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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 | 01:00:00 |
From Nov 2023 to May 2024
TIDM32SS
RNS Number : 4454V
National Bank of Canada
01 December 2023
Regulatory Announcement
National Bank of Canada
December 1(st) , 2023
2023 Management's Discussion and Analysis (Part 2)
National Bank of Canada (the "Bank") announces publication of its 2023 Annual Report, including the Management's Discussion and Analysis thereon (the "2023 MD&A"). The 2023 MD&A has been uploaded to the National Storage Mechanism and will shortly be available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism and is available on the Bank's website as part of the 2023 Annual Report at: https://www.nbc.ca/about-us/investors.html
To view the full PDF of the 2023 MD&A, the 2023 Annual Report and the 2023 Annual CEO and CFO Certifications please click on the following link:
http://www.rns-pdf.londonstockexchange.com/rns/4436V_1-2023-12-1.pdf
http://www.rns-pdf.londonstockexchange.com/rns/4436V_2-2023-12-1.pdf
http://www.rns-pdf.londonstockexchange.com/rns/4436V_3-2023-12-1.pdf
Risk Management
Risk-taking is intrinsic to a financial institution's business. The Bank views risk as an integral part of its development and the diversification of its activities. It advocates a risk management approach that is consistent with its business strategy. The Bank voluntarily exposes itself to certain risk categories, particularly credit and market risk, in order to generate revenue. It also assumes certain risks that are inherent to its activities-to which it does not choose to expose itself-and that do not generate revenue, i.e., mainly operational risks. The purpose of sound and effective risk management is to provide reasonable assurance that incurred risks do not exceed acceptable thresholds, to control the volatility in the Bank's results, and to ensure that risk-taking contributes to the creation of shareholder value.
Risk Management Framework
Risk is rigorously managed. Risks are identified, measured, and controlled to achieve an appropriate balance between returns obtained and risks assumed. Decision-making is therefore guided by risk assessments that align with the Bank's risk appetite and by prudent levels of capital and liquidity. Despite the exercise of stringent risk management and existing mitigation measures, risk cannot be eliminated entirely, and residual risks may occasionally cause losses.
The Bank has developed guidelines that support sound and effective risk management and that help preserve its reputation, brand, and long-term viability:
-- risk is everyone's business: the business units, the risk management and oversight functions, and Internal Audit all play an important role in ensuring a risk management framework is in place; operational transformations and simplifications are conducted without compromising rigorous risk management;
-- client-centric: having quality information is key to understanding clients, effectively managing risk, and delivering excellent client service;
-- enterprise-wide: a good understanding and an integrated view of risk are the basis for sound and effective risk management and decision-making by management;
-- human capital: the Bank's employees are engaged, experienced, and have a high level of expertise; their curiosity supports continuous development and their rigour ensures that risk management is built into the corporate culture; incentive-based compensation programs are designed to adhere to the Bank's risk tolerance;
-- fact-based: good risk management relies heavily on common sense and good judgment and on advanced systems and models.
Risk Appetite
Risk appetite represents how much risk an organization is willing to assume to achieve its business strategy. The Bank defines its risk appetite by setting tolerance thresholds , by aligning those thresholds with its business strategy, and by integrating risk management throughout its corporate culture. Risk appetite is built into decision-making processes as well as into strategic, financial, and capital planning.
The Bank's risk appetite framework consists of principles, statements, metrics as well as targets and is reinforced by policies and limits. When setting its risk appetite targets, the Bank considers regulatory constraints and the expectations of stakeholders, in particular customers, employees, the community, shareholders, regulatory agencies, governments, and rating agencies. The risk appetite framework is defined by the following principles and statements:
The Bank's reputation, brand, and long-term viability are at the centre of our decisions, which demand:
-- a strong credit rating to be maintained; -- a strong capital and liquidity position;
-- rigorous management of risks, including information security, regulatory compliance, and sales practices;
-- attainment of environmental, social, and governance objectives.
The Bank understands the risks taken; they are aligned with our business strategy and translate into:
-- a risk-reward balance; -- a stable risk profile; -- a strategic level of concentration aligned with approved targets.
The Bank's transformation and simplification plan is being carried out without compromising rigorous risk management, which is reflected in:
-- a low tolerance to operational and reputation risk;
-- operational and information systems stability, both under normal circumstances and in times of crisis.
The Bank's management and business units are involved in the risk appetite setting process and are responsible for adequately monitoring the chosen risk indicators. These needs are assessed by means of the enterprise strategic planning process. The risk indicators are reported on a regular basis to ensure an effective alignment between the Bank's risk profile and its risk appetite, failing which appropriate actions might be taken. Additional information on the key credit, market and liquidity risk indicators monitored by the Bank's management is presented on the following pages .
Enterprise-Wide Stress Testing
An enterprise-wide stress testing program is in place at the Bank. It is part of a more extensive process aimed at ensuring that the Bank maintains adequate capital levels commensurate with its business strategy and risk appetite. Stress testing can be defined as a risk management method that assesses the potential effects-on the Bank's financial position, capital and liquidity-of a series of specified changes in risk factors, corresponding to exceptional but plausible events. The program supports management's decision-making process by identifying potential vulnerabilities for the Bank as a whole and that are considered in setting limits as well as in longer term business planning. The scenarios and stress test results are approved by the Stress Testing Oversight Committee and are reviewed by the Global Risk Committee (GRC) and the Risk Management Committee (RMC). For additional information, see the Stress Testing section of this MD&A applicable to credit risk, market risk, and liquidity risk.
Incorporation of Risk Management Into the Corporate Culture
Risk management is supported by the Bank's cultural evolution through, notably, the following pillars:
-- Tone set by management: The Bank's management continually promotes risk management through internal communications. The Bank's risk appetite is therefore known to all.
-- Shared accountability: A balanced approach is advocated, whereby business development initiatives are combined with a constant focus on sound and effective risk management. In particular, risk is taken into consideration when preparing the business plans of the business segments, when analyzing strategic initiatives, and when launching new products.
-- Transparency: A foundation of the business's values, transparency lets us communicate our concerns quickly without fear of reprisal. We are a learning--focused organization where employees are allowed to make mistakes.
-- Behaviour: The Bank's risk management is strengthened by incentive compensation programs that are structured to reflect the Bank's risk appetite.
-- Continuous development: All employees must complete mandatory annual regulatory compliance training focused on the Bank's Code of Conduct and on anti-money laundering and anti-terrorist financing (AML/ATF) efforts as well as cybersecurity training. Risk management training is also offered across all of the Bank's business units.
In addition to these five pillars, Internal Audit carries out an evaluation of the corporate culture as part of its mandate. Furthermore, to ensure the effectiveness of the existing risk management framework, the Bank has defined clear roles and responsibilities by reinforcing the concept of the three lines of defence. The Governance Structure section presented on the following pages defines this concept as well as the roles and responsibilities of the three lines of defence.
Hot Features
Premium
First Line of Defence Second Line of Defence Third Line of Defence
Risk Owner Independent Oversight Independent Assurance
Business Units Risk Management Internal Audit
and Oversight Functions
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* Identify, manage, assess and mitigate risks in * Oversee risk management by setting policies and * Provide the Board and management with independent
day-to-day activities. standards. assurance as to the effectiveness of the main
governance, risk management, and internal control
processes and systems.
* Ensure activities are in alignment with the Bank's * Provide independent oversight of management practices
risk appetite and risk management policies. and an independent challenge of the first line of
defence. * Provide recommendations and advice to promote the
Bank's long-term financial strength.
* Promote sound and effective risk management at the
Bank.
* Monitor and report on risk.
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Governance Structure (1) *
The following chart shows the Bank's overall governance architecture and the governance relationships established for risk management.
The Board of Directors (Board)
The Board is responsible for approving and overseeing management of the Bank's internal and commercial affairs, and it establishes strategic directions together with management. It also approves and oversees the Bank's overall risk philosophy and risk appetite, acknowledges and understands the main risks faced by the Bank, and makes sure appropriate systems are in place to effectively manage and control those risks. In addition, the Board ensures that the Bank operates in accordance with environmental, social and governance (ESG) practices and strategies. It carries out its mandate both directly and through its committees: the Audit Committee, the Risk Management Committee, the Human Resources Committee , the Conduct Review and Corporate Governance Committee, and the Technology Committee. In addition, the various oversight functions, the Global Risk Committee and the working groups report to the Board and advise it.
The Audit Committee
The Audit Committee oversees the work of the Bank's internal auditor and independent auditor ; ensures the Bank's financial strength; establishes the Bank's financial reporting framework, analysis processes, and internal controls ; and reviews any reports of irregularities in accounting, internal controls , or audit .
The Risk Management Committee (RMC)
The Risk Management Committee examines the risk appetite framework and recommends it to the Board for approval. It approves the main risk management policies and risk tolerance limits. It ensures that appropriate resources, processes, and procedures are in place to properly and effectively manage risk on an ongoing basis. Finally, it monitors the risk profile and risk trends of the Bank's activities and ensures alignment with the risk appetite.
The Human Resources Committee
The Human Resources Committee examines and approves the Bank's total compensation policies and programs, taking into consideration the risk appetite framework and ESG strategies, and recommends their approval to the Board. It recommends, for Board approval, the compensation of the President and Chief Executive Officer, of the members of the Senior Leadership Team, and of the heads of the oversight functions. This committee oversees all human resources practices, including employee health, safety and well-being, talent management matters such as succession planning for management and oversight functions, as well as diversity, equity and inclusion.
The Conduct Review and Corporate Governance Committee
The Conduct Review and Corporate Governance Committee ensures that the Bank maintains sound practices that comply with legislation and best practices, particularly in the area of ESG responsibilities, and that they align with the Bank's One Mission. It periodically reviews and approves professional conduct and ethical behaviour standards, including the Code of Conduct. The committee oversees the application of complaint review mechanisms and implements mechanisms that ensure compliance with consumer protection provisions, including the Whistleblower Protection Policy, and that prevent prohibited financial transactions between the Bank and related parties. Lastly, it ensures that the directors are qualified by evaluating the performance and effectiveness of the Board and its members and by planning director succession and the composition of the Board .
The Technology Committee
The Technology Committee oversees the various components of the Bank's technology program . It reviews, among other things, the Bank's technology strategy and monitors technology risks, including cyberrisks, cybercrime, and protection of personal information.
(1) Additional information about the Bank's governance structure can be found in the Management Proxy Circular for the 2024 Annual Meeting of Holders of Common Shares, which will soon be available on the Bank's website at nbc.ca and on SEDAR+'s website at sedarplus.ca. The mandates of the Board and of its committees are available in their entirety at nbc.ca.
Senior Leadership Team of the Bank
Composed of the President and Chief Executive Officer and the officers responsible for the Bank's main functions and business units, the Bank's Senior Leadership Team ensures that risk management is sound and effective and aligned with the Bank's pursuit of its business objectives and strategies. The Senior Leadership Team promotes the integration of risk management into its corporate culture and manages the primary risks facing the Bank.
The Internal Audit Oversight Function
The Internal Audit Oversight Function is the third line of defence in the risk management framework. It is responsible for providing the Bank's Board and management with objective, independent assurance on the effectiveness of the main governance, risk management, and internal control processes and systems and for making recommendations and providing advice to promote the Bank's long-term strength.
The Finance Oversight Function
The Finance Oversight Function is responsible for optimizing management of financial resources and ensuring sound governance of financial information. It helps the business segments and support functions with their financial performance, ensures compliance with regulatory requirements, and carries out the Bank's reporting to shareholders and the external reporting of the various units, entities, and subsidiaries of the Bank. It is responsible for capital management and actively participates in the activities of the Asset Liability Committee.
The Risk Management Oversight Function
The Risk Management service is responsible for identifying, assessing and monitoring-independently and using an integrated approach-the various risks to which the Bank and its subsidiaries are exposed and for promoting a risk management culture throughout the Bank. The Risk Management team helps the Board and management understand and monitor the main risks. This service also develops, maintains, and communicates the risk appetite framework while overseeing the integrity and reliability of risk measures.
The Compliance Oversight Function
The Compliance Oversight Function is responsible for implementing a Bank-wide regulatory compliance risk management framework by relying on an organizational structure that includes functional links to the main business segments. It also exercises independent oversight and conducts assessments of the compliance of the Bank and its subsidiaries with regulatory compliance risk standards and policies.
The Global Risk Committee (GRC)
The Global Risk Committee is the overriding governing entity of all the Bank's risk committees, and it oversees every aspect of the overall management of the Bank's risks. It sets the parameters of the policies that determine risk tolerance and the overall risk strategy, for the Bank and its subsidiaries as a whole, and sets limits as well as tolerance and intervention thresholds enabling the Bank to properly manage the main risks to which it is exposed. The committee approves and monitors all large credit facilities using the limits set out in the Credit Risk Management Policy. It reports to the Board, and recommends for Board approval, the Bank's risk philosophy, risk appetite, and risk profile management. The Operational Risk Management Committee, the Financial Markets Risk Committee, and the Enterprise-Wide Risk Management Committee presented in the governance structure chart are the primary committees reporting to the Global Risk Committee. The Global Risk Committee also carries out its mandate through the Senior Complex Valuation Committee, the Model Oversight Committee, and the Product and Activity Review Committees.
The Compensation Risk Oversight Working Group
The working group that monitors compensation-related risks supports the Human Resources Committee in its compensation risk oversight role. It is made up of at least three members, namely, the Executive Vice-President, Risk Management; the Chief Financial Officer and Executive Vice-President, Finance; and the Executive Vice-President, Employee Experience. The working group helps to ensure that compensation policies and programs do not unduly encourage senior management members, officers, material risk takers, or bank employees to take risks beyond the Bank's risk tolerance thresholds. As part of that role, it ensures that the Bank is adhering to the Corporate Governance Guidelines issued by OSFI and to the Principles for Sound Compensation Practices issued by the Financial Stability Board, for which the Canadian implementation and monitoring is conducted by OSFI. The RMC also reviews the reports presented by this working group.
The ESG Committee
Under the leadership of the Chief Financial Officer and Executive Vice-President, Finance and of the Senior Vice-President, Communications, Public Affairs and ESG, and made up of several officers from different areas of the Bank, the ESG Committee's main role is to develop and support the Bank's environmental, social and governance initiatives and strategies. The ESG Committee is responsible for implementing the recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD) and by the UN Principles for Responsible Banking as well as for implementing the Bank's climate commitments. At least twice a year, the ESG Committee reports to the Conduct Review and Corporate Governance Committee on the progress made and on ongoing and upcoming ESG projects. In addition, and in a timely fashion, the ESG Committee makes presentations on topics of particular interest, such as extra-financial and climate risk disclosures, to the Audit Committee and the RMC.
The IT Risk Management Strategic Committee (ITRMSC)
The Bank's senior management entrusts the ITRMSC with overseeing the implementation of technology risk and cyberrisk management to ensure that the Bank is compliant with the regulations, policies, and protocols related to managing such risks . Under the leadership of the Executive Vice-President, Risk Management and the Executive Vice-President, Technology and Operations, this committee approves the policies related to technology risk and cyberrisk management. Among other responsibilities, it reviews the technology risk and cyberrisk posture as well as any matter requiring an alignment between the technology strategy and the associated risks.
The Privacy Office
The Privacy Office develops and implements the personal information privacy program and the Bank's strategy for ensuring privacy and protecting personal information. It oversees the development, updating, and application of appropriate documentation in support of the Bank's personal information privacy program, including policies, standards, and procedures. It also oversees the risk governance framework and the implementation of appropriate controls designed to mitigate privacy risk. Lastly, it supports the business units in their execution of the Bank's strategic directions and ensures adherence to privacy best practices.
The Business Units
As the first line of defence, the business units manage risks related to their operations within established limits and in accordance with risk management policies by identifying, analyzing, managing, and understanding the risks to which they are exposed and implementing risk mitigation mechanisms. The management of these units must ensure that employees are adhering to current policies and limits.
Asset Liability Committee
The Asset Liability Committee is composed of members of the Bank's Senior Leadership Team, Risk Management officers, and officers from the business units. It monitors and provides strategic actions on structural interest rate risk, structural foreign exchange risk, and liquidity risk. It is also charged with strategic coordination of the annual budget plan with respect to the balance sheet, capital, and funding.
Reputation Risk Committee (RRC)
The Reputation Risk Committee is the central point for sharing information on the Bank's reputation risk practices. In particular, it ensures that appropriate frameworks are in place and being applied, that higher reputation risks are being adequately monitored, and that mitigation plans are in place. It sets risk appetite levels and proposes guidance and alignments that match this risk appetite. The RRC reports to the Senior Leadership Team and the RMC.
Risk Management Policies
The risk management policies and related standards and procedures set out responsibilities, define and describe the main business-related risks, specify the requirements that business units must fulfill when assessing and managing these risks, stipulate the authorization process for risk-taking, and set the risk limits to be adhered to. They also establish the accountability reporting that must be provided to the various risk-related bodies, including the RMC. The policies cover the Bank's main risks, are reviewed regularly to ensure they are still relevant given market changes, regulatory changes and changes in the business plans of the Bank's business units, and they apply to the entire Bank and its subsidiaries, when applicable. Other policies, standards, and procedures complement the main policies and cover more specific aspects of risk management such as business continuity; the launch of new products, initiatives, or activities; or financial instrument measurement.
Governance of Model Risk Management
The Bank uses several models to guide enterprise-wide risk management, financial markets strategy, economic and regulatory capital allocation, global credit risk management, wealth management, and profitability measures. The model risk management policies as well as a rigorous model management process ensure that model usage is appropriate and effective.
The key components of the Bank's model risk management governance framework are as follows: the model risk management policies and standards, the model validation group, and the Model Oversight Committee. The policies and standards set the rules and principles applicable to the development and independent validation of models . The scope of models covered is wide, ranging from market risk pricing models and automated credit decision-making models to the business risk capital models, including models used for regulatory capital and stressed capital purposes, expected credit losses models, and financial-crime models. The framework also includes more advanced artificial intelligence models.
One of the cornerstones of the Bank's policies is the general principle that all models deemed important for the Bank or used for regulatory capital purposes require heightened lifecycle monitoring and independent validation. All models used by the Bank are therefore classified in terms of risk level (low, medium , or high). Based on this classification , the Bank applies strict guidelines regarding the requirements for model development and documentation, independent review thereof , performance monitoring thereof, and minimum review frequency. The Bank believes that the best defence against model risk is the implementation of a robust development and validation framework.
Independent Oversight by the Compliance Service
Compliance is an independent oversight function within the Bank. Its Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer has direct access to the RMC and to the President and Chief Executive Officer and can communicate directly with officers and directors of the Bank and of its subsidiaries and foreign centres. The Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer regularly meets with the Chair of the RMC, in the absence of management, to review matters on the relationship between the Compliance Service and the Bank's management and on access to the information required.
Business unit managers must oversee the implementation of mechanisms for the daily control of regulatory compliance risks arising from the operations under their responsibility. Compliance exercises independent oversight in order to assist managers in effectively managing these risks and to obtain reasonable assurance that the Bank is compliant with the regulatory requirements in effect where it does business, both in Canada and internationally.
Independent Assessment by Internal Audit
Internal Audit is an independent oversight function created by the Audit Committee. Its Senior Vice-President has direct access to the Chair of the Audit Committee and to the Bank's President and Chief Executive Officer and can communicate directly with officers and directors of the Bank and of its subsidiaries and foreign centres. The Senior Vice-President, Internal Audit, regularly meets with the Chair of the Audit Committee, in the absence of management, to review matters on the relationship between Internal Audit and the Bank's management.
Internal Audit provides reasonable assurance that the main governance, risk management, and internal control processes and systems are ensuring that, in all material respects, the Bank's key control procedures are effective and compliant. Internal Audit also provides recommendations and advice on how to strengthen these key control procedures. Business unit managers and senior management must ensure the effectiveness of the main governance, risk management, and internal control processes and systems, and they must implement corrective measures if needed.
Top and Emerging Risks
Managing risk requires a solid understanding of every type of risk faced by the Bank, as they could have a material adverse effect on the Bank's business, results of operations, financial position, and reputation. As part of its risk management approach, the Bank identifies, assesses, reviews and monitors the range of top and emerging risks to which it is exposed in order to proactively manage them and implement appropriate mitigation strategies. Identified top and emerging risks are presented to senior management and communicated to the RMC.
The Bank applies a risk taxonomy that categorizes, into two groups, the top risks to which the Bank is exposed in the normal course of business:
-- Financial risks: Directly tied to the Bank's key business activities and are generally more quantifiable or predictable;
-- Non-financial risks: Inherent to the Bank's activities and to which it does not choose to be exposed.
The Bank separately qualifies the risks to which it is exposed: a "top risk" is a risk that has been identified, is clearly defined, and could have a significant impact on the Bank's business, results of operations, financial position, and reputation, whereas an "emerging risk" is a risk that, while it may also have an impact on the Bank, is not yet well understood in terms of its likelihood, consequences, timing, or the magnitude of its potential impact.
In the normal course of business, the Bank is exposed to the following top risks.
Credit Market Liquidity Operational Regulatory Reputation Strategic Environmental
risk risk and funding risk compliance risk risk and social
risk risk risk
======= ======= ============= ============ ============ =========== ========== ==============
The Bank is also exposed to other new, so-called emerging or significant risks, which are defined as follows.
Information
security Technology, which is now omnipresent in our daily lives, is at
and cybersecurity the heart of banking services and has become the main driver
of innovation in the financial sector. While this digital transformation
meets the growing needs of customers by enhancing the operational
efficiency of institutions, it nevertheless comes with information
security and cybersecurity risks. The personal information and
financial data of financial institution customers are still prime
targets for criminals. These criminals, who are increasingly
well organized and employing ever more sophisticated schemes,
try to use technology to steal information.
Faced with a resurgence of cyberthreats and the sophistication
of cybercriminals, the Bank is exposed to the risks associated
with data breaches, malicious software, unauthorized access,
hacking, phishing, identity theft, intellectual property theft,
asset theft, industrial espionage, and possible denial of service
due to activities causing network failures and service interruptions.
Cyberattacks, as with breaches or interruptions of systems that
support the Bank and its customers, could cause client attrition;
financial loss; an inability of clients to do their banking;
non-compliance with privacy legislation or any other current
laws; legal disputes; fines; penalties or regulatory action;
reputational damage; compliance costs, corrective measures, investigative
or restoration costs; and cost hikes to maintain and upgrade
technological infrastructures and systems, all of which could
affect the Bank's operating results or financial position, in
addition to having an impact on its reputation.
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Risk and Description
Trend
It is also possible for the Bank to be unable to implement effective
preventive measures against every potential cyberthreat, as the
tactics used are multiplying, change frequently, come from a
wide range of sources, and are increasingly sophisticated.
Information
security Within this context, the Bank works to ensure the integrity and
and cybersecurity protection of its systems and the information they contain. The
(continued) Bank reaffirms its commitment to continuous improvement in the
area of information security, the ultimate goal being to protect
its customers and maintain their trust. Along with its partners
in the financial sector and with the regulatory authorities,
the Bank is committed to making a sustained effort to mitigate
technology risks. Multidisciplinary teams consisting of cybersecurity
and fraud prevention specialists focus specifically on anticipating
this type of threat. The Bank is also pursuing initiatives under
its own cybersecurity program aimed at adapting its protection,
surveillance, detection, and response capabilities according
to changing threats, the aim being to continue to reduce delays
in detecting any anomalies or cybersecurity incidents and limiting
the impact thereof as much as possible. A governance and accountability
structure has also been established to support decision-making
based on sound risk management. The Technology Committee is regularly
informed of the cybersecurity posture, of cybersecurity trends
and developments, and of lessons learned from operational incidents
that have occurred in other large organizations such that it
can gain a better understanding of the risks, particularly risks
related to cybersecurity and the protection of personal information.
-------------------- ---------------------------------------------------------------------------
Government decisions and international relations can have a significant
impact on the environment in which the Bank operates. Geopolitical
events can lead to volatility, have a negative impact on at-risk
assets, and cause financial conditions to deteriorate. They can
also directly or indirectly affect banking activities by having
repercussions on clients. The war in Ukraine, which has disrupted
energy and agricultural supply chains, is a good example. The
economic sanctions taken against Russia for its invasion of Ukraine
and the steps taken by Russia to significantly reduce natural
gas supply to Europe have led to soaring energy costs. This situation
has triggered the negative economic headwinds now facing Europe
and heightened the risk of a political reaction in the form of
new governments taking power and social unrest. Even if the war
were to end, the shattered trust suggests that Europe and Russia
will continue to take measures to become less dependent on one
Geopolitical another, notably regarding energy matters. In addition, the recent
risks clashes between Hamas and Israel add a new risk of regional escalation
in the Middle East. The greatest risk is that this conflict spreads
and develops into a more direct confrontation between Iran and
Israel, which could ultimately disrupt oil deliveries in the
Persian Gulf.
While new risks could arise at any time, certain concerns are
compelling us to monitor other situations at this time. The geopolitical
power struggle that for years has pitted the United States against
China is one such concern. Businesses, in particular those operating
in sectors deemed strategic, run an increasing risk of finding
themselves in a maze of contradictory regulations, where complying
with U.S. regulations means violating Chinese law, and vice versa.
These tensions could also partially undo some of the ties forged
between these two superpowers in the financial markets, and Canada
might get caught in the crosshairs of the two countries. Tensions
between China and the United States on the subject of Taiwan
is another source of disagreement between the two superpowers.
While we do not believe an invasion is imminent, China will continue
to exert pressure on Taiwan through a combination of unprecedented
military exercises and economic sanctions. Taiwan's importance
is highlighted by the fact that it is by far the leading global
producer of advanced microchips (over 90% of the market share).
Closer to home, Canada is also dealing with some tensions. Until
recently, India represented an alternative to China as a potential
trading partner against a backdrop of persistent tensions with
the Middle Kingdom (detention of two Canadians in China and Chinese
interference in Canadian elections). However, Ottawa's accusations
that the Indian government was involved in the murder of a Canadian
citizen have soured relations with India, and the conflict could
affect companies that have forged trade links or made investments
there. But the potential for confrontation does not end there,
as protectionism is gaining popularity, and a growing number
of countries are implementing measures to both financially support
domestic businesses in key sectors (high tech, health care, and
food) and to protect them against global competition through
business restrictions. The combined effects of supply shortages
and geopolitical tensions have shifted the focus from efficiency
to supply security.
In addition, the combined effect of climate change and armed
conflict could lead to massive involuntary migration, which has
already risen sharply in recent years. This could have economic
and political repercussions, with Europe being particularly vulnerable.
Lastly, with rising debt levels and interest rates, some governments
could face a dilemma as they try to satisfy public demands to
maintain social safety nets and respond to pressure from the
financial markets to improve their fiscal balance, causing political
tensions in the developed countries. We will continue to monitor
all of these developments, analyze any new risks that arise,
and assess the impacts that they may have on our organization.
-------------------- ---------------------------------------------------------------------------
Risk and Description
Trend
Although the economy recovered quickly during the pandemic, a
number of risks still remain while others emerge. The extremely
aggressive fiscal stimulus in North America at the start of the
Economic pandemic, supply chain issues, and the war in Ukraine led to
risk a resurgence in inflation in 2022 to levels not seen since the
early 1980s. The central banks, guarantors of price stability,
are determined to curb inflation and have pushed interest rates
to the highest levels seen in over two decades. At a time when
investors are wondering about future interest rates, which could
stay high for a prolonged period, financial conditions have deteriorated
substantially worldwide, heightening the risk of recession. Central
banks continue to show concern about inflation, while the economy
has yet to feel the full impact of previous rate hikes. In an
environment characterized by high interest rates, companies may
be reluctant to invest, and this does not usually bode well for
hiring. Corporate profit margins are under pressure in a context
of rising employee compensation and interest expense, which could
lead to difficult decisions about staffing levels. Consumers,
on the other hand, are likely to limit spending when faced with
high prices, amplifying the risks of an economic recession. The
global economy could also face a situation not seen since the
1970s: stagflation. Such a period, characterized by both economic
weakness and high inflation, would place central banks in a dilemma,
making them reluctant to support a moribund economy.
Many governments became much more indebted during the pandemic
and are now facing an interest payment shock as bonds come due.
Government financing needs will be considerable in the years
to come, with demographic changes, the fight against climate
change, and reindustrialization all risking to exacerbate the
pressure on public finances. There is reason to believe that
investors could demand compensation for financing more fragile
governments. This could limit the power of governments to act
in the event of economic weakness.
Lastly, climate issues are an added risk in the current context.
If too few measures are adopted on the climate front, severe
weather events will intensify and result in economic woes over
the long term. Conversely, a too-swift transition could result
in other risks, particularly short- and medium-term costs and
rising pressure on production costs.
In short, given the ongoing uncertainties in this economic environment,
the Bank remains vigilant in the face of numerous factors and
will continue to rely on its strong risk management framework
to identify, assess, and mitigate the negative impacts while
also remaining within its risk appetite limits.
