TIDM32SS
RNS Number : 4470V
National Bank of Canada
01 December 2023
Regulatory Announcement
National Bank of Canada
December 1(st) , 2023
2023 Annual Financial Statements (Part 1)
National Bank of Canada (the "Bank") announces publication of
its 2023 Annual Report, including the audited consolidated
financial statements for the years ended 31 October 2023 and 2022,
together with the notes thereto and independent auditor's report
thereon (the "2023 Financial Statements"). The 2023 Financial
Statements have been uploaded to the National Storage Mechanism and
will shortly be available at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism and are
available on the Bank's website as part of the 2023 Annual Report
at https://www.nbc.ca/about-us/investors.html
To view the full PDF of the 2023 Financial Statements, the 2023
Annual Report and the 2023 Annual CEO and CFO Certifications,
please click on the follo wing links:
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
Audited Consolidated
Financial Statements
Management's Responsibility for
Financial Reporting 130
Independent Auditor's Report 131
Consolidated Balance Sheets 134
Consolidated Statements of Income 135
Consolidated Statements of Comprehensive
Income 136
Consolidated Statements of Changes
in Equity 138
Consolidated Statements of Cash
Flows 139
Notes to the Audited Consolidated Financial
Statements 140
Management's Responsibility for Financial Reporting
The consolidated financial statements of National Bank of Canada
(the Bank) have been prepared in accordance with section 308(4) of
the Bank Act (Canada), which states that, except as otherwise
specified by the Office of the Superintendent of Financial
Institutions (Canada) (OSFI), the financial statements are to be
prepared in accordance with International Financial Reporting
Standards (IFRS), as issued by the International Accounting
Standards Board (IASB). IFRS represent Canadian generally accepted
accounting principles (GAAP). None of the OSFI accounting
requirements are exceptions to IFRS.
Management maintains the accounting and internal control systems
needed to discharge its responsibility, which is to provide
reasonable assurance that the financial accounts are accurate and
complete and that the Bank's assets are adequately safeguarded.
Controls that are currently in place include quality standards on
staff hiring and training; the implementation of organizational
structures with clear divisions of responsibility and
accountability for performance; the Code of Professional Conduct;
and the communication of operating policies and procedures.
As Chief Executive Officer and as Chief Financial Officer, we
have overseen the evaluation of the design and operation of the
Bank's internal control over financial reporting in accordance with
National Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings released by the Canadian Securities
Administrators. Based on the evaluation work performed, we have
concluded that the internal control over financial reporting and
the disclosure controls and procedures were effective as at October
31, 2023 and that they provide reasonable assurance that the Bank's
financial information is reliable and that its consolidated
financial statements have been prepared in accordance with
IFRS.
The Board of Directors (the Board) is responsible for reviewing
and approving the financial information contained in the Annual
Report. Acting through the Audit Committee, the Board also oversees
the presentation of the consolidated financial statements and
ensures that accounting and control systems are maintained.
Composed of directors who are neither officers nor employees of the
Bank, the Audit Committee is responsible, through Internal Audit,
for performing an independent and objective review of the Bank's
internal control effectiveness, i.e., governance processes, risk
management processes and control measures. Furthermore, the Audit
Committee reviews the consolidated financial statements and
recommends their approval to the Board.
The control systems are further supported by the presence of the
Compliance Service, which exercises independent oversight and
evaluation in order to assist managers in effectively managing
regulatory compliance risk and to obtain reasonable assurance that
the Bank is compliant with regulatory requirements.
Both the Senior Vice-President, Internal Audit and the Senior
Vice-President, Chief Compliance Officer and Chief Anti-Money
Laundering Officer have a direct functional link to the Chair of
the Audit Committee and to the Chair of the Risk Management
Committee. They both also have direct access to the President and
Chief Executive Officer.
In accordance with the Bank Act (Canada), OSFI is mandated to
protect the rights and interests of depositors. Accordingly, OSFI
examines and enquires into the business and affairs of the Bank, as
deemed necessary, to ensure that the provisions of the Bank Act
(Canada) are being satisfied and that the Bank is in sound
financial condition.
The independent auditor, Deloitte LLP, whose report follows, was
appointed by the shareholders at the recommendation of the Board.
The auditor has full and unrestricted access to the Audit Committee
to discuss audit and financial reporting matters.
Laurent Ferreira Marie Chantal Gingras
President and Chief Executive Officer Chief Financial Officer and Executive
Vice-President, Finance
Montreal, Canada, November 30, 2023
Independent Auditor's Report
To the Shareholders of National Bank of Canada
Opinion
We have audited the consolidated financial statements of
National Bank of Canada (the Bank), which comprise the consolidated
balance sheets as at October 31, 2023 and 2022, and the
consolidated statements of income, the consolidated statements of
comprehensive income, the consolidated statements of changes in
equity and the consolidated statements of cash flows for the years
then ended, and notes to the consolidated financial statements,
including a summary of significant accounting policies
(collectively referred to as the "financial statements").
In our opinion, the accompanying financial statements present
fairly, in all material respects, the financial position of the
Bank as at October 31, 2023 and 2022, and its financial performance
and its cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian generally
accepted auditing standards (Canadian GAAS). Our responsibilities
under those standards are further described in the Auditor's
Responsibilities for the Audit of the Financial Statements section
of our report. We are independent of the Bank in accordance with
the ethical requirements that are relevant to our audit of the
financial statements in Canada, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the financial
statements for the year ended October 31, 2023. These matters were
addressed in the context of our audit of the financial statements
as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
Allowances for credit losses -Refer to Notes 1 and 7 to the
financial statements
Key Audit Matter Description
The allowances for credit losses represent management's estimate
of expected credit losses (ECL) on financial assets calculated
under the IFRS 9, Financial Instruments ECL framework. The
calculation of ECL is based on the probability of default (PD),
loss given default (LGD), and exposure at default (EAD) of the
underlying assets and represents an unbiased and probability
weighted estimate of losses expected to occur in the future based
on forecasts of macroeconomic variables for three scenarios.
Lifetime ECL is recorded for financial assets that have experienced
significant increases in credit risk (SICR) since initial
recognition or that are impaired; otherwise 12-month ECL is
recorded. Given uncertainty surrounding the key inputs used to
measure credit losses, the Bank has applied expert credit judgment
to adjust the modelled ECL results.
We have identified the allowances for credit losses as a key
audit matter due to the inherent complexity of the ECL models used
and the significant judgment required by management in relation to
the forward-looking nature of some key assumptions including the
impact of a possible economic recession. Significant auditor
judgment was required in evaluating: (i) the models and
methodologies used to measure ECL; (ii) the forecasts of
macroeconomic scenarios and probability weighting; (iii) the
determination of SICR; and (iv) the adjustments to the modelled ECL
results representing management's expert credit judgment. Auditing
the ECL models and the key judgments and assumptions required a
high degree of auditor judgment and an increased extent of audit
effort, including the involvement of professionals with specialized
skills in credit risk and economics.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to the models and the key judgments
and assumptions used by management to estimate ECL included the
following, among others:
-- With the assistance of professionals with specialized skills in credit risk or economics:
o For a selection of ECL models, evaluated the appropriateness
of the models used to estimate ECL;
o Evaluated the forecasts of macroeconomic scenarios and their
probability weighting by comparing them against independently
developed forecasts and publicly available industry data, including
the impact of a possible economic recession;
o Assessed management's determination of SICR and the
appropriateness of the related model's programming;
o Assessed the adjustments to the modelled ECL results by
evaluating management's expert credit judgment.
Income taxes - Uncertain tax positions - Refer to Notes 1 and 24
to the financial statements
Key Audit Matter Description
In the normal course of its business, the Bank is involved in a
number of transactions for which the tax impacts are uncertain. The
Bank accounts for provisions for uncertain tax positions that
adequately represent the risk stemming from tax matters under
discussion or being audited by tax authorities or from other
matters involving uncertainty. These provisions reflect
management's best possible estimate of the amounts that may have to
be paid based on qualitative assessments of all relevant factors.
As disclosed in Note 24, the Bank was reassessed by the tax
authorities for additional income taxes and interest in respect of
certain Canadian dividends received by the Bank for certain
taxation years and may be reassessed for subsequent taxation years
in regard to similar activities. The Bank has not recognized any
tax liability related to these uncertain tax positions.
We have identified the assessment of the accounting of the
uncertain tax positions related to certain Canadian dividends as a
key audit matter given the significant judgment made by management
when evaluating the probability of acceptance of the Bank's tax
positions and when interpreting relevant tax and case law and
administrative positions. Auditing these judgments required a high
degree of auditor judgment and resulted in an increased extent of
audit effort, including the involvement of tax specialists.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures pertaining to the assessment of the
accounting of the uncertain tax positions related to certain
Canadian dividends included the following, among others:
-- With the assistance of tax specialists, evaluated
management's assessment of the probability of acceptance of the
Bank's tax positions by assessing:
o The Bank's interpretations of relevant tax and case law and
administrative positions;
o The correspondence with the relevant tax authorities; and
o The advice and legal opinions obtained by the Bank's external
tax advisors.
Other Information
Management is responsible for the other information. The other
information comprises:
-- Management's Discussion and Analysis; and
-- The information, other than the financial statements and our
auditor's report thereon, in the Annual Report.
Our opinion on the financial statements does not cover the other
information and we do not and will not express any form of
assurance conclusion thereon. In connection with our audit of the
financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the
other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated.
We obtained Management's Discussion and Analysis and the Annual
Report prior to the date of this auditor's report. If, based on the
work we have performed on this other information, we conclude that
there is a material misstatement of this other information, we are
required to report that fact in this auditor's report. We have
nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance
for the Financial Statements
Management is responsible for the preparation and fair
presentation of the financial statements in accordance with IFRS,
and for such internal control as management determines is necessary
to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible
for assessing the Bank's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless management
either intends to liquidate the Bank or to cease operations, or has
no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the
Bank's financial reporting process.
Auditor's Responsibilities for the Audit of the Financial
Statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian GAAS will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
As part of an audit in accordance with Canadian GAAS, we
exercise professional judgment and maintain professional skepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Bank's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by management.
-- Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Bank's ability
to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our
auditor's report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor's report. However, future events or
conditions may cause the Bank to cease to continue as a going
concern.
-- Evaluate the overall presentation, structure and content of
the financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the Bank to express an opinion on the financial statements. We are
responsible for the direction, supervision and performance of the
group audit. We remain solely responsible for our audit
opinion.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the financial statements of the
current period and are therefore the key audit matters. We describe
these matters in our auditor's report unless law or regulation
precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The engagement partner on the audit resulting in this
independent auditor's report is Carl Magnan.
/s/ Deloitte LLP(1)
November 30, 2023
Montreal, Quebec
(1) CPA auditor, public accountancy permit No. A121501
Consolidated Balance Sheets
As at October 31 2023 2022
============================================================ ============ ======== ===========
Assets
Cash and deposits with financial institutions 35,234 31,870
------------------------------------------------------------ ------------ -------- -----------
Notes 3,
Securities 4 and 6
At fair value through profit or loss 99,994 87,375
At fair value through other comprehensive income 9,242 8,828
At amortized cost 12,582 13,516
------------------------------------------------------------ ------------ -------- -----------
121,818 109,719
------------------------------------------------------------------------ -------- -----------
Securities purchased under reverse repurchase
agreements
and securities borrowed 11,260 26,486
--------------------------------------------------------------------------- -------- -----------
Loans Note 7
Residential mortgage 86,847 80,129
Personal 46,358 45,323
Credit card 2,603 2,389
Business and government 84,192 73,317
------------------------------------------------------------ ------------ -------- -----------
220,000 201,158
Customers' liability under acceptances 6,627 6,541
Allowances for credit losses (1,184) (955)
------------------------------------------------------------ ------------ -------- -----------
225,443 206,744
------------------------------------------------------------------------ -------- -----------
Other
Derivative financial instruments Note 16 17,516 18,547
Investments in associates and joint ventures Note 9 49 140
Premises and equipment Note 10 1,592 1,397
Goodwill Note 11 1,521 1,519
Intangible assets Note 11 1,256 1,360
Other assets Note 12 7,889 5,958
------------------------------------------------------------ ------------- -------- -----------
29,823 28,921
------------------------------------------------------------------------ -------- -----------
423,578 403,740
------------------------------------------------------------------------ -------- -----------
Liabilities and equity
Notes 4
Deposits and 13 288,173 266,394
------------------------------------------------------------ ------------- -------- -----------
Other
Acceptances 6,627 6,541
Obligations related to securities sold short 13,660 21,817
Obligations related to securities sold under repurchase
agreements
and securities loaned Note 8 38,347 33,473
Derivative financial instruments Note 16 19,888 19,632
Notes 4
Liabilities related to transferred receivables and 8 25,034 26,277
Other liabilities Note 14 7,423 6,361
------------------------------------------------------------ ------------- -------- -----------
110,979 114,101
------------------------------------------------------------------------ -------- -----------
Subordinated debt Note 15 748 1,499
------------------------------------------------------------ ------------- -------- -----------
Equity
Equity attributable to the Bank's shareholders Notes 18
and holders of other equity instruments and 22
Preferred shares and other equity instruments 3,150 3,150
Common shares 3,294 3,196
Contributed surplus 68 56
Retained earnings 16,744 15,140
Accumulated other comprehensive income 420 202
------------------------------------------------------------ ------------ -------- -----------
23,676 21,744
Non-controlling interests Note 19 2 2
------------------------------------------------------------ ------------- -------- -----------
23,678 21,746
------------------------------------------------------------------------ -------- -----------
423,578 403,740
======================================================================== ======== ===========
The accompanying notes are an integral part of these audited consolidated
financial statements.
Laurent Ferreira Lynn Loewen
President and Chief Director
Executive Officer
Consolidated Statements of Income
Year ended October 31 2023 2022
======================================================== ========= ====== =====
Interest income
Loans 12,676 7,136
Securities at fair value through profit or loss 1,681 1,548
Securities at fair value through other comprehensive
income 279 163
Securities at amortized cost 473 263
Deposits with financial institutions 1,668 435
-------------------------------------------------------- --------- ------ -----
16,777 9,545
----------------------------------------------------------------- ------ -----
Interest expense
Deposits 10,015 3,291
Liabilities related to transferred receivables 633 472
Subordinated debt 47 28
Other 2,496 483
-------------------------------------------------------- --------- ------ -----
13,191 4,274
----------------------------------------------------------------- ------ -----
Net interest income (1) 3,586 5,271
-------------------------------------------------------- --------- ------ -----
Non-interest income
Underwriting and advisory fees 378 324
Securities brokerage commissions 174 204
Mutual fund revenues 578 587
Investment management and trust service fees 1,005 997
Credit fees 574 490
Card revenues 202 186
Deposit and payment service charges 300 298
Trading revenues (losses) Note 21 2,677 543
Gains (losses) on non-trading securities, net 70 113
Insurance revenues, net 171 158
Foreign exchange revenues, other than trading 183 211
Share in the net income of associates and joint
ventures Note 9 11 28
Other Note 9 261 242
-------------------------------------------------------- ---------- ------ -----
6,584 4,381
----------------------------------------------------------------- ------ -----
Total revenues 10,170 9,652
-------------------------------------------------------- --------- ------ -----
Non-interest expenses
Compensation and employee benefits 3,452 3,284
Occupancy Note 10 353 312
Notes 10
Technology and 11 1,085 915
Communications 58 57
Professional fees 257 249
Other Note 30 596 413
-------------------------------------------------------- ---------- ------ -----
5,801 5,230
----------------------------------------------------------------- ------ -----
Income before provisions for credit losses and
income taxes 4,369 4,422
Provisions for credit losses Note 7 397 145
-------------------------------------------------------- ---------- ------ -----
Income before income taxes 3,972 4,277
Income taxes Note 24 637 894
-------------------------------------------------------- ---------- ------ -----
Net income 3,335 3,383
-------------------------------------------------------- --------- ------ -----
Net income attributable to
Preferred shareholders and holders of other equity
instruments 141 107
Common shareholders 3,196 3,277
-------------------------------------------------------- --------- ------ -----
Bank shareholders and holders of other equity
instruments 3,337 3,384
Non-controlling interests (2) (1)
-------------------------------------------------------- --------- ------ -----
3,335 3,383
----------------------------------------------------------------- ------ -----
Earnings per share (dollars) Note 25
Basic 9.47 9.72
Diluted 9.38 9.61
Dividends per common share (dollars) Note 18 3.98 3.58
======================================================== ========== ====== =====
The accompanying notes are an integral part of these audited consolidated
financial statements.
(1) Net interest income includes dividend income. For additional
information, see Note 1 to these audited consolidated financial
statements.
Consolidated Statements of Comprehensive Income
Year ended October 31 2023 2022
=================================================================== ====== =====
Net income 3,335 3,383
------------------------------------------------------------------- ------ -----
Other comprehensive income, net of income taxes
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses)
on investments in foreign operations 155 471
Impact of hedging net foreign currency translation
gains (losses) (52) (138)
103 333
----------------------------------------------------------------- ------ -----
Net change in debt securities at fair value through
other comprehensive income
Net unrealized gains (losses) on debt securities at
fair value through other comprehensive income (87) (197)
Net (gains) losses on debt securities at fair value
through other comprehensive income
reclassified to net income 85 91
Change in allowances for credit losses on debt securities
at fair value through
other comprehensive income reclassified to net income 1 1
---------------------------------------------------------------- ------ -----
(1) (105)
--------------------------------------------------------------- ------ -----
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments
designated as cash flow hedges 90 (25)
Net (gains) losses on designated derivative financial
instruments reclassified to net income 25 33
---------------------------------------------------------------- ------ -----
115 8
--------------------------------------------------------------- ------ -----
Share in the other comprehensive income of associates
and joint ventures 1 (2)
----------------------------------------------------------------- ------ -----
Items that will not be subsequently reclassified to
net income
Remeasurements of pension plans and other post-employment
benefit plans (140) (126)
Net gains (losses) on equity securities designated
at fair value through other comprehensive income 45 (27)
Net fair value change attributable to credit risk on
financial liabilities designated at
fair value through profit or loss (163) 601
---------------------------------------------------------------- ------ -----
(258) 448
---------------------------------------------------------------- ------ -----
Total other comprehensive income, net of income taxes (40) 682
------------------------------------------------------------------- ------ -----
Comprehensive income 3,295 4,065
------------------------------------------------------------------- ------ -----
Comprehensive income attributable to
Bank shareholders and holders of other equity instruments 3,297 4,066
Non-controlling interests (2) (1)
------------------------------------------------------------------ ------ -----
3,295 4,065
=============================================================== ====== =====
The accompanying notes are an integral part of these audited consolidated
financial statements.
Consolidated Statements of Comprehensive Income (cont.)
Income Taxes - Other Comprehensive Income
The following table presents the income tax expense or recovery
for each component of other comprehensive income.
Year ended October 31 2023 2022
================================================================ ==== ====
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses)
on investments in foreign operations (3) (13)
Impact of hedging net foreign currency translation gains
(losses) (14) (28)
(17) (41)
------------------------------------------------------------- ---- ----
Net change in debt securities at fair value through
other comprehensive income
Net unrealized gains (losses) on debt securities at fair
value through other comprehensive income (33) (71)
Net (gains) losses on debt securities at fair value through
other comprehensive income
reclassified to net income 33 32
Change in allowances for credit losses on debt securities
at fair value through
other comprehensive income reclassified to net income - -
------------------------------------------------------------- ---- ----
- (39)
------------------------------------------------------------- ---- ----
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments
designated as cash flow hedges 35 (9)
Net (gains) losses on designated derivative financial
instruments reclassified to net income 9 12
-------------------------------------------------------------- ---- ----
44 3
------------------------------------------------------------- ---- ----
Share in the other comprehensive income of associates
and joint ventures - -
--------------------------------------------------------------- ---- ----
Items that will not be subsequently reclassified to net
income
Remeasurements of pension plans and other post-employment
benefit plans (43) (45)
Net gains (losses) on equity securities designated at
fair value through other
comprehensive income 8 (10)
Net fair value change attributable to credit risk on
financial liabilities designated at
fair value through profit or loss (63) 216
-------------------------------------------------------------- ---- ----
(98) 161
---------------------------------------------------------------- ---- ----
(71) 84
================================================================ ==== ====
The accompanying notes are an integral part of these audited
consolidated financial statements.
Consolidated Statements of Changes in Equity
Year ended October 31 2023 2022
============================================================ ======== ======= =======
Preferred shares and other equity instruments
at beginning Note 18 3,150 2,650
Issuances of preferred shares and other equity
instruments - 500
------------------------------------------------------------ -------- ------- -------
Preferred shares and other equity instruments
at end 3,150 3,150
------------------------------------------------------------ -------- ------- -------
Common shares at beginning Note 18 3,196 3,160
Issuances of common shares pursuant to the Stock
Option Plan 95 61
Repurchases of common shares for cancellation - (24)
Impact of shares purchased or sold for trading 3 (1)
------------------------------------------------------------ -------- ------- -------
Common shares at end 3,294 3,196
------------------------------------------------------------ -------- ------- -------
Contributed surplus at beginning 56 47
Stock option expense Note 22 18 17
Stock options exercised (10) (7)
Other 4 (1)
------------------------------------------------------------ -------- ------- -------
Contributed surplus at end 68 56
------------------------------------------------------------ -------- ------- -------
Retained earnings at beginning 15,140 12,854
Net income attributable to the Bank's shareholders
and holders of other equity instruments 3,337 3,384
Dividends on preferred shares and distributions
on other equity instruments Note 18 (163) (119)
Dividends on common shares Note 18 (1,344) (1,206)
Premium paid on common shares repurchased for cancellation Note 18 - (221)
Issuance expenses for shares and other equity instruments,
net of income taxes - (4)
Remeasurements of pension plans and other post-employment
benefit plans (140) (126)
Net gains (losses) on equity securities designated
at fair value through other comprehensive income 45 (27)
Net fair value change attributable to the credit
risk on financial liabilities designated at fair
value
through profit or loss (163) 601
Impact of a financial liability resulting from
put options written to non-controlling interests Note 14 10 (8)
Other 22 12
------------------------------------------------------------ -------- ------- -------
Retained earnings at end 16,744 15,140
------------------------------------------------------------ -------- ------- -------
Accumulated other comprehensive income at beginning 202 (32)
Net foreign currency translation adjustments 103 333
Net change in unrealized gains (losses) on debt
securities at fair value through other comprehensive
income (1) (105)
Net change in gains (losses) on cash flow hedges 115 8
Share in the other comprehensive income of associates
and joint ventures 1 (2)
------------------------------------------------------------ -------- ------- -------
Accumulated other comprehensive income at end 420 202
------------------------------------------------------------ -------- ------- -------
Equity attributable to the Bank's shareholders
and holders of other equity instruments 23,676 21,744
------------------------------------------------------------ -------- ------- -------
Non-controlling interests at beginning Note 19 2 3
Net income attributable to non-controlling interests (2) (1)
Other 2 -
Non-controlling interests at end 2 2
------------------------------------------------------------ -------- ------- -------
Equity 23,678 21,746
============================================================ ======== ======= =======
Accumulated Other Comprehensive Income
As at October 31 2023 2022
======================================================= ==== ====
Accumulated other comprehensive income
Net foreign currency translation adjustments 307 204
Net unrealized gains (losses) on debt securities
at fair value through other comprehensive income (35) (34)
Net gains (losses) on instruments designated as
cash flow hedges 146 31
Share in the other comprehensive income of associates
and joint ventures 2 1
------------------------------------------------------- ---- ----
420 202
====================================================== ==== ====
The accompanying notes are an integral part of
these audited consolidated financial statements.
