Audited Consolidated
Financial Statements
Management’s Responsibility for Financial Reporting
130
Independent Auditor’s Report
131
Consolidated Balance Sheets
134
Consolidated Statements of Income
135
Consolidated Statements of Comprehensive Income
136
Consolidated Statements of Changes in Equity
138
Consolidated Statements of Cash Flows
139
Notes to the Audited Consolidated Financial Statements
140
1
Management’s Responsibility for Financial Reporting
The consolidated financial statements of National Bank of Canada (the Bank) have been prepared in accordance with section 308(4) of the
Bank Act
(Canada), which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions (Canada) (OSFI), the financial
statements are to be prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting
Standards Board (IASB). IFRS represent Canadian generally accepted accounting principles (GAAP). None of the OSFI accounting requirements are
exceptions to IFRS.
Management maintains the accounting and internal control systems needed to discharge its responsibility, which is to provide reasonable assurance
that the financial accounts are accurate and complete and that the Bank’s assets are adequately safeguarded. Controls that are currently in place
include quality standards on staff hiring and training; the implementation of organizational structures with clear divisions of responsibility and
accountability for performance; the
Code of Professional Conduct
; and the communication of operating policies and procedures.
As Chief Executive Officer and as Chief Financial Officer, we have overseen the evaluation of the design and operation of the Bank’s internal control
over financial reporting in accordance with
National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings
released by
the Canadian Securities Administrators. Based on the evaluation work performed, we have concluded that the internal control over financial reporting
and the disclosure controls and procedures were effective as at October 31, 2023 and that they provide reasonable assurance that the Bank’s financial
information is reliable and that its consolidated financial statements have been prepared in accordance with IFRS.
The Board of Directors (the Board) is responsible for reviewing and approving the financial information contained in the
Annual Report
. Acting through
the Audit Committee, the Board also oversees the presentation of the consolidated financial statements and ensures that accounting and control
systems are maintained. Composed of directors who are neither officers nor employees of the Bank, the Audit Committee is responsible, through
Internal Audit, for performing an independent and objective review of the Bank’s internal control effectiveness, i.e., governance processes, risk
management processes and control measures. Furthermore, the Audit Committee reviews the consolidated financial statements and recommends
their approval to the Board.
The control systems are further supported by the presence of the Compliance Service, which exercises independent oversight and evaluation in order
to assist managers in effectively managing regulatory compliance risk and to obtain reasonable assurance that the Bank is compliant with regulatory
requirements.
Both the Senior Vice-President, Internal Audit and the Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer have a
direct functional link to the Chair of the Audit Committee and to the Chair of the Risk Management Committee. They both also have direct access to the
President and Chief Executive Officer.
In accordance with the
Bank Act
enquires into the business and affairs of the Bank, as deemed necessary, to ensure that the provisions of the
Bank Act
and that the Bank is in sound financial condition.
The independent auditor, Deloitte LLP, whose report follows, was appointed by the shareholders at the recommendation of the Board. The auditor has
full and unrestricted access to the Audit Committee to discuss audit and financial reporting matters.
Laurent Ferreira
President and Chief Executive Officer
Marie Chantal Gingras
Chief Financial Officer and Executive Vice-President, Finance
Montreal, Canada, November 30, 2023
2
Independent Auditor’s Report
To the Shareholders of National Bank of Canada
Opinion
We have audited the consolidated financial statements of National Bank of Canada
(the Bank), which comprise the consolidated balance sheets as at
October 31, 2023 and 2022, and the consolidated statements of income,
the consolidated statements of comprehensive income, the consolidated
statements of changes in equity and the consolidated statements of cash flows for the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at October 31, 2023
and 2022, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards (Canadian GAAS). Our responsibilities under those
standards are further described in the
Auditor’s Responsibilities for the Audit of the Financial Statements
section of our report. We are independent of
the Bank in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our
other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year
ended October 31, 2023. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
Allowances for credit losses —Refer to Notes 1 and 7 to the financial statements
Key Audit Matter Description
The allowances for credit losses represent management’s estimate of expected credit losses (ECL) on financial assets calculated under the IFRS 9,
Financial Instruments ECL framework. The calculation of ECL is based on the probability of default (PD), loss given default (LGD), and exposure at
default (EAD) of the underlying assets and represents an unbiased and probability weighted estimate of losses expected to occur in the future based
on forecasts of macroeconomic variables for threee scenarios. Lifetime ECL is recorded for financial assets that have experienced significant
increases in credit risk (SICR) since initial recognition or that are impaired; otherwise 12-month ECL is recorded. Given uncertainty surrounding the
key inputs used to measure credit losses, the Bank has applied expert credit judgment to adjust the modelled ECL results.
We have identified the allowances for credit losses as a key audit matter due to the inherent complexity of the ECL models used and the significant
judgment required by management in relation to the forward-looking nature of some key assumptions including the impact of a possible economic
recession. Significant auditor judgment was required in evaluating: (i) the models and methodologies used to measure ECL; (ii) the forecasts of
macroeconomic scenarios and probability weighting; (iii) the determination of SICR; and (iv) the adjustments to the modelled ECL results representing
management’s expert credit judgment. Auditing the ECL models and the key judgments and assumptions required a high degree of auditor judgment
and an increased extent of audit effort, including the involvement of professionals with specialized skills in credit risk and economics.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to the models and the key judgments and assumptions used by management to estimate the ECL included the following,
among others:
●
With the assistance of professionals with specialized skills in credit risk or economics:
o
For a selection of ECL models, evaluated the appropriateness of the models used to estimate ECL;
o
Evaluated the forecasts of macroeconomic scenarios and their probability weighting by comparing them against independently developed
forecasts and publicly available industry data, including the impact of a possible economic recession;
o
Assessed management’s determination of SICR and the appropriateness of the related model’s programming;
o
Assessed the adjustments to the modelled ECL results by evaluating management’s expert credit judgment.
3
Income taxes – Uncertain tax positions — Refer to Notes 1 and 24 to the financial statements
Key Audit Matter Description
In the normal course of its business, the Bank is involved in a number of transactions for which the tax impacts are uncertain. The Bank accounts for
provisions for uncertain tax positions that adequately represent the risk stemming from tax matters under discussion or being audited by tax
authorities or from other matters involving uncertainty. These provisions reflect management’s best possible estimate of the amounts that may have
to be paid based on qualitative assessments of all relevant factors. As disclosed in Note 24, the Bank was reassessed by the tax authorities for
additional income taxes and interest in respect of certain Canadian dividends received by the Bank for certain taxation years and may be reassessed
for subsequent taxation years in regard to similar activities. The Bank has not recognized any tax liability related to these uncertain tax positions.
We have identified the assessment of the accounting of the uncertain tax positions related to certain Canadian dividends as a key audit matter given
the significant judgment made by management when evaluating the probability of acceptance of the Bank’s tax positions and when interpreting
relevant tax and case law and administrative positions. Auditing these judgments required a high degree of auditor judgment and resulted in an
increased extent of audit effort, including the involvement of tax specialists.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures pertaining to the assessment of the accounting of the uncertain tax positions related to certain Canadian dividends included the
following, among others:
●
With the assistance of tax specialists, evaluated management’s assessment of the probability of acceptance of the Bank’s tax positions by
assessing:
o
The Bank’s interpretations of relevant tax and case law and administrative positions;
o
The correspondence with the relevant tax authorities; and
o
The advice and legal opinions obtained by the Bank’s external tax advisors.
Other Information
Management is responsible for the other information. The other information comprises:
●
Management’s Discussion and Analysis; and
●
The information, other than the financial statements
and our auditor’s report thereon, in the Annual Report.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion
thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated.
We obtained Management’s Discussion and Analysis and the Annual Report prior to the date of this auditor’s report. If, based on the work we have
performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in
this auditor’s report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control
as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank
or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
4
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism throughout the audit.
We also:
●
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of
not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
●
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control.
●
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by
management.
●
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in
the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern.
●
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial
statements represent the underlying transactions and events in a manner that achieves fair presentation.
●
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Bank to express an
opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely
responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence,
and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable,
related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the
financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of
such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Carl Magnan.
Report on Other Legal and Regulatory Requirements
We have checked the compliance of the financial statements of the Bank as at October 31, 2023 with the relevant statutory requirements set out in the
ESEF Regulation that are applicable to financial statements.
For the Bank it relates to:
●
Financial statements prepared in a valid xHTML format;
●
The XBRL markup of the consolidated financial statements using the core taxonomy and the common rules on markups specified in the ESEF
Regulation.
In our opinion, the financial statements of the Bank as at October 31, 2023, have been prepared, in all material respects, in compliance with the
requirements laid down in the ESEF Regulation.
/s/ Deloitte LLP
1
November 30, 2023
Montreal, Quebec
1
Audited Consolidated Financial Statements
(millions of Canadian dollars)
5
Consolidated Balance Sheets
As at October 31
2023
2022
Assets
Cash and deposits with financial institutions
Securities
Notes 3, 4 and
6
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase agreements
and securities borrowed
Loans
Note 7
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under acceptances
Allowances for credit losses
(1,184 )
(955 )
Other
Derivative financial instruments
Note 16
Investments in associates and joint ventures
Note 9
Premises and equipment
Note 10
Goodwill
Note 11
Intangible assets
Note 11
Other assets
Note 12
Liabilities and equity
Deposits
Notes 4 and 13
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
and securities loaned
Note 8
Derivative financial instruments
Note 16
Liabilities related to transferred receivables
Notes 4 and 8
Other liabilities
Note 14
Subordinated debt
Note 15
Equity
Equity attributable to the Bank’s shareholders and holders of other equity instruments
Notes 18 and 22
Preferred shares and other equity instruments
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Non-controlling interests
Note 19
The accompanying notes are an integral part of these audited consolidated financial statements.
Laurent Ferreira
Lynn Loewen
President and Chief Executive
Officer
Director
Audited Consolidated Financial Statements
(millions of Canadian dollars)
6
Consolidated Statements of Income
Year ended October 31
2023
2022
Interest income
Loans
Securities at fair value through profit or loss
Securities at fair value through other comprehensive income
Securities at amortized cost
Deposits with financial institutions
Interest expense
Deposits
Liabilities related to transferred receivables
Subordinated debt
Other
Net interest income
(1)
Non-interest income
Underwriting and advisory fees
Securities brokerage commissions
Mutual fund revenues
Investment management and trust service fees
Credit fees
Card revenues
Deposit and payment service charges
Trading revenues (losses)
Note 21
Gains (losses) on non-trading securities, net
Insurance revenues, net
Foreign exchange revenues, other than trading
Share in the net income of associates and joint ventures
Note 9
Other
Note 9
Total revenues
Non-interest expenses
Compensation and employee benefits
Occupancy
Note 10
Technology
Notes 10 and 11
Communications
Professional fees
Other
Note 30
Income before provisions for credit losses and income taxes
Provisions for credit losses
Note 7
Income before income taxes
Income taxes
Note 24
Net income
Net income attributable to
Preferred shareholders and holders of other equity instruments
Common shareholders
Bank shareholders and holders of other equity instruments
Non-controlling interests
(2 )
(1 )
Earnings per share
(dollars)
Note 25
Basic
Diluted
Dividends per common share
(dollars)
Note 18
The accompanying notes are an integral part of these audited consolidated financial statements.
(1)
Net interest income
Audited Consolidated Financial Statements
(millions of Canadian dollars)
7
Consolidated Statements of Comprehensive Income
Year ended October 31
2023
2022
Net income
Other comprehensive income, net of income taxes
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Impact of hedging net foreign currency translation gains (losses)
(52 )
(138 )
Net change in debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
(87 )
(197 )
Net (gains) losses on debt securities at fair value through other comprehensive income
reclassified to net income
Change in allowances for credit losses on debt securities at fair value through
other comprehensive income reclassified to net income
(1 )
(105 )
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
(25 )
Net (gains) losses on designated derivative financial instruments reclassified to net income
Share in the other comprehensive income of associates and joint ventures
(2 )
Items that will not be subsequently reclassified to net income
Remeasurements of pension plans and other post-employment benefit plans
(140 )
(126 )
Net gains (losses) on equity securities designated at fair value through other comprehensive income
(27 )
Net fair value change attributable to credit risk on financial liabilities designated at
(163 )
(258 )
Total other comprehensive income, net of income taxes
(40 )
Comprehensive income
Comprehensive income attributable to
Bank shareholders and holders of other equity instruments
Non-controlling interests
(2 )
(1 )
The accompanying notes are an integral part of these audited consolidated financial statements.
Audited Consolidated Financial Statements
(millions of Canadian dollars)
8
Consolidated Statements of Comprehensive Income
(cont.)
Income Taxes – Other Comprehensive Income
The following table presents the income tax expense or recovery for each component of other comprehensive income.
Year ended October 31
2023
2022
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
(3 )
(13 )
Impact of hedging net foreign currency translation gains (losses)
(14 )
(28 )
(17 )
(41 )
Net change in debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
(33 )
(71 )
Net (gains) losses on debt securities at fair value through other comprehensive income
reclassified to net income
Change in allowances for credit losses on debt securities at fair value through
other comprehensive income reclassified to net income
−
−
−
(39 )
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
(9 )
Net (gains) losses on designated derivative financial instruments reclassified to net income
Share in the other comprehensive income of associates and joint ventures
−
−
Items that will not be subsequently reclassified to net income
Remeasurements of pension plans and other post-employment benefit plans
(43 )
(45 )
Net gains (losses) on equity securities designated at fair value through other
comprehensive income
(10 )
Net fair value change attributable to credit risk on financial liabilities designated at
fair value through profit or loss
(63 )
(98 )
(71 )
The accompanying notes are an integral part of these audited consolidated financial statements.
Audited Consolidated Financial Statements
(millions of Canadian dollars)
9
Consolidated Statements of Changes in Equity
Year ended October 31
2023
2022
Preferred shares and other equity instruments
at beginning
Note 18
Issuances of preferred shares and other equity instruments
−
Preferred shares and other equity instruments at end
Common shares at beginning
Note 18
Issuances of common shares pursuant to the Stock Option Plan
Repurchases of common shares for cancellation
−
(24 )
Impact of shares purchased or sold for trading
(1 )
Common shares at end
Contributed surplus at beginning
Stock option expense
Note 22
Stock options exercised
(10 )
(7 )
Other
(1 )
Contributed surplus at end
Retained earnings at beginning
Net income attributable to the Bank’s shareholders and holders of other equity instruments
Dividends on preferred shares and distributions on other equity instruments
Note 18
(163 )
(119 )
Dividends on common shares
Note 18
(1,344 )
(1,206 )
Premium paid on common shares repurchased for cancellation
Note 18
−
(221 )
Issuance expenses for shares and other equity instruments, net of income taxes
−
(4 )
Remeasurements of pension plans and other post-employment benefit plans
(140 )
(126 )
Net gains (losses) on equity securities designated at fair value through other comprehensive income
(27 )
Net fair value change attributable to the credit risk on financial liabilities designated at fair value
through profit or loss
(163 )
Impact of a financial liability resulting from put options written to non-controlling interests
Note 14
(8 )
Other
Retained earnings at end
Accumulated other comprehensive income at beginning
(32 )
Net foreign currency translation adjustments
Net change in unrealized gains (losses) on debt securities at fair value through other comprehensive
income
(1 )
(105 )
Net change in gains (losses) on cash flow hedges
Share in the other comprehensive income of associates and joint ventures
(2 )
Accumulated other comprehensive income at end
Equity attributable to the Bank’s shareholders and holders of other equity instruments
Non-controlling interests at beginning
Note 19
Net income attributable to non-controlling interests
(2 )
(1 )
Other
−
Non-controlling interests at end
Equity
Accumulated Other Comprehensive Income
As at October 31
2023
2022
Accumulated other comprehensive income
Net foreign currency translation adjustments
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
(35 )
(34 )
Net gains (losses) on instruments designated as cash flow hedges
Share in the other comprehensive income of associates and joint ventures
The accompanying notes are an integral part of these audited consolidated financial statements.