---------------- ---------------------------------------------------------------------------
With interest rates up sharply and inflation still high, it is
Real estate normal to wonder how these circumstances are affecting Canadian
and household households, which have high levels of debt. Canadian household
indebtedness debt, when compared internationally, is high in relation to disposable
income, much like other countries with strong social safety nets.
In recent years, policymakers have introduced a number of financial
stability measures to limit Canadian household debt. This has
paid off, as shown by the debt ratio, which has been relatively
unchanged since 2016. Nonetheless, indebted households are feeling
the impact of the current monetary tightening. The labour market
has proved resilient for now, and this has limited late payments
on loans, but we are not immune to a potential recession that
could make matters worse. The Bank offers variable rate/variable
payment mortgage loans. This means that clients in this situation
have been able to gradually adjust their budgets since the start
of the multiple rate hikes and avoid overly high payment shock
when they renew their mortgage term, as is the case for borrowers
that have variable rate/fixed payment mortgages with other lenders.
Soaring house prices have been one of the causes of the country's
high indebtedness. For the time being, property prices have been
resilient in the face of rising interest rates, since their impact
has been offset by record population growth over the past few
quarters. But, as mentioned above, a less buoyant job market
could push the real estate sector into another slump. A severe
recession could cause house prices to plunge, potentially prompting
some borrowers to default strategically. Quebec's lower indebtedness
compared with the rest of the country, from more affordable housing,
combined with the fact that the province has a higher percentage
of households in which both spouses are employed, helps to limit
the Bank's exposure against a significant increase in credit
risk.
The Bank takes all these risks into account when establishing
lending criteria and estimating credit loss allowances. It should
be noted that borrowers are closely monitored on an ongoing basis,
and portfolio stress tests are conducted periodically to detect
any vulnerable borrowers. The Bank proactively contacts those
identified and proposes appropriate solutions to enable them
to continue to meet their commitments.
---------------- ---------------------------------------------------------------------------
Risk and Description
Trend
Protection
of personal Risks related to protecting personal information exist throughout
information the entire lifecycle of information and arise, in particular,
from new control measures and processes as well as from ever-evolving
legislative requirements. Such risks could also arise from information
being improperly created, collected, used, communicated, stored,
or destroyed. Exposure to such risks may increase when the Bank
uses external service providers to process personal information.
The collection, use, and communication of personal information
as well as the management and governance thereof are receiving
increasing attention, and the Bank is investing in technological
solutions and innovations according to the evolution of its commercial
activities.
These risks could lead to the loss or theft of personal information;
client attrition; financial loss; non-compliance with legislation;
legal disputes; fines; penalties; punitive damages; regulatory
action; reputational damage; compliance, remediation, investigative,
or restoration costs; cost hikes to maintain and upgrade technological
infrastructures and systems, all of which could affect the Bank's
operating results or financial position, in addition to having
an impact on its reputation.
In recent years, innovations and the proliferation of technological
solutions that collect, use, and communicate personal information
such as cloud computing, artificial intelligence, automated learning,
and open banking, have given rise to significant legislative
changes in many jurisdictions, including Canada and Quebec. The
Act to modernize legislative provisions as regards the protection
of personal information, adopted by the Government of Quebec
in September 2021, is progressively coming into force until 2024.
It gives new powers to regulatory agencies to impose administrative
and monetary penalties. On June 16, 2022, the federal government
tabled Bill C--27, entitled Digital Charter Implementation Act,
2022, which aims to enhance and modernize the personal information
protection framework and sets out new regulatory powers and fines.
The Bank continues to monitor relevant legislative developments
and has bolstered its governance structure by updating its policies,
standards and practices and by deploying a personal information
privacy program that reflects its determination to maintain the
trust of its clients.
----------------- ---------------------------------------------------------------------------
Reliance
on technology The Bank's clients have high expectations regarding the accessibility
and third-party to products and services on various platforms that house substantial
providers amounts of data. In response to those client expectations, to
the rapid pace of technological change, and to the growing presence
of new actors in the banking sector, the Bank makes significant
and ongoing investments in its technology while maintaining the
operational resilience and robustness of its controls. Inadequate
implementation of technological improvements or new products
or services could significantly affect the Bank's ability to
serve and retain clients.
Third parties provide essential components of the Bank's technological
infrastructure such as Internet connections and access to network
and other communications services. The Bank also relies on the
services of third parties to support certain business processes
and to handle certain IT activities. An interruption of these
services or a breach of security could have an unfavourable impact
on the Bank's ability to provide products and services to its
clients and on its operational resilience, not to mention the
impact that such events would have on the Bank's reputation.
The geographical concentration of third parties and subcontractors
of our third parties also increases the risk of disruption arising
from other risks, such as natural disasters and weather and geopolitical
events. To mitigate this risk, the Bank has a third-party risk
management framework that includes various information security,
financial health, and performance verifications that are carried
out both before entering into an agreement and throughout its
life. It also includes business continuity and technological
succession plans, which are tested periodically to ensure their
effectiveness in times of crisis. A governance and accountability
structure has also been established to support decision-making
based on sound risk management.
Despite these preventive measures and the efforts deployed by
the Bank to manage third parties, there remains a possibility
that certain risks will materialize. In such cases, the Bank
would rely on mitigation mechanisms developed in collaboration
with the various agreement owners and third parties concerned.
Faced with a greater ecosystem of third parties across the industry,
in April 2023 OSFI tabled a new version of its Third-Party Risk
Management Guideline (B-10), which will come into effect on May
1, 2024.
Mindful of the significance of third-party risk, the Bank makes
sure that its third-party management practices and policies evolve
in collaboration with its financial sector partners and with
regulatory authorities.
----------------- ---------------------------------------------------------------------------
Risk and Description
Trend
Technological
innovation Rapid changes in the technology used by financial system participants
and competition could affect the Bank's financial performance and reputation,
which depend in part on its ability to develop and market new
product and service offerings to satisfy changing customer needs,
adopt and develop new technologies that help differentiate its
products and services in the market, and generate cost savings.
In addition, the Bank must adequately assess the impacts of any
changes arising from the deployment of key technological systems
before they are implemented and on an ongoing basis during their
deployment.
The transition to new digital solutions and channels h as accelerated
greatly in recent years, leading to major developments in the
areas of digital currencies, the open banking system, and financial
services from non-bank providers. The arrival of new, non-conventional
players in the market has intensified competition, as they are
proposing to enhance client experience with new technologies,
data analysis tools, and customized solutions. These businesses
are not necessarily subject to the same regulatory requirements
as financial institutions and may sometimes be able to react more
quickly to new consumer habits.
Furthermore, to promote digital innovation and improve the client
experience, the Bank continues to incorporate artificial intelligence
into its business processes. It designs and continuously applies
a set of practices aimed at ensuring the development of equitable
solutions, in addition to rigorous monitoring during the production
stage. The Bank also continues to participate in the industry's
work to i mplement a regulatory framework for the open banking
system.
The Bank remains alert to the risks that could arise from the
transformation of financial services and continues to invest in
the development of its operational and technological capabilities.
Also, the Bank maintains a strong commitment in favour of innovation
through its specialized venture capital arm, NAventures (TM) ,
which makes strategic investments in emerging technologies .
----------------- --------------------------------------------------------------------------
The Bank has identified two types of direct climate-change-related
risks, i.e., physical risks and transition risks. Physical risks
refer to the potential impacts of more frequent and more intense
extreme weather events and/or of chronic changes in weather conditions
on physical assets, infrastructures, the value chain, productivity,
other physical aspects, etc. Transition risks refer to the potential
impacts of moving toward a low-carbon economy (such as technological
changes, behavioural changes by consumers, or political or public
policy shifts designed to reduce GHG emissions through taxes or
incentives) as well as to regulatory changes made to manage and
support such an economy.
Climate Climate risk could have an impact on the traditional risks that
change are inherent to a financial institution's operations, including
credit risk, market risk, liquidity and funding risk, and operational
risk, among others. In addition, a rapidly evolving global regulatory
environment, the commitments and frameworks to which we adhere,
and stakeholder expectations concerning disclosures could lead
to reputation risks and regulatory compliance risk, particularly
due to potential imbalances among their requirements, in addition
to increasing the risk of lawsuits. The publication of many regulatory
standards and projects, such as OSFI's guideline B-15, Climate
Risk Management; the standards of the International Sustainability
Standards Board (ISSB), designed to establish a financial disclosure
framework addressing sustainability and climate; and the CSA's
proposed National Instrument 51-107 - Disclosure of Climate-related
Matters, are an illustration.
It is possible that the Bank's or its clients' business models
fail to align with a low-carbon economy or that their responses
to government strategies and regulatory changes prove inadequate
or fail to achieve the objectives within the predetermined deadlines.
Another possibility is that events caused by physical risks prove
catastrophic (extreme episodes) or that there are adaptability
issues (chronic episodes). As such, these risks could result in
financial losses for the Bank, affect its business activities
and how they are conducted, harm its reputation and increase its
regulatory compliance risk, or even affect the activities and
financial position of the clients to whom it offers financial
services.
The actual impacts of these risks will depend on future events
that are beyond the Bank's control, such as the effectiveness
of targets set by government climate strategies or regulatory
developments. The Bank must therefore devote special attention
to reducing its exposure to these factors and, at the same time,
to seizing new growth opportunities. Its strategies and policies
have therefore been designed to consider climate risks while also
supporting the transition to a low-carbon economy. The Bank strives
to support and advise its clients in their own transition. From
this perspective, we continue to deliver climate risk management
training across the organization, in particular among front-line
employees who have direct contact with clients.
----------------- --------------------------------------------------------------------------
Risk and Description
Trend
Climate
change
(continued) To better understand and mitigate climate change risks, the Bank
also takes part in major national and international initiatives,
including TCFD, the United Nations Principles for Responsible
Banking (UNPRB), the United Nations Principles for Responsible
Investing (UNPRI), and others.
The Bank continues to closely monitor regulatory developments,
evolving frameworks, commitments, and stakeholder expectations,
so that it can enhance its climate change risk management framework
and further adapts its disclosures. For additional information,
see the Environmental and Social Risk section of this MD&A.
--------------- ---------------------------------------------------------------------------
Ability
to recruit The Bank's future performance depends greatly on its ability to
and retain recruit, develop, and retain key resources. In the financial services
key resources sector, there is strong competition, partly supported by a relatively
low unemployment rate, in terms of attracting and retaining the
most qualified people, notably with the arrival of new players
in certain sectors and the emergence of the global workforce concept.
In addition, inflationary pressures are amplifying wage expectations,
which have already been affected by competitive pressures. As
a result, reports are periodically presented to the Board through
the governance mechanisms of the Human Resources Committee, the
aim being to deploy appropriate strategies to implement conditions
favourable to the Bank's competitiveness as an employer. In particular,
the Bank monitors, on a quarterly basis, critical workforce segments
where the attraction and retention challenges are greatest. This
work also covers the associated action plans. The Bank has also
made improvements to its recruitment platform, offering a simplified
experience to candidates. There is no assurance that the Bank
or a business acquired by the Bank will be able to continue recruiting
or retaining people with specific expertise.
--------------- ---------------------------------------------------------------------------
Other Factors That Can Affect the Bank's Business, Operating Results, Financial Position, and Reputation
International Risks
Through the operations of some of the Bank's units (mainly its New York and London offices) and subsidiaries in Canada and abroad (in particular, Credigy Ltd., NBC Global Finance Limited, and Advanced Bank of Asia Limited), the Bank is exposed to risks arising from its presence in international markets and foreign jurisdictions. While these risks do not affect a significant proportion of the Bank's portfolios, their impact must not be overlooked, especially those that are of a legal or regulatory nature. International risks can be particularly high in territories where the enforceability of agreements signed by the Bank is uncertain, in countries and regions facing political or socioeconomic disturbances, or in countries that may be subject to international sanctions. Generally speaking, there are many ways in which the Bank may be exposed to the risks posed by other countries, not the least of which being foreign laws and regulations. In all such situations, it is important to consider what is referred to as "country risk." Country risk affects not only the activities that the Bank carries out abroad but also the business that it conducts with non-resident clients as well as the services it provides to clients doing business abroad, such as electronic funds transfers, international products, and transactions made from Canada in foreign currencies.
As part of its activities, the Bank must adhere to anti-money laundering and anti-terrorist financing (AML/ATF) regulatory requirements in effect in each jurisdiction where it conducts business. It must also comply with the requirements pertaining to current international sanctions in these various jurisdictions. Money laundering and terrorist financing is a financial, regulatory, and reputation risk. For additional information, see the Regulatory Compliance Risk Management section of this MD&A .
The Bank is exposed to financial risks outside Canada and the United States, primarily through its interbank transactions on international financial markets or through international trade finance activities. This geographic exposure represents a moderate proportion of the Bank's total risk. The geographic exposure of loans is disclosed in the quarterly Supplementary Financial Information report available on the Bank's website at nbc.ca. To control country risk, the Bank sets credit concentration limits by country and reviews and submits them to the Board for approval upon renewal of the Credit Risk Management Policy. These limits are based on a percentage of the Bank's regulatory capital, in line with the level of risk represented by each country, particularly emerging countries. The risk is rated using a classification mechanism similar to the one used for credit default risk. In addition to the country limits, authorization caps and limits are established, as a percentage of capital, for the world's high-risk regions, i.e., essentially all regions except for North America, Western European countries, and the developed countries of Asia.
Acquisitions
The Bank's ability to successfully complete an acquisition is often conditional on regulatory approval, and the Bank cannot be certain of the timing or conditions of regulatory decisions. Acquisitions could affect future results should the Bank experience difficulty integrating the acquired business. If the Bank does encounter difficulty integrating an acquired business, maintaining an appropriate governance level over the acquired business, or retaining key officers within the acquired business, these factors could prevent the Bank from realizing expected revenue growth, cost savings, market share gains, and other projected benefits of the acquisition.
Intellectual Property
The Bank adopts various strategies to protect its intellectual property rights. However, the protection measures that it may obtain or implement do not guarantee that it will be able to dissuade or prevent anyone from infringing on its rights or to obtain compensation when infringement occurs. Moreover, the goods and services developed by the Bank are provided in a competitive market where third parties could hold intellectual property rights prior to those held by the Bank. In addition, financial technologies are the subject of numerous developments in intellectual property and patent applications, both in Canada and internationally. Therefore, in certain situations, the Bank could be limited in its ability to acquire intellectual property rights, develop tools, or market certain products and services. It could also infringe on the rights of third parties. In such situations, one of the risks could be an out-of-court claim or legal action brought against the Bank.
Judicial and Regulatory Proceedings
The Bank takes reasonable measures to comply with the laws and regulations in effect in the jurisdictions where it operates. Still, the Bank could be subject to judicial or regulatory decisions resulting in fines, damages, or other costs or to restrictions likely to adversely affect its operating results or its reputation. The Bank may also be subject to litigation in the normal course of business. Although the Bank establishes provisions for the measures it is subject to under accounting requirements, actual losses resulting from such litigation could differ significantly from the recognized amounts, and unfavourable outcomes in such cases could have a significant adverse effect on the Bank's operating results. The resulting reputational damage could also affect the Bank's future business prospects. For additional information, see Note 26 to the consolidated financial statements.
Tax Risk
The tax laws applicable to the Bank are numerous, complex, and subject to amendment at any time. This complexity can result in differing legal interpretations between the Bank and the respective tax authorities with which it deals. In addition, legislative changes and changes in tax policy, including the interpretation thereof by tax authorities and courts, could affect the Bank's earnings. International and domestic initiatives may also result in changes to tax laws and policies, including international efforts by the G20 and the Organisation for Economic Co-operation and Development to broaden the tax base and domestic proposals to increase the taxes payable by banks and insurance companies. For additional information on income taxes, see the Income Taxes section on page 50 of this MD&A, the Critical Accounting Policies and Estimates section on page 111 of this MD&A, and Note 24 to the consolidated financial statements.
Accounting Policies, Methods and Estimates Used by the Bank
The accounting policies and methods used by the Bank determine how the Bank reports its financial position and operating results and require management to make estimates or rely on assumptions about matters that are inherently uncertain. Any changes to these estimates and assumptions may have a significant impact on the Bank's operating results and financial position.
Additional Factors
Other factors that could affect the Bank's business, operating results, and reputation include unexpected changes in consumer spending and saving habits; the timely development and launch of new products and services; the ability to successfully align its organizational structure, resources, and processes; the ability to activate a business continuity plan within a reasonable time; the potential impact of international conflicts, natural disasters or public health emergencies such as pandemics; and the Bank's ability to foresee and effectively manage the risks resulting from these factors through rigorous risk management.
Credit Risk
Credit risk is the risk of incurring a financial loss if an obligor does not fully honour its contractual commitments to the Bank. Obligors may be debtors, issuers, counterparties, or guarantors. Credit risk is the most significant risk facing the Bank in the normal course of its business. The Bank is exposed to credit risk not only through its direct lending activities and transactions but also through commitments to extend credit and through letters of guarantee, letters of credit, over-the-counter derivatives trading, debt securities, securities purchased under reverse repurchase agreements, deposits with financial institutions, brokerage activities, and transactions carrying a settlement risk for the Bank such as irrevocable fund transfers to third parties via electronic payment systems.
Governance
A policy framework centralizes the governance of activities that generate credit risk for the Bank and its subsidiaries and is supplemented by a series of subordinate internal policies and standards. These policies and standards address specific management issues such as concentration limits by borrower group and sector, credit limits, collateral requirements, and risk quantification or issues that provide more thorough guidance for given business segments.
For example, the institutional activities of the Bank and its subsidiaries on financial markets and international commercial transactions are governed by business unit directives that set out standards adapted to the specific environment of these activities. This also applies to retail brokerage subsidiaries. In isolated cases, a business unit or subsidiary may have its own credit policy, and that policy must always fall within the spirit of the Bank's policy framework. Risk Management's leadership team defines the scope of the universe of subsidiaries carrying significant credit risks and the magnitude of the risks incurred.
Credit risk is controlled through a rigorous process that comprises the following elements:
-- credit risk rating and assessment; -- economic capital assessment; -- stress testing; -- credit granting process; -- revision and renewal process; -- risk mitigation; -- follow-up of monitored accounts and recovery; -- counterparty risk assessment; -- settlement risk assessment; -- environmental risk assessment.
Concentration Limits
The risk appetite is allocated based on the setting of concentration limits. The Bank sets credit concentration and settlement limits by obligor group, by industry sector, by country, and by region. These limits are subject to the approval of the RMC. Certain types of financing or financing programs are also subject to specific limits. Breaches of concentration limits by obligor group or by region are reported to the RMC each quarter. Furthermore, every industry sector, country, and region whose exposure equals a predetermined percentage of the corresponding authorized limit are reported to the Bank's Risk Management leadership team. At least once a year, the Bank revises these exposures by industry sector, by country, and by region in order to determine the appropriateness of the corresponding concentration limits.
Reporting
Every quarter, an integrated risk management report is presented to senior management and the RMC. It presents changes in the credit portfolio and highlights on the following matters:
-- credit portfolio volume growth by business segment;
-- a breakdown of the credit portfolio according to various criteria for which concentration limits have been set;
-- changes in provisions and allowances for credit losses; -- changes in impaired loans; -- follow-up of monitored accounts.
Credit Risk Rating and Assessment
Before a sound and prudent credit decision can be made, an obligor's or counterparty's credit risk must be accurately assessed. This is the first step in processing credit applications. Using a credit risk rating system developed by the Bank, each application is analyzed and assigned one of 19 grades on a scale of 1 to 10 for all portfolios exposed to credit risk. As each grade corresponds to a debtor's, counterparty's, or third party's probability of default, the Bank can estimate the credit risk. The credit risk assessment method varies according to portfolio type. There are two main methods for assessing credit risk to determine minimum regulatory capital requirements for most of its portfolios, the Internal Ratings-Based (IRB) Approach and the revised Standardized Approach, as defined by the Basel Accord. The IRB Approach applies to most of its credit portfolios. Since the implementation of the Basel III reforms in April 2023, the Bank must use the Foundation Internal Ratings-Based (FIRB) Approach for certain specific exposure types such as financial institutions, including insurance companies, or large corporations that belong to a group whose consolidated annual sales exceed $750 million. For all other exposure types treated under an IRB Approach, the Bank uses the Advanced Internal Ratings-Based (AIRB) Approach.
The main parameters used to measure credit risk in accordance with the IRB Approach are as follows:
-- probability of default (PD), which is the probability of through-the-cycle 12-month default by the obligor, calibrated on a long-run average PD throughout a full economic cycle;
-- loss given default (LGD), which represents the magnitude of the loss from the obligor's default that would be expected in an economic downturn and subject to certain regulatory floors, expressed as a percentage of exposure at default;
-- exposure at default (EAD), which is an estimate of the amount drawn and of the expected use of any undrawn portion prior to default, and cannot be lower than the current balance.
Under the FIRB approach, the Bank provides its own estimates of PD and applies OSFI's estimates for LGD and EAD. Under both IRB Approaches, risk parameters are subject to specific input floors.
The methodology as well as the data and the downturn periods used to estimate LGD under the AIRB Approach are described in the table below.
AIRB APPROACH DATA (1) DOWNTURN PERIOD METHODOLOGY FOR
(1) CALCULATING LGD
-------------- ------------------------------------------------------------- ------------------ -----------------
Retail The Bank's internal historical 1996-1998 and LGD based on the
data from 1996 to 2022 2008-2009 Bank's
historical
internal data on
recoveries and
losses
-------------- ------------------------------------------------------------- ------------------ -----------------
Corporate 2000-2003, LGD based on the
The Bank's internal historical 2008-2009 Bank's
data from 2000 to 2022 and 2020 historical
recoveries and
Benchmarking results using: losses
* Moody's observed default price of bonds, internal data
and
on Moody's data
from 1983 to 2021
* Global Credit Data Consortium historical loss and
recovery database from 1998 to 2021
-------------- ------------------------------------------------------------- ------------------ -----------------
Sovereign Moody's observed default 1999-2001 and Based on implied
price of bonds, from 1983 2008-2012 market LGD using
to 2015 observed bond
price
S&P rating history from decreases
1975 to 2016 following
the issuer's
default
-------------- ------------------------------------------------------------- ------------------ -----------------
Financial Global Credit Data Consortium 1991-1992, 1994, Model for
institutions historical loss and recovery 1997-1998, predicting
database from 1991 to 2013 2001--2002, LGD based on
and 2008-2009 different
issue- and
issuer-related
risk drivers
-------------- ------------------------------------------------------------- ------------------ -----------------
(1) The performance of the models resulting from the AIRB Approach is measured quarterly, and the methodologies are validated by an independent third party annually. A report on model performance under the AIRB Approach is presented annually to the RMC. According to the most recent performance report, the models continue to perform well and do not require the addition of new data.
Personal Credit Portfolios
This category comprises portfolios of residential mortgage loans, consumer loans, and loans to certain small businesses. To assess credit risk, AIRB models are in place for the main portfolios, particularly mortgage loans, home equity lines of credit, credit cards, budget loans, lines of credit, and SME retail. A risk analysis based on loan grouping in pools of homogeneous obligor and product profiles is used for overall management of personal credit portfolios. This personal credit assessment approach, which has proven particularly effective for estimating credit defaults and losses, takes a number of factors into account, namely:
-- attributes from credit rating agencies (scoring) related to behaviour; -- loan product characteristics; -- collateral provided; -- the length of time on the Bank's balance sheet; -- loan status (active, delinquent, or defaulted).
This mechanism provides adequate risk measurement inasmuch as it effectively differentiates risk levels by pool. Therefore, the results are periodically reviewed and, if necessary, adjustments are made to the models. Obligor migrations between pools are among the factors considered when assessing credit risk.
Loan pools are also established based on PD, LGD, and EAD, which are measured based on the characteristics of the obligor and the transaction itself. The credit risk of these portfolios is estimated using credit scoring models that determine the obligor's PD. LGD is estimated based on transaction-specific factors such as loan product characteristics (for example, a line of credit versus a term loan), loan-to-value ratio, and types of collateral.
Credit scoring models are also used to grant credit. These models use proven statistical methods that measure an obligor's demand characteristics and history based on internal and external historical information to estimate the obligor's future credit behaviour and assign a probability of default. The underlying data include obligor information such as current and past employment, historical loan data in the Bank's management systems, and information from external sources such as credit rating agencies.
The Bank also uses behaviour scoring models to manage and monitor current commitments. The risk assessment is based on statistical analyses of the past behaviour of obligors with which the Bank has a long-term relationship in an effort to predict their future behaviour. The underlying information includes the obligor's cash flows and borrowing trends. Information on characteristics that determine behaviour in these models also comes from both internal sources on current commitments and external sources. The table on the following page presents the PD categories and credit quality of the associated personal credit portfolio.
Mortgage Loan Underwriting
To mitigate the impact of an economic slowdown and ensure the long-term quality of its portfolio, the Bank uses sound risk management when granting residential mortgages to confirm: (i) the obligor's intention to meet its financial obligations, (ii) the obligor's ability to repay its debts, and (iii) the quality of the collateral. In addition, in accordance with the applicable rules, the Bank takes a prudent approach to client qualification by using, for example, a higher interest rate to mitigate the risk of short- or medium-term rate hikes.
Nonetheless, the risk of economic slowdown could adversely affect the profitability of the mortgage portfolio. In stress test analyses, the Bank considers a variety of scenarios to measure the impact of adverse market conditions. In such circumstances, our analyses show significantly higher credit losses, which would decrease profitability and reduce the Bank's capital ratios.
Between March 2, 2022 and July 12, 2023, the Bank of Canada raised its policy rate ten times; the rate has thus risen from 0.25% to 5%. During the September 6 and October 25, 2023 announcements, the central bank opted for a pause, holding the policy rate steady. This rapid increase in rates, undertaken primarily to counter inflation in Canada, is putting pressure on the ability of borrowers to make payments, notably borrowers with variable-rate mortgages or for whom the mortgage term is up for renewal.
New Regulatory Developments
On June 28, 2022, OSFI published a new advisory that complements the expectations set out in guideline B-20. This advisory addresses combined loan plans (CLPs). CLPs are an innovative product that have become the main uninsured real estate secured lending offering. The most significant concern with these products is the re-advanceability of credit above the 65% loan-to-value ratio. To satisfy OSFI's regulatory expectations, on August 27, 2023 the Bank made changes to its All-In-One (AIO) line of credit for circumstances where the authorized credit limit exceeds 65% of the value of the financed property at the time of granting. Holders of certain AIO products can no longer access, on a revolving credit basis, the full principal paid on their mortgage loan.
On December 15, 2022, OSFI confirmed the qualifying rate for uninsured mortgages (i.e., residential mortgages with a down payment of 20% or more) will remain as the greater of the mortgage contract interest rate plus 2% and a minimum floor of 5.25%. OSFI is well aware that the country's economic recovery must be backed by a strong financial system capable of supporting the Canadian population in the current environment and that real estate market conditions in Canada could heighten the financial risk weighing on lenders. The minimum qualifying interest rate provides an additional level of safety to ensure that borrowers would have the ability to make mortgage payments should circumstances change, e.g., in the case of reduced income or a rise in interest rates.
On January 1, 2023, the Prohibition on the Purchase of Residential Property by Non-Canadians Act came into effect. The purpose of this law, which will be in effect until January 1, 2025, is to help Canadians access the property market and to reduce speculative purchasing that risks raising the prices of properties in some already overheated markets. On March 27, 2023, the Act was amended to relax rules and conditions permitting non-Canadians who want to live in Canada to purchase a residential building.
In January 2023, OSFI launched a public consultation on Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures, starting with an initial consultation on debt servicing measures in order to mitigate the risk arising from the high consumer debt levels. As a follow-up to the public consultation, an industry response coordinated by the Canadian Bankers Association was submitted to OSFI on April 14, 2023.
Business and Government Credit Portfolios
This category comprises business (other than some small businesses that are classified in personal credit portfolios), government, and financial institution credit portfolios.
These credit portfolios are assigned a risk rating that is based on a detailed individual analysis of the financial and non-financial aspects of the obligor, including the obligor's financial strength, sector of economic activity, competitive ability, access to funds, and number of years in business. The Bank uses risk-rating tools and models to specifically assess the risk represented by an obligor in relation to its industry and peers. The models used are adapted to the obligor's broad sector of activity. Models are in place for ten sectors: business/commercial, large business, financial institutions, sovereigns, investment funds, energy, real estate, agriculture, insurance, and public-private partnership project financing.
This risk assessment method assigns a default risk rating to an obligor that reflects its credit quality. To each default credit risk rating corresponds a PD (see the table below). Using this classification of obligor credit risk, the Bank can differentiate appropriately between the various assessments of an obligor's capacity to meet its contractual obligations. Default risk ratings are assigned according to an assessment of an obligor's commercial and financial risks based on a solvency review. Various risk quantification models, described below, are used to perform this assessment.
The business and government default risk rating scale used by the Bank is similar to the systems used by major external rating agencies. The following table presents a grouping of the ratings by major risk category and compares them with the ratings of two major rating agencies.
