diversified revenue mix.
* Sound risk management.
* Flexible approach to capital allocation and proven
ability to adapt to evolving capital market
conditions and to deliver consistent financial
performance.
* Entrepreneurial culture: Integrated approach,
teamwork, and alignment among all groups, including
other segments of the Bank.
Global Markets
Financial Markets is a Canadian leader in risk management
solutions, structured products, and market-making in ETFs by
volume. The segment offers solutions in the areas of fixed-income
securities, currencies, equities, and commodities in order to
mitigate the financial and business risks of clients. It also
provides new product development expertise to asset managers and
fund companies and supports their success by providing liquidity,
research, and counterparty services. Financial Markets also
provides tailored investment products across all asset classes to
institutional and retail distribution channels.
Corporate and Investment Banking
Financial Markets provides corporate banking, advisory, and
capital markets services. It offers loan origination and
syndication to large corporations for project financing, merger and
acquisition transactions, and corporate financing solutions. The
segment is also an investment banking leader in Quebec and across
Canada. Its comprehensive services include strategic advisory for
financing and merger and acquisition initiatives as well as for
debt and equity
underwriting. It is the Canadian leader in government debt and
corporate high--yield debt underwriting. Dominant in Quebec, the
segment is the leader in debt underwriting for provincial and
municipal governments across Canada while growing its national
position in infrastructure and project financing. Financial Markets
is active in securitization financing, mainly mortgages insured by
the Government of Canada and mortgage-backed securities.
Economic and Market Review
In an attempt to curb inflation, central banks have tightened
monetary policy considerably in recent months, historically the
main cause of recessions in the G7 countries. Since this tightening
has been highly synchronized, and the impact of interest rate hikes
is usually felt with a lag, the risks of lackluster economic
performance are high for the global economy in 2024. Slowing
inflation means that interest rates are becoming increasingly
restrictive in real terms. With the exception of the U.S., several
economies are already showing signs of significant weakening,
notably the eurozone and China. What's more, the geopolitical
context remains uncertain, with rising tensions in the Middle East
and the continuing war in Ukraine. Given this highly uncertain
backdrop and the high cost of capital, North American companies are
likely to be very cautious about investing and hiring, pointing to
a sluggish year marked by high market volatility.
The economic environment in 2023 and the outlook for 2024 are
discussed in more detail in the Economic Review and Outlook section
on page 24.
Objectives and Strategic Priorities
2023 Achievements and Highlights 2024 Priorities
============== ================================================================ ===========================================================
Maintain our * Ranked number one in Canadian government debt * Maintain our leadership through quality and
leadership underwriting for a ninth consecutive year. innovation .
in
established
businesses * First leading role for a public sector client in the
and leverage U.S. market with a joint lead role on an Ontario
our Teachers' Finance Trust US$1.5 billion 5-year bond
strengths offering.
onto other
businesses
* Won the coveted 1-month and 3-month CORRA
market-making mandates, which enabled us to
participate in the Montréal Exchange's panel
discussions on CORRA in various cities around the
world.
* Won Best Client Service at the 2023 Structured
Products Intelligence Awards.
* Received five awards at the inaugural Canadian ETF
Express awards:
* Best ETF Research Provider in Canada
* Best Institutional ETF Broker in Canada
* Best Market Maker/Authorised Participant - Equity
ETFs in Canada
* Best Market Maker/Authorised Participant - Fixed
Income ETFs in Canada
* Best Overall ETF Liquidity Provider/Market Maker in
Canada
-------------- ================================================================ ===========================================================
Carry on
international * Continued U.S. coverage enhancement in key sectors * Assist our clients in their growth ambitions and
expansion and distribution of select products. funding needs.
supported
by an
innovative * National Bank Financial's inaugural role as a joint
offering bookrunner on a World Bank (International Bank for
Reconstruction and Development (IBRD)) US$500 million
7-year sustainable development floating-rate note.
* Exclusive financial advisor to Triple Flag Precious
Metals Corp. on its combination with Maverix Metals
Inc. for a total consideration of US$606 million. The
transaction positioned Triple Flag as a gold-focused,
emerging senior streaming and royalty company, with a
portfolio of 229 streams and royalties on 29
producing mines and 200 development- and
exploration-stage projects, predominantly located in
the Americas and Australia.
* Financial advisor to Alpha Auto Group on its
acquisition, by its related company Global Auto
Holdings Limited, of UK-listed Lookers plc for GBP504
million.
* Exclusive financial advisor to North American
Construction Group Ltd. on its $395 million
acquisition of Australian-based MacKellar Group.
============== ================================================================ ===========================================================
2023 Achievements and Highlights 2024 Priorities
============= ================================================================ ================================================================
Strengthen * Guided and advised our clients in their energy * Continue discussions with clients, employees, and
our transitions. other stakeholders to achieve net-zero greenhouse gas
leadership (GHG) emissions by 2050.
role in
sustainable * Created the role of Head of Sustainable Finance in
financing order to better spearhead our vision and strategy * Ensure depth and quality of our coverage regarding
solutions with the rest of the Bank. the global energy transition.
* Exclusive financial advisor, lead left underwriter, * Make ESG principles a growth lever and impact
joint bookrunner, and co-sustainability advisor for multiplier for Financial Markets.
$1.45 billion of green bonds and construction
revolver facilities to support the Connect 6ix(1)
$9.0 billion, 39-year public-private partnership for
the Ontario Line Rolling Stock, Systems, Operations
and Maintenance project in Toronto, Ontario.
* Co-financial advisor to Certarus Ltd. on its $1.05
billion sale to Superior Plus Corp. The transaction
establishes a lower carbon and renewable fuels
platform via the addition of compressed natural gas,
renewable natural gas, and hydrogen to Superior's
extensive distribution platform.
* Joint lead placement agent, joint bookrunner, and
financial advisor on Nautilus Solar Energy, LLC's
inaugural US$202.3 million institutional
investment-grade community solar private placement
issuance. The issuance was backed by a 185 megawatt
portfolio of 58 operating community solar projects
located across the Northeastern United States,
Colorado, and Minnesota.
* Exclusive financial advisor to Eavor Technologies
Inc. on its latest financing round, which will enable
Eavor to accelerate the development and deployment of
its revolutionary geothermal technology.
* Sustainability swap provider to Bell Canada on its
first sustainability-linked derivative to support its
ESG objectives.
------------- ================================================================ ================================================================
Ensure * Continued to advance our Inclusion and Diversity * Implement innovative practices for employee
continued strategy through scholarship and sponsorship recruitment, coaching, and retention while fostering
growth programs. inclusion.
by
recruiting,
coaching, * Coached and retained our talent at all levels through
and mentorship and executive development programs.
retaining a
diversified
workforce * Launched an employee development roadmap to help make
career paths clearer.
------------- ================================================================ ================================================================
Further * Invested in technology and talent to deploy * Continue to create differentiated technology across
strengthen technology enhancements. all Financial Markets' business lines.
information
technology
to enhance * Improved alignment of IT projects through a newly
and created project governance committee.
accelerate
our
execution * Used the latest advances in deep learning to automate
and scale our platform.
============= ================================================================ ================================================================
(1) The members are: Plenary Americas LP, Hitachi Rail STS
S.p.A, Webuild - Canada Holding Inc., and Transdev Canada Inc.
2023 Achievements and Highlights 2024 Priorities
=========== ============================================================= ======================================================
Strengthen
our * Through collaborative efforts within Corporate and * Deepen our relationships with corporations,
ability Investment Banking and a focus on energy institutional clients, and public-sector en
to deliver infrastructure, acted as joint bookrunner on $4.4 tities and
integrated billion of senior, hybrid and sustainability-linke help support their growth.
advice and d
solutions debt offerings for Enbridge Inc., Enbridge Gas Inc
to clients .,
and Enbridge Pipelines Inc. for acquisition and
ongoing capital needs.
* Exclusive financial advisor to Sun Life Financial
Inc. in the divestiture of its association and
affinity and group creditor business in Canada to
Canadian Premier Life Insurance Company.
* Exclusive financial advisor to Dialogue Health
Technologies Inc. in its acquisition by Sun Life
Financial Inc. for $365 million.
* Exclusive financial advisor to Northleaf Capital
Partners on its majority acquisition of Provident
Energy Management Inc.; administrative agent, sole
bookrunner, and lead arranger of senior secured
credit facilities to finance the acquisition.
* Sponsored the annual Bloomberg Canadian Finance
Conference for the eleventh year in a row.
=========== ============================================================= ======================================================
Segment Results - Financial Markets
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars) 2023 2022(2) % change
============================================== ======= ======= ========
Global markets
Equities 904 979 (8)
Fixed-income 417 367 14
Commodities and foreign exchange 173 156 11
---------------------------------------------- ------- ------- --------
1,494 1,502 (1)
Corporate and investment banking 1,162 966 20
---------------------------------------------- ------- ------- --------
Total revenues(1) 2,656 2,468 8
Non-interest expenses 1,161 1,029 13
---------------------------------------------- ------- ------- --------
Income before provisions for credit losses
and income taxes 1,495 1,439 4
Provisions for credit losses 39 (23)
---------------------------------------------- ------- ------- --------
Income before income taxes 1,456 1,462 -
Income taxes(1) 401 388 3
---------------------------------------------- ------- ------- --------
Net income 1,055 1,074 (2)
---------------------------------------------- ------- ------- --------
Less: Specified items after income taxes(3) (5) -
---------------------------------------------- ------- ------- --------
Net income - Adjusted (3) 1,060 1,074 (1)
---------------------------------------------- ------- ------- --------
Average assets(4) 180,837 154,349 17
Average loans and acceptances(4) (Corporate
Banking only) 29,027 22,311 30
Net impaired loans(5) 30 91 (67)
Net impaired loans as a % of total loans and
acceptances(5) 0.1 % 0.4%
Average deposits(4) 57,459 47,242 22
Efficiency ratio(5) 43.7 % 41.7%
Efficiency ratio - Adjusted(6) 43.4 % 41.7%
============================================== ======= ======= ========
(1) The Total revenues and Income taxes items of the Financial
Markets segment are presented on a taxable equivalent basis.
Taxable equivalent basis is a calculation method that consists in
grossing up certain revenues taxed at lower rates by the income tax
to a level that would make it comparable to revenues from taxable
sources in Canada . For the year ended October 31, 2023, Total
revenues were grossed up by $571 million ($277 million in 2022),
and an equivalent amount was recognized in Income taxes. The effect
of these adjustments is reversed under the Other heading of segment
results.
(2) For the year ended October 31, 2022, certain amounts were
reclassified, notably due to a revised method for the sectoral
allocation of technology investment expenses.
(3) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP financial measures. During
fiscal 2023, the segment recorded, in the Non-interest expenses
item, $7 million in intangible asset impairment losses ($5 million
net of income taxes) on technology development.
(4) Represents an average of the daily balances for the period.
(5) See the Glossary section on pages 124 to 127 for details on
the composition of these measures.
(6) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP ratios.