Audited Consolidated Financial Statements
(millions of Canadian dollars)
10
Consolidated Statements of Cash Flows
Year ended October 31
2023
2022
Cash flows from operating activities
Net income
Adjustments for
Provisions for credit losses
Depreciation of premises and equipment, including right-of-use assets
Amortization of intangible assets
Impairment losses on premises and equipment and on intangible assets
Notes 10 and 11
Deferred taxes
(229 )
Losses (gains) on sales of non-trading securities, net
(70 )
(113 )
Share in the net income of associates and joint ventures
(11 )
(28 )
Stock option expense
Gain on the fair value remeasurement of an equity interest
Note 9
(91 )
−
Change in operating assets and liabilities
Securities at fair value through profit or loss
(12,619 )
(2,564 )
Securities purchased under reverse repurchase agreements and securities borrowed
(18,970 )
Loans and acceptances, net of securitization
(20,252 )
(23,354 )
Deposits
Obligations related to securities sold short
(8,157 )
Obligations related to securities sold under repurchase agreements and securities loaned
Derivative financial instruments, net
(1,798 )
Securitization
–
(29 )
(37 )
Interest and dividends receivable and interest payable
Current tax assets and liabilities
(313 )
(437 )
Other items
(998 )
(2,102 )
(1,922 )
Cash flows from financing activities
Issuances of preferred shares and other equity instruments
−
Issuances of common shares (including the impact of shares purchased for trading)
Repurchases of common shares for cancellation
−
(245 )
Issuance of subordinated debt
−
Repurchase of subordinated debt
(750 )
−
Issuance expenses for shares and other equity instruments
−
(4 )
Repayments of lease liabilities
(102 )
(99 )
Dividends paid on shares and distributions on other equity instruments
(1,503 )
(1,325 )
(2,267 )
(381 )
Cash flows from investing activities
Net change in investments in associates and joint ventures
−
Purchases of non-trading securities
(8,846 )
(9,307 )
Maturities of non-trading securities
Sales of non-trading securities
Net change in premises and equipment, excluding right-of-use assets
(352 )
(296 )
Net change in intangible assets
(299 )
(374 )
(80 )
(1,456 )
(352)
−
Impact of currency rate movements on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
(2,009 )
Cash and cash equivalents at beginning
Cash and cash equivalents at end
(1)
Supplementary information about cash flows from operating activities
Interest paid
Interest and dividends received
Income taxes paid
The accompanying notes are an integral part of these audited consolidated financial statements.
(1)
This item is the equivalent of Consolidated Balance Sheet item
Cash and deposits with financial institutions
. It includes an amount of $
as at October 31, 2022) for which there are restrictions and of which $
central banks, other regulatory agencies, and certain counterparties.
Audited Consolidated Financial Statements
(millions of Canadian dollars)
11
Notes to the Audited Consolidated Financial Statements
Note 1
Basis of Presentation and Summary of Significant Accounting
Policies
140
Note 17
Hedging Activities
195
Note 2
Future Accounting Policy Changes
157
Note 18
Share Capital and Other Equity Instruments
201
Note 3
Fair Value of Financial Instruments
158
Note 19
Non-Controlling Interests
204
Note 4
Financial Instruments Designated at Fair Value Through Profit or
Loss
169
Note 20
Capital Disclosure
205
Note 5
Offsetting Financial Assets and Financial Liabilities
170
Note 21
Trading Activity Revenues
206
Note 6
Securities
171
Note 22
Share-Based Payments
207
Note 7
Loans and Allowances for Credit Losses
173
Note 23
Employee Benefits – Pension Plans and Other
Note 8
Financial Assets Transferred But Not Derecognized
185
210
Note 9
Investments in Associates and Joint Ventures
186
Note 24
Income Taxes
214
Note 10
Premises and Equipment
187
Note 25
Earnings Per Share
217
Note 11
Goodwill and Intangible Assets
188
Note 26
Guarantees, Commitments and Contingent Liabilities
217
Note 12
Other Assets
190
Note 27
Structured Entities
220
Note 13
Deposits
190
Note 28
Related Party Disclosures
223
Note 14
Other Liabilities
191
Note 29
Management of the Risks Associated with Financial
Instruments
224
Note 15
Subordinated Debt
191
Note 30
Segment Disclosures
229
Note 16
Derivative Financial Instruments
192
Note 31
Event After the Consolidated Balance Sheet Date
231
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies
National Bank of Canada (the Bank) is a financial institution incorporated and domiciled in Canada and whose shares are listed on the Toronto Stock
Exchange. Its head office is located at 600 De La Gauchetière Street West in Montreal, Quebec, Canada.
On November 30, 2023, the Board of Directors (the Board) authorized the publication of the Bank’s audited annual consolidated financial statements
(the consolidated financial statements) for the year ended October 31, 2023.
Basis of Presentation
The Bank’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the
International Accounting Standards Board (IASB). The financial statements also comply with section 308(4) of the
Bank Act
that, except as otherwise specified by OSFI, the consolidated financial statements are to be prepared in accordance with IFRS. IFRS represent
Canadian generally accepted accounting principles (GAAP). None of the OSFI accounting requirements are exceptions to IFRS. The accounting policies
described in the Summary of Significant Accounting Policies section have been applied consistently to all periods presented.
Unless otherwise indicated, all amounts are expressed in Canadian dollars, which is the Bank’s functional and presentation currency.
Interest Rate Benchmark Reform
The reform of interbank offered rates (IBORs) and other interest rate benchmarks is a global initiative being coordinated and led by central banks and
governments around the world, including those in Canada. This reform has been unfolding for several years, with the IASB monitoring developments.
To minimize the financial statement impacts arising from replacing current interest rate benchmarks with alternative benchmarks, the IASB amended
certain IFRS standards and allowed for some temporary exemptions, notably in the area of hedge accounting.
On December 31, 2021, all LIBOR (London Interbank Offered Rates) rates in European, British, Swiss, and Japanese currency as well as the one-week
and two-month USD LIBOR rates were discontinued, whereas the other USD LIBOR rates were discontinued as of June 30, 2023. In Canada, publication
of the CDOR (Canadian Dollar Offered Rate) will be discontinued on June 28, 2024 and will be replaced by the risk-free rate CORRA (Canadian
Overnight Repo Rate Average) and a term CORRA rate, which has been available since September 5, 2023. On July 27, 2023, the Canadian Alternative
Reference Rate (CARR) Working Group published its recommendations and set a milestone stipulating that no new CDOR or bankers’ acceptance loan
contracts can be entered into after November 1, 2023. However, this milestone will have no impact on the ability to draw on existing credit facilities
that have not yet matured, that have been extended, or that have been subject to material amendments before this deadline.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
12
To prepare for the interest rate benchmark reform, the Bank developed an enterprise-wide project, put together a dedicated team of experts,
established a formal governance structure, and prepared a training plan. Several committees were created to ensure the success of the project. The
project team is made up of qualified resources from various fields of expertise to ensure a comprehensive analysis of all aspects of the changes as
well as the financial, legal, operational, and technological impacts. Many of these experts, who have in-depth knowledge of accounting standards and
reform-related activities, are involved in various working groups and participate in meetings with OSFI. The project team regularly reports on the
project’s progress to the project steering committee and the Financial Markets Risk Committee. As at October 31, 2023, the project was progressing
according to schedule. The Bank is exposed to several risks, including interest rate risk and operational risk, which arise from non-derivative financial
assets, non-derivative financial liabilities, and derivative financial instruments. The project team ensures that risks are mitigated while ensuring a
positive experience for its clients. The Bank is taking all necessary steps to identify, measure, and control all of the risks to ensure a smooth transition
throughout the interest rate benchmark reform.
The following table discloses the non-derivative financial assets, non-derivative financial liabilities, and derivative financial instruments subject to the
interest rate benchmark reform as at October 31, 2023 that have not yet transitioned to alternative benchmark rates.
As at October 31, 2023
CDOR
Maturing after June 28,
2024
Non-derivative financial assets
(1)
23,968
Non-derivative financial liabilities
(2)
16,019
Notional amount of derivative financial instruments
425,074
(1)
Non-derivative financial assets include the carrying value of securities as well as the outstanding balances on loans and the customers’ liability under acceptances.
(2)
Non-derivative financial liabilities include the nominal amounts of deposits and the carrying value of acceptances.
Accounting Policy Changes
Amendments to IAS 12 –
Income Taxes
On May 23, 2023, the IASB issued
which amends IAS 12 –
Income Taxes.
These amendments apply
to income taxes arising from tax law enacted or substantively enacted to implement the Pillar 2 model rules of the Organisation for Economic Co-
operation and Development (OECD). The amendments also introduce a temporary exception to the accounting of deferred tax assets and liabilities
arising from the implementation of these rules as well as related disclosures. These amendments apply immediately upon issuance and
retrospectively in accordance with IAS 8 –
Accounting Policies, Changes in Accounting Estimates and Errors
. Additional disclosures of current tax
expense (recovery) and other information related to income tax exposures will be provided annually for periods beginning on or after November 1,
2023. During the year ended October 31, 2023, the Bank applied the exception to the recognition and disclosure of information about deferred tax
assets and liabilities arising from the Pillar 2 rules in the jurisdictions where they have been adopted. To date, these amendments have had no impact
on the Bank’s consolidated results.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
13
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Summary of Significant Accounting Policies
Judgments, Estimates and Assumptions
In preparing consolidated financial statements in accordance with IFRS, management must exercise judgment and make estimates and assumptions
that affect the reporting date carrying amounts of assets and liabilities, net income, and related information. Furthermore, certain accounting policies
require complex judgments and estimates because they apply to matters that are inherently uncertain, in particular accounting policies applicable to
the following: the fair value determination of financial instruments, the impairment of financial assets, the impairment of non-financial assets, pension
plans and other post-employment benefits, income taxes, provisions, the consolidation of structured entities, and the classification of debt
instruments. Descriptions of these judgments and estimates are provided in each of the notes related thereto in the consolidated financial statements.
Actual results could therefore differ from these estimates, in which case the impacts are recognized in the consolidated financial statements of future
fiscal periods. The accounting policies described in this note provide greater detail about the use of estimates and assumptions and reliance on
judgment.
The geopolitical landscape (notably, the Russia-Ukraine war and the recent clashes between Hamas and Israel), inflation, climate change, and higher
interest rates continue to create uncertainty. As a result, establishing reliable estimates and applying judgment continue to be substantially complex.
The uncertainty surrounding certain key inputs used in measuring expected credit losses is described in Note 7 to these consolidated financial
statements.
Basis of Consolidation
Subsidiaries
These consolidated financial statements include all the assets, liabilities, operating results and cash flows of the Bank and its subsidiaries, after
elimination of intercompany transactions and balances. Subsidiaries are entities, including structured entities, controlled by the Bank. A structured
entity is an entity created to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant
factor in deciding who controls the entity, such as when voting rights relate solely to administrative tasks and the relevant activities are directed by
means of contractual arrangements.
Management must exercise judgment in determining whether the Bank must consolidate an entity. The Bank controls an entity only if the following
three conditions are met:
●
it has decision-making authority regarding the entity’s relevant activities;
●
it has exposure or rights to variable returns from its involvement with the entity;
●
it has the ability to use its power to affect the amount of the returns.
When determining decision-making authority, the Bank considers many factors, including the existence and effect of actual and potential voting rights
held by the Bank that can be exercised as well as the holding of instruments that are convertible into voting shares. In addition, the Bank must
determine whether, as an investor with decision-making rights, it acts as a principal or agent.
Based on these principles, an assessment of control is performed at the inception of a relationship between any entity and the Bank. When performing
this assessment, the Bank considers all facts and circumstances, and it must reassess whether it still controls an investee if facts and circumstances
indicate that one or more of the three conditions of control have changed.
The Bank consolidates the entities it controls from the date on which control is obtained and ceases to consolidate them from the date control ceases.
The Bank uses the acquisition method to account for the acquisition of a subsidiary from a third party on the date control is obtained.
Non-Controlling Interests
Non-controlling interests in subsidiaries represent the equity interests held by third parties in the Bank’s subsidiaries and are presented in total
Equity,
Equity attributable to the Bank’s shareholders and holders of other equity instruments.
proportionate shares of the net income and other comprehensive income of the Bank’s subsidiaries are presented separately in the Consolidated
Statement of Income and in the Consolidated Statement of Comprehensive Income, respectively.
With respect to units issued to third parties by mutual funds and certain other funds that are consolidated, they are presented at fair value in
Other
liabilities
on the Consolidated Balance Sheet. Lastly, changes in ownership interests in subsidiaries that do not result in a loss of control are
recognized as equity transactions. The difference between the adjustment in the carrying value of the non-controlling interest and the fair value of the
consideration paid or received is recognized directly in
Equity attributable to the Bank’s shareholders and holders of other equity instruments
.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
14
Investments in Associates and Joint Ventures
The Bank exercises significant influence over an entity when it has the power to participate in the financial and operating policy decisions of the
investee. The Bank has joint control when there is a contractually agreed sharing of control of an entity, and joint control exists only when decisions
about the relevant activities require the unanimous consent of the parties sharing control.
Investments in associates, i.e., entities over which the Bank exercises significant influence, and investments in joint ventures, i.e., entities over which
the Bank has rights to the net assets and exercises joint control, are accounted for using the equity method. Under the equity method, the investment
is initially recorded at cost and, thereafter, the carrying amount is increased or decreased by the Bank's proportionate share of net income, recognized
in
Non-interest income
Other
comprehensive income
Translation of Foreign Currencies
The consolidated financial statements are presented in Canadian dollars, which is the Bank’s functional and presentation currency. Each foreign
operation within the Bank’s scope of consolidation determines its own functional currency, and the items reported in the financial statements of each
foreign operation are measured using that currency.
Monetary items and non-monetary items measured at fair value and denominated in foreign currencies are translated into the functional currency at
exchange rates prevailing at the Consolidated Balance Sheet date. Non-monetary items not measured at fair value are translated into the functional
currency at historical rates. Revenues and expenses denominated in foreign currencies are translated at the average exchange rates for the period.
Translation gains and losses are recognized in
Non-interest income
designated at fair value through other comprehensive income, for which unrealized gains and losses are recorded in
Other comprehensive income
will not be subsequently reclassified to net income.
In the consolidated financial statements, the assets and liabilities of all foreign operations are translated into the Bank’s functional currency at the
exchange rates prevailing at the Consolidated Balance Sheet date, whereas the revenues and expenses of such foreign operations are translated into
the Bank’s functional currency at the average exchange rates for the period. Any goodwill resulting from the acquisition of a foreign operation that
does not have the same functional currency as the parent company, and any fair value adjustments to the carrying amounts of assets and liabilities
resulting from the acquisition, are treated as assets and liabilities of the foreign operation and translated at the exchange rates prevailing at the
Consolidated Balance Sheet date. Unrealized translation gains and losses related to foreign operations, including the impact of hedges and income
taxes on the related results, are presented in
Other comprehensive income
. Upon disposal of a foreign operation, any accumulated translation gains
and losses, along with the related hedges, recorded in the
Accumulated other comprehensive income
Non-interest income
Classification and Measurement of Financial Instruments
At initial recognition, all financial instruments are recorded at fair value on the Consolidated Balance Sheet. At initial recognition, financial assets must
be classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss.
The Bank determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to
manage these financial assets. At initial recognition, financial liabilities are classified as subsequently measured at amortized cost or as at fair value
through profit or loss.
For the purpose of classifying a financial asset, the Bank must determine whether the contractual cash flows associated with the financial asset are
solely payments of principal and interest on the principal amount outstanding. The principal is generally the fair value of the financial asset at initial
recognition. The interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding
during a particular period, and for other basic lending risks and costs as well as of a profit margin. If the Bank determines that the contractual cash
flows associated with a financial asset are not solely payments of principal and interest, the financial assets must be classified as measured at fair
value through profit or loss.
When classifying financial assets, the Bank determines the business model used for each portfolio of financial assets that are managed together to
achieve a same business objective. The business model reflects how the Bank manages its financial assets and the extent to which the financial asset
cash flows are generated by the collection of the contractual cash flows, the sale of the financial assets, or both. The Bank determines the business
model using scenarios that it reasonably expects to occur. Consequently, the business model determination is a matter of fact and requires the use of
judgment and consideration of all the relevant evidence available to the Bank at the date of determination.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
15
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
A financial asset portfolio falls within a “hold to collect” business model when the Bank’s primary objective is to hold these financial assets in order to
collect contractual cash flows from them and not to sell them. When the Bank’s objective is achieved both by collecting contractual cash flows and by
selling the financial assets, the financial asset portfolio falls within a “hold to collect and sell” business model. In this type of business model,
collecting contractual cash flows and selling financial assets are both integral components to achieving the Bank’s objective for this financial asset
portfolio. Financial assets are mandatorily measured at fair value through profit or loss if they do not fall within either a “hold to collect” business
model or a “hold to collect and sell” business model.
Financial Instruments Designated at Fair Value Through Profit or Loss
A financial asset may be irrevocably designated at fair value through profit or loss at initial recognition if certain conditions are met. The Bank may
apply this option if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from
measuring financial assets or liabilities or recognizing gains and losses on them on different bases, and if the fair values are reliable. Financial assets
thus designated are recognized at fair value, and any change in fair value is recorded in
Non-interest income
Interest income arising from these financial instruments designated at fair value through profit or loss is recorded in
Net interest
income
Consolidated Statement of Income.
