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| Name | Symbol | Market | Type |
|---|---|---|---|
| Nat Bk Canada25 | LSE:32SS | London | Medium Term Loan |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 100.625 | 0 | 00:00:00 |
From Jan 2023 to Jan 2025
TIDM32SS
RNS Number : 4480V
National Bank of Canada
01 December 2023
Regulatory Announcement
National Bank of Canada
December 1(st) , 2023
2023 Annual Financial Statements (Part 2)
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 following 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
Note 8 - Financial Assets Transferred But Not Derecognized
In the normal course of its business, the Bank enters into transactions in which it transfers financial assets such as securities or loans directly to third parties, in particular structured entities. According to the terms of some of those transactions, the Bank retains substantially all of the risks and rewards related to those financial assets. The risks include credit risk, interest rate risk, foreign exchange risk, prepayment risk, and other price risks, whereas the rewards include the income streams associated with the financial assets. As such, those financial assets are not derecognized and the transactions are treated as collateralized or secured borrowings. The nature of those transactions is described below.
Securities Sold Under Repurchase Agreements and Securities Loaned
When securities are sold under repurchase agreements and securities loaned under securities lending agreements, the Bank transfers financial assets to third parties in accordance with the standard terms for such transactions. These third parties may have an unlimited right to resell or repledge the financial assets received. If cash collateral is received, the Bank records the cash along with an obligation to return the cash, which is included in Obligations related to securities sold under repurchase agreements and securities loaned on the Consolidated Balance Sheet. Where securities are received as collateral, the Bank does not record the collateral on the Consolidated Balance Sheet.
Financial Assets Transferred to Structured Entities
Under the Canada Mortgage Bond (CMB) program, the Bank sells securities backed by insured residential mortgages and other securities to Canada Housing Trust (CHT), which finances the purchase through the issuance of insured mortgage bonds. Third-party CMB investors have legal recourse only to the transferred assets. The cash received for these transferred assets is treated as a secured borrowing, and a corresponding liability is recorded in Liabilities related to transferred receivables on the Consolidated Balance Sheet.
The following table provides additional information about the nature of the transferred financial assets that do not qualify for derecognition and the associated liabilities.
Hot Features
Premium
As at October 31 2023 2022
==================================================== ======= =======
Carrying value of financial assets transferred but
not derecognized
Securities(1) 91,097 76,551
Residential mortgages 23,227 24,102
---------------------------------------------------- ------- -------
114,324 100,653
---------------------------------------------------- ------- -------
Carrying value of associated liabilities (2) 62,295 56,555
---------------------------------------------------- ------- -------
Fair value of financial assets transferred but not
derecognized
Securities(1) 91,098 76,551
Residential mortgages 22,002 22,954
---------------------------------------------------- ------- -------
113,100 99,505
---------------------------------------------------- ------- -------
Fair value of associated liabilities (2) 61,468 55,767
==================================================== ======= =======
(1) The amount related to the securities loaned is the maximum amount of Bank securities that can be lent. For obligations related to securities sold under repurchase agreements, the amount includes the Bank's own financial assets as well as those of third parties.
(2) Associated liabilities include liabilities related to transferred receivables and obligations related to securities sold under repurchase agreements before the offsetting impact of $6,994 million as at October 31, 2023 ($3,606 million as at October 31, 2022). Liabilities related to securities loaned are not included, as the Bank can lend its own financial assets and those of third parties. The carrying value and fair value of liabilities related to securities loaned stood at $10,171 million before the offsetting impact of $2,090 million as at October 31, 2023 ($8,843 million before the offsetting impact of $2,043 million as at October 31, 2022).
The following table specifies the nature of the transactions related to financial assets transferred but not derecognized.
As at October 31 2023 2022
==================================================== ======= =======
Carrying value of financial assets transferred but
not derecognized
Securities backed by insured residential mortgages
and other securities sold to CHT 24,313 25,468
Securities sold under repurchase agreements 40,357 33,880
Securities loaned 49,654 41,305
114,324 100,653
==================================================== ======= =======
Note 9 - Investments in Associates and Joint Ventures
As at October 31 2023 2022
====================== ========= ======== ========
Business Carrying Carrying
segment value value
====================== ========= ======== ========
Listed associate
TMX Group Limited(1) Other - 96
Unlisted associates 49 44
49 140
====================== ========= ======== ========
(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. Upon the fair value measurement, a $91 million gain was recorded in the Non-interest income - Other item of the Consolidated Statement of Income, reported in the Other heading of segment results. As at October 31, 2022, the Bank was exercising significant influence over TMX, mainly through its equity interest, debt financing, and presence on TMX's board of directors, and the Bank's ownership interest in TMX was 2.5%. During the year ended October 31, 2023, TMX paid $3 million in dividends to the Bank ($7 million for the year ended October 31, 2022).
As at October 31, 2023 and 2022, there were no significant restrictions limiting the ability of associates to transfer funds to the Bank in the form of dividends or to repay any loans or advances. Furthermore, the Bank has not made any specific commitment or contracted any contingent liability with respect to associates.
The table below provides summarized financial information related to the Bank's proportionate share in all unlisted associates that are not individually significant.
Year ended October 31(1) 2023 2022 =========================== ===== ==== Net income 6 5 Other comprehensive income - - Comprehensive income 6 5 ============================ ====== ====
(1) The amounts are based on the cumulative balances for the 12-month periods ended September 30, 2023 and 2022.
Note 10 - Premises and Equipment
Right-of-use
Owned assets held assets Total
-------------- ------------------------------------------------------------------------ ------------ -----
Head
office
building
under Equipment
construction Computer and Leasehold Real
Land (1) Buildings equipment furniture improvements Total estate
=============== ==== ============ ========= ========= ========= ============ ===== ============ =====
Cost
As at October
31,
2021 71 248 68 255 110 338 1,090 732 1,822
Additions and
modifications 3 183 2 53 14 46 301 69 370
Disposals - - (7) - (3) (2) (12) (12)
Fully
depreciated
assets (7) (38) (7) (10) (62) (8) (70) Impact of foreign currency translation - - - 6 3 5 14 12 26 -------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ ----- As at October 31, 2022 74 431 56 276 117 377 1,331 805 2,136 Additions and modifications - 222 3 70 8 53 356 59 415 Disposals - - (7) - (13) (27) (47) (47) Transfers(2) - (397) 386 4 7 - - - - Fully depreciated assets (2) (35) (3) (8) (48) (4) (52) Impact of foreign currency translation - - - 2 - 1 3 3 6 -------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ ----- As at October 31, 2023 74 256 436 317 116 396 1,595 863 2,458 --------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ ----- Accumulated depreciation As at October 31, 2021 47 150 55 156 408 198 606 Depreciation for the year 2 48 15 32 97 105 202 Disposals (4) - (3) (2) (9) (9) Fully depreciated assets (7) (38) (7) (10) (62) (8) (70) Impact of foreign currency translation - 2 1 3 6 4 10 -------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ ----- As at October 31, 2022 38 162 61 179 440 299 739 Depreciation for the year 4 55 10 36 105 106 211 Disposals (5) - (13) (27) (45) (45) Impairment losses(3) - - - - - 11 11 Fully depreciated assets (2) (35) (3) (8) (48) (4) (52) Impact of foreign currency translation - 1 - - 1 1 2 -------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ ----- As at October 31, 2023 35 183 55 180 453 413 866 --------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ ----- Carrying value as at October 31, 2022 74 431 18 114 56 198 891 506 1,397 --------------- ---- ------------ --------- --------- --------- ------------ ----- ------------ ----- Carrying value as at October 31, 2023 74 256 401 134 61 216 1,142 450 1,592 =============== ==== ============ ========= ========= ========= ============ ===== ============ =====
(1) As at October 31, 2023, contractual commitments related to the head office building under construction stood at $86 million, covering a period up to 2025.
(2) During the year ended October 31, 2023, the Bank started occupying certain floors of the new head office building under construction. As a result, an amount related to significant components being utilized was transferred to their corresponding asset categories.
(3) During the year ended October 31, 2023, the Bank recorded $11 million in impairment losses related to right-of-use assets (no amount was recorded during the year ended October 31, 2022). These impairment losses were recognized in the Non-interest expenses - Occupancy item of the Consolidated Statement of Income and reported in the Other heading of segment results.
Assets Leased Under Operating Leases
The Bank is a lessor under operating lease agreements for certain buildings. These leases have terms varying from one year to five years and do not contain any bargain purchase options or contingent rent.
The future minimum payments receivable under these operating leases total $6 million and include sublease revenues of $5 million related to real estate right-of-use assets.
Note 10 - Premises and Equipment (cont.)
Leases Recognized in the Consolidated Statement of Income
Year ended October 31 2023 2022 ============================================ ==== ==== Interest expense 17 16 Expense for leases of low-value assets(1) 10 9 Expense relating to variable lease payments 100 94 Income from leasing and subleasing(2) 4 4 ============================================= ==== ====
(1) The expense relates to lease payments for low-value assets that are part of the exemptions permitted by the practical expedients of IFRS 16.
(2) These amounts for the years ended October 31, 2023 and 2022 include variable lease payments of $2 million.
For the year ended October 31, 2023, the cash outflows for leases amounted to $229 million (2022: $218 million).
Note 11 - Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying amounts of goodwill by cash-generating unit (CGU) and by business segment for the years ended October 31, 2023 and 2022.
Personal
and Financial
Commercial Wealth Markets
(1) Management (1) USSF&I Other Total
------------ ---------- ----------------------------------------- ---------- ------------------------ ---------- ------
Advanced
Bank Flinks
Third-Party Securities Managed Credigy of Asia Technology
Solutions Brokerage Solutions Ltd. Limited Inc.
(1) (1) (1) Total (1) (1) Total (1)
============ ========== =========== ========== ========= ===== ========== ======= ======== ===== ========== ======
Balance as at
October 31,
2021 54 256 434 269 959 235 31 124 155 101 1,504
Impact of
foreign
currency
translation - - - - - - 3 12 15 - 15
------------- ---------- ----------- ---------- --------- ----- ---------- ------- -------- ----- ---------- ------
Balance as at
October 31,
2022 54 256 434 269 959 235 34 136 170 101 1,519
Impact of
foreign
currency
translation - - - - - - - 2 2 - 2
------------- ---------- ----------- ---------- --------- ----- ---------- ------- -------- ----- ---------- ------
Balance as at
October 31,
2023 54 256 434 269 959 235 34 138 172 101 1,521
============== ========== =========== ========== ========= ===== ========== ======= ======== ===== ========== ======
(1) Constitutes a CGU.
Goodwill Impairment Testing and Significant Assumptions
For impairment testing purposes, goodwill resulting from a business combination must be allocated, as of the acquisition date, to a CGU or group of CGUs expected to benefit from the synergies of the business combination. Goodwill is tested for impairment annually or more frequently if events or circumstances indicate that the recoverable value of the CGU or group of CGUs may have fallen below its carrying amount.
Goodwill was tested for impairment during the years ended October 31, 2023 and 2022, and no impairment loss was recognized.
The recoverable value of a CGU or group of CGUs is based on the value in use that is calculated based on discounted after-tax cash flows. Future after-tax cash flows are estimated based on a five-year period, which is the reference period used for the most recent financial forecasts approved by management. Cash flows beyond that period are extrapolated using a long-term growth rate.
The discount rate used for each CGU or group of CGUs is calculated using the cost of debt financing and the cost related to the Bank's equity. This rate corresponds to the Bank's weighted average cost of capital and reflects the risk specific to the CGU. The long-term growth rate used in calculating discounted cash flow estimates is based on the forecasted growth rate plus a risk premium. The rate is constant over the entire five-year period for which the cash flows were determined. Growth rates are determined, among other factors, based on past growth rates, economic trends, inflation, competition, and the impact of the Bank's strategic initiatives. As at October 31, 2023, for each CGU or CGU group, the discount rate (after tax) used was 9.78% (9.48% as at October 31, 2022), and the long-term growth rate varied between 2% and 5%, depending on the CGU, as at October 31, 2023 and 2022.
Estimating a CGU's value in use requires significant judgment regarding the inputs used in applying the discounted cash flow method. The Bank conducts sensitivity analyses by varying the after-tax discount rate upward by 1% and the terminal growth rates downward by 1%. Such sensitivity analyses demonstrate that a reasonable change in assumptions would not result in a CGU's carrying value exceeding its value in use.
Intangible Assets
Indefinite useful
life Finite useful life Total
-------------------- ---------------------------- ----------- ----------------------------- -----
Internally-
Management generated Other
contracts software Other intangible
(1) Trademark Total (2) software assets Total
===================== ========== ========= ===== =========== ========= =========== ===== =====
Cost
As at October 31,
2021 160 9 169 1,908 120 64 2,092 2,261
Acquisitions - - - 346 28 - 374 374
Impairment losses(3) (1) (1) (2) (7) - (2) (9) (11)
Fully amortized
intangible
assets (138) (21) (2) (161) (161)
Impact of foreign
currency
translation - - - - 1 - 1 1
-------------------- ---------- --------- ----- ----------- --------- ----------- ----- -----
As at October 31,
2022 159 8 167 2,109 128 60 2,297 2,464
Acquisitions - - - 282 17 - 299 299
Disposals - - - (19) - - (19) (19)
Impairment losses(3) (1) (1) (2) (315) - - (315) (317)
Fully amortized
intangible
assets (168) (18) - (186) (186)
As at October 31,
2023 158 7 165 1,889 127 60 2,076 2,241
--------------------- ---------- --------- ----- ----------- --------- ----------- ----- -----
Accumulated
amortization
As at October 31,
2021 861 75 51 987 987
Amortization for the
year 253 20 6 279 279
Impairment losses(3) (2) - (1) (3) (3)
Fully amortized
intangible
assets (138) (21) (2) (161) (161)
Impact of foreign
currency
translation - 2 - 2 2
-------------------- ---------- --------- ----- ----------- --------- ----------- ----- -----
As at October 31,
2022 974 76 54 1,104 1,104
Amortization for the
year 287 20 6 313 313
Disposals (6) - - (6) (6)
Impairment losses(3) (240) - - (240) (240)
Fully amortized
intangible
assets (168) (18) - (186) (186)
As at October 31,
2023 847 78 60 985 985
--------------------- ---------- --------- ----- ----------- --------- ----------- ----- -----
Carrying value as at
October 31, 2022 159 8 167 1,135 52 6 1,193 1,360
--------------------- ---------- --------- ----- ----------- --------- ----------- ----- -----
Carrying value as at
October 31, 2023 158 7 165 1,042 49 - 1,091 1,256
===================== ========== ========= ===== =========== ========= =========== ===== =====
(1) For annual impairment testing purposes, management contracts are allocated to the Managed Solutions CGU.
(2) The remaining amortization period for significant internally-generated software is four years.
(3) During the year ended October 31, 2023, the Bank recorded $2 million in impairment losses resulting from the impairment test carried out on indefinite-life intangible assets ($2 million during the year ended October 31, 2022) as well as an amount of $75 million related to internally-generated software for which the Bank has decided to cease its use or development ($5 million during the year ended October 31, 2022). The impairment losses related to internally-generated software were recognized in the Non--interest expenses - Technology item of the Consolidated Statement of Income and reported in the Personal and Commercial ($59 million), Wealth Management ($8 million), Financial Markets ($7 million) segments and in the Other heading ($1 million) of segment results.
Note 12 - Other Assets
As at October 31 2023 2022
============================================== ===== =====
Receivables, prepaid expenses and other items 3,126 2,186
Interest and dividends receivable 1,605 1,057
Due from clients, dealers and brokers 538 842
Defined benefit asset (Note 23) 356 498
Deferred tax assets (Note 24) 634 389
Current tax assets 925 471
Reinsurance assets 14 6
Insurance assets 147 104
Commodities(1) 544 405
----------------------------------------------- ----- -----
7,889 5,958
============================================== ===== =====
(1) Com modities are recorded at fair value based on quoted prices in active markets and are classified in Level 1 of the fair value measurement hierarchy. The commodities were previously presented in Receivables, prepaid expenses and other items.
Note 13 - Deposits
As at October 31 2023 2022
============================ ========= ============ =================== =======
On demand After notice Fixed term
(1) (2) (3) Total Total
============================ ========= ============ ========== ======= =======
Personal 4,335 35,289 48,259 87,883 78,811
Business and government 66,823 32,602 97,903 197,328 184,230
Deposit-taking institutions 1,579 114 1,269 2,962 3,353
----------------------------- --------- ------------ ---------- ------- -------
72,737 68,005 147,431 288,173 266,394
============================ ========= ============ ========== ======= =======
(1) Demand deposits are deposits for which the Bank does not have the right to require notice of withdrawal and consist essentially of deposits in chequing accounts.
(2) Notice deposits are deposits for which the Bank may legally require a notice of withdrawal and consist mainly of deposits in savings accounts.
(3) Fixed-term deposits are deposits that can be withdrawn by the holder on a specified date and include term deposits, guaranteed investment certificates, savings accounts and plans, covered bonds, and other similar instruments.
The Deposits - Business and government item includes, among other items, covered bonds, as described below, and a $17.7 billion amount of deposits as at October 31, 2023 ($12.8 billion as at October 31, 2022) that are subject to the bank bail-in conversion regulations issued by the Government of Canada. These regulations provide certain powers to the Canada Deposit Insurance Corporation (CDIC), notably the power to convert certain eligible Bank shares and liabilities into common shares should the Bank become non-viable.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC Covered Bond Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. During the year ended October 31, 2023, the Bank issued 280 million Swiss francs and 1.0 billion euros in covered bonds, and 1.5 billion euros in covered bonds came to maturity (the Bank issued 1.3 billion euros, US$1.5 billion and 750 million pounds sterling in covered bonds, and 1.0 billion euros and US$1.0 billion in covered bonds came to maturity during the year ended October 31, 2022). The covered bonds totalled $10.9 billion as at October 31, 2023 ($10.4 billion as at October 31, 2022). For additional information, see Note 27 to these consolidated financial statements.
The Bank has limited access to the assets owned by this structured entity according to the terms of the agreements that apply to this transaction. The assets owned by this entity totalled $20.9 billion as at October 31, 2023 ($18.2 billion as at October 31, 2022), of which $20.6 billion ($17.9 billion as at October 31, 2022) is presented in Residential mortgage loans on the Bank's Consolidated Balance Sheet.
Note 14 - Other Liabilities
As at October 31 2023 2022
============================================================= ===== =====
Accounts payable and accrued expenses 2,458 2,582
Subsidiaries ' debts to third parties 224 156
Interest and dividends payable 2,022 1,063
Lease liabilities 517 552
Due to clients, dealers and brokers 669 730
Defined benefit liability (Note 23) 94 111
Allowances for credit losses - Off-balance-sheet commitments
(Note 7) 176 162
Deferred tax liabilities (Note 24) 28 14
Current tax liabilities 208 67
Insurance liabilities 11 10
Other items(1)(2)(3) 1,016 914
-------------------------------------------------------------- ----- -----
7,423 6,361
============================================================= ===== =====
(1) As at October 31, 2023, Other items included $42 million in litigation provisions ($11 million as at October 31, 2022).
(2) As at October 31, 2023, Other items included $31 million in provisions for onerous contracts ($33 million as at October 31, 2022).
(3) As at October 31, 2023, Other items included the financial liability resulting from put options written to non-controlling interests of Flinks for an amount of $23 million ($33 million as at October 31, 2022).
Note 15 - Subordinated Debt
The subordinated debt represents direct unsecured obligations, in the form of notes and debentures, to the Bank's debt holders. The rights of the Bank's note and debenture holders are subordinate to the claims of depositors and certain other creditors. Approval from OSFI is required before the Bank can redeem its subordinated notes and debentures in whole or in part.
On February 1, 2023, the Bank redeemed $750 million of medium-term notes maturing on February 1, 2028 at a price equal to their nominal value plus accrued interest.
On August 31, 2022, the Bank had redeemed debentures denominated in a foreign currency and maturing on February 28, 2087 in an amount of US$7 million at their nominal value plus accrued interest.
On July 25, 2022, the Bank had issued medium-term notes for an amount of $750 million, bearing interest at 5.426% and maturing on August 16, 2032.