Consolidated Statements of Cash Flows
Year ended October 31 2023 2022
==================================================== ========= ======== ========
Cash flows from operating activities
Net income 3,335 3,383
Adjustments for
Provisions for credit losses 397 145
Depreciation of premises and equipment, including
right-of-use assets 211 202
Amortization of intangible assets 313 279
Impairment losses on premises and equipment Notes 10
and on intangible assets and 11 88 8
Deferred taxes (229) 110
Losses (gains) on sales of non-trading securities,
net (70) (113)
Share in the net income of associates and joint
ventures (11) (28)
Stock option expense 18 17
Gain on the fair value remeasurement of an equity
interest Note 9 (91) -
Change in operating assets and liabilities
Securities at fair value through profit or loss (12,619) (2,564)
Securities purchased under reverse repurchase
agreements and securities borrowed 15,226 (18,970)
Loans and acceptances, net of securitization (20,252) (23,354)
Deposits 21,779 25,456
Obligations related to securities sold short (8,157) 1,551
Obligations related to securities sold under
repurchase agreements and securities loaned 4,874 16,180
Derivative financial instruments, net 1,287 (1,798)
Securitization - Credit cards (29) (37)
Interest and dividends receivable and interest
payable 407 150
Current tax assets and liabilities (313) (437)
Other items (998) (2,102)
---------------------------------------------------------------- -------- --------
5,166 (1,922)
------------------------------------------------------------- -------- --------
Cash flows from financing activities
Issuances of preferred shares and other equity
instruments - 500
Issuances of common shares (including the impact
of shares purchased for trading) 88 53
Repurchases of common shares for cancellation - (245)
Issuance of subordinated debt - 739
Repurchase of subordinated debt (750) -
Issuance expenses for shares and other equity
instruments - (4)
Repayments of lease liabilities (102) (99)
Dividends paid on shares and distributions on
other equity instruments (1,503) (1,325)
---------------------------------------------------- --------- -------- --------
(2,267) (381)
------------------------------------------------------------- -------- --------
Cash flows from investing activities
Net change in investments in associates and joint
ventures - 202
Purchases of non-trading securities (8,846) (9,307)
Maturities of non-trading securities 4,249 2,050
Sales of non-trading securities 5,168 6,269
Net change in premises and equipment, excluding
right-of-use assets (352) (296)
Net change in intangible assets (299) (374)
---------------------------------------------------- --------- -------- --------
(80) (1,456)
------------------------------------------------------------- -------- --------
(352) -
Impact of currency rate movements on cash and
cash equivalents 545 1,750
---------------------------------------------------- --------- -------- --------
Increase (decrease) in cash and cash equivalents 3,364 (2,009)
Cash and cash equivalents at beginning 31,870 33,879
---------------------------------------------------- --------- -------- --------
Cash and cash equivalents at end (1) 35,234 31,870
---------------------------------------------------- --------- -------- --------
Supplementary information about cash flows from
operating activities
Interest paid 12,236 3,763
Interest and dividends received 16,228 9,184
Income taxes paid 741 1,118
==================================================== ========= ======== ========
The accompanying notes are an integral part of
these audited consolidated financial statements.
(1) This item is the equivalent of Consolidated Balance Sheet
item Cash and deposits with financial institutions. It includes an
amount of $9.3 billion as at October 31, 2023 ($7.7 billion as at
October 31, 2022) for which there are restrictions and of which
$6.5 billion ($5.3 billion as at October 31, 2022) represent the
balances that the Bank must maintain with central banks, other
regulatory agencies, and certain counterparties.
Notes to the Audited Consolidated Financial Statements
Basis of Presentation and
Note Summary of Significant Accounting Note
1 Policies 140 17 Hedging Activities 195
Note Future Accounting Policy Note Share Capital and Other Equity
2 Changes 157 18 Instruments 201
Note Note
3 Fair Value of Financial Instruments 158 19 Non-Controlling Interests 204
Financial Instruments Designated
Note at Fair Value Through Profit Note
4 or Loss 169 20 Capital Disclosure 205
Note Offsetting Financial Assets Note
5 and Financial Liabilities 170 21 Trading Activity Revenues 206
Note Note
6 Securities 171 22 Share-Based Payments 207
Note Loans and Allowances for Note Employee Benefits - Pension
7 Credit Losses 173 23 Plans and Other
Note Financial Assets Transferred Post-Employment Benefit
8 But Not Derecognized 185 Plans 210
Note Investments in Associates Note
9 and Joint Ventures 186 24 Income Taxes 214
Note Note
10 Premises and Equipment 187 25 Earnings Per Share 217
Note Note Guarantees, Commitments and
11 Goodwill and Intangible Assets 188 26 Contingent Liabilities 217
Note Note
12 Other Assets 190 27 Structured Entities 220
Note Note
13 Deposits 190 28 Related Party Disclosures 223
Note Note Management of the Risks Associated
14 Other Liabilities 191 29 with Financial Instruments 224
Note Note
15 Subordinated Debt 191 30 Segment Disclosures 229
Note Note Event After the Consolidated
16 Derivative Financial Instruments 192 31 Balance Sheet Date 231
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies
National Bank of Canada (the Bank) is a financial institution
incorporated and domiciled in Canada and whose shares are listed on
the Toronto Stock Exchange. Its head office is located at 600 De La
Gauchetière Street West in Montreal, Quebec, Canada. The Bank is a
chartered bank under Schedule 1 of the Bank Act (Canada) and is
regulated by the Office of the Superintendent of Financial
Institutions (Canada) (OSFI). The Bank offers financial services to
individuals, businesses, institutional clients, and governments
throughout Canada as well as specialized services at the
international level. It operates four business segments: the
Personal and Commercial segment, the Wealth Management segment, the
Financial Markets segment, and the U.S. Specialty Finance and
International (USSF&I) segment. Its full line of services
includes banking and investing solutions for individuals and
businesses, corporate banking and investment banking services,
securities brokerage, insurance, and wealth management.
On November 30, 2023, the Board of Directors (the Board)
authorized the publication of the Bank's audited annual
consolidated financial statements (the consolidated financial
statements) for the year ended October 31, 2023.
Basis of Presentation
The Bank's consolidated financial statements are prepared in
accordance with International Financial Reporting Standards (IFRS),
as issued by the International Accounting Standards Board (IASB).
The financial statements also comply with section 308(4) of the
Bank Act (Canada), which states that, except as otherwise specified
by OSFI, the consolidated financial statements are to be prepared
in accordance with IFRS. IFRS represent Canadian generally accepted
accounting principles (GAAP). None of the OSFI accounting
requirements are exceptions to IFRS. The accounting policies
described in the Summary of Significant Accounting Policies section
have been applied consistently to all periods presented.
Unless otherwise indicated, all amounts are expressed in
Canadian dollars, which is the Bank's functional and presentation
currency.
Interest Rate Benchmark Reform
The reform of interbank offered rates (IBORs) and other interest
rate benchmarks is a global initiative being coordinated and led by
central banks and governments around the world, including those in
Canada. This reform has been unfolding for several years, with the
IASB monitoring developments. To minimize the financial statement
impacts arising from replacing current interest rate benchmarks
with alternative benchmarks, the IASB amended certain IFRS
standards and allowed for some temporary exemptions, notably in the
area of hedge accounting.
On December 31, 2021, all LIBOR (London Interbank Offered Rates)
rates in European, British, Swiss, and Japanese currency as well as
the one-week and two--month USD LIBOR rates were discontinued,
whereas the other USD LIBOR rates were discontinued as of June 30,
2023. In Canada, publication of the CDOR (Canadian Dollar Offered
Rate) will be discontinued on June 28, 2024 and will be replaced by
the risk-free rate CORRA (Canadian Overnight Repo Rate Average) and
a term CORRA rate, which has been available since September 5,
2023. On July 27, 2023, the Canadian Alternative Reference Rate
(CARR) Working Group published its recommendations and set a
milestone stipulating that no new CDOR or bankers' acceptance loan
contracts can be entered into after November 1, 2023. However, this
milestone will have no impact on the ability to draw on existing
credit facilities that have not yet matured, that have been
extended, or that have been subject to material amendments before
this deadline.
To prepare for the interest rate benchmark reform, the Bank
developed an enterprise-wide project, put together a dedicated team
of experts, established a formal governance structure, and prepared
a training plan. Several committees were created to ensure the
success of the project. The project team is made up of qualified
resources from various fields of expertise to ensure a
comprehensive analysis of all aspects of the changes as well as the
financial, legal, operational, and technological impacts. Many of
these experts, who have in-depth knowledge of accounting standards
and reform-related activities, are involved in various working
groups and participate in meetings with OSFI. The project team
regularly reports on the project's progress to the project steering
committee and the Financial Markets Risk Committee. As at October
31, 2023, the project was progressing according to schedule. The
Bank is exposed to several risks, including interest rate risk and
operational risk, which arise from non-derivative financial assets,
non-derivative financial liabilities, and derivative financial
instruments. The project team ensures that risks are mitigated
while ensuring a positive experience for its clients. The Bank is
taking all necessary steps to identify, measure, and control all of
the risks to ensure a smooth transition throughout the interest
rate benchmark reform.
The following table discloses the non-derivative financial
assets, non-derivative financial liabilities, and derivative
financial instruments subject to the interest rate benchmark reform
as at October 31, 2023 that have not yet transitioned to
alternative benchmark rates.
As at October
31, 2023
==================================================== ==============
CDOR
---------------------------------------------------- --------------
Maturing after
June 28, 2024
==================================================== ==============
Non-derivative financial assets(1) 23,968
Non-derivative financial liabilities(2) 16,019
Notional amount of derivative financial instruments 425,074
====================================================== ==============
(1) Non-derivative financial assets include the carrying value
of securities as well as the outstanding balances on loans and the
customers' liability under acceptances.
(2) Non-derivative financial liabilities include the nominal
amounts of deposits and the carrying value of acceptances.
Accounting Policy Changes
Amendments to IAS 12 - Income Taxes
On May 23, 2023, the IASB issued International Tax Reform -
Pillar Two Model Rules, which amends IAS 12 - Income Taxes. These
amendments apply to income taxes arising from tax law enacted or
substantively enacted to implement the Pillar 2 model rules of the
Organisation for Economic Co-operation and Development (OECD). The
amendments also introduce a temporary exception to the accounting
of deferred tax assets and liabilities arising from the
implementation of these rules as well as related disclosures. These
amendments apply immediately upon issuance and retrospectively in
accordance with IAS 8 - Accounting Policies, Changes in Accounting
Estimates and Errors. Additional disclosures of current tax expense
(recovery) and other information related to income tax exposures
will be provided annually for periods beginning on or after
November 1, 2023. During the year ended October 31, 2023, the Bank
applied the exception to the recognition and disclosure of
information about deferred tax assets and liabilities arising from
the Pillar 2 rules in the jurisdictions where they have been
adopted . To date, these amendments have had no impact on the
Bank's consolidated results.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Summary of Significant Accounting Policies
Judgments, Estimates and Assumptions
In preparing consolidated financial statements in accordance
with IFRS, management must exercise judgment and make estimates and
assumptions that affect the reporting date carrying amounts of
assets and liabilities, net income, and related information.
Furthermore, certain accounting policies require complex judgments
and estimates because they apply to matters that are inherently
uncertain, in particular accounting policies applicable to the
following: the fair value determination of financial instruments,
the impairment of financial assets, the impairment of non-financial
assets, pension plans and other post-employment benefits, income
taxes, provisions, the consolidation of structured entities, and
the classification of debt instruments. Descriptions of these
judgments and estimates are provided in each of the notes related
thereto in the consolidated financial statements. Actual results
could therefore differ from these estimates, in which case the
impacts are recognized in the consolidated financial statements of
future fiscal periods. The accounting policies described in this
note provide greater detail about the use of estimates and
assumptions and reliance on judgment.
The geopolitical landscape (notably, the Russia-Ukraine war and
the recent clashes between Hamas and Israel), inflation, climate
change, and higher interest rates continue to create uncertainty.
As a result, establishing reliable estimates and applying judgment
continue to be substantially complex. The uncertainty surrounding
certain key inputs used in measuring expected credit losses is
described in Note 7 to these consolidated financial statements.
Basis of Consolidation
Subsidiaries
These consolidated financial statements include all the assets,
liabilities, operating results and cash flows of the Bank and its
subsidiaries, after elimination of intercompany transactions and
balances. Subsidiaries are entities, including structured entities,
controlled by the Bank. A structured entity is an entity created to
accomplish a narrow and well-defined objective and is designed so
that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when voting rights relate
solely to administrative tasks and the relevant activities are
directed by means of contractual arrangements.
Management must exercise judgment in determining whether the
Bank must consolidate an entity. The Bank controls an entity only
if the following three conditions are met:
-- it has decision-making authority regarding the entity's relevant activities;
-- it has exposure or rights to variable returns from its involvement with the entity;
-- it has the ability to use its power to affect the amount of the returns.
When determining decision-making authority, the Bank considers
many factors, including the existence and effect of actual and
potential voting rights held by the Bank that can be exercised as
well as the holding of instruments that are convertible into voting
shares. In addition, the Bank must determine whether, as an
investor with decision-making rights, it acts as a principal or
agent.
Based on these principles, an assessment of control is performed
at the inception of a relationship between any entity and the Bank.
When performing this assessment, the Bank considers all facts and
circumstances, and it must reassess whether it still controls an
investee if facts and circumstances indicate that one or more of
the three conditions of control have changed.
The Bank consolidates the entities it controls from the date on
which control is obtained and ceases to consolidate them from the
date control ceases. The Bank uses the acquisition method to
account for the acquisition of a subsidiary from a third party on
the date control is obtained.
Non-Controlling Interests
Non-controlling interests in subsidiaries represent the equity
interests held by third parties in the Bank's subsidiaries and are
presented in total Equity, separately from Equity attributable to
the Bank's shareholders and holders of other equity instruments .
The non-controlling interests' proportionate shares of the net
income and other comprehensive income of the Bank's subsidiaries
are presented separately in the Consolidated Statement of Income
and in the Consolidated Statement of Comprehensive Income,
respectively.
With respect to units issued to third parties by mutual funds
and certain other funds that are consolidated, they are presented
at fair value in Other liabilities on the Consolidated Balance
Sheet. Lastly, changes in ownership interests in subsidiaries that
do not result in a loss of control are recognized as equity
transactions. The difference between the adjustment in the carrying
value of the non-controlling interest and the fair value of the
consideration paid or received is recognized directly in Equity
attributable to the Bank's shareholders and holders of other equity
instruments.
Investments in Associates and Joint Ventures
The Bank exercises significant influence over an entity when it
has the power to participate in the financial and operating policy
decisions of the investee. The Bank has joint control when there is
a contractually agreed sharing of control of an entity, and joint
control exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control.
Investments in associates, i.e., entities over which the Bank
exercises significant influence, and investments in joint ventures,
i.e., entities over which the Bank has rights to the net assets and
exercises joint control, are accounted for using the equity method.
Under the equity method, the investment is initially recorded at
cost and, thereafter, the carrying amount is increased or decreased
by the Bank's proportionate share of net income, recognized in
Non-interest income in the Consolidated Statement of Income, and by
the proportionate share in other comprehensive income, recognized
in Other comprehensive income in the Consolidated Statement of
Comprehensive Income. Distributions received reduce the carrying
amount of the interest.
Translation of Foreign Currencies
The consolidated financial statements are presented in Canadian
dollars, which is the Bank's functional and presentation currency.
Each foreign operation within the Bank's scope of consolidation
determines its own functional currency, and the items reported in
the financial statements of each foreign operation are measured
using that currency.
Monetary items and non-monetary items measured at fair value and
denominated in foreign currencies are translated into the
functional currency at exchange rates prevailing at the
Consolidated Balance Sheet date. Non-monetary items not measured at
fair value are translated into the functional currency at
historical rates. Revenues and expenses denominated in foreign
currencies are translated at the average exchange rates for the
period. Translation gains and losses are recognized in Non-interest
income in the Consolidated Statement of Income, except for equity
instruments designated at fair value through other comprehensive
income, for which unrealized gains and losses are recorded in Other
comprehensive income and will not be subsequently reclassified to
net income.
In the consolidated financial statements, the assets and
liabilities of all foreign operations are translated into the
Bank's functional currency at the exchange rates prevailing at the
Consolidated Balance Sheet date, whereas the revenues and expenses
of such foreign operations are translated into the Bank's
functional currency at the average exchange rates for the period.
Any goodwill resulting from the acquisition of a foreign operation
that does not have the same functional currency as the parent
company, and any fair value adjustments to the carrying amounts of
assets and liabilities resulting from the acquisition, are treated
as assets and liabilities of the foreign operation and translated
at the exchange rates prevailing at the Consolidated Balance Sheet
date. Unrealized translation gains and losses related to foreign
operations, including the impact of hedges and income taxes on the
related results, are presented in Other comprehensive income. Upon
disposal of a foreign operation, any accumulated translation gains
and losses, along with the related hedges, recorded in the
Accumulated other comprehensive income item of this foreign
operation, are reclassified to Non-interest income in the
Consolidated Statement of Income.
Classification and Measurement of Financial Instruments
At initial recognition, all financial instruments are recorded
at fair value on the Consolidated Balance Sheet. At initial
recognition, financial assets must be classified as subsequently
measured at fair value through other comprehensive income, at
amortized cost, or at fair value through profit or loss. The Bank
determines the classification based on the contractual cash flow
characteristics of the financial assets and on the business model
it uses to manage these financial assets. At initial recognition,
financial liabilities are classified as subsequently measured at
amortized cost or as at fair value through profit or loss.
For the purpose of classifying a financial asset, the Bank must
determine whether the contractual cash flows associated with the
financial asset are solely payments of principal and interest on
the principal amount outstanding. The principal is generally the
fair value of the financial asset at initial recognition. The
interest consists of consideration for the time value of money, for
the credit risk associated with the principal amount outstanding
during a particular period, and for other basic lending risks and
costs as well as of a profit margin. If the Bank determines that
the contractual cash flows associated with a financial asset are
not solely payments of principal and interest, the financial assets
must be classified as measured at fair value through profit or
loss.
When classifying financial assets, the Bank determines the
business model used for each portfolio of financial assets that are
managed together to achieve a same business objective. The business
model reflects how the Bank manages its financial assets and the
extent to which the financial asset cash flows are generated by the
collection of the contractual cash flows, the sale of the financial
assets, or both. The Bank determines the business model using
scenarios that it reasonably expects to occur. Consequently, the
business model determination is a matter of fact and requires the
use of judgment and consideration of all the relevant evidence
available to the Bank at the date of determination.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
A financial asset portfolio falls within a "hold to collect"
business model when the Bank's primary objective is to hold these
financial assets in order to collect contractual cash flows from
them and not to sell them. When the Bank's objective is achieved
both by collecting contractual cash flows and by selling the
financial assets, the financial asset portfolio falls within a
"hold to collect and sell" business model. In this type of business
model, collecting contractual cash flows and selling financial
assets are both integral components to achieving the Bank's
objective for this financial asset portfolio. Financial assets are
mandatorily measured at fair value through profit or loss if they
do not fall within either a "hold to collect" business model or a
"hold to collect and sell" business model.
Financial Instruments Designated at Fair Value Through Profit or
Loss
A financial asset may be irrevocably designated at fair value
through profit or loss at initial recognition if certain conditions
are met. The Bank may apply this option if doing so eliminates or
significantly reduces a measurement or recognition inconsistency
that would otherwise arise from measuring financial assets or
liabilities or recognizing gains and losses on them on different
bases, and if the fair values are reliable. Financial assets thus
designated are recognized at fair value, and any change in fair
value is recorded in Non-interest income in the Consolidated
Statement of Income. Interest income arising from these financial
instruments designated at fair value through profit or loss is
recorded in Net interest income in the Consolidated Statement of
Income.
A financial liability may be irrevocably designated at fair
value through profit or loss when it is initially recognized.
Financial liabilities thus designated are recognized at fair value,
and any changes in fair value attributable to changes in the Bank's
own credit risk are recognized in Other comprehensive income unless
these changes create or enlarge an accounting mismatch in Net
income. Fair value changes not attributable to the Bank's own
credit risk are recognized in Non--interest income in the
Consolidated Statement of Income. The amounts recognized in Other
comprehensive income will not be subsequently reclassified to Net
income. Interest expense arising from these financial liabilities
designated at fair value through profit or loss is recorded in the
Net interest income item of the Consolidated Statement of Income.
The Bank may use this option in the following cases:
-- if doing so eliminates or significantly reduces a measurement
or recognition inconsistency that would otherwise arise from
measuring financial assets or liabilities or recognizing gains and
losses on them on different bases, and if the fair values are
reliable;
-- if a group of financial assets and financial liabilities to
which an instrument belongs is managed and its performance is
evaluated on a fair value basis, in accordance with the Bank's
documented risk management or investment strategy, and information
is provided on that basis to senior management. Consequently, the
Bank may use this option if it has implemented a documented risk
management strategy to manage a group of financial instruments
together on the fair value basis, if it can demonstrate that
significant financial risks are eliminated or significantly
reduced, and if the fair values are reliable;
-- for hybrid financial instruments with one or more embedded
derivatives that would significantly modify the cash flows of the
financial instruments and that would otherwise be bifurcated and
accounted for separately.
Financial Instruments Designated at Fair Value Through Other
Comprehensive Income
At initial recognition, an investment in an equity instrument
that is neither held for trading nor a contingent consideration
recognized in a business combination may be irrevocably designated
as being at fair value through other comprehensive income. In
accordance with this designation, any change in fair value is
recognized in Other comprehensive income with no subsequent
reclassification to net income. Dividend income is recorded in
Interest income in the Consolidated Statement of Income.
Securities Measured at Fair Value Through Other Comprehensive
Income
Securities measured at fair value through other comprehensive
income include: (i) debt securities for which the contractual terms
of the financial asset give rise, on specified dates, to cash flows
that are solely payments of principal and interest on the principal
amount outstanding and that fall within a "hold to collect and
sell" business model and (ii) equity securities designated at fair
value through other comprehensive income with no subsequent
reclassification of gains and losses to net income.
The Bank recognizes securities transactions at fair value
through other comprehensive income on the trade date, and the
transaction costs are capitalized. Interest income and dividend
income are recognized in Interest income in the Consolidated
Statement of Income.
Debt Securities Measured at Fair Value Through Other
Comprehensive Income
Debt securities measured at fair value through other
comprehensive income are recognized at fair value. Unrealized gains
and losses are recognized, net of expected credit losses and
related income taxes, and provided that they are not hedged by
derivative financial instruments in a fair value hedging
relationship, in Other comprehensive income. When the securities
are sold, realized gains or losses, determined on an average cost
basis, are reclassified to Non-interest income - Gains (losses) on
non-trading securities, net in the Consolidated Statement of
Income. Premiums, discounts and related transaction costs are
amortized to interest income over the expected life of the
instrument using the effective interest rate method.
Equity Securities Designated at Fair Value Through Other
Comprehensive Income
Equity securities designated at fair value through other
comprehensive income are recognized at fair value. Unrealized gains
and losses are presented, net of income taxes, in Other
comprehensive income with no subsequent reclassification of
realized gains and losses to net income. Transaction costs incurred
upon the purchase of such equity securities are not reclassified to
net income upon the sale of the securities.
Securities Measured at Amortized Cost
Securities measured at amortized cost include debt securities
for which the contractual terms give rise, on specified dates, to
cash flows that are solely payments of principal and interest on
the principal amount outstanding and that fall within a "hold to
collect" business model.