Internal Default Risk Ratings*
Personal
credit Business and government
Description(1) portfolios Description(1) credit portfolios
--------------- ------------ -------------- -----------------------------------------------------------
PD (%) -
Corporate
and
PD (%) - financial PD (%) - Standard
Retail Ratings institutions Sovereign & Poor's Moody's
=============== ============ ============== ======= ============= ============= ======== ==========
AAA to Aaa to
Excellent 0.000-0.144 Excellent 1-2.5 0.000-0.111 0.000-0.059 A- A3
BBB+ to Baa1 to
Good 0.145-0.506 Good 3-4 0.112-0.383 0.060-0.330 BBB- Baa3
BB+ to Ba1 to
Satisfactory 0.507-2.681 Satisfactory 4.5-6.5 0.384-4.234 0.331-5.737 B B2
Special Special B- to
mention 2.682-9.348 mention 7-7.5 4.235-10.181 5.738-17.963 CCC+ B3 to Caa1
CCC & Caa2 &
Substandard 9.349-99.999 Substandard 8-8.5 10.182-99.999 17.964-99.999 CCC- Caa3
CC, C & Ca, C &
Default 100 Default 9-10 100 100 D D
================ ============ ============== ======= ============= ============= ======== ==========
(1) Additional information is provided in Note 7 - Loans and Allowances for Credit Losses to the consolidated financial statements.
The Bank also uses individual assessment models by industry to assign a risk rating to the credit facility based on the collateral that the obligor is able to provide and, in some cases, based on other factors. The Bank consequently has a bi-dimensional risk-rating system that, using models and internal and external historical data, establishes a default risk rating for each obligor. In addition, the models assign, to each credit facility, an LGD risk rating that is independent of the default risk rating assigned to the obligor.
The Bank's default risk ratings and LGD risk ratings as well as the related risk parameters contribute directly to informed credit-granting, renewal, and monitoring decisions. They are also used to determine and analyze risk-based pricing. In addition, from a credit portfolio management perspective, they are used to establish counterparty credit concentration limits and segment concentration limits as well as limits to decision-making power and to determine the credit risk appetite of these portfolios. Moreover, they represent an important component in estimating expected and unexpected losses, measuring minimum required economic capital, and measuring the minimum level of capital required, as prescribed by the regulatory authorities.
The credit risk of obligors and of their facilities is assessed with the PD and LGD parameters at least once a year or more often if significant changes (triggers) are observed when updating financial information or if another qualitative indicator of a deterioration in the obligor's solvency or in the collateral associated with the obligor's facilities is noted. The Bank also uses a watchlist to more actively monitor the financial position of obligors whose default-risk rating is greater than or equal to 7.0. This process seeks to minimize an obligor's default risk and allows for proactive credit risk management.
Validation
The Risk Management Group monitors the effectiveness of the risk-rating systems and associated parameters, which are also reviewed regularly in accordance with the Bank's policies. Backtesting is performed at regular intervals to validate the effectiveness of the models used to estimate PD, LGD, and EAD. For PD in particular, this backtesting takes the form of sequentially applied measures designed to assess the following criteria:
-- the model's discriminatory power; -- the proportion of overrides; -- model calibration; -- the stability of the model's inputs and outputs.
The credit risk quantification models are developed and tested by a team of specialists with model performance being monitored by the applicable business units and related credit risk management services. Models are validated by a unit that is independent of both the specialists who developed the model and the concerned business units. Approvals of new models or changes to existing models are subject to an escalation process established by the model risk management policy. Furthermore, new models or changes to existing models that markedly impact regulatory capital must be approved by the Board before being submitted to the regulatory agencies.
The facility and default risk-rating systems, methods, and models are also subject to periodic validation, which is a responsibility shared between the development and validation teams, the frequency of which depends on the model's risk level. Models that have a significant impact on regulatory capital must be reviewed regularly, thereby further raising the certainty that these quantification mechanisms are working as expected.
The key aspects to be validated are risk factors allowing for accurate classification of default risk by level, adequate quantification of exposure, use of assessment techniques that consider external factors such as economic conditions and credit status and, lastly, compliance with internal policies and regulatory provisions.
The Bank's credit risk assessment and rating systems are overseen by the Model Oversight Committee, the GRC, and the RMC, and these systems constitute an integral part of a comprehensive Bank-wide credit risk oversight framework. Along with the above-mentioned elements, the Bank documents and periodically reviews the policies, definitions of responsibilities, resource allocation, and existing processes.
Assessment of Economic Capital
The assessment of the Bank's minimum required economic capital is based on the credit risk assessments of obligors. These two activities are therefore interlinked. The different models used to assess the credit risk of a given portfolio type also enable the Bank to determine the default correlation among obligors. This information is a critical component in the evaluation of potential losses for all portfolios carrying credit risk. Estimates of potential losses, whether expected or not, are based on historical loss experience, portfolio monitoring, market data, and statistical modelling. Expected and unexpected losses are factors used in assessing the minimum required economic capital for all of the Bank's credit portfolios. The assessment of economic capital also considers the anticipated potential migrations of the default risk ratings of obligors during the remaining term of their credit commitments. The main risk factors that have an impact on economic capital are as follows:
-- the obligor's PD; -- the obligor's EAD; -- the obligor's LGD; -- the default correlation among various obligors; -- the residual term of credit commitments; -- the impact of economic and sector-based cycles on asset quality.
Stress Testing
The Bank carries out stress tests to evaluate its sensitivity to crisis situations in certain activity sectors and key portfolios. A global stress test methodology covers most business, government, and personal credit portfolios to provide the Bank with an overview of the situation. By simulating specific scenarios, these tests enable the Bank to measure allowances for credit losses according to IFRS 9 - Financial Instruments (IFRS 9), to assess the level of regulatory capital needed to absorb potential losses, and to determine the impact on its solvency. In addition, these tests contribute to portfolio management as they influence the determination of concentration limits by obligor, product, or business sector. During fiscal years 2022 and 2023, several simulations were carried out to assess the impact of rising interest rates and inflation on the financial positions of borrowers. Based on these simulations, the Bank was able to test the resilience of customers, and, in turn, the resilience of the Bank's loan portfolio.
Credit-Granting Process
Credit-granting decisions are based first and foremost on the results of the risk assessment. Aside from an obligor's solvency, credit-granting decisions are also influenced by factors such as available collateral and guarantees, transaction compliance with policies, standards and procedures, and the Bank's overall risk-adjusted return objective. Each credit-granting decision is made by various authorities within the risk management teams and management, who are independent of the business units and are at a reporting level commensurate with the size of the proposed credit transaction and the associated risk. Decision-making authority is determined in compliance with the delegation of authority set out in the Credit Risk Management Policy. A person in a senior position in the organization approves credit facilities that are substantial or carry a higher risk for the Bank. The GRC approves and monitors all substantial credit facilities. Credit applications that exceed management's latitudes are submitted to the Board for approval. The credit-granting process demands a high level of accountability from managers, who must proactively manage the credit portfolio.
Review and Renewal Processes
The Bank periodically reviews credit files. The review process enables the Bank to update information on the quality of the facilities and covers, among other things, risk ratings, compliance with credit conditions, collateral, and obligor behaviour. In the specific case of business credit portfolios, the credit risk of all obligors is reviewed at least once per year. After this periodic review, for on-demand or unused credit, the Bank decides whether to pursue its business relationship with the obligor and, if so, revises the credit conditions. For personal credit portfolios, the credit risk of all obligors is reviewed on a continual basis.
Risk Mitigation
The Bank also controls credit risk using various risk mitigation techniques. In addition to the standard practice of requiring collateral to guarantee repayment of the credit it grants, the Bank also uses protection mechanisms such as credit derivative financial instruments, syndication, and loan assignments as well as an orderly reduction in the amount of credit granted.
The most common method used to mitigate credit risk is obtaining quality collateral from obligors. Obtaining collateral cannot replace a rigorous assessment of an obligor's ability to meet its financial obligations, but, beyond a certain risk threshold, it is an essential complement. The obtaining of collateral depends on the level of risk presented by the obligor and the type of loan granted. The legal validity and enforceability of any collateral obtained and the Bank's ability to regularly and correctly measure the collateral's value are critical for this mechanism to play its proper role in risk mitigation.
In its internal policies and standards, the Bank has established specific requirements regarding the appropriate legal documentation and assessment for the kinds of collateral that business units may require to guarantee the loans granted. The categories of eligible collateral and the lending value of the collateralized assets have also been defined by the Bank. For the most part, they include the following asset categories as well as guarantees (whether secured by collateral or unsecured) and government and bank guarantees:
-- accounts receivable; -- inventories; -- machinery and equipment and rolling stock; -- residential and commercial real estate, office buildings and industrial facilities; -- cash and marketable securities.
Portfolio Diversification and Management
The Bank is exposed to credit risk, not only through outstanding loans and undrawn amounts of commitments to a particular obligor but also through the sectoral distribution of the outstanding loans and undrawn amounts and through the exposure of its various credit portfolios to geographical, concentration, and settlement risks.
The Bank's approach to controlling these diverse risks begins with a diversification of exposures. Measures designed to maintain a healthy degree of credit risk diversification in its portfolios are set out in the Bank's policies, standards, and procedures. These instructions are mainly reflected in the application of various exposure limits: credit concentration limits by counterparty and credit concentration limits by business sector, country, region, product, and type of financial instrument. These limits are determined based on the Bank's credit risk appetite framework and are reviewed periodically. Compliance with these limits, particularly exceptions, is monitored through periodic reports submitted by the Risk Management Group's officers to the Board.
Continuous analyses are performed in order to anticipate problems with a sector or obligor before they materialize, notably as defaulted payments.
Other Risk Mitigation Methods
Credit risk mitigation measures for transactions in derivative financial instruments, which are regularly used by the Bank, are described in detail in the Counterparty Risk section.
Credit Derivative Financial Instruments and Financial Guarantee Contracts
The Bank also reduces credit risk by using the protection provided by credit derivative financial instruments such as credit default swaps. When the Bank acquires credit protection, it pays a premium on the swap to the counterparty in exchange for the counterparty's commitment to pay if the underlying entity defaults or another event involving the counterparty and covered by the legal agreement occurs. Since, like obligors, providers of credit protection must receive a default risk rating, the Bank's standards set out all the criteria under which a counterparty may be judged eligible to mitigate the Bank's credit risk. The Bank may also reduce its credit risk by entering into financial guarantee contracts whereby a guarantor indemnifies the Bank for a loss resulting from an obligor failing to make a payment when due in accordance with the contractual terms of a debt instrument.
Loan Syndication
The Bank has developed specific instructions on the appropriate objectives, responsibilities, and documentation requirements for loan syndication.
Follow-Up of Monitored Accounts and Recovery
Credit granted and obligors are monitored on an ongoing basis and in a manner commensurate with the degree of risk. Loan portfolio managers use an array of intervention methods to conduct a particularly rigorous follow-up on files that show a high risk of default, and they submit comments to credit risk management groups about each identified borrower on the watchlist for whom they are responsible. When loans continue to deteriorate and there is an increase in risk to the point where monitoring has to be increased, a group specialized in managing problem accounts (Work Out units) steps in to maximize collection of the disbursed amounts and tailor strategies to these accounts.
The Work Out units produce a quarterly monitoring report that is submitted to the management of the Credit Risk Management groups. For larger accounts, a monitoring report is also submitted to a monitoring committee that tracks the status of at-risk obligors and the corrective measures undertaken. At the request of the monitoring committee, some of the files will be the subject of a presentation. The authority to approve allowances for credit losses is attributed using limits delegated on the basis of hierarchical level presented in the Credit Risk Management Policy.
Information on the recognition of impaired loans and allowances for credit losses is presented in Notes 1 and 7 to the consolidated financial statements.
Forbearance and Restructuring
Situations where a business or retail obligor begins showing clear signs of potential insolvency are managed on a case-by-case basis and require the use of judgment. The Loan Work Out Policy sets out the principles applicable in such situations to guide loan restructuring decisions and identify situations where distressed restructuring applies. A distressed restructuring situation occurs when the Bank, for economic or legal reasons related to the obligor's financial difficulties, grants the obligor a special concession that is contrary to the Bank's policies. Such concessions could include a lower interest rate, waiver of principal, and extension of the maturity date.
The Bank has established a management framework for commercial and corporate obligors that represent higher-than-normal risk of default. It outlines the roles and responsibilities of loan portfolio managers with respect to managing high-risk accounts and the responsibilities of the Work Out units and other participants in the process. Lastly, the Credit Risk Management Policy and a management framework are used to determine the authorization limits for distressed restructuring situations. During fiscal years 2023 and 2022, the amount of distressed loan restructurings was not significant.
Counterparty Risk Assessment
Counterparty risk is a credit risk that the Bank incurs on various types of transactions involving financial instruments. The most significant risks are those it faces when it trades derivative financial instruments with counterparties on the over-the-counter market or when it purchases securities under reverse repurchase agreements or sells securities under repurchase agreements. Securities lending transactions and securities brokerage activities involving derivative financial instruments are also sources of counterparty risk. Note 16 to the consolidated financial statements provides a complete description of the credit risk for derivative financial instruments by type of traded product.
The Risk Management Group has developed models by type of counterparty through which it applies an advanced methodology for calculating the Bank's credit risk exposure and economic capital. The exposures are subject to limits. These limits are established based on the counterparty's internal default risk rating and on the potential volatility of the underlying assets until expiration of the contract.
Counterparty obligations related to the trading of contracts on derivative financial instruments, securities lending transactions, and reverse repurchase agreements are frequently subject to credit risk mitigation measures. The mitigation techniques are somewhat different from those used for loans and advances and depend on the nature of the instrument or the type of contract traded. The most widely used measure is the signing of master agreements: the International Swaps & Derivatives Association, Inc. (ISDA) master agreement, the Global Master Repurchase Agreement (GMRA), and the Global Master Securities Lending Agreement (GMSLA). These agreements make it possible, in the event of default, insolvency, or bankruptcy of one of the contracting parties, to apply full netting of the gross amounts of the market values for each of the transactions covered by the agreement in force at the time of default. The amount of the final settlement is therefore the net balance of gains and losses on each transaction, which reduces exposure when a counterparty defaults. The Bank's policies require that an ISDA, GMRA, or GMSLA agreement be signed with its trading counterparties to derivatives, foreign exchange forward contracts, securities lending transactions, and reverse repurchase agreements.
Another mechanism for reducing credit risk on derivatives and foreign exchange forward contracts complements the ISDA master agreement in many cases and provides the Bank and its counterparty (or either of the parties, if need be) with the right to request collateral from the counterparty when the net balance of gains and losses on each transaction exceeds a threshold defined in the agreement. These agreements on initial margins and variation margins are a regulatory requirement when financial institutions trade with each other or with governments and central banks on international financial markets because they limit the extent of credit risk and reduce the idiosyncratic risk associated with trading derivative financial instruments and foreign exchange forwards, while giving traders additional leeway to continue trading with the counterparty. When required by regulation (notably, by OSFI), the Bank always uses this type of legal documentation in transactions with financial institutions. For business transactions, the Bank prefers to use internal mechanisms, notably involving collateral and mortgages, set out in the credit agreements. The Bank's internal policies set the conditions governing the implementation of such mitigation methods.
Requiring collateral as part of a securities lending transaction or reverse repurchase agreement is not solely the result of an internal credit decision. In fact, it is a mandatory market practice imposed by self-regulating organizations in the financial services sector such as the Canadian Investment Regulatory Organization (CIRO).
The Bank has identified circumstances in which it is likely to be exposed to wrong-way risk. There are two types of wrong-way risk: general wrong-way risk and specific wrong-way risk. General wrong-way risk occurs when the probability of default of the counterparties is positively correlated to general market risk factors. Specific wrong-way risk occurs when the exposure to a specific counterparty is positively correlated to the probability of default of the counterparty due to the nature of the transactions with this counterparty.
Assessment of Settlement Risk
Settlement risk potentially arises from transactions that feature reciprocal delivery of cash or securities between the Bank and a counterparty. Foreign exchange contracts are an example of transactions that can generate significant levels of settlement risk. However, the implementation of multilateral settlement systems that allow settlement netting among participating institutions has contributed greatly to reducing the risks associated with the settlement of foreign exchange transactions among banks. The Bank also uses financial intermediaries to gain access to established clearing houses in order to minimize settlement risk for certain financial derivative transactions. In some cases, the Bank may have direct access to established clearing houses for settling financial transactions such as repurchase agreements or reverse repurchase agreements. In addition, certain derivative financial instruments traded over the counter are settled directly or indirectly by central counterparties. For additional information, see the table that presents notional amounts in Note 16 to the consolidated financial statements.
There are several other types of transactions that may generate settlement risk, in particular the use of certain electronic fund transfer services. This risk refers to the possibility that the Bank may make a payment or settlement on a transaction without receiving the amount owed by the counterparty, and with no opportunity to recover the funds delivered (irrevocable settlement).
The ultimate means for completely eliminating such a risk is for the Bank to complete no payments or settlements before receiving the funds due from the counterparty. Such an approach cannot, however, be used systematically. For several electronic payment services, the Bank is able to implement mechanisms that allow it to make its transfers revocable or to debit the counterparty in the amount of the settlements before it makes its own transfer. On the other hand, the nature of transactions in financial instruments makes it impossible for such practices to be widely used. For example, on foreign exchange transactions involving a currency other than the U.S. dollar, time zone differentials impose strict payment schedules on the parties. The Bank cannot unduly postpone a settlement without facing penalties, due to the large size of the amounts involved.
The most effective way for the Bank to control settlement risks, both for financial market transactions and irrevocable transfers, is to impose internal risk limits based on the counterparty's ability to pay.
Assessment of Environmental Risk
Environmental risk refers to the impacts on credit risk that may lead to reduced repayment capacity, or a lower value of the asset pledged as collateral due to environmental events, such as soil contamination, waste management, or a spill of materials considered hazardous, to the energy transition, or to extreme weather events. Ultimately, environmental risk can lead to both a higher probability of default and higher credit loss in cases of default among counterparties. In addition to the measures and guidelines adopted by the various levels of government, the Bank has a set of protective measures to follow in order to identify and reduce the potential, current, or future environmental risks to which it is exposed when it grants credit to clients. In recent years, the risk management framework has been expanded to include new measures for identifying, assessing, controlling, and monitoring climate risk. In addition, the Bank has developed and is gradually deploying a process used to assess and quantify the impacts of climate change on its strategy and results. For clients operating in specific industries, the risk analysis framework involves the collection of information on carbon footprint, a classification of climate risks (physical and transitional) according to business sector and industry, their strategic positioning, and the existence of an energy transition plan (commitments, reduction targets, diversification of activities). These various subjects are addressed, at least once a year, as part of the credit granting, review, and renewal processes.
The Bank also assesses its exposure to environment-related credit risk using a variety of control and monitoring mechanisms. For example, analyses are performed on vulnerabilities to physical risks and on loan portfolio transition risks; these analyses are applied to all financing activities. Moreover, for several years the Bank has been carrying out climate risk impact analyses using the scenarios recommended by the Network for Greening the Financial System (NGFS). In doing so, the Bank is able to quantify expected losses related to its loan portfolio. In addition, the Bank periodically assesses the impact of environmental risk on the loan portfolio concentration risk to ensure that there is no significant impact on this risk. Furthermore, a loan portfolio industry sector matrix has been developed to provide the Risk Management Group with a clearer vision of the sectors that are most affected by climate-related risks. These initiatives allow the Bank to take concrete steps in the process used to review sectoral limits, as each business sector or industry now has an ESG section describing its environmental risk.
Maximum Credit Risk Exposure
The amounts in the following tables represent the Bank's maximum exposure to credit risk as at the financial reporting date without considering any collateral held or any other credit enhancements. These amounts do not include allowances for credit losses nor amounts pledged as collateral. The tables also exclude equity securities.
Maximum Credit Risk Exposure Under the Basel Asset Categories(1) *
(millions of
Canadian
dollars) As at October 31, 2023
================ ================================================================================================
Other
off-balance-
Repo-style Derivative sheet Standardized
Drawn Undrawn transactions financial items Approach IRB
(2) commitments (3) instruments (4) Total (5) Approach
=============== ======= =========== ============ =========== ============ ======= ============ ========
Retail
Residential
mortgage 77,073 9,094 - - - 86,167 12% 88%
Qualifying
revolving
retail 3,183 12,052 - - - 15,235 -% 100%
Other retail 16,078 2,692 - - 33 18,803 13% 87%
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
96,334 23,838 - - 33 120,205
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Non-retail
Corporate 91,994 27,846 38,549 385 6,915 165,689 18% 82%
Sovereign 61,438 5,921 61,580 - 267 129,206 3% 97%
Financial
institutions 6,719 1,002 98,222 3,013 1,506 110,462 23% 77%
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
160,151 34,769 198,351 3,398 8,688 405,357
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Trading
portfolio - - - 13,778 - 13,778 2% 98%
Securitization 4,351 - - - 5,318 9,669 92% 8%
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Total - Gross
credit risk 260,836 58,607 198,351 17,176 14,039 549,009 15% 85%
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Standardized
Approach (5) 35,461 1,260 34,717 3,211 5,568 80,217
IRB Approach 225,375 57,347 163,634 13,965 8,471 468,792
---------------- ------- ----------- ------------ ----------- ------------ ------- ------------ --------
Total - Gross
credit risk 260,836 58,607 198,351 17,176 14,039 549,009 15% 85%
================ ======= =========== ============ =========== ============ ======= ============ ========
(millions of
Canadian
dollars) As at October 31, 2022
================ ==========================================================================================================
Other
Derivative off-balance-
Undrawn Repo-style financial sheet Standardized AIRB
Drawn(2) commitments transactions(3) instruments items(4) Total Approach(5) Approach
=============== ======== =========== =============== =========== ============ ======= ============ ========
Retail
Residential
mortgage 73,324 8,616 - - - 81,940 12% 88%
Qualifying
revolving
retail 2,483 6,920 - - - 9,403 -% 100%
Other retail 17,526 2,688 - - 35 20,249 25% 75%
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
93,333 18,224 - - 35 111,592
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
Non-retail
Corporate 81,763 29,811 36,194 322 5,538 153,628 13% 87%
Sovereign 56,253 5,821 68,906 - 326 131,306 2% 98%
Financial
institutions 7,200 166 76,856 1,150 754 86,126 19% 81%
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
145,216 35,798 181,956 1,472 6,618 371,060
---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ --------
Trading
portfolio - - - 13,662 - 13,662 2% 98%
Securitization 4,409 - - - 4,373 8,782 80% 20% ---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ -------- Total - Gross credit risk 242,958 54,022 181,956 15,134 11,026 505,096 12% 88% ---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ -------- Standardized Approach (5) 30,704 311 24,783 1,308 4,610 61,716 AIRB Approach 212,254 53,711 157,173 13,826 6,416 443,380 ---------------- -------- ----------- --------------- ----------- ------------ ------- ------------ -------- Total - Gross credit risk 242,958 54,022 181,956 15,134 11,026 505,096 12% 88% ================ ======== =========== =============== =========== ============ ======= ============ ========
(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
(2) Excludes equity securities and certain other assets such as investments in deconsolidated subsidiaries and joint ventures, right-of-use properties and assets, goodwill, deferred tax assets, and intangible assets.
(3) Securities purchased under reverse repurchase agreements and sold under repurchase agreements as well as securities loaned and borrowed.
(4) Letters of guarantee, documentary letters of credit, and securitized assets that represent the Bank's commitment to make payments in the event that an obligor cannot meet its financial obligations to third parties.
(5) Includes exposures to qualifying central counterparties (QCCP).
Market Risk
Market risk is the risk of losses arising from movements in market prices. Market risk comes from a number of factors, particularly changes to market variables such as interest rates, credit spreads, exchange rates, equity prices, commodity prices, and implied volatilities. The Bank is exposed to market risk through its participation in trading, investment, and asset/liability management activities. Trading activities involve taking positions on various instruments such as bonds, shares, currencies, commodities, or derivative financial instruments. The Bank is exposed to non-trading market risk through its asset/liability management and investment portfolios.
The trading portfolios include positions in financial instruments and commodities held either with trading intent or to hedge other elements of the trading book. Positions held with trading intent are those held for short-term resale and/or with the intent of taking advantage of actual or expected short-term price movements or to lock in arbitrage profits. These portfolios target one of the following objectives: market making, liquidating positions for clients, or selling financial products to clients.
Non-trading portfolios include financial instruments intended to be held to maturity as well as those held for daily cash management or for the purpose of maintaining targeted returns or ensuring asset and liability management.
Governance
A market risk management policy governs global market risk management across the Bank's units and subsidiaries that are exposed to this type of risk. It is approved by the GRC. The policy sets out the principles for managing market risk and the framework that defines risk measures, control and monitoring activities; sets market risk limits; and reports on breaches.
The Financial Markets Risk Committee oversees all Financial Markets segment risks that could adversely affect the Bank's results, liquidity, or capital. This committee also oversees the Financial Markets segment's risk framework to ensure that controls are in place to contain risk in accordance with the Bank's risk appetite framework.
Market risk limits ensure the link and coherence between the Bank's market risk appetite targets and the day-to-day market risk management by all parties involved, notably senior management, the business units, and the market risk teams in their independent control function. The Bank's monitoring and reporting process consists of comparing market risk exposure to alert levels and to the market risk limits established for all limit authorization and approval levels.
Assessment of Market Risk
The Risk Management Group uses a variety of risk measures to estimate the size of potential losses under more or less severe scenarios, and using both short-term and long-term time horizons. For short-term horizons, the Bank's risk measures include Value-at-Risk (VaR), Stressed VaR (SVaR), and sensitivity metrics. For long-term horizons or sudden significant market moves, including those due to a lack of market liquidity, the risk measures include stress testing across an extensive range of scenarios.
VaR and SVaR Models
VaR is a statistical measure of risk that is used to quantify market risks by activity and by risk type. VaR is defined as the maximum loss at a specific confidence level over a certain horizon under normal market conditions. The VaR method has the advantage of providing a uniform measurement of financial-instrument-related market risks based on a single statistical confidence level and time horizon.
For VaR, the Bank uses a historical price distribution to compute the probable loss levels at a 99% confidence level, using a two-year history of daily time series of risk factor changes. VaR is the maximum daily loss that the Bank could incur, in 99 out of 100 cases, in a given portfolio. In other words, the loss could exceed that amount in only one out of 100 cases.
The trading VaR is measured by assuming a holding period of one day for ongoing market risk management and a 10-day holding period for regulatory capital purposes. VaR is calculated on a daily basis both for major classes of financial instruments (including derivative financial instruments) and for all trading portfolios in the Financial Markets segment and the Bank's Global Funding and Treasury Group.
In addition to the one-day trading VaR, the Bank calculates a trading SVaR, which is a statistical measure of risk that replicates the VaR calculation method but uses, instead of a two-year history of risk factor changes, a 12-month data period corresponding to a continuous period of significant financial stress that is relevant in terms of the Bank's portfolios.
VaR methodology techniques are well suited to measuring risks under normal market conditions. VaR metrics are most appropriate as a risk measure for trading positions in liquid financial markets. However, there are limitations in measuring risks with this method when extreme and sudden market risk events occur, since they are likely to underestimate the Bank's market risk. VaR methodology limitations include the following:
-- past changes in market risk factors may not always produce accurate predictions of the distribution and correlations of future market movements;
-- a VaR with a daily time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day;
-- the market risk factor historical database used for VaR calculation may not reflect potential losses that could occur under unusual market conditions (e.g., periods of extreme illiquidity) relative to the historical period used for VaR estimates;
-- the use of a 99% VaR confidence level does not reflect the extent of potential losses beyond that percentile.
Given the limitations of VaR, this measure represents only one component of the Bank's risk management oversight, which also incorporates, among other measures, stress testing, sensitivity analysis, and concentration and liquidity limits and analysis.
The Bank also conducts backtesting of the VaR model. It consists of comparing the profits and losses to the statistical VaR measure. Backtesting is essential to verifying the VaR model's capacity to adequately forecast the maximum risk of market losses and thus validate, retroactively, the quality and accuracy of the results obtained using the model. If the backtesting results present material discrepancies, the VaR model could be revised in accordance with the Bank's model risk management framework. All market risk models and their performance are subject to periodic independent validation by the model validation group.
Controlling Market Risk
A comprehensive set of limits is applied to market risk measures, and these limits are monitored and reported on a regular basis. Instances when limits are exceeded are reported to the appropriate management level. The risk profiles of the Bank's operations remain consistent with its risk appetite and the resulting limits, and are monitored and reported to traders, management of the applicable business unit, senior executives, and Board committees.
The Bank also uses economic capital for market risk as an indicator for risk appetite and limit setting. This indicator measures the amount of capital that is required to absorb unexpected losses due to market risk events over a one-year horizon and with a determined confidence level. For additional information on economic capital, see the Capital Management section of this MD&A.
The following tables provide a breakdown of the Bank's Consolidated Balance Sheet into assets and liabilities by those that carry market risk and those that do not carry market risk, distinguishing between trading positions whose main risk measures are VaR and SVaR and non-trading positions that use other risk measures.