A financial liability may be irrevocably designated at fair value through profit or loss when it is initially recognized. Financial liabilities thus designated
are recognized at fair value, and any changes in fair value attributable to changes in the Bank's own credit risk are recognized in
Other comprehensive
income
Net income.
risk are recognized in
Non-interest income
Other comprehensive income
be subsequently reclassified to
Net income
. Interest expense arising from these financial liabilities designated at fair value through profit or loss is
recorded in the
Net interest income
●
if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring financial
assets or liabilities or recognizing gains and losses on them on different bases, and if the fair values are reliable;
●
if a group of financial assets and financial liabilities to which an instrument belongs is managed and its performance is evaluated on a fair value
basis, in accordance with the Bank’s documented risk management or investment strategy, and information is provided on that basis to senior
management. Consequently, the Bank may use this option if it has implemented a documented risk management strategy to manage a group of
financial instruments together on the fair value basis, if it can demonstrate that significant financial risks are eliminated or significantly reduced,
and if the fair values are reliable;
●
for hybrid financial instruments with one or more embedded derivatives that would significantly modify the cash flows of the financial instruments
and that would otherwise be bifurcated and accounted for separately.
Financial Instruments Designated at Fair Value Through Other Comprehensive Income
At initial recognition, an investment in an equity instrument that is neither held for trading nor a contingent consideration recognized in a business
combination may be irrevocably designated as being at fair value through other comprehensive income. In accordance with this designation, any
change in fair value is recognized in
Other comprehensive income
Interest income
Securities Measured at Fair Value Through Other Comprehensive Income
Securities measured at fair value through other comprehensive income include: (i) debt securities for which the contractual terms of the financial
asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal
amount outstanding and that fall
within a “hold to collect and sell” business model and (ii) equity securities designated at fair value through other comprehensive income with no
subsequent reclassification of gains and losses to net income.
The Bank recognizes securities transactions at fair value through other comprehensive income on the trade date, and the transaction costs are
capitalized. Interest income and dividend income are recognized in
Interest income
in the Consolidated Statement of Income.
Debt Securities Measured at Fair Value Through Other Comprehensive Income
Debt securities measured at fair value through other comprehensive income are recognized at fair value. Unrealized gains and losses are recognized,
net of expected credit losses and related income taxes, and provided that they are not hedged by derivative financial instruments in a fair value
hedging relationship, in
Other comprehensive income
. When the securities are sold, realized gains or losses, determined on an average cost basis, are
reclassified to
Non-interest income – Gains (losses) on non-trading securities, net
related transaction costs are amortized to interest income over the expected life of the instrument using the effective interest rate method.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
16
Equity Securities Designated at Fair Value Through Other Comprehensive Income
Equity securities designated at fair value through other comprehensive income are recognized at fair value. Unrealized gains and losses are
presented, net of income taxes, in
Other comprehensive income
Transaction costs incurred upon the purchase of such equity securities are not reclassified to net income upon the sale of the securities.
Securities Measured at Amortized Cost
Securities measured at amortized cost include debt securities for which the contractual terms give rise, on specified dates, to cash flows that are
solely payments of principal and interest on the principal amount outstanding and that fall within a “hold to collect” business model.
The Bank recognizes these securities transactions at fair value on the trade date, and the transaction costs are capitalized. After initial recognition,
debt securities in this category are recorded at amortized cost. Interest income is recognized in
Interest income
Income. Premiums, discounts and related transaction costs are amortized to interest income over the expected life of the instrument using the
effective interest rate method. Securities measured at amortized cost are presented net of allowances for credit losses on the Consolidated Balance
Sheet.
Securities Measured at Fair Value Through Profit or Loss
Securities not classified or designated as measured at fair value through other comprehensive income or at amortized cost are classified as
measured at fair value through profit or loss.
Securities measured at fair value through profit or loss include (i) securities held for trading, (ii) securities designated at fair value through profit or
loss, (iii) all equity securities other than those designated as measured at fair value through other comprehensive income with no subsequent
reclassifications of gains and losses to net income, and (iv) debt securities for which the contractual cash flows are not solely payments of principal
and any interest on any principal amount outstanding.
The Bank recognizes securities transactions at fair value through profit or loss on the settlement date on the Consolidated Balance Sheet. Changes in
fair value between the trade date and the settlement date are recognized in
Non-interest income
Securities at fair value through profit or loss are recognized at fair value. Interest income, any transaction costs, as well as realized and unrealized
gains or losses on securities held for trading are recognized in
Non-interest income – Trading revenues (losses
) in the Consolidated Statement of
Income. Dividend income is recorded in
Interest income
value through profit or loss is recorded in
Interest income
securities are recognized in
Non-interest income – Trading revenues (losses
) in the Consolidated Statement of Income.
Realized and unrealized gains or losses on equity securities at fair value through profit or loss, other than those held for trading, as well as debt
securities for which the contractual cash flows are not solely payments of principal and interest on the principal amount outstanding, are recognized
in
Non-interest income – Gains (losses) on non-trading securities
,
income on these financial assets are recognized in
Interest income
Securities Purchased Under Reverse Repurchase Agreements, Obligations Related to Securities Sold
Under Repurchase Agreements, and Securities Borrowed and Loaned
The Bank recognizes these transactions at amortized cost using the effective interest rate method, except when they are designated at fair value
through profit or loss and are recorded at fair value. These transactions are held within a business model whose objective is to collect contractual
cash flows, i.e., cash flows that are solely payments of principal and interest on the principal amount outstanding. Securities sold under repurchase
agreements remain on the Consolidated Balance Sheet, whereas securities purchased under reverse repurchase agreements are not recognized.
Reverse repurchase agreements and repurchase agreements are treated as collateralized lending and borrowing transactions.
The Bank also borrows and lends securities. Securities loaned remain on the Consolidated Balance Sheet, while securities borrowed are not
recognized. As part of these transactions, the Bank pledges or receives collateral in the form of cash or securities. Collateral pledged in the form of
securities remains on the Consolidated Balance Sheet. Collateral received in the form of securities is not recognized on the Consolidated Balance
Sheet. Collateral pledged or received in the form of cash is recognized in financial assets or liabilities on the Consolidated Balance Sheet.
When the collateral is pledged or received in the form of cash, the interest income and expense are recorded in
Net interest income
Consolidated Statement of Income.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
17
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Loans
Loans Measured at Amortized Cost
Loans classified as measured at amortized cost include loans originated or purchased by the Bank that are not classified as measured at fair value
through profit or loss or designated at fair value through profit or loss. These loans are held within a business model whose objective is to collect
contractual cash flows, i.e., cash flows that are solely payments of principal and interest on the principal amount outstanding. All loans originated by
the Bank are recognized when cash is advanced to a borrower. Purchased loans are recognized when the cash consideration is paid by the Bank.
All loans are initially recognized at fair value plus directly attributable costs and are subsequently measured at amortized cost using the effective
interest rate method, net of allowances for expected credit losses. For purchased performing loans, the acquisition date fair value adjustment on each
loan is amortized to interest income over the expected remaining life of the loan using the effective interest rate method. For purchased credit-
impaired loans, the acquisition date fair value adjustment on each loan consists of management’s estimate of the shortfall of principal and interest
cash flows that the Bank expects to collect and of the time value of money. The time value of money component of the fair value adjustment is
amortized to interest income over the remaining life of the loan using the effective interest rate method. Loans are presented net of allowances for
credit losses on the Consolidated Balance Sheet.
Loans Measured at Fair Value Through Profit or Loss
Loans classified as measured at fair value through profit or loss, loans designated at fair value through profit or loss, and loans for which the
contractual cash flows are not solely payments of principal and interest on the principal amount outstanding are recognized at fair value on the
Consolidated Balance Sheet. The interest income on loans at fair value through profit or loss is recorded in
Interest income
Statement of Income.
Changes in the fair value of loans classified as at fair value through profit or loss and loans designated at fair value through profit or loss are
recognized in
Non-interest income – Trading revenues (losses
) in the Consolidated Statement of Income. With respect to loans whose contractual
cash flows are not solely payments of principal and interest on the principal amount outstanding, changes in fair value are recognized in
Non-interest
income – Other
Reclassification of Financial Assets
A financial asset, other than a derivative financial instrument or a financial asset that, at initial recognition, was designated as measured at fair value
through profit or loss, is reclassified only in rare situations, i.e., when there is a change in the business model used to manage the financial asset. The
reclassification is applied prospectively from the reclassification date.
Establishing Fair Value
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly
transaction in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial assets and offered prices for financial liabilities, provide the best
evidence of fair value. A financial instrument is considered quoted in an active market when prices in exchange, dealer, broker or principal-to-
principal markets are accessible at the measurement date. An active market is one where transactions occur with sufficient frequency and volume to
provide quoted prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another valuation technique that maximizes the use of relevant observable inputs
and minimizes the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would consider
when pricing a transaction. Judgment is required when applying a large number of acceptable valuation techniques and estimates to determine fair
value. The estimated fair value reflects market conditions on the valuation date and, consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration
received or paid. If there is a difference between the fair value at initial recognition and the transaction price, and the fair value is determined using a
valuation technique based on observable market inputs or, in the case of a derivative, if the risks are fully offset by other contracts entered into with
third parties, this difference is recognized in the Consolidated Statement of Income. In other cases, the difference between the fair value at initial
recognition and the transaction price is deferred on the Consolidated Balance Sheet. The amount of the deferred gain or loss is recognized over the
term of the financial instrument. The unamortized balance is immediately recognized in net income when (i) observable market inputs can be obtained
and support the fair value of the transaction, (ii) the risks associated with the initial contract are substantially offset by other contracts entered into
with third parties, (iii) the gain or loss is realized through a cash receipt or payment, or (iv) the transaction matures or is terminated before maturity.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
18
In certain cases, measurement adjustments are recognized to address factors that market participants would use at the measurement date to
determine fair value but that are not included in the measurement techniques due to system limitations or uncertainty surrounding the measure.
These factors include, but are not limited to, the unobservable nature of the inputs used in the valuation model, assumptions about risk such as market
risk, credit risk, or valuation model risk, and future administration costs. The Bank may also consider market liquidity risk when determining the fair
value of financial instruments when it believes these instruments could be disposed of for a consideration that is below the fair value otherwise
determined due to a lack of market liquidity or an insufficient volume of transactions in a given market. The measurement adjustments also include
the funding valuation adjustment applied to derivative financial instruments to reflect the market implied cost or benefits of funding collateral for
uncollateralized or partly collateralized transactions.
As permitted when certain criteria are met, the Bank has elected to determine fair value based on net exposure to credit risk or market risk for
certain portfolios of financial instruments, mainly derivative financial instruments.
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt
instruments measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that
are not measured at fair value. The ECL model is forward looking. Measurement of ECLs at each reporting period reflects reasonable and supportable
information about past events, current conditions, and forecasts of future events and future economic conditions.
Determining the Stage
The ECL three-stage impairment approach is based on the change in the credit quality of financial assets since initial recognition. If, at the reporting
date, the credit risk of non-impaired financial instruments has not increased significantly since initial recognition, these financial instruments are
classified in Stage 1, and an allowance for credit losses that is measured, at each reporting date, in an amount equal to 12-month expected credit
losses, is recorded. When there is a significant increase in credit risk since initial recognition, these non-impaired financial instruments are migrated
to Stage 2, and an allowance for credit losses that is measured, at each reporting date, in an amount equal to lifetime expected credit losses, is
recorded. In subsequent reporting periods, if the credit risk of a financial instrument improves such that there is no longer a significant increase in
credit risk since initial recognition, the ECL model requires reverting to Stage 1, i.e., recognition of 12-month expected credit losses. When one or more
events that have a detrimental impact on the estimated future cash flows of a financial asset occurs, the financial asset is considered credit-impaired
and is migrated to Stage 3, and an allowance for credit losses equal to lifetime expected credit losses continues to be recorded or the financial asset
is written off. Interest income is calculated on the gross carrying amount for financial assets in Stages 1 and 2 and on the net carrying amount for
financial assets in Stage 3.
Assessment of Significant Increase in Credit Risk
In determining whether credit risk has increased significantly, the Bank uses an internal credit risk grading system, external risk ratings, and
forward-looking information to assess deterioration in the credit quality of a financial instrument. To assess whether or not the credit risk of a
financial instrument has increased significantly, the Bank compares the probability of default (PD) occurring over its expected life as at the reporting
date with the PD occurring over its expected life on the date of initial recognition and considers reasonable and supportable information indicative of a
significant increase in credit risk since initial recognition. The Bank includes relative and absolute thresholds in the definition of significant increase in
credit risk and a backstop of 30 days past due. All financial instruments that are 30 days past due are migrated to Stage 2 even if other metrics do not
indicate that a significant increase in credit risk has occurred. The assessment of a significant increase in credit risk requires significant judgment.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of all expected cash shortfalls over the remaining expected life of the financial
instrument, and reasonable and supportable information about past events, current conditions, and forecasts of future events and economic conditions
is considered. The estimation and application of forward-looking information requires significant judgment. Cash shortfalls represent the difference
between all contractual cash flows owed to the Bank and all cash flows that the Bank expects to receive.
The measurement of ECLs is primarily based on the product of the financial instrument’s PD, loss given default (LGD), and exposure at default (EAD).
Forward-looking macroeconomic factors such as unemployment rates, housing price indices, interest rates, and gross domestic product (GDP) are
incorporated into the risk parameters. The estimate of expected credit losses reflects an unbiased and probability-weighted amount that is determined
by evaluating a range of possible outcomes. The Bank incorporates three forward-looking macroeconomic scenarios in its ECL calculation process: a
base scenario, an upside scenario, and a downside scenario. Probability weights are assigned to each scenario. The scenarios and probability weights
are reassessed quarterly and subject to management review. The Bank applies experienced credit judgment to adjust the modelled ECL results when
it becomes evident that known or expected risk factors and information were not considered in the credit risk rating and modelling process.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
19
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
ECLs for all financial instruments are recognized in
Provisions for credit losses
in the Consolidated Statement of Income. In the case of debt
instruments measured at fair value through other comprehensive income, ECLs are recognized in
Provisions for credit losses
in the Consolidated
Statement of Income, and a corresponding amount is recognized in
Other comprehensive income
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
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
estimated cash flows on initial recognition.
Definition of Default
The definition of default used by the Bank to measure ECLs and transfer financial instruments between stages is consistent with the definition of
default used for internal credit risk management purposes. The Bank considers a financial asset, other than a credit card receivable, to be credit-
impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred or when
contractual payments are 90 days past due. Credit card receivables are considered credit-impaired and are fully written off at the earlier of the
following dates: when a notice of bankruptcy is received, a settlement proposal is made, or contractual payments are 180 days past due.
Write-Offs
A financial asset and its related allowance for credit losses are normally written off in whole or in part when the Bank considers the probability of
recovery to be non-existent and when all guarantees and other remedies available to the Bank have been exhausted or if the borrower is bankrupt or
winding up and balances owing are not likely to be recovered.
Derecognition of Financial Assets and Securitization
A financial asset is considered for derecognition when the Bank has transferred contractual rights to receive the cash flows or assumed an obligation
to transfer these cash flows to a third party. The Bank derecognizes a financial asset when it considers that substantially all the risks and rewards of
ownership of the asset have been transferred or when the contractual rights to the cash flows of the financial asset expire. When the Bank considers
that it has retained substantially all the risks and rewards of ownership of the transferred asset, it continues to recognize the financial asset and, if
applicable, recognizes a financial liability on the Consolidated Balance Sheet. If, due to a derivative financial instrument, the transfer of a financial
asset does not result in derecognition, the derivative financial instrument is not recognized on the Consolidated Balance Sheet.
When the Bank has neither transferred nor retained substantially all the risks and rewards of ownership of the financial asset, it derecognizes the
financial asset it no longer controls. Any rights and obligations retained following the asset transfer are recognized separately as an asset or liability.
If the Bank retains control of the financial asset, it continues to recognize the asset to the extent of its continuing involvement in that asset, i.e., the
extent to which it is exposed to changes in the value of the transferred asset.
To diversify its funding sources, the Bank participates in two Canada Mortgage and Housing Corporation (CMHC) securitization programs: the
Mortgage-Backed Securities Program under the
National Housing Act
program, the Bank issues NHA securities backed by insured residential mortgages and, under the second, the Bank sells NHA securities to Canada
Housing Trust (CHT). As part of these transactions, the Bank retains substantially all the risks and rewards related to ownership of the mortgage loans
sold. Therefore, the insured mortgage loans securitized under the CMB program continue to be recognized in the
Loans
Consolidated Balance Sheet, and the liabilities for the considerations received from the transfer are recognized in
Liabilities related to transferred
receivables
Loans
Derecognition of Financial Liabilities
A financial liability is derecognized when the obligation is discharged, cancelled, or expires. The difference between the carrying value of the financial
liability transferred and the consideration paid is recognized in the Consolidated Statement of Income.