As at October
31 2023 2022
=============== ======== === ================== ==== =====
Maturity date Interest Redemption date
rate
================ ======== === ================== ==== =====
February
2028 3.183% February 1, 2023 - 750
August 2032(1) 5.426% (2) August 16, 2027(3) 750 750
750 1,500
Fair value hedge adjustment(4) - 2
Unamortized issuance costs(5) (2) (3)
--------------------------------------------------- ---- -----
Total 748 1,499
================ ======== === ================== ==== =====
(1) These notes contain non-viability contingent capital (NVCC) provisions and qualify for the purposes of calculating regulatory capital under Basel III. In the case of a trigger event as defined by OSFI, each note will be automatically and immediately converted, on a full and permanent basis, without the consent of the holder, into a specified number of common shares of the Bank as determined using an automatic conversion formula with a multiplier of 1.5 and a conversion price based on the greater of: (i) a floor price of $5.00; (ii) the current market price of common shares, which represents the volume weighted average price of common shares for the ten trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an exchange when this price is being established, the price will be the fair value reasonably determined by the Bank's Board. The number of shares issued is determined by dividing the par value of the note (plus accrued and unpaid interest on such note) by the conversion price and then applying the multiplier.
(2) Bearing interest at a rate of 5.426%, payable semi-annually until August 16, 2027, and thereafter bearing interest at a floating rate equal to CORRA compounded daily plus 2.32%, payable quarterly.
(3) With the prior approval of OSFI, the Bank may, at its option, redeem these notes in whole or in part, at their nominal value plus accrued and unpaid interest.
(4) The fair value hedge adjustment represents the impact of the hedging transactions applied to hedge changes in the fair value of subordinated debt caused by interest rate fluctuations.
(5) The unamortized costs related to the issuance of the subordinated debt represent the initial cost, net of accumulated amortization, calculated using the effective interest rate method.
Note 16 - Derivative Financial Instruments
Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, equity price, commodity price, credit spread, or index.
The main types of derivative financial instruments used are presented below.
Forwards and Futures
Forwards and futures are contractual obligations to buy or sell a specified amount of currency, interest rate, commodity, or financial instrument on a specified future date at a specified price. Forwards are tailor-made agreements transacted in the over-the-counter market. Futures are traded on organized exchanges and are subject to cash margining calculated daily by clearing houses.
Swaps
Swaps are over-the-counter contracts in which two parties agree to exchange cash flows. The Bank uses the following types of swap contracts:
-- Cross-currency swaps are transactions in which counterparties exchange fixed-rate interest payments and principal payments in different currencies.
-- Interest rate swaps are transactions in which counterparties exchange fixed- and floating-rate interest payments based on the notional principal value in the same currency.
-- Commodity swaps are transactions in which counterparties exchange fixed- and floating-rate payments based on the notional principal value of a commodity.
-- Equity swaps are transactions in which counterparties agree to exchange the return on one equity or group of equities for a payment based on an interest rate benchmark.
-- Credit default swaps are transactions in which one of the parties agrees to pay returns to the other party so that the latter can make a payment if a credit event occurs.
Options
Options are agreements between two parties in which the writer of the option grants the buyer the right, but not the obligation, to buy or sell, either at a specified date or dates or at any time prior to a predetermined expiry date, a specific amount of currency, commodity, or financial instrument at an agreed-upon price upon the sale of the option. The writer receives a premium for the sale of this instrument.
Notional Amounts (1)
As at October 31 2023 2022
================= ======================================================================= =========
Term to maturity
---------------- ------------------------------------------------ ========= ==========
Over
3 Over
months 1 Contracts
to year held for Contracts
3 months 12 to Over Total trading designated Total
or less months 5 years 5 years contracts purposes as hedges contracts
================ ======== ======= ======== ======== ========= ========= ========== =========
Interest rate
contracts
OTC contracts
Forward rate
agreements
Not settled by
central
counterparties 8,077 1,035 - - 9,112 9,112 - 8,505
Swaps
Not settled by
central
counterparties 3,681 10,571 72,130 54,055 140,437 138,135 2,302 121,384
Settled by
central
counterparties 192,142 222,675 391,902 141,129 947,848 876,491 71,357 921,657
Options purchased - 996 4,347 2,044 7,387 7,265 122 5,919
Options written 602 785 5,126 2,106 8,619 8,088 531 9,010
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
204,502 236,062 473,505 199,334 1,113,403 1,039,091 74,312 1,066,475
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Exchange-traded
contracts
Futures
Long positions 12,381 29,624 2,463 - 44,468 44,468 - 28,472
Short positions 24,066 30,587 8,765 - 63,418 63,418 - 62,205
Options purchased 14 - - - 14 14 - 3,000
Options written 14 - - - 14 14 - 1,362
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
36,475 60,211 11,228 - 107,914 107,914 - 95,039
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Foreign exchange
contracts
OTC contracts
Forwards 32,985 13,430 7,590 629 54,634 54,634 - 82,172
Swaps 259,006 98,177 109,135 34,523 500,841 480,017 20,824 515,684
Options purchased 16,564 15,029 4,445 - 36,038 36,038 - 34,831
Options written 17,596 19,312 4,253 - 41,161 41,161 - 39,477
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
326,151 145,948 125,423 35,152 632,674 611,850 20,824 672,164
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Exchange-traded
contracts
Futures
Long positions 69 - - - 69 69 - 72
Short positions 28 - - - 28 28 - 55
97 - - - 97 97 - 127
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Equity, commodity
and
credit
derivative
contracts (2)
OTC contracts
Forwards 11 - 3,568 - 3,579 3,579 - 3,735
Swaps
Not settled by
central
counterparties 31,001 19,684 20,439 9,909 81,033 80,889 144 65,569
Settled by
central
counterparties 176 99 6,417 708 7,400 7,400 - 4,633
Options purchased 4,976 315 916 12 6,219 6,219 - 1,822
Options written 51 468 2,459 351 3,329 3,329 - 2,371
36,215 20,566 33,799 10,980 101,560 101,416 144 78,130
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
Exchange-traded
contracts
Futures
Long positions 1,913 621 411 85 3,030 3,030 - 4,789
Short positions 19,161 2,135 1,146 3 22,445 22,445 - 13,452
Options purchased 10,536 1,880 2,204 - 14,620 14,620 - 9,142
Options written 10,187 2,324 3,677 137 16,325 16,325 - 11,490
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
41,797 6,960 7,438 225 56,420 56,420 - 38,873
----------------- -------- ------- -------- -------- --------- --------- ---------- ---------
645,237 469,747 651,393 245,691 2,012,068 1,916,788 95,280 1,950,808
================= ======== ======= ======== ======== ========= ========= ========== =========
(1) Notional amounts are not presented in assets or liabilities on the Consolidated Balance Sheet. They represent the reference amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged.
(2) Includes precious metal contracts.
Note 16 - Derivative Financial Instruments (cont.)
Credit Risk
Credit risk on derivative financial instruments is the risk of financial loss that the Bank will have to assume if a counterparty fails to honour its contractual obligations. Credit risk related to derivative financial instruments is subject to the same credit approval, credit limit, and credit monitoring standards as those applied to the Bank's other credit transactions. Consequently, the Bank evaluates the creditworthiness of counterparties and manages the size of the portfolios as well as the diversification and maturity profiles of these financial instruments.
The Bank limits the credit risk of over-the-counter contracts by dealing with creditworthy counterparties and entering into contracts that provide for the exchange of collateral between parties where the fair value of the outstanding transactions exceeds an agreed threshold. The Bank also negotiates master netting agreements that provide for the simultaneous close-out and settling of all transactions with a given counterparty on a net basis in the event of default, insolvency, or bankruptcy. However, overall exposure to credit risk, reduced through master netting agreements, may change substantially after the balance sheet date because it is affected by all transactions subject to a contract as well as by changes in the market rates of the underlying instruments.
The Bank also uses financial intermediaries to have access to established clearing houses in order to minimize the settlement risk arising from financial derivative transactions. In some cases, the Bank has direct access to clearing houses for settling derivative financial instruments. In addition, certain derivative financial instruments traded over the counter are settled directly or indirectly by central counterparties.
In the case of exchange-traded contracts, exposure to credit risk is limited because these transactions are standardized contracts executed on established exchanges, each of which is associated with a well-capitalized clearing house that assumes the obligations of both counterparties and guarantees their performance obligations. All exchange-traded contracts are subject to initial margins and daily settlement.
Terms Used
Replacement Cost
Replacement cost is the Bank's maximum credit risk associated with derivative financial instruments as at the Consolidated Balance Sheet date. This amount is the positive fair value of all derivative financial instruments, before all master netting agreements and collateral held.
Credit Risk Equivalent
The credit risk equivalent amount is the total replacement cost plus an amount representing the potential future credit risk exposure, as outlined in OSFI's Capital Adequacy Requirements Guideline.
Risk-Weighted Amount
The risk-weighted amount is determined by applying the OSFI guidance to the credit risk equivalent.
Credit Risk Exposure of the Derivative Financial Instrument Portfolio
As at October 31 2023 2022
======================= =================================== =======================================
Credit Risk-
risk weighted Credit Risk-
Replacement equivalent amount Replacement risk weighted
cost (1) (1) cost equivalent(1) amount(1)
====================== =========== =========== ========= =========== ============== ==========
Interest rate contracts 6,708 3,024 457 5,490 2,639 508
Foreign exchange
contracts 7,233 5,607 1,582 8,775 5,926 1,847
Equity, commodity and
credit
derivative contracts 3,575 8,544 1,428 4,282 6,569 1,797
----------------------- ----------- ----------- --------- ----------- -------------- ----------
17,516 17,175 3,467 18,547 15,134 4,152
Impact of master
netting
agreements (8,032) (9,583)
----------------------- ----------- ----------- --------- ----------- -------------- ----------
9,484 17,175 3,467 8,964 15,134 4,152
====================== =========== =========== ========= =========== ============== ==========
(1) The amounts are presented net of the Impact of master netting agreements.
Credit Risk Exposure of the Derivative Financial Instrument Portfolio by Counterparty
As at October 31 2023 2022
================================= ======================== ========================
Credit
Replacement risk Replacement Credit risk
cost equivalent cost equivalent
================================ =========== =========== =========== ===========
OECD member-country governments 928 3,052 1,342 2,700
Banks of OECD member countries 606 3,236 589 3,292
Other 7,950 10,887 7,033 9,142
----------- ----------- ----------- -----------
9,484 17,175 8,964 15,134
================================ =========== =========== =========== ===========
Fair Value of Derivative Financial Instruments
As at October 31 2023 2022
===================================== =========================== ===========================
Positive Negative Net Positive Negative Net
==================================== ======== ======== ======= ======== ======== =======
Contracts held for trading
purposes
Interest rate contracts
Forwards 147 54 93 125 85 40
Swaps 4,753 4,700 53 3,267 3,620 (353)
Options 179 208 (29) 168 166 2
------------------------------------- -------- -------- ------- -------- -------- -------
5,079 4,962 117 3,560 3,871 (311)
------------------------------------- -------- -------- ------- -------- -------- -------
Foreign exchange contracts
Forwards 878 368 510 1,426 919 507
Swaps 5,550 6,004 (454) 6,461 7,140 (679)
Options 588 544 44 707 597 110
------------------------------------- -------- -------- ------- -------- -------- -------
7,016 6,916 100 8,594 8,656 (62)
------------------------------------- -------- -------- ------- -------- -------- -------
Equity, commodity and credit
derivative contracts
Forwards 40 244 (204) 911 314 597
Swaps 2,573 3,741 (1,168) 1,926 3,717 (1,791)
Options 962 2,424 (1,462) 1,440 1,793 (353)
------------------------------------- -------- -------- ------- -------- -------- -------
3,575 6,409 (2,834) 4,277 5,824 (1,547)
------------------------------------- -------- -------- ------- -------- -------- -------
Total - Contracts held for
trading purposes 15,670 18,287 (2,617) 16,431 18,351 (1,920)
------------------------------------- -------- -------- ------- -------- -------- -------
Contracts designated as hedges
Interest rate contracts
Swaps 1,629 1,384 245 1,930 1,137 793
Options - 11 (11) - 35 (35)
------------------------------------- -------- -------- ------- -------- -------- -------
1,629 1,395 234 1,930 1,172 758
------------------------------------- -------- -------- ------- -------- -------- -------
Foreign exchange contracts
Swaps 217 181 36 182 109 73
217 181 36 182 109 73
------------------------------------- -------- -------- ------- -------- -------- -------
Equity, commodity and credit
derivative contracts
Swaps - 25 (25) 4 - 4
- 25 (25) 4 - 4
------------------------------------- -------- -------- ------- -------- -------- -------
Total - Contracts designated
as hedges 1,846 1,601 245 2,116 1,281 835
------------------------------------- -------- -------- ------- -------- -------- -------
Designated as fair value
hedges 928 902 26 1,186 586 600
Designated as cash flow hedges 918 699 219 930 695 235
Total fair value 17,516 19,888 (2,372) 18,547 19,632 (1,085)
Impact of master netting agreements (8,032) (8,032) - (9,583) (9,583) -
------------------------------------- -------- -------- ------- -------- -------- -------
9,484 11,856 (2,372) 8,964 10,049 (1,085)
==================================== ======== ======== ======= ======== ======== =======
Note 17 - Hedging Activities
The Bank's market risk exposure, risk management objectives, policies and procedures, and risk measurement methods are presented in the Risk Management section of the MD&A for the year ended October 31, 2023.
The Bank has elected, as permitted under IFRS 9, to continue applying the hedge accounting requirements of IAS 39. Some of the tables present information on currencies, specifically, the U.S. dollar (USD), the Australian dollar (AUD), the Canadian dollar (CAD), the Hong Kong dollar (HKD), the euro (EUR), the pound sterling (GBP) and the Swiss franc (CHF).
Note 17 - Hedging Activities (cont.)
The following table shows the notional amounts and the weighted average rates by term to maturity of the designated derivative instruments and their fair value by type of hedging relationship.
As at October 31 2023 2022
=================== ================================ ====================================== ====== ====== ===========
Term to maturity Fair value Fair value
--------------- ---------------------------------------------- ====== ------------------- ====== -------------------
Over Over
1 2
1 year years
year to to Over
or 2 5 5
less years years years Total Assets Liabilities Total Assets Liabilities
=============== ====== ====== ====== ====== ====== ====== =========== ====== ====== ===========
Fair value hedges
Interest rate risk
Interest rate
swaps 928 858 1,176 527
Notional amount -
CDOR reform(1) 594 2,850 3,527 638 7,609 10,730
Notional amount -
Other 10,515 2,317 9,768 6,268 28,868 11,559
Average fixed
interest
rate - Pay fixed 0.4 % 1.2 % 2.2 % 3.3% 2.1% 1.7%
Average fixed
interest
rate - Receive
fixed 5.3 % 3.4 % 3.0 % 3.3% 4.1% 2.0%
Cross-currency
swaps - 33 10 24
Notional amount - - - 112 112 192
Average USD-AUD
exchange
rate - - - $0.6943 $0.6943 $0.7381
Average CAD-HKD
exchange
rate - - - - - $0.1621
Average USD-EUR
exchange
rate - - - $1.0513 $1.0513 $1.0513
Options - 11 - 35
Notional amount -
CDOR reform(1) - 30
Notional amount -
Other - - 122 531 653 959
Average fixed
interest
rate - Purchased - - (1.3) % - (1.3)% (1.2)%
Average fixed
interest
rate - Written - - - 2.4% 2.4% 2.8%
----------------- ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
11,109 5,167 13,417 7,549 37,242 928 902 23,470 1,186 586
------------------ ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
Cash flow hedges
Interest rate risk
Interest rate
swaps 701 526 754 610
Notional amount -
CDOR reform(1) 371 1,605 3,693 1,550 7,219 12,400
Notional amount -
Other 6,020 3,643 18,759 1,541 29,963 20,455
Average fixed
interest
rate - Pay fixed 2.8 % 3.5 % 3.4% 3.5% 3.3% 1.9%
Average fixed
interest
rate - Receive
fixed 3.1 % 0.7 % 2.5% 3.4% 2.6% 1.9%
Cross-currency
swaps 217 148 172 85
Notional amount -
CDOR reform(1) 391 1,225 2,297 - 3,913 3,888
Notional amount -
Other 3,301 4,337 9,151 - 16,789 9,202
Average CAD-USD
exchange
rate $ 1.3112 $1.3093 $1.3161 - $1.3133 $1.2972
Average USD-EUR
exchange
rate $ 1.1534 $1.1487 $1.1308 - $1.1402 $1.1691
Average USD-GBP
exchange
rate $ 1.2853 - $1.1945 - $1.2207 $1.2375
Average CHF-USD
exchange
rate - - $1.0064 - $1.0064
Equity price risk
Equity swaps
Notional amount -
CDOR reform(1) 144 - - - 144 - 25 136 4 -
Average price $ 101.63 - - - $101.63 $ 86.36
----------------- ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
10,227 10,810 33,900 3,091 58,028 918 699 46,081 930 695
------------------ ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
Hedges of net
investments
in foreign
operations
(2)
Foreign exchange
risk
Cross-currency
swaps
Notional amount 10 - - - 10 - - 10 - -
Average CAD-USD
exchange
rate $ 1.3209 - - - $1.3209 $1.3802
Average USD-HKD
exchange
rate $ 0.1280 - - - $0.1280 $0.1275
------
10 - - - 10 - - 10 - -
----------------- ------ ------ ------ ------ ------ ------ ----------- ------ ------ -----------
21,346 15,977 47,317 10,640 95,280 1,846 1,601 69,561 2,116 1,281
================== ====== ====== ====== ====== ====== ====== =========== ====== ====== ===========
(1) Includes only contracts that reference CDOR and that mature after June 28, 2024.
(2) As at October 31, 2023, the Bank also designated $1,892 million in foreign currency deposits denominated in U.S. dollars as net investment hedging instruments ($1,410 million as at October 31, 2022).
Fair Value Hedges
Fair value hedge transactions consist of using derivative financial instruments (interest rate swaps and options) to hedge changes in the fair value of a financial asset or financial liability caused by interest rate fluctuations. Changes in the fair values of derivative financial instruments used as hedging instruments offset changes in the fair value of the hedged items. The Bank applies this strategy mainly to portfolios of securities measured at fair value through other comprehensive income, fixed-rate mortgage loans, fixed-rate deposits, liabilities related to transferred receivables, and subordinated debt.
In addition, when a fixed-rate asset or liability is denominated in a foreign currency, the Bank sometimes uses cross-currency swaps to hedge the associated foreign exchange risk. The Bank may designate a cross-currency swap to exchange the fixed-rate foreign currency for the functional currency at a floating rate in a single hedging relationship addressing both interest rate risk and foreign exchange risk. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this strategy mainly to foreign currency fixed-rate deposits.
Regression analysis is used to assess hedge effectiveness and determine the hedge ratio. For fair value hedges, the main source of potential hedge ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show amounts related to hedged items as well as the results of the fair value hedges.
As at October Year ended October 31,
31, 2023 2023
================= ======== ========================= =================================================
Gains Gains
(losses) (losses)
on the on the
hedged hedging
Carrying Cumulative Cumulative items instruments
value hedge adjustments for for
of adjustments from ineffectiveness ineffectiveness Hedge
hedged from active discontinued measurement measurement ineffectiveness
items hedges hedges (1) (1) (1)
============== ======== =========== ============ =============== =============== ===============
Securities at
fair value
through
other
comprehensive
income 6,068 (332) (211) (191) 189 (2)
Mortgages 2,882 (213) (224) (12) 28 16
Deposits 17,728 (606) (168) 214 (219) (5)
Liabilities
related to
transferred
receivables 4,155 (186) 13 202 (202) -
213 (204) 9
============== ======== =========== ============ =============== =============== ===============
As at October Year ended October 31,
31, 2022 2022
================= ======== ========================= ====================================================
Gains Gains
(losses) (losses)
on the on the
Carrying Cumulative Cumulative hedged hedging
value hedge adjustments items instruments
of adjustments from for for
hedged from active discontinued ineffectiveness ineffectiveness Hedge
items hedges hedges measurement(1) measurement(1) ineffectiveness(1)
============== ======== =========== ============ =============== =============== ==================
Securities at
fair value
through
other
comprehensive
income 6,805 (529) (53) (588) 589 1
Mortgages 6,488 (332) (231) (415) 453 38
Deposits 5,803 (595) 9 682 (677) 5
Liabilities
related to
transferred
receivables 682 (3) 68 3 (3) -
Subordinated debt 2 - 2 - - -
----------------- -------- ----------- ------------ --------------- --------------- ------------------
(318) 362 44
============== ======== =========== ============ =============== =============== ==================
(1) Amounts are presented on a pre-tax basis.