Financial Results
In the Financial Markets segment, net income
totalled $1,055 million in fiscal 2023, down
2% year over year. Growth in the segment's total
revenues was more than offset by higher
non-interest Total Revenues by Category
expenses and higher provisions for credit losses. Year ended October 31
As for adjusted net income, which excludes (millions of Canadian dollars)
intangible
asset impairment losses, it totalled $1,060
million, down 1% from $1,074 million in fiscal
2022. The segment's income before provisions 2022 2023
for credit losses and income taxes stood at Global markets - Equities
$1,495 million in fiscal 2023, up $56 million Global markets - Fixed income
or 4% from fiscal 2022. Its fiscal 2023 total Global markets - Commodities and
revenues on a taxable equivalent basis amounted foreign exchange
to $2,656 million, a $188 million or 8% Corporate and investment banking
year-over-year
increase. Global markets revenues were down
1% due to an 8% decrease in revenues from equity
securities, whereas revenues from fixed-income
securities rose 14% and revenues from commodities
and foreign exchange activities rose 11%. As
for the fiscal 2023 corporate and investment
banking revenues, were up 20% year over year
given growth in banking service revenues, revenues
from capital markets activity, and revenues
from merger and acquisition activity.
For fiscal 2023, the segment's non-interest
expenses rose 13% year over year. This increase
was due to higher compensation and employee
benefits (notably wage growth and the variable
compensation associated with revenue growth),
to higher technology investment expenses, and
to expenses related to the segment's business
growth. At 43.7%, the fiscal 2023 efficiency
ratio deteriorated when compared to 41.7% in
fiscal 2022. As for the segment's adjusted
non-interest
expenses, they stood at $1,154 million in fiscal
2023 versus $1,029 million in fiscal 2022. And
as for the adjusted efficiency ratio, it was
43.4% versus 41.7% in fiscal 2022.
Financial Markets recorded $39 million in
provisions
for credit losses during fiscal 2023 compared
to $23 million in recoveries of credit losses
in fiscal 2022. This increase was mainly due
to a $60 million increase in provisions for
credit losses on non-impaired loans, as there
was loan portfolio growth in fiscal 2023 and
the fiscal 2023 macroeconomic conditions were
less favourable than those of fiscal 2022. As
for provisions for credit losses on impaired
loans, they were up slightly year over year.
U.S. Specialty Finance and International
The Bank complements its Canadian growth with a targeted,
disciplined international strategy that aims for superior returns.
The Bank is currently focused on specialty finance in the U.S.
through its Credigy subsidiary and on personal and commercial
banking in Cambodia through its ABA Bank subsidiary. The Bank also
holds minority positions in financial groups operating in
French-speaking Africa and Africa-Asia. The Bank currently has a
moratorium on any new significant investments in emerging markets.
During fiscal 2023, the U.S. Specialty Finance and International
(USSF&I) segment generated 12% of the Bank's consolidated total
revenue and 16% of its net income.
Credigy Breakdown of Total Revenues ABA Bank
Year ended October 31,
2023
Credigy (2022: 40 %)
ABA Bank (2022: 60 %)
U.S. Specialty Finance - Credigy
Key Success Factors
* Proven investment strategy that is adaptable to
rapidly changing market conditions.
* Diversification across several classes of performing
assets.
* Market credibility achieved through 370-plus
transactions and over US$25 billion in total
investments life-to-date.
* Rigorous underwriting approach with continuous
refinement of modelling and analytics capabilities.
* Resilience to unfavourable economic conditions owing
to credit quality and structural enhancements that
provide downside protection.
* Emphasis on recruiting and retaining exceptional
talent.
Founded in 2001 and based in Atlanta, Georgia, Credigy is a
specialty finance company primarily active in financing and
acquiring a diverse range of performing assets. Its portfolio is
mostly comprised of diversified secured consumer receivables in the
U.S. market. Through its best-in-class modelling expertise,
flexibility, and client-centric approach, Credigy is a partner of
choice for financial services institutions.
Economic and Market Review
The progress made in recent months in the United States towards
achieving the Federal Reserve's dual mandate of maintaining full
employment and keeping inflation stable around 2% has certainly
been greeted with enthusiasm. Indeed, there seems to be a growing
number of investors who now expect a greater possibility of a soft
landing for the economy. But the fact that inflation has so far
fallen without too much damage to growth does not guarantee that
future progress towards price stability will be painless.
It's a safe bet that inflation will continue to fall in 2024, as
the U.S. central
bank believes, but there's a significant risk that this will be
to the detriment of
economic activity. It turns out that rate hikes tend to affect
the economy with a long lag, especially in the U.S. where most
mortgages are fixed over a long period. But with the cost of
servicing non-mortgage debt rising, consumers may well have to show
more restraint in the quarters ahead, especially as the excess
savings accumulated during the pandemic may have been fully
deployed. This hypothesis seems to be borne out by data already
showing a significant increase in the percentage of consumer loans
that have fallen into serious delinquency (90 days or more overdue)
in the third quarter of 2023. High interest rates are likely to
dissuade consumers from making major purchases, and cause
businesses to postpone investments as they face an interest payment
shock for refinancing. In such a context, the U.S. economy is
expected to slide into contraction in the first half of 2024, a
scenario that would translate into growth of just 0.3% next
year.
The economic environment in 2023 and the outlook for 2024 are
discussed in more detail in the Economic Review and Outlook section
on page 24.
Objectives and Strategic Priorities - Credigy
Credigy aims to provide customized solutions for the acquisition
or financing of consumer assets in pursuit of the best
risk-adjusted returns and a pre-tax return on assets (ROA) of at
least 2.5%.
2023 Achievements and Highlights 2024 Priorities
===================== ================================================================ ========================================================================
Sustain deal flow
by being a partner * Achieved balance sheet growth through a disciplined * Leverage relationships with current and prospective
of choice for investment approach. partners.
institutions
facing complex
challenges * Invested by establishing new relationships and * Remain prepared to seize opportunities in rapidly
and strategic leveraging existing partners. evolving markets.
changes
* Maintained average assets of approximately $9.8
billion.
--------------------- ================================================================== ======================================================================
Maintain a
diversified * Invested in prime performing secured assets that * Favour asset diversification and a prudent investment
mix of performing lengthened the average life of the business book. profile.
assets
* Continued asset class diversification that is focused * Maintain a stable risk-reward balance while
on high-quality consumer, mortgage, and insurance optimizing for capital efficiency.
assets.
* Leveraged flexibility to invest via financing and
direct acquisitions.
--------------------- ================================================================== ======================================================================
Achieve best
risk-adjusted * Actively monitored the economy for opportunities. * Actively monitor macroeconomic conditions to
returns implement risk mitigation strategies.
* Refined and calibrated credit models to target the
best risk-return investments. * Deliver asset growth through a balanced mix of
financing and direct acquisitions.
* Maintained a prudent approach to achieve a
risk-return balance.
===================== ================================================================== ======================================================================
International - ABA Bank
Established in 1996, ABA Bank provides financial services to
individuals and businesses in Cambodia. It is now the largest by
assets and the fastest growing commercial bank in Cambodia. ABA
Bank offers a full spectrum of financial services to micro, small
and medium enterprises (MSMEs) as well as to individuals through 87
branches, 43 self-banking units, 1,395 automated teller machines
(ATMs) and other self-service machines, and advanced online banking
and mobile banking platforms. It has been selected as the Best Bank
in Cambodia by financial magazines T he Banker , Global Finance
(ninth consecutive year), Euromoney (tenth consecutive year) and
Asiamoney.
Economic and Market Review
Signs of economic slowdown in China continue to affect
Cambodia's tourism industry as well as foreign direct investments.
Garment and textile exports are impacted by weakening global
external demand from the U.S. and Europe, while regional exports
continue to benefit from recent free-trade agreements(1) and from
the diversification of the manufacturing sector. The highly
dollarized nature of the Cambodian economy (80%+) helps to keep the
inflation under control. After peaking at around 8% in mid-2022,
economic growth currently stands at around 2.5%. The economy grew
by 5.2% in 2022 and is expected to grow between 5.5% and 6.0% in
2023. In 2024, growth rates should remain between 5% and 6%, as
tourism and investments trend towards more normalized levels.
Cambodia will also continue to benefit from increased regional
economic integration under the ASEAN trade association. The
Cambodian market is underbanked; there is a high adoption and use
of mobile technology and social media in the country, and over 65%
of the population of 17 million is under 35 years of age.
(1) Regional Comprehensive Trade Partnership between the
Association of Southeast Asian Nations (ASEAN), Australia, New
Zealand, Brunei Darussalam, China and Japan, Cambodia-China,
Cambodia-South Korea.
Objectives and Strategic Priorities - ABA Bank
ABA Bank is pursuing an omnichannel banking strategy with the
goal of becoming the lending partner of choice to MSMEs while
increasing market penetration in deposits and transactional
services for retail and business clients.
2023 Achievements and Highlights 2024 Priorities
============== ================================================================ =================================================================
Grow market
share * Achieved 27% growth in loan volumes. * Open 8 branches and 15 self-banking units in 2024 to
in MSME extend its reach in Cambodia, continue modernizing
lending its branch network, and gain direct access to a
* Maintained its leading market position while larger pool of MSME customers and retail deposits.
continuing to grow the business.
* Focus on MSME clients in industries that have been
* Continued to adapt the MSME lending strategy to minimally affected by the current economic slowdown.
support the growing needs of customers as their
businesses become more mature.
* Continue to adapt the lending strategy in line with
the growing needs of MSME customers as their
* Opened six new branches, bringing the total to 87 businesses become more mature.
throughout the country.
-------------- ================================================================ =================================================================
Maintain
credit * Maintained a well-diversified portfolio (98% of loans * Maintain strong governance, disciplined risk
quality are secured with an average loan-to-value between 40 management, and sound business processes.
and 50).
* Ensure good credit quality across the loan portfolio
* At 3.3% of the loan portfolio as at October 31, 2023, to keep non-performing loan levels below market
non-performing loans were below market average. averages.
* Closely monitored clients that are impacted by the * Continue to focus on secured lending.
current economic slowdown.
* Standard & Poor's maintained ABA Bank's long-term
credit rating at B+ with a "Stable" outlook, based on
its strong financial profile underpinned by its
advanced digital platforms and transactional banking.
-------------- ================================================================ =================================================================
Sustain
growth in * Grew deposit volume by 25% from fiscal 2022. * Further develop the transactional banking model to
deposits and accelerate the migration of cash transactions,
transactional payments, and money transfers to self-service and
services * Continued to enhance self-banking capabilities, digital banking channels.
including the market-leading full-scale mobile
banking application in Cambodia.
* Adapt the product offering to support the growth and
evolving needs of clients.
* Self-banking transactions made up 99% of total
transactions.
* Increase the deposit base by providing convenience to
retail customers through an advanced digital and
* Further expanded ABA 24/7, a network of standalone self-banking infrastructure and by expanding the
self-banking locations that provide customers with network of self-service locations.
round-the-clock access to their accounts and that now
has 43 locations throughout the country.