Cash and Deposits With Financial Institutions
Cash and deposits with financial institutions consist of cash and cash equivalents, amounts pledged as collateral as well as amounts placed in escrow.
Cash and cash equivalents consist of cash, bank notes, deposits with the Bank of Canada and other financial institutions, including net receivables
related to cheques, and other items in the clearing process.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
20
Acceptances and Customers’ Liability Under Acceptances
The potential liability of the Bank under acceptances is recorded as a customer commitment liability on the Consolidated Balance Sheet. The Bank’s
potential recourse vis à vis clients is recorded as an equivalent offsetting asset. Fees are recorded in
Non-interest income
Statement of Income.
Obligations Related to Securities Sold Short
This financial liability represents the Bank’s obligation to deliver the securities it sold but did not own at the time of sale. Obligations related to
securities sold short are recorded at fair value and presented as liabilities on the Consolidated Balance Sheet. Realized and unrealized gains and
losses are recognized in
Non-interest income
Derivative Financial Instruments
In the normal course of business, the Bank uses derivative financial instruments to meet the needs of its clients, to generate trading activity revenues,
and to manage its exposure to interest rate risk, foreign exchange risk, credit risk, and other market risks.
All derivative financial instruments are measured at fair value on the Consolidated Balance Sheet. Derivative financial instruments with a positive fair
value are included in assets, whereas derivative financial instruments with a negative fair value are included in liabilities on the Consolidated Balance
Sheet. Where there are offsetting financial assets and financial liabilities, the net fair value of certain derivative financial instruments is reported
either as an asset or as a liability, depending on the circumstance.
Embedded Derivative Financial Instruments
An embedded derivative is a component of a hybrid contract that also includes a non-derivative host, the effect being that some of the cash flows of
the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that
otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign
exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided, in the case of a non-financial variable, that the
variable is not specific to one of the parties to the contract.
A derivative embedded in a financial liability is separated from the host contract and treated as a separate derivative if, and only if, the following three
conditions are met: the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, the
embedded derivative is a separate instrument that meets the definition of a derivative financial instrument, and the hybrid contract is not measured at
fair value through profit or loss.
Embedded derivatives that are separately accounted for are measured at fair value on the Consolidated Balance Sheet, and subsequent changes in fair
value are recognized in
Non-interest
income
combined basis with the host contract. However, certain embedded derivatives that are separated from the host contract are presented in
Derivative
financial instruments
on the Consolidated Balance Sheet.
Held-for-Trading Derivative Financial Instruments
Derivative financial instruments are recognized at fair value, and the realized and unrealized gains and losses (including interest income and expense)
are recorded in
Non-interest income
Derivative Financial Instruments Designated as Hedging Instruments
Policy
The purpose of a hedging transaction is to modify the Bank’s exposure to one or more risks by creating an offset between changes in the fair value of,
or the cash flows attributable to, the hedged item and the hedging instrument. Hedge accounting ensures that offsetting gains, losses, revenues and
expenses are recognized in the Consolidated Statement of Income in the same period or periods.
Documenting and Assessing Effectiveness
The Bank designates and formally documents each hedging relationship, at its inception, by detailing the risk management objective and the hedging
strategy. The documentation identifies the specific asset, liability, or cash flows being hedged, the related hedging instrument, the nature of the
specific risk exposure or exposures being hedged, the intended term of the hedging relationship, and the method for assessing the effectiveness or
ineffectiveness of the hedging relationship. At the inception of the hedging relationship, and for every financial reporting period for which the hedge
has been designated, the Bank ensures that the hedging relationship is highly effective and consistent with its originally documented risk management
objective and strategy. When a hedging relationship meets the hedge accounting requirements, it is designated as either a fair value hedge, a cash
flow hedge or a foreign exchange hedge of a net investment in a foreign operation.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
21
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Interest Rate Benchmark Reform
A hedging relationship is directly affected by interest rate benchmark reform such as interbank offered rates (IBORs) only if the reform gives rise to
uncertainties about (a) the interest rate benchmark (contractually or non-contractually specified) designated as a hedged risk; and/or (b) the timing or
the amount of the interest-rate-benchmark-based cash flows of the hedged item or of the hedging instrument.
For such hedging relationships, the following temporary exceptions apply during the period of uncertainty:
•
when determining whether a forecast transaction is highly probable or expected to occur, it is assumed that the interest rate benchmark on which
the hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform;
•
when assessing whether a hedge is expected to be highly effective, it is assumed that the interest rate benchmark on which the hedged cash flows
and/or the hedged risk (contractually or non-contractually specified) are based, or the interest rate benchmark on which the cash flows of the
hedging instrument are based, is not altered as a result of interest rate benchmark reform;
•
a hedge is not required to be discontinued if the actual results of the hedge are outside an effectiveness range of 80% to 125% as a result of
interest rate benchmark reform;
•
for a hedge of a non-contractually specified benchmark portion of interest rate risk, the requirement that the designated portion be separately
identifiable need only be met at the inception of the hedging relationship.
Fair Value Hedges
For fair value hedges, the Bank mainly uses interest rate swaps to hedge changes in the fair value of a hedged item. The carrying amount of the
hedged item is adjusted based on the effective portion of the gains or losses attributable to the hedged risk, which are recognized in the Consolidated
Statement of Income, as well as the change in the fair value of the hedging instrument. The resulting ineffective portion is recognized in
Non-interest
income
The Bank prospectively discontinues hedge accounting if the hedging instrument is sold or expires or if the hedging relationship no longer qualifies for
hedge accounting or if the Bank revokes the designation. When the designation is revoked, the hedged item is no longer adjusted to reflect changes in
fair value, and the amounts previously recorded as cumulative adjustments with respect to the effective portion of gains and losses attributable to the
hedged risk are amortized using the effective interest rate method and recognized in the Consolidated Statement of Income over the remaining useful
life of the hedged item. If the hedged item is sold or terminated before maturity, the cumulative adjustments with respect to the effective portion of
gains and losses attributable to the hedged risk are immediately recorded in the Consolidated Statement of Income.
Cash Flow Hedges
For cash flow hedges, the Bank mainly uses interest rate swaps and total return swaps to hedge variable cash flows attributable to the hedged risk
related to a financial asset or liability (or to a group of financial assets or financial liabilities). The effective portion of changes in fair value of the
hedging instrument is recognized in
Other comprehensive income
, whereas the ineffective portion is recognized in
Non-interest income
Consolidated Statement of Income.
The amounts previously recorded in
Accumulated other comprehensive income
or periods during which the cash flows of the hedged item affect the Consolidated Statement of Income. If the hedging instrument is sold or expires or
if the hedging relationship no longer qualifies for hedge accounting or if the Bank cancels that designation, then the amounts previously recognized in
Accumulated other comprehensive income
flows of the hedged item affect the Consolidated Statement of Income.
Hedges of Net Investments in Foreign Operations
Derivative and non-derivative financial instruments are used to hedge foreign exchange risk related to investments made in foreign operations whose
functional currency is not the Canadian dollar. The effective portion of the gains and losses on the hedging instrument is recognized in
Other
comprehensive income
, whereas the ineffective portion is recognized in
Non-interest income
or partial sale of a net investment in a foreign operation, amounts reported in
Accumulated other comprehensive income
are reclassified, in whole or
in part, to
Non-interest income
in the Consolidated Statement of Income.
Offsetting of Financial Assets and Liabilities
Financial assets and liabilities are offset, and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable
right to set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
22
Premises and Equipment
Premises and equipment, except for land and the portion of the head office building under construction, are recognized at cost less accumulated
depreciation and accumulated impairment losses, if any. Land and the portion of the head office building under construction are recorded at cost less
any accumulated impairment losses. Right-of-use assets are presented in
Premises and equipment
information about the accounting treatment of right-of-use assets, see the Leases section presented below.
Buildings, computer equipment, and equipment and furniture are systematically depreciated over their estimated useful lives. The depreciation period
for leasehold improvements is the lesser of the estimated useful life of the leasehold improvements or the non-cancellable period of the lease.
Depreciation methods and estimated useful lives are reviewed annually. The depreciation expense is recorded in
Non-interest expenses
Consolidated Statement of Income.
Method
Useful life
Significant components of the head office building
Interior design
Straight-line
10-20 years
Exterior design, roofing and electromechanical system
Straight-line
30 years
Structure
Straight-line
75 years
Other buildings
5% declining balance
Computer equipment
Straight-line
3-7 years
Equipment and furniture
Straight-line
8 years
Leasehold improvements
Straight-line
(1)
(1)
The depreciation period is the lesser of the estimated useful life or the lease term.
Leases
At the inception date of a contract, the Bank assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if it conveys the
right to control the use of an identified asset for a period of time in exchange for consideration. When the Bank is a lessee, it recognizes a right-of-use
asset and a corresponding lease liability at the lease commencement date except for short-term leases (defined as leases with terms of 12 months or
less) other than real estate leases and leases for which the underlying asset is of low value. For such leases, the Bank recognizes the lease payments
in the
Non-interest expenses
Bank elected, for real estate leases, not to separate non-lease components from lease components and instead account for them as a single lease
component. When the Bank is the lessor, the leased assets remain on the Consolidated Balance Sheet and are reported in
Premises and equipment
,
and the rental income is recognized net of related expenses in
Non-interest income
in the Consolidated Statement of Income.
Right-of-use assets are initially measured at cost and subsequently measured at cost less accumulated depreciation and accumulated impairment
losses, if any, and adjusted for certain remeasurements of lease liabilities. The cost of a right-of-use asset comprises the amount of the initial
measurement of the lease liability, any lease payments made at or before the commencement date, any initial direct costs incurred when entering into
the lease, and an estimate of costs to dismantle the asset or restore the site, less any lease incentives received. Right-of-use assets are depreciated
on a straight-line basis over the lesser of the lease term and the estimated useful life of the asset. Right-of-use assets are presented in
Premises and
equipment
Non-interest expenses
Consolidated Statement of Income.
The lease liability is initially measured at the present value of future lease payments net of lease incentives not yet received. The present value of
lease payments is determined using the Bank’s incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the
effective interest method. In determining the lease term, the Bank considers all the facts and circumstances that create an economic incentive to
exercise an extension option or not to exercise a termination option. The lease term determined by the Bank comprises the non-cancellable period of
lease contracts, the periods covered by an option to extend the lease if the Bank is reasonably certain to exercise that option, and the periods covered
by an option to terminate the lease if the Bank is reasonably certain not to exercise that option. The Bank reassesses the lease term if a significant
event or change in circumstances occurs and that is within its control. The Bank applies judgment to determine the lease term when the lease
contains extension and termination options. Lease liabilities are presented in
Other liabilities
on the Consolidated Balance Sheet, and the interest
expense is presented in the
Interest expense – Other
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
23
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Goodwill
The Bank uses the acquisition method to account for business combinations. The consideration transferred in a business combination is measured at
the acquisition-date fair value, and the transaction costs related to the acquisition are expensed as incurred. When the Bank acquires control of a
business, all of the identifiable assets and liabilities of the acquiree, including intangible assets, are recorded at fair value. The interests previously
held in the acquiree are also measured at fair value. Goodwill represents the excess of the purchase consideration and all previously held interests
over the fair value of the identifiable net assets of the acquiree. If the fair value of the identifiable net assets exceeds the purchase consideration and
all previously held interests, the difference is immediately recognized in income as a gain on a bargain purchase.
Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Bank’s ownership interest and can be
initially measured at either fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. The
measurement basis is selected on a case-by-case basis. Following an acquisition, non-controlling interests consist of the value assigned to those
interests at initial recognition plus the non-controlling interests’ share of changes in equity since the date of the acquisition.
Intangible Assets
Intangible Assets With Finite Useful Lives
Software that is not part of a cloud computing arrangement and certain other intangible assets are recognized at cost less accumulated amortization
and accumulated impairment losses. These intangible assets are systematically amortized on a straight-line basis over their useful lives, which vary
between four and ten years. The amortization expense is recorded in
Non-interest expenses
Intangible Assets With Indefinite Useful Lives
The Bank’s intangible assets with indefinite useful lives come from the acquisition of subsidiaries or groups of assets and consist of management
contracts and a trademark. They are recognized at the acquisition-date fair value. The management contracts are for the management of open-ended
funds. At the end of each reporting period, the Bank reviews the useful lives to determine whether facts and circumstances continue to support an
indefinite useful life assessment.
Intangible assets are deemed to have an indefinite useful life following an examination of all relevant factors, in
particular: (a) the contracts do not have contractual maturities; (b) the stability of the business segment to which the intangible assets belong; (c) the
Bank’s capacity to control the future economic benefits of the intangible assets; and (d) the continued economic benefits generated by the intangible
assets.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate
that their carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that
premises and equipment or intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not available for use or
that have indefinite useful lives are tested for impairment annually or more frequently if there is an indication that the asset might be impaired.
An asset is tested for impairment by comparing its carrying amount with its recoverable amount. The recoverable amount must be estimated for the
individual asset. Where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the cash-generating
unit (CGU) to which the asset belongs will be determined. A CGU is the smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of assets. The Bank uses judgment to identify CGUs.
An asset’s recoverable amount is the higher of fair value less costs to sell and the value in use of the asset or CGU. Value in use is the present value
of expected future cash flows from the asset or CGU. The recoverable amount of the asset or CGU is determined using valuation models that consider
various factors such as projected future cash flows, discount rates, and growth rates. The use of different estimates and assumptions in applying the
impairment tests could have a significant impact on income.
Corporate assets, such as the head office building and computer equipment, do not generate cash inflows that are largely independent of the cash
inflows generated by other assets or groups of assets. Therefore, the recoverable amount of an individual corporate asset cannot be determined
unless management has decided to dispose of the asset. However, if there is an indication that a corporate asset may be impaired, the recoverable
amount is determined for the CGU or group of CGUs to which the corporate asset belongs, and that recoverable amount is compared with the carrying
amount of this CGU or group of CGUs.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
24
Goodwill is always tested for impairment at the level of a CGU or group of CGUs. For impairment testing purposes, from the acquisition date, goodwill
resulting from a business combination must be allocated to the CGU or group of CGUs expected to benefit from the synergies of the business
combination. Each CGU or group of CGUs to which goodwill is allocated must represent the lowest level for which the goodwill is monitored internally
at the Bank and must not be larger than an operating segment. The allocation of goodwill to a CGU or group of CGUs involves management’s judgment.
If an impairment loss is to be recognized, the Bank does so by first reducing the carrying amount of goodwill allocated to the CGU or group of CGUs
and then reducing the carrying amounts of the other assets of the CGU or group of CGUs in proportion to the carrying amount of each asset in the CGU
or group of CGUs.
If the recoverable amount of an asset or a CGU is less than its carrying amount, the carrying amount is reduced to its recoverable amount and an
impairment loss is recognized in
Non-interest expenses
an asset other than goodwill must be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable
amount since the last impairment was recognized. If this is the case, the carrying amount of the asset is increased, given that the impairment loss was
reversed, but shall not exceed the carrying amount that would have been determined, net of amortization, had no impairment loss been recognized for
this asset in previous years.
Provisions
Provisions are liabilities of uncertain timing and amount. A provision is recognized when the Bank has a present obligation (legal or constructive)
arising from a past event, when it is probable that an outflow of economic resources will be required to settle the obligation and when the amount of
the obligation can be reliably estimated. Provisions are based on the Bank’s best estimates of the economic resources required to settle the present
obligation, given all relevant risks and uncertainties, and, when it is significant, the effect of the time value of money. Provisions are reviewed at the
end of each reporting period. Provisions are presented in
Other liabilities
on the Consolidated Balance Sheet.
Interest Income and Expense
Interest income and expense, except for the interest income on securities classified as at fair value through profit or loss, are recognized in
Net
interest income
The effective interest rate is the rate that exactly discounts estimated future cash inflows and outflows through the expected life of a financial asset or
financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability. When calculating the effective interest
rate, the Bank estimates expected cash flows by considering all the contractual terms of the financial instrument but does not consider expected
credit losses. The calculation includes all fees and points paid or received between the parties to the contract that are an integral part of the effective
interest rate, transaction costs, and all other premiums or discounts. Interest income is calculated by applying the effective interest rate to the gross
carrying amount of a financial asset except for purchased or originated credit-impaired financial assets and financial assets that were not impaired
upon their purchase or origination but became impaired thereafter. For purchased or originated credit-impaired financial assets, the Bank applies the
credit-adjusted effective interest rate to the amortized cost of the financial asset from initial recognition. The credit-adjusted effective interest rate
reflects expected credit losses. As for loans that have subsequently become credit-impaired, interest income is calculated by applying the effective
interest rate to the net carrying amount (net of allowances for credit losses) rather than to the gross carrying amount.