Note 17 - Hedging Activities (cont.)
Cash Flow Hedges
Cash flow hedge transactions consist of using interest rate swaps to hedge the risk of changes in future cash flows caused by floating-rate assets or liabilities. In addition, the Bank sometimes uses cross-currency swaps to hedge the foreign exchange risk caused by assets or liabilities denominated in foreign currencies. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this strategy mainly to its loan, personal credit line, acceptance, and deposit portfolios as well as liabilities related to transferred receivables.
The Bank also uses total return swaps to hedge the risk of changes in future cash flows related to the Restricted Stock Unit (RSU) Plan. Some of these swaps are designated as part of a cash flow hedge against a portion of the unrecognized obligation of the RSU Plan. In cash flow hedges, the derivative financial instruments used as hedging instruments reduce the variability of the future cash flows related to the hedged items.
Regression analysis is used to assess hedge effectiveness and to determine the hedge ratio. For cash flow hedges, the main source of potential hedge ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show the amounts related to hedged items as well as the results of the cash flow hedges.
As at October Year ended October 31,
31, 2023 2023
============== ============================ =============== =============== ============================================
Unrealized
gains
(losses)
included
in Other
comprehensive
Gains income
Accumulated Gains (losses) as the Losses
Accumulated other (losses) on hedging effective (gains)
other comprehensive on hedged instruments portion reclassified
comprehensive income items for for of the to Net
income from ineffectiveness ineffectiveness Hedge hedging interest
from active discontinued measurement measurement ineffectiveness instrument income
hedges hedges (1) (1) (1) (1) (1)
============ ============= ============= =============== =============== =============== ============= ============
Interest rate
risk
Loans (170) (240) 127 (131) (3) (127) 128
Deposits 127 117 (666) 667 8 223 (17)
Acceptances 59 266 (54) 52 - 52 (52)
Liabilities
related
to
transferred
receivables 11 49 6 (6) - (6) (25)
------------- ------------- ------------- --------------- --------------- --------------- ------------- ------------
27 192 (587) 582 5 142 34
------------ ------------- ------------- --------------- --------------- --------------- ------------- ------------
Equity price
risk
Other
liabilities (16) - 17 (17) - (17) -
------------- ------------- ------------- --------------- --------------- --------------- ------------- ------------
11 192 (570) 565 5 125 34
============ ============= ============= =============== =============== =============== ============= ============
As at October 31, Year ended October 31,
2022 2022
============== ============================ =============== =============== ===============================================
Unrealized
gains
(losses)
included
in Other
comprehensive
Accumulated income Losses
Accumulated other Gains (losses) as the (gains)
other comprehensive Gains (losses) on hedging effective reclassified
comprehensive income on hedged instruments portion to Net
income from items for for of the interest
from active discontinued ineffectiveness ineffectiveness Hedge hedging income
hedges hedges measurement(1) measurement(1) ineffectiveness(1) instrument(1) (1)
============ ============= ============= =============== =============== ================== ============= ============
Interest rate
risk
Loans (169) (241) 357 (356) - (356) 33
Deposits 28 10 257 (253) - 62 -
Acceptances 210 115 (253) 255 2 253 23
Liabilities
related
to
transferred
receivables 64 27 (54) 55 1 54 (11)
------------- ------------- ------------- --------------- --------------- ------------------ ------------- ------------
133 (89) 307 (299) 3 13 45
------------ ------------- ------------- --------------- --------------- ------------------ ------------- ------------
Equity price
risk
Other
liabilities - - 47 (47) - (47) -
------------- ------------- ------------- --------------- --------------- ------------------ ------------- ------------
133 (89) 354 (346) 3 (34) 45
============ ============= ============= =============== =============== ================== ============= ============
(1) Amounts are presented on a pre-tax basis.
Hedges of Net Investments in Foreign Operations
The Bank's structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. The Bank measures this risk by assessing the impact of foreign currency fluctuations and hedges it using derivative and non-derivative financial instruments (cross-currency swaps and deposits). In a hedge of a net investment in a foreign operation (net investment hedge), the financial instruments used offset the foreign exchange gains and losses on the investments. When non-derivative financial instruments are designated as foreign exchange risk hedges, only the changes in fair value that are attributable to foreign exchange risk are taken into account when assessing and calculating the effectiveness of the hedge.
Assessing the effectiveness of net investment hedges consists of comparing changes in the carrying value of the deposits or the fair value of the derivative attributable to exchange rate fluctuations with changes in the net investment in a foreign operation attributable to exchange rate fluctuations. Inasmuch as the notional amount of the hedging instruments and the hedged net investments are aligned, no ineffectiveness is expected.
The following tables present the amounts related to hedged items as well as the results of the net investment hedges.
As at October Year ended October 31,
31, 2023 2023
============= ============================ =============== =============== ============================================
Unrealized
gains
(losses)
included
in Other
comprehensive
Gains income
Accumulated Gains (losses) as the Losses
Accumulated other (losses) on hedging effective (gains)
other comprehensive on hedged instruments portion reclassified
comprehensive income items for for of the to the
income from ineffectiveness ineffectiveness Hedge hedging Non-interest
from active discontinued measurement measurement ineffectiveness instrument income
hedges hedges (1) (1) (1) (1) (1)
============ ============= ============= =============== =============== =============== ============= ============
Net
investments
in foreign
operations
denominated
in:
USD 38 (353) 66 (66) - (66) -
============= ============= ============= =============== =============== =============== ============= ============
As at October 31, Year ended October 31,
2022 2022
============= ============================ =============== =============== ===============================================
Unrealized
gains
(losses)
included
in Other
comprehensive
Accumulated income Losses
Accumulated other Gains (losses) as the (gains)
other comprehensive Gains (losses) on hedging effective reclassified
comprehensive income on hedged instruments portion to the
income from items for for of the Non-interest
from active discontinued ineffectiveness ineffectiveness Hedge hedging income
hedges hedges measurement(1) measurement(1) ineffectiveness(1) instrument(1) (1)
============ ============= ============= =============== =============== ================== ============= ============
Net
investments
in foreign
operations
denominated
in:
USD 26 (276) 166 (166) - (166) -
============= ============= ============= =============== =============== ================== ============= ============
(1) Amounts are presented on a pre-tax basis.
Note 17 - Hedging Activities (cont.)
Reconciliation of Equity Components
The following table presents a reconciliation by risk category of Accumulated other comprehensive income attributable to hedge accounting.
As at October 31 2023 2022
=========================================== ========================== ==========================
Net gains Net foreign Net gains Net foreign
(losses) currency (losses) currency
on cash translation on cash translation
flow hedges adjustments flow hedges adjustments
========================================= ============ ============ ============ ============
Balance at beginning 31 204 23 (129)
Hedges of net investments in foreign
operations (1)
Gains (losses) included as the effective
portion (66) (166)
Net foreign currency translation gains
(losses) on investments
in foreign operations 152 458
Cash flow hedges (1)
Gains (losses) included as the effective
portion
Interest rate risk 142 13
Equity price risk (17) (47)
Losses (gains) reclassified to Net
interest income
Interest rate risk 34 45
Income taxes (44) 17 (3) 41
------------------------------------------- ------------ ------------ ------------ ------------
Balance at end 146 307 31 204
=========================================== ============ ============ ============ ============
(1) Amounts are presented on a pre-tax basis.
Note 18 - Share Capital and Other Equity Instruments
Authorized
Common Shares
An unlimited number of shares without par value.
First Preferred Shares
An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $5 billion.
First Preferred Shares and Other Equity Instruments
As at October 31, 2023
============ =========== ======= ========== ===== =========== ==== ============================
Dividend Reset
Redemption per premium
price share of the
Redemption per Convertible ($) or dividend
and share or into interest rate or
conversion LRCN preferred rate per interest
date(1)(2) ($)(1) shares(2) LRCN(3) rate
============ =========== ======= ========== ===== =========== ==== ======== ===== ===========
First
preferred
shares
issued and
outstanding
May 15,
Series 30(4) 2024 (5)(6) 25.00 Series 31 0.25156 (7) 2.40%
February
Series 32(4) 15, 2025 (5)(6) 25.00 Series 33 0.23994 (7) 2.25%
November
Series 38(4) 15, 2027 (5)(6) 25.00 Series 39 0.43919 (7) 3.43%
May 15,
Series 40(4) 2028 (5)(6) 25.00 Series 41 0.36363 (7) 2.58%
November
Series 42(4) 15, 2023 (5)(6) 25.00 Series 43 0.30938 (8) 2.77%
Other equity
instruments
issued and
outstanding
Limited
Recourse
Capital
Notes (LRCN)
Series 1
(LRCN
- Series October
1)(9)(10) 15, 2025 (5) 1,000.00 Series 44 (9) 4.30 %(11) 3.943%
Series 2
(LRCN
- Series July 15,
2)(9)(10) 2026 (5) 1,000.00 Series 45 (9) 4.05 %(11) 3.045%
Series 3
(LRCN
- Series October
3)(9)(10) 16, 2027 (5) 1,000.00 Series 46 (9) 7.50 %(11) 4.281%
First
preferred
shares
authorized
but not
issued
May 15, Floating
Series 31(4) 2024 (5) 25.00 (12) n.a. rate (13) 2.40%
February Floating
Series 33(4) 15, 2025 (5) 25.00 (12) n.a. rate (13) 2.25%
November Floating
Series 39(4) 15, 2027 (5) 25.00 (12) n.a. rate (13) 3.43%
May 15, Floating
Series 41(4) 2028 (5) 25.00 (12) n.a. rate (13) 2.58%
November Floating
Series 43(4) 15, 2023 (5) 25.50 (14) n.a. rate (13) 2.77%
============= ========== ======= ========== ===== =========== ==== ======== ===== ===== ===
n.a. Not applicable
(1) Redeemable in cash at the Bank's option, in whole or in part, subject to the provisions of the Bank Act (Canada) and to OSFI approval. For the preferred shares, the redemption prices are increased by all the declared and unpaid dividends on the preferred shares to the date fixed for redemption. In the case of LRCN , the redemption prices are increased by interest accrued and unpaid up to the redemption date .
(2) Convertible at the option of the holders of first preferred shares issued and outstanding, subject to certain conditions.
(3) The dividends are non-cumulative and payable quarterly, whereas interest on the LRCN is payable semi-annually.
(4) Upon the occurrence of a trigger event, as defined by OSFI, each outstanding preferred share will be automatically and immediately converted, on a full and permanent basis, without the consent of the holder, into a number of Bank common shares determined pursuant to an automatic conversion formula. This conversion will be calculated by dividing the value of the preferred shares, i.e., $25.00 per share, plus all declared and unpaid dividends as at the date of the trigger event, by the value of the common shares. The value of the common shares will be the greater of a $5.00 floor price or the current market price of the common shares. Current market price means the volume weighted average trading price of common shares for the ten consecutive trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an exchange when this price is being established, the price will be the fair value reasonably determined by the Bank's Board.
(5) For the preferred shares, redeemable at the date fixed for redemption and on the same date every five years thereafter. In the case of LRCN , the redemption occurs automatically upon the redemption of the preferred shares issued by the Bank in conjunction with the LRCN and held in a limited recourse trust. The preferred shares issued and held in a limited recourse trust are redeemable for a period of one month from the date fixed for redemption and on the same dates every five years thereafter.
(6) Convertible on the date fixed for conversion and on the same date every five years thereafter, subject to certain conditions.
(7) The dividend amount is set for the five-year period commencing on May 16, 2019 for Series 30, on February 16, 2020 for Series 32, on November 16, 2022 for Series 38, and on May 16, 2023 for Series 40 and ending on the redemption date. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per share determined by multiplying the rate of interest equal to the sum of the five-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00, plus the reset premium.
(8) The dividend amount is set for the initial period ending on the date fixed for redemption. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per share determined by multiplying the rate of interest equal to the sum of the five-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00, plus the reset premium.
Note 18 - Share Capital and Other Equity Instruments (cont.)
(9) The LRCN - Series 1, LRCN - Series 2 and LRCN - Series 3 are notes for which recourse is limited to the assets held by an independent trustee in a consolidated limited recourse trust. The trust assets consist of Series 44, Series 45 and Series 46 preferred shares issued by the Bank in conjunction with the LRCN - Series 1, LRCN - Series 2 and LRCN - Series 3. In the event of (i) non-payment of interest on any of the interest payment dates, (ii) non-payment of the redemption amount upon redemption of the LRCN, (iii) non-payment of the principal amount upon maturity of the LRCN, or (iv) an event of default in respect of the LRCN, the noteholders will have recourse only to the assets of the trust, and each noteholder will be entitled to its pro rata share of the assets of the trust. In such circumstances, delivery of the assets of the trust will eliminate all of the Bank's obligations with respect to the LRCN. The LRCN - Series 1, LRCN - Series 2 and LRCN - Series 3 are redeemable at maturity or earlier to the extent that the Bank redeems the Series 44, Series 45 and Series 46 preferred shares from the date fixed for redemption, and subject to OSFI's consent and approval.
(10) The Series 44, Series 45 and Series 46 preferred shares issued by the Bank in conjunction with the LRCN - Series 1, LRCN - Series 2 and LRCN - Series 3 are held by a consolidated limited recourse trust on the Bank's balance sheet and are therefore eliminated for financial reporting purposes. Upon the occurrence of a trigger event, as defined by OSFI; (i) each LRCN will be automatically redeemed and the redemption price will be covered by delivery of the trust's assets that consist of Series 44, Series 45 and Series 46 preferred shares; (ii) each outstanding preferred share will be automatically and immediately converted on a full and permanent basis, without the consent of the holder, into a number of Bank common shares determined pursuant to an automatic conversion formula. This conversion will be calculated by dividing the value of the preferred shares, i.e., $1,000 per share, plus all accrued and unpaid interest as at the date of the trigger event, by the value of the common shares. The value of the common shares will be the greater of a $5.00 floor price or the current market price of the common shares. Current market price means the volume weighted average trading price of common shares for the ten consecutive trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an exchange when this price is being established, the price will be the fair value reasonably determined by the Bank's Board.
(11) The interest rate is set for the initial period ending on the date fixed for redemption. Every five years thereafter until November 15, 2075 for the LRCN - Series 1 , until August 15, 2076 for the LRCN - Series 2 and until November 16, 2077 for the LRCN - Series 3 , the interest rate on the notes will be adjusted and will be an annual interest rate equal to the five-year Government of Canada bond yield on the applicable interest rate calculation date, plus the interest rate reset premium.
(12) As of the date fixed for redemption, and every five years thereafter, the redemption price will be $25.00 per share.
(13) The dividend period begins as of the date fixed for redemption. The amount of the floating quarterly non-cumulative dividend is determined by multiplying by $25.00 the rate of interest equal to the sum of the 90-day Government of Canada treasury bill yield on the floating rate calculation date, plus the reset premium.
(14) As of the date fixed for redemption, the redemption price will be $25.50 per share. Thereafter, on the same date every five years, the redemption price will be $25.00 per share.
Second Preferred Shares
15 million shares without par value, issuable for a maximum aggregate consideration of $300 million. As at October 31, 2023, no shares had been issued or traded.
Shares and Other Equity Instruments Outstanding
As at October 31 2023 2022
====================================== ===================== ======================
Number Shares Number Shares or
of shares or LRCN of shares LRCN
or LRCN $ or LRCN $
==================================== =========== ======== =========== =========
First Preferred Shares
Series 30 14,000,000 350 14,000,000 350
Series 32 12,000,000 300 12,000,000 300
Series 38 16,000,000 400 16,000,000 400
Series 40 12,000,000 300 12,000,000 300
Series 42 12,000,000 300 12,000,000 300
------------------------------------- ----------- -------- ----------- ---------
66,000,000 1,650 66,000,000 1,650
------------------------------------ ----------- -------- ----------- ---------
Other equity instruments
LRCN - Series 1 500,000 500 500,000 500
LRCN - Series 2 500,000 500 500,000 500
LRCN - Series 3 500,000 500 500,000 500
------------------------------------- ----------- -------- ----------- ---------
1,500,000 1,500 1,500,000 1,500
------------------------------------ ----------- -------- ----------- ---------
Preferred shares and other equity
instruments 67,500,000 3,150 67,500,000 3,150
-------------------------------------- ----------- -------- ----------- ---------
Common shares at beginning of year 336,582,124 3,196 337,912,283 3,160
Issued pursuant to the Stock Option
Plan 1,678,321 95 1,193,663 61
Repurchase of common shares for
cancellation - - (2,500,000) (24)
Impact of shares purchased or sold
for trading(1) 31,975 3 (18,295) (1)
Other (7,791) - (5,527) -
-------------------------------------- ----------- -------- ----------- ---------
Common shares at end of year 338,284,629 3,294 336,582,124 3,196
====================================== =========== ======== =========== =========
(1) As at October 31, 2023, a total of 26,725 shares were sold short for trading, representing an amount of $3 million (5,250 shares were held for trading, representing a negligible amount as at October 31, 2022).
Dividends Declared and Distributions on Other Equity Instruments
Year ended October 31 2023 2022
==================================== ======================== ========================
Dividends Dividends
or interest Dividends or interest Dividends
$ per share $ per share
================================== ============ ========== ============ ==========
First Preferred Shares
Series 30 14 1.0063 14 1.0063
Series 32 12 0.9598 12 0.9598
Series 38 28 1.7568 18 1.1125
Series 40 16 1.3023 14 1.1500
Series 42 14 1.2375 14 1.2375
----------------------------------- ------------ ---------- ------------ ----------
84 72
---------------------------------- ------------ ---------- ------------ ----------
Other equity instruments
LRCN - Series 1(1) 21 21
LRCN - Series 2(2) 20 20
LRCN - Series 3(3) 38 6
----------------------------------- ------------ ---------- ------------ ----------
79 47
---------------------------------- ------------ ---------- ------------ ----------
Preferred shares and other equity
instruments 163 119
------------------------------------ ------------ ---------- ------------ ----------
Common shares 1,344 3.9800 1,206 3.5800
------------------------------------ ------------ ---------- ------------ ----------
1,507 1,325
================================== ============ ========== ============ ==========
(1) The LRCN - Series 1 bear interest at a fixed rate of 4.30% per annum.
(2) The LRCN - Series 2 bear interest at a fixed rate of 4.05% per annum.
(3) The LRCN - Series 3 bear interest at a fixed rate of 7.50% per annum.
Issuances of Other Equity Instruments
On September 8, 2022, the Bank had issued $500 million of LRCN - Series 3 for which recourse of the noteholders is limited to the assets held by an independent trustee in a consolidated limited recourse trust. The trust's assets consist of $500 million of Series 46 f irst preferred shares issued by the Bank in conjunction with the LRCN - Series 3. The LRCN - Series 3 sell for $1 ,000 each and bear interest at a fixed rate of 7.50% per annum until November 16, 2027 exclusively and, thereafter, at an annual rate equal to the five -year Government of Canada bond yield plus 4.281% until November 16, 2077. The LRCN - Series 3 mature on November 16, 2082.
In the event of (i) non-payment of interest on any of the interest payment dates, (ii) non-payment of the redemption amount upon redemption of the LRCN, (iii) non-payment of the principal amount upon maturity of the LRCN, or (iv) an event of default in respect of the notes, the noteholders will have recourse only to the assets of the trust, and each noteholder will be entitled to its pro rata share of the assets of the trust. In such circumstances, delivery of the trust's assets will eliminate all of the Bank's obligations with respect to the LRCN. The LRCN - Series 3 are redeemable at maturity or earlier to the extent that the Bank redeems the Series 46 preferred shares on certain redemption dates specified in the terms and conditions of said preferred shares, and subject to OSFI's consent and approval.