The Bank recognizes these securities transactions at fair value
on the trade date, and the transaction costs are capitalized. After
initial recognition, debt securities in this category are recorded
at amortized cost. Interest income is recognized in Interest income
in the Consolidated Statement of Income. Premiums, discounts and
related transaction costs are amortized to interest income over the
expected life of the instrument using the effective interest rate
method. Securities measured at amortized cost are presented net of
allowances for credit losses on the Consolidated Balance Sheet.
Securities Measured at Fair Value Through Profit or Loss
Securities not classified or designated as measured at fair
value through other comprehensive income or at amortized cost are
classified as measured at fair value through profit or loss.
Securities measured at fair value through profit or loss include
(i) securities held for trading, (ii) securities designated at fair
value through profit or loss, (iii) all equity securities other
than those designated as measured at fair value through other
comprehensive income with no subsequent reclassifications of gains
and losses to net income, and (iv) debt securities for which the
contractual cash flows are not solely payments of principal and any
interest on any principal amount outstanding.
The Bank recognizes securities transactions at fair value
through profit or loss on the settlement date on the Consolidated
Balance Sheet. Changes in fair value between the trade date and the
settlement date are recognized in Non-interest income in the
Consolidated Statement of Income.
Securities at fair value through profit or loss are recognized
at fair value. Interest income, any transaction costs, as well as
realized and unrealized gains or losses on securities held for
trading are recognized in Non-interest income - Trading revenues
(losses) in the Consolidated Statement of Income. Dividend income
is recorded in Interest income in the Consolidated Statement of
Income. Interest income on securities designated at fair value
through profit or loss is recorded in Interest income in the
Consolidated Statement of Income. Realized and unrealized gains or
losses on these securities are recognized in Non--interest income -
Trading revenues (losses) in the Consolidated Statement of
Income.
Realized and unrealized gains or losses on equity securities at
fair value through profit or loss, other than those held for
trading, as well as debt securities for which the contractual cash
flows are not solely payments of principal and interest on the
principal amount outstanding, are recognized in Non-interest income
- Gains (losses) on non-trading securities, net in the Consolidated
Statement of Income. The dividend income and interest income on
these financial assets are recognized in Interest income in the
Consolidated Statement of Income.
Securities Purchased Under Reverse Repurchase Agreements,
Obligations Related to Securities Sold
Under Repurchase Agreements, and Securities Borrowed and
Loaned
The Bank recognizes these transactions at amortized cost using
the effective interest rate method, except when they are designated
at fair value through profit or loss and are recorded at fair
value. These transactions are held within a business model whose
objective is to collect contractual cash flows, i.e., cash flows
that are solely payments of principal and interest on the principal
amount outstanding. Securities sold under repurchase agreements
remain on the Consolidated Balance Sheet, whereas securities
purchased under reverse repurchase agreements are not recognized.
Reverse repurchase agreements and repurchase agreements are treated
as collateralized lending and borrowing transactions.
The Bank also borrows and lends securities. Securities loaned
remain on the Consolidated Balance Sheet, while securities borrowed
are not recognized. As part of these transactions, the Bank pledges
or receives collateral in the form of cash or securities.
Collateral pledged in the form of securities remains on the
Consolidated Balance Sheet. Collateral received in the form of
securities is not recognized on the Consolidated Balance Sheet.
Collateral pledged or received in the form of cash is recognized in
financial assets or liabilities on the Consolidated Balance
Sheet.
When the collateral is pledged or received in the form of cash,
the interest income and expense are recorded in Net interest income
in the Consolidated Statement of Income.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Loans
Loans Measured at Amortized Cost
Loans classified as measured at amortized cost include loans
originated or purchased by the Bank that are not classified as
measured at fair value through profit or loss or designated at fair
value through profit or loss. These loans are held within a
business model whose objective is to collect contractual cash
flows, i.e., cash flows that are solely payments of principal and
interest on the principal amount outstanding. All loans originated
by the Bank are recognized when cash is advanced to a borrower.
Purchased loans are recognized when the cash consideration is paid
by the Bank.
All loans are initially recognized at fair value plus directly
attributable costs and are subsequently measured at amortized cost
using the effective interest rate method, net of allowances for
expected credit losses. For purchased performing loans, the
acquisition date fair value adjustment on each loan is amortized to
interest income over the expected remaining life of the loan using
the effective interest rate method. For purchased credit-impaired
loans, the acquisition date fair value adjustment on each loan
consists of management's estimate of the shortfall of principal and
interest cash flows that the Bank expects to collect and of the
time value of money. The time value of money component of the fair
value adjustment is amortized to interest income over the remaining
life of the loan using the effective interest rate method. Loans
are presented net of allowances for credit losses on the
Consolidated Balance Sheet.
Loans Measured at Fair Value Through Profit or Loss
Loans classified as measured at fair value through profit or
loss, loans designated at fair value through profit or loss, and
loans for which the contractual cash flows are not solely payments
of principal and interest on the principal amount outstanding are
recognized at fair value on the Consolidated Balance Sheet. The
interest income on loans at fair value through profit or loss is
recorded in Interest income in the Consolidated Statement of
Income.
Changes in the fair value of loans classified as at fair value
through profit or loss and loans designated at fair value through
profit or loss are recognized in Non-interest income - Trading
revenues (losses) in the Consolidated Statement of Income. With
respect to loans whose contractual cash flows are not solely
payments of principal and interest on the principal amount
outstanding, changes in fair value are recognized in Non-interest
income - Other in the Consolidated Statement of Income.
Reclassification of Financial Assets
A financial asset, other than a derivative financial instrument
or a financial asset that, at initial recognition, was designated
as measured at fair value through profit or loss, is reclassified
only in rare situations, i.e., when there is a change in the
business model used to manage the financial asset. The
reclassification is applied prospectively from the reclassification
date.
Establishing Fair Value
The fair value of a financial instrument is the price that would
be received to sell a financial asset or paid to transfer a
financial liability in an orderly transaction in the principal
market at the measurement date under current market conditions
(i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices
for financial assets and offered prices for financial liabilities,
provide the best evidence of fair value. A financial instrument is
considered quoted in an active market when prices in exchange,
dealer, broker or principal-to-principal markets are accessible at
the measurement date. An active market is one where transactions
occur with sufficient frequency and volume to provide quoted prices
on an ongoing basis.
When there is no quoted price in an active market, the Bank uses
another valuation technique that maximizes the use of relevant
observable inputs and minimizes the use of unobservable inputs. The
chosen valuation technique incorporates all the factors that market
participants would consider when pricing a transaction. Judgment is
required when applying a large number of acceptable valuation
techniques and estimates to determine fair value. The estimated
fair value reflects market conditions on the valuation date and,
consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at
initial recognition is the transaction price, i.e., the fair value
of the consideration received or paid. If there is a difference
between the fair value at initial recognition and the transaction
price, and the fair value is determined using a valuation technique
based on observable market inputs or, in the case of a derivative,
if the risks are fully offset by other contracts entered into with
third parties, this difference is recognized in the Consolidated
Statement of Income. In other cases, the difference between the
fair value at initial recognition and the transaction price is
deferred on the Consolidated Balance Sheet. The amount of the
deferred gain or loss is recognized over the term of the financial
instrument. The unamortized balance is immediately recognized in
net income when (i) observable market inputs can be obtained and
support the fair value of the transaction, (ii) the risks
associated with the initial contract are substantially offset by
other contracts entered into with third parties, (iii) the gain or
loss is realized through a cash receipt or payment, or (iv) the
transaction matures or is terminated before maturity.
In certain cases, measurement adjustments are recognized to
address factors that market participants would use at the
measurement date to determine fair value but that are not included
in the measurement techniques due to system limitations or
uncertainty surrounding the measure. These factors include, but are
not limited to, the unobservable nature of the inputs used in the
valuation model, assumptions about risk such as market risk, credit
risk, or valuation model risk, and future administration costs. The
Bank may also consider market liquidity risk when determining the
fair value of financial instruments when it believes these
instruments could be disposed of for a consideration that is below
the fair value otherwise determined due to a lack of market
liquidity or an insufficient volume of transactions in a given
market. The measurement adjustments also include the funding
valuation adjustment applied to derivative financial instruments to
reflect the market implied cost or benefits of funding collateral
for uncollateralized or partly collateralized transactions.
As permitted when certain criteria are met, the Bank has elected
to determine fair value based on net exposure to credit risk or
market risk for certain portfolios of financial instruments, mainly
derivative financial instruments.
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a
three-stage impairment approach to measure the expected credit
losses (ECL) on all debt instruments measured at amortized cost or
at fair value through other comprehensive income and on loan
commitments and financial guarantees that are not measured at fair
value. The ECL model is forward looking. Measurement of ECLs at
each reporting period reflects reasonable and supportable
information about past events, current conditions, and forecasts of
future events and future economic conditions.
Determining the Stage
The ECL three-stage impairment approach is based on the change
in the credit quality of financial assets since initial
recognition. If, at the reporting date, the credit risk of
non-impaired financial instruments has not increased significantly
since initial recognition, these financial instruments are
classified in Stage 1, and an allowance for credit losses that is
measured, at each reporting date, in an amount equal to 12-month
expected credit losses, is recorded. When there is a significant
increase in credit risk since initial recognition, these
non-impaired financial instruments are migrated to Stage 2, and an
allowance for credit losses that is measured, at each reporting
date, in an amount equal to lifetime expected credit losses, is
recorded. In subsequent reporting periods, if the credit risk of a
financial instrument improves such that there is no longer a
significant increase in credit risk since initial recognition, the
ECL model requires reverting to Stage 1, i.e., recognition of
12-month expected credit losses. When one or more events that have
a detrimental impact on the estimated future cash flows of a
financial asset occurs, the financial asset is considered
credit-impaired and is migrated to Stage 3, and an allowance for
credit losses equal to lifetime expected credit losses continues to
be recorded or the financial asset is written off. Interest income
is calculated on the gross carrying amount for financial assets in
Stages 1 and 2 and on the net carrying amount for financial assets
in Stage 3.
Assessment of Significant Increase in Credit Risk
In determining whether credit risk has increased significantly,
the Bank uses an internal credit risk grading system, external risk
ratings, and forward-looking information to assess deterioration in
the credit quality of a financial instrument. To assess whether or
not the credit risk of a financial instrument has increased
significantly, the Bank compares the probability of default (PD)
occurring over its expected life as at the reporting date with the
PD occurring over its expected life on the date of initial
recognition and considers reasonable and supportable information
indicative of a significant increase in credit risk since initial
recognition. The Bank includes relative and absolute thresholds in
the definition of significant increase in credit risk and a
backstop of 30 days past due. All financial instruments that are 30
days past due are migrated to Stage 2 even if other metrics do not
indicate that a significant increase in credit risk has occurred.
The assessment of a significant increase in credit risk requires
significant judgment.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of
all expected cash shortfalls over the remaining expected life of
the financial instrument, and reasonable and supportable
information about past events, current conditions, and forecasts of
future events and economic conditions is considered. The estimation
and application of forward-looking information requires significant
judgment. Cash shortfalls represent the difference between all
contractual cash flows owed to the Bank and all cash flows that the
Bank expects to receive.
The measurement of ECLs is primarily based on the product of the
financial instrument's PD, loss given default (LGD), and exposure
at default (EAD). Forward-looking macroeconomic factors such as
unemployment rates, housing price indices, interest rates, and
gross domestic product (GDP) are incorporated into the risk
parameters. The estimate of expected credit losses reflects an
unbiased and probability-weighted amount that is determined by
evaluating a range of possible outcomes. The Bank incorporates
three forward-looking macroeconomic scenarios in its ECL
calculation process: a base scenario, an upside scenario, and a
downside scenario. Probability weights are assigned to each
scenario. The scenarios and probability weights are reassessed
quarterly and subject to management review. The Bank applies
experienced credit judgment to adjust the modelled ECL results when
it becomes evident that known or expected risk factors and
information were not considered in the credit risk rating and
modelling process.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
ECLs for all financial instruments are recognized in Provisions
for credit losses in the Consolidated Statement of Income. In the
case of debt instruments measured at fair value through other
comprehensive income, ECLs are recognized in Provisions for credit
losses in the Consolidated Statement of Income, and a corresponding
amount is recognized in Other comprehensive income with no
reduction in the carrying amount of the asset on the Consolidated
Balance Sheet. As for debt instruments measured at amortized cost,
they are presented net of the related allowances for credit losses
on the Consolidated Balance Sheet. Allowances for credit losses for
off-balance-sheet credit exposures that are not measured at fair
value are included in Other liabilities on the Consolidated Balance
Sheet.
Purchased or Originated Credit-Impaired Financial Assets
On initial recognition of a financial asset, the Bank determines
whether the asset is credit-impaired. For financial assets that are
credit-impaired upon purchase or origination, the lifetime expected
credit losses are reflected in the initial fair value. In
subsequent reporting periods, the Bank recognizes only the
cumulative changes in these lifetime ECLs since initial recognition
as an allowance for credit losses. The Bank recognizes changes in
ECLs in Provisions for credit losses in the Consolidated Statement
of Income, even if the lifetime ECLs are less than the ECLs that
were included in the estimated cash flows on initial
recognition.
Definition of Default
The definition of default used by the Bank to measure ECLs and
transfer financial instruments between stages is consistent with
the definition of default used for internal credit risk management
purposes. The Bank considers a financial asset, other than a credit
card receivable, to be credit-impaired when one or more events that
have a detrimental impact on the estimated future cash flows of the
financial asset have occurred or when contractual payments are 90
days past due. Credit card receivables are considered
credit-impaired and are fully written off at the earlier of the
following dates: when a notice of bankruptcy is received, a
settlement proposal is made, or contractual payments are 180 days
past due.
Write-Offs
A financial asset and its related allowance for credit losses
are normally written off in whole or in part when the Bank
considers the probability of recovery to be non-existent and when
all guarantees and other remedies available to the Bank have been
exhausted or if the borrower is bankrupt or winding up and balances
owing are not likely to be recovered.
Derecognition of Financial Assets and Securitization
A financial asset is considered for derecognition when the Bank
has transferred contractual rights to receive the cash flows or
assumed an obligation to transfer these cash flows to a third
party. The Bank derecognizes a financial asset when it considers
that substantially all the risks and rewards of ownership of the
asset have been transferred or when the contractual rights to the
cash flows of the financial asset expire. When the Bank considers
that it has retained substantially all the risks and rewards of
ownership of the transferred asset, it continues to recognize the
financial asset and, if applicable, recognizes a financial
liability on the Consolidated Balance Sheet. If, due to a
derivative financial instrument, the transfer of a financial asset
does not result in derecognition, the derivative financial
instrument is not recognized on the Consolidated Balance Sheet.
When the Bank has neither transferred nor retained substantially
all the risks and rewards of ownership of the financial asset, it
derecognizes the financial asset it no longer controls. Any rights
and obligations retained following the asset transfer are
recognized separately as an asset or liability. If the Bank retains
control of the financial asset, it continues to recognize the asset
to the extent of its continuing involvement in that asset, i.e.,
the extent to which it is exposed to changes in the value of the
transferred asset.
To diversify its funding sources, the Bank participates in two
Canada Mortgage and Housing Corporation (CMHC) securitization
programs: the Mortgage-Backed Securities Program under the National
Housing Act (Canada) (NHA) and Canada Mortgage Bond (CMB) program.
Under the first program, the Bank issues NHA securities backed by
insured residential mortgages and, under the second, the Bank sells
NHA securities to Canada Housing Trust (CHT). As part of these
transactions, the Bank retains substantially all the risks and
rewards related to ownership of the mortgage loans sold. Therefore,
the insured mortgage loans securitized under the CMB program
continue to be recognized in the Loans item of the Bank's
Consolidated Balance Sheet, and the liabilities for the
considerations received from the transfer are recognized in
Liabilities related to transferred receivables on the Consolidated
Balance Sheet. Moreover, insured mortgage loans securitized and
retained by the Bank continue to be recognized in Loans on the
Consolidated Balance Sheet.
Derecognition of Financial Liabilities
A financial liability is derecognized when the obligation is
discharged, cancelled, or expires. The difference between the
carrying value of the financial liability transferred and the
consideration paid is recognized in the Consolidated Statement of
Income.
Cash and Deposits With Financial Institutions
Cash and deposits with financial institutions consist of cash
and cash equivalents, amounts pledged as collateral as well as
amounts placed in escrow. Cash and cash equivalents consist of
cash, bank notes, deposits with the Bank of Canada and other
financial institutions, including net receivables related to
cheques, and other items in the clearing process.
Acceptances and Customers' Liability Under Acceptances
The potential liability of the Bank under acceptances is
recorded as a customer commitment liability on the Consolidated
Balance Sheet. The Bank's potential recourse vis à vis clients is
recorded as an equivalent offsetting asset. Fees are recorded in
Non-interest income in the Consolidated Statement of Income.
Obligations Related to Securities Sold Short
This financial liability represents the Bank's obligation to
deliver the securities it sold but did not own at the time of sale.
Obligations related to securities sold short are recorded at fair
value and presented as liabilities on the Consolidated Balance
Sheet. Realized and unrealized gains and losses are recognized in
Non-interest income in the Consolidated Statement of Income.
Derivative Financial Instruments
In the normal course of business, the Bank uses derivative
financial instruments to meet the needs of its clients, to generate
trading activity revenues, and to manage its exposure to interest
rate risk, foreign exchange risk, credit risk, and other market
risks.
All derivative financial instruments are measured at fair value
on the Consolidated Balance Sheet. Derivative financial instruments
with a positive fair value are included in assets, whereas
derivative financial instruments with a negative fair value are
included in liabilities on the Consolidated Balance Sheet. Where
there are offsetting financial assets and financial liabilities,
the net fair value of certain derivative financial instruments is
reported either as an asset or as a liability, depending on the
circumstance.
Embedded Derivative Financial Instruments
An embedded derivative is a component of a hybrid contract that
also includes a non-derivative host, the effect being that some of
the cash flows of the combined instrument vary in a way similar to
a stand-alone derivative. An embedded derivative causes some or all
of the cash flows that otherwise would be required by the contract
to be modified according to a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of
prices or rates, credit rating or credit index, or other variable,
provided, in the case of a non-financial variable, that the
variable is not specific to one of the parties to the contract.
A derivative embedded in a financial liability is separated from
the host contract and treated as a separate derivative if, and only
if, the following three conditions are met: the economic
characteristics and risks of the embedded derivative are not
closely related to those of the host contract, the embedded
derivative is a separate instrument that meets the definition of a
derivative financial instrument, and the hybrid contract is not
measured at fair value through profit or loss.
Embedded derivatives that are separately accounted for are
measured at fair value on the Consolidated Balance Sheet, and
subsequent changes in fair value are recognized in Non-interest
income in the Consolidated Statement of Income. In general, all
embedded derivatives are presented on a combined basis with the
host contract. However, certain embedded derivatives that are
separated from the host contract are presented in Derivative
financial instruments on the Consolidated Balance Sheet.
Held-for-Trading Derivative Financial Instruments
Derivative financial instruments are recognized at fair value,
and the realized and unrealized gains and losses (including
interest income and expense) are recorded in Non-interest income in
the Consolidated Statement of Income.
Derivative Financial Instruments Designated as Hedging
Instruments
Policy
The purpose of a hedging transaction is to modify the Bank's
exposure to one or more risks by creating an offset between changes
in the fair value of, or the cash flows attributable to, the hedged
item and the hedging instrument. Hedge accounting ensures that
offsetting gains, losses, revenues and expenses are recognized in
the Consolidated Statement of Income in the same period or
periods.
Documenting and Assessing Effectiveness
The Bank designates and formally documents each hedging
relationship, at its inception, by detailing the risk management
objective and the hedging strategy. The documentation identifies
the specific asset, liability, or cash flows being hedged, the
related hedging instrument, the nature of the specific risk
exposure or exposures being hedged, the intended term of the
hedging relationship, and the method for assessing the
effectiveness or ineffectiveness of the hedging relationship. At
the inception of the hedging relationship, and for every financial
reporting period for which the hedge has been designated, the Bank
ensures that the hedging relationship is highly effective and
consistent with its originally documented risk management objective
and strategy. When a hedging relationship meets the hedge
accounting requirements, it is designated as either a fair value
hedge, a cash flow hedge or a foreign exchange hedge of a net
investment in a foreign operation.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Interest Rate Benchmark Reform
A hedging relationship is directly affected by interest rate
benchmark reform such as interbank offered rates (IBORs) only if
the reform gives rise to uncertainties about (a) the interest rate
benchmark (contractually or non-contractually specified) designated
as a hedged risk; and/or (b) the timing or the amount of the
interest-rate-benchmark-based cash flows of the hedged item or of
the hedging instrument.
For such hedging relationships, the following temporary
exceptions apply during the period of uncertainty:
-- when determining whether a forecast transaction is highly
probable or expected to occur, it is assumed that the interest rate
benchmark on which the hedged cash flows (contractually or
non-contractually specified) are based is not altered as a result
of interest rate benchmark reform;
-- when assessing whether a hedge is expected to be highly
effective, it is assumed that the interest rate benchmark on which
the hedged cash flows and/or the hedged risk (contractually or
non-contractually specified) are based, or the interest rate
benchmark on which the cash flows of the hedging instrument are
based, is not altered as a result of interest rate benchmark
reform;
-- a hedge is not required to be discontinued if the actual results of the hedge are outside an effectiveness range of 80% to 125% as a result of interest rate benchmark reform;
-- for a hedge of a non-contractually specified benchmark
portion of interest rate risk, the requirement that the designated
portion be separately identifiable need only be met at the
inception of the hedging relationship.
Fair Value Hedges
For fair value hedges, the Bank mainly uses interest rate swaps
to hedge changes in the fair value of a hedged item. The carrying
amount of the hedged item is adjusted based on the effective
portion of the gains or losses attributable to the hedged risk,
which are recognized in the Consolidated Statement of Income, as
well as the change in the fair value of the hedging instrument. The
resulting ineffective portion is recognized in Non-interest income
in the Consolidated Statement of Income.
The Bank prospectively discontinues hedge accounting if the
hedging instrument is sold or expires or if the hedging
relationship no longer qualifies for hedge accounting or if the
Bank revokes the designation. When the designation is revoked, the
hedged item is no longer adjusted to reflect changes in fair value,
and the amounts previously recorded as cumulative adjustments with
respect to the effective portion of gains and losses attributable
to the hedged risk are amortized using the effective interest rate
method and recognized in the Consolidated Statement of Income over
the remaining useful life of the hedged item. If the hedged item is
sold or terminated before maturity, the cumulative adjustments with
respect to the effective portion of gains and losses attributable
to the hedged risk are immediately recorded in the Consolidated
Statement of Income.
Cash Flow Hedges
For cash flow hedges, the Bank mainly uses interest rate swaps
and total return swaps to hedge variable cash flows attributable to
the hedged risk related to a financial asset or liability (or to a
group of financial assets or financial liabilities). The effective
portion of changes in fair value of the hedging instrument is
recognized in Other comprehensive income, whereas the ineffective
portion is recognized in Non-interest income in the Consolidated
Statement of Income.
The amounts previously recorded in Accumulated other
comprehensive income are reclassified to the Consolidated Statement
of Income of the period or periods during which the cash flows of
the hedged item affect the Consolidated Statement of Income. If the
hedging instrument is sold or expires or if the hedging
relationship no longer qualifies for hedge accounting or if the
Bank cancels that designation, then the amounts previously
recognized in Accumulated other comprehensive income are
reclassified to the Consolidated Statement of Income in the period
or periods during which the cash flows of the hedged item affect
the Consolidated Statement of Income.