============== ================================================================ =================================================================
Segment Results - USSF&I
Year ended October 31
(millions of Canadian dollars) 2023 2022 % change
============================================ ====== ====== ========
Total revenues
Credigy 483 439 10
ABA Bank 726 669 9
International - 2
-------------------------------------------- ------ ------ --------
1,209 1,110 9
------------------------------------------- ------ ------ --------
Non-interest expenses
Credigy 140 131 7
ABA Bank 260 212 23
International 2 1
-------------------------------------------- ------ ------ --------
402 344 17
------------------------------------------- ------ ------ --------
Income before provisions for credit losses
and income taxes 807 766 5
-------------------------------------------- ------ ------ --------
Provisions for credit losses
Credigy 81 35
ABA Bank 32 31 3
-------------------------------------------- ------ ------ --------
113 66 71
------------------------------------------- ------ ------ --------
Income before income taxes 694 700 (1)
-------------------------------------------- ------ ------ --------
Income taxes
Credigy 55 57 (4)
ABA Bank 91 86 6
-------------------------------------------- ------ ------ --------
146 143 2
------------------------------------------- ------ ------ --------
Net income
Credigy 207 216 (4)
ABA Bank 343 340 1
International (2) 1
-------------------------------------------- ------ ------ --------
548 557 (2)
------------------------------------------- ------ ------ --------
Average assets(1) 23,007 18,890 22
Average loans and receivables(1) 18,789 15,283 23
Purchased or originated credit-impaired
(POCI) loans 511 459 11
Net impaired loans excluding POCI loans(2) 283 180
Average deposits(1) 10,692 8,577 25
Efficiency ratio(2) 33.3 % 31.0%
============================================ ====== ====== ========
(1) Represents an average of the daily balances for the period.
(2) See the Glossary section on pages 124 to 127 for details on
the composition of these measures.
Financial Results
In the USSF&I segment, net income totalled $548 million in
fiscal 2023 compared to $557 million in fiscal 2022, as growth in
total revenues was more than offset by higher non-interest expenses
and higher provisions for credit losses. The segment's total
revenues amounted to $1,209 million in fiscal 2023 versus $1,110
million in fiscal 2022, a 9% increase driven by a $44 million
increase in Credigy's revenues and a $57 million increase in ABA
Bank's revenues.
For fiscal 2023, the segment's non-interest expenses stood at
$402 million compared to $344 million in fiscal 2022, a 17%
increase attributable mainly to higher non-interest expenses at ABA
Bank resulting from business growth.
The segment's fiscal 2023 provisions for credit losses were up
$47 million year over year, with the increase being essentially
attributable to Credigy.
Credigy
For fiscal 2023, the Credigy subsidiary's net income totalled
$207 million, a 4% year-over-year decrease that was due to
significantly higher provisions for credit losses. The subsidiary's
income before provisions for credit losses and income taxes
totalled $343 million in fiscal 2023, up 11% year over year. Its
total revenues amounted to $483 million in fiscal 2023, up from
$439 million in fiscal 2022. A decrease in net interest income was
more than offset by growth in non-interest income, as there was a
higher unfavourable impact from fair value remeasurements of
certain portfolios during fiscal 2022. For fiscal 2023, Credigy's
non-interest expenses rose $9 million year over year, mainly due to
compensation and employee benefits. Its provisions for credit
losses increased by $46 million year over year, due to an increase
in provisions for credit losses on non-impaired loans (associated
with growth in the loan portfolio and a deterioration in certain
risk parameters) and on impaired loans. These increases were partly
offset by a decrease in provisions for credit losses on POCI loans,
as there were favourable remeasurements of certain portfolios
during fiscal 2023.
ABA Bank
For fiscal 2023, the ABA Bank subsidiary's net income totalled
$343 million, up $3 million or 1% from fiscal 2022. Growth in the
subsidiary's business activities, mainly sustained loan growth,
drove total revenues up 9% year over year. This increase was,
however, partly offset by higher interest rates on deposits and
lower interest rates on loans given a competitive environment in
Cambodia. ABA Bank's fiscal 2023 non-interest expenses stood at
$260 million, a 23% year-over-year increase resulting from higher
compensation and employee benefits (notably higher wage expense
given a greater number of employees), from higher occupancy
expenses given business growth and the opening of new branches, and
from higher advertising expenses. Its provisions for credit losses
stood at $32 million in fiscal 2023, a $1 million year-over-year
increase that stems from higher provisions for credit losses on
non-impaired loans, partly offset by lower provisions for credit
losses on impaired loans.
Average Loans and Receivables - Average Loans and Average Deposits
Credigy - ABA Bank and International
Year ended October 31 Year ended October 31
(millions of Canadian dollars) (millions of Canadian dollars)
2022 2023 2022 2023
Loans Loans
POCI loans Deposits
Other
The Other heading reports on Treasury operations; liquidity
management; Bank funding; asset and liability management; the
activities of the Flinks subsidiary, a fintech company specialized
in financial data aggregation and distribution; certain specified
items; and the unallocated portion of corporate units. Corporate
units include Technology and Operations, Risk Management, Employee
Experience, and Finance. These units provide advice and guidance
throughout the Bank and to its business segments in addition to
expertise and support in their respective fields.
Segment Results - Other
Year ended October 31
(millions of Canadian dollars) 2023 2022(1)
============================================================= ====== =======
Net interest income(2) (591) (536)
Non-interest income(2) (141) 201
-------------------------------------------------------------- ------ -------
Total revenues (732) (335)
Non-interest expenses 194 199
-------------------------------------------------------------- ------ -------
Income before provisions for credit losses and income
taxes (926) (534)
Provisions for credit losses 5 2
-------------------------------------------------------------- ------ -------
Income before income taxes (931) (536)
Income taxes (recovery)(2) (667) (340)
-------------------------------------------------------------- ------ -------
Net loss (264) (196)
Non-controlling interests (2) (1)
-------------------------------------------------------------- ------ -------
Net loss attributable to the Bank's shareholders and holders
of other equity instruments (262) (195)
-------------------------------------------------------------- ------ -------
Less: Specified items after income taxes(3) 12 -
-------------------------------------------------------------- ------ -------
Net loss - Adjusted (3) (276) (196)
-------------------------------------------------------------- -------
Average assets(4) 69,731 71,868
============================================================== ====== =======
(1) For the year ended October 31, 2022, certain amounts were
reclassified, notably due to a revised method for the sectoral
allocation of technology investment expenses.
(2) For the year ended October 31, 2023, Net interest income was
reduced by $332 million ($234 million in 2022), Non-interest income
was reduced by $247 million ($48 million in 2022), and an
equivalent amount was recorded in Income taxes (recovery). These
adjustments include a reversal of the taxable equivalent of the
Financial Markets segment and the Other heading. Taxable equivalent
basis is a calculation method that consists of grossing up certain
revenues taxed at lower rates by the income tax to a level that
would make it comparable to revenues from taxable sources in
Canada.
(3) See the Financial Reporting Method section on pages 14 to 19
for additional information on non-GAAP financial measures. The Bank
recorded a $91 million gain ($67 million net of income taxes) upon
the fair value measurement of an equity interest, a $25 million
expense ($18 million net of income taxes) related to the
retroactive impact of changes to the Excise Tax Act, $12 million in
impairment losses ($9 million net of income taxes) on premises and
equipment and intangible assets, $6 million in charges ($4 million
net of income taxes) related to penalties on onerous contracts, and
a $24 million income tax expense related to the Canadian
government's 2022 tax measures.
(4) Represents an average of the daily balances for the period.
Financial Results
For the Other heading of segment results, there was a net loss
of $264 million in fiscal 2023 compared to a net loss of $196
million in fiscal 2022. The change in net loss was notably
attributable to lower gains on investments in fiscal 2023, partly
offset by a higher contribution from Treasury activities and a $91
million gain recorded upon the fair value measurement of an equity
interest during fiscal 2023. For fiscal 2023, non-interest expenses
were down slightly year over year, mainly due to variable
compensation, partly offset by certain specified items recorded in
fiscal 2023, notably a $25 million expense related to the
retroactive impact of changes to the Excise Tax Act, $12 million in
impairment losses on premises and equipment and intangible assets,
and $6 million in charges related to penalties on onerous
contracts.
The fiscal 2023 specified items had a $12 million favourable
impact on net loss. As for adjusted net loss, it stood at $276
million in fiscal 2023 compared to a $196 million net loss in
fiscal 2022.
Quarterly Financial Information
Several trends and factors have an impact on the Bank's
quarterly net income, revenues, non-interest expenses and
provisions for credit losses. The following table presents a
summary of results for the past eight quarters.
Quarterly Results Summary (1)
(millions of Canadian
dollars) 2023 2022
=========================== ========================== ===== ===== ===== =====
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
========================= ===== ===== ===== ===== ===== ===== ===== =====
Statement of income data
Net interest income 735 870 882 1,099 1,207 1,419 1,313 1,332
Non-interest income 1,859 1,645 1,597 1,483 1,127 994 1,126 1,134
--------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Total revenues 2,594 2,515 2,479 2,582 2,334 2,413 2,439 2,466
Non-interest expenses 1,607 1,417 1,374 1,403 1,346 1,305 1,299 1,280
--------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Income before provisions
for credit losses and
income taxes 987 1,098 1,105 1,179 988 1,108 1,140 1,186
Provisions for credit
losses 115 111 85 86 87 57 3 (2)
Income taxes 104 148 173 212 163 225 248 258
--------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Net income 768 839 847 881 738 826 889 930
=========================== ===== ===== ===== ===== ===== ===== ===== =====
(1) For additional information about the 2023 fourth-quarter
results, visit the Bank's website at nbc.ca or the SEDAR+ website
at sedarplus.ca to consult the Bank's Press Release for the Fourth
Quarter of 2023 , published on December 1, 2023 . Also, a summary
of results for the past 12 quarters is provided in Table 1 on pages
114 and 115 of this MD&A.
The analysis of the past eight quarters reflects the sustained
performance of all the business segments and helps readers identify
the items that have favourably or unfavourably affected results. In
the third and fourth quarters of fiscal 2023, the Bank's net income
results increased year over year owing to growth in total revenues,
partly offset by higher non-interest expenses and higher provisions
for credit losses. Conversely, in the first two quarters of fiscal
2023, net income was down year over year due to net income
decreases in the Financial Markets and USSF&I segments as well
as to higher provisions for credit losses during those quarters of
fiscal 2023, as there were more favourable macroeconomic conditions
during the same quarters of fiscal 2022.
Year over year, net interest income was down in every quarter of
fiscal 2023. These decreases were essentially due to the trading
activity revenues of the Financial Markets segment. However, the
fiscal 2023 net interest income generated by all the other business
segments was up year over year in every quarter (except the second
quarter for USSF&I). These increases were driven by loan and
deposit growth in both the Personal and Commercial and Wealth
Management segments, by loan portfolio growth and by the good
performance of certain Credigy portfolios, and by an increase in
ABA Bank's net interest income owing to sustained business growth.
Moreover, the interest rate hikes that occurred in fiscal 2023 and
2022 had a favourable impact on net interest income in every
quarter of fiscal 2023.
For fiscal 2023, non-interest income increased year over year in
every quarter, essentially due to the trading activity revenues of
the Financial Markets segment, which had a favourable impact on
non-interest income in every quarter of fiscal 2023. These
increases were also due to sustained business growth in the
Personal and Commercial segment, particularly in the area of card
revenues, where there was a notable increase in purchasing volume,
as well as to revenues from bankers' acceptances. In the Wealth
Management segment, non-interest income experienced notable
year-over-year decreases in the first and second quarters of fiscal
2023 due to a decrease in fee-based revenues, as stock market
performance was weaker compared to the same quarters of fiscal
2022, as well as to a decrease in transaction-based and other
revenues. The third-quarter increase in non-interest income was
notably due to a $91 million gain recorded upon a fair value
remeasurement of an equity interest.