Loan origination fees, including commitment, restructuring, and renegotiation fees, are considered an integral part of the yield earned on the loan.
They are deferred and amortized using the effective interest rate method, and the amortization is recognized in
Interest income
loan. Direct costs for originating a loan are netted against the loan origination fees. If it is likely that a commitment will result in a loan, commitment
fees receive the same accounting treatment, i.e., they are deferred and amortized using the effective interest rate method and the amortization is
recognized in
Interest income
Non-interest income
Loan syndication fees are recorded in
Non-interest income
lenders involved in the financing. In such cases, an appropriate portion of the fees is deferred and amortized using the effective interest rate method,
and the amortization is recognized in
Interest income
Interest
income
Dividend Income
Dividends from an equity instrument are recognized in
Net interest income
payment is established.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
25
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Fee and Commission Income
Fee and commission income is recognized when, or as, a performance obligation is satisfied, i.e., when control of a promised service is transferred to
a customer and in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for the service. The revenue
may therefore be recognized at a point in time, upon completion of the service, or over time as services are provided.
The Bank must also determine whether its performance obligation is to provide the service itself or to arrange for another party to provide the service
(in other words, whether the Bank is acting as a principal or agent). A principal may itself satisfy its performance obligation to provide the specified
good or service or it may engage another party to satisfy some or all of the performance obligation on its behalf. A principal also has the primary
responsibility for fulfilling the promise to provide the good or service to the customer and has discretion in establishing the price for the service. If the
Bank is acting as a principal, revenue is recognized on a gross basis in an amount corresponding to the consideration to which the Bank expects to be
entitled. If the Bank is acting as an agent, then revenue is recognized net of the service fees and other costs incurred in relation to the commission and
fees earned.
Underwriting and Advisory Fees
Underwriting and advisory fees include underwriting fees, financial advisory fees, and loan syndication fees. These fees are mainly earned in the
Financial Markets segment and are recognized at a point in time as revenue upon successful completion of the engagement. Financial advisory fees
are fees earned for assisting customers with transactions related to mergers and acquisitions and financial restructurings. Loan syndication fees
represent fees earned as the agent or lead lender responsible for structuring, arranging, and administering a loan syndication and are recorded in
Non-interest income
cases, an appropriate portion of the fees is deferred and amortized using the effective interest rate method, and the amortization is recognized in
Interest income
Securities Brokerage Commissions
Securities brokerage commissions are earned in the Wealth Management segment and are recognized when the transaction is executed.
Mutual Fund Revenues
Mutual fund revenues include management fees earned in the Wealth Management segment. Management fees are primarily calculated based on a
fund’s net asset value and are recorded in the period the services are performed.
Investment Management and Trust Service Fees
Investment management and trust service fees include management fees, trust service fees, and fees for other investment services provided to
clients and earned in the Wealth Management segment. Generally, these fees are calculated using the balances of assets under administration and
assets under management. Such fees are recognized in the period the service is performed.
Card Revenues
Card revenues are earned in the Personal and Commercial segment and include card fees such as annual and transactional fees as well as
interchange fees. Interchange fees are recognized when a card transaction is settled. Card fees are recognized on the transaction date except for
annual fees, which are recorded evenly throughout the year. Reward costs are recorded as a reduction to interchange fees.
Credit Fees and Deposit and Payment Service Charges
Credit fees and deposit and payment service charges are earned in the Personal and Commercial, Financial Markets, and U.S. Specialty Finance and
International segments. Credit fees include commissions earned by providing services for loan commitments, financial guarantee contracts, bankers’
acceptances, and letters of credit and guarantee, and they are generally recognized in income over the period the services are provided. Deposit and
payment service charges include fees related to account maintenance activities and transaction-based service charges. Fees related to account
maintenance activities are recognized in the period the services are provided, whereas transaction-based service charges are recognized when the
transaction is executed.
Insurance Revenues
Insurance contracts, including reinsurance contracts, are arrangements under which one party accepts significant insurance risk by agreeing to
compensate the policyholder if a specified uncertain future event was to occur. Gross premiums, net of premiums transferred under reinsurance
contracts, are recognized when they become due. Royalties received from reinsurers are recognized when earned. Claims are recognized when
received and an amount is estimated as they are being processed. All these amounts are recognized on a net basis in
Non-interest income
Consolidated Statement of Income.
Upon recognition of a premium, a reinsurance asset and insurance liability are recognized, respectively, in
Other assets
and in
Other liabilities
on the
Consolidated Balance Sheet. Subsequent changes in the carrying values of the reinsurance asset and insurance liability are recognized on a net basis
in
Non-interest income
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
26
Income Taxes
Income taxes include current taxes and deferred taxes and are recorded in net income except for income taxes generated by items recognized in
Other comprehensive income
or directly in equity.
Current tax is the amount of income tax payable on the taxable income for a period. It is calculated using the enacted or substantively enacted tax
rates prevailing on the reporting date, and any adjustments recognized in the period for the current tax of prior periods. Current tax assets and
liabilities are offset, and the net balance is presented in either
Other assets
or
Other liabilities
legally enforceable right to set off the recognized amounts and intends to settle on a net basis or to simultaneously realize the asset and settle the
liability.
Deferred tax is established based on temporary differences between the carrying values and the tax bases of assets and liabilities, in accordance with
enacted or substantively enacted income tax laws and rates that will apply on the date the differences reverse. Deferred tax is not recognized for
temporary differences related to the following:
●
the initial accounting of goodwill;
●
the initial accounting of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects
neither accounting income nor taxable income;
●
investments in subsidiaries, associates and joint ventures when it is probable that the temporary difference will not reverse in the foreseeable
future and that the Bank controls the timing of the reversal of the temporary difference;
●
investments in subsidiaries, associates and joint ventures when it is probable that the temporary difference will not reverse in the foreseeable
future and that there will not be taxable income to which the temporary difference can be recognized.
Deferred tax assets are tax benefits in the form of deductions that the Bank may claim to reduce its taxable income in future years. At the end of each
reporting period, the carrying amount of deferred tax assets is revised, and it is reduced to the extent that it is no longer probable that sufficient
taxable income will be available to allow the benefit of the deferred tax asset to be utilized.
Deferred tax assets and liabilities are offset, and the net balance is presented in either
Other assets
Other liabilities
on the Consolidated Balance
Sheet when the Bank has a legally enforceable right to set off the current tax assets and liabilities and if the deferred tax assets and liabilities relate
to taxes levied by the same taxation authority on the same taxable entity or on different taxable entities that intend to settle current tax assets and
liabilities based on their net amount.
The Bank makes assumptions to estimate income taxes as well as deferred tax assets and liabilities. This process involves estimating the actual
amount of current taxes and evaluating tax loss carryforwards and temporary differences arising from differences between the values of items
reported for accounting and for income tax purposes. Deferred tax assets and liabilities presented on the Consolidated Balance Sheet are calculated
according to the tax rates to be applied in future periods. Previously recorded deferred tax assets and liabilities must be adjusted when the date of the
future event is revised based on current information.
The Bank is subject to the jurisdictions of various tax authorities. In the normal course of its business, the Bank is involved in a number of transactions
for which the tax impacts are uncertain. As a result, the Bank accounts for provisions for uncertain tax positions that adequately represent the tax risk
stemming from tax matters under discussion or being audited by tax authorities or from other matters involving uncertainty. The amounts of these
provisions reflect the best possible estimates of the amounts that may have to be paid based on qualitative assessments of all relevant factors. The
provisions are estimated at the end of each reporting period. However, it is possible that, at a future date, a provision might need to be adjusted
following an audit by the tax authorities. When the final assessment differs from the initially provisioned amounts, the difference will impact the
income taxes of the period in which the assessment was made.
Financial Guarantee Contracts
A financial guarantee contract is a contract or indemnification agreement that could require the Bank to make specified payments (in cash, financial
instruments, other assets, Bank shares, or provisions of services) to reimburse a beneficiary in the event of a loss resulting from a debtor defaulting
on the original or amended terms of a debt instrument.
To reflect the fair value of an obligation assumed at the inception of a financial guarantee, a liability is recorded in
Other liabilities
on the Consolidated
Balance Sheet. After initial recognition, the Bank must measure financial guarantee contracts at the higher of the allowance for credit losses,
determined using the ECL model, and of the initially recognized amount less, where applicable, the cumulative amount of revenue recognized. This
revenue is recognized in
Credit fees
in the Consolidated Statement of Income.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
27
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Employee Benefits – Pension Plans and Other Post-Employment Benefit Plans
The Bank offers pension plans that have a defined benefit component and a defined contribution component. The Bank also offers other post-
employment benefit plans to eligible employees. The other post-employment benefit plans include post-employment medical, dental, and life
insurance coverage. The defined benefit component of the pension plans is funded, whereas the defined contribution component of the pension plans
and of the other post-employment benefit plans are not funded.
Defined Benefit Component of the Pension Plans and Other Post-Employment Benefit Plans
Plan expenses and obligations are actuarially determined based on the projected benefit method prorated on service. The calculations incorporate
management’s best estimates of various actuarial assumptions such as discount rates, rates of compensation increase, health care cost trend rates,
mortality rates, and retirement age.
The net asset or net liability related to these plans is calculated separately for each plan as the difference between the present value of the future
benefits earned by employees for current and prior-period service and the fair value of plan assets. The net asset or net liability is included in either
the
Other assets
Other liabilities
The expense related to these plans consists of the following items: current service cost, net interest on the net plan asset or liability, administration
costs, and past service cost, if any, recognized when a plan is amended. This expense is recognized in
Compensation and employee benefits
Consolidated Statement of Income. The net amount of interest income and expense is determined by applying a discount rate to the net plan asset or
liability amount.
Remeasurements of defined benefit pension plans and other post-employment benefit plans represent actuarial gains and losses related to the
defined benefit obligation and the actual return on plan assets, excluding net interest determined by applying a discount rate to the net plan asset or
liability amount. Remeasurements are immediately recognized in
Other comprehensive income
these cumulative gains and losses are reclassified to
Retained earnings.
Defined Contribution Component of the Pension Plans
The expense for these plans is equivalent to the Bank’s contributions during the period and is recognized in
Compensation and employee benefits
the Consolidated Statement of Income.
Share-Based Payments
The Bank has several share-based compensation plans: the Stock Option Plan, the Stock Appreciation Rights (SAR) Plan, the Deferred Stock Unit
(DSU) Plan, the Restricted Stock Unit (RSU) Plan, the Performance Stock Unit (PSU) Plan, the Deferred Compensation Plan (DCP) of National Bank
Financial, and the Employee Share Ownership Plan.
Compensation expense is recognized over the service period required for employees to become fully entitled to the award. This period is generally the
same as the vesting period, except where the required service period begins before the award date. Compensation expense related to awards granted
to employees eligible to retire on the award date is immediately recognized on the award date. Compensation expense related to awards granted to
employees who will become eligible to retire during the vesting period is recognized over the period from the award date to the date the employee
becomes eligible to retire. For all of these plans, as of the first year of recognition, the expense includes cancellation and forfeiture estimates. These
estimates are subsequently revised, as necessary. The Bank uses derivative financial instruments to hedge the risks associated with some of these
plans. The compensation expense for these plans, net of related hedges, is recognized in the Consolidated Statement of Income.
Under the Stock Option Plan, the Bank uses the fair value method to account for stock options awarded. The options vest at 25% per year, and each
tranche is treated as though it was a separate award. The fair value of each of the tranches is measured on the award date using the Black-Scholes
model, and this fair value is recognized in
Compensation and employee benefits
Contributed surplus.
Contributed surplus
Equity – Common shares
when these options are exercised are also credited to
Equity – Common shares
SARs are recorded at fair value when awarded, and their fair value is remeasured at the end of each reporting period until they are exercised. The
cost is recognized in
Compensation and employee benefits
Other liabilities
on the Consolidated
Balance Sheet. The obligation that results from the change in fair value at each period is recognized in net income gradually over the vesting period,
and periodically thereafter, until the SARs are exercised. When a SAR is exercised, the Bank makes a cash payment equal to the increase in the stock
price since the date of the award.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
28
The obligation that results from the award of a DSU, RSU, PSU and DCP unit is recognized in net income, and the corresponding amount is included in
Other liabilities
on the Consolidated Balance Sheet. For the DSU, RSU and DCP plans, the change in the obligation attributable to changes in the share
price and dividends paid on the common shares of these plans is recognized in
Compensation and employee benefits
Income for the period in which the changes occur. On the redemption date, the Bank makes a cash payment equal to the value of the common shares
on that date. For the PSU Plan, the change in the obligation attributable to changes in the share price, adjusted upward or downward depending on the
relative result of the performance criteria, and the change in the obligation attributable to dividends paid on the shares awarded under the plan, are
recognized in
Compensation and employee benefits
redemption date, the Bank makes a cash payment equal to the value of the common shares on that date, adjusted upward or downward according to
the performance criteria.
The Bank’s contributions to the employee share ownership plan are expensed as incurred.
Note 2 – Future Accounting Policy Changes
The Bank closely monitors both new accounting standards and amendments to existing accounting standards issued by the IASB. The following
standard has been issued but is not yet in effect. The Bank is currently assessing the impacts of applying this standard on the consolidated financial
statements.
Effective Date – November 1, 2023
IFRS 17 –
In May 2017, the IASB published IFRS 17 –
Insurance Contracts
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
Other liabilities,
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.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
29
Note 3 – Fair Value of Financial Instruments
Fair Value and Carrying Value of Financial Instruments by Category
Financial assets and financial liabilities are recognized on the Consolidated Balance Sheet at fair value or at amortized cost in accordance with the
categories set out in the accounting framework for financial instruments.
As at October 31, 2023
Carrying value
and fair value
Carrying
value
Fair
value
Total
carrying
value
Total
fair
value
Financial
instruments
classified as
at fair value
through profit
or loss
Financial
instruments
designated
at fair value
through profit
or loss
Debt securities
classified as at
fair value
through other
comprehensive
income
Equity securities
designated at
fair value
through other
comprehensive
income
Financial
instruments
at
amortized
cost, net
Financial
instruments
at
amortized
cost, net
Financial assets
Cash and deposits with financial
institutions
−
−
−
−
35,234
35,234
35,234
35,234
−
−
Securities
99,236
758
8,583
659
12,582
12,097
121,818
121,333
Securities purchased under reverse
repurchase agreements
and securities borrowed
−
−
−
−
11,260
11,260
11,260
11,260
Loans and acceptances, net of allowances
13,124
−
−
−
212,319
210,088
225,443
223,212
Other
Derivative financial instruments
17,516
−
−
−
−
−
17,516
17,516
Other assets
73
−
−
−
4,293
4,293
4,366
4,366
Financial liabilities
Deposits
(1)
−
18,275
269,898
269,490
288,173
287,765
Other
Acceptances
−
−
6,627
6,627
6,627
6,627
Obligations related to securities sold
short
13,660
−
−
−
13,660
13,660
Obligations related to securities sold
under
repurchase agreements and
securities loaned
−
−
38,347
38,347
38,347
38,347
Derivative financial instruments
19,888
−
−
−
19,888
19,888
Liabilities related to transferred
receivables
−
9,952
15,082
14,255
25,034
24,207
Other liabilities
−
−
3,497
3,494
3,497
3,494
Subordinated debt
−
−
748
727
748
727
(1)
Includes embedded derivative financial instruments.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
30
As at October 31, 2022
Carrying value
and fair value
Carrying
value
Fair
value
Total
carrying
value
Total
fair
value
Financial
instruments
classified as
at fair value
through profit
or loss
Financial
instruments
designated
at fair value
through profit
or loss
Debt securities
classified as at
fair value
through other
comprehensive
income
Equity securities
designated at
fair value
through other
comprehensive
income
Financial
instruments
at
amortized
cost, net
Financial
instruments
at
amortized
cost, net
Financial assets
Cash and deposits with financial
institutions
−
−
−
−
31,870
31,870
31,870
31,870
Securities
86,338
1,037
8,272
556
13,516
13,007
109,719
109,210
Securities purchased under reverse
repurchase agreements and
securities borrowed
−
−
−
−
26,486
26,486
26,486
26,486
Loans and acceptances, net of allowances
10,516
−
−
−
196,228
190,955
206,744
201,471
Other
Derivative financial instruments
18,547
−
−
−
−
−
18,547
18,547
Other assets
87
−
−
−
3,221
3,221
3,308
3,308
Financial liabilities
Deposits
(1)
−
15,355
251,039
249,937
266,394
265,292
Other
Acceptances
−
−
6,541
6,541
6,541
6,541
Obligations related to securities sold
short
21,817
−
−
−
21,817
21,817
Obligations related to securities sold
under
repurchase agreements and
securities loaned
−
−
33,473
33,473
33,473
33,473
Derivative financial instruments
19,632
−
−
−
19,632
19,632
Liabilities related to transferred
receivables
−
11,352
14,925
14,137
26,277
25,489
Other liabilities
−
−
2,632
2,627
2,632
2,627
Subordinated debt
−
−
1,499
1,478
1,499
1,478
(1)
Includes embedded derivative financial instruments.