Hedges of Net Investments in Foreign Operations
Derivative and non-derivative financial instruments are used to
hedge foreign exchange risk related to investments made in foreign
operations whose functional currency is not the Canadian dollar.
The effective portion of the gains and losses on the hedging
instrument is recognized in Other comprehensive income, whereas the
ineffective portion is recognized in Non-interest income in the
Consolidated Statement of Income. Upon the total or partial sale of
a net investment in a foreign operation, amounts reported in
Accumulated other comprehensive income are reclassified, in whole
or in part, to Non-interest income in the Consolidated Statement of
Income.
Offsetting of Financial Assets and Liabilities
Financial assets and liabilities are offset, and the net amount
is presented on the Consolidated Balance Sheet when the Bank has a
legally enforceable right to set off the recognized amounts and
intends to settle on a net basis or to realize the asset and settle
the liability simultaneously.
Premises and Equipment
Premises and equipment, except for land and the portion of the
head office building under construction, are recognized at cost
less accumulated depreciation and accumulated impairment losses, if
any. Land and the portion of the head office building under
construction are recorded at cost less any accumulated impairment
losses. Right-of-use assets are presented in Premises and equipment
on the Consolidated Balance Sheet. For additional information about
the accounting treatment of right-of-use assets, see the Leases
section presented below.
Buildings, computer equipment, and equipment and furniture are
systematically depreciated over their estimated useful lives. The
depreciation period for leasehold improvements is the lesser of the
estimated useful life of the leasehold improvements or the
non-cancellable period of the lease. Depreciation methods and
estimated useful lives are reviewed annually. The depreciation
expense is recorded in Non-interest expenses in the Consolidated
Statement of Income.
Method Useful life
=============================================== ===================== ===========
Significant components of the head office
building
Interior design Straight-line 10-20 years
Exterior design, roofing and electromechanical
system Straight-line 30 years
Structure Straight-line 75 years
Other buildings 5% declining balance
Computer equipment Straight-line 3-7 years
Equipment and furniture Straight-line 8 years
Leasehold improvements Straight-line (1)
================================================ ====================== ===========
(1) The depreciation period is the lesser of the estimated useful life or the lease term.
Leases
At the inception date of a contract, the Bank assesses whether
the contract is, or contains, a lease. A contract is, or contains,
a lease if it conveys the right to control the use of an identified
asset for a period of time in exchange for consideration. When the
Bank is a lessee, it recognizes a right-of-use asset and a
corresponding lease liability at the lease commencement date except
for short-term leases (defined as leases with terms of 12 months or
less) other than real estate leases and leases for which the
underlying asset is of low value. For such leases, the Bank
recognizes the lease payments in the Non-interest expenses item of
the Consolidated Statement of Income on a straight-line basis over
the lease term. As a practical expedient, the Bank elected, for
real estate leases, not to separate non-lease components from lease
components and instead account for them as a single lease
component. When the Bank is the lessor, the leased assets remain on
the Consolidated Balance Sheet and are reported in Premises and
equipment, and the rental income is recognized net of related
expenses in Non-interest income in the Consolidated Statement of
Income.
Right-of-use assets are initially measured at cost and
subsequently measured at cost less accumulated depreciation and
accumulated impairment losses, if any, and adjusted for certain
remeasurements of lease liabilities. The cost of a right-of-use
asset comprises the amount of the initial measurement of the lease
liability, any lease payments made at or before the commencement
date, any initial direct costs incurred when entering into the
lease, and an estimate of costs to dismantle the asset or restore
the site, less any lease incentives received. Right-of-use assets
are depreciated on a straight-line basis over the lesser of the
lease term and the estimated useful life of the asset. Right-of-use
assets are presented in Premises and equipment on the Consolidated
Balance Sheet. The depreciation expense and impairment losses, if
any, are recorded in Non-interest expenses in the Consolidated
Statement of Income.
The lease liability is initially measured at the present value
of future lease payments net of lease incentives not yet received.
The present value of lease payments is determined using the Bank's
incremental borrowing rate. The lease liability is subsequently
measured at amortized cost using the effective interest method. In
determining the lease term, the Bank considers all the facts and
circumstances that create an economic incentive to exercise an
extension option or not to exercise a termination option. The lease
term determined by the Bank comprises the non-cancellable period of
lease contracts, the periods covered by an option to extend the
lease if the Bank is reasonably certain to exercise that option,
and the periods covered by an option to terminate the lease if the
Bank is reasonably certain not to exercise that option. The Bank
reassesses the lease term if a significant event or change in
circumstances occurs and that is within its control. The Bank
applies judgment to determine the lease term when the lease
contains extension and termination options. Lease liabilities are
presented in Other liabilities on the Consolidated Balance Sheet,
and the interest expense is presented in the Interest expense -
Other item of the Consolidated Statement of Income.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Goodwill
The Bank uses the acquisition method to account for business
combinations. The consideration transferred in a business
combination is measured at the acquisition-date fair value, and the
transaction costs related to the acquisition are expensed as
incurred. When the Bank acquires control of a business, all of the
identifiable assets and liabilities of the acquiree, including
intangible assets, are recorded at fair value. The interests
previously held in the acquiree are also measured at fair value.
Goodwill represents the excess of the purchase consideration and
all previously held interests over the fair value of the
identifiable net assets of the acquiree. If the fair value of the
identifiable net assets exceeds the purchase consideration and all
previously held interests, the difference is immediately recognized
in income as a gain on a bargain purchase.
Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the Bank's ownership
interest and can be initially measured at either fair value or at
the non-controlling interest's proportionate share of the
acquiree's identifiable net assets. The measurement basis is
selected on a case-by-case basis. Following an acquisition,
non-controlling interests consist of the value assigned to those
interests at initial recognition plus the non-controlling
interests' share of changes in equity since the date of the
acquisition.
Intangible Assets
Intangible Assets With Finite Useful Lives
Software that is not part of a cloud computing arrangement and
certain other intangible assets are recognized at cost less
accumulated amortization and accumulated impairment losses. These
intangible assets are systematically amortized on a straight-line
basis over their useful lives, which vary between four and ten
years. The amortization expense is recorded in Non-interest
expenses in the Consolidated Statement of Income.
Intangible Assets With Indefinite Useful Lives
The Bank's intangible assets with indefinite useful lives come
from the acquisition of subsidiaries or groups of assets and
consist of management contracts and a trademark. They are
recognized at the acquisition-date fair value. The management
contracts are for the management of open-ended funds. At the end of
each reporting period, the Bank reviews the useful lives to
determine whether facts and circumstances continue to support an
indefinite useful life assessment. Intangible assets are deemed to
have an indefinite useful life following an examination of all
relevant factors, in particular: (a) the contracts do not have
contractual maturities; (b) the stability of the business segment
to which the intangible assets belong; (c) the Bank's capacity to
control the future economic benefits of the intangible assets; and
(d) the continued economic benefits generated by the intangible
assets.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful
lives are tested for impairment when events or changes in
circumstances indicate that their carrying value may not be
recoverable. At the end of each reporting period, the Bank
determines whether there is an indication that premises and
equipment or intangible assets with finite useful lives may be
impaired. Goodwill and intangible assets that are not available for
use or that have indefinite useful lives are tested for impairment
annually or more frequently if there is an indication that the
asset might be impaired.
An asset is tested for impairment by comparing its carrying
amount with its recoverable amount. The recoverable amount must be
estimated for the individual asset. Where it is not possible to
estimate the recoverable amount of an individual asset, the
recoverable amount of the cash-generating unit (CGU) to which the
asset belongs will be determined. A CGU is the smallest
identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups
of assets. The Bank uses judgment to identify CGUs.
An asset's recoverable amount is the higher of fair value less
costs to sell and the value in use of the asset or CGU. Value in
use is the present value of expected future cash flows from the
asset or CGU. The recoverable amount of the asset or CGU is
determined using valuation models that consider various factors
such as projected future cash flows, discount rates, and growth
rates. The use of different estimates and assumptions in applying
the impairment tests could have a significant impact on income.
Corporate assets, such as the head office building and computer
equipment, do not generate cash inflows that are largely
independent of the cash inflows generated by other assets or groups
of assets. Therefore, the recoverable amount of an individual
corporate asset cannot be determined unless management has decided
to dispose of the asset. However, if there is an indication that a
corporate asset may be impaired, the recoverable amount is
determined for the CGU or group of CGUs to which the corporate
asset belongs, and that recoverable amount is compared with the
carrying amount of this CGU or group of CGUs.
Goodwill is always tested for impairment at the level of a CGU
or group of CGUs. For impairment testing purposes, from the
acquisition date, goodwill resulting from a business combination
must be allocated to the CGU or group of CGUs expected to benefit
from the synergies of the business combination. Each CGU or group
of CGUs to which goodwill is allocated must represent the lowest
level for which the goodwill is monitored internally at the Bank
and must not be larger than an operating segment. The allocation of
goodwill to a CGU or group of CGUs involves management's judgment.
If an impairment loss is to be recognized, the Bank does so by
first reducing the carrying amount of goodwill allocated to the CGU
or group of CGUs and then reducing the carrying amounts of the
other assets of the CGU or group of CGUs in proportion to the
carrying amount of each asset in the CGU or group of CGUs.
If the recoverable amount of an asset or a CGU is less than its
carrying amount, the carrying amount is reduced to its recoverable
amount and an impairment loss is recognized in Non-interest
expenses in the Consolidated Statement of Income. An impairment
loss recognized in prior periods for an asset other than goodwill
must be reversed if, and only if, there has been a change in the
estimates used to determine the asset's recoverable amount since
the last impairment was recognized. If this is the case, the
carrying amount of the asset is increased, given that the
impairment loss was reversed, but shall not exceed the carrying
amount that would have been determined, net of amortization, had no
impairment loss been recognized for this asset in previous
years.
Provisions
Provisions are liabilities of uncertain timing and amount. A
provision is recognized when the Bank has a present obligation
(legal or constructive) arising from a past event, when it is
probable that an outflow of economic resources will be required to
settle the obligation and when the amount of the obligation can be
reliably estimated. Provisions are based on the Bank's best
estimates of the economic resources required to settle the present
obligation, given all relevant risks and uncertainties, and, when
it is significant, the effect of the time value of money.
Provisions are reviewed at the end of each reporting period.
Provisions are presented in Other liabilities on the Consolidated
Balance Sheet.
Interest Income and Expense
Interest income and expense, except for the interest income on
securities classified as at fair value through profit or loss, are
recognized in Net interest income and calculated using the
effective interest rate method.
The effective interest rate is the rate that exactly discounts
estimated future cash inflows and outflows through the expected
life of a financial asset or financial liability to the gross
carrying amount of a financial asset or to the amortized cost of a
financial liability. When calculating the effective interest rate,
the Bank estimates expected cash flows by considering all the
contractual terms of the financial instrument but does not consider
expected credit losses. The calculation includes all fees and
points paid or received between the parties to the contract that
are an integral part of the effective interest rate, transaction
costs, and all other premiums or discounts. Interest income is
calculated by applying the effective interest rate to the gross
carrying amount of a financial asset except for purchased or
originated credit-impaired financial assets and financial assets
that were not impaired upon their purchase or origination but
became impaired thereafter. For purchased or originated
credit-impaired financial assets, the Bank applies the
credit-adjusted effective interest rate to the amortized cost of
the financial asset from initial recognition. The credit-adjusted
effective interest rate reflects expected credit losses. As for
loans that have subsequently become credit-impaired, interest
income is calculated by applying the effective interest rate to the
net carrying amount (net of allowances for credit losses) rather
than to the gross carrying amount.
Loan origination fees, including commitment, restructuring, and
renegotiation fees, are considered an integral part of the yield
earned on the loan. They are deferred and amortized using the
effective interest rate method, and the amortization is recognized
in Interest income over the term of the loan. Direct costs for
originating a loan are netted against the loan origination fees. If
it is likely that a commitment will result in a loan, commitment
fees receive the same accounting treatment, i.e., they are deferred
and amortized using the effective interest rate method and the
amortization is recognized in Interest income over the term of the
loan. Otherwise, they are recorded in Non-interest income over the
term of the commitment.
Loan syndication fees are recorded in Non-interest income unless
the yield on the loan retained by the Bank is less than that of
other comparable lenders involved in the financing. In such cases,
an appropriate portion of the fees is deferred and amortized using
the effective interest rate method, and the amortization is
recognized in Interest income over the term of the loan. Certain
mortgage loan prepayment fees are recognized in Interest income in
the Consolidated Statement of Income when earned.
Dividend Income
Dividends from an equity instrument are recognized in Net
interest income in the Consolidated Statement of Income when the
Bank's right to receive payment is established.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Fee and Commission Income
Fee and commission income is recognized when, or as, a
performance obligation is satisfied, i.e., when control of a
promised service is transferred to a customer and in an amount that
reflects the consideration that the entity expects to be entitled
to receive in exchange for the service. The revenue may therefore
be recognized at a point in time, upon completion of the service,
or over time as services are provided.
The Bank must also determine whether its performance obligation
is to provide the service itself or to arrange for another party to
provide the service (in other words, whether the Bank is acting as
a principal or agent). A principal may itself satisfy its
performance obligation to provide the specified good or service or
it may engage another party to satisfy some or all of the
performance obligation on its behalf. A principal also has the
primary responsibility for fulfilling the promise to provide the
good or service to the customer and has discretion in establishing
the price for the service. If the Bank is acting as a principal,
revenue is recognized on a gross basis in an amount corresponding
to the consideration to which the Bank expects to be entitled. If
the Bank is acting as an agent, then revenue is recognized net of
the service fees and other costs incurred in relation to the
commission and fees earned.
Underwriting and Advisory Fees
Underwriting and advisory fees include underwriting fees,
financial advisory fees, and loan syndication fees. These fees are
mainly earned in the Financial Markets segment and are recognized
at a point in time as revenue upon successful completion of the
engagement. Financial advisory fees are fees earned for assisting
customers with transactions related to mergers and acquisitions and
financial restructurings. Loan syndication fees represent fees
earned as the agent or lead lender responsible for structuring,
arranging, and administering a loan syndication and are recorded in
Non-interest income unless the yield on the loan retained by the
Bank is less than that of other comparable lenders involved in the
financing. In such cases, an appropriate portion of the fees is
deferred and amortized using the effective interest rate method,
and the amortization is recognized in Interest income over the term
of the loan.
Securities Brokerage Commissions
Securities brokerage commissions are earned in the Wealth
Management segment and are recognized when the transaction is
executed.
Mutual Fund Revenues
Mutual fund revenues include management fees earned in the
Wealth Management segment. Management fees are primarily calculated
based on a fund's net asset value and are recorded in the period
the services are performed.
Investment Management and Trust Service Fees
Investment management and trust service fees include management
fees, trust service fees, and fees for other investment services
provided to clients and earned in the Wealth Management segment.
Generally, these fees are calculated using the balances of assets
under administration and assets under management. Such fees are
recognized in the period the service is performed.
Card Revenues
Card revenues are earned in the Personal and Commercial segment
and include card fees such as annual and transactional fees as well
as interchange fees. Interchange fees are recognized when a card
transaction is settled. Card fees are recognized on the transaction
date except for annual fees, which are recorded evenly throughout
the year. Reward costs are recorded as a reduction to interchange
fees.
Credit Fees and Deposit and Payment Service Charges
Credit fees and deposit and payment service charges are earned
in the Personal and Commercial, Financial Markets, and U.S.
Specialty Finance and International segments. Credit fees include
commissions earned by providing services for loan commitments,
financial guarantee contracts, bankers' acceptances, and letters of
credit and guarantee, and they are generally recognized in income
over the period the services are provided. Deposit and payment
service charges include fees related to account maintenance
activities and transaction-based service charges. Fees related to
account maintenance activities are recognized in the period the
services are provided, whereas transaction-based service charges
are recognized when the transaction is executed.
Insurance Revenues
Insurance contracts, including reinsurance contracts, are
arrangements under which one party accepts significant insurance
risk by agreeing to compensate the policyholder if a specified
uncertain future event was to occur. Gross premiums, net of
premiums transferred under reinsurance contracts, are recognized
when they become due. Royalties received from reinsurers are
recognized when earned. Claims are recognized when received and an
amount is estimated as they are being processed. All these amounts
are recognized on a net basis in Non-interest income in the
Consolidated Statement of Income.
Upon recognition of a premium, a reinsurance asset and insurance
liability are recognized, respectively, in Other assets and in
Other liabilities on the Consolidated Balance Sheet. Subsequent
changes in the carrying values of the reinsurance asset and
insurance liability are recognized on a net basis in Non--interest
income in the Consolidated Statement of Income.
Income Taxes
Income taxes include current taxes and deferred taxes and are
recorded in net income except for income taxes generated by items
recognized in Other comprehensive income or directly in equity.
Current tax is the amount of income tax payable on the taxable
income for a period. It is calculated using the enacted or
substantively enacted tax rates prevailing on the reporting date,
and any adjustments recognized in the period for the current tax of
prior periods. Current tax assets and liabilities are offset, and
the net balance is presented in either Other assets or Other
liabilities on the Consolidated Balance Sheet when the Bank has a
legally enforceable right to set off the recognized amounts and
intends to settle on a net basis or to simultaneously realize the
asset and settle the liability.
Deferred tax is established based on temporary differences
between the carrying values and the tax bases of assets and
liabilities, in accordance with enacted or substantively enacted
income tax laws and rates that will apply on the date the
differences reverse. Deferred tax is not recognized for temporary
differences related to the following:
-- the initial accounting of goodwill;
-- the initial accounting of an asset or liability in a
transaction that is not a business combination and that, at the
time of the transaction, affects neither accounting income nor
taxable income;
-- investments in subsidiaries, associates and joint ventures
when it is probable that the temporary difference will not reverse
in the foreseeable future and that the Bank controls the timing of
the reversal of the temporary difference;
-- investments in subsidiaries, associates and joint ventures
when it is probable that the temporary difference will not reverse
in the foreseeable future and that there will not be taxable income
to which the temporary difference can be recognized.
Deferred tax assets are tax benefits in the form of deductions
that the Bank may claim to reduce its taxable income in future
years. At the end of each reporting period, the carrying amount of
deferred tax assets is revised, and it is reduced to the extent
that it is no longer probable that sufficient taxable income will
be available to allow the benefit of the deferred tax asset to be
utilized.
Deferred tax assets and liabilities are offset, and the net
balance is presented in either Other assets or Other liabilities on
the Consolidated Balance Sheet when the Bank has a legally
enforceable right to set off the current tax assets and liabilities
and if the deferred tax assets and liabilities relate to taxes
levied by the same taxation authority on the same taxable entity or
on different taxable entities that intend to settle current tax
assets and liabilities based on their net amount.
The Bank makes assumptions to estimate income taxes as well as
deferred tax assets and liabilities. This process involves
estimating the actual amount of current taxes and evaluating tax
loss carryforwards and temporary differences arising from
differences between the values of items reported for accounting and
for income tax purposes. Deferred tax assets and liabilities
presented on the Consolidated Balance Sheet are calculated
according to the tax rates to be applied in future periods.
Previously recorded deferred tax assets and liabilities must be
adjusted when the date of the future event is revised based on
current information.
The Bank is subject to the jurisdictions of various tax
authorities. In the normal course of its business, the Bank is
involved in a number of transactions for which the tax impacts are
uncertain. As a result, the Bank accounts for provisions for
uncertain tax positions that adequately represent the tax risk
stemming from tax matters under discussion or being audited by tax
authorities or from other matters involving uncertainty. The
amounts of these provisions reflect the best possible estimates of
the amounts that may have to be paid based on qualitative
assessments of all relevant factors. The provisions are estimated
at the end of each reporting period. However, it is possible that,
at a future date, a provision might need to be adjusted following
an audit by the tax authorities. When the final assessment differs
from the initially provisioned amounts, the difference will impact
the income taxes of the period in which the assessment was
made.
Financial Guarantee Contracts
A financial guarantee contract is a contract or indemnification
agreement that could require the Bank to make specified payments
(in cash, financial instruments, other assets, Bank shares, or
provisions of services) to reimburse a beneficiary in the event of
a loss resulting from a debtor defaulting on the original or
amended terms of a debt instrument.
To reflect the fair value of an obligation assumed at the
inception of a financial guarantee, a liability is recorded in
Other liabilities on the Consolidated Balance Sheet. After initial
recognition, the Bank must measure financial guarantee contracts at
the higher of the allowance for credit losses, determined using the
ECL model, and of the initially recognized amount less, where
applicable, the cumulative amount of revenue recognized. This
revenue is recognized in Credit fees in the Consolidated Statement
of Income.
Note 1 - Basis of Presentation and Summary of Significant
Accounting Policies (cont.)
Employee Benefits - Pension Plans and Other Post-Employment
Benefit Plans
The Bank offers pension plans that have a defined benefit
component and a defined contribution component. The Bank also
offers other post-employment benefit plans to eligible employees.
The other post-employment benefit plans include post-employment
medical, dental, and life insurance coverage. The defined benefit
component of the pension plans is funded, whereas the defined
contribution component of the pension plans and of the other
post-employment benefit plans are not funded.
Defined Benefit Component of the Pension Plans and Other
Post-Employment Benefit Plans
Plan expenses and obligations are actuarially determined based
on the projected benefit method prorated on service. The
calculations incorporate management's best estimates of various
actuarial assumptions such as discount rates, rates of compensation
increase, health care cost trend rates, mortality rates, and
retirement age.
The net asset or net liability related to these plans is
calculated separately for each plan as the difference between the
present value of the future benefits earned by employees for
current and prior-period service and the fair value of plan assets.
The net asset or net liability is included in either the Other
assets or Other liabilities item of the Consolidated Balance
Sheet.
The expense related to these plans consists of the following
items: current service cost, net interest on the net plan asset or
liability, administration costs, and past service cost, if any,
recognized when a plan is amended. This expense is recognized in
Compensation and employee benefits in the Consolidated Statement of
Income. The net amount of interest income and expense is determined
by applying a discount rate to the net plan asset or liability
amount.
Remeasurements of defined benefit pension plans and other
post-employment benefit plans represent actuarial gains and losses
related to the defined benefit obligation and the actual return on
plan assets, excluding net interest determined by applying a
discount rate to the net plan asset or liability amount.
Remeasurements are immediately recognized in Other comprehensive
income and are not subsequently reclassified to net income; these
cumulative gains and losses are reclassified to Retained
earnings.
Defined Contribution Component of the Pension Plans
The expense for these plans is equivalent to the Bank's
contributions during the period and is recognized in Compensation
and employee benefits in the Consolidated Statement of Income.
Share-Based Payments
The Bank has several share-based compensation plans: the Stock
Option Plan, the Stock Appreciation Rights (SAR) Plan, the Deferred
Stock Unit (DSU) Plan, the Restricted Stock Unit (RSU) Plan, the
Performance Stock Unit (PSU) Plan, the Deferred Compensation Plan
(DCP) of National Bank Financial, and the Employee Share Ownership
Plan.
Compensation expense is recognized over the service period
required for employees to become fully entitled to the award. This
period is generally the same as the vesting period, except where
the required service period begins before the award date.
Compensation expense related to awards granted to employees
eligible to retire on the award date is immediately recognized on
the award date. Compensation expense related to awards granted to
employees who will become eligible to retire during the vesting
period is recognized over the period from the award date to the
date the employee becomes eligible to retire. For all of these
plans, as of the first year of recognition, the expense includes
cancellation and forfeiture estimates. These estimates are
subsequently revised, as necessary. The Bank uses derivative
financial instruments to hedge the risks associated with some of
these plans. The compensation expense for these plans, net of
related hedges, is recognized in the Consolidated Statement of
Income.