For fiscal 2023, non-interest expenses posted year-over-year
increases in every quarter. These increases came from compensation
and employee benefits, notably due to wage growth and a greater
number of employees, as well as from investments made as part of
the Bank's technological evolution. Occupancy expense was also up
in every quarter of fiscal 2023, due to expansion of the ABA Bank
network and to expenses arising from the Bank's new head office
building. Travel and business development expenses were also up in
every quarter of fiscal 2023 as activities with clients resumed. In
the third quarter of fiscal 2023, non-interest expenses included a
$25 million expense related to the retroactive impact of changes to
the Excise Tax Act, and in the fourth quarter of fiscal 2023, the
Bank recorded $86 million in impairment losses on premises and
equipment and intangible assets, $35 million in litigation
expenses, and $15 million in provisions for contracts.
Year over year, provisions for credit losses were up in every
quarter of fiscal 2023. These increases were due to higher
provisions for credit losses on impaired loans at Personal Banking
and Commercial Banking, reflecting a normalization of credit risk,
as well as to higher provisions for credit losses on Credigy's
impaired loans. However, in the first quarter of fiscal 2023,
provisions for credit losses on impaired loans were down year over
year, as the Financial Markets segment recorded higher recoveries
of credit losses in the first quarter. Year over year, provisions
for credit losses on non-impaired loans were up in every quarter of
fiscal 2023 due to growth in the loan portfolios, to the migration
of credit risk, and to updates and revisions to the probability
weightings of scenarios, reflecting uncertainties in the
macroeconomic outlook. In the first and second quarters of fiscal
2022, the Bank had posted reversals of allowances for credit losses
on non-impaired loans to reflect improvements in both the
macroeconomic outlook and credit conditions at that time.
For fiscal 2023, the year-over-year change in effective income
tax rate stems essentially from a higher level and proportion of
tax-exempt dividend income and from higher income in lower tax-rate
jurisdictions, factors that were partly offset by the additional
1.5% tax. In addition, in the first quarter of fiscal 2023, the tax
rate reflects the impact of the Canadian government's 2022 tax
measures, namely, the Canada Recovery Dividend and the $24 million
impact related to current and deferred taxes for fiscal 2022.
Analysis of the Consolidated Balance Sheet
Consolidated Balance Sheet Summary
As at October 31
(millions of Canadian dollars) 2023 2022 % change
================================================== ======= ======= ========
Assets
Cash and deposits with financial institutions 35,234 31,870 11
Securities 121,818 109,719 11
Securities purchased under reverse repurchase
agreements and securities borrowed 11,260 26,486 (57)
Loans and acceptances, net of allowances 225,443 206,744 9
Other 29,823 28,921 3
-------------------------------------------------- ------- ------- --------
423,578 403,740 5
------------------------------------------------- ------- ------- --------
Liabilities and equity
Deposits 288,173 266,394 8
Other 110,979 114,101 (3)
Subordinated debt 748 1,499 (50)
Equity attributable to the Bank ' s shareholders
and holders of other equity instruments 23,676 21,744 9
Non-controlling interests 2 2 -
-------------------------------------------------- ------- ------- --------
423,578 403,740 5
================================================= ======= ======= ========
As at October 31, 2023, the Bank had total assets of $423.6
billion, up $19.9 billion or 5% from $403.7 billion since the end
of fiscal 2022.
Cash and Deposits With Financial Institutions
At $35.2 billion as at October 31, 2023, cash and deposits with
financial institutions were up $3.3 billion since October 31, 2022,
mainly due to an increase in deposits with the U.S. Federal
Reserve, partly offset by a decrease in deposits with the Bank of
Canada. The high level of cash and deposits with financial
institutions is explained in part by the excess liquidity related
to the accommodative monetary policies that have been applied by
central banks since 2020. The Bank's liquidity and funding risk
management practices are described on pages 91 to 100 of this
MD&A.
Securities
Securities rose $12.1 billion since October 31, 2022, due to a
$12.6 billion or 14% increase in securities at fair value through
profit or loss, an increase that was essentially attributable to
equity securities and securities issued or guaranteed by the
Canadian government, partly offset by a decrease in securities
issued or guaranteed by U.S. Treasury, other U.S. agencies, and
other foreign governments. As for securities other than those
measured at fair value through profit or loss, they decreased by
$0.5 billion. Securities purchased under reverse repurchase
agreements and securities borrowed decreased by $15.2 billion since
October 31, 2022, mainly due to the activities of the Financial
Markets segment and Treasury. The Bank's market risk management
policies are described on pages 84 to 90 of this MD&A.
Loans and Acceptances
As at October 31, 2023, loans and acceptances, net of allowances
for credit losses, accounted for 53% of total assets and totalled
$225.4 billion, rising $18.7 billion or 9% since October 31,
2022.
Residential mortgage loans outstanding amounted to $86.8 billion
as at October 31, 2023, rising $6.7 billion or 8% since October 31,
2022. This growth was mainly driven by sustained demand for
mortgage credit in the Personal and Commercial segment as well as
by the activities of the Financial Markets segment and the ABA Bank
and Credigy subsidiaries. Personal loans totalled $46.4 billion at
year-end 2023, rising $1.1 billion from $45.3 billion since October
31, 2022. This increase came mainly from business growth at
Personal Banking and ABA Bank. At $2.6 billion, credit card
receivables rose $0.2 billion since October 31, 2022.
As at October 31, 2023, loans and acceptances to business and
government totalled $90.8 billion, a $10.9 billion or 14% increase
since October 31, 2022 that was mainly due to business growth at
Commercial Banking, in corporate financial services, and at ABA
Bank.
Table 9 (page 121) shows, among other information, gross loans
and acceptances by borrower category as at October 31, 2023. At
$99.9 billion as at October 31, 2023, residential mortgages
(including home equity lines of credit) have posted strong growth
since 2019 and accounted for 44% of total loans and acceptances.
The growth in residential mortgages was driven by sustained demand
for mortgage credit in the Personal and Commercial segment and by
the business activity at Financial Markets, ABA Bank, and Credigy.
As for personal loans (including credit card receivables), they
totalled $20.7 billion as at October 31, 2023, rising $2.0 billion
since October 31, 2022. As for loans to businesses, the key
increases were recorded in the utilities, communications, financial
services, real estate and real-estate-construction, professional
services, and other services categories. As at October 31, 2023,
certain sectors were down year over year, notably non-real-estate
construction and manufacturing. POCI loans rose since October 31,
2022, an increase that was due to portfolios acquired by Credigy
and Commercial Banking during fiscal 2023.
Impaired Loans
Impaired loans include all loans classified in Stage 3 of the
expected credit loss model and POCI loans.
As at October 31, 2023, gross impaired loans stood at $1,584
million compared to $1,271 million as at October 31, 2022 (Table
10, page 122). As for net impaired loans, they totalled $1,276
million as at October 31, 2023 compared to $1,030 million as at
October 31, 2022. Net impaired loans excluding POCI loans amounted
to $606 million, rising $127 million from $479 million as at
October 31, 2022. This increase was due to an increase in the net
impaired loans of the loan portfolios of Personal and Commercial
Banking and of the Credigy (excluding POCI loans) and ABA Bank
subsidiaries, partly offset by a decrease in the net impaired loans
of the loan portfolios of the Wealth Management and Financial
Markets segments. The net POCI loans stood at $670 million as at
October 31, 2023 compared to $551 million as at October 31, 2022,
an increase due to portfolio acquisitions conducted by Credigy and
Commercial Banking during fiscal 2023.
A detailed description of the Bank's credit risk management
practices is provided on pages 74 to 83 of this MD&A as well as
in Note 7 to the consolidated financial statements.
Other Assets
As at October 31, 2023, other assets totalled $29.8 billion
compared to $28.9 billion as at October 31, 2022, a $0.9 billion
increase that was mainly due to a $1.9 billion increase in other
assets, notably receivables, prepaid expenses and other items;
interest and dividends receivable; and current tax assets, with
these increases being partly offset by a decrease in amounts due
from clients, dealers and brokers. Furthermore, derivative
financial instruments were down $1.0 billion, with this result
being related to the activities of the Financial Markets
segment.
Deposits
As at October 31, 2023, deposits stood at $288.2 billion, rising
$21.8 billion or 8% since the end of fiscal 2022. At $87.9 billion,
personal deposits, as presented in Table 12 (page 123), accounted
for 31% of all deposits, and had increased $9.1 billion since
October 31, 2022. This increase was driven by business growth at
Personal Banking, in both the Wealth Management and Financial
Markets segments, and at ABA Bank.
As shown in Table 12, business and government deposits totalled
$197.3 billion as at October 31, 2023, rising $13.1 billion from
$184.2 billion as at October 31, 2022. This increase came from the
funding activities of the Financial Markets segment and of
Treasury, including $4.9 billion in deposits subject to bank
recapitalization (bail-in) conversion regulations, as well as from
Commercial Banking activities. Deposits from deposit-taking
institutions totalled $3.0 billion as at October 31, 2023,
declining $0.4 billion since the end of fiscal 2022.
Other Liabilities
Other liabilities, totalling $111.0 billion as at October 31,
2023, decreased $3.1 billion since October 31, 2022, resulting
essentially from an $8.1 billion decrease in obligations related to
securities sold short and a $1.3 billion decrease in liabilities
related to transferred receivables. These decreases were partly
offset by a $4.8 billion increase in obligations related to
securities sold under repurchase agreements and securities loaned
and a $1.1 billion increase in other liabilities, notably interest
and dividends payable.
Subordinated Debt and Other Contractual Obligations
Subordinated debt decreased since October 31, 2022 as a result
of the Bank's redemption, on February 1, 2023, of $750 million in
medium-term notes. The contractual obligations are presented in
detail in Note 29 to the consolidated financial statements.
Equity
As at October 31, 2023, equity attributable to the Bank's
shareholders and holders of other equity instruments totalled $23.7
billion, rising $2.0 billion from $21.7 billion since October 31,
2022. This increase was due to net income net of dividends; to the
issuances of common shares under the Stock Option Plan; and to
accumulated other comprehensive income, notably net unrealized
foreign currency translation gains on investments in foreign
operations and net gains on instruments designated as cash flow
hedges. These increases were partly offset by remeasurements of
pension plans and other post-employment benefit plans as well as by
the net fair value change attributable to the credit risk on
financial liabilities designated at fair value through profit or
loss.
The Consolidated Statements of Changes in Equity on page 138 of
this Annual Report present the items that make up equity. In
addition, an analysis of the Bank's regulatory capital is presented
in the Capital Management section of this MD&A.
Related Party Transactions
In the normal course of business, the Bank provides various
banking services and enters into contractual agreements and other
transactions with associates, joint ventures, directors, key
officers and other related parties. These agreements and
transactions are entered into under conditions similar to those
offered to non-related third parties.
In accordance with the Bank Act (Canada), the aggregate of loans
granted to key officers of the Bank, excluding mortgage loans
granted on their principal residence, cannot exceed twice the
officer's annual salary.