Establishing Fair Value
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly
transaction in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets provide the best evidence of fair value. When there is no quoted price in an active market, the Bank applies
other valuation techniques that maximize the use of relevant observable inputs and that minimize the use of unobservable inputs. Such valuation
techniques include the following: using information available from recent market transactions, referring to the current fair value of a comparable
financial instrument, applying discounted cash flow analysis, applying option pricing models, or relying on any other valuation technique that is
commonly used by market participants and has proven to yield reliable estimates. Judgment is required when applying many of the valuation
techniques.
The Bank’s valuation was based on its assessment of the conditions prevailing as at October 31, 2023 and may change in the future.
Furthermore, there may be measurement uncertainty resulting from the choice of valuation model used.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
31
Note 3
Fair Value of Financial Instruments (cont.)
Valuation Governance
Fair value is established in accordance with a rigorous control framework. The Bank has policies and procedures that govern the process for
determining fair value. These policies are documented and periodically reviewed by the Risk Management Group. All valuation models are validated,
and controls have been implemented to ensure that they are applied.
The fair value of existing or new products is determined and validated by functions independent of the risk-taking team. Complex fair value matters
are reviewed by valuation committees made up of experts from various specialized functions.
For financial instruments classified in Level 3 of the fair value hierarchy, the Bank has documented the hierarchy classification policies, and controls
are in place to ensure that fair value is measured appropriately, reliably, and consistently. Valuation methods and the underlying assumptions are
regularly reviewed.
Valuation Methods and Assumptions
Financial Instruments Whose Fair Value Equals Carrying Value
The carrying value of the following financial instruments is a reasonable approximation of fair value:
●
cash and deposits with financial institutions;
●
securities purchased under reverse repurchase agreements and securities borrowed;
●
obligations related to securities sold under repurchase agreements and securities loaned;
●
customers’ liability under acceptances;
●
acceptances;
●
certain items of other assets and other liabilities.
Securities and Obligations Related to Securities Sold Short
These financial instruments, except for securities at amortized cost, are recognized at fair value on the Consolidated Balance Sheet. Their fair value is
based on quoted prices in active markets, i.e., bid prices for financial assets and offered prices for financial liabilities. If there are no quoted prices in
an active market, fair value is estimated using prices for securities that are substantially the same. If such prices are not available, fair value is
determined using valuation techniques that incorporate assumptions based primarily on observable market inputs such as current market prices, the
contractual prices of the underlying instruments, the time value of money, credit risk, interest rate yield curves, and currency rates.
When one or more significant inputs are not observable in the markets, fair value is established primarily using internal estimates and data that
consider the valuation policies in effect at the Bank, economic conditions, the characteristics specific to the financial asset or liability, and other
relevant factors.
Securities Issued or Guaranteed by Governments
Securities issued or guaranteed by governments include debt securities of the governments of Canada (federal, provincial and municipal) as well as
debt securities of the U.S. government (U.S. Treasury), of other U.S. agencies, and of other foreign governments. The fair value of these securities is
based on unadjusted quoted prices in active markets. For those classified in Level 2, quoted prices for identical or similar instruments in active
markets are used to determine fair value. In the absence of an observable market, a valuation technique such as the discounted cash flow method
could be used, incorporating assumptions on benchmark yields and the risk spreads of similar securities.
Equity Securities and Other Debt Securities
The fair value of equity securities is determined primarily by using quoted prices in active markets. For equity securities and other debt securities
classified in Level 2, a valuation technique based on quoted prices of identical and similar instruments in an active market is used to determine fair
value. In the absence of observable inputs, a valuation technique such as the discounted cash flow method could be used, incorporating assumptions
on benchmark yields and the risk spreads of similar securities. For those classified in Level 3, fair value can be determined based on net asset value,
which represents the estimated value of a security based on valuations received from investment or fund managers or the general partners of limited
partnerships. Fair value can also be determined using internal valuation techniques adjusted to reflect financial instrument risk factors and economic
conditions.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
32
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on the Consolidated Balance Sheet. For exchange-traded derivative financial instruments,
fair value is based on quoted prices in an active market.
For over-the-counter (OTC) derivative financial instruments, fair value is determined using well established valuation techniques that incorporate
assumptions based primarily on observable market inputs such as current market prices and the contractual prices of the underlying instruments, the
time value of money, interest rate yield curves, credit curves, currency rates as well as price and rate volatility factors. In establishing the fair value of
OTC derivative financial instruments, the Bank also incorporates the following factors:
Credit Valuation Adjustment (CVA)
The CVA is a valuation adjustment applied to derivative financial instruments to reflect the credit risk of the counterparty. For each counterparty, the
CVA is based on the expected positive exposure and probabilities of default through time. The exposures are determined by using relevant factors
such as current and potential future market values, master netting agreements, collateral agreements, and expected recovery rates. The default
probabilities are inferred using credit default swap (CDS) spreads. When such information is unavailable, relevant proxies are used. While the general
methodology currently assumes independence between expected positive exposures and probabilities of default, adjustments are applied to certain
types of transactions where there is a direct link between the exposure at default and the default probabilities.
Funding Valuation Adjustment (FVA)
The FVA is a valuation adjustment applied to derivative financial instruments to reflect the market-implied cost or benefits of funding collateral for
uncollateralized or partly collateralized transactions. The expected exposures are determined using methodologies consistent with the CVA
framework. The funding level used to determine the FVA is based on the average funding level of relevant market participants.
When the valuation techniques incorporate one or more significant inputs that are not observable in the markets, the fair value of OTC derivative
financial instruments is established primarily on the basis of internal estimates and data that consider the valuation policies in effect at the Bank,
economic conditions, the characteristics specific to the financial asset or financial liability, and other relevant factors.
Loans
The fair value of fixed-rate mortgage loans is determined by discounting expected future contractual cash flows, adjusted for several factors, including
prepayment options, current market interest rates for similar loans, and other relevant variables where applicable. The fair value of variable-rate
mortgage loans is deemed to equal carrying value.
The fair value of other fixed-rate loans is determined by discounting expected future contractual cash flows using current market interest rates
charged for similar new loans. The fair value of other variable-rate loans is deemed to equal carrying value.
Deposits
The fair value of fixed-term deposits is determined primarily by discounting expected future contractual cash flows and considering several factors
such as redemption options and market interest rates currently offered for financial instruments with similar conditions. For certain term funding
instruments, fair value is determined using market prices for similar instruments. The fair value of demand deposits and notice deposits is deemed to
equal carrying value.
The fair value of structured deposit notes is established using valuation models that maximize the use of observable inputs when available, such as
benchmark indices, and also incorporates the Bank’s own credit risk. In calculating the Bank’s own credit risk, the market implied spreads of the Bank
are used to infer its probabilities of default. Lastly, when fair value is determined using option pricing models, the valuation techniques are similar to
those described for derivative financial instruments.
Liabilities Related to Transferred Receivables
These liabilities arise from sale transactions to Canada Housing Trust (CHT) of securities backed by insured residential mortgages and other securities
under the Canada Mortgage Bond (CMB) program. These transactions do not qualify for derecognition. They are recorded as guaranteed borrowings,
which results in the recording of liabilities on the Consolidated Balance Sheet. The fair value of these liabilities is established using valuation
techniques based on observable market inputs such as Canada Mortgage Bond prices.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
33
Note 3
Fair Value of Financial Instruments (cont.)
Other Liabilities and Subordinated Debt
The fair value of these financial liabilities is based on quoted market prices in an active market. If there is no active market, fair value is determined by
discounting contractual cash flows using the current market interest rates offered for similar financial instruments that have the same term to
maturity.
Hierarchy of Fair Value Measurements
Determining the Levels of the Fair Value Measurement Hierarchy
IFRS establishes a fair value measurement hierarchy that classifies the inputs used in financial instrument fair value measurement techniques
according to three levels. This fair value hierarchy requires observable market inputs to be used whenever such inputs exist. According to the
hierarchy, the highest level of inputs are unadjusted quoted prices in active markets for identical instruments and the lowest level of inputs are
unobservable inputs. In some cases, the inputs used to measure the fair value of a financial instrument might be categorized within different levels of
the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the
lowest level input that is significant to the entire measurement. The fair value measurement hierarchy has the following levels:
Level 1
Inputs corresponding to unadjusted quoted prices in active markets for identical assets and liabilities and accessible to the Bank at the measurement
date. These instruments consist primarily of equity securities, derivative financial instruments traded in active markets, and certain highly liquid debt
securities actively traded in over-the-counter markets.
Level 2
Valuation techniques based on inputs, other than the quoted prices included in Level 1 inputs, that are directly or indirectly observable in the market
for the asset or liability. These inputs are quoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are
derived principally from or corroborated by observable market inputs by correlation or other means. These instruments consist primarily of certain
loans, certain deposits, derivative financial instruments traded in over-the-counter markets, certain debt securities, certain equity securities whose
value is not directly observable in an active market, liabilities related to transferred receivables, and certain other liabilities.
Level 3
Valuation techniques based on one or more significant inputs that are not observable in the market for the asset or liability. The Bank classifies
financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the markets. The
valuation technique may also be partly based on observable market inputs.
Financial instruments whose fair values are classified in Level 3 consist of the following:
●
financial instruments measured at fair value through profit or loss: investments in hedge funds for which there are certain restrictions on unit or
security redemptions, equity securities and debt securities of private companies, as well as certain derivative financial instruments whose fair
value is established using internal valuation models that are based on significant unobservable market inputs;
●
securities at fair value through other comprehensive income: equity and debt securities of private companies;
●
certain loans and certain deposits (structured deposit notes) whose fair value is established using internal valuation models that are based on
significant unobservable market inputs;
●
certain other assets (receivables) for which fair value is established using internal valuation models that are based on significant unobservable
market inputs.
Transfers Between the Fair Value Hierarchy Levels
Transfers of financial instruments between Levels 1 and 2 and transfers to (or from) Level 3 are deemed to have taken place at the beginning of the
quarter in which the transfer occurred. Significant transfers can occur between the fair value hierarchy levels due to new information on inputs used
to determine fair value and the observable nature of those inputs.
During fiscal 2023, $17 million in securities classified as at fair value through profit or loss and $3 million in obligations related to securities sold short
were transferred from Level 2 to Level 1 as a result of changing market conditions ($41 million in securities classified as at fair value through profit or
loss and $3 million in obligations related to securities sold short in fiscal 2022). In addition, during fiscal 2023, $15 million in securities classified as at
fair value through profit or loss and $3 million in obligations related to securities sold short were transferred from Level 1 to Level 2 as a result of
changing market conditions (in fiscal 2022, $26 million in securities classified as at fair value through profit or loss and $2 million in obligations
related to securities sold short).
During fiscal years 2023 and 2022, financial instruments were transferred to (or from) Level 3 due to changes in the availability of observable market
inputs as a result of changing market conditions.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
34
Financial Instruments Recorded at Fair Value on the Consolidated Balance Sheet
The following tables show financial instruments recorded at fair value on the Consolidated Balance Sheet according to the fair value hierarchy.
As at October 31, 2023
Level 1
Level 2
Level 3
Total financial
assets/liabilities
at fair value
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government
6,403
10,872
−
17,275
Canadian provincial and municipal governments
−
8,260
−
8,260
U.S. Treasury, other U.S. agencies and other foreign governments
2,781
2,105
−
4,886
Other debt securities
−
3,450
65
3,515
Equity securities
65,018
554
486
66,058
74,202
25,241
551
99,994
At fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government
73
4,124
−
4,197
Canadian provincial and municipal governments
−
1,938
−
1,938
U.S. Treasury, other U.S. agencies and other foreign governments
904
254
−
1,158
Other debt securities
−
1,290
−
1,290
Equity securities
−
281
378
659
977
7,887
378
9,242
Loans
−
12,907
217
13,124
Other
Derivative financial instruments
285
17,224
7
17,516
Other assets
–
−
−
73
73
75,464
63,259
1,226
139,949
Financial liabilities
Deposits
(1)
−
18,134
−
18,134
Other
Obligations related to securities sold short
8,335
5,325
−
13,660
Derivative financial instruments
467
19,399
22
19,888
Liabilities related to transferred receivables
−
9,952
−
9,952
8,802
52,810
22
61,634
(1)
The amounts include the fair value of embedded derivative financial instruments in deposits.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
35
Note 3
Fair Value of Financial Instruments (cont.)
As at October 31, 2022
Level 1
Level 2
Level 3
Total financial
assets/liabilities
at fair value
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government
4,736
8,186
−
12,922
Canadian provincial and municipal governments
−
9,260
−
9,260
U.S. Treasury, other U.S. agencies and other foreign governments
10,639
4,445
−
15,084
Other debt securities
−
3,324
60
3,384
Equity securities
45,805
504
416
46,725
61,180
25,719
476
87,375
At fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government
21
3,191
−
3,212
Canadian provincial and municipal governments
−
1,970
−
1,970
U.S. Treasury, other U.S. agencies and other foreign governments
1,687
191
−
1,878
Other debt securities
−
1,212
−
1,212
Equity securities
−
236
320
556
1,708
6,800
320
8,828
Loans
−
10,272
244
10,516
Other
Derivative financial instruments
342
18,204
1
18,547
Other assets
–
−
−
87
87
63,230
60,995
1,128
125,353
Financial liabilities
Deposits
(1)
−
15,424
8
15,432
Other
Obligations related to securities sold short
15,213
6,604
−
21,817
Derivative financial instruments
625
18,989
18
19,632
Liabilities related to transferred receivables
−
11,352
−
11,352
15,838
52,369
26
68,233
(1)
The amounts include the fair value of embedded derivative financial instruments in deposits.
Financial Instruments Classified in Level 3
The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in
the markets. The valuation technique may also be based, in part, on observable market inputs. The table on the following page shows the significant
unobservable inputs used for the fair value measurements of financial instruments classified in Level 3 of the hierarchy.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
36
As at October 31, 2023
Fair
value
Primary
valuation techniques
Significant
Range of input values
Financial assets
Securities
Equity securities and other debt securities
929
Net asset value
Net asset value
100
%
100
%
Market comparable
EV/EBITDA
(1)
11
x
14
x
Discounted cash flows
Discount rate
6.50
%
15.10
%
Loans
Loans at fair value through profit or loss
217
Discounted cash flows
Discount rate
8.08
%
15.99
%
Discounted cash flows
Liquidity premium
3.57
%
11.32
%
Other
Derivative financial instruments
Equity contracts
5
Option pricing model
Long-term volatility
7
%
58
%
Market correlation
15
%
94
%
Credit derivative contracts
2
Discounted cash flows
Credit spread
22
Bps
(2)
91
Bps
(2)
Other assets
–
73
Discounted cash flows
Discount rate
13
%
13
%
1,226
Financial liabilities
Other
Derivative financial instruments
Interest rate contracts
5
Discounted cash flows
Discount rate
2.20
%
2.20
%
Equity contracts
16
Option pricing model
Long-term volatility
7
%
58
%
Market correlation
(9)
%
94
%
Credit derivative contracts
1
Discounted cash flows
Credit spread
22
Bps
(2)
91
Bps
(2)
22
As at October 31, 2022
Fair
value
Primary
valuation techniques
Significant
unobservable inputs
Range of input values
Financial assets
Securities
Equity securities and other debt securities
796
Net asset value
Net asset value
100
%
100
%
Market comparable
EV/EBITDA
(1)
18
x
21
x
Discounted cash flows
Discount rate
4.50
%
19.00
%
Loans
Loans at fair value through profit or loss
244
Discounted cash flows
Discount rate
7.06
%
15.09
%
Discounted cash flows
Liquidity premium
2.62
%
10.49
%
Other
Derivative financial instruments
Equity contracts
1
Option pricing model
Long-term volatility
21
%
54
%
Market correlation
38
%
95
%
Other assets
–
87
Discounted cash flows
Discount rate
9
%
9
%
1,128
Financial liabilities
Deposits
Structured deposit notes
(3)
8
Option pricing model
Long-term volatility
10
%
35
%
Market correlation
(3)
%
94
%
Other
Derivative financial instruments
Interest rate contracts
8
Discounted cash flows
Discount rate
2.20
%
2.20
%
Equity contracts
10
Option pricing model
Long-term volatility
9
%
51
%
Market correlation
1
%
95
%
26
(1)
EV/EBITDA means Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization.