Under the Stock Option Plan, the Bank uses the fair value method
to account for stock options awarded. The options vest at 25% per
year, and each tranche is treated as though it was a separate
award. The fair value of each of the tranches is measured on the
award date using the Black-Scholes model, and this fair value is
recognized in Compensation and employee benefits and Contributed
surplus. When the options are exercised, the Contributed surplus
amount is credited to Equity - Common shares on the Consolidated
Balance Sheet. The proceeds received from the employees when these
options are exercised are also credited to Equity - Common shares
on the Consolidated Balance Sheet.
SARs are recorded at fair value when awarded, and their fair
value is remeasured at the end of each reporting period until they
are exercised. The cost is recognized in Compensation and employee
benefits in the Consolidated Statement of Income and in Other
liabilities on the Consolidated Balance Sheet. The obligation that
results from the change in fair value at each period is recognized
in net income gradually over the vesting period, and periodically
thereafter, until the SARs are exercised. When a SAR is exercised,
the Bank makes a cash payment equal to the increase in the stock
price since the date of the award.
The obligation that results from the award of a DSU, RSU, PSU
and DCP unit is recognized in net income, and the corresponding
amount is included in Other liabilities on the Consolidated Balance
Sheet. For the DSU, RSU and DCP plans, the change in the obligation
attributable to changes in the share price and dividends paid on
the common shares of these plans is recognized in Compensation and
employee benefits in the Consolidated Statement of Income for the
period in which the changes occur. On the redemption date, the Bank
makes a cash payment equal to the value of the common shares on
that date. For the PSU Plan, the change in the obligation
attributable to changes in the share price, adjusted upward or
downward depending on the relative result of the performance
criteria, and the change in the obligation attributable to
dividends paid on the shares awarded under the plan, are recognized
in Compensation and employee benefits in the Consolidated Statement
of Income for the period in which the changes occur. On the
redemption date, the Bank makes a cash payment equal to the value
of the common shares on that
date, adjusted upward or downward according to the performance
criteria.
The Bank's contributions to the employee share ownership plan
are expensed as incurred.
Note 2 - Future Accounting Policy Changes
The Bank closely monitors both new accounting standards and
amendments to existing accounting standards issued by the IASB. The
following standard has been issued but is not yet in effect. The
Bank is currently assessing the impacts of applying this standard
on the consolidated financial statements.
Effective Date - November 1, 2023
IFRS 17 - Insurance Contracts
In May 2017, the IASB published IFRS 17 - Insurance Contracts
(IFRS 17), which replaces IFRS 4, the current insurance contract
accounting standard. IFRS 17 introduces a new accounting framework
that improves the comparability and quality of financial
information. IFRS 17 provides guidance on the recognition,
measurement, presentation, and disclosure of insurance contracts.
IFRS 17 must be applied retrospectively for annual periods
beginning on or after January 1, 2023. If full retrospective
application to a group of insurance contracts is impracticable, the
modified retrospective approach or the fair value approach may be
used.
IFRS 17 affects how an entity accounts for its insurance
contracts and how it reports financial performance in the
consolidated income statement, in particular the timing of revenue
recognition for insurance contracts. The current consolidated
balance sheet presentation, whereby the items are included and
reported in Other assets and Other liabilities, respectively, will
change.
IFRS 17 introduces three approaches to measure insurance
contracts: the general model approach, the premium allocation
approach, and the variable fee approach. The general model
approach, which is primarily used by the Bank, measures insurance
contracts based on the present value of estimates of the expected
future cash flows necessary to fulfill the contracts, including an
adjustment for non-financial risk as well as the contractual
service margin (CSM), which represents the unearned profits that
are recognized as services are provided in the future. The premium
allocation approach is applied to short-term contracts, and
insurance revenues are recognized systematically over the coverage
period. For all measurement approaches, if contracts are expected
to be onerous, losses are recognized immediately.
The Bank is finalizing its analysis of the IFRS 17 adoption
impacts on its consolidated financial statements for the annual
period beginning on or after November 1, 2023. At the transition
date, November 1, 2022, the Bank applied two of the three
transition approaches available under IFRS 17: the full
retrospective approach and the fair value approach. For most groups
of contracts, the fair value approach has been applied considering
that the full retrospective approach is impracticable, since
reasonable and supportable information for applying this approach
is not available without undue cost or effort.
As at October 31, 2023, the Bank's best estimate of the impact
of transitioning to IFRS 17 is a decrease of $48 million, net of
income taxes, in equity as at November 1, 2022, related to the new
recognition and measurement principles of insurance and reinsurance
contract assets and liabilities, including a net amount of CSM
established at approximately $89 million. The impact on the Common
Equity Tier 1 (CET1) capital ratio is not expected to be
material.
The estimated impact of applying the new measurement approaches
for insurance and reinsurance contracts is not significant. The
Bank continues to refine and validate the new measurement
approaches leading up to the disclosure of its 2024 first-quarter
results.
Note 3 - Fair Value of Financial Instruments
Fair Value and Carrying Value of Financial Instruments by
Category
Financial assets and financial liabilities are recognized on the
Consolidated Balance Sheet at fair value or at amortized cost in
accordance with the categories set out in the accounting framework
for financial instruments.
As at October
31, 2023
================ =========== =========== ============= ============= =========== ==============================
Carrying value Carrying Fair
and fair value value value
------------- ------------------------------------------------------ ----------- ----------- ======== =======
Financial Debt Equity
instruments Financial securities securities
classified instruments classified designated
as designated as at at Financial Financial
at fair at fair fair value fair value instruments instruments
value value through through at at
through through other other amortized amortized Total Total
profit profit comprehensive comprehensive cost, cost, carrying fair
or loss or loss income income net net value value
============= =========== =========== ============= ============= =========== =========== ======== =======
Financial assets
Cash and
deposits
with financial
institutions - - - - 35,234 35,234 35,234 35,234
- -
Securities 99,236 758 8,583 659 12,582 12,097 121,818 121,333
Securities
purchased
under reverse
repurchase
agreements
and securities
borrowed - - - - 11,260 11,260 11,260 11,260
Loans and
acceptances,
net of
allowances 13,124 - - - 212,319 210,088 225,443 223,212
Other
Derivative
financial
instruments 17,516 - - - - - 17,516 17,516
Other assets 73 - - - 4,293 4,293 4,366 4,366
--------------- ----------- ----------- ------------- ------------- ----------- ----------- -------- -------
Financial
liabilities
Deposits (1) - 18,275 269,898 269,490 288,173 287,765
Other
Acceptances - - 6,627 6,627 6,627 6,627
Obligations
related
to securities
sold
short 13,660 - - - 13,660 13,660
Obligations
related
to securities
sold
under
repurchase
agreements
and
securities
loaned - - 38,347 38,347 38,347 38,347
Derivative
financial
instruments 19,888 - - - 19,888 19,888
Liabilities
related
to transferred
receivables - 9,952 15,082 14,255 25,034 24,207
Other
liabilities - - 3,497 3,494 3,497 3,494
Subordinated
debt - - 748 727 748 727
=============== =========== =========== ============= ============= =========== =========== ======== =======
(1) Includes embedded derivative financial instruments.
As at October 31,
2022
================ =========== =========== ============= ============= =========== ==============================
Carrying value Carrying Fair
and fair value value value
------------- ------------------------------------------------------ ----------- ----------- ======== =======
Financial Debt Equity
instruments Financial securities securities
classified instruments classified designated
as designated as at at Financial Financial
at fair at fair fair value fair value instruments instruments
value value through through at at
through through other other amortized amortized Total Total
profit profit comprehensive comprehensive cost, cost, carrying fair
or loss or loss income income net net value value
============= =========== =========== ============= ============= =========== =========== ======== =======
Financial assets
Cash and
deposits
with financial
institutions - - - - 31,870 31,870 31,870 31,870
Securities 86,338 1,037 8,272 556 13,516 13,007 109,719 109,210
Securities
purchased
under reverse
repurchase
agreements
and
securities
borrowed - - - - 26,486 26,486 26,486 26,486
Loans and
acceptances,
net of
allowances 10,516 - - - 196,228 190,955 206,744 201,471
Other
Derivative
financial
instruments 18,547 - - - - - 18,547 18,547
Other assets 87 - - - 3,221 3,221 3,308 3,308
--------------- ----------- ----------- ------------- ------------- ----------- ----------- -------- -------
Financial
liabilities
Deposits (1) - 15,355 251,039 249,937 266,394 265,292
Other
Acceptances - - 6,541 6,541 6,541 6,541
Obligations
related
to securities
sold
short 21,817 - - - 21,817 21,817
Obligations
related
to securities
sold
under
repurchase
agreements
and
securities
loaned - - 33,473 33,473 33,473 33,473
Derivative
financial
instruments 19,632 - - - 19,632 19,632
Liabilities
related
to transferred
receivables - 11,352 14,925 14,137 26,277 25,489
Other
liabilities - - 2,632 2,627 2,632 2,627
Subordinated
debt - - 1,499 1,478 1,499 1,478
=============== =========== =========== ============= ============= =========== =========== ======== =======
(1) Includes embedded derivative financial instruments.
Establishing Fair Value
The fair value of a financial instrument is the price that would
be received to sell a financial asset or paid to transfer a
financial liability in an orderly transaction in the principal
market at the measurement date under current market conditions
(i.e., an exit price).
Unadjusted quoted prices in active markets provide the best
evidence of fair value. When there is no quoted price in an active
market, the Bank applies other valuation techniques that maximize
the use of relevant observable inputs and that minimize the use of
unobservable inputs. Such valuation techniques include the
following: using information available from recent market
transactions, referring to the current fair value of a comparable
financial instrument, applying discounted cash flow analysis,
applying option pricing models, or relying on any other valuation
technique that is commonly used by market participants and has
proven to yield reliable estimates. Judgment is required when
applying many of the valuation techniques. The Bank's valuation was
based on its assessment of the conditions prevailing as at October
31, 2023 and may change in the future. Furthermore, there may be
measurement uncertainty resulting from the choice of valuation
model used.
Note 3 - Fair Value of Financial Instruments (cont.)
Valuation Governance
Fair value is established in accordance with a rigorous control
framework. The Bank has policies and procedures that govern the
process for determining fair value. These policies are documented
and periodically reviewed by the Risk Management Group. All
valuation models are validated, and controls have been implemented
to ensure that they are applied.
The fair value of existing or new products is determined and
validated by functions independent of the risk-taking team. Complex
fair value matters are reviewed by valuation committees made up of
experts from various specialized functions.
For financial instruments classified in Level 3 of the fair
value hierarchy, the Bank has documented the hierarchy
classification policies, and controls are in place to ensure that
fair value is measured appropriately, reliably, and consistently.
Valuation methods and the underlying assumptions are regularly
reviewed.
Valuation Methods and Assumptions
Financial Instruments Whose Fair Value Equals Carrying Value
The carrying value of the following financial instruments is a
reasonable approximation of fair value:
-- cash and deposits with financial institutions;
-- securities purchased under reverse repurchase agreements and securities borrowed;
-- obligations related to securities sold under repurchase agreements and securities loaned;
-- customers' liability under acceptances;
-- acceptances;
-- certain items of other assets and other liabilities.
Securities and Obligations Related to Securities Sold Short
These financial instruments, except for securities at amortized
cost, are recognized at fair value on the Consolidated Balance
Sheet. Their fair value is based on quoted prices in active
markets, i.e., bid prices for financial assets and offered prices
for financial liabilities. If there are no quoted prices in an
active market, fair value is estimated using prices for securities
that are substantially the same. If such prices are not available,
fair value is determined using valuation techniques that
incorporate assumptions based primarily on observable market inputs
such as current market prices, the contractual prices of the
underlying instruments, the time value of money, credit risk,
interest rate yield curves, and currency rates.
When one or more significant inputs are not observable in the
markets, fair value is established primarily using internal
estimates and data that consider the valuation policies in effect
at the Bank, economic conditions, the characteristics specific to
the financial asset or liability, and other relevant factors.
Securities Issued or Guaranteed by Governments
Securities issued or guaranteed by governments include debt
securities of the governments of Canada (federal, provincial and
municipal) as well as debt securities of the U.S. government (U.S.
Treasury), of other U.S. agencies, and of other foreign
governments. The fair value of these securities is based on
unadjusted quoted prices in active markets. For those classified in
Level 2, quoted prices for identical or similar instruments in
active markets are used to determine fair value. In the absence of
an observable market, a valuation technique such as the discounted
cash flow method could be used, incorporating assumptions on
benchmark yields and the risk spreads of similar securities.
Equity Securities and Other Debt Securities
The fair value of equity securities is determined primarily by
using quoted prices in active markets. For equity securities and
other debt securities classified in Level 2, a valuation technique
based on quoted prices of identical and similar instruments in an
active market is used to determine fair value. In the absence of
observable inputs, a valuation technique such as the discounted
cash flow method could be used, incorporating assumptions on
benchmark yields and the risk spreads of similar securities. For
those classified in Level 3, fair value can be determined based on
net asset value, which represents the estimated value of a security
based on valuations received from investment or fund managers or
the general partners of limited partnerships. Fair value can also
be determined using internal valuation techniques adjusted to
reflect financial instrument risk factors and economic
conditions.
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on
the Consolidated Balance Sheet. For exchange-traded derivative
financial instruments, fair value is based on quoted prices in an
active market.
For over-the-counter (OTC) derivative financial instruments,
fair value is determined using well established valuation
techniques that incorporate assumptions based primarily on
observable market inputs such as current market prices and the
contractual prices of the underlying instruments, the time value of
money, interest rate yield curves, credit curves, currency rates as
well as price and rate volatility factors. In establishing the fair
value of OTC derivative financial instruments, the Bank also
incorporates the following factors:
Credit Valuation Adjustment (CVA)
The CVA is a valuation adjustment applied to derivative
financial instruments to reflect the credit risk of the
counterparty. For each counterparty, the CVA is based on the
expected positive exposure and probabilities of default through
time. The exposures are determined by using relevant factors such
as current and potential future market values, master netting
agreements, collateral agreements, and expected recovery rates. The
default probabilities are inferred using credit default swap (CDS)
spreads. When such information is unavailable, relevant proxies are
used. While the general methodology currently assumes independence
between expected positive exposures and probabilities of default,
adjustments are applied to certain types of transactions where
there is a direct link between the exposure at default and the
default probabilities.
Funding Valuation Adjustment (FVA)
The FVA is a valuation adjustment applied to derivative
financial instruments to reflect the market-implied cost or
benefits of funding collateral for uncollateralized or partly
collateralized transactions. The expected exposures are determined
using methodologies consistent with the CVA framework. The funding
level used to determine the FVA is based on the average funding
level of relevant market participants.
When the valuation techniques incorporate one or more
significant inputs that are not observable in the markets, the fair
value of OTC derivative financial instruments is established
primarily on the basis of internal estimates and data that consider
the valuation policies in effect at the Bank, economic conditions,
the characteristics specific to the financial asset or financial
liability, and other relevant factors.
Loans
The fair value of fixed-rate mortgage loans is determined by
discounting expected future contractual cash flows, adjusted for
several factors, including prepayment options, current market
interest rates for similar loans, and other relevant variables
where applicable. The fair value of variable-rate mortgage loans is
deemed to equal carrying value.
The fair value of other fixed-rate loans is determined by
discounting expected future contractual cash flows using current
market interest rates charged for similar new loans. The fair value
of other variable-rate loans is deemed to equal carrying value.
Deposits
The fair value of fixed-term deposits is determined primarily by
discounting expected future contractual cash flows and considering
several factors such as redemption options and market interest
rates currently offered for financial instruments with similar
conditions. For certain term funding instruments, fair value is
determined using market prices for similar instruments. The fair
value of demand deposits and notice deposits is deemed to equal
carrying value.
The fair value of structured deposit notes is established using
valuation models that maximize the use of observable inputs when
available, such as benchmark indices, and also incorporates the
Bank's own credit risk. In calculating the Bank's own credit risk,
the market implied spreads of the Bank are used to infer its
probabilities of default. Lastly, when fair value is determined
using option pricing models, the valuation techniques are similar
to those described for derivative financial instruments.
Liabilities Related to Transferred Receivables
These liabilities arise from sale transactions to Canada Housing
Trust (CHT) of securities backed by insured residential mortgages
and other securities under the Canada Mortgage Bond (CMB) program.
These transactions do not qualify for derecognition. They are
recorded as guaranteed borrowings, which results in the recording
of liabilities on the Consolidated Balance Sheet. The fair value of
these liabilities is established using valuation techniques based
on observable market inputs such as Canada Mortgage Bond
prices.
Note 3 - Fair Value of Financial Instruments (cont.)
Other Liabilities and Subordinated Debt
The fair value of these financial liabilities is based on quoted
market prices in an active market. If there is no active market,
fair value is determined by discounting contractual cash flows
using the current market interest rates offered for similar
financial instruments that have the same term to maturity.
Hierarchy of Fair Value Measurements
Determining the Levels of the Fair Value Measurement
Hierarchy
IFRS establishes a fair value measurement hierarchy that
classifies the inputs used in financial instrument fair value
measurement techniques according to three levels. This fair value
hierarchy requires observable market inputs to be used whenever
such inputs exist. According to the hierarchy, the highest level of
inputs are unadjusted quoted prices in active markets for identical
instruments and the lowest level of inputs are unobservable inputs.
In some cases, the inputs used to measure the fair value of a
financial instrument might be categorized within different levels
of the fair value hierarchy. In those cases, the fair value
measurement is categorized in its entirety in the same level of the
fair value hierarchy as the lowest level input that is significant
to the entire measurement. The fair value measurement hierarchy has
the following levels:
Level 1
Inputs corresponding to unadjusted quoted prices in active
markets for identical assets and liabilities and accessible to the
Bank at the measurement date. These instruments consist primarily
of equity securities, derivative financial instruments traded in
active markets, and certain highly liquid debt securities actively
traded in over-the-counter markets.
Level 2
Valuation techniques based on inputs, other than the quoted
prices included in Level 1 inputs, that are directly or indirectly
observable in the market for the asset or liability. These inputs
are quoted prices of similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not
active; inputs other than quoted prices used in a valuation model
that are observable for that instrument; and inputs that are
derived principally from or corroborated by observable market
inputs by correlation or other means. These instruments consist
primarily of certain loans, certain deposits, derivative financial
instruments traded in over-the-counter markets, certain debt
securities, certain equity securities whose value is not directly
observable in an active market, liabilities related to transferred
receivables, and certain other liabilities.
Level 3
Valuation techniques based on one or more significant inputs
that are not observable in the market for the asset or liability.
The Bank classifies financial instruments in Level 3 when the
valuation technique is based on at least one significant input that
is not observable in the markets. The valuation technique may also
be partly based on observable market inputs.
Financial instruments whose fair values are classified in Level
3 consist of the following:
-- financial instruments measured at fair value through profit
or loss: investments in hedge funds for which there are certain
restrictions on unit or security redemptions, equity securities and
debt securities of private companies, as well as certain derivative
financial instruments whose fair value is established using
internal valuation models that are based on significant
unobservable market inputs;
-- securities at fair value through other comprehensive income:
equity and debt securities of private companies;
-- certain loans and certain deposits (structured deposit notes)
whose fair value is established using internal valuation models
that are based on significant unobservable market inputs;
-- certain other assets (receivables) for which fair value is
established using internal valuation models that are based on
significant unobservable market inputs.
Transfers Between the Fair Value Hierarchy Levels
Transfers of financial instruments between Levels 1 and 2 and
transfers to (or from) Level 3 are deemed to have taken place at
the beginning of the quarter in which the transfer occurred.
Significant transfers can occur between the fair value hierarchy
levels due to new information on inputs used to determine fair
value and the observable nature of those inputs.
During fiscal 2023, $17 million in securities classified as at
fair value through profit or loss and $3 million in obligations
related to securities sold short were transferred from Level 2 to
Level 1 as a result of changing market conditions ($41 million in
securities classified as at fair value through profit or loss and
$3 million in obligations related to securities sold short in
fiscal 2022). In addition, during fiscal 2023, $15 million in
securities classified as at fair value through profit or loss and
$3 million in obligations related to securities sold short were
transferred from Level 1 to Level 2 as a result of changing market
conditions (in fiscal 2022, $26 million in securities classified as
at fair value through profit or loss and $2 million in obligations
related to securities sold short).
During fiscal years 2023 and 2022, financial instruments were
transferred to (or from) Level 3 due to changes in the availability
of observable market inputs as a result of changing market
conditions.
Financial Instruments Recorded at Fair Value on the Consolidated
Balance Sheet
The following tables show financial instruments recorded at fair
value on the Consolidated Balance Sheet according to the fair value
hierarchy.
As at October 31, 2023
=============================================== ====== ==================================
Total
financial
assets/liabilities
Level Level Level at fair
1 2 3 value
=============================================== ====== ====== ===== ===================
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government 6,403 10,872 - 17,275
Canadian provincial and municipal governments - 8,260 - 8,260
U.S. Treasury, other U.S. agencies and
other foreign governments 2,781 2,105 - 4,886
Other debt securities - 3,450 65 3,515
Equity securities 65,018 554 486 66,058
------------------------------------------------ ------ ------ ----- -------------------
74,202 25,241 551 99,994
----------------------------------------------- ------ ------ ----- -------------------
At fair value through other comprehensive
income
Securities issued or guaranteed by
Canadian government 73 4,124 - 4,197
Canadian provincial and municipal governments - 1,938 - 1,938
U.S. Treasury, other U.S. agencies and
other foreign governments 904 254 - 1,158
Other debt securities - 1,290 - 1,290
Equity securities - 281 378 659
------------------------------------------------ ------ ------ ----- -------------------
977 7,887 378 9,242
----------------------------------------------- ------ ------ ----- -------------------
Loans - 12,907 217 13,124
Other
Derivative financial instruments 285 17,224 7 17,516
Other assets - Other items - - 73 73
------------------------------------------------- ------ ------ ----- -------------------
75,464 63,259 1,226 139,949
--------------------------------------------------- ------ ------ ----- -------------------
Financial liabilities
Deposits (1) - 18,134 - 18,134
Other
Obligations related to securities sold
short 8,335 5,325 - 13,660
Derivative financial instruments 467 19,399 22 19,888
Liabilities related to transferred receivables - 9,952 - 9,952
8,802 52,810 22 61,634
=================================================== ====== ====== ===== ===================
(1) The amounts include the fair value of embedded derivative financial instruments in deposits.
Note 3 - Fair Value of Financial Instruments (cont.)
As at October 31, 2022
=============================================== ======= =====================================
Total financial
assets/liabilities
at fair
Level 1 Level 2 Level 3 value
=============================================== ======= ======= ======= ===================
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government 4,736 8,186 - 12,922
Canadian provincial and municipal governments - 9,260 - 9,260
U.S. Treasury, other U.S. agencies and
other foreign governments 10,639 4,445 - 15,084
Other debt securities - 3,324 60 3,384
Equity securities 45,805 504 416 46,725
------------------------------------------------ ------- ------- ------- -------------------
61,180 25,719 476 87,375
----------------------------------------------- ------- ------- ------- -------------------
At fair value through other comprehensive
income
Securities issued or guaranteed by
Canadian government 21 3,191 - 3,212
Canadian provincial and municipal governments - 1,970 - 1,970
U.S. Treasury, other U.S. agencies and
other foreign governments 1,687 191 - 1,878
Other debt securities - 1,212 - 1,212
Equity securities - 236 320 556
------------------------------------------------ ------- ------- ------- -------------------
1,708 6,800 320 8,828
----------------------------------------------- ------- ------- ------- -------------------
Loans - 10,272 244 10,516
Other
Derivative financial instruments 342 18,204 1 18,547
Other assets - Other items - - 87 87
------------------------------------------------- ------- ------- ------- -------------------
63,230 60,995 1,128 125,353
------------------------------------------------ ------- ------- ------- -------------------
Financial liabilities
Deposits (1) - 15,424 8 15,432
Other
Obligations related to securities sold
short 15,213 6,604 - 21,817
Derivative financial instruments 625 18,989 18 19,632
Liabilities related to transferred receivables - 11,352 - 11,352
15,838 52,369 26 68,233
================================================ ======= ======= ======= ===================
(1) The amounts include the fair value of embedded derivative financial instruments in deposits.