Loans to eligible key officers are granted under the same
conditions as those granted to any other employee of the Bank. The
main conditions are as follows:
-- the employee must meet the same credit requirements as a client;
-- mortgage loans are offered at the preferential employee rate;
-- home equity lines of credit bear interest at Canadian prime
less 0.5%, but never lower than Canadian prime divided by two;
-- personal loans bear interest at a risk-based regular client rate;
-- credit card advances bear interest at a prescribed fixed rate
in accordance with Bank policy;
-- personal lines of credit bear interest at Canadian prime less
0.5%, but never lower than Canadian prime divided by two.
The Bank also offers a deferred stock unit plan to directors who
are not Bank employees. For additional information, see Note 22 to
the consolidated financial statements. Additional information about
related parties is presented in Notes 9, 27 and 28 to the
consolidated financial statements.
Income Taxes
Notice of Assessment
In March 2023, the Bank was reassessed by the Canada Revenue
Agency (CRA) for additional income tax and interest of
approximately $90 million (including estimated provincial tax and
interest) in respect of certain Canadian dividends received by the
Bank during the 2018 taxation year.
In prior fiscal years, the Bank had been reassessed for
additional income tax and interest of approximately $875 million
(including provincial tax and interest) in respect of certain
Canadian dividends received by the Bank during the 2012-2017
taxation years.
In the reassessments, the CRA alleges that the dividends were
received as part of a "dividend rental arrangement".
In October 2023, the Bank filed a notice of appeal with the Tax
Court of Canada, and the matter is now in litigation. The CRA may
issue reassessments to the Bank for taxation years subsequent to
2018 in regard to certain 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, 2023.
Canadian Government's 2022 Tax Measures
On November 4, 2022, the Government of Canada introduced Bill
C-32 - An Act to implement certain provisions of the fall economic
statement tabled 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 April 7, 2022 budget.
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, as well as a 1.5% increase in the
statutory tax rate. On December 15, 2022, Bill C-32 received royal
assent. Given that these tax measures were in effect at the
financial reporting date, a $32 million tax expense for the CRD and
an $8 million tax recovery for the tax rate increase, including the
impact related to current and deferred taxes for fiscal 2022, were
recognized in the consolidated financial statements for the year
ended October 31, 2023.
Proposed Legislation
On November 28, 2023, the Government of Canada released draft
legislation entitled An Act to implement certain provisions of the
fall economic statement tabled in Parliament on November 21, 2023
and certain provisions of the budget tabled in Parliament on March
28, 2023 to implement tax measures applicable to the Bank. The
measures include the denial of the deduction in respect of
dividends received after 2023 on shares that are mark-to-market
property for tax purposes (except for dividends received on
"taxable preferred shares" as defined in the Income Tax Act), as
well as the application of a 2% tax on the net value of equity
repurchases occurring as of January 1, 2024.
In its March 28, 2023 budget, the Government of Canada also
proposed to implement the Pillar 2 rules (global minimum tax)
published by the Organisation for Economic Co-operation and
Development (OECD) for fiscal years beginning as of December 31,
2023. To date, the Pillar 2 rules have not yet been included in a
bill in Canada. During fiscal 2023, the Pillar 2 rules were
included in a bill in certain jurisdictions where the Bank
operates.
The federal budget of March 28, 2023 also included another tax
measure on amendments to the Excise Tax Act, indicating that
payment card clearing services rendered by a payment card network
operator are subject to the goods and services tax (GST) and the
harmonized sales tax (HST). On April 20, 2023, the Government of
Canada tabled Bill C-47 - An Act to implement certain provisions of
the budget tabled in Parliament on March 28, 2023 to implement,
among other things, these amendments to the GST/HST for payment
cards. On June 22, 2023, Bill C-47 received royal assent. Given
that the amendment to the Excise Tax Act had been adopted at the
reporting date, an expense of $25 million was recognized in the
consolidated financial statements for the year ended October 31,
2023.
Event After the Consolidated Balance Sheet Date
Repurchase of Common Shares
On November 30, 2023, the Bank's Board of Directors approved a
normal course issuer bid, beginning December 12, 2023, to
repurchase for cancellation up to 7,000,000 common shares
(representing approximately 2.07% of its then outstanding common
shares) over the 12-month period ending December 11, 2024. Any
repurchase through the Toronto Stock Exchange will be done at
market prices. The common shares may also be repurchased through
other means authorized by the Toronto Stock Exchange and applicable
regulations, including private agreements or share repurchase
programs under issuer bid exemption orders issued by the securities
regulators. A private purchase made under an exemption order issued
by a securities regulator will be done at a discount to the
prevailing market price. The amounts that are paid above the
average book value of the common shares are charged to Retained
earnings. This normal course issuer bid is subject to the approval
of OSFI and the Toronto Stock Exchange (TSX).
Securitization and Off-Balance-Sheet Arrangements
In the normal course of business, the Bank is party to various
financial arrangements that, under IFRS, are not required to be
recorded on the Consolidated Balance Sheet or are recorded under
amounts other than their notional or contractual values. These
arrangements include, among others, transactions with structured
entities, derivative financial instruments, the issuance of
guarantees, credit instruments, and financial assets received as
collateral.
Structured Entities
The Bank uses structured entities, among other means, to
diversify its funding sources and to offer services to clients, in
particular to help them securitize their financial assets or
provide them with investment opportunities. Under IFRS, a
structured entity must be consolidated if the Bank controls the
entity. Note 1 to the consolidated financial statements describes
the accounting policy and criteria used for consolidating
structured entities. Additional information on consolidated and
non-consolidated structured entities is provided in Note 27 to the
consolidated financial statements.
Securitization of the Bank's Financial Assets
Mortgage Loans
The Bank participates in two Canada Mortgage and Housing
Corporation (CMHC) securitization programs: the Mortgage-Backed
Securities (MBS) Program under the National Housing Act (Canada)
(NHA) and the Canada Mortgage Bond (CMB) Program. Under the first
program, the Bank issues NHA securities backed by insured
residential mortgage loans and, under the second, the Bank sells
NHA securities to Canada Housing Trust (CHT), which finances the
purchase through the issuance of mortgage bonds insured by CMHC.
Moreover, these mortgage bonds feature an interest rate swap
agreement under which a CMHC-certified counterparty pays CHT the
interest due to investors and receives the interest on the NHA
securities. As at October 31, 2023, the outstanding amount of NHA
securities issued by the Bank and sold to CHT was $23.2 billion.
The mortgage loans sold consist of fixed- or variable-rate
residential loans that are insured against potential losses by a
loan insurer. In accordance with the NHA-MBS Program, the Bank
advances the funds required to cover late payments and, if
necessary, obtains reimbursement from the insurer that insured the
loan. The NHA-MBS and CMB programs do not use liquidity guarantee
arrangements. The Bank uses these securitization programs mainly to
diversify its funding sources. In accordance with IFRS, because the
Bank retains substantially all of the risks and rewards of
ownership of the mortgage loans transferred to CHT, the
derecognition criteria are not met. Therefore, the insured mortgage
loans securitized under the CMB Program continue to be recognized
in Loans on the Bank's Consolidated Balance Sheet, and the
liabilities for the considerations received from the transfer are
recognized in Liabilities related to transferred receivables on the
Consolidated Balance Sheet. For additional information, see Note 8
to the consolidated financial statements.
Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II
(CCCT II) to continue its program of securitizing credit card
receivables on a revolving basis . The Bank uses this entity for
capital management and funding purposes. The Bank acts as the
servicer of the receivables sold and maintains the client
relationship. Furthermore, it administers the securitization
program and ensures that all related procedures are stringently
followed and that investors are paid according to the provisions of
the program.
As at October 31, 2023, the credit card receivables portfolio
held by CCCT II represented an amount outstanding of $2.3 billion.
CCCT II issued notes to investors, $0.1 billion of which is held by
third parties and $0.8 billion is held by the Bank. CCCT II also
issued a bank certificate held by the Bank that stood at $1.4
billion as at October 31, 2023. New receivables are periodically
sold to the structure on a revolving basis to replace the
receivables reimbursed by clients.
Every series of notes is rated by the Fitch and DBRS Morningstar
(DBRS) rating agencies. From this portfolio of sold receivables,
the Bank retains the excess spread, i.e., the residual net interest
income after all the expenses related to this structure have been
paid, and thus provides first-loss protection. Furthermore,
second-loss protection for issued series is provided by notes
subordinated to the senior notes, representing 5.8% of the total
amount of the series issued. The Bank controls CCCT II and thus
consolidates it.
Securitization of Third-Party Financial Assets
The Bank administers multi-seller conduits that purchase
financial assets from clients and finance those purchases by
issuing commercial paper backed by the acquired assets. Clients use
these multi-seller conduits to diversify their funding sources and
reduce borrowing costs while continuing to service the financial
assets and providing some amount of first-loss protection. Notes
issued by the conduits and held by third parties provide additional
credit loss protection. The Bank acts as a financial agent and
provides administrative and transaction structuring services to
these conduits. The Bank provides backstop liquidity and credit
enhancement facilities under the commercial paper program. These
facilities are presented and described in Notes 26 and 27 to the
consolidated financial statements. The Bank has entered into
derivative financial instrument contracts with these conduits, the
fair value of which is presented on the Bank's Consolidated Balance
Sheet. The Bank is not required to consolidate these conduits, as
it does not control them.
Derivative Financial Instruments
The Bank uses various types of derivative financial instruments
to meet its clients' needs, generate trading activity revenues, and
manage its exposure to interest rate, foreign exchange, and credit
risk as well as other market risks. All derivative financial
instruments are accounted for at fair value on the Consolidated
Balance Sheet. Transactions in derivative financial instruments are
expressed as notional amounts. These amounts are not presented as
assets or liabilities on the Consolidated Balance Sheet. They
represent the face amount of the contract to which a rate or price
is applied to determine the amount of cash flows to be exchanged.
Notes 1 and 16 to the consolidated financial statements provide
additional information on the types of derivative financial
instruments used by the Bank and their accounting basis.
Guarantees
In the normal course of business, the Bank enters into various
guarantee contracts. The principal types of guarantees are letters
of guarantee, backstop liquidity and credit enhancement facilities,
certain securities lending activities, and certain indemnification
agreements. Note 26 to the consolidated financial statements
provides detailed information on these guarantees.
Credit Instruments
In the normal course of business, the Bank enters into various
off-balance-sheet credit commitments. The credit instruments used
to meet the financing needs of its clients represent the maximum
amount of additional credit that the Bank could be required to
extend if the commitments were fully drawn. For additional
information on these off-balance-sheet credit instruments and other
items, see Note 26 to the consolidated financial statements.
Financial Assets Received as Collateral
In the normal course of business, the Bank receives financial
assets as collateral as a result of transactions involving
securities purchased under reverse repurchase agreements,
securities borrowing and lending agreements, and derivative
financial instrument transactions. For additional information on
financial assets received as collateral, see Note 26 to the
consolidated financial statements.
Capital Management
Capital management has a dual role of ensuring a competitive
return to the Bank's shareholders while maintaining a solid capital
foundation that covers the risks inherent to the Bank's business
activities, supports its business segments, and protects its
clients.