Reconciliation of Market Risk With Consolidated Balance Sheet Items*
(millions of Canadian dollars) As at October 31, 2023
=============================== =======================================================================
Market risk measures
------------------------------ ------- ---------------------- ----------- -------------------------
Not subject
Balance Trading Non-Trading to market Non-traded risk
sheet (1) (2) risk primary risk sensitivity
============================= ======= ======== ============ =========== =========================
Assets
Cash and deposits with
financial Interest rate
institutions 35,234 685 24,950 9,599 (3)
Securities
Interest rate
At fair value through profit (3) and equity
or loss 99,994 98,559 1,435 - (4)
Interest rate
At fair value through other (3) and equity
comprehensive income 9,242 - 9,242 - (5)
Interest rate
At amortized cost 12,582 - 12,582 - (3)
Securities purchased under
reverse repurchase
agreements and securities Interest rate
borrowed 11,260 - 11,260 - (3)(6)
Loans and acceptances, net Interest rate
of allowances 225,443 12,739 212,704 - (3)
Interest rate
Derivative financial (7) and exchange
instruments 17,516 16,349 1,167 - rate (7)
Defined benefit asset 356 - 356 - Other (8)
Other 11,951 544 - 11,407
------------------------------ ------- -------- ------------ ----------- -------------------------
423,578 128,876 273,696 21,006
----------------------------- ------- -------- ------------ ----------- -------------------------
Liabilities
Interest rate
Deposits 288,173 18,126 270,047 - (3)
Interest rate
Acceptances 6,627 - 6,627 - (3)
Obligations related to
securities
sold short 13,660 13,660 - -
Obligations related to
securities
sold under repurchase
agreements and securities Interest rate
loaned 38,347 - 38,347 - (3)(6)
Interest rate
Derivative financial (7) and exchange
instruments 19,888 19,145 743 - rate (7)
Liabilities related to
transferred Interest rate
receivables 25,034 9,507 15,527 - (3)
Defined benefit liability 94 - 94 - Other (8)
Interest rate
Other 7,329 - 49 7,280 (3)
Interest rate
Subordinated debt 748 - 748 - (3)
------------------------------ ------- -------- ------------ ----------- -------------------------
399,900 60,438 332,182 7,280
============================== ======= ======== ============ =========== =========================
(1) Trading positions whose risk measures are VaR as well as total SVaR. For additional information, see the table in the pages ahead that shows the VaR distribution of the trading portfolios by risk category, their diversification effect, and total trading SVaR.
(2) Non-trading positions that use other risk measures.
(3) For additional information, see the tables in the pages ahead, namely, the table that shows the VaR distribution of the trading portfolios by risk category, their diversification effect, and total trading SVaR as well as the table that shows the interest rate sensitivity.
(4) For additional information, see Note 6 to the consolidated financial statements.
(5) The fair value of equity securities designated at fair value through other comprehensive income is presented in Notes 3 and 6 to the consolidated financial statements.
(6) These instruments are recorded at amortized cost and are subject to credit risk for capital management purposes. For trading-related transactions with maturities of more than one day, interest rate risk is included in the VaR and SVaR measures.
(7) For additional information, see Notes 16 and 17 to the consolidated financial statements.
(8) For additional information, see Note 23 to the consolidated financial statements.
(millions of Canadian dollars) As at October 31, 2022
=============================== =======================================================================
Market risk measures
------------------------------ ------- -------------------------- ----------- ---------------------
Not subject Non-traded risk
Balance to market primary
sheet Trading(1) Non-trading(2) risk risk sensitivity
============================= ======= ========== ============== =========== =====================
Assets
Cash and deposits with
financial
institutions 31,870 837 20,269 10,764 Interest rate(3)
Securities
At fair value through profit Interest rate(3)
or loss 87,375 85,805 1,570 - and equity(4)
At fair value through other Interest rate(3)
comprehensive income 8,828 - 8,828 - and equity(5)
At amortized cost 13,516 - 13,516 - Interest rate(3)
Securities purchased under
reverse repurchase
agreements and securities
borrowed 26,486 - 26,486 - Interest rate(3)(6)
Loans and acceptances, net
of allowances 206,744 9,914 196,830 - Interest rate(3)
Derivative financial Interest rate(7)
instruments 18,547 16,968 1,579 - and exchange rate(7)
Defined benefit asset 498 - 498 - Other(8)
Other 9,876 405 - 9,471
------------------------------ ------- ---------- -------------- ----------- ---------------------
403,740 113,929 269,576 20,235
----------------------------- ------- ---------- -------------- ----------- ---------------------
Liabilities
Deposits 266,394 15,422 250,972 - Interest rate(3)
Acceptances 6,541 - 6,541 - Interest rate(3)
Obligations related to
securities
sold short 21,817 21,817 - -
Obligations related to
securities
sold under repurchase
agreements and securities
loaned 33,473 - 33,473 - Interest rate(3)(6)
Derivative financial Interest rate(7)
instruments 19,632 18,909 723 - and exchange rate(7)
Liabilities related to
transferred
receivables 26,277 9,927 16,350 - Interest rate(3)
Defined benefit liability 111 - 111 - Other(8)
Other 6,250 - 77 6,173 Interest rate(3)
Subordinated debt 1,499 - 1,499 - Interest rate(3)
------------------------------ ------- ---------- -------------- ----------- ---------------------
381,994 66,075 309,746 6,173
============================== ======= ========== ============== =========== =====================
(1) Trading positions whose risk measures are VaR as well as total SVaR. For additional information, see the table on the following page that shows the VaR distribution of the trading portfolios by risk category, their diversification effect, and total trading SVaR.
(2) Non-trading positions that use other risk measures.
(3) For additional information, see the tables in the pages ahead, namely, the table that shows the VaR distribution of the trading portfolios by risk category, their diversification effect, and total trading SVaR as well as the table that shows the interest rate sensitivity.
(4) For additional information, see Note 6 to the consolidated financial statements.
(5) The fair value of equity securities designated at fair value through other comprehensive income is presented in Notes 3 and 6 to the consolidated financial statements.
(6) These instruments are recorded at amortized cost and are subject to credit risk for capital management purposes. For trading-related transactions with maturities of more than one day, interest rate risk is included in the VaR and SVaR measures.
(7) For additional information, see Notes 16 and 17 to the consolidated financial statements. (8) For additional information, see Note 23 to the consolidated financial statements.
Trading Activities
The table below shows the VaR distribution of trading portfolios by risk category and their diversification effect as well as total trading SVaR, i.e., the VaR of the Bank's current portfolios obtained following the calibration of risk factors over a 12-month stress period.
VaR and SVaR of Trading Portfolios(1)(2) *
Year ended October
31
(millions of Canadian
dollars) 2023 2022
========================== ====== ======================= ===== =======================
Period Period
Low High Average end Low High Average end
========================== ====== ====== ======= ====== ===== ====== ======= ======
Interest rate (5.2) (11.3) (7.4) (8.7) (3.9) (11.3) (5.8) (5.2)
Foreign exchange (0.9) (5.9) (2.7) (5.0) (0.4) (6.9) (2.1) (2.1)
Equity (5.1) (10.8) (7.6) (6.5) (4.0) (10.6) (7.2) (7.1)
Commodity (0.6) (1.6) (1.2) (1.6) (0.5) (1.6) (0.9) (1.2)
Diversification effect(3) n.m. n.m. 9.4 10.4 n.m. n.m. 8.1 7.3
--------------------------- ------ ------ ------- ------ ----- ------ ------- ------
Total trading VaR (6.7) (12.4) (9.5) (11.4) (4.6) (11.4) (7.9) (8.3)
--------------------------- ------ ------ ------- ------ ----- ------ ------- ------
Total trading SVaR (10.3) (25.1) (17.2) (17.1) (5.1) (26.2) (14.6) (18.8)
=========================== ====== ====== ======= ====== ===== ====== ======= ======
n.m. Computation of a diversification effect for the high and low is not meaningful, as highs and lows may occur on different days and be attributable to different types of risk.
(1) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(2) Amounts are presented on a pre-tax basis and represent one-day VaR and SVaR using a 99% confidence level.
(3) The total trading VaR is less than the sum of the individual risk factor VaR results due to the diversification effect.
The average total trading VaR stood at $9.5 million for fiscal 2023, up from $7.9 million in fiscal 2022. The average total trading SVaR was also up, increasing from $14.6 million in fiscal 2022 to $17.2 million in fiscal 2023. These increases were mainly driven by higher equity risk and higher interest rate risk.
The revenues generated by trading activities are compared with VaR as a backtesting assessment of the appropriateness of this risk measure as well as the financial performance of trading activities relative to the risk undertaken.
The chart below shows daily trading and underwriting revenues and VaR. Daily trading and underwriting revenues were positive on 94% of the days for the year ended October 31, 2023. Net daily trading and underwriting losses in excess of $1 million were recorded on seven days. None of these losses exceeded the VaR.
Daily Trading and Underwriting Revenues
Year ended October 31, 2023
(millions of Canadian dollars)
Stress Testing
Stress testing is a risk management technique that consists of estimating potential losses under abnormal market conditions and risk factor movements. This technique enhances transparency by exploring a range of severe but plausible scenarios.
These stress tests simulate the results that the portfolios would generate if the extreme scenarios in question were to occur. The Bank's stress testing framework, which is applied to all positions generating market risk, currently comprises the following categories of stress test scenarios:
-- Historical scenarios based on past major disruption situations;
-- Hypothetical scenarios designed to be forward-looking in the face of potential market stresses;
-- Scenarios specific to asset classes, including:
o sharp parallel increases/decreases in interest rates; non-parallel movements of interest rates (flattening and steepening) and increases/decreases in credit spreads;
o sharp stock market crash coupled with a significant increase in volatility of the term structure; increase in stock prices combined with less volatility;
o significant increases/decreases in commodity prices coupled with increases/decreases in volatility; short-term and long-term increases/decreases in commodity prices;
o depreciation/appreciation of the U.S. dollar and of other currencies relative to the Canadian dollar.
Structural Interest Rate Risk
As part of its core banking activities, such as lending and deposit taking, the Bank is exposed to interest rate risk. Structural interest rate risk is the potential negative impact of interest rate fluctuations on the Bank's annual net interest income and the economic value of its equity. Activities related to hedging, investments, and term funding are also exposed to structural interest rate risk. The Bank's main exposure to interest rate risk stems from a variety of sources:
-- yield curve risk, which refers to changes in the level, slope, and shape of the yield curve;
-- repricing risk, which arises from timing differences in the maturity and repricing of on- and off-balance-sheet items;
-- options risk, either implicit (e.g., prepayment of mortgage loans) or explicit (e.g., capped mortgages and rate guarantees) in balance sheet products;
-- basis risk that is caused by an imperfect correlation between different yield curves.
The Bank's exposure to structural interest rate risk is assessed and controlled mostly through the impact of stress scenarios and market shocks on the economic value of the Bank's equity and on 12-month net interest income projections. These two metrics are calculated daily. They are based on cash flow projections prepared using a number of assumptions. Specifically, the Bank has developed key assumptions on loan prepayment levels, deposit redemptions, and the behaviour of customers that were granted rate guarantees as well as the rate and duration profile of non-maturity deposits. These specific assumptions were developed based on historical analyses and are regularly reviewed.
Funds transfer pricing is a process by which the Bank's business units are charged or paid according to their use or supply of funding. Through this mechanism, all funding activities as well as the interest rate risk and liquidity risk associated with those activities are centralized in the Global Funding and Treasury Group.
Active management of structural interest rate risk can significantly enhance the Bank's profitability and add to shareholder value. The Bank's goal is to maximize the economic value of its equity and its annual net interest income considering its risk appetite. This goal must be achieved within prescribed risk limits and is accomplished primarily by implementing a policy framework, approved by the GRC and submitted for information purposes to the RMC, that sets a risk tolerance threshold, monitoring structures controlled by the various committees, risk indicators, reporting procedures, delegation of responsibilities, and segregation of duties. The Bank also prepares an annual funding plan that includes the expected growth of assets and liabilities.
Governance
Management of the Bank's structural interest rate risk is mandated to the Global Funding and Treasury Group. In this role, the executives and personnel of this group are responsible for the day-to-day management of the risks inherent to structural interest rate risk hedging decisions and operations. They act as the primary effective challenge function with respect to the execution of these activities. The GRC approves and endorses the structural interest rate exposure and strategies. The Asset Liability Committee and the Financial Markets Risk Committee ensure that senior management monitors structural interest rate risk on an ongoing basis. The Risk Management Group is responsible for assessing structural interest rate risk, monitoring activities, and ensuring compliance with the structural interest rate risk management policy. The Risk Management Group ensures that an appropriate risk management framework is in place and ensures compliance with the risk appetite framework and policy. Structural interest rate risk supervision is mainly provided by the Financial Markets Risk Committee. This committee reviews exposure to structural interest rate risk, the use of limits, and changes made to assumptions.
Stress Testing
Stress tests are performed on a regular basis to assess the impact of various scenarios on annual net interest income and on the economic value of equity in order to guide the management of structural interest rate risk. Stress test scenarios are performed where the yield curve level, slope, and shape are shocked. Yield curve basis and volatility scenarios are also performed. All risk factors mentioned above are covered by specific scenarios and have Board-approved or GRC--approved risk limits.
Dynamic simulation is also used to project the Bank's future net interest income, future economic value, and future exposure to structural interest rate risk. These simulations project cash flows of assets, liabilities, and off-balance-sheet products over a given investment horizon. Given their dynamic nature, they encompass assumptions pertaining to changes in volume, client term preference, prepayments of deposits and loans, and the yield curve.
The following table presents the potential before-tax impact of an immediate and sustained 100-basis-point increase or of an immediate and sustained 100--basis-point decrease in interest rates on the economic value of equity and on the net interest income of the Bank's non-trading portfolios for the next 12 months, assuming no further hedging is undertaken.
Interest Rate Sensitivity - Non-Trading Activities (Before Tax)*
As at October 31
(millions of Canadian dollars) 2023 2022
================================= ============================= ======== ==================
Canadian Other Canadian Other
dollar currencies Total dollar currencies Total
================================ ======== =========== ===== ======== =========== =====
Impact on equity
100-basis-point increase in the
interest rate (297) 2 (295) (191) (24) (215)
100-basis-point decrease in the
interest rate 272 7 279 179 27 206
--------------------------------- -------- ----------- ----- -------- ----------- -----
Impact on net interest income
100-basis-point increase in the
interest rate 73 1 74 128 2 130
100-basis-point decrease in the
interest rate (103) 1 (102) (141) (2) (143)
================================= ======== =========== ===== ======== =========== =====
Investment Governance
The Bank has created securities portfolios in liquid and less liquid securities for strategic, long-term investment, and liquidity management purposes. These investments carry market risk, credit risk, liquidity risk, and concentration risk.
The investment governance framework sets out the guiding principles and general management standards that must be followed by all those who manage portfolios of these securities included in the portfolios of the Bank and its subsidiaries. Under this investment governance framework, business units that are active in managing these types of portfolios adopt internal investment policies that set, among other things, targets and limits for the allocation of assets in the portfolios concerned and internal approval mechanisms. The primary objective is to reduce concentration risk by industry, issuer, country, type of financial instrument, and credit quality.
Overall limits in value and in proportion to the Bank's equity are set on the outstanding amount of liquid preferred shares, liquid equity securities excluding preferred shares, and instruments classified as illiquid securities in the securities portfolios. The overall exposure to common shares with respect to an individual issuer and the total outstanding amount invested in private equity funds, for investment banking services, are also subject to limits. Restrictions are also set on investments defined as special. Lastly, the Bank has a specific policy, approved by the RMC, applicable to investments in debt and equity securities, including strategic investments. Strategic investments are defined as purchases of business assets or acquisitions of significant interests in an entity for purposes of acquiring control or creating a long-term relationship.
Structural Foreign Exchange Risk
The Bank's structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. This risk, predominantly in U.S. dollars, is measured by assessing the impact of currency fluctuations on retained earnings. The Bank uses financial instruments (derivative and non-derivative) to hedge this risk. An adverse change in foreign exchange rates can also impact the Bank's capital ratios due to the amount of RWA denominated in a foreign currency. When the Canadian dollar depreciates relative to other currencies, unrealized translation gains on the Bank's net investments in foreign operations, as well as the impact on hedging transactions, are reported in other comprehensive income in shareholders' equity. In addition, the Canadian-dollar equivalent of U.S.-dollar-denominated RWA and regulatory capital deductions increases. The reverse is true when the Canadian dollar appreciates relative to the U.S. dollar. The structural foreign exchange risk is managed to ensure that the potential impacts on the capital ratios and net income are within tolerable limits set by risk policies.
Liquidity and Funding Risk
Liquidity and funding risk is the risk that the Bank will be unable to honour daily cash and financial obligations without resorting to costly and untimely measures. Liquidity and funding risk arises when sources of funds become insufficient to meet scheduled payments under the Bank's commitments. Liquidity risk stems from mismatched cash flows related to assets and liabilities as well as the characteristics of certain products such as credit commitments and non-fixed-term deposits.
The Bank's primary objective as a financial institution is to manage liquidity such that it supports the Bank's business strategy and allows it to honour its commitments when they come due, even in extreme conditions. This is done primarily by implementing a policy framework approved by the RMC, which establishes a risk appetite, monitoring structures controlled by various committees, risk indicators, reporting procedures, delegation of responsibilities, and segregation of duties. The Bank also prepares an annual funding plan that incorporates the expected growth of assets and liabilities.
Regulatory Environment
The Bank works closely with national and international regulators to implement regulatory liquidity standards. The Bank adapts its processes and policies to reflect its liquidity risk appetite towards these new requirements.
The Liquidity Adequacy Requirements (LAR) are reviewed annually to reflect domestic and international regulatory changes. They constitute OSFI's proposed liquidity framework and include seven chapters:
-- overview; -- liquidity coverage ratio (LCR); -- net stable funding ratio (NSFR); -- net cumulative cash flow (NCCF); -- operating cash flow statement; -- liquidity monitoring tools; -- intraday liquidity monitoring tools.
LCR is used to ensure that banks can overcome severe short-term stress, while the NSFR is a structural ratio over a one-year horizon. The NCCF metric is defined as a monitoring tool that calculates a survival period. It is based on the assumptions of a stress scenario prescribed by OSFI that aims to represent a combined systemic and bank-specific crisis. The Bank publishes LCR and NSFR on a quarterly basis, whereas NCCF is produced monthly and communicated to OSFI.
On November 7, 2022, OSFI published a new guideline entitled Assurance on Capital, Leverage and Liquidity Returns. OSFI relies largely on the regulatory returns produced by financial institutions when assessing their safety and soundness. The purpose of this guideline is to better inform auditors and institutions on the work to be performed on regulatory returns in order to clarify and align OSFI's assurance expectations across all financial institutions. In particular, the guideline addresses the assurance that must be provided by an external audit, attestation by senior management, the assurance that must be provided by an internal audit, and the effective dates. For D-SIBs, the internal audit assurance requirements regarding the capital, leverage and liquidity returns commence as of fiscal 2023, the senior management attestation and internal review requirements apply as of fiscal 2024, and the external audit assurance requirements apply as of fiscal 2025.
On April 1, 2023, revisions to OSFI's Liquidity Adequacy Requirements Guideline came into effect. OSFI made changes that will improve the sensitivity to risk and ensure that financial institutions hold sufficient cash or other liquid investments to meet potential liquidity needs and to support the continued lending of credit, in particular during periods of financial stress.
On October 31, 2023, OSFI announced its decision on reviewing the Liquidity Adequacy Requirements (LAR) Guideline with respect to wholesale funding sources with retail-like characteristics, specifically high-interest savings account exchange-traded funds (HISA ETFs). OSFI determined these sources to be unsecure wholesale funding provided by other legal entities. Despite some retail-like characteristics and term agreements with depositors, the fact that these products are held directly by fund managers led OSFI to conclude that a 100% run-off factor for these products was appropriate. As a result, deposit-taking institutions exposed to such funding must hold sufficient high-quality liquid assets to support all HISA ETF balances that can be withdrawn within 30 days. By January 31, 2024, all deposit-taking institutions will be required to transition the measurement and related reporting to the run-off treatment specified in the LAR. Moreover, changes for reporting the LCR must be calculated retrospectively to the start of the quarter to account for daily fluctuations in the ratio (November 1, 2023 for the Bank).
The Bank continues to closely monitor regulatory developments and actively participates in various consultation processes.
Governance
The Global Funding and Treasury Group is responsible for managing liquidity and funding risk. Although the day-to-day and strategic management of risks associated with liquidity, funding, and pledging activities is assumed by the Global Funding and Treasury Group, the Risk Management Group is responsible for assessing liquidity risk and overseeing compliance with the resulting policy. The Risk Management Group ensures that an appropriate risk management framework is in place and ensures compliance with the risk appetite framework. This structure provides an independent oversight and effective challenge for liquidity, funding, and pledging decisions, strategy, and exposure.
The Bank's Liquidity, Funding and Pledging Governance Policy requires review and approval by the RMC, based on recommendations from the GRC. The Bank has established three levels of limits. The first two levels involve the Bank's overall cash position and are respectively approved by the Board and the GRC, whereas the third level of limits focuses more on specific aspects of liquidity risk and is approved by the Financial Markets Risk Committee. The Board not only approves the supervision of day-to-day risk management and governance but also backup plans in anticipation of emergency and liquidity crisis situations. If a limit has to be revised, the Risk Management Group with the support of the Global Funding and Treasury Group, submits the proposed revision to the approving committee.
Oversight of liquidity risk is entrusted mainly to the Financial Markets Risk Committee, whose members include representatives of the Financial Markets segment, the Global Funding and Treasury Group, and the Risk Management Group. In addition, the Asset Liability Committee ensures that senior management monitors liquidity and funding risk on an ongoing basis.
The Bank also has policies and guidelines governing its own collateral pledged to counterparties, given the potential impact of such asset transfers on its liquidity. In accordance with its Liquidity, Funding and Pledging Governance Policy, the Bank conducts simulations of potential counterparty collateral claims in the event of a Bank downgrade or other unlikely occurrences, such as large market fluctuations.
Through the Financial Markets Risk Committee, the Risk Management Group regularly reports changes in liquidity, funding, and pledging indicators and compliance with regulatory-, Board-, and GRC-approved limits. If control reports indicate non-compliance with the limits and a general deterioration of liquidity indicators, the Global Funding and Treasury Group takes remedial action. According to an escalation process, problematic situations are reported to management and to the GRC and the RMC. An executive report on the Bank's liquidity and funding risk management is submitted quarterly to the RMC; this report describes the Bank's liquidity position and informs the Board of non-compliance with the limits and other rules observed during the reference period as well as remedial action taken.
Liquidity Management
The Bank performs liquidity management, funding, and pledging operations not only from its head office and regional offices in Canada, but also through certain foreign centres. Although the volume of such operations abroad represents a sizable portion of global liquidity management, the Bank's liquidity management is centralized. By organizing liquidity management, funding, and pledging activities within the Global Funding and Treasury Group, the Bank can better coordinate enterprise-wide funding and risk monitoring activities. All internal funding transactions between Bank entities are controlled by the Global Funding and Treasury Group.
This centralized structure streamlines the allocation and control of liquidity management, funding, and pledging limits. Nonetheless, the Liquidity, Funding and Pledging Governance Policy contains special provisions for financial centres whose size and/or strategic importance makes them more likely to contribute to the Bank's liquidity risk. Consequently, a liquidity and funding risk management structure exists at each financial centre. This structure imposes a set of limits of varying levels, up to the limits approved by the RMC, on diverse liquidity parameters, including liquidity stress tests as well as simple concentration measures.
The Bank's funds transfer pricing system prices liquidity by allocating the cost or income to the various business segments. Liquidity costs are allocated to liquidity-intensive activities, mainly long-term loans, and commitments to extend credit and less liquid securities as well as strategic investments. The liquidity compensation is credited to the suppliers of funds, primarily funding in the form of stable deposits from the Bank's distribution network.
Short-term day-to-day funding decisions are based on a daily cumulative net cash position, which is controlled using liquidity ratio limits. Among these ratios and parameters, the Bank pays particular attention to the funds obtained on the wholesale market and to cumulative cash flows over various time horizons.
Moreover, the Bank's collateral pledging activities are monitored in relation to the different limits set by the Bank and are subject to monthly stress tests. In particular, the Bank uses various scenarios to estimate the potential amounts of additional collateral that would be required in the event of a downgrade to the Bank's credit rating.
Liquidity risk can be assessed in many different ways using different liquidity indicators. One of the key liquidity risk monitoring tools is the result over a three-month stress testing period, which is based on contractual maturity and behavioural assumptions applied to balance sheet items and off-balance-sheet commitments.
Stress Testing
The results over a three-month stress test period measure the Bank's liquidity profile by checking not only its ability to survive a three-month crisis but also the liquidity buffer it can generate with its liquid assets. This result is measured on a weekly basis using three scenarios that are designed to assess sensitivity to a crisis specific to the Bank and/or of a systemic nature. Among the assumptions behind these scenarios, deposit loss simulations are carried out based on their degree of stability, while the value of certain assets is encumbered by an amount reflecting their readiness for liquidation in a crisis. Appropriate scenarios and limits are included in the Bank's Liquidity, Funding and Pledging Governance Policy.
The Bank maintains an up-to-date, comprehensive financial contingency and crisis recovery plan that describes the measures to be taken in the event of a critical liquidity situation. This plan is reviewed and approved annually by the Board as part of business continuity and recovery planning. For additional information, see the Regulatory Compliance Risk section of this MD&A.
Liquidity Risk Appetite
The Bank monitors and manages its risk appetite through liquidity limits, ratios, and stress tests. The Bank's liquidity risk appetite is based on the following three principles:
-- ensure the Bank has a sufficient amount of unencumbered liquid assets to cover its financial requirements, in both normal and stressed conditions;
-- ensure the Bank keeps a liquidity buffer above the minimum regulatory requirement; -- ensure the Bank maintains diversified and stable sources of funding.
Liquid Assets
To protect depositors and creditors from unexpected crisis situations, the Bank holds a portfolio of unencumbered liquid assets that can be readily liquidated to meet financial obligations. The majority of the unencumbered liquid assets are held in Canadian or U.S. dollars. Moreover, all assets that can be quickly monetized are considered liquid assets. The Bank's liquidity reserves do not factor in the availability of the emergency liquidity facilities of central banks. The following tables provide information on the Bank's encumbered and unencumbered assets.
Liquid Asset Portfolio(1) *
As at October 31
(millions of Canadian
dollars) 2023 2022
======================== ========== ========= ======= ======================== ============
Bank-owned Liquid Encumbered
liquid assets Total liquid Unencumbered Unencumbered
assets received liquid assets liquid liquid
(2) (3) assets (4) assets assets
====================== ========== ========= ======= ========== ============ ============
Cash and deposits with
financial
institutions 35,234 - 35,234 9,290 25,944 24,180
Securities
Issued or guaranteed by
the
Canadian government,
U.S. Treasury, other
U.S.
agencies and
other foreign
governments 34,292 35,181 69,473 40,411 29,062 25,894
Issued or guaranteed by
Canadian
provincial
and municipal
governments 12,130 7,128 19,258 12,855 6,403 8,421
Other debt securities 8,679 4,078 12,757 2,662 10,095 9,809
Equity securities 66,717 41,532 108,249 80,996 27,253 27,291
Loans
Securities backed by
insured
residential mortgages 12,836 - 12,836 6,696 6,140 5,582
----------------------- ---------- --------- ------- ---------- ------------ ------------
As at October 31, 2023 169,888 87,919 257,807 152,910 104,897
------------------------ ---------- --------- ------- ---------- ------------ ------------
As at October 31, 2022 153,384 92,257 245,641 144,464 101,177
======================== ========== ========= ======= ========== ============ ============
As at October 31
(millions of Canadian dollars) 2023 2022
========================================================= ========== ==========================
Unencumbered liquid assets by entity
National Bank (parent) 55,626 52,544
Domestic subsidiaries 10,013 14,576
Foreign subsidiaries and branches 39,258 34,057
-------------------------------------------------------- ---------- --------------------------
104,897 101,177
======================================================= ========== ==========================
As at October 31
(millions of Canadian dollars) 2023 2022
========================================================= ========== ==========================
Unencumbered liquid assets by currency
Canadian dollar 51,882 49,466
U.S. dollar 35,243 24,871
Other currencies 17,772 26,840
-------------------------------------------------------- ---------- --------------------------
104,897 101,177
======================================================= ========== ==========================
Liquid Asset Portfolio (1) * - Average (5)
Year ended October 31
(millions of Canadian
dollars) 2023 2022
=========================== ========== ========= ======= ======================== ============
Bank-owned Liquid Encumbered
liquid assets Total liquid Unencumbered Unencumbered
assets received liquid assets liquid liquid
(2) (3) assets (4) assets assets
========================= ========== ========= ======= ========== ============ ============
Cash and deposits with
financial
institutions 40,728 - 40,728 8,128 32,600 31,369
Securities
Issued or guaranteed by
the
Canadian government,
U.S. Treasury, other U.S.
agencies and
other foreign governments 36,786 37,074 73,860 50,472 23,388 23,701
Issued or guaranteed by
Canadian
provincial
and municipal governments 14,067 7,940 22,007 14,771 7,236 6,276
Other debt securities 10,653 3,728 14,381 3,116 11,265 8,771
Equity securities 64,439 47,099 111,538 82,542 28,996 24,427
Loans
Securities backed by
insured
residential mortgages 12,381 - 12,381 7,136 5,245 4,218
-------------------------- ---------- --------- ------- ---------- ------------ ------------
As at October 31, 2023 179,054 95,841 274,895 166,165 108,730
--------------------------- ---------- --------- ------- ---------- ------------ ------------
As at October 31, 2022 160,463 85,847 246,310 147,548 98,762
=========================== ========== ========= ======= ========== ============ ============
(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
(2) Bank-owned liquid assets include assets for which there are no legal or geographic restrictions.