Financial Instruments Classified in Level 3
The Bank classifies financial instruments in Level 3 when the
valuation technique is based on at least one significant input that
is not observable in the markets. The valuation technique may also
be based, in part, on observable market inputs. The table on the
following page shows the significant unobservable inputs used for
the fair value measurements of financial instruments classified in
Level 3 of the hierarchy.
As at October
31, 2023
================= ====== ================ ================= =================================
Range of input
values
====== ================ ================= ---------------------------------
Primary Significant
Fair valuation unobservable
value techniques inputs Low High
==================== ====== ================ ================= ========= ==== ========== ====
Financial assets
Securities
Equity securities
and
other debt
securities 929 Net asset value Net asset value 100% 100%
Market EV/EBITDA(1)
comparable multiple 11x 14x
Discounted cash
flows Discount rate 6.50% 15.10%
Loans
Loans at fair value
through profit or Discounted cash
loss 217 flows Discount rate 8.08% 15.99%
Discounted cash
flows Liquidity premium 3.57% 11.32%
Other
Derivative
financial
instruments
Option pricing Long-term
Equity contracts 5 model volatility 7% 58%
Market
correlation 15% 94%
Credit derivative Discounted cash Bps Bps
contracts 2 flows Credit spread 22 (2) 91 (2)
Other assets -
Other Discounted cash
items 73 flows Discount rate 13% 13%
------------------- ------ ---------------- ----------------- --------- --- ---------- ---
1,226
----------------- ------ ---------------- ----------------- --------- ---- ---------- ----
Financial liabilities
Other
Derivative
financial
instruments
Interest rate Discounted cash
contracts 5 flows Discount rate 2.20% 2.20%
Option pricing Long-term
Equity contracts 16 model volatility 7% 58%
Market
correlation (9)% 94%
Credit derivative Discounted cash Bps Bps
contracts 1 flows Credit spread 22 (2) 91 (2)
------------------ ------ ---------------- ----------------- --------- ---- ---------- ----
22
================== ====== ================ ================= ========= ==== ========== ====
As at October 31,
2022
================= ====== ================ ================= =================================
Range of input
values
====== ================ ================= ---------------------------------
Primary Significant
Fair valuation unobservable
value techniques inputs Low High
==================== ====== ================ ================= ========= ==== ========== ====
Financial assets
Securities
Equity securities
and
other debt
securities 796 Net asset value Net asset value 100% 100%
Market EV/EBITDA(1)
comparable multiple 18x 21x
Discounted cash
flows Discount rate 4.50% 19.00%
Loans
Loans at fair value
through profit or Discounted cash
loss 244 flows Discount rate 7.06% 15.09%
Discounted cash
flows Liquidity premium 2.62% 10.49%
Other
Derivative
financial
instruments
Option pricing Long-term
Equity contracts 1 model volatility 21% 54%
Market
correlation 38% 95%
Other assets -
Other Discounted cash
items 87 flows Discount rate 9% 9%
------------------- ------ ---------------- ----------------- --------- --- ---------- ---
1,128
----------------- ------ ---------------- ----------------- --------- ---- ---------- ----
Financial liabilities
Deposits
Structured deposit Option pricing Long-term
notes(3) 8 model volatility 10% 35%
Market
correlation (3)% 94%
Other
Derivative
financial
instruments
Interest rate Discounted cash
contracts 8 flows Discount rate 2.20% 2.20%
Option pricing Long-term
Equity contracts 10 model volatility 9% 51%
Market
correlation 1% 95%
----------------- ------ ---------------- ----------------- --------- --- ---------- ---
26
================== ====== ================ ================= ========= ==== ========== ====
(1) EV/EBITDA means Enterprise Value/Earnings Before Interest,
Taxes, Depreciation and Amortization.
(2) Bps or basis point is a unit of measure equal to 0.01%.
(3) Includes embedded derivative financial instruments .
Note 3 - Fair Value of Financial Instruments (cont.)
Significant Unobservable Inputs Used for Fair Value Measurements
of Financial Instruments Classified in Level 3
Net Asset Value
Net asset value is the estimated value of a security based on
valuations received from the investment or fund managers, the
administrators of the conduits, or the general partners of limited
partnerships. The net asset value of a fund is the total fair value
of assets less liabilities.
EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes,
Depreciation and Amortization) Multiple and Price Equivalent
Private equity valuation inputs include earnings multiples,
which are determined based on comparable companies, and a higher
multiple will translate into a higher fair value. Price equivalent
is a percentage of the market price based on the liquidity of the
security.
Discount Rate
The discount rate is the input used to bring future cash flows
to their present value. A higher discount rate will translate into
a lower fair value.
Liquidity Premium
A liquidity premium may be applied when few or no transactions
exist to support the valuations. A higher liquidity premium will
result in a lower value.
Long-Term Volatility
Volatility is a measure of the expected future variability of
market prices. Volatility is generally observable in the market
through options prices. However, the long-term volatility of
options with a longer maturity might not be observable. An increase
(decrease) in long-term volatility is generally associated with an
increase (decrease) in long-term correlation. Higher long-term
volatility may increase or decrease an instrument's fair value
depending on its terms.
Market Correlation
Correlation is a measure of the inter-relationship between two
different variables. A positive correlation means that the
variables tend to move in the same direction; a negative
correlation means that the variables tend to move in opposite
directions. Correlation is used to measure financial instruments
whose future returns depend on several variables. Changes in
correlation will either increase or decrease a financial
instrument's fair value depending on the terms of its contractual
payout.
Credit Spread
A credit spread (yield) is the difference between the
instrument's yield and a benchmark yield. Benchmark instruments
have high credit quality ratings with similar maturities. The
credit spread therefore represents the discount rate used to
determine the present value of future cash flows of an asset to
reflect the market return required for credit quality in the
estimated cash flows. A higher credit spread will result in a lower
value.
Sensitivity Analysis of Financial Instruments Classified in
Level 3
The Bank performs sensitivity analyses for the fair value
measurements of Level 3 financial instruments, substituting
unobservable inputs with one or more reasonably possible
alternative assumptions.
For equity securities and other debt securities, the Bank varies
significant unobservable inputs such as net asset values, EV/EBITDA
multiples, or price equivalents and establishes a reasonable fair
value range that could result in a $155 million increase or
decrease in the fair value recorded as at October 31, 2023 (a $126
million increase or decrease as at October 31, 2022).
For loans, the Bank varies unobservable inputs such as a
liquidity premium and establishes a reasonable fair value range
that could result in a $25 million increase or decrease in the fair
value recorded as at October 31, 2023 (a $31 million increase or
decrease as at October 31, 2022).
For derivative financial instruments and embedded derivative
financial instruments related to structured deposit notes, the Bank
varies long-term volatility, market correlation inputs, and credit
spread and establishes a reasonable fair value range. As at October
31, 2023, for derivative financial instruments, the net fair value
could result in a $16 million increase or decrease (a $5 million
increase or decrease as at October 31, 2022), whereas for
structured deposit notes, the net fair value could have resulted in
a $1 million increase or decrease as at October 31, 2022.
For other assets, the Bank varies unobservable inputs such as
discount rates and establishes a reasonable fair value range that
could result in a $9 million increase or decrease in the fair value
recorded as at October 31, 2023 (a $10 million increase or decrease
as at October 31, 2022).
For all Level 3 financial instruments, the reasonable fair value
ranges could result in a 6% increase or decrease in net income as
at October 31, 2023 (a 5% increase or decrease in net income as at
October 31, 2022).
Change in the Fair Value of Financial Instruments Classified in
Level 3
The Bank may hedge the fair value of financial instruments
classified in the various levels through offsetting hedge
positions. Gains and losses for financial instruments classified in
Level 3 presented in the following tables do not reflect the
inverse gains and losses on financial instruments used for economic
hedging purposes that may have been classified in Level 1 or 2 by
the Bank. In addition, the Bank may hedge the fair value of
financial instruments classified in Level 3 using other financial
instruments classified in Level 3. The effect of these hedges is
not included in the net amount presented in the following tables.
The gains and losses presented hereafter may comprise changes in
fair value based on observable and unobservable inputs.
Year ended October
31, 2023
======================================= ========== ============== ======= ======================
Securities
Securities at fair
at fair value
value through Loans Derivative
through other and financial
profit comprehensive other instruments Deposits
or loss income assets (1) (2)
====================================== ========== ============== ======= ============ ========
Fair value as at October 31, 2022 476 320 331 (17) (8)
Total realized and unrealized gains
(losses) included in Net income
(3) 33 - (4) (15) -
Total realized and unrealized gains
(losses) included in
Other comprehensive income - 58 - - -
Purchases 62 - - - -
Sales (21) - (9) - -
Issuances - - 29 - -
Settlements and other - - (57) 7 -
Financial instruments transferred
into Level 3 1 - - 8 -
Financial instruments transferred
out of Level 3 - - - 2 8
--------------------------------------- ---------- -------------- ------- ------------ --------
Fair value as at October 31, 2023 551 378 290 (15) -
--------------------------------------- ---------- -------------- ------- ------------ --------
Change in unrealized gains and losses
included in Net income with respect
to financial assets and financial
liabilities held as at October 31,
2023(4) 62 - (4) (15) -
======================================= ========== ============== ======= ============ ========
Year ended October
31, 2022
==================================== ========== ============== ======= ============================
Securities
Securities at fair
at fair value
value through Loans
through other and Derivative
profit comprehensive other financial
or loss income assets instruments(1) Deposits(2)
=================================== ========== ============== ======= =============== ===========
Fair value as at October 31, 2021 471 306 297 2 -
Total realized and unrealized gains
(losses) included in Net income
(5) 21 - (50) (19) 3
Total realized and unrealized gains
(losses) included in
Other comprehensive income - 7 - - -
Purchases 60 7 71 - -
Sales (64) - - - -
Issuances - - 22 - (3)
Settlements and other - - (9) (1) -
Financial instruments transferred
into Level 3 - - - 1 (8)
Financial instruments transferred
out of Level 3 (12) - - - -
------------------------------------ ---------- -------------- ------- --------------- -----------
Fair value as at October 31, 2022 476 320 331 (17) (8)
------------------------------------ ---------- -------------- ------- --------------- -----------
Change in unrealized gains and
losses
included in Net income with respect
to financial assets and financial
liabilities held as at October 31,
2022(6) 3 - (50) (19) 3
==================================== ========== ============== ======= =============== ===========
(1) The derivative financial instruments include assets and
liabilities presented on a net basis.
(2) The amounts include the fair value of embedded derivative financial instruments in deposits.
(3) Total gains (losses) included in Non-interest income was a gain of $14 million.
(4) Total unrealized gains (losses) included in Non-interest
income was an unrealized gain of $43 million.
(5) Total gains (losses) included in Non-interest income was a loss of $45 million.
(6) Total unrealized gains (losses) included in Non-interest
income was an unrealized loss of $63 million.
Note 3 - Fair Value of Financial Instruments (cont.)
Financial Instruments Not Recorded at Fair Value on the
Consolidated Balance Sheet
The following tables show the financial instruments that have
not been recorded at fair value on the Consolidated Balance Sheet
according to the fair value hierarchy, except for those whose
carrying value is a reasonable approximation of fair value.
As at October 31, 2023
=================================================== ======== ==========================
Level Level Level
1 2 3 Total
=============================================== ======== ======== ======= =======
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government - 5,935 - 5,935
Canadian provincial and municipal governments - 1,772 - 1,772
U.S. Treasury, other U.S. agencies and
other foreign governments - 593 - 593
Other debt securities - 3,797 - 3,797
------------------------------------------------- --------- -------- ------- -------
- 12,097 - 12,097
--------------------------------------------------- --------- -------- ------- -------
Loans, net of allowances - 86,887 116,627 203,514
-------------------------------------------------- --------- -------- ------- -------
Financial liabilities
Deposits - 269,490 - 269,490
Other
Liabilities related to transferred receivables - 14,255 - 14,255
Other liabilities - 46 - 46
Subordinated debt - 727 - 727
-------------------------------------------------- --------- -------- ------- -------
- 284,518 - 284,518
=================================================== ========= ======== ======= =======
As at October 31, 2022
=================================================== ======== ==========================
Level 1 Level 2 Level 3 Total
=============================================== ======== ======== ======= =======
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government - 5,439 - 5,439
Canadian provincial and municipal governments - 1,708 - 1,708
U.S. Treasury, other U.S. agencies and
other foreign governments - 140 - 140
Other debt securities - 5,720 - 5,720
------------------------------------------------- --------- -------- ------- -------
- 13,007 - 13,007
--------- ---------------------------------------------- -------- ------- -------
Loans, net of allowances - 81,828 102,640 184,468
-------------------------------------------------- --------- -------- ------- -------
Financial liabilities
Deposits - 249,937 - 249,937
Other
Liabilities related to transferred receivables - 14,137 - 14,137
Other liabilities - 73 - 73
Subordinated debt - 1,478 - 1,478
-------------------------------------------------- --------- -------- ------- -------
- 265,625 - 265,625
=================================================== ========= ======== ======= =======
Note 4 - Financial Instruments Designated at Fair Value Through
Profit or Loss
The Bank chose to designate certain financial instruments at
fair value through profit or loss according to the criteria
presented in Note 1 to these consolidated financial statements.
Consistent with its risk management strategy and in accordance with
the fair value option, which permits the designation if it
eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring financial
assets and liabilities or recognizing the gains and losses thereon
on different bases, the Bank designated certain securities and
certain liabilities related to transferred receivables at fair
value through profit or loss. The fair value of liabilities related
to transferred receivables does not include credit risk, as the
holders of these liabilities are not exposed to the Bank's credit
risk. The Bank also designated certain deposits that include
embedded derivative financial instruments at fair value through
profit or loss.
To determine a change in fair value arising from a change in the
credit risk of deposits designated at fair value through profit or
loss, the Bank calculates, at the beginning of the period, the
present value of the instrument's contractual cash flows using the
following rates: first, an observed discount rate for similar
securities that reflects the Bank's credit spread and, then, a rate
that excludes the Bank's credit spread. The difference obtained
between the two values is then compared to the difference obtained
using the same rates at the end of the period.
Information about the financial assets and financial liabilities
designated at fair value through profit or loss is provided in the
following tables.
Unrealized
Unrealized gains (losses)
Carrying gains (losses) since the
value as for the initial
at year ended recognition
October October of
31, 2023 31, 2023 the instrument
=============================================== ========= =============== ===============
Financial assets designated at fair value
through profit or loss
Securities 758 (5) (12)
------------------------------------------------ --------- --------------- ---------------
Financial liabilities designated at fair
value through profit or loss
Deposits(1)(2) 18,275 493 3,546
Liabilities related to transferred receivables 9,952 80 562
------------------------------------------------ --------- --------------- ---------------
28,227 573 4,108
================================================ ========= =============== ===============
Unrealized
Unrealized gains (losses)
Carrying gains (losses) since the
value as for the initial
at year ended recognition
October October of
31, 2022 31, 2022 the instrument
=============================================== ========= =============== ===============
Financial assets designated at fair value
through profit or loss
Securities 1,037 (21) (7)
------------------------------------------------ --------- --------------- ---------------
Financial liabilities designated at fair
value through profit or loss
Deposits(1)(2) 15,355 2,888 3,062
Liabilities related to transferred receivables 11,352 513 533
------------------------------------------------ --------- --------------- ---------------
26,707 3,401 3,595
================================================ ========= =============== ===============
(1) For the year ended October 31, 2023, the change in the fair
value of deposits designated at fair value through profit or loss
attributable to credit risk, and recorded in Other comprehensive
income, resulted in a loss of $226 million ($817 million gain for
the year ended October 31, 2022).
(2) The amount at maturity that the Bank will be contractually
required to pay to the holders of these deposits varies and will
differ from the reporting date fair value.
Note 5 - Offsetting Financial Assets and Financial
Liabilities
Financial assets and liabilities are offset, and the net amount
is presented on the Consolidated Balance Sheet when the Bank has a
legally enforceable right to set off the recognized amounts and
intends to settle on a net basis or to realize the asset and settle
the liability simultaneously.
Generally, over-the-counter derivative financial instruments
subject to master netting agreements of the International Swaps
& Derivatives Association, Inc. or other similar agreements do
not meet the offsetting criteria on the Consolidated Balance Sheet,
because the right of set-off is legally enforceable only in the
event of default, insolvency, or bankruptcy.
Generally, securities purchased under reverse repurchase
agreements and securities borrowed as well as obligations related
to securities sold under repurchase agreements and securities
loaned, subject to master agreements, do not meet the offsetting
criteria if they confer only a right of set-off that is enforceable
only in the event of default, insolvency, or bankruptcy.
However, the above-mentioned transactions may be subject to
contractual netting agreements concluded with clearing houses. If
the offsetting criteria are met, these transactions are netted on
the Consolidated Balance Sheet. In addition, as part of these
transactions, the Bank may pledge or receive cash or other
financial instruments used as collateral.
The following tables present information on financial assets and
financial liabilities that are netted on the Consolidated Balance
Sheet, because they meet the offsetting criteria as well as
information on those that are not netted and are subject to an
enforceable master netting agreement or similar agreement.
As at October
31, 2023
=============== ========== ============ ============ ============== =========================
Associated amounts
not set off on
the
Consolidated
Balance Sheet
========== ============ ============ --------------------------------
Amounts Net amounts
set off reported Financial
on the on the assets
Gross Consolidated Consolidated Financial received/pledged
amounts Balance Balance instruments as collateral Net
recognized Sheet Sheet (1) (2) amounts
============ ========== ============ ============ ============== ================ =======
Financial
assets
Securities
purchased
under
reverse
repurchase
agreements
and
securities
borrowed 20,344 9,084 11,260 2,538 8,649 73
Derivative
financial
instruments 35,404 17,888 17,516 8,032 7,065 2,419
-------------- ---------- ------------ ------------ -------------- ---------------- -------
55,748 26,972 28,776 10,570 15,714 2,492
------------ ---------- ------------ ------------ -------------- ---------------- -------
Financial
liabilities
Obligations
related to
securities
sold under
repurchase
agreements
and
securities
loaned 47,431 9,084 38,347 2,538 35,679 130
Derivative
financial
instruments 37,776 17,888 19,888 8,032 5,703 6,153
-------------- ---------- ------------ ------------ -------------- ---------------- -------
85,207 26,972 58,235 10,570 41,382 6,283
============ ========== ============ ============ ============== ================ =======
As at October
31, 2022
=============== ========== ============ ============ ============== =========================
Associated amounts
not set off on
the
Consolidated Balance
Sheet
========== ============ ============ --------------------------------
Amounts Net amounts
set off reported
on the on the Financial
Gross Consolidated Consolidated assets
amounts Balance Balance Financial received/pledged Net
recognized Sheet Sheet instruments(1) as collateral(2) amounts
============ ========== ============ ============ ============== ================ =======
Financial
assets
Securities
purchased
under
reverse
repurchase
agreements
and
securities
borrowed 32,134 5,648 26,486 1,887 24,459 140
Derivative
financial
instruments 33,112 14,565 18,547 9,583 6,062 2,902
-------------- ---------- ------------ ------------ -------------- ---------------- -------
65,246 20,213 45,033 11,470 30,521 3,042
------------ ---------- ------------ ------------ -------------- ---------------- -------
Financial
liabilities
Obligations
related to
securities
sold under
repurchase
agreements
and
securities
loaned 39,121 5,648 33,473 1,887 31,440 146
Derivative
financial
instruments 34,197 14,565 19,632 9,583 4,089 5,960
-------------- ---------- ------------ ------------ -------------- ---------------- -------
73,318 20,213 53,105 11,470 35,529 6,106
============ ========== ============ ============ ============== ================ =======
(1) Carrying amount of financial instruments that are subject to
an enforceable master netting agreement or similar agreement but
that do not satisfy offsetting criteria.
(2) Excludes collateral in the form of non-financial instruments.
Note 6 - Securities
Residual Contractual Maturities of Securities
As at October 31 2023 2022
====================================== ================================================= ======
Over
1
year No
1 year to Over specified
or less 5 years 5 years maturity Total Total
=================================== ========= ======== ======== ========== ====== ======
Securities at fair value through
profit or loss
Securities issued or guaranteed
by
Canadian government 2,065 10,320 4,890 - 17,275 12,922
Canadian provincial and municipal
governments 1,209 1,758 5,293 - 8,260 9,260
U.S. Treasury, other U.S. agencies
and other foreign governments 3,073 361 1,452 - 4,886 15,084
Other debt securities 286 2,051 1,178 - 3,515 3,384
Equity securities - - - 66,058 66,058 46,725
-------------------------------------- --------- -------- -------- ---------- ------ ------
6,633 14,490 12,813 66,058 99,994 87,375
-------------------------------------- --------- -------- -------- ---------- ------ ------
Securities at fair value through
other comprehensive income
Securities issued or guaranteed
by
Canadian government 793 2,719 685 - 4,197 3,212
Canadian provincial and municipal
governments 41 467 1,430 - 1,938 1,970
U.S. Treasury, other U.S. agencies
and other foreign governments - 1,150 8 - 1,158 1,878
Other debt securities 3 750 537 - 1,290 1,212
Equity securities - - - 659 659 556
-------------------------------------- --------- -------- -------- ---------- ------ ------
837 5,086 2,660 659 9,242 8,828
-------------------------------------- --------- -------- -------- ---------- ------ ------
Securities at amortized cost (1)
Securities issued or guaranteed
by
Canadian government 909 5,263 - - 6,172 5,737
Canadian provincial and municipal
governments 275 521 1,136 - 1,932 1,826
U.S. Treasury, other U.S. agencies
and other foreign governments 423 181 - - 604 150
Other debt securities 800 2,858 216 - 3,874 5,803
-------------------------------------- --------- -------- -------- ---------- ------ ------
2,407 8,823 1,352 - 12,582 13,516
=================================== ========= ======== ======== ========== ====== ======
(1) As at October 31, 2023, securities at amortized cost are
presented net of $4 million in allowances for credit losses ($7
million as at October 31, 2022).
Credit Quality
As at October 31, 2023 and 2022, securities at fair value
through other comprehensive income and securities at amortized cost
were mainly classified in Stage 1, with their credit quality
falling mostly in the "Excellent" category according to the Bank's
internal risk-rating categories. For additional information on the
reconciliation of allowances for credit losses, see Note 7 to these
consolidated financial statements.
Note 6 - Securities (cont.)