Capital Management Framework
The Bank's capital management policy defines the guiding
principles as well as the roles and responsibilities of its
internal capital adequacy assessment process. This process aims to
determine the capital level that the Bank must maintain to pursue
its business activities and accommodate unexpected losses arising
from extremely adverse economic and operational conditions. The
Bank has implemented a rigorous internal capital adequacy
assessment process that comprises the following procedures:
-- conducting an overall risk assessment;
-- measuring significant risks and the capital requirements
related to the Bank's financial budget for the next fiscal year and
current and prospective risk profiles;
-- integrating stress tests across the organization and
executing sensitivity analyses to determine the capital buffer
above minimum regulatory levels (for additional information on
enterprise-wide stress testing, see the Risk Management section of
this MD&A);
-- aggregating capital and monitoring the reasonableness of
internal capital compared with regulatory capital;
-- comparing projected internal capital against regulatory
capital levels, internal operating targets, and competing
banks;
-- attesting to the adequacy of the Bank's capital levels.
Assessing capital adequacy is an integral part of capital
planning and strategy. The Bank sets internal operating targets
that include a discretionary cushion in excess of the minimum
regulatory requirements, which provides a solid financial structure
and sufficient capital to meet management's business needs in
accordance with its risk appetite, along with competitive returns
to shareholders, under both normal market conditions and a range of
severe but plausible stress testing scenarios. The internal capital
adequacy assessment process is a key tool in establishing the
Bank's capital strategy and is subject to quarterly reviews and
periodic amendments.
Risk-adjusted return on capital and shareholder value added
(SVA), which are obtained from an assessment of required economic
capital, are calculated quarterly for each of the Bank's business
segments. The results are then used to guide management in
allocating capital among the various business segments.
Structure and Governance
Along with its partners from Risk Management, the Global Funding
and Treasury Group, and Finance, the Capital Management team is
responsible for maintaining integrated control methods and
processes so that an overall assessment of capital adequacy may be
performed.
The Board oversees the structure and development of the Bank's
capital management policy and ensures that the Bank maintains
sufficient capital in accordance with regulatory requirements and
in consideration of market conditions. The Board delegates certain
responsibilities to the Risk Management Committee (RMC), which in
turn recommends capital management policies and oversees
application thereof. The Board, on the recommendation of the RMC,
assumes the following responsibilities:
-- reviewing and approving the capital management policy;
-- reviewing and approving the Bank's risk appetite, including
the main capital and risk targets and the corresponding limits;
-- reviewing and approving the capital plan and strategy on an
annual basis, including the Bank's internal capital adequacy
assessment process;
-- reviewing and approving the implementation of significant
measures respecting capital, including contingency measures;
-- reviewing significant capital disclosures, including Basel capital adequacy ratios;
-- ensuring the appropriateness of the regulatory capital adequacy assessment.
The Senior Leadership Team is responsible for defining the
Bank's strategy and plays a key role in guiding capital-related
measures and decisions. The Enterprise--Wide Risk Management
Committee oversees capital management, which consists of reviewing
the capital plan and strategy and implementing significant
capital-related measures, including contingency measures, and
making recommendations about these measures.
Basel Accord and Regulatory Environment
Basel Accord
The Basel Accord proposes a range of approaches of varying
complexity, the choice of which determines the sensitivity of
capital to risks. A less complex approach, such as the Standardized
Approach, uses regulatory weightings, while a more complex approach
uses the Bank's internal estimates of risk components to establish
risk-weighted assets (RWA) and calculate regulatory capital.
As required under Basel, risk-weighted assets are calculated for
each credit risk, market risk, and operational risk. Some of OSFI's
revision to its capital, leverage, liquidity, and disclosure rules,
made as part of the Basel III reforms, took effect during the
second quarter of 2023, notably the implementation of the revised
Standardized Approach and IRB Approach to credit risk, the revision
of the operational framework of the leverage ratio framework, and
the introduction of a more risk-sensitive capital floor. The Bank
uses the Internal Ratings-Based (IRB) Approaches for credit risk to
determine minimum regulatory capital requirements for most of its
portfolios. The Bank must use the Foundation Internal Ratings-Based
(FIRB) Approach for certain specific exposure types such as large
corporates and financial institutions. For all other exposure types
treated under an IRB Approach, the Bank uses the Advanced Internal
Ratings-Based (AIRB) Approach. Under the FIRB Approach, the Bank
can use its own estimate of probability of default (PD) but must
also rely on OSFI estimates for loss given default (LGD) and
exposure at default (EAD) risk parameters. Under the AIRB Approach,
the Bank can use its own estimates for all risk parameters: PD,
LGD, EAD. Under both IRB Approaches, the risk parameters are
subject to specific input floors. The credit risk of certain
portfolios considered to be less significant is weighted according
to the revised Standardized Approach, which uses prescribed
regulatory weightings. Exposure to banking book equity securities
is also weighted according to the revised Standardized
Approach.
With respect to the risk related to securitization operations,
the capital treatment depends on the type of underlying exposures
and on the information available about the exposures. The Bank must
use the Securitization: Internal Ratings-Based Approach (SEC-IRBA)
if it is able to apply an approved internal ratings-based model and
has sufficient information to calculate the capital requirements
for all underlying exposures in the securitization pool. Under this
approach, RWA is derived from a combination of supervisory inputs
and inputs specific to the securitization exposure, such as the
implicit capital charge related to the underlying exposures, the
credit enhancement level, the effective maturity, the number of
exposures, and the weighted average LGD.
If the Bank cannot use the SEC-IRBA, it must use the
Securitization: External Ratings-Based Approach (SEC-ERBA) for the
securitization exposures that are externally rated. This approach
assigns risk weights to exposures using external ratings. The Bank
uses the ratings assigned by Moody's, Standard & Poor's
(S&P), Fitch, Kroll Bond Rating Agency, or DBRS or a
combination of these ratings. The Bank uses the Securitization:
Internal Assessment Approach (SEC-IAA) for unrated securitization
exposures relating to the asset-backed commercial paper conduits it
sponsors. The SEC-IAA rating methodologies used are mainly based on
criteria published by the above-mentioned credit rating agencies
and consider risk factors that the Bank deems relevant to assessing
the credit quality of the exposures. The Bank's SEC-IAA includes an
assessment of the extent by which the credit enhancement available
for loss protection provides coverage of expected losses. The
levels of stressed coverage the Bank requires for each internal
risk rating are consistent with the requirements published by the
rating agencies for equivalent external ratings by asset class. If
the Bank cannot apply the SEC-ERBA or the SEC-IAA, it must use the
supervisory formula under the Securitization Standardized Approach
(SEC-SA). Under this approach, RWA is derived from inputs specific
to the securitization exposure, such as the implicit capital charge
related to the underlying exposures calculated under the
standardized credit risk approach as well as credit enhancement and
delinquency levels.
If none of the above approaches can be used, the securitization
exposure must be assigned a risk weight of 1,250%. The Bank can
apply a reduced capital charge for securitization exposures that
meet the criteria of the Simple, Transparent and Comparable (STC)
framework.
For operational risk, the Bank applies the revised Standardized
Approach, which now incorporates the Bank's internal operational
risk loss experience in the RWA calculation.
Market risk-weighted assets are primarily determined using the
Internal Model-Based Approach, while the Standardized Approach is
used to assess interest-rate-specific risk. Credit valuation
adjustment (CVA) risk-weighted assets are determined under a
prescribed Standardized Approach. In the first quarter of 2024, the
Bank will implement the revised market risk and CVA frameworks in
accordance with the Basel III reforms.
The Bank must also meet the requirements of an updated capital
output floor that will ensure that its total calculated RWA is not
below 72.5% of the total RWA as calculated under the Basel III
Standardized Approaches. OSFI is allowing a three-year phase-in of
the floor factor, starting at 65.0% in the second quarter of 2023
and rising 2.5% per year to reach 72.5% in fiscal 2026. If the
capital requirement is less than the capital output floor
requirement after applying the floor factor, the difference is
added to total RWA.
Capital ratios are calculated by dividing capital by RWA.
Credit, market, and operational risks are factored into the RWA
calculation for regulatory purposes. Basel rules apply at the
consolidated level of the Bank. The assets of non-consolidated
entities for regulatory purposes are therefore excluded from the
RWA calculation.
The definition adopted by the Basel Committee on Banking
Supervision (BCBS) distinguishes between three types of capital.
Common Equity Tier 1 (CET1) capital consists of common
shareholders' equity less goodwill, intangible assets, and other
CET1 capital deductions. Additional Tier 1 (AT1) capital consists
of eligible non-cumulative preferred shares, limited recourse
capital notes (LRCN), and other AT1 capital adjustments. The sum of
CET1 and AT1 capital forms what is known as Tier 1 capital. Tier 2
capital consists of eligible subordinated debts and certain
allowances for credit losses. Total regulatory capital is the sum
of Tier 1 and Tier 2 capital.
OSFI is responsible for applying the Basel Accord in Canada. As
required under the Basel Accord, OSFI requires that recognized
regulatory capital instruments other than common equity must have a
non-viability contingent capital (NVCC) clause to ensure that
investors bear losses before taxpayers should the government
determine that it is in the public interest to rescue a non-viable
financial institution. As at October 31, 2023, all of the Bank's
regulatory capital instruments, other than common shares, have an
NVCC clause. Furthermore, in the regulations of the Canada Deposit
Insurance Corporation (CDIC) Act and the Bank Act (Canada), the
Government of Canada has provided detailed information on
conversion, issuance, and compensation regimes for bail-in
instruments issued by Domestic Systemically Important Banks
(D-SIBs) (collectively the Bail-In Regulations) . Pursuant to the
CDIC Act, in circumstances where OSFI has determined that the Bank
has ceased, or is about to cease, to be viable, the Governor in
Council may, upon a Minister of Finance recommendation indicating
that he or she believes that it is in the public interest to do so,
grant an order directing CDIC to convert all or a portion of
certain shares and liabilities of the Bank into common shares (a
"Bail-In Conversion").
The Bail-In Regulations governing the conversion and issuance of
bail-in instruments came into force on September 23, 2018, and
those governing compensation for holders of converted instruments
came into force on March 27, 2018. Any shares and liabilities
issued before the effective date of the Bail-In Regulations are not
subject to a Bail-In Conversion, unless, in the case of a
liability, the terms of said liability are, on or after that day,
amended to increase its principal amount or to extend its term to
maturity, and the liability, as amended, meets the requirements to
be subject to a Bail-In Conversion.
The Bail-In Regulations prescribe the types of shares and
liabilities that are subject to a Bail-In Conversion. In general,
any senior debt securities with an initial or amended
term-to-maturity greater than 400 days that are unsecured or
partially secured and have been assigned a Committee on Uniform
Securities Identification Procedures (CUSIP), an International
Securities Identification Number (ISIN), or similar identification
number are subject to a Bail-In Conversion. However, certain other
debt obligations of the Bank, such as structured notes (as defined
in the Bail-In Regulations), covered bonds, deposits, and certain
derivative financial instruments, are not subject to a Bail-In
Conversion.