Given that the LRCN - Series 3 satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under Basel III.
Note 18 - Share Capital and Other Equity Instruments (cont.)
Repurchases of Common Shares
On December 12, 2022, the Bank began a normal course issuer bid to repurchase for cancellation up to 7,000,000 common shares (representing approximately 2.1% of its then outstanding common shares) over the 12-month period ending on December 11, 2023. On December 10, 2021, the Bank had begun a normal course issuer bid to repurchase for cancellation up to 7,000,000 common shares (representing approximately 2% of its then outstanding common shares) over the 12-month period ended December 9, 2022. Any repurchase through the Toronto Stock Exchange is done at market prices. The common shares may also be repurchased through other means authorized by the Toronto Stock Exchange and applicable regulations, including private agreements or share repurchase programs under issuer bid exemption orders issued by the securities regulators. A private purchase made under an exemption order issued by a securities regulator will be done at a discount to the prevailing market price. The amounts that are paid above the average book value of the common shares are charged to Retained earnings. During the year ended October 31, 2023, the Bank did not repurchase any common shares. During the year ended October 31, 2022, the Bank had repurchased 2,500,000 common shares for $245 million, which had reduced Common share capital by $24 million and Retained earnings by $221 million.
Reserved Common Shares
As at October 31, 2023 and 2022, there were 15,507,568 common shares reserved under the Dividend Reinvestment and Share Purchase Plan. As at October 31, 2023, there were 20,063,688 common shares reserved under the Stock Option Plan (21,742,009 as at October 31, 2022).
Restriction on the Payment of Dividends
The Bank is prohibited from declaring dividends on its common or preferred shares if there are reasonable grounds for believing that the Bank would, by so doing, be in contravention of the regulations of the Bank Act (Canada) or OSFI's capital adequacy and liquidity guidelines. In addition, the ability to pay common share dividends is restricted by the terms of the outstanding preferred shares pursuant to which the Bank may not pay dividends on its common shares without the approval of the holders of the outstanding preferred shares, unless all preferred share dividends have been declared and paid or set aside for payment.
Dividend Reinvestment and Share Purchase Plan
The Bank has a Dividend Reinvestment and Share Purchase Plan for holders of its common and preferred shares under which they can acquire common shares of the Bank without paying commissions or administration fees. Participants acquire common shares through the reinvestment of cash dividends paid on the shares they hold or through optional cash payments of at least $1 per payment, up to a maximum of $5,000 per quarter. Common shares subscribed by participants are purchased on their behalf in the secondary market through the Bank's transfer agent, Computershare Trust Company of Canada, at a price equal to the average purchase price of the common shares during the three business days immediately following the dividend payment date.
Note 19 - Non-Controlling Interests
As at October 31 2023 2022 ========================== ===== ==== Flinks Technology Inc.(1) 2 2 =========================== ====== ==== (1) As at October 31, 2023 and 2022, the non-controlling interest in Flinks stood at 14.1%.
Note 20 - Capital Disclosure
Capital Management Objectives, Policies and Procedures
Capital management has a dual role of ensuring a competitive return to the Bank's shareholders while maintaining a solid capital foundation that covers the risks inherent to the Bank's business, supports its business segments, and protects its clients.
The Bank's capital management policy defines the guiding principles as well as the roles and responsibilities regarding its internal capital adequacy assessment process. This process is a key tool in establishing the Bank's capital strategy and is subject to quarterly reviews and periodic amendments.
Capital Management
Capital ratios are obtained by dividing capital (as defined by OSFI's Capital Adequacy Requirements Guideline) by risk-weighted assets and are expressed as percentages. Risk-weighted assets are calculated in accordance with the rules established by OSFI for on- and off-balance-sheet risks. Credit, market, and operational risks are factored into the risk-weighted assets calculation for regulatory purposes. The definition adopted by the Basel Committee on Banking Supervision (BCBS) distinguishes between three types of capital. Common Equity Tier 1 (CET1) capital consists of common shareholders' equity less goodwill, intangible assets, and other CET1 capital deductions. Additional Tier 1 (AT1) capital consists of eligible non-cumulative preferred shares, limited recourse capital notes, and other AT1 capital adjustments. The sum of CET1 and AT1 capital forms what is known as Tier 1 capital. Tier 2 capital consists of the eligible portion of subordinated debt and certain allowances for credit losses. Total regulatory capital is the sum of Tier 1 and Tier 2 capital.
The Bank and all other major Canadian banks have to maintain the following minimum capital ratios established by OSFI: a CET1 capital ratio of at least 11.0%, a Tier 1 capital ratio of at least 12.5%, and a Total capital ratio of at least 14.5%. All of these ratios include a capital conservation buffer of 2.5% established by the Basel Committee on Banking Supervision and OSFI, a 1.0% surcharge applicable solely to Domestic Systemically Important Banks (D-SIBs), and a 3.0% domestic stability buffer. On December 8, 2022, OSFI expanded the domestic stability buffer range, setting it at 0% to 4.0% instead of the previous range of 0% to 2.5%, and it announced that the domestic stability buffer would rise from 2.5% to 3.0% effective February 1, 2023. On June 20, 2023, OSFI raised the buffer by 50 bps to 3.5% effective November 1, 2023. The domestic stability buffer must consist exclusively of CET1 capital. A D--SIB that fails to meet this buffer requirement will not be subject to automatic constraints to reduce capital distributions but must provide a remediation plan to OSFI. The Bank must also meet the requirements of an updated capital output floor that will ensure that its total calculated RWA is not below 72.5% of the total RWA as calculated under the Basel III Standardized Approaches. OSFI is allowing a phase-in of the floor factor over three years, starting at 65.0% in the second quarter of 2023 and rising 2.5% per year to reach 72.5% in fiscal 2026. If the capital requirement is less than the capital output floor requirement after applying the floor factor, the difference is added to total RWA. Lastly, OSFI requires D-SIBs to maintain a Basel III leverage ratio of at least 3.5%. Effective February 1, 2023, OSFI increased the leverage ratio minimum requirement by imposing a Tier 1 capital buffer of 0.5% applicable only to D-SIBs.
OSFI also requires D-SIBs to maintain a risk-based total loss-absorbing capacity (TLAC) ratio of at least 24.5% (including the domestic stability buffer) of risk-weighted assets and a TLAC leverage ratio of at least 7.25% (increase of 0.5% since February 1, 2023). The purpose of TLAC is to ensure that a D-SIB has sufficient loss-absorbing capacity to support its recapitalization in the unlikely event it becomes non-viable.
In the second quarter of 2023, the Bank implemented OSFI's finalized guidance relating to the Basel III reforms, consisting primarily of:
-- a revised Standardized Approach and Internal Ratings-Based (IRB) Approach for credit risk; -- a revised Standardized Approach for operational risk; -- a revised capital output floor; -- a revised Leverage Ratio Framework; and -- revised Pillar 3 disclosure requirements.
The Basel III reforms also affected the market risk and credit valuation adjustment (CVA) risk frameworks, which will be implemented in the first quarter of 2024.
During the years ended October 31, 2023 and 2022, the Bank was in compliance with all of OSFI's regulatory capital, leverage, and TLAC requirements.
Note 20 - Capital Disclosure (cont.)
Regulatory Capital (1) , Leverage Ratio(1) and TLAC(2)
As at October 31 2023 2022
====================== ======= =======
Capital
CET1 16,920 14,818
Tier 1 20,068 17,961
Total 21,056 19,727
---------------------- ------- -------
Risk-weighted assets 125,592 116,840
------- -------
Total exposure 456,478 401,780
---------------------- ------- -------
Capital ratios
CET1 13.5 % 12.7%
Tier 1 16.0 % 15.4%
Total 16.8 % 16.9%
---------------------- ------- -------
Leverage ratio 4.4 % 4.5%
---------------------- ------- -------
Available TLAC 36,732 32,351
TLAC ratio 29.2 % 27.7%
TLAC leverage ratio 8.0 % 8.1%
====================== ======= =======
(1) Capital, risk-weighted assets, total exposure, the capital ratios, and the leverage ratio are calculated in accordance with the Basel III rules, as set out in OSFI's Capital Adequacy Requirements Guideline and Leverage Requirements Guideline. The calculation of the figures as at October 31, 2022 had included the transitional measure applicable to expected credit loss provisioning and the temporary measure regarding the exclusion of central bank reserves implemented by OSFI in response to the COVID-19 pandemic. These provisions ceased to apply on November 1, 2022 and April 1, 2023, respectively.
(2) Available TLAC, the TLAC ratio, and the TLAC leverage ratio are calculated in accordance with OSFI's Total Loss Absorbing Capacity Guideline.
Note 21 - Trading Activity Revenues
Trading activity revenues consist of the net interest income and the non-interest income related to trading activities.
Net interest income comprises dividends related to financial assets and liabilities associated with trading activities and certain interest income related to the financing of these financial assets and liabilities, net of interest expenses.
Non-interest income consists of realized and unrealized gains and losses as well as interest income on securities measured at fair value through profit or loss, income from held-for-trading derivative financial instruments, changes in the fair value of loans at fair value through profit or loss, changes in the fair value of financial instruments designated at fair value through profit or loss, realized and unrealized gains and losses as well as interest expenses on obligations related to securities sold short, certain commission income as well as other income related to trading activities, and any applicable transaction costs.
Year ended October 31 2023 2022
=========================== ======= =====
Net interest income (loss) (1,816) 682
---------------------------- ------- -----
Non-interest income
Trading revenues (losses) 2,677 543
Other revenues 19 5
---------------------------- ------- -----
2,696 548
--------------------------- ------- -----
880 1,230
=========================== ======= =====
Note 22 - Share-Based Payments
The compensation expense information provided below excludes the impact of hedging.
Stock Option Plan
The Bank's Stock Option Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, options are awarded annually and provide participants with the right to purchase common shares at an exercise price equal to the closing price of the Bank's common share on the Toronto Stock Exchange on the day preceding the award. The options vest evenly over a four-year period and expire ten years from the award date or, in certain circumstances set out in the plan, within specified time limits. The Stock Option Plan contains provisions for retiring employees that allow the participant's rights to continue vesting in accordance with the stated terms of the award agreement. The maximum number of common shares that may be issued under the Stock Option Plan was 20,063,688 as at October 31, 2023 (21,742,009 as at October 31, 2022). The number of common shares reserved for a participant may not exceed 5% of the total number of Bank shares issued and outstanding.
As at October 31 2023 2022
========================= ======================== ========================
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
========================= =========== =========== =========== ===========
Stock Option Plan
Outstanding at beginning 11,861,749 $ 64.80 11,348,680 $ 57.93
Awarded 1,416,060 $ 94.05 1,771,588 $ 96.35
Exercised (1,678,321) $ 50.43 (1,193,663) $ 45.73
Cancelled(1) (52,800) $ 87.49 (64,856) $ 76.10
Outstanding at end 11,546,688 $ 70.37 11,861,749 $ 64.80
Exercisable at end 7,471,041 $ 61.18 7,344,536 $ 55.50
========================== =========== ======= ===========
(1) Includes 8,096 expired options during the year ended October 31, 2023 (27,714 expired options during the year ended October 31, 2022).
Options Options
Exercise price outstanding exercisable Expiry date
$44.96 368,469 368,469 December 2023
$47.93 813,888 813,888 December 2024
$42.17 727,265 727,265 December 2025
$54.69 770,928 770,928 December 2026
$64.14 1,063,142 1,063,142 December 2027
$58.79 1,341,590 1,341,590 December 2028
$71.86 1,478,183 1,075,695 December 2029
$71.55 1,857,658 884,810 December 2030
$96.35 1,728,733 425,254 December 2031
$94.05 1,396,832 - December 2032
11,546,688 7,471,041
During the year ended October 31, 2023, the Bank awarded 1,416,060 stock options (1,771,588 stock options during the year ended October 31, 2022) with an average fair value of $14.76 per option ($13.24 for the year ended October 31, 2022).
The average fair value of options awarded was estimated on the award date using the Black-Scholes model as well as the following assumptions.
Year ended October 31 2023 2022 ========================= ======= ======= Risk-free interest rate 3.25% 1.79% Expected life of options 7 years 7 years Expected volatility 23.13% 22.68% Expected dividend yield 4.23% 3.88% ========================== ======= =======
Note 22 - Share-Based Payments (cont.)
The expected life of the options is based on historical data and is not necessarily representative of how the options will be exercised in the future. Expected volatility is extrapolated from the implied volatility of the Bank's share price and observable market inputs, which are not necessarily representative of actual results. The expected dividend yield represents the annualized dividend divided by the Bank's share price at the award date. The risk-free interest rate is based on the Canadian dollar swap curve at the award date. The exercise price is equal to the Bank's share price at the award date. No other market parameter has been included in the fair value measurement of the options.
For the year ended October 31, 2023, an $18 million compensation expense related to this plan was recognized in the Consolidated Statement of Income ($17 million for the year ended October 31, 2022).
Stock Appreciation Rights (SAR) Plan
The SAR Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, participants receive, upon exercising the right, a cash amount equal to the difference between the closing price of the Bank's common share on the Toronto Stock Exchange on the day preceding the exercise date and the closing price on the day preceding the award date. SARs vest evenly over a four-year period and expire ten years after the award date or, in certain circumstances set out in the plan, within specified time limits. The SAR Plan contains provisions for retiring employees that allow the participant's rights to continue vesting in accordance with the stated terms of the award agreement. For the years ended October 31, 2023 and 2022, a negligible compensation expense related to this plan was recognized in the Consolidated Statement of Income.
As at October 31 2023 2022
Weighted Weighted
average average
Number exercise Number exercise
of SARs price of SARs price
=========== ========= ===========
SAR Plan (1)
Outstanding at beginning 207,841 $ 60.73 266,075 $ 57.61
Awarded 19,072 $ 94.05 21,464 $ 96.35
Exercised (41,241) $ 55.64 (79,698) $ 59.89
-------
Outstanding at end 185,672 $ 65.29 207,841 $ 60.73
Exercisable at end 124,531 $ 55.53 130,319 $ 51.31
=========
(1) No SARs cancelled or expired during the years ended October 31, 2023 and 2022.
SARs SARs
Exercise price outstanding exercisable Expiry date
$44.96 9,886 9,886 December 2023
$47.93 28,824 28,824 December 2024
$42.17 19,748 19,748 December 2025
$54.69 16,320 16,320 December 2026
$64.14 16,236 16,236 December 2027
$58.79 16,604 16,604 December 2028
$71.86 22,266 11,547 December 2029
$71.55 15,252 - December 2030
$96.35 21,464 5,366 December 2031
$94.05 19,072 - December 2032
------------ ------------
185,672 124,531
============ ============
Deferred Stock Unit (DSU) Plans
The DSU Plans are for officers and other designated persons of the Bank and its subsidiaries as well as for directors. These plans allow the Bank to tie a portion of the value of the compensation of participants to the future value of the Bank's common shares. A DSU is a right that has a value equal to the closing price of a common share of the Bank on the Toronto Stock Exchange on the day preceding the award. DSUs generally vest evenly over four years. Additional DSUs are credited to the accounts of participants in an amount equal to the dividends declared on Bank common shares and vest evenly over the same period as the reference DSUs. DSUs may be cashed only when participants retire or leave the Bank or, for directors, when their term ends. The DSU Plans contain provisions for retiring employees whereby participants may continue vesting all units in accordance with the stated terms of the award agreement.
During the year ended October 31, 2023, the Bank awarded 37,477 DSUs at a weighted average price of $97.45 (39,227 DSUs at a weighted average price of $97.10 for the year ended October 31, 2022). A total of 483,735 DSUs were outstanding as at October 31, 2023 (551,539 DSUs as at October 31, 2022). For the year ended October 31, 2023, a $3 million compensation expense related to these plans was recognized in the Consolidated Statement of Income ($1 million for the year ended October 31, 2022).
Restricted Stock Unit (RSU) Plan
The RSU Plan is for certain officers and other designated persons of the Bank and its subsidiaries. The objective of this plan is to ensure that the compensation of certain officers and other designated persons is competitive and to foster retention. An RSU represents a right that has a value equal to the average closing price of the Bank's common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December . RSUs generally vest evenly over three years, although some RSUs vest on the sixth business day of December of the third year following the award date, i.e., the date on which all RSUs expire. Additional RSUs are credited to the accounts of participants in an amount equal to the dividends declared on the Bank's common shares and vest over the same period as the reference RSUs. The RSU Plan contains provisions for retiring employees whereby participants may continue vesting units in accordance with the stated terms of the award agreement.
During the year ended October 31, 2023, the Bank awarded 2,058,936 RSUs at a weighted average price of $96.42 (1,895,489 RSUs at a weighted average price of $99.59 for the year ended October 31, 2022). As at October 31, 2023, a total of 4,382,431 RSUs were outstanding (4,203,383 RSUs as at October 31, 2022). For the year ended October 31, 2023, a $173 million compensation expense related to this plan was recognized in the Consolidated Statement of Income ($172 million for the year ended October 31, 2022).
Performance Stock Unit (PSU) Plan
The PSU Plan is for officers and other designated persons of the Bank . The objective of this plan is to tie a portion of the value of the compensation of these officers and other designated persons to the future value of the Bank's common shares. A PSU represents a right that has a value equal to the average closing price of the Bank's common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December , adjusted upward or downward according to performance criteria, which is based on the Bank's total shareholder return (TSR) growth index over three years compared to the average TSR growth index of the comparator group composed of Canadian banks over three years. PSUs vest on the sixth business day of December of the third year following the award date, i.e. , the date on which all PSUs expire. Additional PSUs are credited to the accounts of participants in an amount equal to the dividends declared on the Bank's common shares and vest over the same period as the reference PSUs. The PSU Plan contains provisions for retiring employees whereby participants may continue vesting units in accordance with the stated terms of the award agreement.
During the year ended October 31, 2023, the Bank awarded 234,706 PSUs at a weighted average price of $96.42 (238,082 PSUs at a weighted average price of $99.59 for the year ended October 31, 2022). As at October 31, 2023, a total of 745,764 PSUs were outstanding (739,359 PSUs as at October 31, 2022). For the year ended October 31, 2023, a $27 million compensation expense related to this plan was recognized in the Consolidated Statement of Income ($30 million for the year ended October 31, 2022).
Deferred Compensation Plan
This plan is exclusively for key employees of the Wealth Management segment. The purpose of this plan is to foster the retention of key employees and promote revenue growth and continuous profitability improvement within the Wealth Management segment. Under this plan, participants can defer a portion of their annual compensation, and the Bank may pay a contribution to key employees when certain financial objectives are met. Amounts awarded by the Bank and the compensation deferred by participants are invested in, among other items, Bank common share units. These share units represent a right that has a value equal to the closing price of the Bank's common share on the Toronto Stock Exchange on the award date. Additional units are credited to the accounts of participants in an amount equal to the dividends declared on the Bank's common shares. Share units representing the amounts awarded by the Bank vest evenly over four years. When a participant retires, or in certain cases when the participant's employment ceases, the participant receives a cash amount representing the value of the vested share units.
During the year ended October 31, 2023, the Bank awarded 161,713 share units at a weighted average price of $94.90 (129,464 share units at a weighted average price of $94.87 for the year ended October 31, 2022). As at October 31, 2023, a total of 2,229,248 share units were outstanding (2,036,524 share units as at October 31, 2022). For the year ended October 31, 2023, a $3 million compensation expense related to this plan was recognized in the Consolidated Statement of Income (a $19 million reversal of the compensation expense for the year ended October 31, 2022).
Employee Share Ownership Plan
Under the Bank's Employee Share Ownership Plan, employees who meet the eligibility criteria can contribute up to 8% of their annual gross salary by way of payroll deductions. The Bank matches 25% of the employee contribution up to a maximum of $1,500 per annum. Bank contributions vest to the employee after one year of uninterrupted participation in the plan. Subsequent contributions vest immediately. The Bank's contributions, amounting to $16 million for the year ended October 31, 2023 ($15 million for the year ended October 31, 2022), were recognized when paid in the Compensation and employee benefits item of the Consolidated Statement of Income. As at October 31, 2023, a total of 6,392,648 common shares were held for this plan (6,304,689 common shares as at October 31, 2022).