Unrealized Gross Gains (Losses) on Securities at Fair Value
Through
Other Comprehensive Income (1)
As at October 31, 2023
=============================================== =============================================
Gross Gross Carrying
Amortized unrealized unrealized value
cost gains losses (2)
============================================== ========= =========== =========== ========
Securities issued or guaranteed by
Canadian government 4,406 1 (210) 4,197
Canadian provincial and municipal governments 2,110 - (172) 1,938
U.S. Treasury, other U.S. agencies and
other foreign governments 1,227 - (69) 1,158
Other debt securities 1,423 - (133) 1,290
Equity securities 616 66 (23) 659
----------------------------------------------- --------
9,782 67 (607) 9,242
=============================================== ========= =========== =========== ========
As at October 31, 2022
=============================================== ========================================================
Amortized Gross unrealized Gross unrealized Carrying
cost gains losses value(2)
============================================== ========= ================ ================ =========
Securities issued or guaranteed by
Canadian government 3,386 1 (175) 3,212
Canadian provincial and municipal governments 2,129 1 (160) 1,970
U.S. Treasury, other U.S. agencies and
other foreign governments 2,022 - (144) 1,878
Other debt securities 1,355 - (143) 1,212
Equity securities 570 21 (35) 556
----------------------------------------------- ---------
9,462 23 (657) 8,828
=============================================== ========= ================ ================ =========
(1) Excludes the impact of hedging.
(2) The allowances for credit losses on securities at fair value
through other comprehensive income (excluding equity securities),
representing $ 3 million as at October 31, 2023 ($2 million as at
October 31, 2022), are reported in Other comprehensive income. For
additional information, see Note 7 to these consolidated financial
statements.
Equity Securities Designated at Fair Value Through Other
Comprehensive Income
The Bank designated certain equity securities, the main business
objective of which is to generate dividend income, at fair value
through other comprehensive income without subsequent
reclassification of gains and losses to net income. During the year
ended October 31, 2023, a dividend income amount of $33 million was
recognized for these investments ($14 million for the year ended
October 31, 2022), including amounts of $2 million for investments
that were sold during the year ended October 31, 2023 ($4 million
for investments that were sold during the year ended October 31,
2022).
Year ended October 31, 2023 Year ended October 31, 2022
=============== ======================================= =======================================
Equity Equity Equity Equity
securities securities securities securities
of private of public of private of public
companies companies Total companies companies Total
=============== =============== =============== ===== =============== =============== =====
Fair value at
beginning 320 236 556 306 311 617
Change in fair
value 58 (5) 53 7 (44) (37)
Designated at
fair
value through
other
comprehensive
income(1) - 314 314 7 143 150
Sales(2) - (264) (264) - (174) (174)
---------------- --------------- --------------- ----- --------------- --------------- -----
Fair value at end 378 281 659 320 236 556
================= =============== =============== ===== =============== =============== =====
(1) On May 2, 2023, the Bank concluded that it had lost
significant influence over TMX Group Limited (TMX) and therefore,
as of this date, 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.
(2) The Bank disposed of private and public company equity securities for economic reasons.
Gains (Losses) on Disposals of Securities at Amortized Cost
During the years ended October 31, 2023 and 2022, the Bank
disposed of certain debt securities measured at amortized cost. The
carrying value of these securities upon disposal was $821 million
for the year ended October 31, 2023 ($337 million for the year
ended October 31, 2022), and the Bank recognized negligible gains
for the year ended October 31, 2023 ($4 million for the year ended
October 31, 2022) in Non-interest income - Gains (losses) on
non--trading securities, net in the Consolidated Statement of
Income.
Note 7 - Loans and Allowances for Credit Losses
Loans are recognized either at fair value through profit or loss
or at amortized cost using the financial asset classification
criteria defined in IFRS 9.
Determining and Measuring Expected Credit Losses (ECL)
Determining Expected Credit Losses
Expected credit losses are determined using a three-stage
impairment approach that is based on the change in the credit
quality of financial assets since initial recognition.
Non-impaired loans
Stage 1
Financial assets that have experienced no significant increase
in credit risk between initial recognition and the reporting date,
and for which 12--month expected credit losses are recorded at the
reporting date, are classified in Stage 1.
Stage 2
Financial assets that have experienced a significant increase in
credit risk between initial recognition and the reporting date, and
for which lifetime expected credit losses are recorded at the
reporting date, are classified in Stage 2.
Impaired loans
Stage 3
Financial assets for which there is objective evidence of
impairment, for which one or more events have had a detrimental
impact on the estimated future cash flows of these financial assets
at the reporting date, and for which lifetime expected credit
losses are recorded, are classified in Stage 3.
POCI
Financial assets that are credit-impaired when purchased or
originated (POCI) are classified in the POCI category.
Impairment Governance
A rigorous control framework is applied to the determination of
expected credit losses. The Bank has policies and procedures that
govern impairments arising from credit risk. These policies are
documented and periodically reviewed by the Risk Management Group.
All models used to calculate expected credit losses are validated,
and controls are in place to ensure they are applied.
These models are validated by groups that are independent of the
team that prepares the calculations. Complex questions on
measurement methodologies and assumptions are reviewed by a group
of experts from various functions. Furthermore, the inputs and
assumptions used to determine expected credit losses are regularly
reviewed.
Measurement of Expected Credit Losses (ECL)
Expected credit losses are estimated using three main variables:
(1) probability of default (PD), (2) loss given default (LGD) and
(3) exposure at default (EAD). For accounting purposes, 12-month PD
and lifetime PD are the probabilities of a default occurring over
the next 12 months or over the life of a financial instrument,
respectively, based on conditions existing at the balance sheet
date and on future economic conditions that have, or will have, an
impact on credit risk. LGD reflects the losses expected should
default occur and considers such factors as the mitigating effects
of collateral, the realizable value thereof, and the time value of
money. EAD is the expected balance owing at default and considers
such factors as repayments of principal and interest between the
balance sheet date and the time of default as well as any amounts
expected to be drawn on a committed facility. Twelve-month expected
credit losses are estimated by multiplying 12-month PD by LGD and
by EAD. Lifetime expected credit losses are estimated using the
lifetime PD.
For most financial instruments, expected credit losses are
measured on an individual basis. Financial instruments that have
credit losses measured on a collective basis are grouped according
to similar credit risk characteristics such as type of instrument,
geographic location, comparable risk level, and business sector or
industry.
Inputs, Assumptions and Estimation Techniques
The Bank's approach to calculating expected credit losses
consists essentially of leveraging existing regulatory models and
then adjusting their parameters for IFRS 9 purposes. These models
have the advantage of having been thoroughly tested and validated.
In addition, using the same base models, regardless of the purpose,
provides consistency across risk assessments. These models use
inputs, assumptions and estimation techniques that require a high
degree of management judgment. The main factors that contribute to
changes in ECL that are subject to significant judgment include the
following:
-- calibration of regulatory parameters in order to obtain
point-in-time and forward-looking parameters;
-- forecasts of macroeconomic variables for multiple scenarios
and the probability weighting of the scenarios;
-- determination of the significant increases in credit risk (SICR) of a loan.
Note 7 - Loans and Allowances for Credit Losses (cont.)
Main Parameters
PD Estimates
Since the objective of the regulatory calibration of PD is to
align historical data to the long-run default rate, adjustments are
required to obtain a point-in-time, forward-looking PD, as required
by IFRS 9. The Bank performs the following: (1) A point-in-time
calibration, where the PD of the portfolio is aligned with the
appropriate default rate. The resulting PD estimate generally
equals the prior-year default rate. The prior-year default rate is
selected for the calibration performed at this stage, as it often
reflects one of the most accurate and appropriate estimates of the
current-year default rate; (2) Forward-looking adjustments are
incorporated through, among other measures, a calibration factor
based on forecasts produced by the stress testing team's analyses.
The team considers three macroeconomic scenarios, and, for each
scenario, produces a forward-looking assessment covering the three
upcoming years.
LGD Estimates
The LGD estimation method consists of using, for each of the
three macroeconomic scenarios, expected LGD based on the LGD values
observed using backtesting, the economic LGD estimated and used to
calculate economic capital, and lastly, the estimated downturn LGD
used to calculate regulatory capital.
EAD Estimates
For term loans, the Bank uses expected EAD, which is the
outstanding balance anticipated at each point in time. Expected EAD
decreases over time according to contractual repayments and to
prepayments. For revolving loans, the EAD percentage is based on
the percentage estimated by the corresponding regulatory model and,
thereafter, is converted to dollars according to the authorized
balance.
Expected Life
For most financial instruments, the expected life used when
measuring expected credit losses is the remaining contractual life.
For revolving financial instruments where there is no contractual
maturity, such as credit cards or lines of credit, the expected
life is based on the behavioural life of clients who have defaulted
or closed their account.
Incorporation of Forward-Looking Information
The Bank's Economy and Strategy Group is responsible for
developing three macroeconomic scenarios and for recommending
probability weights for each scenario. Macroeconomic scenarios are
not developed for specific portfolios, as the Economy and Strategy
Group provides a set of variables for each of the defined scenarios
for the next three years. The PDs are also adjusted to incorporate
economic assumptions (interest rates, unemployment rates, GDP
forecasts, oil prices, housing price indices, etc.) that can be
statistically tied to PD changes that will have an impact beyond
the next 12 months. These statistical relationships are determined
using the processes developed for stress testing. In addition, the
group considers other relevant factors that may not be adequately
reflected in the information used to calculate the PDs (including
late payments and whether the financial asset is subject to
additional monitoring within the watchlist process for business and
government loan portfolios).
Determination of a Significant Increase in the Credit Risk of a
Financial Instrument
At each reporting period, the Bank determines whether credit
risk has increased significantly since initial recognition by
examining the change in the risk of default occurring over the
remaining life of the financial instrument. First, the Bank
compares the point-in-time forward-looking remaining lifetime PD at
the reporting date with the expected point-in-time forward-looking
remaining lifetime PD established at initial recognition. Based on
this comparison, the Bank determines whether the loan has
deteriorated when compared to the initial conditions. Because the
comparison includes an adjustment based on origination--date
forward-looking information and reporting-date forward-looking
information, the deterioration may be caused by the following
factors: (i) deterioration of the economic outlook used in the
forward-looking assessment; (ii) deterioration of the borrower's
conditions (payment defaults, worsening financial ratios, etc.); or
(iii) a combination of both factors. The quantitative criteria used
to determine a significant increase in credit risk are a series of
relative and absolute thresholds, and a backstop is also applied.
All financial instruments that are over 30 days past due but below
90 days past due are migrated to Stage 2, even if the other
criteria do not indicate a significant increase in credit risk.
Credit Quality of Loans
The following tables present the gross carrying amounts of loans
as at October 31, 2023 and 2022, according to credit quality and
ECL impairment stage of each loan category at amortized cost, and
according to credit quality for loans at fair value through profit
or loss. For additional information on credit quality according to
the Internal Ratings-Based (IRB) categories, see the Internal
Default Risk Ratings table on page 77 in the Credit Risk section of
the MD&A for the year ended October 31, 2023.
As at October 31, 2023
============================ ========== ======== ======= =============================
Non-impaired loans Impaired loans
---------------------------- -------------------- ---------------- =========== =======
Loans at
fair value
through
Stage Stage Stage profit or
1 2 3 POCI loss (1) Total
============================ ========== ======== ======= ======= =========== =======
Residential mortgage
Excellent 30,075 13 - - - 30,088
Good 17,008 247 - - - 17,255
Satisfactory 11,795 4,118 - - - 15,913
Special mention 318 773 - - - 1,091
Substandard 61 252 - - - 313
Default - - 66 - - 66
----------------------------- ---------- -------- ------- ------- ----------- -------
IRB Approach 59,257 5,403 66 - - 64,726
Standardized Approach 9,540 218 287 304 11,772 22,121
----------------------------- ---------- -------- ------- ------- ----------- -------
Gross carrying amount 68,797 5,621 353 304 11,772 86,847
Allowances for credit
losses(2) 69 93 87 (95) - 154
----------------------------- ---------- -------- ------- ------- ----------- -------
Carrying amount 68,728 5,528 266 399 11,772 86,693
----------------------------- ---------- -------- ------- ------- ----------- -------
Personal
Excellent 21,338 120 - - - 21,458
Good 7,360 1,665 - - - 9,025
Satisfactory 6,497 2,240 - - - 8,737
Special mention 1,849 810 - - - 2,659
Substandard 29 224 - - - 253
Default - - 156 - - 156
----------------------------- ---------- -------- ------- ------- ----------- -------
IRB Approach 37,073 5,059 156 - - 42,288
Standardized Approach 3,713 79 71 207 - 4,070
----------------------------- ---------- -------- ------- ------- ----------- -------
Gross carrying amount 40,786 5,138 227 207 - 46,358
Allowances for credit
losses(2) 91 108 87 (15) - 271
----------------------------- ---------- -------- ------- ------- ----------- -------
Carrying amount 40,695 5,030 140 222 - 46,087
----------------------------- ---------- -------- ------- ------- ----------- -------
Credit card
Excellent 641 - - - - 641
Good 380 1 - - - 381
Satisfactory 752 68 - - - 820
Special mention 304 210 - - - 514
Substandard 37 86 - - - 123
Default - - - - - -
---------------------------- ---------- -------- ------- ------- ----------- -------
IRB Approach 2,114 365 - - - 2,479
Standardized Approach 124 - - - - 124
----------------------------- ---------- -------- ------- ------- ----------- -------
Gross carrying amount 2,238 365 - - - 2,603
Allowances for credit
losses(2) 33 106 - - - 139
----------------------------- ---------- -------- ------- ------- ----------- -------
Carrying amount 2,205 259 - - - 2,464
----------------------------- ---------- -------- ------- ------- ----------- -------
Business and government
(3)
Excellent 7,785 - - - 1,113 8,898
Good 28,525 16 - - 53 28,594
Satisfactory 32,095 8,400 - 2 140 40,637
Special mention 215 1,790 - - - 2,005
Substandard 27 290 - - - 317
Default - - 397 - - 397
----------------------------- ---------- -------- ------- ------- ----------- -------
IRB Approach 68,647 10,496 397 2 1,306 80,848
Standardized Approach 9,774 57 47 47 46 9,971
----------------------------- ---------- -------- ------- ------- ----------- -------
Gross carrying amount 78,421 10,553 444 49 1,352 90,819
Allowances for credit
losses(2) 182 194 244 - - 620
----------------------------- ---------- -------- ------- ------- ----------- -------
Carrying amount 78,239 10,359 200 49 1,352 90,199
----------------------------- ---------- -------- ------- ------- ----------- -------
Total loans and acceptances
Gross carrying amount 190,242 21,677 1,024 560 13,124 226,627
Allowances for credit
losses(2) 375 501 418 (110) - 1,184
----------------------------- ---------- -------- ------- ------- ----------- -------
Carrying amount 189,867 21,176 606 670 13,124 225,443
============================= ========== ======== ======= ======= =========== =======
(1) Not subject to expected credit losses.
(2) The allowances for credit losses do not include the amounts
related to undrawn commitments reported in the Other liabilities
item of the Consolidated Balance Sheet.
(3) Includes customers' liability under acceptances.
Note 7 - Loans and Allowances for Credit Losses (cont.)
As at October 31, 2022
============================ ========= ========= ========= ===============================
Non-impaired loans Impaired loans
---------------------------- -------------------- ---------------- =============== =======
Loans at
fair value
through profit
Stage 1 Stage 2 Stage 3 POCI or loss(1) Total
============================ ========= ========= ========= ===== =============== =======
Residential mortgage
Excellent 30,465 - - - - 30,465
Good 16,351 12 - - - 16,363
Satisfactory 10,765 3,269 - - - 14,034
Special mention 609 394 - - - 1,003
Substandard 76 140 - - - 216
Default - - 49 - - 49
----------------------------- --------- --------- --------- ----- --------------- -------
AIRB Approach 58,266 3,815 49 - - 62,130
Standardized Approach 7,266 179 211 384 9,959 17,999
----------------------------- --------- --------- --------- ----- --------------- -------
Gross carrying amount 65,532 3,994 260 384 9,959 80,129
Allowances for credit
losses(2) 53 80 61 (76) - 118
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 65,479 3,914 199 460 9,959 80,011
----------------------------- --------- --------- --------- ----- --------------- -------
Personal
Excellent 22,190 22 - - - 22,212
Good 8,792 479 - - - 9,271
Satisfactory 6,928 1,394 - - - 8,322
Special mention 358 775 - - - 1,133
Substandard 26 203 - - - 229
Default - - 130 - - 130
----------------------------- --------- --------- --------- ----- --------------- -------
AIRB Approach 38,294 2,873 130 - - 41,297
Standardized Approach 3,837 78 36 75 - 4,026
----------------------------- --------- --------- --------- ----- --------------- -------
Gross carrying amount 42,131 2,951 166 75 - 45,323
Allowances for credit
losses(2) 67 113 75 (16) - 239
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 42,064 2,838 91 91 - 45,084
----------------------------- --------- --------- --------- ----- --------------- -------
Credit card
Excellent 600 - - - - 600
Good 359 - - - - 359
Satisfactory 689 51 - - - 740
Special mention 287 178 - - - 465
Substandard 37 71 - - - 108
Default - - - - - -
---------------------------- --------- --------- --------- ----- --------------- -------
AIRB Approach 1,972 300 - - - 2,272
Standardized Approach 117 - - - - 117
----------------------------- --------- --------- --------- ----- --------------- -------
Gross carrying amount 2,089 300 - - - 2,389
Allowances for credit
losses(2) 31 95 - - - 126
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 2,058 205 - - - 2,263
----------------------------- --------- --------- --------- ----- --------------- -------
Business and government
(3)
Excellent 6,140 2 - - 147 6,289
Good 27,607 112 - - 53 27,772
Satisfactory 26,567 8,803 - - 145 35,515
Special mention 75 1,172 - - - 1,247
Substandard 41 272 - - - 313
Default - - 367 - - 367
----------------------------- --------- --------- --------- ----- --------------- -------
AIRB Approach 60,430 10,361 367 - 345 71,503
Standardized Approach 8,096 28 19 - 212 8,355
----------------------------- --------- --------- --------- ----- --------------- -------
Gross carrying amount 68,526 10,389 386 - 557 79,858
Allowances for credit
losses(2) 115 160 197 - - 472
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 68,411 10,229 189 - 557 79,386
----------------------------- --------- --------- --------- ----- --------------- -------
Total loans and acceptances
Gross carrying amount 178,278 17,634 812 459 10,516 207,699
Allowances for credit
losses(2) 266 448 333 (92) - 955
----------------------------- --------- --------- --------- ----- --------------- -------
Carrying amount 178,012 17,186 479 551 10,516 206,744
============================= ========= ========= ========= ===== =============== =======
(1) Not subject to expected credit losses.
(2) The allowances for credit losses do not include the amounts
related to undrawn commitments reported in the Other liabilities
item of the Consolidated Balance Sheet.
(3) Includes customers' liability under acceptances.
The following table presents the credit risk exposures of
off-balance-sheet commitments as at October 31, 2023 and 2022
according to credit quality and ECL impairment stage.
As at October 31 2023 2022
====================== ====== ==================== ====== ====================
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
====================== ====== ===== ===== ====== ====== ===== ===== ======
Off-balance-sheet
commitments (1)
Retail
Excellent 16,648 67 - 16,715 15,292 13 - 15,305
Good 3,485 467 - 3,952 3,316 165 - 3,481
Satisfactory 1,268 285 - 1,553 1,170 180 - 1,350
Special mention 239 93 - 332 193 68 - 261
Substandard 17 15 - 32 15 15 - 30
Default - - 2 2 - - 1 1
Non-retail
Excellent 14,117 - - 14,117 13,136 - - 13,136
Good 21,082 - - 21,082 18,723 24 - 18,747
Satisfactory 12,258 4,354 - 16,612 7,894 3,488 - 11,382
Special mention 17 248 - 265 12 246 - 258
Substandard 19 33 - 52 4 24 - 28
Default - - 10 10 - - 18 18
---------------------- ------ ----- ----- ------ ------ ----- ----- ------
IRB Approach 69,150 5,562 12 74,724 59,755 4,223 19 63,997
Standardized Approach 18,172 - - 18,172 15,432 - - 15,432
---------------------- ------ ----- ----- ------ ------ ----- ----- ------
Total exposure 87,322 5,562 12 92,896 75,187 4,223 19 79,429
Allowances for credit
losses 116 60 - 176 99 63 - 162
---------------------- ------ ----- ----- ------ ------ ----- ----- ------
Total exposure, net
of allowances 87,206 5,502 12 92,720 75,088 4,160 19 79,267
====================== ====== ===== ===== ====== ====== ===== ===== ======
(1) Represent letters of guarantee and documentary letters of
credit, undrawn commitments, and backstop liquidity and credit
enhancement facilities.
Loans Past Due But Not Impaired (1)
As at
October
31 2023 2022
========== ========================================= =========== ======== =====================
Business
and Business
Residential Credit government Residential Credit and
mortgage Personal card (2) mortgage Personal card government(2)
========= =========== ======== ====== ========== =========== ======== ====== =============
Past due
but
not
impaired
31 to 60
days 139 102 27 38 106 105 23 23
61 to 90
days 58 65 14 21 38 30 11 9
Over 90
days(3) - - 30 - - - 22 -
---------- ----------- -------- ------ ---------- ----------- -------- ------ -------------
197 167 71 59 144 135 56 32
========== =========== ======== ====== ========== =========== ======== ====== =============
(1) Loans less than 31 days past due are not presented as they
are not considered past due from an administrative standpoint.
(2) Includes customers' liability under acceptances.
(3) All loans more than 90 days past due, except for credit card
receivables, are considered impaired (Stage 3).
Note 7 - Loans and Allowances for Credit Losses (cont.)
Impaired Loans
As at October 31 2023 2022
============================ ===== ================== =========================
Allowances Allowances
for credit for credit
Gross losses Net Gross losses Net
=========================== ===== =========== ===== ===== =========== =====
Loans - Stage 3
Residential mortgage 353 87 266 260 61 199
Personal 227 87 140 166 75 91
Credit card(1) - - - - - -
Business and government(2) 444 244 200 386 197 189
--------------------------- ----- ----------- ----- ----- ----------- -----
1,024 418 606 812 333 479
Loans - POCI 560 (110) 670 459 (92) 551
---------------------------- ----- ----------- ----- ----- ----------- -----
1,584 308 1,276 1,271 241 1,030
============================ ===== =========== ===== ===== =========== =====
(1) Credit card receivables are considered impaired, at the
latest, when payment is 180 days past due, and they are written off
at that time.
(2) Includes customers' liability under acceptances.
Maximum Exposure to Credit Risk of Impaired Loans
The following table presents the maximum exposure to credit risk
of impaired loans, the percentage of exposure covered by
guarantees, and the main types of collateral and guarantees held
for each loan category.
As at October 31 2023 2022
======================= ========= ============== ========= ================= =====================
Percentage
Gross covered Gross Percentage
impaired by guarantees impaired covered Types of collateral
loans (1) loans by guarantees(1) and guarantees
====================== ========= ============== ========= ================= =====================
Loans - Stage 3
Residential mortgage 353 97% 260 100% Residential buildings
Buildings, land
Personal 227 59% 166 56% and automobiles
Business and Buildings, land,
government(2) 444 51% 386 59% equipment,
government and
bank guarantees
Buildings and
Loans - POCI 560 36% 459 52% automobiles
======================= ========= ============== ========= ================= =====================
(1) For gross impaired loans, the ratio is calculated on a
weighted average basis using the estimated value of the collateral
and guarantees held for each loan category presented. The value of
the collateral and guarantees held for a specific loan may exceed
the balance of the loan; when this is the case, the ratio is capped
at 100%.
(2) Includes customers' liability under acceptances.
Allowances for Credit Losses
The following tables present a reconciliation of the allowances
for credit losses by Consolidated Balance Sheet item and by type of
off-balance-sheet commitment.