(3) Securities received as collateral with respect to securities financing and derivative transactions and securities purchased under reverse repurchase agreements and securities borrowed.
(4) In the normal course of its funding activities, the Bank pledges assets as collateral in accordance with standard terms. Encumbered liquid assets include assets used to cover short sales, obligations related to securities sold under repurchase agreements and securities loaned, guarantees related to security-backed loans and borrowings, collateral related to derivative financial instrument transactions, asset-backed securities, and liquid assets legally restricted from transfers.
(5) The average is based on the sum of the end-of-period balances of the 12 months of the year divided by 12.
Summary of Encumbered and Unencumbered Assets(1) *
As at October
(millions of Canadian dollars) 31, 2023
================================== =========== ======== =========== ======== ===================
Encumbered
assets
as %
Encumbered Unencumbered of total
assets (2) assets Total assets
--------------------------------- --------------------- --------------------- ------- ----------
Pledged Available
as Other as Other
collateral (3) collateral (4)
================================= =========== ======== =========== ======== ======= ==========
Cash and deposits with financial
institutions 449 8,841 25,944 - 35,234 2.2
Securities 49,005 - 72,813 - 121,818 11.6
Securities purchased under
reverse repurchase
agreements and securities
borrowed - 11,260 - - 11,260 2.6
Loans and acceptances, net
of allowances 36,705 - 6,140 182,598 225,443 8.7
Derivative financial instruments - - - 17,516 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 - - - 7,889 7,889 -
---------------------------------- ----------- -------- ----------- -------- ------- ----------
86,159 20,101 104,897 212,421 423,578 25.1
================================== =========== ======== =========== ======== ======= ==========
As at October
(millions of Canadian dollars) 31, 2022
================================== =========== ======== =========== ======== ===================
Encumbered
assets
as %
Encumbered Unencumbered of total
assets(2) assets Total assets
--------------------------------- --------------------- --------------------- ------- ----------
Pledged Available
as as
collateral Other(3) collateral Other(4)
================================= =========== ======== =========== ======== ======= ==========
Cash and deposits with financial
institutions 295 7,395 24,180 - 31,870 1.9
Securities 42,972 - 66,747 - 109,719 10.6
Securities purchased under
reverse repurchase
agreements and securities
borrowed - 21,818 4,668 - 26,486 5.4
Loans and acceptances, net
of allowances 37,426 - 5,582 163,736 206,744 9.3
Derivative financial instruments - - - 18,547 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 - - - 5,958 5,958 -
---------------------------------- ----------- -------- ----------- -------- ------- ----------
80,693 29,213 101,177 192,657 403,740 27.2
================================== =========== ======== =========== ======== ======= ==========
(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
(2) In the normal course of its funding activities, the Bank pledges assets as collateral in accordance with standard terms. Encumbered assets include assets used to cover short sales, obligations related to securities sold under repurchase agreements and securities loaned, guarantees related to security-backed loans and borrowings, collateral related to derivative financial instrument transactions, asset-backed securities, residential mortgage loans securitized and transferred under the Canada Mortgage Bond program, assets held in consolidated trusts supporting the Bank's funding activities, and mortgage loans transferred under the covered bond program.
(3) Other encumbered assets include assets for which there are restrictions and that cannot therefore be used for collateral or funding purposes as well as assets used to cover short sales.
(4) Other unencumbered assets are assets that cannot be used for collateral or funding purposes in their current form. This category includes assets that are potentially eligible as funding program collateral (e.g., mortgages insured by the Canada Mortgage and Housing Corporation that can be securitized into mortgage-backed securities under the National Housing Act (Canada)).
Liquidity Coverage Ratio
The liquidity coverage ratio (LCR) was introduced primarily to ensure that banks could withstand periods of severe short-term stress. LCR is calculated by dividing the total amount of high-quality liquid assets (HQLA) by the total amount of net cash outflows. OSFI has been requiring Canadian banks to maintain a minimum LCR of 100%. An LCR above 100% ensures that banks are holding sufficient high-quality liquid assets to cover net cash outflows given a severe, 30--day liquidity crisis. The assumptions underlying the LCR scenario were established by the BCBS and OSFI's Liquidity Adequacy Requirements Guideline.
The following table provides average LCR data calculated using the daily figures in the quarter. For the quarter ended October 31, 2023, the Bank's average LCR was 155%, well above the 100% regulatory requirement and demonstrating the Bank's solid liquidity position.
LCR Disclosure Requirements(1)(2) *
For the quarter
(millions of Canadian dollars) ended
============================================= ================ ============== ==================
July 31,
October 31, 2023 2023
--------------------------------------------- -------------------------------- --------------
Total unweighted Total weighted Total weighted
value (3) value (4) value(4)
(average) (average) (average)
============================================ ================ ============== ==============
High-quality liquid assets (HQLA)
Total HQLA n.a. 74,177 73,834
Cash outflows
Retail deposits and deposits from small
business
customers, of which: 74,934 10,934 10,515
Stable deposits 27,706 831 839
Less stable deposits 47,228 10,103 9,676
Unsecured wholesale funding, of which: 97,158 51,528 53,485
Operational deposits (all counterparties)
and deposits in networks of cooperative
banks 30,433 7,417 7,314
Non-operational deposits (all
counterparties) 57,366 34,752 35,640
Unsecured debt 9,359 9,359 10,531
Secured wholesale funding n.a. 24,716 22,390
Additional requirements, of which: 65,937 16,774 16,327
Outflows related to derivative exposures
and other collateral requirements 21,681 8,912 8,510
Outflows related to loss of funding on
secured
debt securities 1,949 1,949 1,805
Backstop liquidity and credit enhancement
facilities and commitments to extend
credit 42,307 5,913 6,012
Other contractual commitments to extend
credit 2,149 760 769
Other contingent commitments to extend
credit 134,225 1,968 1,941
-------------------------------------------- ---------------- -------------- --------------
Total cash outflows n.a. 106,680 105,427
-------------------------------------------- ---------------- -------------- --------------
Cash inflows
Secured lending (e.g., reverse repos) 113,802 27,660 26,779
Inflows from fully performing exposures 10,243 6,669 6,634
Other cash inflows 23,574 23,574 21,324
-------------------------------------------- ---------------- -------------- --------------
Total cash inflows 147,619 57,903 54,737
============================================ ================ ============== ==============
Total adjusted Total adjusted
value (5) value(5)
========================================== ================ ============== ==============
Total HQLA 74,177 73,834
Total net cash outflows 48,777 50,690
Liquidity coverage ratio (%) (6) 155 % 146 %
============================================= ================ ============== ==============
n.a. Not applicable
(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
(2) OSFI prescribed a table format in order to standardize disclosure throughout the banking industry.
(3) Unweighted values are calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows).
(4) Weighted values are calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates.
(5) Total adjusted values are calculated after the application of both haircuts and inflow and outflow rates and any applicable caps.
(6) The data in this table has been calculated using averages of the daily figures in the quarter.
As at October 31, 2023, Level 1 liquid assets represented 84% of the Bank's HQLA, which includes cash, central bank deposits, and bonds issued or guaranteed by the Canadian government and Canadian provincial governments. Cash outflows arise from the application of OSFI-prescribed assumptions on deposits, debt, secured funding, commitments, and additional collateral requirements. The cash outflows are partly offset by cash inflows, which come mainly from secured loans and performing loans. The Bank expects some quarter-over-quarter variation between reported LCRs without such variation being necessarily indicative of a trend. The variation between the quarter ended October 31, 2023 and the preceding quarter is a result of normal business operations. The Bank's liquid asset buffer is well in excess of its total net cash outflows. The LCR assumptions differ from the assumptions used for the liquidity disclosures presented in the tables on the previous pages or those used for internal liquidity management rules. While the liquidity disclosure framework is prescribed by the EDTF, the Bank's internal liquidity metrics use assumptions that are calibrated according to its business model and experience.
Intraday Liquidity
The Bank manages its intraday liquidity in such a way that the amount of available liquidity exceeds its maximum intraday liquidity requirements. The Bank monitors its intraday liquidity on an hourly basis, and the evolution thereof is presented monthly to the Financial Markets Risk Committee.
Net Stable Funding Ratio
The BCBS has developed the Net Stable Funding Ratio (NSFR) to promote a more resilient banking sector. The NSFR requires institutions to maintain a stable funding profile in relation to the composition of their assets and off-balance-sheet activities. A viable funding structure is intended to reduce the likelihood that disruptions to an institution's regular sources of funding would erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR is calculated by dividing available stable funding by required stable funding. OSFI has been requiring Canadian banks to maintain a minimum NSFR of 100%.
The following table provides the available stable funding and the required stable funding in accordance with OSFI's Liquidity Adequacy Requirements Guideline . As at October 31, 2023, the Bank's NSFR was 118%, well above the 100% regulatory requirement and demonstrating the Bank's solid liquidity in a long-term position.
NSFR Disclosure Requirements (1)(2) *
As at October As at
31, July 31,
(millions of Canadian dollars) 2023 2023
================================= ======== ====== ======= ================= ========
Unweighted value by residual
maturity
------------------------------- ------------------------------------- ========
Over
6 6
months months Weighted
No or to 1 Over value Weighted
maturity less year 1 year (3) value(3)
=============================== ======== ====== ======= ======= ======== ========
Available Stable Funding (ASF)
Items
Capital: 23,678 - - 748 24,425 23,772
Regulatory capital 23,678 - - 748 24,425 23,772
Other capital instruments - - - - - -
Retail deposits and deposits from
small business customers: 67,049 17,292 7,913 23,768 103,077 101,196
Stable deposits 25,263 5,053 3,957 8,015 40,575 40,032
Less stable deposits 41,786 12,239 3,956 15,753 62,502 61,164
Wholesale funding: 60,916 92,294 10,338 45,691 99,442 101,485
Operational deposits 31,441 - - - 15,721 15,257
Other wholesale funding 29,475 92,294 10,338 45,691 83,721 86,228
Liabilities with matching
interdependent
assets(4) - 2,755 2,673 19,606 - -
------ ------- -------
Other liabilities(5) : 17,450 16,672 674 674
------ ------- -------
NSFR derivative liabilities(5) n.a. 4,868 n.a. n.a.
------ ------- -------
All other liabilities and equity
not included in the above
categories 17,450 2,836 150 8,818 674 674
-------------------------------- -------- ------ ------- ------- -------- --------
Total ASF n.a. n.a. n.a. n.a. 227,618 227,127
--------------------------------- -------- ------ ------- ------- -------- --------
Required Stable Funding (RSF)
Items
Total NSFR high-quality liquid
assets (HQLA) n.a. n.a. n.a. n.a. 9,004 10,714
Deposits held at other financial
institutions for operational
purposes - - - - - -
Performing loans and securities: 61,863 64,837 24,092 104,639 159,117 154,770
Performing loans to financial
institutions secured by Level
1 HQLA 96 262 - - 18 36
Performing loans to financial
institutions secured by
non-Level
1
HQLA and unsecured performing
loans to financial institutions 6,697 35,275 1,781 889 6,408 6,295
Performing loans to
non-financial
corporate clients, loans to
retail
and small business customers,
and loans to sovereigns,
central
banks and public sector
entities,
of which: 30,036 23,152 14,633 39,535 79,695 76,011
With a risk weight of less than
or equal to 35% under the
Basel
II
Standardized Approach for
credit
risk 172 1,473 449 742 1,556 1,826
Performing residential
mortgages,
of which: 9,115 5,322 6,421 59,334 54,184 53,591
With a risk weight of less than
or equal to 35% under the
Basel
II
Standardized Approach for
credit
risk 9,115 5,322 6,421 59,334 54,184 53,533
Securities that are not in
default
and do not qualify as HQLA,
including
exchange-traded equities 15,919 826 1,257 4,881 18,812 18,837
Assets with matching
interdependent
liabilities(4) - 2,755 2,673 19,606 - -
------ ------- -------
Other assets(5) : 6,082 32,272 20,922 23,089
------ ------- -------
Physical traded commodities,
including
gold 449 n.a. n.a. n.a. 449 423
------ ------- -------
Assets posted as initial margin
for derivative contracts and
contributions to default funds
of central counterparties(5) n.a. 9,096 7,732 10,092
------ ------- -------
NSFR derivative assets(4)(5) n.a. 1,605 - -
------ ------- -------
NSFR derivative liabilities
before
deduction of the variation
margin posted(5) n.a. 14,658 733 631
------ ------- -------
All other assets not included
in the above categories 5,633 3,562 1,757 1,594 12,008 11,943
------ ------- -------
Off-balance-sheet items(5) n.a. 112,954 4,259 4,175
--------------------------------- -------- ------ ------- ------- -------- --------
Total RSF n.a. n.a. n.a. n.a. 193,302 192,748
--------------------------------- -------- ------ ------- ------- -------- --------
Net Stable Funding Ratio (%) n.a. n.a. n.a. n.a. 118% 118%
================================= ======== ====== ======= ======= ======== ========
n.a. Not applicable
(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.
(2) OSFI prescribed a table format in order to standardize disclosure throughout the banking industry.
(3) Weighted values are calculated after application of the weightings set out in OSFI's Liquidity Adequacy Requirements Guideline.
(4) As per OSFI's specifications, liabilities arising from transactions involving the Canada Mortgage Bond program and their corresponding encumbered mortgages are given ASF and RSF weights of 0%, respectively.
(5) As per OSFI's specifications, there is no need to differentiate by maturity.
The NSFR represents the amount of ASF relative to the amount of RSF. ASF is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of RSF of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance-sheet exposures. The amounts of ASF and RSF are calibrated to reflect the degree of stability of liabilities and liquidity of assets. The Bank expects some quarter-over-quarter variation between reported NSFRs without such variation being necessarily indicative of a trend.
The NSFR assumptions differ from the assumptions used for the liquidity disclosures provided in the tables on the preceding pages or those used for internal liquidity management rules. While the liquidity disclosure framework is prescribed by the EDTF, the Bank's internal liquidity metrics use assumptions that are calibrated according to its business model and experience.
Funding Risk
Funding risk is defined as the risk to the Bank's ongoing ability to raise sufficient funds to finance actual or proposed business activities on an unsecured or secured basis at an acceptable price. The Bank maintains a good balance of its funding through appropriate diversification of its unsecured funding vehicles, securitization programs, and secured funding. The Bank also diversifies its funding by currency, geography, and maturity. The funding management priority is to achieve an optimal balance between deposits, securitization, secured funding, and unsecured funding. This brings optimal stability to the funding and reduces vulnerability to unpredictable events.
Liquidity and funding levels remained sound and robust over the year, and the Bank does not foresee any event, commitment, or demand that might have a significant impact on its liquidity and funding risk position. For additional information, see the table entitled Residual Contractual Maturities of Balance Sheet Items and Off-Balance-Sheet Commitments in Note 29 to the consolidated financial statements.
Credit Ratings
The credit ratings assigned by ratings agencies represent their assessment of the Bank's credit quality based on qualitative and quantitative information provided to them. Credit ratings may be revised at any time based on various factors, including macroeconomic factors, the methodologies used by ratings agencies, or the current and projected financial condition of the Bank. Credit ratings are one of the main factors that influence the Bank's ability to access financial markets at a reasonable cost. A downgrade in the Bank's credit ratings could adversely affect the cost, size, and term of future funding and could also result in increased requirement to pledge collateral or decreased capacity to engage in certain collateralized business activities at a reasonable cost, including hedging and derivative financial instrument transactions.
Liquidity and funding levels remain sound and robust, and the Bank continues to enjoy excellent access to the market for its funding needs. The Bank received favourable credit ratings from all the agencies, reflecting the high quality of its debt instruments, and the Bank's objective is to maintain these strong credit ratings. As at October 31, 2023, the outlooks of the ratings agencies remained unchanged at "Stable". The following table presents the Bank's credit ratings according to four rating agencies as at October 31, 2023.
The Bank's Credit Ratings
As at October 31,
2023
======================================== ========== ========== =====================
Moody's S&P DBRS Fitch
======================================== ========== ========== =========== ======
Short-term senior debt P-1 A-1 R-1 (high) F1+
Canadian commercial paper A-1 (mid)
Long-term deposits Aa3 AA AA-
Long-term non-bail-inable senior debt(1) Aa3 A AA AA-
Long term senior debt(2) A3 BBB+ AA (low) A+
NVCC subordinated debt Baa2 (hyb) BBB A (low)
NVCC limited recourse capital notes Ba1 (hyb) BB+ BBB (high) BBB
NVCC preferred shares Ba1 (hyb) P-3 (high) Pfd-2
Counterparty risk(3) Aa3/P-1 AA-
Covered bonds program Aaa AAA AAA
------------------------------------------ ---------- ---------- ----------- ------
Rating outlook Stable(4) Stable Stable Stable
========================================== ========== ========== =========== ======
(1) Includes senior debt issued before September 23, 2018 and senior debt issued on or after September 23, 2018, which is excluded from the Bank Recapitalization (Bail-In) Regime.
(2) Subject to conversion under the Bank Recapitalization (Bail-In) Regime.
(3) Moody's uses the term Counterparty Risk Rating while Fitch uses the term Derivative Counterparty Rating.
(4) On November 6, 2023, Moody's changed the rating trends for the Bank and its related entities to "Positive" from "Stable". This change reflects Moody's recognition of the Bank's solid performance in recent years.
Guarantees
As part of a comprehensive liquidity management framework, the Bank regularly reviews its contracts that stipulate that additional collateral could be required in the event of a downgrade of the Bank's credit rating. The Bank's liquidity position management approach already incorporates additional collateral requirements in the event of a one-, two-, or three-notch downgrade. These additional collateral requirements are presented in the table below.
(millions of Canadian dollars) As at October 31, 2023
================================ ===================================
One-notch Two-notch Three-notch
downgrade downgrade downgrade
=============================== ========== ========== ===========
Derivatives(1) 31 120 125
================================ ========== ========== ===========
(1) Contractual requirements related to agreements known as initial margins and variation margins.
Funding Strategy
The main objective of the funding strategy is to support the Bank's organic growth while also enabling it to survive potentially severe and prolonged crises and to meet its regulatory obligations and financial targets.
The Bank's funding framework is summarized as follows:
-- pursue a diversified deposit strategy to fund core banking activities through stable deposits coming from the networks of each of the Bank's major business segments;
-- maintain sound liquidity risk management through centralized expertise and management of liquidity metrics within a predefined risk appetite;
-- maintain active access to various markets to ensure a diversification of institutional funding in terms of source, geographic location, currency, instrument, and maturity, whether or not funding is secured.
The funding strategy is implemented in support of the Bank's overall objectives of strengthening its franchise among market participants and reinforcing its excellent reputation. The Bank continuously monitors and analyzes market trends as well as possibilities for accessing less expensive and more flexible funding, considering both the risks and opportunities observed. The deposit strategy remains a priority for the Bank, which continues to prefer deposits to institutional funding.
The Bank actively monitors and controls liquidity risk exposures and funding needs within and across entities, business segments, and currencies. The process involves evaluating the liquidity position of individual business segments in addition to that of the Bank as a whole as well as the liquidity risk from raising unsecured and secured funding in foreign currencies. The funding strategy is implemented through the funding plan and deposit strategy, which are monitored, updated to reflect actual results, and regularly evaluated.
Diversified Funding Sources
The primary purpose of diversifying by source, geographic location, currency, instrument, maturity, and depositor is to mitigate liquidity and funding risk by ensuring that the Bank maintains alternative sources of funds that strengthen its capacity to withstand a variety of severe yet plausible institution-specific and market-wide shocks. To meet this objective, the Bank:
-- takes funding diversification into account in the business planning process; -- maintains a variety of funding programs to access different markets; -- sets limits on funding concentration; -- maintains strong relationships with fund providers; -- is active in various funding markets of all tenors and for various instruments; -- identifies and monitors the main factors that affect the ability to raise funds.
The Bank is active in the following funding and securitization platforms:
-- Canadian dollar Senior Unsecured Debt; -- U.S. dollar Senior Unsecured Debt programs; -- Canadian Medium-Term Note Shelf; -- U.S. dollar Commercial Paper programs; -- U.S. dollar Certificates of Deposit; -- Euro Medium-Term Note program; -- Canada Mortgage and Housing Corporation securitization programs; -- Canadian Credit Card Trust II; -- Legislative Covered Bond program.
The table below presents the residual contractual maturities of the Bank's wholesale funding. The information has been presented in accordance with the categories recommended by the EDTF for comparison purposes with other banks.
Residual Contractual Maturities of Wholesale Funding(1) *
(millions of Canadian As at October
dollars) 31, 2023
======================= ======== ======= ======= ======= ======== ======== ===============
Over Over Over
1 3 6 Over
month months months 1
to to to Subtotal year Over
1 month 3 6 12 1 year to 2
or less months months months or less 2 years years Total
====================== ======== ======= ======= ======= ======== ======== ======= ======
Deposits from banks(2) 24 - - - 24 - 861 885
Certificates of deposit
and commercial
paper(3) 1,966 3,356 11,685 513 17,520 - - 17,520
Senior unsecured
medium-term
notes(4)(5) 1,347 400 2,686 3,595 8,028 6,539 6,385 20,952
Senior unsecured
structured
notes - - - - - 40 2,613 2,653
Covered bonds and
asset-backed
securities
Mortgage securitization - 1,760 829 2,760 5,349 3,915 15,770 25,034
Covered bonds - 1,100 - - 1,100 1,805 7,993 10,898
Securitization of
credit
card receivables - - - - - 48 - 48
Subordinated
liabilities(6) - - - - - - 748 748
3,337 6,616 15,200 6,868 32,021 12,347 34,370 78,738
----------------------- -------- ------- ------- ------- -------- -------- ------- ------
Secured funding - 2,860 829 2,760 6,449 5,768 23,763 35,980
Unsecured funding 3,337 3,756 14,371 4,108 25,572 6,579 10,607 42,758
----------------------- -------- ------- ------- ------- -------- -------- ------- ------
3,337 6,616 15,200 6,868 32,021 12,347 34,370 78,738
----------------------- -------- ------- ------- ------- -------- -------- ------- ------
As at October 31, 2022 6,122 8,390 8,393 7,113 30,018 9,338 32,752 72,108
======================= ======== ======= ======= ======= ======== ======== ======= ======
(1) Bankers' acceptances are not included in this table.
(2) Deposits from banks include all non-negotiable term deposits from banks.
(3) Includes bearer deposit notes.
(4) Certificates of deposit denominated in euros are included in senior unsecured medium-term notes.
(5) Includes debts subject to bank recapitalization (Bail-In) conversion regulations.
(6) Subordinated debt is presented in this table, but the Bank does not consider it as part of its wholesale funding.
Operational Risk
Operational risk is the risk of loss resulting from an inadequacy or a failure ascribable to human resources, equipment, processes, technology, or external events. Operational risk exists for every Bank activity. Theft, fraud, cyberattacks, unauthorized transactions, system errors, human error, misinterpretation of laws and regulations, litigation or disputes with clients, inappropriate sales practice behaviour, or property damage are just a few examples of events likely to cause financial loss, harm the Bank's reputation, or lead to regulatory penalties or sanctions.
Although operational risk cannot be eliminated entirely, it can be managed in a thorough and transparent manner to keep it at an acceptable level. The Bank's operational risk management framework is built on the concept of three lines of defence and provides a clear allocation of responsibilities to all levels of the organization, as mentioned below.
Operational Risk Management Framework
The operational risk management framework is described in the Operational Risk Management Policy, which is derived from the Risk Management Policy. The operational risk management framework is aligned with the Bank's risk appetite and is made up of policies, standards, and procedures specific to each operational risk, which fall under the responsibility of specialized groups.
The Operational Risk Management Committee (ORMC), a subcommittee of the GRC, is the main governance committee overseeing operational risk matters. Its mission is to provide oversight of the operational risk level across the organization to ensure it aligns with the Bank's established risk appetite targets. It implements effective frameworks for managing operational risk, including policies and standards, and monitors the application thereof.
The segments use several operational risk management tools and methods to identify, assess, manage and monitor their operational risks and control measures. With these tools and methods, the segments can :
-- recognize and understand the inherent and residual risks to which their activities and operations are exposed;
-- identify how to manage and monitor the identified risks to keep them at an acceptable level; -- proactively and continuously manage risks;
-- obtain an integrated view of operational risks by combining the results of these various tools in the risk profile.
Operational Risk Management Tools and Methods
Operational Risk Taxonomy
With the aim of developing a common language for the Bank's operational risk universe, an operational risk taxonomy has been established. It is comparable to the Basel taxonomy and based on eight risk categories and two risk themes.
Collection and Analysis of Data on Internal Operational Events
The Operational Risk Unit applies a process, across the Bank and its subsidiaries, for identifying, collecting, and analyzing data on internal operational events. This process helps determine the Bank's exposure to the operational risks and operational losses incurred and assess the effectiveness of internal controls. It also helps limit operational events, keep losses at an acceptable level and, as a result, reduce potential capital charges and lower the likelihood of damage to the Bank's reputation . These data are processed and saved in a centralized database and are periodically the subject of a quality assurance exercise.
Analysis and Lessons Learned from Operational Events Observed in Other Large Businesses
By collecting and analyzing media-reported information about significant operational incidents, in particular incidents related to fraud, information security, and theft of personal information experienced by other organizations, the Bank can assess the effectiveness of its own operational risk management practices and reinforce them, if necessary.
Operational Risk Self-Assessment Program
The operational risk self-assessment program gives each business unit and corporate unit the means to proactively and periodically identify and assess the new or major operational risks to which they are exposed, evaluate the effectiveness of monitoring and mitigating controls, and develop action plans to keep such risks at acceptable levels. As such, the program helps in anticipating factors that could hinder performance or the achievement of objectives.
Key Risk Indicators
Key risk indicators are used to monitor the main operational risk exposure factors and track how risks are evolving in order to proactively manage them. The business units and corporate units define the key indicators associated with their main operational risks and assign tolerance thresholds to them. These indicators are monitored periodically and, when they show a significant increase in risk or when a tolerance threshold is exceeded, they are sent to an appropriate level in the hierarchy and action plans are implemented as required.
Scenario Analysis
Scenario analysis, which is part of a Bank-wide stress testing program, is an important and useful tool for assessing the impacts related to potentially serious events. It is used to define the risk appetite, set risk exposure limits, and engage in business planning. More specifically, scenario analysis provides management with a better understanding of the risks faced by the Bank and helps it make appropriate management decisions to mitigate potential operational risks that are inconsistent with the Bank's risk appetite .
Insurance Program
To protect itself against any material losses arising from unforeseeable operational risk exposure, the Bank also has adequate insurance, the nature and amount of which meet its coverage requirements.
Operational Risk Reports and Disclosures
Operational events for which the financial impact exceeds tolerance thresholds or that have a significant non-financial impact are submitted to appropriate decision-making levels. Management is obligated to report on its management process and to remain alert to current and future issues. Reports on the Bank's risk profile, highlights, and emerging risks are periodically submitted, on a timely basis, to the ORMC, the GRC, and the RMC . This reporting enhances the transparency and proactive management of the main operational risk factors.
Regulatory Compliance Risk
Regulatory compliance risk is the risk of the Bank or of one of its employees or business partners failing to comply with the regulatory requirements in effect where it does business, both in Canada and internationally. Regulatory compliance risk is present in all of the daily operations of each Bank segment. A situation of regulatory non-compliance can adversely affect the Bank's reputation and result in penalties and sanctions or increased oversight by regulators.
Organizational Structure of Compliance
Compliance is an independent oversight function within the Bank. The Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer serves as both chief compliance officer (CCO) and chief anti-money laundering officer (CAMLO) for the Bank and its subsidiaries and foreign centres. She is responsible for implementing and updating the Bank's programs for regulatory compliance management, regulatory requirements related to AML/ATF, international sanctions, and the fight against corruption . The CCO and CAMLO has a direct relationship with the Chair of the RMC and meets with her at least once every quarter. She can also communicate directly with senior management, officers, and directors of the Bank and of its subsidiaries and foreign centres.
Regulatory Compliance Framework
The Bank operates in a highly regulated industry. To ensure sound management of regulatory compliance, the Bank favours proactive approaches and incorporates regulatory requirements into its day-to-day operations.