(2)
Bps or basis point is a unit of measure equal to 0.01%.
(3)
Includes embedded derivative financial instruments.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
37
Note 3
Fair Value of Financial Instruments (cont.)
Significant Unobservable Inputs Used for Fair Value Measurements of Financial Instruments Classified in Level 3
Net Asset Value
Net asset value is the estimated value of a security based on valuations received from the investment or fund managers, the administrators of the
conduits, or the general partners of limited partnerships. The net asset value of a fund is the total fair value of assets less liabilities.
EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization) Multiple and Price Equivalent
Private equity valuation inputs include earnings multiples, which are determined based on comparable companies, and a higher multiple will translate
into a higher fair value. Price equivalent is a percentage of the market price based on the liquidity of the security.
Discount Rate
The discount rate is the input used to bring future cash flows to their present value. A higher discount rate will translate into a lower fair value.
Liquidity Premium
A liquidity premium may be applied when few or no transactions exist to support the valuations. A higher liquidity premium will result in a lower value.
Long-Term Volatility
Volatility is a measure of the expected future variability of market prices. Volatility is generally observable in the market through options prices.
However, the long-term volatility of options with a longer maturity might not be observable. An increase (decrease) in long-term volatility is generally
associated with an increase (decrease) in long-term correlation. Higher long-term volatility may increase or decrease an instrument’s fair value
depending on its terms.
Market Correlation
Correlation is a measure of the inter-relationship between two different variables. A positive correlation means that the variables tend to move in the
same direction; a negative correlation means that the variables tend to move in opposite directions. Correlation is used to measure financial
instruments whose future returns depend on several variables. Changes in correlation will either increase or decrease a financial instrument’s fair
value depending on the terms of its contractual payout.
Credit Spread
A credit spread (yield) is the difference between the instrument’s yield and a benchmark yield. Benchmark instruments have high credit quality ratings
with similar maturities. The credit spread therefore represents the discount rate used to determine the present value of future cash flows of an asset
to reflect the market return required for credit quality in the estimated cash flows. A higher credit spread will result in a lower value.
Sensitivity Analysis of Financial Instruments Classified in Level 3
The Bank performs sensitivity analyses for the fair value measurements of Level 3 financial instruments, substituting unobservable inputs with one or
more reasonably possible alternative assumptions.
For equity securities and other debt securities
,
the Bank varies significant unobservable inputs such as net asset values, EV/EBITDA multiples, or price
equivalents and establishes a reasonable fair value range that could result in a $155 million increase or decrease in the fair value recorded as at
October 31, 2023 (a $126 million increase or decrease as at October 31, 2022).
For loans, the Bank varies unobservable inputs such as a liquidity premium and establishes a reasonable fair value range that could result in a
$25 million increase or decrease in the fair value recorded as at October 31, 2023 (a $31 million increase or decrease as at October 31, 2022).
For derivative financial instruments and embedded derivative financial instruments related to structured deposit notes, the Bank varies long-term
volatility, market correlation inputs, and credit spread and establishes a reasonable fair value range. As at October 31, 2023, for derivative financial
instruments, the net fair value could result in a $16 million increase or decrease (a $5 million increase or decrease as at October 31, 2022), whereas
for structured deposit notes, the net fair value could have resulted in a $1 million increase or decrease as at October 31, 2022.
For other assets, the Bank varies unobservable inputs such as discount rates and establishes a reasonable fair value range that could result in a
$9 million increase or decrease in the fair value recorded as at October 31, 2023 (a $10 million increase or decrease as at October 31, 2022).
For all Level 3 financial instruments, the reasonable fair value ranges could result in a 6% increase or decrease in net income as at October 31, 2023 (a
5% increase or decrease in net income as at October 31, 2022).
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
38
Change in the Fair Value of Financial Instruments Classified in Level 3
The Bank may hedge the fair value of financial instruments classified in the various levels through offsetting hedge positions. Gains and losses for
financial instruments classified in Level 3 presented in the following tables do not reflect the inverse gains and losses on financial instruments used
for economic hedging purposes that may have been classified in Level 1 or 2 by the Bank. In addition, the Bank may hedge the fair value of financial
instruments classified in Level 3 using other financial instruments classified in Level 3. The effect of these hedges is not included in the net amount
presented in the following tables. The gains and losses presented hereafter may comprise changes in fair value based on observable and
unobservable inputs.
Year ended October 31, 2023
Securities
at fair value
through profit
or loss
Securities
at fair value
through other
comprehensive
income
Loans and
other assets
Derivative
financial
instruments
(1)
Deposits
(2)
Fair value as at October 31, 2022
476
320
331
(17)
(8)
Total realized and unrealized gains (losses) included in
Net income
(3)
33
−
(4)
(15)
−
Total realized and unrealized gains (losses) included in
Other comprehensive income
−
58
−
−
−
Purchases
62
−
−
−
−
Sales
(21)
−
(9)
−
−
Issuances
−
−
29
−
−
Settlements and other
−
−
(57)
7
−
Financial instruments transferred into Level 3
1
−
−
8
−
Financial instruments transferred out of Level 3
−
−
−
2
8
Fair value as at October 31, 2023
551
378
290
(15)
−
Change in unrealized gains and losses included in
Net income
respect
to financial assets and financial liabilities held as at October 31, 2023
(4)
62
−
(4)
(15)
−
Year ended October 31, 2022
Securities
at fair value
through profit
or loss
Securities
at fair value
through other
comprehensive
income
Loans and
other assets
Derivative
financial
instruments
(1)
Deposits
(2)
Fair value as at October 31, 2021
471
306
297
2
−
Total realized and unrealized gains (losses) included in
Net income
(5)
21
−
(50)
(19)
3
Total realized and unrealized gains (losses) included in
Other comprehensive income
−
7
−
−
−
Purchases
60
7
71
−
−
Sales
(64)
−
−
−
−
Issuances
−
−
22
−
(3)
Settlements and other
−
−
(9)
(1)
−
Financial instruments transferred into Level 3
−
−
−
1
(8)
Financial instruments transferred out of Level 3
(12)
−
−
−
−
Fair value as at October 31, 2022
476
320
331
(17)
(8)
Change in unrealized gains and losses included in
Net income
respect
to financial assets and financial liabilities held as at October 31, 2022
(6)
3
−
(50)
(19)
3
(1)
The derivative financial instruments include assets and liabilities presented on a net basis.
(2)
The amounts include the fair value of embedded derivative financial instruments in deposits.
(3)
Total gains (losses) included in
Non-interest income
(4)
Total unrealized gains (losses) included in
Non-interest income
(5)
Total gains (losses) included in
Non-interest income
(6)
Total unrealized gains (losses) included in
Non-interest income
was an unrealized loss of $63 million.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
39
Note 3
Fair Value of Financial Instruments (cont.)
Financial Instruments Not Recorded at Fair Value on the Consolidated Balance Sheet
The following tables show the financial instruments that have not been recorded at fair value on the Consolidated Balance Sheet according to the fair
value hierarchy, except for those whose carrying value is a reasonable approximation of fair value.
As at October 31, 2023
Level 1
Level 2
Level 3
Total
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government
−
5,935
−
5,935
Canadian provincial and municipal governments
−
1,772
−
1,772
U.S. Treasury, other U.S. agencies and other foreign governments
−
593
−
593
Other debt securities
−
3,797
−
3,797
−
12,097
−
12,097
Loans, net of allowances
−
86,887
116,627
203,514
Financial liabilities
Deposits
−
269,490
−
269,490
Other
Liabilities related to transferred receivables
−
14,255
−
14,255
Other liabilities
−
46
−
46
Subordinated debt
−
727
−
727
−
284,518
−
284,518
As at October 31, 2022
Level 1
Level 2
Level 3
Total
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government
−
5,439
−
5,439
Canadian provincial and municipal governments
−
1,708
−
1,708
U.S. Treasury, other U.S. agencies and other foreign governments
−
140
−
140
Other debt securities
−
5,720
−
5,720
−
13,007
−
13,007
Loans, net of allowances
−
81,828
102,640
184,468
Financial liabilities
Deposits
−
249,937
−
249,937
Other
Liabilities related to transferred receivables
−
14,137
−
14,137
Other liabilities
−
73
−
73
Subordinated debt
−
1,478
−
1,478
−
265,625
−
265,625
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
40
Note 4 – Financial Instruments Designated at Fair Value Through Profit or Loss
The Bank chose to designate certain financial instruments at fair value through profit or loss according to the criteria presented in Note 1 to these
consolidated financial statements. Consistent with its risk management strategy and in accordance with the fair value option, which permits the
designation if it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring financial
assets and liabilities or recognizing the gains and losses thereon on different bases, the Bank designated certain securities and certain liabilities
related to transferred receivables at fair value through profit or loss. The fair value of liabilities related to transferred receivables does not include
credit risk, as the holders of these liabilities are not exposed to the Bank’s credit risk. The Bank also designated certain deposits that include
embedded derivative financial instruments at fair value through profit or loss.
To determine a change in fair value arising from a change in the credit risk of deposits designated at fair value through profit or loss, the Bank
calculates, at the beginning of the period, the present value of the instrument’s contractual cash flows using the following rates: first, an observed
discount rate for similar securities that reflects the Bank’s credit spread and, then, a rate that excludes the Bank’s credit spread. The difference
obtained between the two values is then compared to the difference obtained using the same rates at the end of the period.
Information about the financial assets and financial liabilities designated at fair value through profit or loss is provided in the following tables.
Carrying
value as at
October 31, 2023
Unrealized
gains (losses)
for the year ended
October 31, 2023
Unrealized
gains (losses)
since the initial
recognition of
the instrument
Financial assets designated at fair value through profit or loss
Securities
758
(5)
(12)
Financial liabilities designated at fair value through profit or loss
Deposits
(1)(2)
18,275
493
3,546
Liabilities related to transferred receivables
9,952
80
562
28,227
573
4,108
Carrying
value as at
October 31, 2022
Unrealized
gains (losses)
for the year ended
October 31, 2022
Unrealized
gains (losses)
since the initial
recognition of
the instrument
Financial assets designated at fair value through profit or loss
Securities
1,037
(21)
(7)
Financial liabilities designated at fair value through profit or loss
Deposits
(1)(2)
15,355
2,888
3,062
Liabilities related to transferred receivables
11,352
513
533
26,707
3,401
3,595
(1)
For the year ended October 31, 2023, the change in the fair value of deposits designated at fair value through profit or loss attributable to credit risk, and recorded in
Other
comprehensive income
, resulted in a loss of $226 million ($817 million gain for the year ended October 31, 2022).
(2)
The amount at maturity that the Bank will be contractually required to pay to the holders of these deposits varies and will differ from the reporting date fair value.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
41
Note 5 – Offsetting Financial Assets and Financial Liabilities
Financial assets and liabilities are offset, and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable
right to set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
Generally, over-the-counter derivative financial instruments subject to master netting agreements of the International Swaps & Derivatives
Association, Inc. or other similar agreements do not meet the offsetting criteria on the Consolidated Balance Sheet, because the right of set-off is
legally enforceable only in the event of default, insolvency, or bankruptcy.
Generally, securities purchased under reverse repurchase agreements and securities borrowed as well as obligations related to securities sold under
repurchase agreements and securities loaned, subject to master agreements, do not meet the offsetting criteria if they confer only a right of set-off
that is enforceable only in the event of default, insolvency, or bankruptcy.
However, the above-mentioned transactions may be subject to contractual netting agreements concluded with clearing houses. If the offsetting
criteria are met, these transactions are netted on the Consolidated Balance Sheet. In addition, as part of these transactions, the Bank may pledge or
receive cash or other financial instruments used as collateral.
The following tables present information on financial assets and financial liabilities that are netted on the Consolidated Balance Sheet, because they
meet the offsetting criteria as well as information on those that are not netted and are subject to an enforceable master netting agreement or similar
agreement.
As at October 31, 2023
Gross
amounts
recognized
Amounts
set off on the
Consolidated
Balance Sheet
Net amounts
reported
on the
Consolidated
Balance Sheet
Associated amounts
not set off on the
Consolidated Balance Sheet
Financial
instruments
(1)
Financial assets
received/pledge
d
as collateral
(2)
Net
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed
20,344
9,084
11,260
2,538
8,649
73
Derivative financial instruments
35,404
17,888
17,516
8,032
7,065
2,419
55,748
26,972
28,776
10,570
15,714
2,492
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned
47,431
9,084
38,347
2,538
35,679
130
Derivative financial instruments
37,776
17,888
19,888
8,032
5,703
6,153
85,207
26,972
58,235
10,570
41,382
6,283
As at October 31, 2022
Gross
amounts
recognized
Amounts
set off on the
Consolidated
Balance Sheet
Net amounts
reported
on the
Consolidated
Balance Sheet
Associated amounts
not set off on the
Consolidated Balance Sheet
Financial
instruments
(1)
Financial assets
received/pledge
d
as collateral
(2)
Net
amounts
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed
32,134
5,648
26,486
1,887
24,459
140
Derivative financial instruments
33,112
14,565
18,547
9,583
6,062
2,902
65,246
20,213
45,033
11,470
30,521
3,042
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned
39,121
5,648
33,473
1,887
31,440
146
Derivative financial instruments
34,197
14,565
19,632
9,583
4,089
5,960
73,318
20,213
53,105
11,470
35,529
6,106
(1)
Carrying amount of financial instruments that are subject to an enforceable master netting agreement or similar agreement but that do not satisfy offsetting criteria.
(2)
Excludes collateral in the form of non-financial instruments.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
42
Note 6 – Securities
Residual Contractual Maturities of Securities
As at October 31
2023
2022
or less
Over 1
year to
Over
No
specified
Total
Total
Securities at fair value through profit or loss
Securities issued or guaranteed by
Canadian government
2,065
10,320
4,890
−
17,275
12,922
Canadian provincial and municipal governments
1,209
1,758
5,293
−
8,260
9,260
U.S. Treasury, other U.S. agencies
and other foreign governments
3,073
361
1,452
−
4,886
15,084
Other debt securities
286
2,051
1,178
−
3,515
3,384
Equity securities
−
−
−
66,058
66,058
46,725
6,633
14,490
12,813
66,058
99,994
87,375
Securities at fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government
793
2,719
685
−
4,197
3,212
Canadian provincial and municipal governments
41
467
1,430
−
1,938
1,970
U.S. Treasury, other U.S. agencies
and other foreign governments
−
1,150
8
−
1,158
1,878
Other debt securities
3
750
537
−
1,290
1,212
Equity securities
−
−
−
659
659
556
837
5,086
2,660
659
9,242
8,828
Securities at amortized cost
(1)
Securities issued or guaranteed by
Canadian government
909
5,263
−
−
6,172
5,737
Canadian provincial and municipal governments
275
521
1,136
−
1,932
1,826
U.S. Treasury, other U.S. agencies
and other foreign governments
423
181
−
−
604
150
Other debt securities
800
2,858
216
−
3,874
5,803
2,407
8,823
1,352
−
12,582
13,516
(1)
As at October 31, 2023, securities at amortized cost are presented net of $4 million in allowances for credit losses ($7 million as at October 31, 2022).
Credit Quality
As at October 31, 2023 and 2022, securities at fair value through other comprehensive income and securities at amortized cost were mainly classified
in Stage 1, with their credit quality falling mostly in the “Excellent” category according to the Bank’s internal risk-rating categories. For additional
information on the reconciliation of allowances for credit losses, see Note 7 to these consolidated financial statements.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
43
Note 6 – Securities (cont.)
Unrealized Gross Gains (Losses) on Securities at Fair Value Through
Other Comprehensive Income
(1)
As at October 31, 2023
Amortized
cost
Gross unrealized
gains
Gross unrealized
losses
Carrying
value
(2)
Securities issued or guaranteed by
Canadian government
4,406
1
(210)
4,197
Canadian provincial and municipal governments
2,110
−
(172)
1,938
U.S. Treasury, other U.S. agencies and other foreign governments
1,227
−
(69)
1,158
Other debt securities
1,423
−
(133)
1,290
Equity securities
616
66
(23)
659
9,782
67
(607)
9,242
As at October 31, 2022
Amortized
cost
Gross unrealized
gains
Gross unrealized
losses
Carrying
value
(2)
Securities issued or guaranteed by
Canadian government
3,386
1
(175)
3,212
Canadian provincial and municipal governments
2,129
1
(160)
1,970
U.S. Treasury, other U.S. agencies and other foreign governments
2,022
−
(144)
1,878
Other debt securities
1,355
−
(143)
1,212
Equity securities
570
21
(35)
556
9,462
23
(657)
8,828
(1)
Excludes the impact of hedging.
