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.
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.
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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.
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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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END
FR FLFFSFELLIIV
(END) Dow Jones Newswires
December 01, 2023 10:22 ET (15:22 GMT)
Grafico Azioni Nat Bk Canada25 (LSE:32SS)
Storico
Da Dic 2024 a Gen 2025
Grafico Azioni Nat Bk Canada25 (LSE:32SS)
Storico
Da Gen 2024 a Gen 2025