Plan shares are purchased on the open market and are considered to be outstanding for earnings per share calculations. Dividends paid on the Bank's common shares held for the Employee Share Ownership Plan are used to purchase other common shares on the open market.
Plan Liabilities and Intrinsic Value
Total liabilities arising from the Bank's share-based compensation plans amounted to $686 million as at October 31, 2023 ($716 million as at October 31, 2022). The intrinsic value of these liabilities that had vested as at October 31, 2023 was $345 million ($359 million as at October 31, 2022).
Note 23 - Employee Benefits - Pension Plans and Other Post-Employment Benefit Plans
The Bank offers pension plans that have a defined benefit component and a defined contribution component. The Bank also offers other post-employment benefit plans to eligible employees. The defined benefit component of the pension plans provides benefits based on years of plan participation and average earnings at retirement. The other post-employment benefits include post-employment medical, dental, and life insurance coverage. Since September 19, 2022, the Bank has been offering a new defined contribution component that is available to all new employees upon hiring as well as to current participants of the defined benefit component. Therefore, as of that date, the defined benefit component is no longer offered to new employees. For the defined contribution component, the Bank's base contribution equals a percentage of annual salary and the Bank's additional contribution varies according to the employee's contributions, and the sum of the employee's age and years of continuous service. The defined benefit component of the pension plans is funded, whereas the defined contribution component and the other post-employment benefit plans are not funded. The fair value of the defined benefit component and the present value of the defined benefit obligations were measured as at October 31.
The Bank's most significant pension plan is the Employee Pension Plan of the National Bank of Canada; it is registered with OSFI and the Canada Revenue Agency and subject to the Pension Benefits Standards Act, 1985 and the Income Tax Act.
The defined benefit component of the pension plans and the other post-employment benefit plans exposes the Bank to specific risks such as investment performance, changes to the discount rate used to calculate the obligation, the longevity of plan participants, and future inflation. While management believes that the assumptions used in the actuarial valuation process are reasonable, there remains a degree of risk and uncertainty that may cause future results to differ significantly from these assumptions, which could give rise to gains or losses.
According to the Bank's governance rules, the policies and risk management related to the defined benefit component of the pension plans are overseen at different levels by the pension committees, the Bank's management, and the Board's Human Resources Committee. The defined benefit component of the pension plans are examined on an ongoing basis in order to monitor the funding and investment policies, the financial status of the plans, and the Bank's funding requirements.
The Bank's funding policy for the defined benefit component of the pension plans is to make at least the minimum annual contributions required by pension regulators.
For funded plans, the Bank determines whether an economic benefit exists in the form of potential reductions in future contributions and in the form of refunds from the plan surplus, where permitted by applicable regulations and plan provisions.
Defined Benefit Obligation, Assets of the Plans, and Funded Status
As at October 31
Pension plans - Defined Other post-employment
benefit component benefit plans
2023 2022 2023 2022
========================================== ========== ============= ========== ===========
Defined benefit obligation
Balance at beginning 3,971 4,745 111 143
Current service cost 92 129 - 1
Interest cost 218 171 6 5
Remeasurements
Actuarial (gains) losses arising from
changes in demographic assumptions (40) 55 1 1
Actuarial (gains) losses arising from
changes in financial assumptions (163) (1,063) (3) (24)
Actuarial (gains) losses arising from
experience adjustments 71 95 (12) (6)
Employee contributions 72 65
Benefits paid (201) (226) (9) (9)
Balance at end 4,020 3,971 94 111
---------- ------------- ---------- -----------
Plan assets
Fair value at beginning 4,469 5,436
Interest income 242 191
Administration cost (3) (3)
Remeasurements
Return on plan assets (excluding interest
income) (329) (1,113)
Bank contributions(1) 126 119
Employee contributions 72 65
Benefits paid (201) (226)
Fair value at end 4,376 4,469
---------- -------------
Defined benefit asset (liability)
at end 356 498 (94) (111)
========== ============= ========== ===========
(1) For fiscal 2024, the Bank expects to pay an employer contribution of $122 million to the defined benefit component of the pension plans.
Defined Benefit Asset (Liability)
As at October 31
Pension plans -
Defined Other post-employment
benefit component benefit plans
2023 2022 2023 2022
======================================== ========= ========== ===========
Defined benefit asset included in Other
assets 356 498
Defined benefit liability included
in Other liabilities - - (94) (111)
---------
356 498 (94) (111)
========= ========== ===========
Cost for Pension Plans and Other Post-Employment Benefit Plans
Year ended October 31
Other post-employment
Pension plans benefit plans
2023 2022 2023 2022
====== =========== ==========
Current service cost 92 129 - 1
Interest expense (income), net (24) (20) 6 5
Administration costs 3 3
------
Expense of the defined benefit component 71 112 6 6
Expense of the defined contribution
component 11 -
----------
Expense recognized in Net income 82 112 6 6
------ ----------- ----------
Remeasurements (1)
Actuarial (gains) losses on the defined
benefit obligation (132) (913) (14) (29)
Return on plan assets(2) 329 1,113
------
Remeasurements recognized in Other
comprehensive income 197 200 (14) (29)
------
279 312 (8) (23)
====== =========== ==========
(1) Changes related to the discount rate and to the return on plan assets are reviewed and updated on a quarterly basis. All other assumptions are updated annually.
(2) Excludes interest income.
Allocation of the Fair Value of the Assets of the Defined Benefit Component of the Pensions Plans
As at October 31 2023 2022
Quoted
in an Not quoted Quoted Not quoted
active in an in an in an
market active active active
(1) market Total market(1) market Total
======= ========== ===== ========== ========== =====
Asset classes
Cash and cash equivalents - 378 378 - 273 273
Equity securities 841 1,300 2,141 988 1,150 2,138
Debt securities
Canadian government(2) (237) - (237) 114 - 114
Canadian provincial and municipal
governments - 2,128 2,128 - 1,769 1,769
Other issuers - 171 171 - 264 264
Other - (205) (205) - (89) (89)
----------
604 3,772 4,376 1,102 3,367 4,469
================================== ===== =====
(1) Unadjusted quoted prices in active markets for identical assets that the Bank can access at the measurement date.
(2) Includes obligations related to securities sold short.
The Bank's investment strategy for plan assets considers several factors, including the time horizon of pension plan obligations and investment risk. For each plan, an allocation range per asset class is defined using a mix of equity and debt securities to optimize the risk-return profile of plan assets and minimize asset/liability mismatching.
The assets of the pension plans may include investment securities issued by the Bank. As at October 31, 2023 and 2022, the assets of the pension plans do not include any securities issued by the Bank.
For fiscal 2023, the Bank and its related entities received $20 million ($21 million in fiscal 2022) in fees from the pension plans for related management, administration, and custodial services.
Note 23 - Employee Benefits - Pension Plans and Other Post-Employment Benefit Plans (cont.)
Allocation of the Defined Benefit Obligation by the Status of the Participants in the Defined Benefit Component of the Pension Plans
As at October 31
========== ==== ========= ========= ==== ========
Pension plans - Defined Other post-employment
benefit component benefit plans
2023 2022 2023 2022
================================== ========= ========
Active employees 41 % 41% 3 % 7%
Retirees 54 % 53% 97 % 93%
Participants with deferred vested
benefits 5 % 6%
----
100 % 100% 100 % 100%
---- ----
Weighted average duration of
the
defined benefit obligation (in
years) 14 14 10 10
========= ========
Significant Actuarial Assumptions (Weighted Average)
Discount Rate
The discount rate assumption is based on an interest rate curve that represents the yields on corporate AA bonds. Short-term maturities are obtained using a curve based on observed data from corporate AA bonds. Long-term maturities are obtained using a curve based on actual data and extrapolated data.
To measure the obligation related to the defined benefit component of the pension plans and related to the other post-employment benefit plans, the vested benefits that the Bank expects to pay in each future period are discounted to the measurement date using the spot rate associated with each of the respective periods based on the yield curve derived using the above methodology. The sum of discounted benefit amounts represents the defined benefit obligation. An average discount rate that replicates this obligation is then computed.
To better reflect current service cost, a separate discount rate was determined to account for the timing of future benefit payments associated with the additional year of service to be earned by the plan's active participants. Since these benefits are, on average, being paid at a later date than the benefits already earned by participants as a whole (i.e., longer duration), this method results in the use of a generally higher discount rate for calculating current service cost than that used to measure obligations where the yield curve is positively sloped. The methodology used to determine this discount rate is the same as the one used to establish the discount rate for measuring the obligation.
Other Assumptions
For measurement purposes, the estimated annual growth rate for health care costs was 4.94% as at October 31, 2023 (4.77% as at October 31, 2022). Based on the assumption retained, this rate is expected to decrease gradually to 3.57% in 2040 and remain steady thereafter.
Mortality assumptions are a determining factor when measuring the defined benefit obligation. Determining the expected benefit payout period is based on best estimate assumptions regarding mortality. Mortality tables are reviewed at least once a year, and the assumptions made are in accordance with accepted actuarial practice. New results regarding the plans are reviewed and used in calculating best estimates of future mortality.
As at October 31
Pension plans - Defined Other post-employment
benefit component benefit plans
2023 2022 2023 2022
=================================
Defined benefit obligation
Discount rate 5.65 % 5.45% 5.65 % 5.45%
Rate of compensation increase 4.00 % 3.00% 2.00 % 3.00%
Health care cost trend rate 4.94 % 4.77%
Life expectancy (in years) at
65 for a participant currently
at
Age 65
Men 22.4 22.4 22.4 22.4
Women 24.8 24.7 24.8 24.7
Age 45
Men 23.4 23.4 23.4 23.4
Women 25.7 25.6 25.7 25.6
Year ended October 31
==== ==== ========
Pension plans - Defined Other post-employment
benefit component benefit plans
2023 2022 2023 2022
==== ==== ========
Pension plan expense
Discount rate - Current service 5.45 % 3.70% 5.45 % 3.70%
Discount rate - Interest expense
(income), net 5.45 % 3.55% 5.45 % 3.55%
Rate of compensation increase 4.00 % 3.00% 2.00 % 3.00%
Health care cost trend rate 4.77 % 4.52%
Life expectancy (in years) at
65 for a participant currently
at
Age 65
Men 22.4 21.4 22.4 21.4
Women 24.7 23.7 24.7 23.7
Age 45
Men 23.4 22.4 23.4 22.4
Women 25.6 24.7 25.6 24.7
==== ========
Sensitivity of Significant Assumptions for 2023
The following table shows the potential impacts of changes to key assumptions on the defined benefit obligation of the pension plans and other post--employment benefit plans as at October 31, 2023. These impacts are hypothetical and should be interpreted with caution, as changes in each significant assumption may not be linear.
As at October 31, 2023
Pension plans
- Defined benefit Other post-employment
component benefit plans
Change in the Change in the
obligation obligation
Impact of a 1.00% increase in the discount rate (509) (3)
Impact of a 1.00% decrease in the discount rate 642 3
Impact of a 0.25% increase in the rate of compensation
increase 26
Impact of a 0.25% decrease in the rate of compensation
increase (25)
Impact of a 1.00% increase in the health care
cost trend rate 4
Impact of a 1.00% decrease in the health care
cost trend rate (3)
Impact of an increase in the age of participants
by one year (81) (1)
Impact of a decrease in the age of participants
by one year 78 1
Projected Benefit Payments
Year ended October 31
Pension plans
- Defined benefit Other post-employment
component benefit plans
2024 209 10
2025 217 9
2026 226 9
2027 233 8
2028 239 8
2029 to 2033 1,310 41
Note 24 - Income Taxes
The Bank's income tax expense reported in the consolidated financial statements is as follows.
Year ended October 31 2023 2022
===== ====
Consolidated Statement of Income
Current taxes
Current year 776 803
Canada Recovery Dividend(1) 32
Change in income tax rate(1) 10
Prior period adjustments 48 (19)
-----
866 784
---------------------------------------------------------- ----- ----
Deferred taxes
Origination and reversal of temporary differences (148) 110
Change in income tax rate(1) (18)
Prior period adjustments (63) -
----------------------------------------------------------- ----
(229) 110
---------------------------------------------------------- ----
637 894
---------------------------------------------------------- ----- ----
Consolidated Statement of Changes in Equity
Share issuance expenses, other equity instruments and
other (23) (14)
Consolidated Statement of Comprehensive Income
Remeasurements of pension plans and other post-employment
benefit plans (43) (45)
Net change in cash flow hedges 44 3
Net fair value change attributable to credit risk on
financial liabilities designated at fair value through
profit or loss (63) 216
Other (9) (90)
(71) 84
---------------------------------------------------------- ----
Income taxes 543 964
===== ====
The breakdown of the income tax expense is as follows.
Year ended October 31 2023 2022
===== ====
Current taxes 774 933
Deferred taxes (231) 31
----------------------- ----
543 964
====================== ===== ====
(1) During the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020 average taxable income above $1 billion, as well as an $8 million tax recovery related to the 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred taxes for fiscal 2022.
The temporary differences and tax loss carryforwards resulting in deferred tax assets and liabilities are as follows.
As at October Year ended October Year ended October
31 31 31
Consolidated Consolidated Statement Consolidated Statement
Balance Sheet of Income of Comprehensive
Income
2023 2022 2023 2022 2023 2022
============================= ======= ======= ========== ============ =========== ===========
Deferred tax assets
Allowances for credit losses 314 235 79 10 - -
Deferred charges 362 317 45 (37) - -
Defined benefit liability
- Other post-employment
benefit plans 36 38 2 (1) (4) (8)
Investments in associates - 23 (23) (34) - -
Leases liabilities 108 118 (10) (14) - -
Deferred revenue 91 62 29 11 - -
Tax loss carryforwards 50 35 15 2 - -
Other items(1) 31 32 (1) 1 - -
992 860 136 (62) (4) (8)
-----------------------------
Deferred tax liabilities
Premises and equipment and
intangible assets (225) (312) 87 (13) - -
Defined benefit asset -
Pension plans (89) (127) (3) (2) 41 53
Investments in associates (12) (2) (2) (2) (8) -
Other items (60) (44) 11 (31) (27) 32
(386) (485) 93 (48) 6 85
-----------------------------
Net deferred tax assets
(liabilities) 606 375 229 (110) 2 77
(1) As at October 31, 2023, the Consolidated Balance Sheet included a negligible amount of deferred tax asset related to share issuance costs ($2 million as at October 31, 2022) reported in Retained earnings on the Consolidated Statement of Changes in Equity.
Net deferred tax assets are included in Other assets and net deferred tax liabilities are included in Other liabilities.
As at October 31 2023 2022
==== ====
Deferred tax assets 634 389
Deferred tax liabilities (28) (14)
---- ----
606 375
========================= ====
According to forecasts, which are based on information available as at October 31, 2023, the Bank believes that the results of future operations will likely generate sufficient taxable income to utilize all the deferred tax assets before they expire.
As at October 31, 2023, the total amount of temporary differences, unused tax loss carryforwards, and unused tax credits for which no deferred tax asset has been recognized was $536 million ($561 million as at October 31, 2022).
As at October 31, 2023, the total amount of temporary differences related to investments in subsidiaries, associates, and joint ventures for which no deferred tax liability has been recognized was $5,762 million ($5,636 million as at October 31, 2022).
Note 24 - Income Taxes (cont.)
The following table provides a reconciliation of the Bank's income tax rate.
Year ended October 31 2023 2022
============
$ % $ %
===== ====== ===== =====
Income before income taxes 3,972 100.0 4,277 100.0
----- ------ ----- -----
Income taxes at Canadian statutory
income tax rate 1,112 28.0 1,133 26.5
----- ------ ----- -----
Reduction in income tax rate due to
Tax-exempt income from securities (310) (7.8) (191) (4.5)
Non-taxable portion of capital gains (1) - (1) -
Impact of enacted tax measures(1) 24 0.6
Tax rates of subsidiaries, foreign
entities and associates (178) (4.5) (71) (1.7)
Other items (10) (0.3) 24 0.6
------------------------------------------- ----- -----
(475) (12.0) (239) (5.6)
------------------------------------------
Income taxes reported in the Consolidated
Statement of Income and
effective income tax rate 637 16.0 894 20.9
=========================================== ===== ====== ===== =====
(1) During the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020 average taxable income above $1 billion, as well as an $8 million tax recovery related to the 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred taxes for fiscal 2022.
Notice of Assessment
In March 2023, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $90 million (including estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2018 taxation year.
In prior fiscal years, the Bank had been reassessed for additional income tax and interest of approximately $875 million (including provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2012-2017 taxation years.
In the reassessments, the CRA alleges that the dividends were received as part of a "dividend rental arrangement".
In October 2023, the Bank filed a notice of appeal with the Tax Court of Canada, and the matter is now in litigation. The CRA may issue reassessments to the Bank for taxation years subsequent to 2018 in regard to certain activities similar to those that were the subject of the above-mentioned reassessments. The Bank remains confident that its tax position was appropriate and intends to vigorously defend its position. As a result, no amount has been recognized in the consolidated financial statements as at October 31, 2023.
Canadian Government's 2022 Tax Measures
On November 4, 2022, the Government of Canada introduced Bill C-32 - An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022 to implement tax measures applicable to certain entities of banking and life insurer groups, as presented in its April 7, 2022 budget. These tax measures include the Canada Recovery Dividend (CRD), which is a one-time, 15% tax on the fiscal 2021 and 2020 average taxable income above $1 billion, as well as a 1.5% increase in the statutory tax rate. On December 15, 2022, Bill C-32 received royal assent. Given that these tax measures were in effect at the financial reporting date, a $32 million tax expense for the CRD and an $8 million tax recovery for the tax rate increase, including the impact related to current and deferred taxes for fiscal 2022, were recognized in the consolidated financial statements for the year ended October 31, 2023.
Proposed Legislation
On November 28, 2023, the Government of Canada released draft legislation entitled An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023 to implement tax measures applicable to the Bank. The measures include the denial of the deduction in respect of dividends received after 2023 on shares that are mark-to-market property for tax purposes (except for dividends received on "taxable preferred shares" as defined in the Income Tax Act), as well as the application of a 2% tax on the net value of equity repurchases occurring as of January 1, 2024.
In its March 28, 2023 budget, the Government of Canada also proposed to implement the Pillar 2 rules (global minimum tax) published by the Organisation for Economic Co-operation and Development (OECD) for fiscal years beginning as of December 31, 2023. To date, the Pillar 2 rules have not yet been included in a bill in Canada. During fiscal 2023, the Pillar 2 rules were included in a bill in certain jurisdictions where the Bank operates.
Note 25 - Earnings Per Share
Diluted earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding after taking into account the dilution effect of stock options using the treasury stock method and any gain (loss) on the redemption of preferred shares.
Year ended October 31 2023 2022
======= =======
Basic earnings per share
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 141 107
Net income attributable to common shareholders 3,196 3,277
Weighted average basic number of common shares outstanding
(thousands) 337,660 337,099
-------
Basic earnings per share (dollars) 9.47 9.72
-------
Diluted earnings per share
Net income attributable to common shareholders 3,196 3,277
-------
Weighted average basic number of common shares outstanding
(thousands) 337,660 337,099
Adjustment to average number of common shares (thousands)
Stock options(1) 3,108 3,738
-------
Weighted average diluted number of common shares outstanding
(thousands) 340,768 340,837
-------
Diluted earnings per share (dollars) 9.38 9.61
=======
(1) For the year ended October 31, 2023, given that the exercise price of the options was lower than the average price of the Bank's common shares, no options were excluded from the diluted earnings per share calculation. For the year ended October 31, 2022, the calculation of diluted earnings per share excluded an average number of 1,575,093 options outstanding with a weighted average exercise price of $96.35, given that the exercise price of these options was greater than the average price of the Bank's common shares.
Note 26 - Guarantees, Commitments and Contingent Liabilities
Guarantees
The maximum potential amount of future payments represents the maximum risk of loss if there were a total default by the guaranteed parties, without consideration of recoveries under recourse provisions or insurance policies or from collateral held or pledged. The maximum potential amount of future payments under significant guarantees issued by the Bank is presented in the following table.