Such proactive management also provides reasonable assurance that the Bank is in compliance, in all material respects, with the regulatory requirements in effect where it does business, both in Canada and internationally.
The implementation of a regulatory compliance risk management framework across the Bank is entrusted to the Compliance Service, which has the following mandate:
-- implement policies and standards that ensure compliance with current regulatory requirements, including those related to AML/ATF, to international sanctions, and to the fight against corruption;
-- develop compliance and AML/ATF training programs for Bank employees, officers, and directors;
-- exercise independent oversight and monitoring of the programs, policies, and procedures implemented by the management of the Bank, its subsidiaries, and its foreign centres to ensure that the control mechanisms are sufficient, respected, and effective ;
-- report relevant compliance and AML/ATF matters to the Bank's Board and inform it of any significant changes in the effectiveness of the risk management framework.
The Bank holds itself to high regulatory compliance risk management standards in order to earn the trust of its clients, its shareholders, the market, and the general public.
Described below are the main regulatory developments that have been monitored over the past year.
Reform of the Official Languages Act (federal law)
The purpose of Bill C-13, An Act to amend the Official Languages Act, to enact the Use of French in Federally Regulated Private Businesses Act and to make related amendments to other Acts is to provide a new legal framework and support the official languages of Canada. It modernizes the Official Languages Act by giving new powers to the Commissioner (compliance agreements, orders, penalties, etc.) to protect the language rights of Canadians. It also introduces a new law that confers rights and obligations on federal businesses regarding language of service (consumers) and language of work in Quebec and in other regions of Canada with a strong francophone presence. The bill was assented to on June 20, 2023. The amendments to the Official Languages Act then came into effect (the new Act will come into effect by order-in-council at a later date).
Amendments to the Charter of the French Language (Quebec)
Bill 96, An Act respecting French, the official and common language of Québec, made amendments to the Charter of the French Language and other legislation. The objectives consist mainly of strengthening the presence and use of the French language in Quebec and affirming that French is the only official language of Quebec. Among the major themes addressed were the language of work, the language of commerce and business (including new requirements for contracts of adhesion and commercial advertising), the francization committees of businesses, and procedures for publishing rights and disputes. Bill 96 was assented to on June 1, 2022, when several provisions entered into effect. Other provisions entered into effect on September 1, 2022 (publication of rights and disputes) and on June 1, 2023 (contracts of adhesion), while certain provisions relating to commercial advertising will come into effect on June 1, 2025.
Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances (Guideline)
On July 5, 2023, the Financial Consumer Agency of Canada (FCAC) published, with immediate effect, its Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances. This guideline sets out the FCAC's expectations for federally regulated financial institutions (FRFIs) to contribute to the protection of consumers of financial products and services by providing tailored support to natural persons with an existing residential mortgage loan on their principal residence who are experiencing severe financial stress, as a result of exceptional circumstances, and are at risk of mortgage default. These exceptional circumstances include the current combined effects of high household indebtedness, the rapid rise in interest rates, and the increased cost of living. The FCAC expects FRFIs to consider all available mortgage relief measures and to adopt an approach that reflects the personal circumstances of consumers and their financial needs.
Bill C-30 Addressing Unclaimed Bank Balances, Among Other Matters
Bill C-30 makes an amendment to the Bank Act. Unclaimed balances refer in particular to a deposit in an inactive bank account and will now include deposits and instruments in foreign currencies. This plan notably requires financial institutions to send letters to clients to inform them of the existence of unclaimed balances. Additional information about clients who have an unclaimed balance will also have to be sent to the Bank of Canada. The bill came into effect on June 30, 2023, but the first notices are expected to be issued by January 1, 2024.
Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Activities
Amendments made to the regulations set out in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act took effect on June 1, 2021 . The new reporting requirements are expected to take effect in 2023-2024 such that the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) can prepare the new reporting forms.
In addition, the federal government's budget of March 28, 2023 proposed changes to Canada's AML/ATF regime (creation of an agency that will become the main organization for applying the law against financial crimes in Canada, modernizing oversight of the financial sector, strengthening investigative tools, application of the law, and information sharing), some of which will be implemented through Bill C-47.
Protection of Personal Information
Given changing technologies and societal behaviours, privacy and the protection of personal information is a topical issue in Canada. Recent regulatory measures (such as the General Data Protection Regulation (GDPR) in Europe in 2018 and the California Consumer Privacy Act in the United States in 2020) reflect a desire to implement a stronger legislative framework in the areas of confidentiality and use of personal information. In Quebec, most of the obligations of the new Act 25, An Act to modernize legislative provisions as regards the protection of personal information, came into effect in September 2023, which has introduced substantial changes regarding the protection of personal information. Essentially, the Act promotes transparency, raises the confidentiality level of data, and provides a framework for the collection, use, and sharing of personal information. At the federal level, Bill C-27, tabled in June 2022, enacts three new laws: the Consumer Privacy Protection Act, the Personal Information and Data Protection Tribunal Act, the Artificial Intelligence and Data Act. The latter act is the first bill designed to regulate artificial intelligence in Canada. Still at the federal level, members of industry, regulatory agencies, and consumer advocates were consulted to help design and establish the pillars of an open banking system, which aims to enable consumers to transfer their
financial data between financial institutions and accredited third parties in a secure and user-friendly manner.
Employment Equity Act
Amendments to the Employment Equity Regulations introduced new pay transparency reporting obligations, among other things, under the Employment Equity Act. The amendments came into effect on January 1, 2021 and created new pay gap reporting obligations for affected employers, which were required to be included in employer annual reports (which were due by June 1, 2022). The aggregate wage gap data for each employer will be publicly posted in the winter of 2023 (and updated annually thereafter). The purpose of the Employment Equity Act is to achieve equality in the workplace so that no person shall be denied employment opportunities or benefits for reasons unrelated to ability and, in the fulfilment of that goal, to correct the conditions of disadvantage in employment experienced by women, Indigenous Peoples, persons with disabilities, and members of visible minorities by giving effect to the principle that employment equity means more than treating persons in the same way but also requires special measures and the accommodation of differences.
Pay Equity Act
Under the federal Pay Equity Act, which came into effect on August 31, 2021, employers with more than ten employees are required to develop a pay equity plan that identifies and corrects gender-based wage gaps within three years (i.e., by September 3, 2024). The purpose of the Act is to achieve pay equity through proactive means by redressing the systemic gender-based discrimination in the compensation practices and systems of employers that is experienced by employees who occupy positions in predominantly female job classes. This Act seeks to ensure that employees receive equal compensation for work of equal value, while taking into account the diverse needs of employers and then to maintain pay equity through proactive means. Employers with over 100 employees must prepare (and maintain) their pay equity plan in a joint employer-employee pay equity committee.
Recovery and Resolution Planning
As part of the regulatory measures used to manage systemic risks, D-SIBs are required to prepare recovery and resolution plans. A recovery plan is essentially a roadmap that guides the recovery of a bank in the event of severe financial stress; conversely, a resolution plan guides its orderly wind-down in the event of failure when recovery is no longer an option. The Bank improves and periodically updates its recovery and resolution plans to prepare for these high-risk, but low-probability, events. In addition, the Bank and other D-SIBs continue to work with the CDIC to maintain a comprehensive resolution plan that would ensure an orderly winding down of the Bank's operations. These plans are approved by the Board and submitted to the national regulatory agencies.
Section 871(m) - Dividend Equivalent Payments
Section 871(m) of the U.S. Internal Revenue Code (IRC) aims to ensure that non-U.S. persons pay tax on payments that can be considered dividends on U.S. shares when these payments are made on certain derivative instruments. The derivative instruments for which the underlyings are U.S. shares (including U.S. exchange-traded funds) or "non-qualified indices" are therefore subject to the withholding and reporting requirements. The effective date of certain aspects of these regulations, as well as some of the obligations of Qualified Derivatives Dealers under section 871(m) of the IRC and the Qualified Intermediary Agreement, have been postponed until January 1, 2025. Given that the Internal Revenue Service (IRS) is still expected to issue clarifications to enable institutions to comply with these requirements, the industry will be making efforts to have the effective date postponed further.
U.S. Foreign Account Tax Compliance Act and Common Reporting Standard
The U.S. law addressing foreign account tax compliance (Foreign Account Tax Compliance Act or FATCA) and the international regulation Common Reporting Standard (CRS), incorporated into the Income Tax Act (Canada), are intended to counter tax evasion by taxpayers through the international exchange of tax information reported annually by Canadian financial institutions to the Canada Revenue Agency. On August 23, 2023, clarifications were provided regarding the application of certain guidelines in these regulations.
Publicly Traded Partnership (PTP)
On October 7, 2020, the IRS and the U.S. Department of the Treasury issued new regulations under section 1446(f) of the IRC regarding the application of withholding tax to non-U.S. persons (individuals and corporations) holding interests in a publicly traded partnership (PTP) related to a trade, business, or activity in the United States and generating income effectively connected to a U.S. business (US ECI). Under these new rules, which came into effect on January 1, 2023, a broker carrying out a distribution of a PTP must collect withholding tax on any distribution of US ECI paid to non-U.S. investors as well as on the proceeds of disposition upon sale or transfer.
Proposed Rules on Sales and Exchanges of Digital Assets by Brokers
In August 2023, the U.S. Department of the Treasury published proposed regulations on broker sales and exchanges of digital assets. Brokers will be required to report the gross proceeds from sales of digital assets effected on or after January 1, 2025. Reporting on an adjusted basis will be required for sales effected on or after January 1, 2026.
Reform of Interest Rate Benchmarks
The reform of interest rate benchmarks is a global initiative that is being coordinated and led by central banks, industry groups, and governments around the world, including Canada. The objective is to improve benchmarks by ensuring that they meet robust international standards. LIBOR (London Interbank Offered Rates) was discontinued, and risk-free rates such as SOFR (Secured Overnight Financing Rate), ESTR (Euro Short-Term Rate), SONIA (Sterling Over Night Index Average), SARON (Swiss Average Rate Overnight), and TONAR (Tokyo Overnight Average Rate) replaced LIBOR. On December 31, 2021, all LIBOR (London Interbank Offered Rates) rates in European, British, Swiss, and Japanese currency as well as the one-week and two-month USD LIBOR rates were discontinued, whereas the other USD LIBOR rates were discontinued as of June 30, 2023. The LIBOR rate administrator (ICE Benchmark Administration Ltd.) will continue to publish a "synthetic" version of LIBOR in British currency for three-month maturities until March 28, 2024, and in U.S. currency for 1-month, 3--month and 6-month maturities until September 30, 2024, for certain contracts that could not be remedied (commonly known as tough legacy contracts). In Canada, publication of CDOR (Canadian Dollar Offered Rate) will be discontinued on June 28, 2024 and replaced by the risk-free rate CORRA (Canadian Overnight Repo Rate Average). A forward-looking rate, the 1-month and 3-month Term CORRA has also been available for certain financial products since September 5, 2023. For additional information, see the Basis of Presentation section in Note 1 to the consolidated financial statements.
One-Day Settlement Cycle
Canada and the United States have agreed to shorten the standard securities settlement cycle from two days to one day after the trade date (from T+2 to T+1). The U.S. Securities and Exchange Commission (SEC) has set Tuesday, May 28, 2024 as the transition date to T+1 for U.S. participants. Given the interconnectedness of North American markets and the scope of interlisted securities traded on the Canadian and U.S. markets, Canadian stakeholders have chosen Monday, May 27, 2024 as the transition date to T+1 in Canada.
In December 2022, the CSA published for comment proposed amendments to National Instrument 24-101 - Institutional Trade Matching and Settlement (NI 24-101) to support the transition to T+1. The goal of the proposed amendments is to shorten the standard settlement cycle and, in particular, permanently repeal the exception reporting requirements set out in Part 4 of NI 24-101. To this end, in June 2023, the CSA published Coordinated Blanket Order 24-930, Exemption from Certain Filing Requirements of National Instrument 24-101. In August 2023, the CSA published Staff Notice 24-319 - Regarding National Instrument 24--101 Institutional Trade Matching and Settlements - Update and Staff Recommendation. The Staff intends to recommend that the respective decision-makers of the member jurisdictions adopt a revised version of the proposed amendments that would include a trade-matching deadline of 3:59 a.m. Eastern Time on the day after the trade. The CSA also published Staff Notice 81-335 - Investment Fund Settlement Cycles, in which it announced that it does not propose to amend National Instrument 81-102 - Investment Funds to shorten the settlement cycle so that investment funds will have the flexibility to determine whether such a cycle is suitable for them. In April 2023, the Canadian Investment Regulatory Organization also published amendments to support the securities industry's transition to the T+1 settlement cycle.
Canadian Investment Regulatory Organization (CIRO)
The CSA created a new self-regulatory organization that, among other things, combines the functions of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada. This new organization has been operating since January 1, 2023. The new organization officially changed its name to the Canadian Investment Regulatory Organization (CIRO) on June 1, 2023.
Accessible Canada Act
The Act was adopted in June 2019. The purpose of the Act is to make Canada a barrier-free country by January 1, 2040. The Bank published its accessibility plan on nbc.ca on May 31, 2023.
Client Relationship Model (Phase 3) - Amendments to National Instrument 31-103
In April 2023, the CSA published the final version of changes designed to enhance disclosure requirements on the cost of investment funds and to impose new disclosure requirements on the cost and performance of individual variable insurance contracts (segregated fund contracts). All dealers, advisers, registered investment fund managers, and insurers offering segregated fund contracts are affected by these new requirements, which will come into effect on January 1, 2026.
Reputation Risk
Reputation risk is the risk that the Bank's operations or practices will be judged negatively by the public, whether that judgment is with or without basis, thereby adversely affecting the perception, image, or trademarks of the Bank and potentially resulting in costly litigation or loss of income. Reputation risk generally arises from a deficiency in managing another risk. The Bank's reputation may, for example, be adversely affected by non-compliance with laws and regulations or by process failures. All risks must therefore be managed effectively in order to protect the Bank's reputation.
The Bank's corporate culture continually promotes the behaviours and values to be adopted by employees. Ethics are at the heart of everything we do. To fulfill our mission, put people first, and continue to build a strong bank, we must maintain the highest degree of work ethic. Our Code of Conduct outlines what is expected from each employee in terms of ethical behaviour and rules to be followed as they carry out their duties.
Reputation Risk Management Policy
Approved by the GRC, the reputation risk policy covers all of the Bank's practices and activities. It sets out the principles and rules for managing reputation risk within our risk appetite limits along the following five focal points: clients, employees, community, shareholders and governance, all of which represent Bank stakeholders. The policy is supplemented by specific provisions of several policies and standards, such as the policy on new products and activities, the business continuity and crisis management policy, and the investment governance policy.
Strategic Risk
Strategic risk is the risk of a financial loss or of reputational harm arising from inappropriate strategic orientations, improper execution, or ineffective response to economic, financial, or regulatory changes. The corporate strategic plan is developed by the Senior Leadership Team, in alignment with the Bank's overall risk appetite, and approved by the Board. Once approved, the initiatives of the strategic plan are monitored regularly to ensure that they are progressing. If not, strategies could be reviewed or adjusted if deemed appropriate.
In addition, the Bank has a specific Board-approved policy for strategic investments, which are defined as purchases of business assets or acquisitions of significant interests in an entity for the purposes of acquiring control or creating a long-term relationship. As such, acquisition projects and other strategic investments are analyzed through a due diligence process to ensure that these investments are aligned with the corporate strategic plan and the Bank's risk appetite.
Environmental and Social Risk
Environmental and social risk is the possibility that environmental and social matters would result in a financial loss for the Bank or affect its business activities. Environmental risk consists of many aspects, including the use of energy, water, and other resources; climate change; and biodiversity. Social risk includes, for example, considerations relating to human rights, including those of Indigenous Peoples, accessibility, diversity, equity and inclusion, our human capital management practices, including work conditions and the health, safety and well-being of our employees.
A rapidly changing global regulatory environment, the commitments and frameworks to which we adhere, and potential imbalances among their requirements represent challenges, as do the expectations and differing views among stakeholders about the Bank's environmental and social priorities. These considerations can affect assessments of our exposure to environmental and social risks. An inadequate assessment of the risks and opportunities could affect our ability to set and achieve our objectives, priorities, and targets. The Bank's reputation could also be affected by its action or inaction or by a perception of inaction or inadequate action on environmental and social matters, particularly regarding the progress made. Furthermore, the Bank is mindful about the accuracy of the information it provides in a context of heightened disclosure and the presence of greenwashing and socialwashing risks. All these factors can lead to greater exposure to reputation risk, regulatory compliance risk, and strategic risk. We monitor the evolution of these factors, analyze them, and update our procedures on an ongoing basis.
Governance
Our ESG governance structure is based on all levels of the organization being involved in achieving our objectives and meeting our commitments, including the Board, which exercises an ESG oversight role. Together with management, the Board, through its committees, oversees the execution of the Bank's ESG strategy, which is structured around nine ESG principles that are approved by the Board. These ESG principles have been incorporated into the Bank's strategic priorities. In addition, the Board ensures that ESG criteria are incorporated into the Bank's long-term strategic objectives, and it monitors the development and integration of ESG initiatives and principles into our day-to-day activities. Furthermore, the Board's various committees monitor environmental and social risks in accordance with their respective mandates. They are supported by management in the performance of their duties. Environmental and social issues are now central to the Bank's decision-making process. ESG factors continue to be incorporated into the Bank's processes, in line with its strategy and the principles approved by the Board. ESG indicators have been added to the various monitoring dashboards and are gradually being integrated into the Bank's risk appetite framework. Reports on the ESG indicators and on the Bank's ESG commitments are being periodically presented to the internal committees and to the Board committees tasked with overseeing them.
The Bank's Code of Conduct outlines what is expected from each employee in their professional, business, and community interactions. It also provides guidance on adhering to the Bank's values, on the day-to-day conduct of the Bank's affairs, and on relationships with third parties, employees, and clients to create an environment conducive to achieving the Bank's One Mission, namely, to have a positive impact on people's lives. In addition, our Human Rights Statement sets out our guiding principles, commitments, and expectations. This statement outlines how the Bank applies its principles in its activities and relationships with stakeholders, in every role it plays in society.
Risk Management
Assessing and mitigating environmental and social risks are integral parts of the Bank's risk management framework and risk appetite framework. The Bank has implemented an environmental policy that expresses its determination to protect the environment from human activities, both in terms of our own operations and the benefits to the community. Effective management of environmental and social risks can create business opportunities for both us and our clients.
As a key player in the financial industry, the Bank has demonstrated its commitment to environmental and social groups and associations such as the United Nations Principles for Responsible Banking, the Partnership for Carbon Accounting Financials (PCAF), and the Net-Zero Banking Alliance (NZBA).
The frameworks and methodologies developed by these groups may evolve, which could lead the Bank to reconsider its membership therein. In addition, their efforts to develop such frameworks and objectives could raise competition-related concerns.
The Bank works, along with various industry partners, to identify and implement sound management practices to support the transition to a low-carbon economy. As part of its PCAF and NZBA commitments, the Bank has continued to quantify its financed GHG emissions and to define interim reduction targets for the commercial property and energy production sectors. However, it should be remembered that the need to make an orderly and fair transition to a low-carbon economy means that the Bank's decarbonization efforts must be gradual. The Bank takes concrete steps to meet its commitments and to move its plan forward, notably by quantifying the financial impacts of environmental and social risk. Furthermore, the Bank is committed to transparently communicating information about its progress and its signatory commitments by periodically publishing performance reports.
With respect to its own activities, the Bank is pursuing its commitment to carbon neutrality by reducing the carbon footprint and by offsetting its GHG emissions. Responsible procurement criteria have been incorporated into the procurement and supplier selection practices for the construction of the Bank's new head office building. The new head office is, in fact, aiming to achieve LEED v4(1) Gold certification in addition to WELL(2) certification. We are continuing to work on the implementation of a global responsible procurement strategy. Moreover, the Bank has adopted a Supplier Code of Conduct that describes its expectations of suppliers to uphold responsible business practices. By adopting this code, the Bank is manifesting its intention to do business with suppliers that incorporate environmental, social and governance issues into their operations and throughout their supply chains. Before entering into a relationship with a third party, the business segment conducts due diligence to assess the risk.
Our ability to achieve our environmental and social objectives, priorities, and targets depends on several assumptions and factors, many of which are beyond the Bank's control and whose effects are difficult to predict. In addition, we may need to redefine certain objectives, priorities, or targets or revise data to reflect changes in methodologies or the quality of the available data. It is also possible that the Bank's predictions, targets, or projections prove to be inaccurate, that its assumptions may not be confirmed, and that its strategic objectives and performance targets will not be achieved within the deadlines.
These past few years also saw the emergence of a new environmental risk issue, i.e., the potential financial repercussions of climate change on biodiversity, ecosystems, and ecosystemic services. Financial system participants were called upon by the PRB Biodiversity Community initiative of the United Nations Environment Programme Finance Initiative (UNEP-FI), of which the Bank is a member. As this environmental risk issue begins to emerge, the Bank will continue to closely monitor the various initiatives and contribute to deliberations about potentially incorporating this issue into both investment and credit-granting decisions. The Risk Management Group closely monitors changes in trends and calculation methods and actively participates in various industry discussion groups.
This integration of ESG factors into the credit-granting process is conducted with due diligence, starting with the corporate credit portfolio and prioritizing activity sectors with high GHG emissions. For this clientele, ESG risk is being analyzed using a collection of carbon footprint information and a climate risk classification (transition and physical risks) based on industry as well as scores assigned by ESG-rating agencies. Several other criteria are also being considered, notably waste management, labour standards, corporate governance, product liability, and human rights policies. The Bank plans to gradually extend the collection of such information to clients in other portfolios by adapting the current process. For more information on how climate is integrated into credit risk management, refer to the Assessment of Environmental Risk heading in the Credit Risk section.
To proactively ensure the strategic positioning of its entire portfolio, the Bank continues to support the transition to a low-carbon economy while closely monitoring the related developments and implications. Doing so involves ongoing and stronger adaptation efforts as well as additional mitigation measures for instances of business interruptions or disruptions caused by major incidents such as natural disasters or health crises. Such measures include the business continuity plan, the operational risk management program, and the disaster risk management program.
Regulatory Developments
On March 7, 2023, OSFI published guideline B-15 Climate Risk Management , which sets out OSFI's expectations regarding climate risk. The guideline is OSFI's first supervisory framework dedicated to climate change and that addresses the impacts of climate change on managing the risks existing in the country's financial system. It covers two main topics: Governance and financial disclosures. The guideline will take effect for D-SIBs at the end of fiscal 2024. OSFI plans on revising this guideline to incorporate changes in practices and standards, in particular, to reflect the requirements of IFRS S2 - Climate-related Disclosures published by the International Sustainability Standards Board (ISSB).
On June 26, 2023, the ISSB published IFRS S1 - General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 - Climate-related Disclosures. IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors the sustainability-related risks and opportunities they face over the short-, medium- and long-term. IFRS S2 sets out specific climate-related disclosures and has to be used with IFRS S1. These standards will be applicable for fiscal years beginning on or after January 1, 2024, and certain relief measures will be available, to be done on a voluntary basis or according to the requirements of the regulatory agencies.
(1) Criteria of the LEED (Leadership in Energy and Environmental Design) certification system. LEED certification involves satisfying climate criteria and adaptation characteristics that will help limit potential physical climate risks.
(2) The WELL Standard, administered by the International WELL Building Institute, recognizes environments that support the health and well-being of the occupants.
Critical Accounting Policies and Estimates
A summary of the significant accounting policies used by the Bank is presented in Note 1 to the consolidated financial statements of this Annual Report. The accounting policies discussed below are considered critical given their importance to the presentation of the Bank's financial position and operating results and require subjective and complex judgments and estimates on matters that are inherently uncertain. Any change in these judgments and estimates could have a significant impact on the Bank's consolidated financial statements.
The geopolitical landscape (notably the Russia-Ukraine war and the recent clashes between Hamas and Israel), inflation, climate change, and higher interest rates continue to create uncertainty. As a result, establishing reliable estimates and applying judgment continue to be substantially complex. Some of the Bank's accounting policies, such as measurement of expected credit losses (ECLs), require particularly complex judgments and estimates. See Note 1 to the consolidated financial statements for a summary of the most significant estimation processes used to prepare the consolidated financial statements in accordance with IFRS and the valuation techniques used to determine carrying values and fair values of assets and liabilities. The uncertainty regarding certain key inputs used in measuring ECLs is described in Note 7 to the consolidated financial statements.
Classification of Financial Instruments
At initial recognition, all financial instruments are recorded at fair value on the Consolidated Balance Sheet. At initial recognition, financial assets must be classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss. The Bank determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to manage these financial assets. At initial recognition, financial liabilities are classified as subsequently measured at amortized cost or as at fair value through profit or loss.
For the purpose of classifying a financial asset, the Bank must determine whether the contractual cash flows associated with the financial asset are solely payments of principal and interest on the principal amount outstanding. The principal is generally the fair value of the financial asset at initial recognition. The interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period, and for other basic lending risks and costs as well as of a profit margin. If the Bank determines that the contractual cash flows associated with a financial asset are not solely payments of principal and interest, the financial assets must be classified as measured at fair value through profit or loss.
When classifying financial assets, the Bank determines the business model used for each portfolio of financial assets that are managed together to achieve a same business objective. The business model reflects how the Bank manages its financial assets and the extent to which the financial asset cash flows are generated by the collection of the contractual cash flows, the sale of the financial assets, or both. The Bank determines the business model using scenarios that it reasonably expects to occur. Consequently, the business model determination is a matter of fact and requires the use of judgment and consideration of all the relevant evidence available to the Bank at the date of determination.
A financial asset portfolio falls within a "hold to collect" business model when the Bank's primary objective is to hold these financial assets in order to collect contractual cash flows from them and not to sell them. When the Bank's objective is achieved both by collecting contractual cash flows and by selling the financial assets, the financial asset portfolio falls within a "hold to collect and sell" business model. In this type of business model, collecting contractual cash flows and selling financial assets are both integral components to achieving the Bank's objective for this financial asset portfolio. Financial assets are mandatorily measured at fair value through profit or loss if they do not fall within either a "hold to collect" business model or a "hold to collect and sell" business model.
Fair Value of Financial Instruments
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial assets and offered prices for financial liabilities, provide the best evidence of fair value. A financial instrument is considered quoted in an active market when prices in exchange, dealer, broker or principal--to--principal markets are accessible at the measurement date. An active market is one where transactions occur with sufficient frequency and volume to provide quoted prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another valuation technique that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would consider when pricing a transaction. Judgment is required when applying a large number of acceptable valuation techniques and estimates to determine fair value. The estimated fair value reflects market conditions on the measurement date and, consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration received or paid. If there is a difference between the fair value at initial recognition and the transaction price, and the fair value is determined using a valuation technique based on observable market inputs or, in the case of a derivative, if the risks are fully offset by other contracts entered into with third parties, this difference is recognized in the Consolidated Statement of Income. In other cases, the difference between the fair value at initial recognition and the transaction price is deferred on the Consolidated Balance Sheet. The amount of the deferred gain or loss is recognized over the term of the financial instrument. The unamortized balance is immediately recognized in net income when (i) observable market inputs can be obtained and support the fair value of the transaction, (ii) the risks associated with the initial contract are substantially offset by other contracts entered into with third parties, (iii) the gain or loss is realized through a cash receipt or payment, or (iv) the transaction matures or is terminated before maturity.
In certain cases, measurement adjustments are recognized to address factors that market participants would use at the measurement date to determine fair value but that are not included in the valuation technique due to system limitations or uncertainty surrounding the measure. These factors include, but are not limited to, the unobservable nature of inputs used in the valuation model, assumptions about risk such as market risk, credit risk, or valuation model risk and future administration costs. The Bank may also consider market liquidity risk when determining the fair value of financial instruments when it believes these instruments could be disposed of for a consideration below the fair value otherwise determined due to a lack of market liquidity or an insufficient volume of transactions in a given market. The measurement adjustments also include the funding valuation adjustment applied to derivative financial instruments to reflect the market implied cost or benefits of funding collateral for uncollateralized or partly collateralized transactions.
IFRS establishes a fair value measurement hierarchy that classifies the inputs used in financial instrument fair value measurement techniques according to three levels. The fair value measurement hierarchy has the following levels:
Level 1
Inputs corresponding to unadjusted quoted prices in active markets for identical assets and liabilities and accessible to the Bank at the measurement date. These instruments consist primarily of equity securities, derivative financial instruments traded in active markets, and certain highly liquid debt securities actively traded in over-the-counter markets.
Level 2
Valuation techniques based on inputs, other than the quoted prices included in Level 1 inputs, that are directly or indirectly observable in the market for the asset or liability. These inputs are quoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived principally from or corroborated by observable market inputs by correlation or other means. These instruments consist primarily of certain loans, certain deposits, derivative financial instruments traded in over-the-counter markets, certain debt securities, certain equity securities whose value is not directly observable in an active market, liabilities related to transferred receivables, and certain other liabilities.