Year ended October
31, 2023
=============================== ========== ========== ========== ========= =======================
Allowances
for Allowances
credit for
losses as Provisions credit
at for losses as
October credit Write-offs Recoveries at October
31, 2022 losses (1) Disposals and other 31, 2023
=============================== ========== ========== ========== ========= ========== ===========
Balance sheet
Cash and deposits with
financial institutions
(2)(3) 5 5 - - - 10
-------------------------------- ---------- ---------- ---------- --------- ---------- -----------
Securities (3)
At fair value through
other comprehensive income(4) 2 1 - - - 3
At amortized cost(2) 7 (3) - - - 4
------------------------------- ---------- ---------- ---------- --------- ---------- -----------
Securities purchased under
reverse repurchase
agreements and securities
borrowed (2)(3) - - - - - -
------------------------------- ---------- ---------- ---------- --------- ---------- -----------
Loans (5)
Residential mortgage 118 36 (3) - 3 154
Personal 239 114 (101) - 19 271
Credit card 126 81 (83) - 15 139
Business and government 418 150 (12) - 11 567
Customers' liability under
acceptances 54 (1) - - - 53
------------------------------- ---------- ---------- ---------- --------- ---------- -----------
955 380 (199) - 48 1,184
------------------------------- ---------- ---------- ---------- --------- ---------- -----------
Other assets (2)(3) - - - - - -
-------------------------------- ---------- ---------- ---------- --------- ---------- -----------
Off-balance-sheet commitments
(6)
Letters of guarantee and
documentary letters of
credit 13 3 - - - 16
Undrawn commitments 143 9 - - - 152
Backstop liquidity and
credit enhancement facilities 6 2 - - - 8
-------------------------------- ---------- ---------- ---------- --------- ---------- -----------
162 14 - - - 176
------------------------------- ---------- ---------- ---------- --------- ---------- -----------
1,131 397 (199) - 48 1,377
================================ ========== ========== ========== ========= ========== ===========
Year ended October
31, 2022
===================== ============== ========== ============= ========= ==========================
Allowances Allowances
for for
credit losses Provisions credit losses
as at for as
October credit Recoveries at October
31, 2021 losses Write-offs(1) Disposals and other 31, 2022
===================== ============== ========== ============= ========= ========== ==============
Balance sheet
Cash and deposits with
financial
institutions
(2)(3) 5 - - - - 5
---------------------- -------------- ---------- ------------- --------- ---------- --------------
Securities (3)
At fair value through
other comprehensive
income(4) 1 1 - - - 2
At amortized cost(2) 3 4 - - - 7
--------------------- -------------- ---------- ------------- --------- ---------- --------------
Securities purchased
under
reverse repurchase
agreements and
securities
borrowed (2)(3) - - - - - -
--------------------- -------------- ---------- ------------- --------- ---------- --------------
Loans (5)
Residential mortgage 71 46 (3) - 4 118
Personal 202 69 (52) - 20 239
Credit card 122 49 (62) - 17 126
Business and
government 515 10 (116) - 9 418
Customers' liability
under
acceptances 88 (34) - - - 54
--------------------- -------------- ---------- ------------- --------- ---------- --------------
998 140 (233) - 50 955
--------------------- -------------- ---------- ------------- --------- ---------- --------------
Other assets (2)(3) - - - - - -
---------------------- -------------- ---------- ------------- --------- ---------- --------------
Off-balance-sheet
commitments
(6)
Letters of guarantee
and
documentary letters
of
credit 13 - - - - 13
Undrawn commitments 143 - - - - 143
Backstop liquidity and
credit enhancement
facilities 6 - - - - 6
---------------------- -------------- ---------- ------------- --------- ---------- --------------
162 - - - - 162
--------------------- -------------- ---------- ------------- --------- ---------- --------------
1,169 145 (233) - 50 1,131
====================== ============== ========== ============= ========= ========== ==============
(1) The contractual amount outstanding on financial assets that
were written off during the year ended October 31, 2023 and that
are still subject to enforcement activity was $118 million ($91
million for the year ended October 31, 2022).
(2) These financial assets are presented net of the allowances
for credit losses on the Consolidated Balance Sheet.
(3) As at October 31, 2023 and 2022, these financial assets were
mainly classified in Stage 1 and their credit quality fell mostly
within the Excellent category.
(4) The allowances for credit losses are reported in the
Accumulated other comprehensive income item of the Consolidated
Balance Sheet.
(5) The allowances for credit losses are reported in the
Allowances for credit losses item of the Consolidated Balance
Sheet.
(6) The allowances for credit losses are reported in the Other
liabilities item of the Consolidated Balance Sheet.
Note 7 - Loans and Allowances for Credit Losses (cont.)
The following tables present the reconciliation of allowances
for credit losses for each loan category at amortized cost
according to ECL impairment stage.
Year ended October
31 2023 2022
==================== ====== ====== ==================== ====== ======= =======================
Allowances Allowances Allowances
for for for Allowances
credit losses credit losses credit losses for
on on on credit losses
non-impaired impaired non-impaired on
loans loans loans impaired loans
------------------ -------------- ------------- ===== --------------- ---------------- =====
Stage Stage Stage POCI Stage Stage Stage
1 2 3 (1) Total 1 2 3 POCI(1) Total
==================== ====== ====== ===== ====== ===== ====== ======= ====== ======== =====
Residential mortgage
Balance at beginning 53 80 61 (76) 118 50 52 29 (60) 71
-------------------- ------ ------ ----- ------ ----- ------ ------- ------ -------- -----
Originations or
purchases 18 - - - 18 19 - - - 19
Transfers(2) :
to Stage 1 52 (48) (4) - - 19 (17) (2) - -
to Stage 2 (12) 30 (18) - - (10) 13 (3) - -
to Stage 3 (2) (33) 35 - - (1) (7) 8 - -
Net remeasurement
of loss
allowances(3) (29) 65 21 (17) 40 (24) 39 29 (9) 35
Derecognitions(4) (7) (9) (8) - (24) (3) (3) (3) - (9)
Changes to models (5) 7 - - 2 - 1 - - 1
Provisions for
credit
losses 15 12 26 (17) 36 - 26 29 (9) 46
Write-offs - - (3) - (3) - - (3) - (3)
Disposals - - - - - - - - - -
Recoveries - - 2 - 2 - - 3 - 3
Foreign exchange
movements
and other 1 1 1 (2) 1 3 2 3 (7) 1
-------------------- ------ ------ ----- ------ ----- ------ ------- ------ -------- -----
Balance at end 69 93 87 (95) 154 53 80 61 (76) 118
-------------------- ------ ------ ----- ------ ----- ------ ------- ------ -------- -----
Includes:
Amounts drawn 69 93 87 (95) 154 53 80 61 (76) 118
Undrawn
commitments(5) - - - - - - - - - -
------ ------ ----- ------ ------ ------- ------ --------
Personal
Balance at beginning 70 117 75 (16) 246 73 103 63 (29) 210
-------------------- ------ ------ ----- ------ ----- ------ ------- ------ -------- -----
Originations or
purchases 47 - - - 47 45 - - - 45
Transfers(2) :
to Stage 1 91 (82) (9) - - 61 (56) (5) - -
to Stage 2 (25) 30 (5) - - (21) 23 (2) - -
to Stage 3 (2) (88) 90 - - - (31) 31 - -
Net remeasurement
of loss
allowances(3) (77) 152 23 1 99 (72) 85 28 15 56
Derecognitions(4) (11) (18) (4) - (33) (9) (15) (5) - (29)
Changes to models 1 3 - - 4 (10) 6 - - (4)
Provisions for
credit
losses 24 (3) 95 1 117 (6) 12 47 15 68
Write-offs - - (101) - (101) - - (52) - (52)
Disposals - - - - - - - - - -
Recoveries - - 20 - 20 - - 17 - 17
Foreign exchange
movements
and other 1 - (2) - (1) 3 2 - (2) 3
-------------------- ------ ------ ----- ------ ------ ------- ------ -------- -----
Balance at end 95 114 87 (15) 281 70 117 75 (16) 246
-------------------- ------ ------ ----- ------ ----- ------ ------- ------ -------- -----
Includes:
Amounts drawn 91 108 87 (15) 271 67 113 75 (16) 239
Undrawn
commitments(5) 4 6 - - 10 3 4 - - 7
=================== ====== ====== ===== ====== ====== ======= ====== ========
(1) The total amount of undiscounted initially expected credit
losses on the POCI loans acquired during the year ended October 31,
2023 was $93 million ($15 million for the year ended October 31,
2022). The expected credit losses reflected in the purchase price
have been discounted.
(2) Represent stage transfers deemed to have taken place at the
beginning of the quarter in which the transfer occurred.
(3) Includes the net remeasurement of loss allowances (after
transfers) attributable mainly to changes in volumes and in the
credit quality of existing loans as well as to changes in risk
parameters.
(4) Represent reversals to loss allowances arising from full
loan repayments (excluding write-offs and disposals).
(5) The allowances for credit losses on undrawn commitments are
reported in the Other liabilities item of the Consolidated Balance
Sheet.
Year ended October
31 2023 2022
Allowances Allowances Allowances
for for for Allowances
credit losses credit losses credit losses for
on on on credit losses
non-impaired impaired non-impaired on
loans loans loans impaired loans
Stage Stage Stage POCI Stage Stage Stage
1 2 3 (1) Total 1 2 3 POCI(1) Total
Credit card
Balance at beginning 53 112 - - 165 57 101 - - 158
------- ----- ----- ------- ------ ------- ------ --------
Originations or
purchases 11 - - - 11 12 - - - 12
Transfers(2) :
to Stage 1 100 (100) - - - 84 (84) - - -
to Stage 2 (19) 19 - - - (16) 16 - - -
to Stage 3 - (35) 35 - - (1) (23) 24 - -
Net remeasurement
of
loss allowances(3) (83) 133 33 - 83 (80) 104 21 - 45
Derecognitions(4) (3) (2) - - (5) (2) (1) - - (3)
Changes to models - - - - - (1) (1) - - (2)
Provisions for
credit
losses 6 15 68 - 89 (4) 11 45 - 52
Write-offs - - (83) - (83) - - (62) - (62)
Disposals - - - - - - - - - -
Recoveries - - 15 - 15 - - 17 - 17
Foreign exchange
movements
and other - - - - - - - - - -
------- ----- ----- ------- ------ ------- ------ --------
Balance at end 59 127 - - 186 53 112 - - 165
------- ----- ----- ------- ------ ------- ------ --------
Includes:
Amounts drawn 33 106 - - 139 31 95 - - 126
Undrawn
commitments(5) 26 21 - - 47 22 17 - - 39
------- ----- ----- ------- ------ ------- ------ --------
Business and
government
(6)
Balance at beginning 177 195 197 - 569 177 238 287 - 702
------- ----- ----- ------- ------ ------- ------ --------
Originations or
purchases 93 - - - 93 82 - - - 82
Transfers(2) :
to Stage 1 54 (54) - - - 67 (65) (2) - -
to Stage 2 (28) 36 (8) - - (27) 31 (4) - -
to Stage 3 (1) (6) 7 - - - (3) 3 - -
Net remeasurement
of
loss allowances(3) (24) 79 61 (7) 109 (93) 21 24 - (48)
Derecognitions(4) (19) (29) (4) - (52) (29) (27) (4) - (60)
Changes to models (2) (1) - - (3) - - - - -
Provisions for
credit
losses 73 25 56 (7) 147 - (43) 17 - (26)
Write-offs - - (12) - (12) - - (116) - (116)
Disposals - - - - - - - - - -
Recoveries - - 3 7 10 - - 3 - 3
Foreign exchange
movements
and other 1 - - - 1 - - 6 - 6
------- ----- ----- ------- ------ ------- ------ --------
Balance at end 251 220 244 - 715 177 195 197 - 569
------- ----- ----- ------- ------ ------- ------ --------
Includes:
Amounts drawn 182 194 244 - 620 115 160 197 - 472
Undrawn
commitments(5) 69 26 - - 95 62 35 - - 97
Total allowances for
credit losses at
end
(7) 474 554 418 (110) 1,336 353 504 333 (92) 1,098
Includes:
Amounts drawn 375 501 418 (110) 1,184 266 448 333 (92) 955
Undrawn
commitments(5) 99 53 - - 152 87 56 - - 143
======= ===== ===== ======= ====== ======= ====== ========
(1) The total amount of undiscounted initially expected credit
losses on the POCI loans acquired during the year ended October 31,
2023 was $93 million ($15 million for the year ended October 31,
2022). The expected credit losses reflected in the purchase price
have been discounted.
(2) Represent stage transfers deemed to have taken place at the
beginning of the quarter in which the transfer occurred.
(3) Includes the net remeasurement of loss allowances (after
transfers) attributable mainly to changes in volumes and in the
credit quality of existing loans as well as to changes in risk
parameters.
(4) Represent reversals to loss allowances arising from full
loan repayments (excluding write-offs and disposals).
(5) The allowances for credit losses on undrawn commitments are
reported in the Other liabilities item of the Consolidated Balance
Sheet.
(6) Includes customers' liability under acceptances.
(7) Excludes allowances for credit losses on other financial assets at amortized cost and on off-balance-sheet commitments other than undrawn commitments.
Note 7 - Loans and Allowances for Credit Losses (cont.)
Distribution of Gross and Impaired Loans by Borrower
Category
Under the Basel Asset Classes
2023 2022
Year ended Year ended
As at October 31 October 31 As at October 31 October 31
Allowances
for credit
losses Allowances
on Provisions for credit Provisions
Gross Impaired impaired for losses for
loans loans loans credit Gross Impaired on impaired credit
(1) (1) (1)(2) losses Write-offs loans(1) loans(1) loans(1)(2) losses Write-offs
========== ========== ========== ======== =========== ========== ==========
Retail
Residential
mortgage(3) 99,910 405 91 28 2 95,575 299 64 31 4
Qualifying
revolving
retail(4) 4,000 24 18 82 96 3,801 16 12 54 72
Other retail(5) 16,696 157 67 81 88 14,899 102 58 36 41
---------- -------- ----------- ---------- ----------
120,606 586 176 191 186 114,275 417 134 121 117
---------- -------- ----------- ---------- ----------
Non-retail
Agriculture 8,545 67 4 2 - 8,109 31 2 (1) -
Oil and gas 1,826 - - (7) - 1,435 6 6 (19) 26
Mining 1,245 - - (4) - 1,049 11 4 4 -
Utilities 12,427 - - (35) - 9,682 35 35 (2) 59
Non-real-estate
construction(6) 1,739 38 31 - - 1,935 38 32 5 -
Manufacturing 7,047 76 51 41 - 7,374 21 10 (4) 14
Wholesale 3,208 51 40 15 - 3,241 35 26 2 -
Retail 3,801 29 18 (1) - 3,494 30 19 2 -
Transportation 2,631 14 9 3 1 2,209 8 7 - -
Communications 2,556 17 14 5 2 1,830 11 10 2 -
Financial
services 11,693 22 5 6 2 10,777 5 3 - -
Real estate
services and
real estate
construction(7) 25,967 19 5 - 3 22,382 26 6 1 12
Professional
services 3,973 8 3 (1) 2 2,338 9 4 - 1
Education and
health care 3,700 83 55 31 1 3,412 108 25 25 2
Other services 6,898 13 7 - 2 6,247 20 9 2 2
Government 1,727 - - - - 1,661 - - - -
Other 6,478 1 - (1) - 5,790 1 1 - -
---------- ---------- -------- ----------- ---------- ----------
105,461 438 242 54 13 92,965 395 199 17 116
---------- -------- ----------- ---------- ----------
Excluding POCI
loans 226,067 1,024 418 245 199 207,240 812 333 138 233
POCI 560 560 (110) (23) - 459 459 (92) 6 -
226,627 1,584 308 222 199 207,699 1,271 241 144 233
---------- -------- ----------- ----------
Stages 1 and
2 (8) 175 1
-------- ---------- ----------
397 199 145 233
========== ========== ========== ======== =========== ========== ==========
(1) Includes customers' liability under acceptances.
(2) Allowances for credit losses on drawn amounts.
(3) Includes residential mortgages on one-to-four-unit dwellings
(Basel definition) and home equity lines of credit.
(4) Includes lines of credit and credit card receivables.
(5) Includes consumer loans and other retail loans but excludes SME loans.
(6) Includes civil engineering loans, public-private partnership
loans, and project finance loans.
(7) Includes residential mortgages on dwellings of five or more units and SME loans.
(8) Includes provisions for credit losses on other financial assets at amortized cost and on off-balance-sheet commitments.
Main Macroeconomic Factors
The following tables show the main macroeconomic factors used to
estimate the allowances for credit losses on loans. For each
scenario, namely, the base scenario, upside scenario, and downside
scenario, the average values of the macroeconomic factors over the
next 12 months (used for Stage 1 credit loss calculations) and over
the remaining forecast period (used for Stage 2 credit loss
calculations) are presented.
As at October 31,
2023
======== ====== === ========= ====== ===
Base scenario Upside scenario Downside scenario
Next Remaining Remaining Remaining
12 forecast Next forecast Next forecast
months period 12 months period 12 months period
======== =========== ========= =========== ========= ===========
Macroeconomic
factors
(1)
GDP growth(2) - % 1.7 % 0.4 % 1.9 % (4.9) % 2.6 %
Unemployment rate 6.3 % 6.5 % 5.9 % 5.9 % 7.7 % 7.2 %
Housing price
index
growth(2) (1.1) % 1.9 % 2.5 % 2.4 % (13.9) % 0.3 %
BBB spread(3) 2.4 % 2.1 % 1.9 % 1.8 % 3.1 % 2.3 %
S&P/TSX
growth(2)(4) (10.0) % 3.7 % 4.0 % 3.0 % (25.6) % 5.5 %
WTI oil price(5)
(US$ per barrel) 77 80 91 86 46 56
======== ====== === ========= ====== === ========= ====== ===
As at July 31, 2023
========= ====== === ========= ====== ===
Base scenario Upside scenario Downside scenario
Remaining Remaining Next Remaining
Next forecast Next forecast 12 forecast
12 months period 12 months period months period
========= =========== ========= =========== ======== ===========
Macroeconomic
factors
(1)
GDP growth(2) (0.4)% 1.7% 0.4% 1.9% (4.9)% 2.6%
Unemployment rate 6.1% 6.5% 5.7% 5.6% 7.5% 7.0%
Housing price
index
growth(2) -% 2.4% 6.1% 2.3% (13.9)% 0.3%
BBB spread(3) 2.4% 2.1% 1.9% 1.8% 3.1% 2.4%
S&P/TSX
growth(2)(4) (5.5)% 3.7% 4.0% 3.0% (25.6)% 5.5%
WTI oil price(5)
(US$ per barrel) 67 70 82 77 41 50
========= ====== === ========= ====== === ======== ====== ===
As at October 31,
2022
======== ====== === ========= ====== ===
Base scenario Upside scenario Downside scenario
Next Remaining Remaining Remaining
12 forecast Next forecast Next forecast
months period 12 months period 12 months period
======== =========== ========= =========== ========= ===========
Macroeconomic
factors
(1)
GDP growth(2) 0.6% 1.7% 1.1% 1.6% (5.2)% 2.9%
Unemployment rate 6.0% 6.1% 5.4% 5.4% 7.4% 6.4%
Housing price
index
growth(2) (11.2)% 0.7% -% 0.2% (13.9)% 0.3%
BBB spread(3) 2.4% 2.1% 2.0% 1.9% 3.4% 2.6%
S&P/TSX
growth(2)(4) (4.3)% 2.4% 5.1% 2.6% (25.6)% 5.5%
WTI oil price(5)
(US$ per barrel) 78 77 102 97 44 51
======== ====== === ========= ====== === ========= ====== ===
(1) All macroeconomic factors are based on the Canadian economy unless otherwise indicated.
(2) Growth rate is annualized.
(3) Yield on corporate BBB bonds less yield on Canadian federal
government bonds with a 10-year maturity.
(4) Main stock index in Canada.
(5) The West Texas Intermediate (WTI) index is commonly used as
a benchmark for the price of oil.
The main macroeconomic factors used for the personal credit
portfolio are unemployment rate and growth in the housing price
index, based on the economy of Canada or Quebec. The main
macroeconomic factors used for the business and government credit
portfolio are unemployment rate, spread on corporate BBB bonds,
S&P/TSX growth, and WTI oil price.
An increase in unemployment rate or BBB spread will generally
lead to higher allowances for credit losses, whereas an increase in
the other macroeconomic factors (GDP, S&P/TSX, housing price
index, and WTI oil price) will generally lead to lower allowances
for credit losses.
Note 7 - Loans and Allowances for Credit Losses (cont.)
During the year ended October 31, 2023, the macroeconomic
outlook remained essentially unchanged and uncertainty remains
high.
The economic outlook is still marked by uncertainty, as central
banks have become extremely determined to curb inflation, which
remains too high in many countries. With interest rates rising
sharply, the year ahead could prove shaky for the global economy.
Geopolitical instability could keep energy prices relatively high,
despite an expected economic slowdown. Our baseline forecast shows
a few quarters of economic contraction in the United States and
Canada over the coming year. Of all the G7 countries, Canada has
the most restrictive monetary policy, and signs of fragility are
emerging, in particular as GDP stagnates over the last two quarters
and the unemployment rate rises. Moreover, data from household and
business surveys do not suggest an upswing but rather an economy
that continues to deteriorate. As for real estate, the market is
showing signs of weakness after a fleeting reversal at the start of
the year. In the base scenario, the unemployment rate stands at
6.5% after 12 months, up 1.0 percentage point, and house prices are
down 1.1% year over year. The S&P/TSX sits at 18,145 points
after one year, and the price of oil hovers around US$73.
In the upside scenario, an easing of geopolitical tensions
boosts confidence. Inflation continues to subside, as the pressure
on supply chains eases without the restrictive monetary policy
having caused too much damage to the economy. The Canadian and U.S.
governments continue to expand spending, offsetting the effects of
restrictive monetary policies. With the labour market holding up,
consumer spending remains relatively resilient. House prices rise
at a moderate pace against a backdrop of strong demographic growth.
After one year, the unemployment rate in this scenario is more
favourable than in the base scenario (four-tenths lower). House
prices rise 2.5%, the S&P/TSX is at 20,957 points after one
year, and the price of oil hovers around US$81.
In the downside scenario, central banks have underestimated the
impact of simultaneous tightening measures, and the global economy
sinks into a recession as falling demand translates into reduced
investment by businesses, which also lay off a large number of
workers. Given budgetary constraints, governments are unable to
support households and businesses as they did during the pandemic.
The geopolitical situation continues to cause concern, with the
risk of conflicts escalating. After 12 months, economic contraction
pushes unemployment to 8.5%. House prices fall sharply (-13.9%).
The S&P/TSX sits at 14,994 points after one year, and the price
of oil hovers around US$40.
Given uncertainty surrounding the key inputs used to measure
credit losses, the Bank has applied expert credit judgment to
adjust the modelled ECL results.
Sensitivity Analysis of Allowances for Credit Losses on
Non-Impaired Loans
Scenarios
The following table shows a comparison of the Bank's allowances
for credit losses on non-impaired loans (Stages 1 and 2) as at
October 31, 2023 based on the probability weightings of three
scenarios with allowances for credit losses resulting from
simulations of each scenario weighted at 100%.
Allowances
for credit
losses on non-impaired
loans
Balance as at October 31, 2023 1,028
Simulations
100% upside scenario 716
100% base scenario 824
100% downside scenario 1,338
Migration
The following table shows a comparison of the Bank's allowances
for credit losses on non-impaired loans (Stages 1 and 2) as at
October 31, 2023 with the estimated allowances for credit losses
that would result if all these non-impaired loans were in Stage
1.
Allowances
for credit
losses on non-impaired
loans
Balance as at October 31, 2023 1,028
Simulations
Non-impaired loans if they were all in Stage 1 801
================================================ =======================
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