As at October 31 2023 2022
Letters of guarantee(1) 8,339 6,618
Backstop liquidity, credit enhancement facilities and
other(1) 10,101 8,707
Securities lending 147 180
====== =====
(1) For additional information on allowances for credit losses related to off-balance-sheet commitments, see Note 7 to these consolidated financial statements.
Letters of Guarantee
In the normal course of business, the Bank issues letters of guarantee. These letters of guarantee represent irrevocable commitments that the Bank will make payments in the event that a client cannot meet its obligations to third parties. The Bank's policy for requiring collateral security with respect to letters of guarantee is similar to that for loans. Generally, the term of these letters of guarantee is less than two years.
Backstop Liquidity and Credit Enhancement Facilities
Facilities to Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing asset-backed commercial paper. The Bank provides backstop liquidity facilities to these multi-seller conduits. As at October 31, 2023, the notional amount of the global-style backstop liquidity facilities totalled $4.6 billion ($3.2 billion as at October 31, 2022), representing the total amount of commercial paper outstanding.
These backstop liquidity facilities can be drawn if the conduits are unable to access the commercial paper market, even if there is no general market disruption. These facilities have terms of less than one year and can be periodically renewed. The terms and conditions of these backstop liquidity facilities do not require the Bank to advance money to the conduits if the conduits are insolvent or involved in bankruptcy proceedings or to fund non-performing assets beyond the amount of the available credit enhancements. The backstop liquidity facilities provided by the Bank have not been drawn to date.
Note 26 - Guarantees, Commitments and Contingent Liabilities (cont.)
The Bank also provides credit enhancement facilities to these multi-seller conduits. These facilities have terms of less than one year and are automatically renewable unless the Bank sends a non-renewal notice. As at October 31, 2023 and 2022, the committed notional value for these facilities was $30 million. To date, the credit enhancement facilities provided by the Bank have not been drawn.
The maximum risk of loss for the Bank cannot exceed the total amount of commercial paper outstanding, i.e., $4.6 billion as at October 31, 2023 ($3.2 billion as at October 31, 2022). As at October 31, 2023, the Bank held $67 million ($35 million as at October 31, 2022) of this commercial paper and, consequently, the maximum potential amount of future payments, taking into account the credit enhancement facilities, was $4.5 billion ($3.2 billion as at October 31, 2022).
CDCC Overnight Liquidity Facility
Canadian Derivatives Clearing Corporation (CDCC) acts as a central clearing counterparty for multiple financial instrument transactions in Canada. Certain fixed-income clearing members of CDCC have provided an equally shared committed and uncommitted global overnight liquidity facility for the purpose of supporting CDCC in its clearing activities of securities purchased under reverse repurchase agreements or sold under repurchase agreements. The objective of this facility is to maintain sufficient liquidity in the event of a clearing member's default. As a fixed-income clearing member providing support to CDCC, the Bank provided a liquidity facility. As at October 31, 2023, the notional amount of the overnight uncommitted liquidity facility amounted to $5.6 billion ($5.6 billion as at October 31, 2022). As at October 31, 2023 and 2022, no amount had been drawn.
Securities Lending
Under securities lending agreements that the Bank has entered into with certain clients who have entrusted it with the safekeeping of their securities, the Bank lends the securities to third parties and indemnifies its clients in the event of loss. To protect itself against any contingent loss, the Bank obtains, as security from the borrower, a cash amount or extremely liquid marketable securities with a fair value greater than that of the securities loaned. No amount has been recognized on the Consolidated Balance Sheet with respect to potential indemnities resulting from securities lending agreements.
Other Indemnification Agreements
In the normal course of business, including securitization transactions and discontinuances of businesses and operations, the Bank enters into numerous contractual agreements under which it undertakes to compensate the counterparty for costs incurred as a result of litigation, changes in laws and regulations (including tax legislation), claims with respect to past performance, incorrect representations or the non-performance of certain restrictive covenants. The Bank also undertakes to indemnify any person acting as a director or officer or performing a similar function within the Bank or one of its subsidiaries or another entity, at the request of the Bank, for all expenses incurred by that person in proceedings or investigations to which he or she is party in that capacity. Moreover, as a member of a securities transfer network and pursuant to the membership agreement and the regulations governing the operation of the network, the Bank granted collateral in favour of the Bank of Canada to guarantee any obligation of the Bank towards the Bank of Canada that could result from the Bank's participation in the securities transfer network. The durations of the indemnification agreements vary according to circumstance; as at October 31, 2023 and 2022, given the nature of the agreements, the Bank is unable to make a reasonable estimate of the maximum potential liability it could be required to pay to counterparties. No amount related to these agreements has been recognized on the Consolidated Balance Sheet.
Commitments
Credit Instruments
In the normal course of business, the Bank enters into various off-balance-sheet commitments. The credit instruments used to meet the financing needs of its clients represent the maximum amount of additional credit that the Bank could be obligated to extend if the commitments were fully drawn.
As at October 31 2023 2022
Letters of guarantee(1) 8,339 6,618
Documentary letters of credit(2) 157 161
Credit card receivables(3) 9,802 9,337
Commitments to extend credit(3) 90,706 82,117
====== ======
(1) See the Letters of Guarantee item on the previous page.
(2) Documentary letters of credit are documents issued by the Bank and used in international trade to enable a third party to present a payment request to the Bank for up to an amount established under specific terms and conditions; these instruments are collateralized by the delivery of the goods to which they are related.
(3) Credit card receivables and commitments to extend credit represent unused portions of authorizations to extend credit, under certain conditions, in the form of loans or bankers' acceptances.
Financial Assets Received as Collateral
As at October 31, 2023, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge was $87.9 billion ($92.3 billion as at October 31, 2022). These financial assets received as collateral consist of securities related to securities financing and derivative transactions as well as securities purchased under reverse repurchase agreements and securities borrowed.
Other Commitments
The Bank acts as an investor in investment banking activities whereby it enters into agreements to finance external private equity funds and investments in equity and debt securities at market value at the time the agreements are signed. In connection with these activities, the Bank had commitments to invest up to $127 million as at October 31, 2023 ($102 million as at October 31, 2022). In addition, through one of its subsidiaries, the Bank purchases retail loans originated by other financial institutions at market value at the time of purchase. As at October 31, 2023, the Bank had commitments to purchase loans of a negligible amount ($60 million as at October 31, 2022).
Pledged Assets
In the normal course of business, the Bank pledges securities and other assets as collateral. A breakdown of encumbered assets pledged as collateral is provided in the following table. These transactions are concluded in accordance with standard terms and conditions.
As at October 31 2023 2022
Assets pledged to
Bank of Canada 300 325
Direct clearing organizations(1) 3,046 1,634
Assets pledged in relation to
Derivative financial instrument transactions 6,628 5,368
Borrowing, securities lending and securities sold under
reverse repurchase agreements 85,673 68,458
Securitization transactions 25,088 26,361
Covered bonds(2) 12,120 11,590
Other 752 159
--------------------------------------------------------- ------- -------
Total 133,607 113,895
======= =======
(1) Includes assets pledged as collateral for activities in the systemically important payment system (designated as Lynx) as at October 31, 2023 and 2022.
(2) The Bank has a covered bond program. For additional information, see Notes 13 and 27 to these consolidated financial statements.
Contingent Liabilities
Litigation
In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment portfolios, and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions, or other legal remedies of varied natures.
More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal proceeding involving the Bank are as follows:
Defrance
On January 21, 2019, the Quebec Superior Court authorized a class action against the National Bank and several other Canadian financial institutions. The originating application was served to the Bank on April 23, 2019. The class action was initiated on behalf of consumers residing in Quebec. The plaintiffs allege that non-sufficient funds charges, billed by all of the defendants when a payment order is refused due to non-sufficient funds, are illegal and prohibited by the Consumer Protection Act. The plaintiffs are claiming, in the form of damages, the repayment of these charges as well as punitive damages.
It is impossible to determine the outcome of the claims instituted or which may be instituted against the Bank and its subsidiaries. The Bank estimates, based on the information at its disposal, that while the amount of contingent liabilities pertaining to these claims, taken individually or in the aggregate, could have a material impact on the Bank's consolidated results of operations for a particular period, it would not have a material adverse impact on the Bank's consolidated financial position.
Note 27 - Structured Entities
A structured entity is an entity created to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate solely to administrative tasks and the relevant activities are directed by means of contractual arrangements. Structured entities are assessed for consolidation in accordance with the accounting treatment described in Note 1 to these consolidated financial statements. The Bank's maximum exposure to loss resulting from its interests in these structured entities consists primarily of the investments in these entities, the fair value of derivative financial instrument contracts entered into with them, and the backstop liquidity and credit enhancement facilities granted to certain structured entities.
In the normal course of business, the Bank may enter into financing transactions with third-party structured entities, including commercial loans, reverse repurchase agreements, prime brokerage margin lending, and similar collateralized lending transactions. While such transactions expose the Bank to the counterparty credit risk of the structured entities, this exposure is mitigated by the collateral related to these transactions. The Bank typically has neither power nor significant variable returns resulting from financing transactions with structured entities and does not consolidate such entities. Financing transactions with third-party-sponsored structured entities are included in the Bank's consolidated financial statements and are not included in the table accompanying this note on the next page.
Non-Consolidated Structured Entities
Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the assets acquired. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs, while continuing to manage the financial assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The Bank acts as a financial agent and provides these conduits with administrative and transaction structuring services as well as backstop liquidity and credit enhancement facilities under the commercial paper program. These facilities are presented and described in Note 26. The Bank has concluded derivative financial instrument contracts with these conduits, the fair value of which is presented on the Bank's Consolidated Balance Sheet. Although the Bank has the ability to direct the relevant activities of these conduits, it cannot use its power to affect the amount of the returns it obtains, as it acts as an agent. Consequently, the Bank does not control these conduits and does not consolidate them.
Investment Funds
The Bank enters into derivative or other financial instrument contracts with third parties to provide them with the desired exposure to certain investment funds. The Bank economically hedges the risks related to these derivatives by investing in those investment funds. The Bank can also hold economic interests in certain investment funds as part of its investing activities. In addition, the Bank is sponsor and investment manager of mutual funds in which it has insignificant or no interest. The Bank does not control the funds where its holdings are not significant given that, in these circumstances, the Bank either acts only as an agent or does not have any power over the relevant activities. In both cases, it does not have significant exposure to the variable returns of the funds. Therefore, the Bank does not consolidate these funds.
Private Investments
The Bank invests in several limited liability partnerships and other incorporated entities. These investment companies in turn invest in operating companies with a view to reselling these investments at a profit over the medium or long term. The Bank does not intervene in the operations of these entities; its only role is that of an investor. Consequently, it does not control these companies and does not consolidate them.
Third-Party Structured Entities
The Bank has invested in third-party structured entities, some of which are asset-backed. The underlying assets consist of residential mortgages, consumer loans, equipment loans, leases, and securities. The Bank does not have the ability to direct the relevant activities of these structured entities and has no exposure to their variable returns, other than the right to receive interest income and dividend income from its investments. Consequently, the Bank does not control these structured entities and does not consolidate them.
The following table presents the carrying amounts of the assets and liabilities relating to the Bank's interests in non-consolidated structured entities, the Bank's maximum exposure to loss from these interests, as well as the total assets of these structured entities. The structured entity Canada Housing Trust is not presented. For additional information, see Note 8 to these consolidated financial statements.
As at October 31, 2023
Third-party
Multi-seller Investment Private structured
conduits funds investments entities
(1) (2) (3) (4)
Assets on the Consolidated Balance Sheet
Securities at fair value through profit
or loss 67 1,042 92 -
Securities at amortized cost - - - 3,106
Derivative financial instruments - - - 341
67 1,042 92 3,447
As at October 31, 2022 35 335 77 5,201
Liabilities on the Consolidated Balance
Sheet
Derivative financial instruments (82) - - (90)
(82) - - (90)
As at October 31, 2022 (71) - - (91)
Maximum exposure to loss
Securities 67 1,042 92 3,447
Liquidity, credit enhancement facilities
and commitments 4,549 - - 469
4,616 1,042 92 3,916
-----------------------------------------
As at October 31, 2022 3,190 335 77 5,669
Total assets of the structured entities 4,587 2,583 651 11,390
As at October 31, 2022 3,183 1,772 535 11,197
(1) The main underlying assets, located in Canada, are residential mortgages, automobile loans, automobile inventory financings, and other receivables. As at October 31, 2023, the notional committed amount of the global-style liquidity facilities totalled $4.6 billion ($3.2 billion as at October 31, 2022 ), representing the total amount of commercial paper outstanding. The Bank also provides series-wide credit enhancement facilities for a notional committed amount of $30 million ($30 million as at October 31, 2022 ). The maximum exposure to loss cannot exceed the amount of commercial paper outstanding. As at October 31, 2023, the Bank held $67 million in commercial paper ($35 million as at October 31, 2022 ) and, consequently, the maximum potential amount of future payments as at October 31, 2023 was limited to $4.5 billion ($3.2 billion as at October 31, 2022 ), which represents the undrawn liquidity and credit enhancement facilities.
(2) The underlying assets are various financial instruments and are presented on a net asset basis. Certain investment funds are in a trading portfolio.
(3) The underlying assets are private investments. The amount of total assets of the structured entities corresponds to the amount for the most recent available period.
(4) The underlying assets are residential mortgages, consumer loans, equipment loans, leases, and securities.
Consolidated Structured Entities
Securitization Entity for the Bank's Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II (CCCT II) to continue its credit card securitization program on a revolving basis and to use the entity for capital management and funding purposes.
The Bank provides first-loss protection against the losses, since it retains the excess spread from the portfolio of sold receivables. The excess spread represents the residual net interest income after all the expenses related to this structure have been paid. The Bank also provides second-loss protection as it holds subordinated notes issued by CCCT II. In addition, the Bank acts as an administrative agent and servicer and as such is responsible for the daily administration and management of CCCT II's credit card receivables. The Bank therefore has the ability to direct the relevant activities of CCCT II and can exercise its power to affect the amount of returns it obtains. Consequently, the Bank controls CCCT II and consolidates it.
Multi-Seller Conduit
The Bank administers a multi-seller conduit that purchases various financial assets from clients and finances those purchases by issuing debt securities (including commercial paper) backed by the assets acquired. The clients use this multi-seller conduit to diversify their funding sources and reduce borrowing costs, while continuing to manage the financial assets and providing some amount of first-loss protection. The Bank holds the sole note issued by the conduit and has concluded a derivative financial instrument contract with the conduit. The Bank controls the relevant activities of this conduit through its involvement as a financial agent, agent for administrative and transaction structuring services as well as investor in the conduit's sole note. The Bank's functions and investment in the conduit confer to it decision-making power over the composition of assets acquired by the conduit and the selection of the seller as well as some exposure to the conduit's variable returns. Therefore, the Bank consolidates this conduit.
Note 27 - Structured Entities (cont.)
Investment Funds
The Bank enters into derivative or other financial instrument contracts with third parties to provide them with the desired exposure to certain investment funds. The Bank economically hedges the risks related to these derivatives by investing in those investment funds. The Bank can also hold economic interests in certain investment funds as part of its investing activities. The Bank controls the relevant activities of certain funds through its involvement as an investor and its significant exposure to their variable returns. Therefore, the Bank consolidates these funds.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC Covered Bond Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. The Bank acts as manager of the partnership and has decision-making authority over its relevant activities in accordance with the contractual terms governing the covered bond legislative program. In addition, the Bank is able, in accordance with the contractual terms governing the covered bond legislative program, to affect the variable returns of the partnership, which are directly related to the return on the mortgage loan portfolio and the interest on the loans from the Bank. Consequently, the Bank controls the partnership and consolidates it.
Third-Party Structured Entities
In 2018, the Bank, through one of its subsidiaries, provided financing to a third-party structured entity in exchange for a 100% interest in a loan portfolio, the sole asset held by that entity. The Bank controls and therefore consolidates the structured entity, as it has the ability to direct the entity's relevant activities through its involvement in the decision-making process. The Bank is also exposed to the entity's variable returns.
The following table presents the Bank's investments and other assets in the consolidated structured entities as well as the total assets of these entities.
As at October 31 2023 2022
Investments Total Investments
and other assets and other Total
assets (1) assets assets(1)
Consolidated structured entities
Securitization entity for the Bank
' s credit card receivables(2)(3) 2,176 2,272 1,916 2,073
Multiseller conduit(4) 1,655 1,655 802 802
Investment funds(5) 26 26 56 56
Covered bonds(6) 20,458 20,869 17,900 18,237
Third-party structured entities(7) 147 147 166 166
----------- ----------- ----------
24,462 24,969 20,840 21,334
=================================== =========== =========== ==========
(1) There are restrictions, arising essentially from regulatory requirements, corporate or securities laws, and contractual arrangements, that limit the ability of some of the Bank's consolidated structured entities to transfer funds to the Bank.
(2) The underlying assets are credit card receivables. (3) The Bank's investment is presented net of third-party holdings. (4) The underlying assets, located in Canada, are mainly residential mortgages.
(5) The underlying assets are various financial instruments and are presented on a net asset basis. Certain investment funds are in a trading portfolio.
(6) The underlying assets are uninsured residential mortgage loans of the Bank. The average maturity of these underlying assets is two years. As at October 31, 2023, the total amount of transferred mortgage loans was $20.6 billion ($17.9 billion as at October 31, 2022), and the total amount of covered bonds of $10.9 billion was recognized in Deposits on the Consolidated Balance Sheet ($10.4 billion as at October 31, 2022). For additional information, see Note 13 to these consolidated financial statements.
(7) The underlying assets consist of a loan portfolio.
Note 28 - Related Party Disclosures
In the normal course of business, the Bank provides various banking services to related parties and enters into contractual agreements and other operations with related parties. The Bank considers the following to be related parties:
-- its key officers and directors and members of their immediate family, i.e., spouses and children under 18 living in the same household;
-- entities over which its key officers and directors and their immediate family have control or significant influence through their significant voting power;
-- the Bank's associates and joint ventures;
-- the Bank's pension plans (for additional information, see Note 23 to these consolidated financial statements).
According to the established definition, the Bank's key officers are those persons having authority and responsibility for planning, directing, and controlling the Bank's activities, directly or indirectly.
Related Party Transactions
As at October 31
========= ======== ====== ===== ===== ====
Key officers
and directors(1) Related entities
2023 2022 2023 2022
=============================== ========= ========
Assets
Mortgage loans and other loans 24 22 223 (2) 449 (2)
--------- ------ ----- ----- ----
Liabilities
Deposits 45 58 230 (3) 80 (3)
Other - - 3 6
========= ====== ===== ===== ====
(1) As at October 31, 2023, key officers and directors and their immediate family members were holding $28 million of the Bank's common and preferred shares ($68 million as at October 31, 2022).
(2) As at October 31, 2023, mortgage loans and other loans consisted of: (i) $7 million in loans to the Bank's associates ($1 million as at October 31, 2022) and (ii) $216 million in loans to entities over which the Bank's key officers or directors or their immediate family members exercise control or significant influence through significant voting power ($448 million as at October 31, 2022).
(3) As at October 31, 2023, deposits consisted of: (i) $1 million in deposits to the Bank's associates (nil as at October 31, 2022) and (ii) $229 million in deposits from entities over which the Bank's key officers or directors and their immediate family members exercise control or significant influence through significant voting power ($80 million as at October 31, 2022).
The contractual agreements and other transactions with related entities as well as with directors and key officers are entered into under conditions similar to those offered to non-related third parties. These agreements did not have a significant impact on the Bank's results. The Bank also offers a deferred stock unit plan to directors who are not Bank employees. For additional information, see Notes 9, 22 and 27 to these consolidated financial statements.
Compensation of Key Officers and Directors
Year ended October 31 2023 2022 Compensation and other short-term and long-term benefits 24 24 Share-based payments 26 21 ========================================================== ==== ====
Note 28 - Related Party Disclosures (cont.)