The Bank and all other major Canadian banks have to maintain the
following minimum capital ratios established by OSFI: a CET1
capital ratio of at least 11.0%, a Tier 1 capital ratio of at least
12.5%, and a Total capital ratio of at least 14.5%. All of these
ratios are to include a capital conservation buffer of 2.5%
established by the BCBS and OSFI, a 1.0% surcharge applicable
solely to D-SIBs, and a 3.0% domestic stability buffer (DSB)
established by OSFI. On December 8, 2022, OSFI expanded the DSB
range, setting it at 0% to 4.0% instead of the previous range of 0%
to 2.5%, and it announced that the DSB would rise from 2.5% to 3.0%
effective February 1, 2023. On June 20, 2023, OSFI raised the DSB
by 50 bps to 3.5% effective November 1, 2023. The DSB consists
exclusively of CET1 capital. A D-SIB that fails to meet this buffer
requirement is not subject to automatic constraints to reduce
capital distributions but must provide a remediation plan to OSFI.
Additionally, OSFI requires D-SIBs to meet a Basel III leverage
ratio of at least 3.5%. Effective February 1, 2023, OSFI increased
the leverage ratio minimum requirement by imposing a Tier 1 capital
buffer of 0.5% applicable only to D-SIBs. The leverage ratio is a
measure independent of risk that is calculated by dividing the
amount of Tier 1 capital by total exposure. Total exposure is
defined as the sum of on-balance-sheet assets (including derivative
financial instrument exposures and securities financing transaction
exposures) and off--balance-sheet items. The assets deducted from
Tier 1 capital are also deducted from total exposure.
OSFI's Total Loss Absorbing Capacity (TLAC) Guideline, which
applies to all D-SIBs under the federal government's Bail-In
Regulations, is to ensure that a D-SIB has sufficient
loss-absorbing capacity to support its recapitalization in the
unlikely event it becomes non-viable. Available TLAC includes total
capital as well as certain senior unsecured debts that satisfy all
of the eligibility criteria of OSFI's TLAC guideline. OSFI requires
D-SIBs to maintain a risk-based TLAC ratio of at least 24.5%
(including the DSB) of risk-weighted assets and a TLAC leverage
ratio of at least 7.25% (increased by 0.5% effective February 1,
2023). As at October 31, 2023, outstanding liabilities of $17.7
billion ($12.8 billion as at October 31, 2022) were subject to
conversion under the Bail-In Regulations.
Requirements - Regulatory Capital(1) , Leverage(1) , and TLAC(2)
Ratios
Requirements as at October
31, 2023
--------- ------- ------------ ------- --------- --------------------------------- ====
Minimum
set
by OSFI
(3) ,
Minimum including
Minimum set Domestic the Ratios
Capital set by stability domestic as at
conservation by D-SIB OSFI buffer stability October
Minimum buffer BCBS surcharge (3) (4) buffer 31, 2023
========== ======= ============ ======= ========= ======= ========= =========== =========
Capital
ratios
CET1 4.5 % 2.5 % 7.0 % 1.0 % 8.0 % 3.0 %11.0 % 13.5 %
Tier 1 6.0 % 2.5 % 8.5 % 1.0 % 9.5 % 3.0 %12.5 % 16.0 %
Total 8.0 % 2.5 % 10.5 % 1.0 % 11.5 % 3.0 %14.5 % 16.8 %
--------- ------- ------------ ------- --------- ------- --------- ---- ----- ---- ---
Leverage
ratio 3.0 % n.a. 3.0 % 0.5 % 3.5 % n.a. 3.5 % 4.4 %
---------- ------- ------------ ------- --------- ------- --------- ---- ----- ---- ---
TLAC ratio 21.5 % n.a. 21.5 % n.a. 21.5 % 3.0 %24.5 % 29.2 %
---------- ------- ------------ ------- --------- ------- --------- ---- ----- ---- ---
TLAC
leverage
ratio 6.75 % n.a. 6.75 % 0.5 % 7.25 % n.a. 7.25 % 8.0 %
========== ======= ============ ======= --------- ======= ========= ==== ===== ==== ===
n.a. Not applicable
(1) 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) The TLAC ratio and the TLAC leverage ratio are calculated in
accordance with OSFI's Total Loss Absorbing Capacity Guideline.
(3) The capital ratios and the TLAC ratio include the capital
conservation buffer and the D-SIB surcharge. On February 1, 2023,
OSFI raised the minimum leverage ratio and the TLAC leverage ratio
by imposing a Tier 1 capital buffer of 0.5% (surcharge related to
D-SIBs).
(4) On December 8, 2022, OSFI announced that the DSB would rise
from 2.5% to 3.0%, effective February 1, 2023. On June 20, 2023,
OSFI announced that the DSB will rise from 3.0% to 3.5% effective
November 1, 2023.
The Bank ensures that its capital levels are always above the
minimum capital requirements set by OSFI, including the DSB. By
maintaining a strong capital structure, the Bank can cover the
risks inherent to its business activities, support its business
segments, and protect its clients.
Other disclosure requirements pursuant to Pillar 3 of the Basel
Accord and a set of recommendations defined by the EDTF are
presented in the Supplementary Regulatory Capital and Pillar 3
Disclosure report published quarterly and available on the Bank's
website at nbc.ca. Furthermore, a complete list of capital
instruments and their main features is also available on the Bank's
website.
Regulatory Context
The Bank closely monitors regulatory developments and
participates actively in various consultative processes. In
response to the impact of the COVID--19 pandemic, on March 27, 2020
OSFI had announced a series of regulatory adjustments to support
the financial and operational resilience of banks. Listed below are
the OSFI measures that had an impact during fiscal 2023 but that
are no longer applicable as at October 31, 2023.
-- Capital floor: OSFI lowered the capital floor factor from 75%
to 70% in accordance with the Basel II Standardized Approach; this
factor stayed in place until the domestic implementation of the
Basel III capital floor in the second quarter of 2023.
-- Leverage ratio: OSFI continued to allow banks to temporarily
exclude exposures from central bank reserves for leverage ratio
purposes until April 1, 2023.
A brief description of ongoing regulatory projects is presented
below.
Basel III Reforms
In the second quarter of 2023, the Bank implemented OSFI's
finalized guidance relating to the Basel III reforms, consisting
primarily of:
-- a revised Standardized Approach and Internal Ratings-Based (IRB) Approach for credit risk;
-- a revised Standardized Approach for operational risk;
-- a revised capital output floor;
-- a revised Leverage Ratio Framework; and
-- revised Pillar 3 disclosure requirements.
The Basel III reforms also affect the market risk and CVA risk
frameworks, which will take effect in the first quarter of
2024.
Other Projects
On September 12, 2023, OSFI released the final Parental
Stand-Alone (Solo) TLAC Framework for Domestic Systemically
Important Banks Guideline. This guideline focuses on the
loss-absorbing capacity of Canadian parent banks rather than its
consolidated operations, allowing OSFI to assess the stand-alone
financial strength of the parent bank and its ability to act as a
source of financial strength for its subsidiaries and branches. The
framework complements OSFI's existing TLAC guideline for D-SIBs on
a group consolidated basis, providing an additional layer of
protection to safeguard the rights and interests of depositors,
policyholders, and creditors. D-SIBs must adhere to this guideline
effective November 1, 2023.
Capital Management in 2023
Management Activities
On December 12, 2022, the Bank began a normal course issuer bid
to repurchase for cancellation up to 7,000,000 common shares
(representing approximately 2.1% of its then outstanding common
shares) over the 12-month period ending no later than December 11,
2023. During the year ended October 31, 2023, the Bank did not
repurchase any common shares.
On February 1, 2023, the Bank redeemed $750 million of
medium-term notes maturing on February 1, 2028. These instruments
were excluded from the capital ratio calculations as at January 31,
2023.
As at October 31, 2023, the Bank had 338,284,629 issued and
outstanding common shares compared to 336,582,124 a year earlier.
It also had 66,000,000 issued and outstanding preferred shares and
1,500,000 LRCN, unchanged from October 31, 2022. For additional
information on capital instruments, see Notes 15 and 18 to the
consolidated financial statements.
Dividends
The Bank's strategy for common share dividends is to aim for a
dividend payout ratio between 40% and 50% of net income
attributable to common shareholders, taking into account such
factors as financial position, cash needs, regulatory requirements,
and any other factor deemed relevant by the Board.
For fiscal 2023, the Bank declared $1,344 million in dividends
to common shareholders, representing 42.0% of net income
attributable to common shareholders (2022: 36.8%) and representing
41.1% of adjusted net income attributable to common shareholders
(2022: 36.8%). The declared dividends are within the target payout
range as a result of the dividend increase during the fiscal year.
Given the economic conditions during fiscal 2023, the Bank has
taken a prudent approach to managing regulatory capital and remains
confident in its ability to increase earnings going forward.
Shares , Other Equity Instruments, and Stock Options
As at October 31, 2023
========================== ==========================
Number of
shares or LRCN $ million
========================== =============== =========
First preferred shares
Series 30 14,000,000 350
Series 32 12,000,000 300
Series 38 16,000,000 400
Series 40 12,000,000 300
Series 42 12,000,000 300
-------------------------- --------------- ---------
66,000,000 1,650
------------------------- --------------- ---------
Other equity instruments
LRCN - Series 1 500,000 500
LRCN - Series 2 500,000 500
LRCN - Series 3 500,000 500
-------------------------- --------------- ---------
1,500,000 1,500
------------------------- --------------- ---------
67,500,000 3,150
------------------------- --------------- ---------
Common shares 338,284,629 3,294
-------------------------- --------------- ---------
Stock options 11,546,688
========================== =============== =========
As at November 24, 2023, there were 338,269,824 common shares
and 11,534,768 stock options outstanding. NVCC provisions require
the conversion of capital instruments into a variable number of
common shares should OSFI deem a bank to be non-viable or should
the government publicly announce that a bank has accepted or agreed
to accept a capital injection. If an NVCC trigger event were to
occur, all of the Bank's preferred shares, LRCNs, and medium-term
notes maturing on August 16, 2032, which are NVCC capital
instruments, would be converted into common shares of the Bank
according to an automatic conversion formula at a conversion price
corresponding to the greater of the following amounts: (i) a $5.00
contractual floor price; or (ii) the market price of the Bank's
common shares on the date of the trigger event (10-day weighted
average price). Based on a $5.00 floor price and including an
estimate for accrued dividends and interest, these NVCC capital
instruments would be converted into a maximum of 868 million Bank
common shares, which would have a 72.0% dilutive effect based on
the number of Bank common shares outstanding as at October 31,
2023.
Regulatory Capital Ratios, Leverage Ratio, and TLAC Ratios
As at October 31, 2023, the Bank's CET1, Tier 1, and Total
capital ratios were, respectively, 13.5%, 16.0% and 16.8%, compared
to ratios of, respectively, 12.7%, 15.4% and 16.9% as at October
31, 2022. The CET1 and Tier 1 capital ratios increased since
October 31, 2022, essentially due to the contribution from net
income net of dividends, to common share issuances under the Stock
Option Plan, and to the positive impact from the implementation of
the Basel III reforms related to the credit and operational risk
frameworks. These factors were partly offset by growth in RWA and
by the end of the transitional measures applicable to ECL
provisioning implemented by OSFI at the beginning of the COVID-19
pandemic. The Total capital ratio increased due to the same factors
mentioned above, but the increase was more than offset by the $750
million redemption of medium-term notes on February 1, 2023.