Level 3
Valuation techniques based on one or more significant inputs that are not observable in the market for the asset or liability. The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the markets. The valuation technique may also be partly based on observable market inputs. Financial instruments whose fair values are classified in Level 3 consist of investments in hedge funds, certain derivative financial instruments, equity and debt securities of private companies, certain loans, certain deposits (structured deposit notes), and certain other assets (receivables).
Establishing fair value is an accounting estimate and has an impact on the following items: Securities at fair value through profit or loss, certain Loans, Securities at fair value through other comprehensive income, Obligations related to securities sold short, Derivative financial instruments, financial instruments designated at fair value through profit or loss, and financial instruments designated at fair value through other comprehensive income on the Consolidated Balance Sheet. This estimate also has an impact on Non-interest income in the Consolidated Statement of Income of the Financial Markets segment and of the Other heading. Lastly, this estimate has an impact on Other comprehensive income in the Consolidated Statement of Comprehensive Income. For additional information on the fair value determination of financial instruments, see Notes 3 and 6 to the consolidated financial statements.
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt instruments measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that are not measured at fair value. ECLs are a probability-weighted estimate of credit losses over the remaining expected life of the financial instrument. The ECL model is forward looking. Measurement of ECLs at each reporting period reflects reasonable and supportable information about past events, current conditions, and forecasts of future events and economic conditions. Judgment is required in making assumptions and estimates, determining movements between the three stages, and applying forward-looking information. Any changes in assumptions and estimates, as well as the use of different, but equally reasonable, estimates and assumptions, could have an impact on the allowances for credit losses and the provisions for credit losses for the year. All business segments are affected by this accounting estimate. For additional information, see Note 7 to the consolidated financial statements.
Determining the Stage
The ECL three-stage impairment approach is based on the change in the credit quality of financial assets since initial recognition. If, at the reporting date, the credit risk of non-impaired financial instruments has not increased significantly since initial recognition, these financial instruments are classified in Stage 1, and an allowance for credit losses that is measured, at each reporting date, in an amount equal to 12-month expected credit losses, is recorded. When there is a significant increase in credit risk since initial recognition, these non-impaired financial instruments are migrated to Stage 2, and an allowance for credit losses that is measured, at each reporting date, in an amount equal to lifetime expected credit losses, is recorded. In subsequent reporting periods, if the credit risk of a financial instrument improves such that there is no longer a significant increase in credit risk since initial recognition, the ECL model requires reverting to Stage 1, i.e., recognition of 12-month expected credit losses. When one or more events that have a detrimental impact on the estimated future cash flows of a financial asset occurs, the financial asset is considered credit-impaired and is migrated to Stage 3, and an allowance for credit losses equal to lifetime expected credit losses continues to be recorded or the financial asset is written off. Interest income is calculated on the gross carrying amount for financial assets in Stages 1 and 2 and on the net carrying amount for financial assets in Stage 3.
Assessment of Significant Increase in Credit Risk
In determining whether credit risk has increased significantly, the Bank uses an internal credit risk grading system, external risk ratings, and forward-looking information to assess deterioration in the credit quality of a financial instrument. To assess whether or not the credit risk of a financial instrument has increased significantly, the Bank compares the probability of default (PD) occurring over its expected life as at the reporting date with the PD occurring over its expected life on the date of initial recognition and considers reasonable and supportable information indicative of a significant increase in credit risk since initial recognition. The Bank includes relative and absolute thresholds in the definition of significant increase in credit risk and a backstop of 30 days past due. All financial instruments that are 30 days past due are migrated to Stage 2 even if other metrics do not indicate that a significant increase in credit risk has occurred. The assessment of a significant increase in credit risk requires significant judgment.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of all expected cash shortfalls over the remaining expected life of the financial instrument, and reasonable and supportable information about past events, current conditions, and forecasts of future events and economic conditions is considered. The estimation and application of forward-looking information requires significant judgment. Cash shortfalls represent the difference between all contractual cash flows owed to the Bank and all cash flows that the Bank expects to receive.
The measurement of ECLs is primarily based on the product of the financial instrument's PD, loss given default (LGD) and exposure at default (EAD). Forward-looking macroeconomic factors such as unemployment rates, housing price indices, interest rates, and gross domestic product (GDP) are incorporated into the risk parameters. The estimate of expected credit losses reflects an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes. The Bank incorporates three forward-looking macroeconomic scenarios in its ECL calculation process: a base scenario, an upside scenario, and a downside scenario. Probability weights are assigned to each scenario. The scenarios and probability weights are reassessed quarterly and are subject to management review. The Bank applies experienced credit judgment to adjust the modelled ECL results when it becomes evident that known or expected risk factors and information were not considered in the credit risk rating and modelling process.
ECLs for all financial instruments are recognized in Provisions for credit losses in the Consolidated Statement of Income. In the case of debt instruments measured at fair value through other comprehensive income, ECLs are recognized in Provisions for credit losses in the Consolidated Statement of Income, and a corresponding amount is recognized in Other comprehensive income with no reduction in the carrying amount of the asset on the Consolidated Balance Sheet. As for debt instruments measured at amortized cost, they are presented net of the related allowances for credit losses on the Consolidated Balance Sheet. Allowances for credit losses for off-balance-sheet credit exposures that are not measured at fair value are included in Other liabilities on the Consolidated Balance Sheet.
Purchased or Originated Credit-Impaired Financial Assets
On initial recognition of a financial asset, the Bank determines whether the asset is credit-impaired. For financial assets that are credit-impaired upon purchase or origination, the lifetime expected credit losses are reflected in the initial fair value. In subsequent reporting periods, the Bank recognizes only the cumulative changes in these lifetime ECLs since initial recognition as an allowance for credit losses. The Bank recognizes changes in ECLs in Provisions for credit losses in the Consolidated Statement of Income, even if the lifetime ECLs are less than the ECLs that were included in the estimated cash flows on initial recognition.
Definition of Default
The definition of default used by the Bank to measure ECLs and transfer financial instruments between stages is consistent with the definition of default used for internal credit risk management purposes. The Bank considers a financial asset, other than a credit card receivable, to be credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred or when contractual payments are 90 days past due. Credit card receivables are considered credit-impaired and are fully written off at the earlier of the following dates: when a notice of bankruptcy is received, a settlement proposal is made, or contractual payments are 180 days past due.
Write-Offs
A financial asset and its related allowance for credit losses are normally written off in whole or in part when the Bank considers the probability of recovery to be non-existent and when all guarantees and other remedies available to the Bank have been exhausted or if the borrower is bankrupt or winding up and balances owing are not likely to be recovered.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not available for use or that have indefinite useful lives are tested for impairment annually or more frequently if there is an indication that the asset might be impaired.
An impairment test compares the carrying amount of an asset with its recoverable amount. The recoverable amount must be estimated for the individual asset. Where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the cash-generating unit (CGU) to which the asset belongs will be determined. Goodwill is always tested for impairment at the level of a CGU or a group of CGUs. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Bank uses judgment to identify CGUs.
An asset's recoverable amount is the higher of fair value less costs to sell and the value in use of the asset or CGU . Value in use is the present value of expected future cash flows from the asset or CGU . The recoverable amount of the asset or CGU is determined using valuation models that consider various factors such as projected future cash flows, discount rates, and growth rates. The use of different estimates and assumptions in applying the impairment tests could have a significant impact on income. If the recoverable amount of an asset or a CGU is less than its carrying amount, the carrying amount is reduced to its recoverable amount and an impairment loss is recognized in Non-interest expenses in the Consolidated Statement of Income.
Management exercises judgment when determining whether there is objective evidence that premises and equipment or intangible assets with finite useful lives may be impaired. It also uses judgment in determining to which CGU or group of CGUs an asset or goodwill is to be allocated. Moreover, for impairment assessment purposes, management must make estimates and assumptions regarding the recoverable amount of non-financial assets, CGUs, or a group of CGUs. For additional information on the estimates and assumptions used to calculate the recoverable amount of an asset or CGU, see Note 11 to the consolidated financial statements.
Any changes to these estimates and assumptions may have an impact on the recoverable amount of a non-financial asset and, consequently, on impairment testing results. These accounting estimates have an impact on Premises and equipment, Intangible assets and Goodwill reported on the Consolidated Balance Sheet. The aggregate impairment loss, if any, is recognized as a non-interest expense for the corresponding segment and presented in the Other item.
Employee Benefits - Pension Plans and Other Post-Employment Benefit Plans
The expense and obligation of the defined benefit component of the pension plans and other post-employment benefit plans are actuarially determined using the projected benefit method prorated on service. The calculations incorporate management's best estimates of various actuarial assumptions such as discount rates, rates of compensation increase, health care cost trend rates, mortality rates, and retirement age.
Remeasurements of these plans represent the actuarial gains and losses related to the defined benefit obligation and the actual return on plan assets, excluding the net interest determined by applying a discount rate to the net asset or net liability of the plans. Remeasurements are immediately recognized in Other comprehensive income and are not subsequently reclassified to net income; these cumulative gains and losses are reclassified to Retained earnings.
The use of different assumptions could have a significant impact on the defined benefit asset (liability) presented in Other assets (Other liabilities) on the Consolidated Balance Sheet, on the pension plan and other post-employment benefit plan expenses presented in Compensation and employee benefits in the Consolidated Statement of Income, as well as on Remeasurements of pension plans and other post-employment benefit plans presented in Other comprehensive income. All business segments are affected by this accounting estimate. For additional information, including the significant assumptions used to determine the Bank's pension plan and other post-employment benefit plan expenses and the sensitivity analysis for significant plan assumptions, see Note 23 to the consolidated financial statements.
Income Taxes
The Bank makes assumptions to estimate income taxes as well as deferred tax assets and liabilities. This process involves estimating the actual amount of current taxes and evaluating tax loss carryforwards and temporary differences arising from differences between the values of items reported for accounting and for income tax purposes. Deferred tax assets and liabilities, presented in Other assets and Other liabilities on the Consolidated Balance Sheet, are calculated according to the tax rates to be applied in future periods. Previously recorded deferred tax assets and liabilities must be adjusted when the date of the future event is revised based on current information. The Bank periodically evaluates deferred tax assets to assess recoverability. In the Bank's opinion, based on the information at its disposal, it is probable that all deferred tax assets will be realized before they expire.
This accounting estimate affects Income taxes in the Consolidated Statement of Income for all business segments. For additional information on income taxes, see Notes 1 and 24 to the consolidated financial statements.
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.
Provisions are liabilities for which the timing or amount are uncertain. A provision is recognized when the Bank has a present obligation (legal or constructive) arising from a past event, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when the amount of the obligation can be reliably estimated. The recognition of a litigation provision requires the judgment of the Bank's management in assessing the existence of an obligation, the timing and probability of loss, and estimates of potential monetary impact. Provisions are based on the Bank's best estimates of the economic resources required to settle the present obligation, given all available information and relevant risks and uncertainties, and, when it is significant, the effect of the time value of money. However, the actual amount required to settle litigation could be significantly higher or lower than the amounts recognized, as the actual amounts depend on a variety of factors and risks, notably the degree to which proceedings have advanced when the amount is determined, the presence of multiple defendants whose share of responsibility is undetermined, including that of the Bank, the types of matters or allegations in question, including some that may involve new legal frameworks or regulations or that set forth new legal interpretations and theories.
The Bank regularly assesses all litigation provisions by considering the development of each case, the Bank's past experience in similar transactions, and the opinion of its legal counsel. Each new piece of information can alter the Bank's assessment as to the probability and estimated amount of loss and therefore the extent to which it adjusts the recorded provision.
Structured Entities
In the normal course of business, the Bank enters into arrangements and transactions with structured entities . Structured entities are entities designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate solely to administrative tasks and the relevant activities are directed by means of contractual arrangements. A structured entity is consolidated when the Bank concludes, after evaluating the substance of the relationship and its right or exposure to variable returns , that it controls that entity. Management must exercise judgment in determining whether the Bank controls an entity. Additional information is provided in the Securitization and Off-Balance-Sheet Arrangements section of this MD&A and in Note 27 to the consolidated financial statements.
Accounting Policy Changes
Amendments to IAS 12 - Income Taxes
On May 23, 2023, the IASB issued International Tax Reform - Pillar Two Model Rules, which amends IAS 12 - Income Taxes. These amendments apply to income taxes arising from tax law enacted or substantively enacted to implement the Pillar 2 model rules of the OECD. The amendments also introduce a temporary exception to the accounting of deferred tax assets and liabilities arising from the implementation of these rules as well as related disclosures. These amendments apply immediately upon issuance and retrospectively in accordance with IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors. Additional disclosures of current tax expense (recovery) and other information related to income tax exposures will be provided annually for periods beginning on or after November 1, 2023. During the year ended October 31, 2023, the Bank applied the exception to the recognition and disclosure of information about deferred tax assets and liabilities arising from the Pillar 2 rules in the jurisdictions where they have been adopted . To date, these amendments have had no impact on the Bank's consolidated results.
Future Accounting Policy Changes
The Bank closely monitors both new accounting standards and amendments to existing accounting standards issued by the IASB. The following standard has been issued but is not yet in effect. The Bank is currently assessing the impacts of applying this standard on the consolidated financial statements.
Effective Date - November 1, 2023
IFRS 17 - Insurance Contracts
In May 2017, the IASB published IFRS 17 - Insurance Contracts (IFRS 17), which replaces IFRS 4, the current insurance contract accounting standard. IFRS 17 introduces a new accounting framework that improves the comparability and quality of financial information. IFRS 17 provides guidance on the recognition, measurement, presentation, and disclosure of insurance contracts. IFRS 17 must be applied retrospectively for annual periods beginning on or after January 1, 2023. If full retrospective application to a group of insurance contracts is impracticable, the modified retrospective approach or the fair value approach may be used.
IFRS 17 affects how an entity accounts for its insurance contracts and how it reports financial performance in the consolidated income statement, in particular the timing of revenue recognition for insurance contracts. The current consolidated balance sheet presentation, whereby the items are included and reported in Other assets and Other liabilities, respectively, will change.
IFRS 17 introduces three approaches to measure insurance contracts: the general model approach, the premium allocation approach, and the variable fee approach. The general model approach, which is primarily used by the Bank, measures insurance contracts based on the present value of estimates of the expected future cash flows necessary to fulfill the contracts, including an adjustment for non-financial risk as well as the contractual service margin (CSM), which represents the unearned profits that are recognized as services are provided in the future. The premium allocation approach is applied to short-term contracts, and insurance revenues are recognized systematically over the coverage period. For all measurement approaches, if contracts are expected to be onerous, losses are recognized immediately.
The Bank is finalizing its analysis of the IFRS 17 adoption impacts on its consolidated financial statements for the annual period beginning on or after November 1, 2023. At the transition date, November 1, 2022, the Bank applied two of the three transition approaches available under IFRS 17: the full retrospective approach and the fair value approach. For most groups of contracts, the fair value approach has been applied considering that the full retrospective approach is impracticable, since reasonable and supportable information for applying this approach is not available without undue cost or effort.
As at October 31, 2023, the Bank's best estimate of the impact of transitioning to IFRS 17 is a decrease of $48 million, net of income taxes, in equity as at November 1, 2022, related to the new recognition and measurement principles of insurance and reinsurance contract assets and liabilities, including a net amount of CSM established at approximately $89 million. The impact on the Common Equity Tier 1 (CET1) capital ratio is not expected to be material.
The estimated impact of applying the new measurement approaches for insurance and reinsurance contracts is not significant. The Bank continues to refine and validate the new measurement approaches leading up to the disclosure of its 2024 first-quarter results.
Additional Financial Information
Table 1 - Quarterly Results
(millions of Canadian dollars,
except
per share amounts) 2023
================================ ===============================================================
Total Q4 Q3 Q2 Q1
============================== ======= ======= ======= ======= =======
Statement of income data
Net interest income 3,586 735 870 882 1,099
Non-interest income(1) 6,584 1,859 1,645 1,597 1,483
-------------------------------- ------- ------- ------- ------- -------
Total revenues 10,170 2,594 2,515 2,479 2,582
Non-interest expenses(2) 5,801 1,607 1,417 1,374 1,403
-------------------------------- ------- ------- ------- ------- -------
Income before provisions for
credit
losses and income taxes 4,369 987 1,098 1,105 1,179
Provisions for credit losses 397 115 111 85 86
Income taxes(3) 637 104 148 173 212
-------------------------------- ------- ------- ------- ------- -------
Net income 3,335 768 839 847 881
Non-controlling interests (2) - (1) (1) -
-------------------------------- ------- ------- ------- ------- -------
Net income attributable to the
Bank's
shareholders and
holders of other equity
instruments 3,337 768 840 848 881
-------------------------------- ------- ------- ------- ------- -------
Earnings per common share
Basic $ 9.47 $ 2.16 $ 2.38 $ 2.41 $ 2.51
Diluted 9.38 2.14 2.36 2.38 2.49
------------------------------- ------- ------- ------- ------- -------
Dividends (per share)
Common $ 3.98 $ 1.02 $ 1.02 $ 0.97 $ 0.97
Preferred
Series 30 1.0063 0.2516 0.2516 0.2515 0.2516
Series 32 0.9598 0.2400 0.2399 0.2400 0.2399
Series 34 - - - - -
Series 36 - - - - -
Series 38 1.7568 0.4392 0.4392 0.4392 0.4392
Series 40 1.3023 0.3637 0.3636 0.2875 0.2875
Series 42 1.2375 0.3094 0.3093 0.3094 0.3094
------------------------------- ------- ------- ------- ------- -------
Return on common shareholders'
equity
(4) 16.5 % 14.4 % 16.2 % 17.5 % 17.9 %
-------------------------------- ------- ------- ------- ------- -------
Total assets 423,578 426,015 417,684 418,342
-------------------------------- ------- ------- ------- ------- -------
Subordinated debt (5) 748 748 748 1,497
-------------------------------- ------- ------- ------- ------- -------
Net impaired loans excluding
POCI
loans (4) 606 537 477 476
-------------------------------- ------- ------- ------- ------- -------
Number of common shares
outstanding
(thousands)
Average - Basic 337,660 338,229 337,916 337,497 336,993
Average - Diluted 340,768 341,143 341,210 340,971 340,443
End of period 338,285 338,228 337,720 337,318
------------------------------- ------- ------- ------- ------- -------
Per common share
Book value(4) $ 60.68 $ 58.75 $ 57.65 $ 55.92
Share price
High $ 103.58 103.58 103.28 103.45 99.95
Low 84.97 84.97 94.62 92.67 91.02
------------------------------- ------- ------- ------- ------- -------
Number of employees - Worldwide
(full-time equivalent) 28,916 28,901 28,170 27,674
Number of branches in Canada 368 372 374 378
================================ ======= ======= ======= ======= =======
(1) For fiscal 2023, Non-interest income included a $91 million gain recorded to reflect a fair value remeasurement of the equity interest in TMX (2021: $33 million gain following a remeasurement of the previously held equity interest in Flinks and a $30 million loss related to the fair value remeasurement of the Bank's equity interest in AfrAsia).
(2) For fiscal 2023, Non-interest expenses included $86 million in impairment losses on premises and equipment and on intangible assets (2021: $9 million), $35 million in litigation expenses, a $25 million expense related to changes to the Excise Tax Act and $15 million in provisions for contracts.
(3) Income taxes in fiscal 2023 included an amount of $24 million related to the Canadian government's 2022 tax measures.
(4) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(5) Long-term financial liabilities.
2022 2021
=========================================================== ===========================================================
Total Q4 Q3 Q2 Q1 Total Q4 Q3 Q2 Q1
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
5,271 1,207 1,419 1,313 1,332 4,783 1,190 1,230 1,156 1,207
4,381 1,127 994 1,126 1,134 4,144 1,021 1,024 1,082 1,017
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
9,652 2,334 2,413 2,439 2,466 8,927 2,211 2,254 2,238 2,224
5,230 1,346 1,305 1,299 1,280 4,903 1,268 1,224 1,217 1,194
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
4,422 988 1,108 1,140 1,186 4,024 943 1,030 1,021 1,030
145 87 57 3 (2) 2 (41) (43) 5 81
894 163 225 248 258 882 215 240 228 199
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
3,383 738 826 889 930 3,140 769 833 788 750
(1) - - (1) - - - - - -
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
3,384 738 826 890 930 3,140 769 833 788 750
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 9.72 $ 2.10 $ 2.38 $ 2.56 $ 2.67 $ 8.95 $ 2.20 $ 2.38 $ 2.24 $ 2.13
9.61 2.08 2.35 2.53 2.64 8.85 2.17 2.35 2.21 2.12
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 3.58 $ 0.92 $ 0.92 $ 0.87 $ 0.87 $ 2.84 $ 0.71 $ 0.71 $ 0.71 $ 0.71
1.0063 0.2516 0.2516 0.2515 0.2516 1.0063 0.2516 0.2516 0.2515 0.2516
0.9598 0.2400 0.2399 0.2400 0.2399 0.9598 0.2400 0.2399 0.2400 0.2399
- - - - - 0.7000 - - 0.3500 0.3500
- - - - - 1.0125 - 0.3375 0.3375 0.3375
1.1125 0.2781 0.2781 0.2782 0.2781 1.1125 0.2781 0.2781 0.2782 0.2781
1.1500 0.2875 0.2875 0.2875 0.2875 1.1500 0.2875 0.2875 0.2875 0.2875
1.2375 0.3094 0.3093 0.3094 0.3094 1.2375 0.3094 0.3093 0.3094 0.3094
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
18.8 % 15.3 % 17.9 % 20.7 % 21.9% 20.7 % 18.7 % 21.4 % 21.8 % 21.1%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
403,740 386,833 369,570 366,680 355,621 353,873 350,581 343,489
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
1,499 1,510 764 766 768 769 771 773
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
479 301 293 287 283 312 349 400
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
337,099 336,530 336,437 337,381 338,056 337,212 337,779 337,517 337,142 336,408
340,837 339,910 339,875 341,418 342,318 340,861 342,400 341,818 340,614 338,617
336,582 336,456 336,513 338,367 337,912 337,587 337,372 336,770
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 55.24 $ 54.29 $ 52.28 $ 49.71 $ 47.44 $ 45.51 $ 43.11 $ 41.04
$ 105.44 94.37 97.87 104.59 105.44 $ 104.32 104.32 96.97 89.42 73.81
83.12 83.12 83.33 89.33 94.37 65.54 95.00 89.47 72.30 65.54
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
27,103 26,539 25,823 25,417 24,495 24,074 23,865 23,885
378 384 385 385 384 389 401 402
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Table 2 - Overview of Results
Year ended October 31 (millions of Canadian dollars) 2023 2022 2021 2020 2019 ================================= ====== ===== ===== ===== ===== Net interest income 3,586 5,271 4,783 4,255 3,596 Non-interest income(1) 6,584 4,381 4,144 3,672 3,836 --------------------------------- ------ ----- ----- ----- ----- Total revenues 10,170 9,652 8,927 7,927 7,432 Non-interest expenses(2) 5,801 5,230 4,903 4,616 4,375 --------------------------------- ------ ----- ----- ----- ----- Income before provisions for credit losses and income taxes 4,369 4,422 4,024 3,311 3,057 Provisions for credit losses 397 145 2 846 347 --------------------------------- ------ ----- ----- ----- ----- Income before income taxes 3,972 4,277 4,022 2,465 2,710 Income taxes(3) 637 894 882 434 443 --------------------------------- ------ ----- ----- ----- ----- Net income 3,335 3,383 3,140 2,031 2,267 Non-controlling interests (2) (1) - 42 66 --------------------------------- ------ ----- ----- ----- ----- Net income attributable to the Bank's shareholders and holders of other equity instruments 3,337 3,384 3,140 1,989 2,201 ================================= ====== ===== ===== ===== =====
(1) For fiscal 2023, Non-interest income included a $91 million gain recorded to reflect a fair value remeasurement of the equity interest in TMX (2021: $33 million gain following a remeasurement of the previously held equity interest in Flinks and a $30 million loss related to the fair value remeasurement of the Bank's equity interest in AfrAsia; 2020: $24 million foreign currency translation loss on a disposal of subsidiaries; 2019: $79 million gain on disposal of Fiera Capital Corporation shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss resulting from the fair value measurement of an investment).
(2) For fiscal 2023, Non-interest expenses included impairment losses on premises and equipment and intangible assets of $86 million (2021: $9 million; 2020: $71 million; 2019: $57 million), $35 million in litigation expenses, a $25 million expense related to changes to the Excise Tax Act, and $15 million in provisions for contracts (2019: $45 million). In fiscal 2020, Non-interest expenses had included $48 million in severance pay (2019: $10 million) and a $13 million charge related to Maple Financial Group Inc. (Maple) (2019: $11 million ).
(3) Income taxes in fiscal 2023 included an amount of $24 million related to the Canadian government's 2022 tax measures.
Table 3 - Changes in Net Interest Income
Year ended October 31 (millions of Canadian dollars) 2023 2022 2021 2020 2019 =================================== ======= ======= ======= ======= ======= Personal and Commercial Net interest income 3,321 2,865 2,547 2,420 2,360 Average assets(1) 148,511 140,300 126,637 115,716 111,140 Average interest-bearing assets(2) 141,458 133,543 120,956 110,544 106,995 Net interest margin(2) 2.35 % 2.15% 2.11% 2.19% 2.21% ------------------------------------ ------- ------- ------- ------- ------- Wealth Management Net interest income on a taxable equivalent basis(3) 778 594 446 442 455 Average assets(1) 8,560 8,440 7,146 5,917 6,219 ------------------------------------ ------- ------- ------- ------- ------- Financial Markets Net interest income on a taxable equivalent basis(3) (1,054) 1,258 1,262 971 498 Average assets(1) 180,837 154,349 151,240 125,565 114,151 ------------------------------------ ------- ------- ------- ------- ------- USSF&I Net interest income 1,132 1,090 907 807 656 Average assets(1) 23,007 18,890 16,150 14,336 10,985 ------------------------------------ ------- ------- ------- ------- ------- Other Net interest income(3) (591) (536) (379) (385) (373) Average assets(1) 69,731 71,868 62,333 56,553 43,667 ------------------------------------ ------- ------- ------- ------- ------- Total Net interest income 3,586 5,271 4,783 4,255 3,596 Average assets(1) 430,646 393,847 363,506 318,087 286,162 ==================================== ======= ======= ======= ======= ======= (1) Represents an average of the daily balances for the period.
(2) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(3) For fiscal 2023, the Net interest income item of the Financial Markets segment was grossed up by $324 million (2022: $229 million; 2021: $175 million; 2020: $202 million; 2019: $191 million), the Net interest income item of the Other heading was grossed up by $8 million (2022: $5 million; 2021: $6 million; 2020: $6 million; 2019: $3 million), the Net interest income item of the Wealth Management segment was grossed up by $1 million in 2019. The effect of these adjustments is reversed under the Other heading.
Table 4 - Non-Interest Income
Year ended October 31 (millions of Canadian dollars) 2023 2022 2021 2020 2019 Underwriting and advisory fees 378 324 415 314 246 Securities brokerage commissions 174 204 238 204 166 Mutual fund revenues 578 587 563 477 449 Investment management and trust service fees 1,005 997 900 735 677 Credit fees 183 155 164 147 134 Revenues from acceptances, letters of credit and guarantee 391 335 342 320 283 Card revenues 202 186 148 138 175 Deposit and payment service charges 300 298 274 262 271 Trading revenues (losses) 2,677 543 268 544 788 Gains (losses) on non-trading securities, net 70 113 151 93 77 Insurance revenues, net 171 158 131 128 136 Foreign exchange revenues,
other than trading 183 211 202 164 137
Share in the net income of
associates and
joint ventures 11 28 23 28 34
Other(1) 261 242 325 118 263
---------------------------------- ----- ----- ----- ----- -----
6,584 4,381 4,144 3,672 3,836
---------------------------------- ----- ----- ----- ----- -----
Canada 5,812 4,299 3,992 3,574 3,645
United States 98 18 106 5 85
Other countries 674 64 46 93 106
---------------------------------- ----- ----- ----- ----- -----
Non-interest income as a %
of total revenues 64.7 % 45.4% 46.4% 46.3% 51.6%
================================== ===== ===== ===== ===== =====
(1) For fiscal 2023, the Other item included a $91 million gain recorded to reflect a fair value remeasurement of the equity interest in TMX (2021: $33 million gain following a remeasurement of the previously held equity interest in Flinks and a $30 million loss related to the fair value remeasurement of the Bank's equity interest in AfrAsia; 2020: $24 million foreign currency translation loss on a disposal of subsidiaries; 2019: $79 million gain on disposal of Fiera Capital Corporation shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss resulting from the fair value measurement of an investment).