Principal Subsidiaries of the Bank (1)
As at October
31, 2023
Principal office Voting Investment
Name Business activity address shares(2) at cost
Canada and United States
National Bank Acquisition
Holding Inc. Holding company Montreal, Canada 100% 1,785
National Bank Financial
Inc. Investment dealer Montreal, Canada 100%
NBF International
Holdings
Inc. Holding company Montreal, Canada 100%
National Bank of Canada
Financial New York, NY,
Group Inc. Holding company United States 100%
Atlanta, GA, United
Credigy Ltd. Holding company States 100%
National Bank of
Canada New York, NY,
Financial Inc. Investment dealer United States 100%
National Bank Investments Mutual funds
Inc. dealer Montreal, Canada 100% 441
National Bank Life
Insurance
Company Insurance Montreal, Canada 100%
Natcan Trust Company Trustee Montreal, Canada 100% 238
National Bank Trust Inc. Trustee Montreal, Canada 100% 195
National Bank Realty Inc. Real estate Montreal, Canada 100% 80
Hollywood, FL,
NatBC Holding Corporation Holding company United States 100% 44
Natbank, National Hollywood, FL,
Association Commercial bank United States 100%
Information
Flinks Technology Inc. technology Montreal, Canada 86% 144
Other countries
Natcan Global Holdings
Ltd. Holding company Sliema, Malta 100% 22
NBC Global Finance
Limited Investment services Dublin, Ireland 100%
NBC Financial Markets Asia
Limited Investment dealer Hong Kong, China 100% 5
Advanced Bank of Asia
Limited Commercial bank Phnom Penh, Cambodia 100% 941
Information
ATA IT Ltd. technology Bangkok, Thailand 100% 3
========== ==========
(1) Excludes consolidated structured entities. For additional information, see Note 27 to these consolidated financial statements.
(2) The Bank's percentage of voting rights in these subsidiaries.
Note 29 - Management of the Risks Associated With Financial Instruments
The Bank is exposed to credit risk, market risk, and liquidity and funding risk. The Bank's objectives, policies, and procedures for managing risk and the risk measurement methods are presented in the Risk Management section of the MD&A for the year ended October 31, 2023. Text in grey shading and tables identified with an asterisk (*) in the Risk Management section of the MD&A for the year ended October 31, 2023 are integral parts of these consolidated financial statements.
Residual Contractual Maturities of Balance Sheet Items and Off-Balance-Sheet Commitments
The following tables present balance sheet items and off-balance-sheet commitments by residual contractual maturity as at October 31, 2023 and 2022. The information gathered from this maturity analysis is a component of liquidity and funding management. However, this maturity profile does not represent how the Bank manages its interest rate risk nor its liquidity risk and funding needs. The Bank considers factors other than contractual maturity when assessing liquid assets or determining expected future cash flows.
In the normal course of business, the Bank enters into various off-balance-sheet commitments. The credit instruments used to meet the funding needs of its clients represent the maximum amount of additional credit that the Bank could be obligated to extend if the commitments were fully drawn.
The Bank also has future minimum commitments under leases for premises as well as under other contracts, mainly commitments to purchase loans and contracts for outsourced information technology services. Most of the lease commitments are related to operating leases.
As at October 31, 2023
Over Over Over Over Over
1 3 6 9 1 Over
1 month months months months year 2
month to to to to to years Over No
or 3 6 9 12 2 to 5 specified
less months months months months years 5 years years maturity Total
Assets
Cash and deposits
with financial
institutions 25,374 448 354 50 216 - - - 8,792 35,234
Securities
At fair value
through
profit or loss 694 258 1,663 1,758 2,260 3,667 10,823 12,813 66,058 99,994
At fair value
through
other
comprehensive
income 3 30 154 224 426 538 4,548 2,660 659 9,242
At amortized cost 4 158 508 338 1,399 4,110 4,713 1,352 - 12,582
701 446 2,325 2,320 4,085 8,315 20,084 16,825 66,717 121,818
Securities
purchased
under
reverse
repurchase
agreements and
securities
borrowed 2,275 1,641 716 72 416 693 - - 5,447 11,260
Loans (1)
Residential
mortgage 1,409 1,250 1,990 3,126 2,990 15,339 51,112 9,089 542 86,847
Personal 613 637 1,060 1,271 1,396 6,258 15,656 5,713 13,754 46,358
Credit card 2,603 2,603
Business and
government 21,406 4,262 4,007 3,204 2,783 6,695 11,322 5,414 25,099 84,192
Customers'
liability
under
acceptances 6,191 373 50 13 - - - - - 6,627
Allowances for
credit
losses (1,184) (1,184)
29,619 6,522 7,107 7,614 7,169 28,292 78,090 20,216 40,814 225,443
Other
Derivative
financial
instruments 2,040 1,982 1,367 1,197 611 1,696 2,399 6,224 - 17,516
Investments in
associates
and
joint ventures 49 49
Premises and
equipment 1,592 1,592
Goodwill 1,521 1,521
Intangible assets 1,256 1,256
Other assets(1) 2,639 746 166 1,206 546 597 249 659 1,081 7,889
4,679 2,728 1,533 2,403 1,157 2,293 2,648 6,883 5,499 29,823
62,648 11,785 12,035 12,459 13,043 39,593 100,822 43,924 127,269 423,578
============== ====== ====== ====== ====== ====== ====== ======= ====== ========= =======
(1) Amounts collectible on demand are considered to have no specified maturity.
Note 29 - Management of the Risks Associated With Financial Instruments (cont.)
As at October 31, 2023
Over Over Over Over Over Over
1 3 6 9 1 2
1 month months months months year years
month to to to to to to Over No
or 3 6 9 12 2 5 5 specified
less months months months months years years years maturity Total
==================
Liabilities and
equity
Deposits (1)(2)
Personal 4,648 3,722 4,491 6,056 5,145 8,398 11,635 4,164 39,624 87,883
Business and
government 32,642 10,044 17,495 4,271 3,498 9,127 15,768 5,058 99,425 197,328
Deposit-taking
institutions 646 408 32 109 18 8 15 33 1,693 2,962
37,936 14,174 22,018 10,436 8,661 17,533 27,418 9,255 140,742 288,173
Other
Acceptances 6,191 373 50 13 - - - - - 6,627
Obligations related
to securities sold
short(3) 35 155 129 73 76 347 2,332 4,123 6,390 13,660
Obligations related
to
securities sold
under
repurchase
agreements
and
securities loaned 23,041 2,719 1,040 3,467 - 274 - - 7,806 38,347
Derivative financial
instruments 1,912 2,697 1,186 1,086 467 2,415 3,068 7,057 - 19,888
Liabilities related
to transferred
receivables(4) - 1,760 829 2,142 618 3,915 8,678 7,092 - 25,034
Securitization -
Credit card(5) - - - - - 48 - - - 48
Lease liabilities(5) 9 28 25 24 23 83 197 128 - 517
Other liabilities
- Other items(1)(5) 1,417 309 174 7 27 37 58 105 4,724 6,858
32,605 8,041 3,433 6,812 1,211 7,119 14,333 18,505 18,920 110,979
Subordinated debt - - - - - - - 748 - 748
Equity 23,678 23,678
70,541 22,215 25,451 17,248 9,872 24,652 41,751 28,508 183,340 423,578
Off-balance-sheet
commitments
Letters of guarantee
and
documentary letters
of credit 89 1,287 1,975 2,185 1,490 1,165 255 50 - 8,496
Credit card
receivables(6) 9,802 9,802
Backstop liquidity
and credit
enhancement
facilities(7) - 15 5,552 15 - - - - 4,519 10,101
Commitments to extend
credit(8) 3,186 10,675 8,445 7,562 4,316 4,579 3,312 39 48,592 90,706
Obligations related
to:
Lease commitments(9) 1 1 1 2 2 6 7 1 - 21
Other contracts(10) 11 22 34 33 36 46 138 13 127 460
====== ====== ====== ====== ====== ====== ====== ====== ========= =======
(1) Amounts payable upon demand or notice are considered to have no specified maturity.
(2) The Deposits item is presented in greater detail than it is on the Consolidated Balance Sheet.
(3) Amounts are disclosed according to the residual contractual maturity of the underlying security.
(4) These amounts mainly include liabilities related to the securitization of mortgage loans.
(5) The Other liabilities item is presented in greater detail than it is on the Consolidated Balance Sheet.
(6) These amounts are unconditionally revocable at the Bank's discretion at any time.
(7) In the event of payment on one of the backstop liquidity facilities, the Bank will receive as collateral government bonds in an amount up to $5.6 billion.
(8) These amounts include $46.7 billion that is unconditionally revocable at the Bank's discretion at any time.
(9) These amounts include leases for which the underlying asset is of low value and leases other than for real estate of less than one year.
(10) These amounts include $0.1 billion in contractual commitments related to the portion of the head office building under construction.
As at October 31, 2022
Over Over Over Over Over
1 3 6 9 1 Over
1 month months months months year 2
month to to to to to years Over No
or 3 6 9 12 2 to 5 specified
less months months months months years 5 years years maturity Total
Assets
Cash and deposits
with financial
institutions 23,141 142 311 18 685 - - - 7,573 31,870
------ ------ ------ ------ ------ ------ ------- ------ --------- -------
Securities
At fair value
through
profit or loss 1,527 6,450 5,405 2,267 2,337 3,369 8,634 10,661 46,725 87,375
At fair value
through
other
comprehensive
income 5 30 13 20 46 952 4,910 2,296 556 8,828
At amortized cost 602 196 1,876 1,032 95 2,840 5,802 1,073 - 13,516
------ ------ ------ ------ ------ ------ ------- ------ --------- -------
2,134 6,676 7,294 3,319 2,478 7,161 19,346 14,030 47,281 109,719
------ ------ ------ ------ ------ ------ ------- ------ --------- -------
Securities
purchased
under
reverse
repurchase
agreements and
securities
borrowed 12,489 1,231 890 - 409 1,044 - - 10,423 26,486
------ ------ ------ ------ ------ ------ ------- ------ --------- -------
Loans (1)
Residential
mortgage 1,155 1,124 1,899 2,716 2,364 8,910 53,335 8,059 567 80,129
Personal 423 449 878 1,208 1,036 3,701 17,792 5,085 14,751 45,323
Credit card 2,389 2,389
Business and
government 19,980 3,491 3,971 3,586 2,604 6,167 11,452 2,985 19,081 73,317
Customers '
liability
under
acceptances 5,967 554 20 - - - - - - 6,541
Allowances for
credit
losses (955) (955)
------ ------ ------ ------ ------ ------ ------- ------
27,525 5,618 6,768 7,510 6,004 18,778 82,579 16,129 35,833 206,744
------ ------ ------ ------ ------ ------ ------- ------ --------- -------
Other
Derivative
financial
instruments 2,046 2,804 1,853 1,190 698 1,742 5,182 3,032 - 18,547
Investments in
associates
and
joint ventures 140 140
Premises and
equipment 1,397 1,397
Goodwill 1,519 1,519
Intangible assets 1,360 1,360
Other assets(1) 2,228 527 472 161 94 502 107 491 1,376 5,958
------ ------ ------ ------ ------ ------ ------- ------ --------- -------
4,274 3,331 2,325 1,351 792 2,244 5,289 3,523 5,792 28,921
------ ------ ------ ------ ------ ------ ------- ------ --------- -------
69,563 16,998 17,588 12,198 10,368 29,227 107,214 33,682 106,902 403,740
==============
(1) Amounts collectible on demand are considered to have no specified maturity.
Note 29 - Management of the Risks Associated With Financial Instruments (cont.)
As at October 31, 2022
Over Over Over Over Over Over
1 3 6 9 1 2
1 month months months months year years
month to to to to to to Over No
or 3 6 9 12 2 5 5 specified
less months months months months years years years maturity Total
================== ====== ====== ====== ====== ====== ====== ====== ====== ========= =======
Liabilities and
equity
Deposits (1)(2)
Personal 1,482 1,493 2,955 6,013 6,141 6,418 7,942 4,252 42,115 78,811
Business and
government 36,864 11,605 10,644 4,875 3,728 5,988 13,659 4,227 92,640 184,230
Deposit-taking
institutions 724 624 54 122 30 - 7 36 1,756 3,353
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
39,070 13,722 13,653 11,010 9,899 12,406 21,608 8,515 136,511 266,394
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Other
Acceptances 5,967 554 20 - - - - - - 6,541
Obligations related
to securities sold
short(3) 428 394 634 74 920 1,493 3,948 6,386 7,540 21,817
Obligations related
to
securities sold
under
repurchase
agreements
and
securities loaned 16,233 5,445 1,567 3,406 - 22 - - 6,800 33,473
Derivative financial
instruments 2,584 2,302 1,640 1,009 595 2,047 3,570 5,885 - 19,632
Liabilities related
to transferred
receivables(4) - 2,672 422 1,329 2,288 4,558 9,612 5,396 - 26,277
Securitization -
Credit card(5) - - - 29 - - 49 - - 78
Lease liabilities(5) 8 16 23 23 24 87 219 152 - 552
Other liabilities
- Other items(1)(5) 1,076 46 99 23 39 27 42 92 4,287 5,731
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
26,296 11,429 4,405 5,893 3,866 8,234 17,440 17,911 18,627 114,101
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Subordinated debt - - - - - - - 1,499 - 1,499
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
Equity 21,746 21,746
------ ------ ------ ------ ------ ------ ------ ------ --------- -------
65,366 25,151 18,058 16,903 13,765 20,640 39,048 27,925 176,884 403,740
Off-balance-sheet
commitments
Letters of guarantee
and
documentary letters
of credit 180 1,451 1,338 982 1,398 1,292 138 - - 6,779
Credit card
receivables(6) 9,337 9,337
Backstop liquidity
and credit
enhancement
facilities(7) - 15 5,552 15 - - - - 3,125 8,707
Commitments to extend
credit(8) 3,126 9,205 6,179 6,678 3,270 4,066 3,186 39 46,368 82,117
Obligations related
to:
Lease commitments(9) 1 1 2 2 2 6 9 8 - 31
Other contracts(10) 38 42 47 46 47 21 34 - 102 377
(1) Amounts payable upon demand or notice are considered to have no specified maturity.
(2) The Deposits item is presented in greater detail than it is on the Consolidated Balance Sheet.
(3) Amounts have been disclosed according to the residual contractual maturity of the underlying security.
(4) These amounts mainly include liabilities related to the securitization of mortgage loans.
(5) The Other liabilities item is presented in greater detail than it is on the Consolidated Balance Sheet.
(6) These amounts are unconditionally revocable at the Bank's discretion at any time.
(7) In the event of payment on one of the backstop liquidity facilities, the Bank will receive as collateral government bonds in an amount up to $5.6 billion.
(8) These amounts include $44.8 billion that is unconditionally revocable at the Bank's discretion at any time.
(9) These amounts include leases for which the underlying asset is of low value and leases other than for real estate of less than one year.
(10) These amounts include $0.2 billion in contractual commitments related to the head office building under construction.
Note 30 - Segment Disclosures
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other heading. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy. The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the fiscal year beginning November 1, 2022. This presentation reflects a revision to the method used for the sectoral allocation of technology investment expenses, which are now immediately allocated to the various business segments, whereas certain expenses, notably costs incurred during the research phase of projects, had previously been recorded in the Other heading of segment results. This revision is consistent with the accounting policy change applied in fiscal 2022 related to cloud computing arrangements.
Personal and Commercial
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals, advisors and businesses as well as insurance operations.
Wealth Management
The Wealth Management segment comprises investment solutions, trust services, banking services, lending services and other wealth management solutions offered through internal and third-party distribution networks.
Financial Markets
The Financial Markets segment encompasses corporate banking and investment banking and financial solutions for large and mid-size corporations, public sector organizations, and institutional investors.
U.S. Specialty Finance and International (USSF&I)
The USSF&I segment encompasses the specialty finance expertise provided by the Credigy subsidiary; the activities of the ABA Bank subsidiary, which offers financial products and services to individuals and businesses in Cambodia; and the activities of targeted investments in certain emerging markets.
Other
This heading encompasses treasury activities; liquidity management; Bank funding; asset/liability management activities; the activities of the Flinks subsidiary, a fintech company specialized in financial data aggregation and distribution; certain specified items; and the unallocated portion of corporate units.
The segment disclosures are prepared in accordance with the accounting policies described in Note 1 to these consolidated financial statements, except for the net interest income, non-interest income, and income taxes (recovery) of the operating segments, which are presented on a taxable equivalent basis. Taxable equivalent basis is a calculation method that consists of grossing up certain revenues taxed at lower rates (notably dividends) by the income tax to a level that would make it comparable to revenues from taxable sources in Canada. An equivalent amount is added to income taxes (recovery). The effect of these adjustments is reversed under the Other heading. Operations support charges are allocated to each operating segment presented in the business segment results. The Bank assesses performance based on the net income attributable to the Bank's shareholders and holders of other equity instruments. Intersegment revenues are recognized at the exchange amount.
Note 30 - Segment Disclosures (cont.)
Results by Business Segment
Year ended October
31(1)
Personal Wealth Financial
and Commercial Management Markets USSF&I Other Total
2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022
Net interest
income(2) 3,321 2,865 778 594 (1,054) 1,258 1,132 1,090 (591) (536) 3,586 5,271
Non-interest
income(2)(3) 1,195 1,169 1,743 1,781 3,710 1,210 77 20 (141) 201 6,584 4,381
------- ----- ------- ------ ------ -------
Total revenues 4,516 4,034 2,521 2,375 2,656 2,468 1,209 1,110 (732) (335) 10,170 9,652
Non-interest
expenses(4)(5)(6)(7) 2,510 2,241 1,534 1,417 1,161 1,029 402 344 194 199 5,801 5,230
------- ----- ------- ------ ------ -------
Income before
provisions for
credit losses
and income taxes 2,006 1,793 987 958 1,495 1,439 807 766 (926) (534) 4,369 4,422
Provisions for
credit losses 238 97 2 3 39 (23) 113 66 5 2 397 145
------- ----- ------ ------ -------
Income before
income taxes
(recovery) 1,768 1,696 985 955 1,456 1,462 694 700 (931) (536) 3,972 4,277
Income taxes
(recovery)(2)(8) 486 449 271 254 401 388 146 143 (667) (340) 637 894
------- ----- ------- ------ -------
Net income 1,282 1,247 714 701 1,055 1,074 548 557 (264) (196) 3,335 3,383
Non-controlling
interests - - - - - - - - (2) (1) (2) (1)
------- ----- ------- ------
Net income
attributable
to the
Bank's shareholders
and
holders of other
equity
instruments 1,282 1,247 714 701 1,055 1,074 548 557 (262) (195) 3,337 3,384
------- ----- ------- ------ -------
Average assets(9) 148,511 140,300 8,560 8,440 180,837 154,349 23,007 18,890 69,731 71,868 430,646 393,847
------- ----- ------- ------ ------ -------
Total assets 154,728 146,668 8,666 8,486 178,784 157,803 25,308 21,217 56,092 69,566 423,578 403,740
(1) For the year ended October 31, 2022, certain amounts were reclassified, notably due to a revised method for the sectoral allocation of technology investment expenses.
(2) For the year ended October 31, 2023, Net interest income was grossed up by $ 332 million ($ 234 million in 2022), Non-interest income was grossed up by $ 247 million ($ 48 million in 2022), and an equivalent amount was recognized in Income taxes (recovery). The effects of these adjustments have been reversed under the Other heading.
(3) For the year ended October 31, 2023, the Bank concluded that it had lost significant influence over TMX and therefore ceased using the equity method to account for this investment. The Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Upon the fair value measurement, a $91 million gain was recorded in the Non-interest income item of the Other heading.
(4) For the year ended October 31, 2023, the Bank recorded $75 million in intangible asset impairment losses on technology development in the Non-interest expenses item of the following segments: Personal and Commercial ($59 million), Wealth Management ($8 million), Financial Markets ($7 million), and in the Other heading ($1 million) . Moreover, it recorded $11 million in premises and equipment impairment losses related to right-of-use assets in the Non-interest expenses item of the Other heading .
(5) For the year ended October 31, 2023, the Bank recorded $35 million in litigation expenses to resolve litigations and other disputes arising from various ongoing or potential claims against the Bank in the Non-interest expenses item of the Wealth Management segment.