As at October 31, 2023, the leverage ratio was 4.4% compared to
4.5% as at October 31, 2022. The decrease in the leverage ratio is
essentially due to the growth in total exposure and to the end of
the temporary measure permitted by OSFI with respect to the
exclusion of central bank reserves from the leverage exposure
calculation. These factors were partly offset by the growth in Tier
1 capital.
As at October 31, 2023, the Bank's TLAC ratio and TLAC leverage
ratio were, respectively, 29.2% and 8.0%, compared with 27.7% and
8.1%, respectively, as at October 31, 2022. The increase in the
TLAC ratio was due to the same factors described for the Total
capital ratio as well as to the net instrument issuances that met
the TLAC eligibility criteria during the period. The decrease in
the TLAC leverage ratio was due to the same factors as those
provided for the leverage ratio, partly offset by the net TLAC
instrument issuances.
During the year ended October 31, 2023, the Bank was in
compliance with all of OSFI's regulatory capital, leverage, and
TLAC requirements.
Regulatory Capital(1) , Leverage Ratio(1) , and TLAC(2)
As at October 31 2023 2022
====================== ======= =======
Capital
CET1 16,920 14,818
Tier 1 20,068 17,961
Total 21,056 19,727
---------------------- ------- -------
Risk-weighted assets 125,592 116,840
------- -------
Total exposure 456,478 401,780
---------------------- ------- -------
Capital ratios
CET1 13.5 % 12.7%
Tier 1 16.0 % 15.4%
Total 16.8 % 16.9%
---------------------- ------- -------
Leverage ratio 4.4 % 4.5%
---------------------- ------- -------
Available TLAC 36,732 32,351
TLAC ratio 29.2 % 27.7%
TLAC leverage ratio 8.0 % 8.1%
====================== ======= =======
(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. The
calculation of the figures as at October 31, 2022 had included the
transitional measure applicable to expected credit loss
provisioning and the temporary measure regarding the exclusion of
central bank reserves implemented by OSFI in response to the
COVID-19 pandemic. These provisions ceased to apply on November 1,
2022 and April 1, 2023, respectively.
(2) Available TLAC, the TLAC ratio, and the TLAC leverage ratio
are calculated in accordance with OSFI's Total Loss Absorbing
Capacity Guideline.
Movement in Regulatory Capital(1)
Year ended October 31
(millions of Canadian dollars) 2023 2022
============================================================= ======= =======
Common Equity Tier 1 (CET1) capital
Balance at beginning 14,818 12,973
Issuance of common shares (including Stock Option Plan) 85 54
Impact of shares purchased or sold for trading 3 (1)
Repurchase of common shares - (245)
Other contributed surplus 22 16
Dividends on preferred and common shares and distributions
on other equity instruments (1,507) (1,325)
Net income attributable to the Bank's shareholders and
holders of other equity instruments 3,337 3,384
Removal of own credit spread net of income taxes 232 (733)
Other (226) 448
Movements in accumulated other comprehensive income
Translation adjustments 103 333
Debt securities at fair value through other comprehensive
income (1) (105)
Other 1 (2)
Change in goodwill and intangible assets (net of related
tax liability) 37 (67)
Other, including regulatory adjustments and transitional
arrangements
Change in defined benefit pension plan asset (net of
related tax liability) 101 145
Change in amount exceeding 15% threshold
Deferred tax assets - -
Significant investment in common shares of financial
institutions - -
Deferred tax assets, unless they result from temporary
differences (net of related tax liability) (25) (5)
Other deductions of regulatory adjustments to CET1
implemented by OSFI(2) (60) (52)
Change in other regulatory adjustments - -
----------------------------------------------------------- ------- -------
Balance at end 16,920 14,818
------------------------------------------------------------- ------- -------
Additional Tier 1 capital
Balance at beginning 3,143 2,649
New Tier 1 eligible capital issuances - 500
Redeemed capital - -
Other, including regulatory adjustments and transitional
arrangements 5 (6)
------------------------------------------------------------ ------- -------
Balance at end 3,148 3,143
------------------------------------------------------------- ------- -------
Total Tier 1 capital 20,068 17,961
------------------------------------------------------------- ------- -------
Tier 2 capital
Balance at beginning 1,766 1,021
New Tier 2 eligible capital issuances - 750
Redeemed capital (750) -
Tier 2 instruments issued by subsidiaries and held by
third parties - -
Change in certain allowances for credit losses (54) 21
Other, including regulatory adjustments and transitional
arrangements 26 (26)
------------------------------------------------------------ ------- -------
Balance at end 988 1,766
------------------------------------------------------------- ------- -------
Total regulatory capital 21,056 19,727
============================================================= ======= =======
(1) See the Financial Reporting Method section on pages 14 to 19
for additional information on capital management measures.
(2) As at October 31, 2022, this item included the transitional
measure applicable to expected credit loss provisioning implemented
by OSFI in response to the COVID-19 pandemic. This provision ceased
to apply on November 1, 2022.
RWA by Key Risk Drivers
Risk-weighted assets (RWA) amounted to $125.6 billion as at
October 31, 2023 compared to $116.8 billion as at October 31, 2022,
an $8.8 billion increase resulting mainly from organic growth in
RWA, a deterioration in the credit quality of the loan portfolio,
and by foreign exchange movements, partly offset by methodology
changes related to the implementation of the Basel III reforms,
notably for operational risk and credit risk. Changes in the Bank's
RWA by risk type are presented in the following table.
Risk-Weighted Assets Movement by Key Drivers(1)
Quarter ended
October July 31, April January October
(millions of Canadian dollars) 31, 2023 2023 30, 2023 31, 2023 31, 2022
===================================== ========= ======== ========= ========= =========
Total Total Total Total Total
=================================== ========= ======== ========= ========= =========
Credit risk - Risk-weighted assets
at beginning 102,087 101,986 100,820 96,141 91,229
Book size 2,288 578 572 4,439 2,405
Book quality 1,045 467 951 697 93
Model updates (107) - 116 172 300
Methodology and policy - - (1,051) 106 339
Acquisitions and disposals - - - - -
Foreign exchange movements 1,832 (944) 578 (735) 1,775
------------------------------------ --------- -------- --------- --------- ---------
Credit risk - Risk-weighted assets
at end 107,145 102,087 101,986 100,820 96,141
------------------------------------- --------- -------- --------- --------- ---------
Market risk - Risk-weighted assets
at beginning 5,985 5,060 5,960 6,025 5,696
Movement in risk levels (2) (323) 925 (900) (65) 329
Model updates - - - - -
Methodology and policy - - - - -
Acquisitions and disposals - - - - -
------------------------------------ --------- -------- --------- --------- ---------
Market risk - Risk-weighted assets
at end 5,662 5,985 5,060 5,960 6,025
------------------------------------- --------- -------- --------- --------- ---------
Operational risk - Risk-weighted
assets at beginning 12,490 12,065 15,033 14,674 14,452
Movement in risk levels 295 425 93 359 222
Methodology and policy - - (3,061) - -
Acquisitions and disposals - - - - -
------------------------------------ --------- -------- --------- --------- ---------
Operational risk - Risk-weighted
assets at end 12,785 12,490 12,065 15,033 14,674
------------------------------------- --------- -------- --------- --------- ---------
Risk-weighted assets at end 125,592 120,562 119,111 121,813 116,840
===================================== ========= ======== ========= ========= =========
(1) See the Financial Reporting Method section on pages 14 to 19
for additional information on capital management measures.
(2) Also includes foreign exchange rate movements that are not considered material.
The table above provides the risk-weighted assets movements by
the key drivers underlying the different risk categories.
The Book size item reflects organic changes in book size and
composition (including new loans and maturing loans). RWA movements
attributable to book size include increases or decreases in
exposures, measured by exposure at default, assuming a stable risk
profile.
The Book quality item is the Bank's best estimate of changes in
book quality related to experience such as underlying customer
behaviour or demographics, including changes resulting from model
recalibrations or realignments and also including risk mitigation
factors.
The Model updates item is used to reflect implementations of new
models, changes in model scope, and any other change applied to
address model malfunctions. During the year ended October 31, 2023,
the Bank updated the models used for certain retail exposures,
mortgages, and non-retail exposures.
The Methodology and policy item presents the impact of changes
in calculation methods resulting from changes in regulatory
policies or from new regulations. During the quarter ended April
30, 2023, the Bank finalized the implementation of the Basel III
reform requirements related to credit risk, operational risk, and
capital output floor.
Allocation of Economic Capital and Regulatory RWA
Economic capital is an internal measure that the Bank uses to
determine the capital it needs to remain solvent and to pursue its
business operations. Economic capital takes into consideration the
credit, market, operational, business, and other risks to which the
Bank is exposed as well as the risk diversification effect among
them and among the business segments. Economic capital thus helps
the Bank to determine the capital required to protect itself
against such risks and ensure its long-term viability. The
by-segment allocation of economic capital and regulatory RWA was
carried out on a stand-alone basis before attribution of goodwill
and intangible assets. The method used to assess economic capital
is reviewed regularly in order to accurately quantify these
risks.
The Risk Management section of this MD&A provides
comprehensive information about the main types of risk. The "Other
risks" presented below include risks such as business risk and
structural interest rate risk in addition to the benefit of
diversification among types of risk.
Allocation of Risks by Business Segment
As at October 31, 2023
(millions of Canadian dollars)
Business Personal Wealth Management Financial U.S. Specialty Other
segments and Commercial Markets Finance and
International
Major
activities * Banking services * Full-service brokerage * Equities, fixed-inco * U.S. Specialty Finance * Treasury activities
me, commodities and foreig
n
* Credit services * Private banking exchange * Credigy * Liquidity management
* Financing * Direct brokerage * Corporate banking * International * Bank funding
* Investment solutions * Investment solutions * Investment banking * ABA Bank (Cambodia) * Asset and liability management
* Insurance * Administrative and trade execution services * Minority interests in emerging markets * Corporate units
* Transaction products * Fintech services
* Trust and estate services * Flinks Technology Inc.
------------------------------ ---------------------------------------------------- --------------------------- ----------------------------------------------- ---------------------------------------
Economic
capital
by type
of risk Credit 3,781 Credit 86 Credit 3,116 Credit 1,330 Credit 202
Market - Market - Market 314 Market 1 Market (128)
Operational 410 Operational 183 Operational 394 Operational 36 Operational -
Other Other Other Other Other
risks 403 risks 564 risks 968 risks 102 risks (1,125)
------------------------------------- ----------------------------- -------------- ------------------------- -------------
Total 4,594 Total 833 Total 4,792 Total 1,469 Total (1,051)
------------------------------------- ----------- ----------------------------- --------------------- -------------- ----------- ------------------------- -------------------- ------------- ------------------------
Credit 48,479 Credit 1,833 Credit 32,042 Credit 16,100 Credit 8,691
Market - Market - Market 5,524 Market - Market 138
Operational 5,120 Operational 2,281 Operational 4,928 Operational 456 Operational -
---------------- ----------------------------- -------------- ------------------------- -------------
Risk-weighted
assets
(1) Total 53,599 Total 4,114 Total 42,494 Total 16,556 Total 8,829
---------------- ----------- ----------------------------- --------------------- -------------- ----------- ------------------------- -------------------- ------------- ------------------------
(1) See the Financial Reporting Method section on pages 14 to 19
for additional information on capital management measures.
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