Table 5 - Trading Activity Revenues
Year ended October 31
(millions of Canadian dollars) 2023 2022 2021 2020 2019
================================= ======= ===== ===== ===== =====
Net interest income (loss)
related to trading activity(1) (1,816) 682 777 522 28
Taxable equivalent basis(2) 321 229 171 202 188
--------------------------------- ------- ----- ----- ----- -----
Net interest income (loss)
related to trading activity
on
a taxable equivalent basis
(2) (1,495) 911 948 724 216
--------------------------------- ------- ----- ----- ----- -----
Non-interest income related
to trading activity(1) 2,696 548 282 625 800
Taxable equivalent basis(2) 247 48 8 57 135
--------------------------------- ------- ----- ----- ----- -----
Non-interest income related
to trading activity on
a taxable equivalent basis
(2) 2,943 596 290 682 935
--------------------------------- ------- ----- ----- ----- -----
Trading activity revenues(1) 880 1,230 1,059 1,147 828
Taxable equivalent basis(2) 568 277 179 259 323
--------------------------------- ------- ----- ----- ----- -----
Trading activity revenues
on a taxable equivalent basis
(2) 1,448 1,507 1,238 1,406 1,151
--------------------------------- ------- ----- ----- ----- -----
Trading activity revenues
by segment
on a taxable equivalent basis
(2)
Financial Markets
Equities 904 979 685 706 621
Fixed-income 417 367 357 430 285
Commodities and foreign
exchange 173 156 128 132 126
--------------------------------- ------- ----- ----- ----- -----
1,494 1,502 1,170 1,268 1,032
Other segments (46) 5 68 138 119
--------------------------------- ------- ----- ----- ----- -----
1,448 1,507 1,238 1,406 1,151
================================= ======= ===== ===== ===== =====
(1) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(2) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures. The taxable equivalent basis presented in this table is related to trading portfolios. The Bank also uses the taxable equivalent basis for certain investment portfolios, and the amounts stood at $11 million for fiscal 2023 (2022: $5 million; 2021: $10 million; 2020: $6 million; 2019: $7 million).
Table 6 - Non-Interest Expenses
Year ended October 31 (millions of Canadian dollars) 2023 2022 2021 2020 2019 =============================== ===== ===== ===== ===== ===== Compensation and employee benefits(1) 3,452 3,284 3,027 2,713 2,532 Occupancy(2) 181 157 147 151 254 Amortization - Premises and equipment(3) 172 155 152 140 44 Technology 653 589 557 510 446 Amortization - Technology(4) 432 326 314 366 332 Communications 58 57 53 58 62 Professional fees 257 249 246 244 249 Advertising and business development 168 144 109 103 128 Capital and payroll taxes 37 32 52 73 70 Other(5) 391 237 246 258 258 -------------------------------- ----- ----- ----- ----- ----- Total 5,801 5,230 4,903 4,616 4,375 -------------------------------- ----- ----- ----- ----- ----- Canada 5,261 4,760 4,478 4,195 4,005 United States 226 209 203 209 210 Other countries 314 261 222 212 160 -------------------------------- ----- ----- ----- ----- ----- Efficiency ratio(6) 57.0 % 54.2% 54.9% 58.2% 58.9% ================================ ===== ===== ===== ===== =====
(1) For fiscal 2020, Compensation and employee benefits included $48 million in severance pay (2019: $10 million).
(2) Occupancy expense in fiscal 2019 included $45 million in provisions for onerous contracts.
(3) For fiscal 2023, the Amortization - Premises and Equipment expense included $11 million in impairment losses.
(4) For fiscal 2023, the Amortization - Technology expense included $75 million in intangible asset impairment losses (2021: $9 million; 2020: $71 million; 2019: $57 million).
(5) For fiscal 2023, Other expenses included $35 million in litigation expenses, a $25 million expense related to changes to the Excise Tax Act, and a $15 million in provisions for contracts. For fiscal 2020, Other expenses had included a $13 million charge related to Maple (2019: $11 million).
(6) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
Table 7 - Provisions for Credit Losses (1)
Year ended October 31
(millions of Canadian dollars) 2023 2022 2021 2020 2019
================================= ======= ======= ======= ======= =======
Personal Banking (2)
Stage 3 119 75 65 147 166
Stages 1 and 2 38 9 (77) 121 8
-------------------------------- ------- ------- ------- ------- -------
157 84 (12) 268 174
------------------------------- ------- ------- ------- ------- -------
Commercial Banking
Stage 3 48 13 26 76 31
Stages 1 and 2 40 - 26 103 19
POCI (7) - - - -
-------------------------------- ------- ------- ------- ------- -------
81 13 52 179 50
------------------------------- ------- ------- ------- ------- -------
Wealth Management
Stage 3 (1) 1 1 4 -
Stages 1 and 2 3 2 - 3 -
-------------------------------- ------- ------- ------- ------- -------
2 3 1 7 -
------------------------------- ------- ------- ------- ------- -------
Financial Markets
Stage 3 3 1 78 99 22
Stages 1 and 2 36 (24) (102) 210 21
-------------------------------- ------- ------- ------- ------- -------
39 (23) (24) 309 43
------------------------------- ------- ------- ------- ------- -------
USSF&I
Stage 3 76 48 13 46 94
Stages 1 and 2 53 12 (2) 41 (24)
POCI (16) 6 (26) (7) 10
-------------------------------- ------- ------- ------- ------- -------
113 66 (15) 80 80
------------------------------- ------- ------- ------- ------- -------
Other
Stage 3 - - - - -
Stages 1 and 2 5 2 - 3 -
-------------------------------- ------- ------- ------- ------- -------
5 2 - 3 -
------------------------------- ------- ------- ------- ------- -------
Total provisions for credit
losses
Stage 3 245 138 183 372 313
Stages 1 and 2 175 1 (155) 481 24
POCI (23) 6 (26) (7) 10
--------------------------------- ------- ------- ------- ------- -------
397 145 2 846 347
--------------------------------- ------- ------- ------- ------- -------
Average loans and acceptances 215,976 194,340 172,323 159,275 148,765
--------------------------------- ------- ------- ------- ------- -------
Provisions for credit losses
on impaired loans
excluding POCI loans(3) as
a % of average loans and
acceptances(3) 0.11 % 0.07% 0.11% 0.23% 0.21%
-------------------------------- ------- ------- ------- ------- -------
Provisions for credit losses
as a % of average loans and
acceptances(3) 0.18 % 0.07% -% 0.53% 0.23%
================================ ======= ======= ======= ======= =======
(1) The Stage 3 category presented in this table represents provisions for credit losses on loans classified in Stage 3 of the expected credit loss model and excludes POCI loans (impaired loans excluding POCI loans). The Stages 1 and 2 category represents provisions for credit losses on non-impaired loans. The POCI category represents provisions for credit losses on POCI loans.
(2) Includes credit card receivables.
(3) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
Table 8 - Change in Average Volumes (1)
Year ended October
31
(millions of Canadian
dollars) 2023 2022 2021 2020 2019
======================= ============== ============== ============== ============== ==============
Average Average Average Average Average
volume Rate volume Rate volume Rate volume Rate volume Rate
$ % $ % $ % $ % $ %
====================== ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Assets
Deposits with financial
institutions 40,824 4.09 42,042 1.03 40,294 0.31 24,966 0.44 13,172 1.64
Securities 126,182 1.93 111,863 1.77 116,023 1.25 97,025 1.63 85,772 1.74
Securities purchased
under reverse
repurchase agreements
and
securities borrowed 19,533 6.61 16,255 2.08 11,559 0.90 16,408 1.39 22,472 1.60
Residential mortgage
loans 82,884 3.95 75,712 2.90 68,297 2.93 59,801 3.13 54,493 3.30
Personal loans 44,829 5.44 42,723 3.82 38,434 3.16 36,273 3.68 35,816 4.25
Credit card receivables 2,325 13.17 2,133 12.81 1,864 13.47 1,995 14.62 2,221 14.06
Business and government
loans 69,599 6.49 58,947 3.63 50,216 3.06 47,272 4.13 42,922 5.34
POCI loans 545 21.98 493 32.68 686 22.64 1,073 16.45 1,386 13.37
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Average
interest-bearing
assets(1) 386,721 4.30 350,168 2.69 327,373 2.13 284,813 2.66 258,254 3.17
Other assets 43,925 43,679 36,133 33,274 27,908
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
430,646 3.90 393,847 2.43 363,506 1.93 318,087 2.38 286,162 2.86
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Liabilities and equity
Personal deposits 84,262 2.03 72,927 0.67 68,334 0.42 63,634 0.87 58,680 1.22
Deposit-taking
institutions 4,997 3.81 5,695 0.88 6,522 0.09 6,494 0.63 5,987 1.80
Other deposits 195,311 4.15 180,307 1.28 161,373 0.68 137,253 1.26 119,793 2.06
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
284,570 3.51 258,929 1.10 236,229 0.58 207,381 1.12 184,460 1.79
Subordinated debt 937 5.16 960 3.70 758 3.22 759 3.25 758 3.25
Obligations other
than deposits(2) 90,194 3.43 81,659 1.13 80,808 0.67 70,973 1.12 67,638 1.67
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Average
interest-bearing
liabilities(1) 375,701 3.51 341,548 1.25 317,795 0.69 279,113 1.19 252,856 1.81
Other liabilities 30,698 30,209 28,195 23,400 18,593
Equity 24,247 22,090 17,516 15,574 14,713
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
430,646 3.07 393,847 1.09 363,506 0.61 318,087 1.04 286,162 1.60
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net interest margin(3) 0.83 1.34 1.32 1.34 1.26
======================= ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
(1) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(2) Average obligations other than deposits represent the average of the daily balances for the fiscal year of obligations related to securities sold short, obligations related to securities sold under repurchase agreements and securities loaned, and liabilities related to transferred receivables.
(3) Calculated by dividing net interest income by average assets.
Table 9 - Distribution of Gross Loans and Acceptances by Borrower Category Under
Basel Asset Classes
As at October 31
(millions of Canadian
dollars) 2023 2022 2021 2020 2019
============================= ============== ============== ============== ============== ==============
$ % $ % $ % $ % $ %
============================ ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Residential mortgage(1) 99,910 44.1 95,575 46.0 89,035 48.5 81,543 49.2 74,448 48.4
Qualifying revolving
retail (2) 4,000 1.8 3,801 1.8 3,589 2.0 3,599 2.2 4,099 2.7
Other retail (3) 16,696 7.4 14,899 7.2 12,949 7.0 11,569 7.0 11,606 7.5
Agriculture 8,545 3.8 8,109 3.9 7,357 4.0 6,696 4.0 6,308 4.1
Oil and gas 1,826 0.8 1,435 0.7 1,807 1.0 2,506 1.5 2,742 1.8
Mining 1,245 0.5 1,049 0.5 529 0.3 756 0.5 758 0.5
Utilities 12,427 5.5 9,682 4.6 7,687 4.2 6,640 4.0 4,713 3.0
Non-real-estate
construction(4) 1,739 0.8 1,935 0.9 1,541 0.8 1,079 0.7 1,168 0.8
Manufacturing 7,047 3.1 7,374 3.6 5,720 3.1 5,803 3.5 6,549 4.3
Wholesale 3,208 1.4 3,241 1.6 2,598 1.4 2,206 1.3 2,221 1.4
Retail 3,801 1.7 3,494 1.7 2,978 1.6 2,955 1.8 3,289 2.1
Transportation 2,631 1.2 2,209 1.1 1,811 1.0 1,528 0.9 1,682 1.1
Communications 2,556 1.1 1,830 0.9 1,441 0.8 1,184 0.7 1,601 1.0
Financial services 11,693 5.1 10,777 5.2 8,870 4.8 7,476 4.4 6,115 3.9
Real estate and
real-estate-construction(5) 25,967 11.5 22,382 10.8 18,195 9.9 14,171 8.6 11,635 7.6
Professional services 3,973 1.7 2,338 1.1 1,872 1.0 1,490 0.9 1,845 1.2
Education and health
care 3,700 1.6 3,412 1.6 4,073 2.2 3,800 2.3 3,520 2.3
Other services 6,898 3.0 6,247 3.0 5,875 3.2 5,296 3.2 4,937 3.2
Government 1,727 0.8 1,661 0.8 1,159 0.6 1,160 0.7 1,071 0.7
Other 6,478 2.9 5,790 2.8 4,137 2.3 3,586 2.1 2,456 1.6
POCI loans 560 0.2 459 0.2 464 0.3 855 0.5 1,166 0.8
----------------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
226,627 100.0 207,699 100.0 183,687 100.0 165,898 100.0 153,929 100.0
============================= ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
(1) Includes residential mortgage loans on one- to four-unit dwellings (Basel definition) and home equity lines of credit.
(2) Includes lines of credit and credit card receivables. (3) Includes consumer loans and other retail loans but excludes SME loans.
(4) Includes civil engineering loans, public-private partnership loans, and project finance loans.
(5) Includes residential mortgages on dwellings of five or more units and SME loans.
Table 10 - Impaired Loans
As at October 31
(millions of Canadian dollars) 2023 2022 2021 2020 2019
==================================== ===== ===== ===== ===== =====
Gross impaired loans
Personal Banking 220 176 169 287 256
Commercial Banking 296 206 244 333 294
Wealth Management 13 21 23 8 5
Financial Markets 110 167 162 134 93
USSF&I 385 242 64 55 36
Gross impaired loans excluding
POCI loans(1) 1,024 812 662 817 684
Gross POCI loans 560 459 464 855 1,166
------------------------------------ ----- ----- ----- ----- -----
1,584 1,271 1,126 1,672 1,850
----------------------------------- ----- ----- ----- ----- -----
Net impaired loans (2)
Personal Banking 145 104 106 206 187
Commercial Banking 140 89 107 184 192
Wealth Management 8 15 16 2 3
Financial Markets 30 91 14 43 53
USSF&I 283 180 40 30 15
Net impaired loans excluding
POCI loans(1) 606 479 283 465 450
Net POCI loans 670 551 553 921 1,223
------------------------------------ ----- ----- ----- ----- -----
1,276 1,030 836 1,386 1,673
----------------------------------- ----- ----- ----- ----- -----
Allowances for credit losses
on impaired loans
excluding POCI loans(1) 418 333 379 352 234
Allowances for credit losses
on POCI loans (110) (92) (89) (66) (57)
------------------------------------ ----- ----- ----- ----- -----
Allowances for credit losses
on impaired loans 308 241 290 286 177
------------------------------------ ----- ----- ----- ----- -----
Impaired loan provisioning
rate excluding POCI loans(1) 40.8 % 41.0% 57.3% 43.1% 34.2%
Gross impaired loans excluding
POCI loans as a %
of total loans and acceptances(1) 0.45 % 0.39% 0.36% 0.49% 0.45%
Net impaired loans excluding
POCI loans as a %
of loans and acceptances(1) 0.27 % 0.23% 0.15% 0.28% 0.29%
==================================== ===== ===== ===== ===== =====
(1) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(2) Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and on POCI loans.
Table 11 - Allowances for Credit Losses
Year ended October 31 (millions of Canadian dollars) 2023 2022 2021 2020 2019 ==================================== ===== ===== ===== ===== ===== Balance at beginning 1,131 1,169 1,343 755 714 Provisions for credit losses 397 145 2 846 347 Write-offs (199) (233) (192) (294) (351) Disposals - - (14) - (1) Recoveries 47 40 44 44 52 Exchange rate and other movements 1 10 (14) (8) (6) ----------------------------------- ----- ----- ----- ----- ----- Balance at end 1,377 1,131 1,169 1,343 755 ----------------------------------- ----- ----- ----- ----- ----- Composition of allowances: Allowances for credit losses on impaired loans excluding POCI loans(1) 418 333 379 352 234 Allowances for credit losses on POCI loans (110) (92) (89) (66) (57) Allowances for credit losses on non-impaired loans 876 714 708 872 501 Allowances for credit losses on off-balance-sheet commitments and other assets 193 176 171 185 77 =================================== ===== ===== ===== ===== =====
(1) See the Glossary section on pages 124 to 127 for details on the composition of these measures.
Table 12 - Deposits
As at October 31
(millions of Canadian
dollars) 2023 2022 2021 2020 2019
======================= ============== ============== ============== ============== ==============
$ % $ % $ % $ % $ %
====================== ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Personal 87,883 30.5 78,811 29.6 70,076 29.1 67,499 31.3 60,065 31.7
Business and government 197,328 68.5 184,230 69.1 167,870 69.7 143,787 66.6 125,266 66.1
Deposit-taking
institutions 2,962 1.0 3,353 1.3 2,992 1.2 4,592 2.1 4,235 2.2
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total 288,173 100.0 266,394 100.0 240,938 100.0 215,878 100.0 189,566 100.0
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Canada 257,732 89.4 238,239 89.5 216,906 90.0 195,730 90.7 172,764 91.1
United States 9,520 3.3 9,147 3.4 9,234 3.8 8,126 3.7 6,907 3.7
Other countries 20,921 7.3 19,008 7.1 14,798 6.2 12,022 5.6 9,895 5.2
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total 288,173 100.0 266,394 100.0 240,938 100.0 215,878 100.0 189,566 100.0
----------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Personal deposits
as a %
of total assets 20.7 19.5 19.7 20.4 21.3
======================= ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Glossary
Acceptances
Acceptances and the customers' liability under acceptances constitute a guarantee of payment by a bank and can be traded in the money market. The Bank earns a "stamping fee" for providing this guarantee.
Allowances for credit losses
Allowances for credit losses represent management's unbiased estimate of expected credit losses as at the balance sheet date. These allowances are primarily related to loans and off-balance-sheet items such as loan commitments and financial guarantees.
Assets under administration
Assets in respect of which a financial institution provides administrative services on behalf of the clients who own the assets. Such services include custodial services, collection of investment income, settlement of purchase and sale transactions, and record-keeping. Assets under administration are not reported on the balance sheet of the institution offering such services.
Assets under management
Assets managed by a financial institution and that are beneficially owned by clients. Management services are more comprehensive than administrative services and include selecting investments or offering investment advice. Assets under management, which may also be administered by the financial institution, are not reported on the balance sheet of the institution offering such services.
Available TLAC
Available TLAC includes total capital as well as certain senior unsecured debt subject to the federal government's bail-in regulations that satisfy all of the eligibility criteria in OSFI's Total Loss Absorbing Capacity (TLAC) Guideline.
Average interest-bearing assets
Average interest-bearing assets include interest-bearing deposits with financial institutions and certain cash items, securities, securities purchased under reverse repurchase agreements and securities borrowed, and loans, while excluding customers' liability under acceptances and other assets. The average is calculated based on the daily balances for the period.
Average interest-bearing assets, non-trading
Average interest-bearing assets, non-trading, include interest-bearing deposits with financial institutions and certain cash items, securities purchased under reverse repurchase agreements and securities borrowed, and loans, while excluding other assets and assets related to trading activities. The average is calculated based on the daily balances for the period.
Average volumes
Average volumes represent the average of the daily balances for the period of the consolidated balance sheet items.
Basic earnings per share
Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average basic number of common shares outstanding.
Basis point (bps)
Unit of measure equal to one one-hundredth of a percentage point (0.01%).
Book value of a common share
The book value of a common share is calculated by dividing common shareholders' equity by the number of common shares on a given date.
Common Equity Tier 1 (CET1) capital ratio
CET1 capital consists of common shareholders' equity less goodwill, intangible assets, and other capital deductions. The CET1 capital ratio is calculated by dividing total CET1 capital by the corresponding risk-weighted assets.
Compound annual growth rate (CAGR)
CAGR is a rate of growth that shows, for a period exceeding one year, the annual change as though the growth had been constant throughout the period.
Derivative financial instruments
Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, equity, commodity price, credit instrument or index. Examples of derivatives include swaps, options, forward rate agreements, and futures. The notional amount of the derivative is the contract amount used as a reference point to calculate the payments to be exchanged between the two parties, and the notional amount itself is generally not exchanged by the parties.
Diluted 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.
Dividend payout ratio
The dividend payout ratio represents the dividends of common shares (per share amount) expressed as a percentage of basic earnings per share.
Economic capital
Economic capital is the internal measure used by the Bank to determine the capital required for its solvency and to pursue its business operations. Economic capital takes into consideration the credit, market, operational, business and other risks to which the Bank is exposed as well as the risk diversification effect among them and among the business segments. Economic capital thus helps the Bank to determine the capital required to protect itself against such risks and ensure its long-term viability.
Efficiency ratio
The efficiency ratio represents non-interest expenses expressed as a percentage of total revenues. It measures the efficiency of the Bank's operations.
Fair value
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., an exit price).
Gross impaired loans as a percentage of total loans and acceptances
This measure represents gross impaired loans expressed as a percentage of the balance of loans and acceptances.
Gross impaired loans excluding POCI loans
Gross impaired loans excluding POCI loans are all loans classified in Stage 3 of the expected credit loss model excluding POCI loans.
Gross impaired loans excluding POCI loans as a percentage of total loans and acceptances
This measure represents gross impaired loans excluding POCI loans expressed as a percentage of the balance of loans and acceptances.
Hedging
The purpose of a hedging transaction is to modify the Bank's exposure to one or more risks by creating an offset between changes in the fair value of, or the cash flows attributable to, the hedged item and the hedging instrument.
Impaired loans
The Bank considers a financial asset, other than a credit card receivable, to be credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred or when contractual payments are 90 days past due. Credit card receivables are considered credit-impaired and are fully written off at the earlier of the following dates: when a notice of bankruptcy is received, a settlement proposal is made, or contractual payments are 180 days past due.
Leverage ratio
The leverage ratio is calculated by dividing Tier 1 capital by total exposure. Total exposure is defined as the sum of on-balance-sheet assets (including derivative financial instrument exposures and securities financing transaction exposures) and off-balance-sheet items.
Liquidity coverage ratio (LCR)
The LCR is a measure designed to ensure that the Bank has sufficient high-quality liquid assets to cover net cash outflows given a severe, 30--day liquidity crisis.
Loans and acceptances
Loans and acceptances represent the sum of loans and of the customers' liability under acceptances.
Loan-to-value ratio
The loan-to-value ratio is calculated according to the total facility amount for residential mortgages and home equity lines of credit divided by the value of the related residential property.
Master netting agreement
Legal agreement between two parties that have multiple derivative contracts with each other that provides for the net settlement of all contracts through a single payment, in the event of default, insolvency or bankruptcy.
Net impaired loans
Net impaired loans are gross impaired loans presented net of allowances for credit losses on Stage 3 loan amounts drawn.
Net impaired loans as a percentage of total loans and acceptances
This measure represents net impaired loans as a percentage of the balance of loans and acceptances.
Net impaired loans excluding POCI loans
Net impaired loans excluding POCI loans are gross impaired loans excluding POCI loans presented net of allowances for credit losses on amounts drawn on Stage 3 loans granted by the Bank.
Net interest income from trading activities
Net interest income from trading activities comprises dividends related to financial assets and liabilities associated with trading activities, net of interest expenses and interest income related to the financing of these financial assets and liabilities.
Net interest income, non-trading
Net interest income, non-trading, comprises revenues related to financial assets and liabilities associated with non-trading activities, net of interest expenses and interest income related to the financing of these financial assets and liabilities.
Net interest margin
Net interest margin is calculated by dividing net interest income by average interest-bearing assets.
Net stable funding ratio (NSFR)
The NSFR ratio is a measure that helps guarantee that the Bank is maintaining a stable funding profile to reduce the risk of funding stress.
Net write-offs as a percentage of average loans and acceptances
This measure represents the net write-offs (net of recoveries) expressed as a percentage of average loans and acceptances.
Non-interest income related to trading activities
Non-interest income related to trading activities consists of realized and unrealized gains and losses as well as interest income on securities measured at fair value through profit or loss, income from held-for-trading derivative financial instruments, changes in the fair value of loans at fair value through profit or loss, changes in the fair value of financial instruments designated at fair value through profit or loss, certain commission income, other trading activity revenues, and any applicable transaction costs.
Office of the Superintendent of Financial Institutions (Canada) (OSFI)
The mandate of OSFI is to regulate and supervise financial institutions and private pension plans subject to federal oversight, to help minimize undue losses to depositors and policyholders and, thereby, to contribute to public confidence in the Canadian financial system.
Operating leverage
Operating leverage is the difference between the growth rate for total revenues and the growth rate for non-interest expenses.
Provisioning rate
This measure represents the allowances for credit losses on impaired loans expressed as a percentage of gross impaired loans.
Provisioning rate excluding POCI loans
This measure represents the allowances for credit losses on impaired loans excluding POCI loans expressed as a percentage of gross impaired loans excluding POCI loans.
Provisions for credit losses
Amount charged to income necessary to bring the allowances for credit losses to a level deemed appropriate by management and is comprised of provisions for credit losses on impaired and non-impaired financial assets.
Provisions for credit losses as a percentage of average loans and acceptances
This measure represents the provisions for credit losses expressed as a percentage of average loans and acceptances.
Provisions for credit losses on impaired loans as a percentage of average loans and acceptances
This measure represents the provisions for credit losses on impaired loans expressed as a percentage of average loans and acceptances.
Provisions for credit losses on impaired loans excluding POCI loans as a percentage of average loans and acceptances or provisions for credit losses on impaired loans excluding POCI loans ratio
This measure represents the provisions for credit losses on impaired loans excluding POCI loans expressed as a percentage of average loans and acceptances.
Return on average assets
Return on average assets represents net income expressed as a percentage of average assets.
Return on common shareholders' equity (ROE)
ROE represents net income attributable to common shareholders expressed as a percentage of average equity attributable to common shareholders. It is a general measure of the Bank's efficiency in using equity.
Risk-weighted assets
Assets are risk weighted according to the guidelines established by OSFI. In the Standardized calculation approach, risk factors are applied directly to the face value of certain assets in order to reflect comparable risk levels. In the Advanced Internal Ratings-Based (AIRB) Approach, risk-weighted assets are derived from the Bank's internal models, which represent the Bank's own assessment of the risks it incurs. In the Foundation Internal Ratings-Based (FIRB) Approach, the Bank can use its own estimate of probability of default but must rely on OSFI estimates for the loss given default and exposure at default risk parameters. Off-balance-sheet instruments are converted to balance sheet (or credit) equivalents by adjusting the notional values before applying the appropriate risk-weighting factors.
Securities purchased under reverse repurchase agreements
Securities purchased by the Bank from a client pursuant to an agreement under which the securities will be resold to the same client on a specified date and at a specified price. Such an agreement is a form of short-term collateralized lending.
Securities sold under repurchase agreements
Financial obligations related to securities sold pursuant to an agreement under which the securities will be repurchased on a specified date and at a specified price. Such an agreement is a form of short-term funding.
Stressed VaR (SVaR)
SVaR is a statistical measure of risk that replicates the VaR calculation method but uses, instead of a two-year history of risk factor changes, a 12--month data period corresponding to a continuous period of significant financial stress that is relevant in terms of the Bank's portfolios.
Structured entity
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.
Taxable equivalent
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. The Bank uses the taxable equivalent basis to calculate net interest income, non-interest income and income taxes.
Tier 1 capital ratio
Tier 1 capital ratio consists of Common Equity Tier 1 capital and Additional Tier 1 instruments, namely, qualifying non-cumulative preferred shares and the eligible amount of innovative instruments. Tier 1 capital ratio is calculated by dividing Tier 1 capital, less regulatory adjustments, by the corresponding risk-weighted assets.
TLAC leverage ratio
The TLAC leverage ratio is an independent risk measure that is calculated by dividing available TLAC by total exposure, as set out in OSFI's Total Loss Absorbing Capacity (TLAC) Guideline.
TLAC ratio
The TLAC ratio is a measure used to assess whether a non-viable Domestic Systemically Important Bank (D-SIB) has sufficient loss-absorbing capacity to support its recapitalization. It is calculated by dividing available TLAC by risk weighted assets, as set out in OSFI's Total Loss Absorbing Capacity (TLAC) Guideline.
Total capital ratio
Total capital is the sum of Tier 1 and Tier 2 capital. Tier 2 capital consists of the eligible portion of subordinated debt and certain allowances for credit losses. The Total capital ratio is calculated by dividing Total capital, less regulatory adjustments, by the corresponding risk-weighted assets.
Total shareholder return (TSR)
TSR represents the average total return on an investment in the Bank's common shares. The return includes changes in share price and assumes that the dividends received were reinvested in additional common shares of the Bank.
Trading activity revenues
Trading activity revenues consist of the net interest income and the non-interest income related to trading activities. Net interest income comprises dividends related to financial assets and liabilities associated with trading activities, net of interest expenses and interest income related to the financing of these financial assets and liabilities. Non-interest income consists of realized and unrealized gains and losses as well as interest income on securities measured at fair value through profit or loss, income from held-for-trading derivative financial instruments, changes in the fair value of loans at fair value through profit or loss, changes in the fair value of financial instruments designated at fair value through profit or loss, certain commission income, other trading activity revenues, and any applicable transaction costs.
Value-at-Risk (VaR)
VaR is a statistical measure of risk that is used to quantify market risks across products, per types of risks, and aggregate risk on a portfolio basis. VaR is defined as the maximum loss at a specific confidence level over a certain horizon under normal market conditions. The VaR method has the advantage of providing a uniform measurement of financial instrument-related market risks based on a single statistical confidence level and time horizon.
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