(6) For the year ended October 31, 2023, the Non-interest expenses item of the Other heading included an expense of $25 million related to the retroactive impact of the changes to the Excise Tax Act, indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax (HST).
(7) For the year ended October 31, 2023, the Bank recorded in the Non-interest expenses item $15 million in charges for (i) contract termination penalties (Personal and Commercial segment: $9 million) and for (ii) provisions for onerous contracts (Other heading: $6 million).
(8) For the year ended October 31, 2023 , the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020 average taxable income above $1 billion, as well as an $8 million tax recovery related to a 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred taxes for fiscal 2022. These items are recorded in the Other heading. For additional information on these tax measures, see Note 24.
(9) Represents an average of the daily balances for the period, which is also the basis on which sectoral assets are reported in the business segments.
Results by Geographic Segment
Year ended October 31
======= ======= ======= ====== ====== ====== ======= =======
Canada United States Other Total
2023 2022 2023 2022 2023 2022 2023 2022
============================== ======= ======= ====== =======
Net interest income 1,901 3,758 1,051 773 634 740 3,586 5,271
Non-interest income(1) 5,812 4,299 98 18 674 64 6,584 4,381
------- ------ ------ -------
Total revenues 7,713 8,057 1,149 791 1,308 804 10,170 9,652
Non-interest
expenses(2)(3)(4)(5) 5,261 4,760 226 209 314 261 5,801 5,230
------- ------ ------ -------
Income before provisions for
credit losses and income taxes 2,452 3,297 923 582 994 543 4,369 4,422
Provisions for credit losses 284 79 81 35 32 31 397 145
------- ------ ------ -------
Income before income taxes 2,168 3,218 842 547 962 512 3,972 4,277
Income taxes(6) 371 723 68 67 198 104 637 894
------- ------ ------ -------
Net income 1,797 2,495 774 480 764 408 3,335 3,383
Non-controlling interests (2) (1) - - - - (2) (1)
------ ------
Net income attributable to
the Bank's shareholders and
holders of other equity
instruments 1,799 2,496 774 480 764 408 3,337 3,384
------- ------ ------ -------
Average assets(7) 355,337 324,415 29,116 29,988 46,193 39,444 430,646 393,847
------- ------ ------ -------
Total assets 348,073 336,215 29,968 27,986 45,537 39,539 423,578 403,740
======= ======= ====== =======
(1) For the year ended October 31, 2023, the Bank concluded that it had lost significant influence over TMX and therefore ceased using the equity method to account for this investment. The Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Following the fair value measurement, a $91 million gain was recorded in the Non-interest income item in Canada .
(2) For the year ended October 31, 2023, the Bank recorded $75 million in intangible asset impairment losses on technology development, and it recorded $11 million in premises and equipment impairment losses related to right-of-use assets in the Non-interest expenses item in Canada .
(3) For the year ended October 31, 2023, the Bank recorded $35 million in litigation expenses to resolve litigations and other disputes arising from various ongoing or potential claims against the Bank in the Non-interest expenses item in Canada .
(4) For the year ended October 31, 2023, the Non-interest expenses item in Canada included an expense of $25 million related to the retroactive impact of the changes to the Excise Tax Act, indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax (HST).
(5) For the year ended October 31, 2023, the Bank recorded, in the Non-interest expenses item in Canada , $15 million in charges for (i) contract termination penalties and for (ii) provisions for onerous contracts.
(6) For the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020 average taxable income above $1 billion, as well as an $8 million tax recovery related to a 1.5% increase in the statutory tax rate, which includes the impact related to current and deferred taxes for fiscal 2022. These items are recorded in Canada. For additional information on these tax measures, see Note 24.
(7) Represents an average of the daily balances for the period.
Note 31 - Event After the Consolidated Balance Sheet Date
Repurchase of Common Shares
On November 30, 2023, the Bank's Board of Directors approved a normal course issuer bid, beginning December 12, 2023, to repurchase for cancellation up to 7,000,000 common shares (representing approximately 2.07% of its then outstanding common shares) over the 12-month period ending December 11, 2024. Any repurchase through the Toronto Stock Exchange will be done at market prices. The common shares may also be repurchased through other means authorized by the Toronto Stock Exchange and applicable regulations, including private agreements or share repurchase programs under issuer bid exemption orders issued by the securities regulators. A private purchase made under an exemption order issued by a securities regulator will be done at a discount to the prevailing market price. The amounts that are paid above the average book value of the common shares are charged to Retained earnings. This normal course issuer bid is subject to the approval of OSFI and the Toronto Stock Exchange (TSX).
Supplementary
Information
Statistical Review 234
Information for Shareholders 236
Statistical Review
As at October 31 or for the year ended October 31(1) (millions of Canadian dollars) 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 ======================= Consolidated Balance Sheet data Cash and deposits with financial institutions 35,234 31,870 33,879 29,142 13,698 12,756 8,802 8,183 7,567 8,086 Securities 121,818 109,719 106,304 102,131 82,226 69,783 65,343 64,541 56,040 52,953 Securities purchased under reverse repurchase agreements and securities borrowed 11,260 26,486 7,516 14,512 17,723 18,159 20,789 13,948 17,702 24,525 Loans and acceptances, net of allowances 225,443 206,744 182,689 164,740 153,251 146,082 136,457 128,036 116,676 106,959 Other assets 29,823 28,921 25,233 20,963 14,475 15,661 14,433 17,498 18,105 12,906 Total assets 423,578 403,740 355,621 331,488 281,373 262,441 245,824 232,206 216,090 205,429 Deposits 288,173 266,394 240,938 215,878 189,566 170,830 156,671 142,066 130,458 119,883 Other liabilities 110,979 114,101 95,233 98,589 75,983 76,539 75,589 77,026 72,755 73,163 Subordinated debt 748 1,499 768 775 773 747 9 1,012 1,522 1,881 Share capital and other equity instruments Preferred shares and other equity instruments 3,150 3,150 2,650 2,950 2,450 2,450 2,050 1,650 1,023 1,223 Common shares 3,294 3,196 3,160 3,057 2,949 2,822 2,768 2,645 2,614 2,293 Contributed surplus 68 56 47 47 51 57 58 73 67 52 Retained earnings 16,744 15,140 12,854 10,307 9,227 8,442 7,703 6,706 6,705 5,850 Accumulated other comprehensive income 420 202 (32) (118) 16 175 168 218 145 289 Non-controlling interests 2 2 3 3 358 379 808 810 801 795 Total liabilities and equity 423,578 403,740 355,621 331,488 281,373 262,441 245,824 232,206 216,090 205,429 Average assets(2) 430,646 393,847 363,506 318,087 286,162 265,940 248,351 235,913 222,929 206,680 Net impaired loans excluding POCI loans(3)(4) under IFRS 9 606 479 283 465 450 404 Net impaired loans excluding POCI loans(4) under IAS 39 206 281 254 248 Consolidated Statement of Income data Net interest income 3,586 5,271 4,783 4,255 3,596 3,382 3,436 3,205 2,929 2,761 Non-interest income 6,584 4,381 4,144 3,672 3,836 3,784 3,173 2,635 2,817 2,703 Total revenues 10,170 9,652 8,927 7,927 7,432 7,166 6,609 5,840 5,746 5,464 Non-interest expenses 5,801 5,230 4,903 4,616 4,375 4,100 3,861 3,875 3,665 3,423 Income before provisions for credit losses and income taxes 4,369 4,422 4,024 3,311 3,057 3,066 2,748 1,965 2,081 2,041 Provisions for credit losses 397 145 2 846 347 327 244 484 228 208 Income taxes 637 894 882 434 443 534 483 225 234 295 Net income 3,335 3,383 3,140 2,031 2,267 2,205 2,021 1,256 1,619 1,538 Non-controlling interests (2) (1) - 42 66 87 84 75 70 69 Net income attributable to the Bank ' s shareholders and holders of other equity instruments 3,337 3,384 3,140 1,989 2,201 2,118 1,937 1,181 1,549 1,469
(1) Certain amounts from fiscal years 2017 to 2021 were adjusted in 2022 to reflect an accounting policy change applicable to cloud computing arrangements, aside from the average assets figures for fiscal years 2017 to 2019.
(2) Represents an average of the daily balances for the period.
(3) Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different criteria. Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and, in this table, the net impaired loans presented exclude POCI loans.
(4) Includes customers' liability under acceptances.
As at October
31(1) 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014
Number of
common
shares(2)
(thousands) 338,285 336,582 337,912 335,998 334,172 335,071 339,592 338,053 337,236 329,297
Basic earnings
per share(2) $ 9.47 $ 9.72$ 8.95$ 5.57$ 6.22$ 5.93$ 5.43$ 3.31$ 4.56$ 4.36
Diluted
earnings
per share(2) $ 9.38 $ 9.61$ 8.85$ 5.54$ 6.17$ 5.86$ 5.37$ 3.29$ 4.51$ 4.32
Dividend per
share(2) $ 3.98 $ 3.58$ 2.84$ 2.84$ 2.66$ 2.44$ 2.28$ 2.18$ 2.04$ 1.88
Share price(2)
High $ 103.58 $ 105.44$ 104.32$ 74.79$ 68.02$ 65.63$ 62.74$ 47.88$ 55.06$ 53.88
Low $ 84.97 $ 83.12$ 65.54$ 38.73$ 54.97$ 58.69$ 46.83$ 35.83$ 40.75$ 41.60
Close $ 86.22 $ 92.76$ 102.46$ 63.94$ 68.02$ 59.76$ 62.61$ 47.88$ 43.31$ 52.68
Book
value(2)(3) $ 60.68 $ 55.24$ 47.44$ 39.56$ 36.64$ 34.31$ 31.50$ 28.52$ 28.26$ 25.76
Dividends on
preferred
shares
Series 16 - - - - - - - - -$ 1.2125
Series 20 - - - - - - - -$ 1.5000$ 1.5000
Series 24 - - - - - - - - -$ 0.4125
Series 26 - - - - - - - - -$ 0.4125
Series 28 - - - - - -$ 0.9500$ 0.9500$ 0.9500$ 0.9500
Series 30 $ 1.0063 $ 1.0063$ 1.0063$ 1.0063$ 1.0156$ 1.0250$ 1.0250$ 1.0250$ 1.0250$ 0.7849
Series 32 $ 0.9598 $ 0.9598$ 0.9598$ 0.9636$ 0.9750$ 0.9750$ 0.9750$ 0.9750$ 1.0760 -
Series 34 - -$ 0.7000$ 1.4000$ 1.4000$ 1.4000$ 1.4000$ 1.1373 - -
Series 36 - -$ 1.0125$ 1.3500$ 1.3500$ 1.3500$ 1.3500$ 0.5733 - -
Series 38 $ 1.7568 $ 1.1125$ 1.1125$ 1.1125$ 1.1125$ 1.1125$ 0.4724 - - -
Series 40 $ 1.3023 $ 1.1500$ 1.1500$ 1.1500$ 1.1500$ 0.9310 - - - -
Series 42 $ 1.2375 $ 1.2375$ 1.2375$ 1.2375$ 1.2375$ 0.5323 - - - -
LRCN interests
Series 1 4.30% 4.30% 4.30% 4.30% - - - - - -
Series 2 4.05% 4.05% 4.05% - - - - - - -
Series 3 7.50% 7.50% - - - - - - - -
-------
Financial
ratios
Return on
common
shareholders
' equity(3) 16.5% 18.8% 20.7% 14.6% 18.0% 18.4% 18.1% 11.7% 16.9% 17.9%
Return on
average
assets(3) 0.77% 0.86% 0.86% 0.64% 0.81% 0.84% 0.81% 0.53% 0.73% 0.74%
-------
Regulatory
ratios under
Basel III
(4)
Capital ratios
CET1 13.5% 12.7% 12.4% 11.8% 11.7% 11.7% 11.2% 10.1% 9.9% 9.2%
Tier 1 16.0% 15.4% 15.0% 14.9% 15.0% 15.5% 14.9 %(5) 13.5% 12.5 %(6) 12.3 %(7)
Total 16.8% 16.9% 15.9% 16.0% 16.1% 16.8% 15.1 %(5) 15.3% 14.0 %(8) 15.1 %(7)
Leverage ratio 4.4% 4.5% 4.4% 4.4% 4.0% 4.0% 4.0% 3.7% 4.0%
-------
TLAC ratio(9) 29.2% 27.7% 26.3% 23.7%
TLAC leverage
ratio(9) 8.0% 8.1% 7.8% 7.0%
-------
Liquidity
coverage
ratio
(LCR)(10) 155% 140% 154% 161% 146% 147% 132% 134% 131%
Net stable
funding ratio
(NSFR)(10) 118% 117% 117%
-------
Other
information
Number of
employees(11) 28,916 27,103 24,495 25,604 24,557 22,426 20,584 20,600 19,026 18,725
Branches in
Canada 368 378 384 403 422 428 429 450 452 452
Banking
machines
in Canada 944 939 927 940 939 937 931 938 930 935
(1) Certain amounts from fiscal years 2017 to 2021 have been adjusted to reflect an accounting policy change in 2022 applicable to cloud computing arrangements, aside from the return on common shareholders' equity and return on average assets figures for fiscal years 2017 to 2019.
(2) The figures for 2014 have been adjusted to reflect the stock dividend paid in 2014.
(3) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(4) Ratios as at October 31, 2022, 2021 and 2020 are calculated in accordance with the Basel III rules, as set out in OSFI's Capital Adequacy Requirements Guideline and Leverage Requirements Guideline, and reflect the transitional measures granted by OSFI.
(5) Taking into account the redemption of the Series 28 preferred shares on November 15, 2017. (6) Taking into account the redemption of the Series 20 preferred shares on November 15, 2015. (7) Taking into account the redemption of the Series 16 preferred shares on November 15, 2014.
(8) Taking into account the redemption of the Series 20 preferred shares on November 15, 2015 and the $500 million redemption of notes on November 2, 2015.
(9) The TLAC ratio and the TLAC leverage ratio are calculated in accordance with OSFI's Total Loss Absorbing Capacity Guideline.
(10) The LCR ratio and the NSFR ratio are calculated in accordance with OSFI's Liquidity Adequacy Requirements Guideline.
(11) Full-time equivalent. The methodology was refined during fiscal 2023 and the fiscal 2022 and 2021 figures have been restated.
Information for Shareholders
Description of Share Capital
The authorized share capital of the Bank consists of an unlimited number of common shares, without par value, an unlimited number of first preferred shares, without par value, issuable for a maximum aggregate consideration of $5 billion, and 15 million second preferred shares, without par value, issuable for a maximum aggregate consideration of $300 million. As at October 31, 2023 , the Bank had a total of 338,284,629 common shares and 66,000,000 first preferred shares issued and outstanding.
Stock Exchange Listings
The Bank's common shares and Series 30, 32, 38, 40 and 42 First Preferred Shares are listed on the Toronto Stock Exchange in Canada.
Issue or class Ticker symbol
Common shares NA
First Preferred Shares
Series 30 NA.PR.S
Series 32 NA.PR.W
Series 38 NA.PR.C
Series 40 NA.PR.E
Series 42 NA.PR.G
=============
Number of Registered Shareholders
As at October 31, 2023, there were 19,881 common shareholders recorded in the Bank's common share register.
Dividends
Dividend Dates in Fiscal 2024
(subject to approval by the Board of Directors of the Bank)
Record date Payment date Common shares December 25, 2023 February 1, 2024 March 25, 2024 May 1, 2024 June 24, 2024 August 1, 2024 September 30, 2024 November 1, 2024 Preferred shares, Series 30, 32, 38, 40 and 42 January 8, 2024 February 15, 2024 April 5, 2024 May 15, 2024 July 8, 2024 August 15, 2024 October 7, 2024 November 15, 2024
Dividends Declared on Common Shares During Fiscal 2023
Dividend per
Record date Payment date share ($)
December 26, February 1,
2022 2023 0.97
March 27, 2023 May 1, 2023 0.97
June 26, 2023 August 1, 2023 1.02
September 25, November 1,
2023 2023 1.02
Dividends Declared on Preferred Shares During Fiscal 2023
Dividend per share
($)
Record Payment Series Series Series Series Series
date date 30 32 38 40 42
======
January February
6, 2023 15, 2023 0.2516 0.2399 0.4392 0.2875 0.3094
April 5, May 15,
2023 2023 0.2515 0.2400 0.4392 0.2875 0.3094
July 6, August
2023 15, 2023 0.2516 0.2399 0.4392 0.3636 0.3093
October November
6, 2023 15, 2023 0.2516 0.2400 0.4392 0.3637 0.3094
=========
Dividends paid are "eligible dividends" in accordance with the Income Tax Act (Canada).
Dividend Reinvestment and Share Purchase Plan
National Bank has a Dividend Reinvestment and Share Purchase Plan for holders of its common and preferred shares under which they can acquire common shares of the Bank without paying commissions or administration fees. Participants acquire common shares through the reinvestment of cash dividends paid on the shares they hold or through optional cash payments of at least $1 per payment, up to a maximum of $5,000 per quarter.
For additional information, shareholders may contact National Bank's registrar and transfer agent, Computershare Trust Company of Canada, at 1--888--838--1407. To participate in the plan, National Bank's beneficial or non-registered common shareholders must contact their financial institution or broker.
Direct Deposit
Shareholders may elect to have their dividend payments deposited directly via electronic funds transfer to their bank account at any financial institution that is a member of the Canadian Payments Association. To do so, they must send a written request to the transfer agent, Computershare Trust Company of Canada.
Head Office
National Bank of Canada
600 De La Gauchetière Street West, 4(th) Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000 Website: nbc.ca
Annual Meeting
The Annual Meeting of Holders of Common Shares of the Bank will be held on April 19, 2024.
Corporate Social Responsibility Statement
The information will be available in March 2024 on the Bank ' s website at nbc.ca.
Communication with Shareholders
For information about stock transfers, address changes, dividends, lost certificates, tax forms and estate transfers, shareholders of record may contact the transfer agent at the following address:
Computershare Trust Company of Canada
Share Ownership Management
100 University Avenue, 8(th) Floor
Toronto, Ontario M5J 2Y1 Canada
Telephone: 1-888-838-1407 Fax: 1-888-453-0330 E-mail: service@computershare.com Website: computershare.com
Shareholders whose shares are held by a market intermediary are asked to contact the market intermediary concerned.
Other shareholder inquiries can be addressed to:
Investor Relations
National Bank of Canada
600 De La Gauchetière Street West, 7(th) Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 1-866-517-5455 E-mail: investorrelations@nbc.ca Website: nbc.ca/investorrelations
Caution Regarding Forward-Looking Statements
From time to time, National Bank of Canada makes written and oral forward--looking statements, including in this Annual Report, in other filings with Canadian regulators, in reports to shareholders, in press releases and in other communications. These statements are made pursuant to the Canadian and American securities legislation.
The Caution Regarding Forward-Looking Statements section can be found on page 13 of this Annual Report.
Trademarks
The trademarks belonging to National Bank of Canada and used in this report include National Bank of Canada, National Bank, NBC, NBC Financial Markets, National Bank Financial, NAventures, National Bank Financial-Wealth Management, Private Banking 1859, National Bank Direct Brokerage, National Bank Investments, NBI, National Bank Independent Network, National Bank Trust, National Bank Life Insurance, Natcan Trust Company, National Bank Realty, Natbank and their respective logos. Certain trademarks owned by third parties are also mentioned in this report.
Pour obtenir une version française du Rapport annuel,
veuillez vous adresser à :
Relations avec les investisseurs
Banque Nationale du Canada
600, rue De La Gauchetière Ouest, 7(e) étage
Montréal (Québec) H3B 4L2 Canada
Téléphone : 1 866 517-5455 Adresse électronique : relationsinvestisseurs@bnc.ca
Legal Deposit
ISBN 978-2-921835-79-4
Legal deposit - Bibliothèque et Archives nationales du Québec, 2023
Legal deposit - Librar y and Archives Canada, 2023
Printing
L'Empreinte
National Bank of Canada participates in a carbon neutral program and purchased carbon credits to offset the greenhouse gases emitted to produce this paper and is proud to help save the environment by using EcoLogo and Forest Stewardship Council(R) (FSC(R) ) certified paper.
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