(2)
The allowances for credit losses on securities at fair value through other comprehensive income (excluding equity securities), representing $3 million as at October 31, 2023
($2 million as at October 31, 2022), are reported in
Other comprehensive income
. For additional information, see Note 7 to these consolidated financial statements.
Equity Securities Designated at Fair Value Through Other Comprehensive Income
The Bank designated certain equity securities, the main business objective of which is to generate dividend income, at fair value through other
comprehensive income without subsequent reclassification of gains and losses to net income. During the year ended October 31, 2023, a dividend
income amount of $33 million was recognized for these investments ($14 million for the year ended October 31, 2022), including amounts of $2 million
for investments that were sold during the year ended October 31, 2023 ($4 million for investments that were sold during the year ended
October 31, 2022).
Year ended October 31, 2023
Year ended October 31, 2022
Equity securities
of private companies
Equity securities
of public companies
Total
Equity securities
of private companies
Equity securities
of public companies
Total
Fair value at beginning
320
236
556
306
311
617
Change in fair value
58
(5)
53
7
(44)
(37)
Designated at fair value through other
comprehensive income
(1)
−
314
314
7
143
150
Sales
(2)
−
(264)
(264)
−
(174)
(174)
Fair value at end
378
281
659
320
236
556
(1)
On May 2, 2023, the Bank concluded that it had lost significant influence over TMX Group Limited (TMX) and therefore, as of this date, ceased using the equity method to account for
this investment. The Bank designated its investment in TMX as a financial asset measured at fair value through other comprehe nsive income in an amount of $191 million.
(2)
The Bank disposed of private and public company equity securities for economic reasons.
Gains (Losses) on Disposals of Securities at Amortized Cost
During the years ended October 31, 2023 and 2022, the Bank disposed of certain debt securities measured at amortized cost. The carrying value of
these securities upon disposal was $821 million for the year ended October 31, 2023 ($337 million for the year ended October 31, 2022), and the Bank
recognized negligible gains for the year ended October 31, 2023 ($4 million for the year ended October 31, 2022) in
Non-interest income – Gains
(losses) on non-trading securities, net
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
44
Note 7 – Loans and Allowances for Credit Losses
Loans are recognized either at fair value through profit or loss or at amortized cost using the financial asset classification criteria defined in IFRS 9.
Determining and Measuring Expected Credit Losses (ECL)
Determining Expected Credit Losses
Expected credit losses are determined using a three-stage impairment approach that is based on the change in the credit quality of financial assets
since initial recognition.
Non-impaired loans
Stage 1
Financial assets that have experienced no significant increase in credit risk between initial recognition and the reporting date, and for which 12-month
expected credit losses are recorded at the reporting date, are classified in Stage 1.
Stage 2
Financial assets that have experienced a significant increase in credit risk between initial recognition and the reporting date, and for which lifetime
expected credit losses are recorded at the reporting date, are classified in Stage 2.
Impaired loans
Stage 3
Financial assets for which there is objective evidence of impairment, for which one or more events have had a detrimental impact on the estimated
future cash flows of these financial assets at the reporting date, and for which lifetime expected credit losses are recorded, are classified in Stage 3.
POCI
Financial assets that are credit-impaired when purchased or originated (POCI) are classified in the POCI category.
Impairment Governance
A rigorous control framework is applied to the determination of expected credit losses. The Bank has policies and procedures that govern
impairments arising from credit risk. These policies are documented and periodically reviewed by the Risk Management Group. All models used to
calculate expected credit losses are validated, and controls are in place to ensure they are applied.
These models are validated by groups that are independent of the team that prepares the calculations. Complex questions on measurement
methodologies and assumptions are reviewed by a group of experts from various functions. Furthermore, the inputs and assumptions used to
determine expected credit losses are regularly reviewed.
Measurement of Expected Credit Losses (ECL)
Expected credit losses are estimated using three main variables: (1) probability of default (PD), (2) loss given default (LGD) and (3) exposure at default
(EAD). For accounting purposes, 12-month PD and lifetime PD are the probabilities of a default occurring over the next 12 months or over the life of a
financial instrument, respectively, based on conditions existing at the balance sheet date and on future economic conditions that have, or will have, an
impact on credit risk. LGD reflects the losses expected should default occur and considers such factors as the mitigating effects of collateral, the
realizable value thereof, and the time value of money. EAD is the expected balance owing at default and considers such factors as repayments of
principal and interest between the balance sheet date and the time of default as well as any amounts expected to be drawn on a committed facility.
Twelve-month expected credit losses are estimated by multiplying 12-month PD by LGD and by EAD. Lifetime expected credit losses are estimated
using the lifetime PD.
For most financial instruments, expected credit losses are measured on an individual basis. Financial instruments that have credit losses measured
on a collective basis are grouped according to similar credit risk characteristics such as type of instrument, geographic location, comparable risk
level, and business sector or industry.
Inputs, Assumptions and Estimation Techniques
The Bank’s approach to calculating expected credit losses consists essentially of leveraging existing regulatory models and then adjusting their
parameters for IFRS 9 purposes. These models have the advantage of having been thoroughly tested and validated. In addition, using the same base
models, regardless of the purpose, provides consistency across risk assessments. These models use inputs, assumptions and estimation techniques
that require a high degree of management judgment. The main factors that contribute to changes in ECL that are subject to significant judgment
include the following:
●
calibration of regulatory parameters in order to obtain point-in-time and forward-looking parameters;
●
forecasts of macroeconomic variables for multiple scenarios and the probability weighting of the scenarios;
●
determination of the significant increases in credit risk (SICR) of a loan.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
45
Note 7 – Loans and Allowances for Credit Losses (cont.)
Main Parameters
PD Estimates
Since the objective of the regulatory calibration of PD is to align historical data to the long-run default rate, adjustments are required to obtain a point-
in-time, forward-looking PD, as required by IFRS 9. The Bank performs the following: (1) A point-in-time calibration, where the PD of the portfolio is
aligned with the appropriate default rate. The resulting PD estimate generally equals the prior-year default rate. The prior-year default rate is selected
for the calibration performed at this stage, as it often reflects one of the most accurate and appropriate estimates of the current-year default rate; (2)
Forward-looking adjustments are incorporated through, among other measures, a calibration factor based on forecasts produced by the stress testing
team's analyses. The team considers three macroeconomic scenarios, and, for each scenario, produces a forward-looking assessment covering the
three upcoming years.
LGD Estimates
The LGD estimation method consists of using, for each of the three macroeconomic scenarios, expected LGD based on the LGD values observed using
backtesting, the economic LGD estimated and used to calculate economic capital, and lastly, the estimated downturn LGD used to calculate regulatory
capital.
EAD Estimates
For term loans, the Bank uses expected EAD, which is the outstanding balance anticipated at each point in time. Expected EAD decreases over time
according to contractual repayments and to prepayments. For revolving loans, the EAD percentage is based on the percentage estimated by the
corresponding regulatory model and, thereafter, is converted to dollars according to the authorized balance.
Expected Life
For most financial instruments, the expected life used when measuring expected credit losses is the remaining contractual life. For revolving financial
instruments where there is no contractual maturity, such as credit cards or lines of credit, the expected life is based on the behavioural life of clients
who have defaulted or closed their account.
Incorporation of Forward-Looking Information
The Bank’s Economy and Strategy Group is responsible for developing three macroeconomic scenarios and for recommending probability weights for
each scenario. Macroeconomic scenarios are not developed for specific portfolios, as the Economy and Strategy Group provides a set of variables for
each of the defined scenarios for the next three years. The PDs are also adjusted to incorporate economic assumptions (interest rates, unemployment
rates, GDP forecasts, oil prices, housing price indices, etc.) that can be statistically tied to PD changes that will have an impact beyond the next 12
months. These statistical relationships are determined using the processes developed for stress testing. In addition, the group considers other
relevant factors that may not be adequately reflected in the information used to calculate the PDs (including late payments and whether the financial
asset is subject to additional monitoring within the watchlist process for business and government loan portfolios).
Determination of a Significant Increase in the Credit Risk of a Financial Instrument
At each reporting period, the Bank determines whether credit risk has increased significantly since initial recognition by examining the change in the
risk of default occurring over the remaining life of the financial instrument. First, the Bank compares the point-in-time forward-looking remaining
lifetime PD at the reporting date with the expected point-in-time forward-looking remaining lifetime PD established at initial recognition. Based on this
comparison, the Bank determines whether the loan has deteriorated when compared to the initial conditions. Because the comparison includes an
adjustment based on origination-date forward-looking information and reporting-date forward-looking information, the deterioration may be caused
by the following factors: (i) deterioration of the economic outlook used in the forward-looking assessment; (ii) deterioration of the borrower’s
conditions (payment defaults, worsening financial ratios, etc.); or (iii) a combination of both factors. The quantitative criteria used to determine a
significant increase in credit risk are a series of relative and absolute thresholds, and a backstop is also applied. All financial instruments that are
over 30 days past due but below 90 days past due are migrated to Stage 2, even if the other criteria do not indicate a significant increase in credit risk.
Credit Quality of Loans
The following tables present the gross carrying amounts of loans as at October 31, 2023 and 2022, according to credit quality and ECL impairment
stage of each loan category at amortized cost, and according to credit quality for loans at fair value through profit or loss. For additional information
on credit quality according to the Internal Ratings-Based (IRB) categories, see the Internal Default Risk Ratings table on page 77 in the Credit Risk
section of the MD&A for the year ended October 31, 2023.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
46
As at October 31, 2023
Non-impaired loans
Impaired loans
Loans at fair value
through profit or loss
(1)
Total
Stage 1
Stage 2
Stage 3
POCI
Residential mortgage
30,075
13
−
−
−
30,088
17,008
247
−
−
−
17,255
11,795
4,118
−
−
−
15,913
318
773
−
−
−
1,091
61
252
−
−
−
313
−
−
66
−
−
66
IRB Approach
59,257
5,403
66
−
−
64,726
Standardized Approach
9,540
218
287
304
11,772
22,121
Gross carrying amount
68,797
5,621
353
304
11,772
86,847
Allowances for credit losses
(2)
69
93
87
(95)
−
154
Carrying amount
68,728
5,528
266
399
11,772
86,693
Personal
21,338
120
−
−
−
21,458
7,360
1,665
−
−
−
9,025
6,497
2,240
−
−
−
8,737
1,849
810
−
−
−
2,659
29
224
−
−
−
253
−
−
156
−
−
156
IRB Approach
37,073
5,059
156
−
−
42,288
Standardized Approach
3,713
79
71
207
−
4,070
Gross carrying amount
40,786
5,138
227
207
−
46,358
Allowances for credit losses
(2)
91
108
87
(15)
−
271
Carrying amount
40,695
5,030
140
222
−
46,087
Credit card
641
−
−
−
−
641
380
1
−
−
−
381
752
68
−
−
−
820
304
210
−
−
−
514
37
86
−
−
−
123
−
−
−
−
−
−
IRB Approach
2,114
365
−
−
−
2,479
Standardized Approach
124
−
−
−
−
124
Gross carrying amount
2,238
365
−
−
−
2,603
Allowances for credit losses
(2)
33
106
−
−
−
139
Carrying amount
2,205
259
−
−
−
2,464
Business and government
(3)
7,785
−
−
−
1,113
8,898
28,525
16
−
−
53
28,594
32,095
8,400
−
2
140
40,637
215
1,790
−
−
−
2,005
27
290
−
−
−
317
−
−
397
−
−
397
IRB Approach
68,647
10,496
397
2
1,306
80,848
Standardized Approach
9,774
57
47
47
46
9,971
Gross carrying amount
78,421
10,553
444
49
1,352
90,819
Allowances for credit losses
(2)
182
194
244
−
−
620
Carrying amount
78,239
10,359
200
49
1,352
90,199
Total loans and acceptances
Gross carrying amount
190,242
21,677
1,024
560
13,124
226,627
Allowances for credit losses
(2)
375
501
418
(110)
−
1,184
Carrying amount
189,867
21,176
606
670
13,124
225,443
(1)
Not subject to expected credit losses.
(2)
The allowances for credit losses do not include the amounts related to undrawn commitments reported in the
Other liabilities
item of the Consolidated Balance Sheet.
(3)
Includes customers’ liability under acceptances.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
47
Note 7 – Loans and Allowances for Credit Losses (cont.)
As at October 31, 2022
Non-impaired loans
Impaired loans
Loans at fair value
through profit or loss
(1)
Total
Stage 1
Stage 2
Stage 3
POCI
Residential mortgage
30,465
−
−
−
−
30,465
16,351
12
−
−
−
16,363
10,765
3,269
−
−
−
14,034
609
394
−
−
−
1,003
76
140
−
−
−
216
−
−
49
−
−
49
AIRB Approach
58,266
3,815
49
−
−
62,130
Standardized Approach
7,266
179
211
384
9,959
17,999
Gross carrying amount
65,532
3,994
260
384
9,959
80,129
Allowances for credit losses
(2)
53
80
61
(76)
−
118
Carrying amount
65,479
3,914
199
460
9,959
80,011
Personal
22,190
22
−
−
−
22,212
8,792
479
−
−
−
9,271
6,928
1,394
−
−
−
8,322
358
775
−
−
−
1,133
26
203
−
−
−
229
−
−
130
−
−
130
AIRB Approach
38,294
2,873
130
−
−
41,297
Standardized Approach
3,837
78
36
75
−
4,026
Gross carrying amount
42,131
2,951
166
75
−
45,323
Allowances for credit losses
(2)
67
113
75
(16)
−
239
Carrying amount
42,064
2,838
91
91
−
45,084
Credit card
600
−
−
−
−
600
359
−
−
−
−
359
689
51
−
−
−
740
287
178
−
−
−
465
37
71
−
−
−
108
−
−
−
−
−
−
AIRB Approach
1,972
300
−
−
−
2,272
Standardized Approach
117
−
−
−
−
117
Gross carrying amount
2,089
300
−
−
−
2,389
Allowances for credit losses
(2)
31
95
−
−
−
126
Carrying amount
2,058
205
−
−
−
2,263
Business and government
(3)
6,140
2
−
−
147
6,289
27,607
112
−
−
53
27,772
26,567
8,803
−
−
145
35,515
75
1,172
−
−
−
1,247
41
272
−
−
−
313
−
−
367
−
−
367
AIRB Approach
60,430
10,361
367
−
345
71,503
Standardized Approach
8,096
28
19
−
212
8,355
Gross carrying amount
68,526
10,389
386
−
557
79,858
Allowances for credit losses
(2)
115
160
197
−
−
472
Carrying amount
68,411
10,229
189
−
557
79,386
Total loans and acceptances
Gross carrying amount
178,278
17,634
812
459
10,516
207,699
Allowances for credit losses
(2)
266
448
333
(92)
−
955
Carrying amount
178,012
17,186
479
551
10,516
206,744
(1)
Not subject to expected credit losses.
(2)
The allowances for credit losses do not include the amounts related to undrawn commitments reported in the
Other liabilities
item of the Consolidated Balance Sheet.
(3)
Includes customers’ liability under acceptances.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
48
The following table presents the credit risk exposures of off-balance-sheet commitments as at October 31, 2023 and 2022 according to credit quality
and ECL impairment stage.
As at October 31
2023
2022
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
Off-balance-sheet commitments
(1)
Retail
16,648
67
−
16,715
15,292
13
−
15,305
3,485
467
−
3,952
3,316
165
−
3,481
1,268
285
−
1,553
1,170
180
−
1,350
239
93
−
332
193
68
−
261
17
15
−
32
15
15
−
30
−
−
2
2
−
−
1
1
Non-retail
14,117
−
−
14,117
13,136
−
−
13,136
21,082
−
−
21,082
18,723
24
−
18,747
12,258
4,354
−
16,612
7,894
3,488
−
11,382
17
248
−
265
12
246
−
258
19
33
−
52
4
24
−
28
−
−
10
10
−
−
18
18
IRB Approach
69,150
5,562
12
74,724
59,755
4,223
19
63,997
Standardized Approach
18,172
−
−
18,172
15,432
−
−
15,432
Total exposure
87,322
5,562
12
92,896
75,187
4,223
19
79,429
Allowances for credit losses
116
60
−
176
99
63
−
162
Total exposure, net of allowances
87,206
5,502
12
92,720
75,088
4,160
19
79,267
(1)
Represent letters of guarantee and documentary letters of credit, undrawn commitments, and backstop liquidity and credit enhancement facilities.
Loans Past Due But Not Impaired
(1)
As at October 31
2023
2022
Residential
mortgage
Personal
Credit card
Business and
government
(2)
Residential
mortgage
Personal
Credit card
Business and
government
(2)
Past due but not impaired
31 to 60 days
139
102
27
38
106
105
23
23
61 to 90 days
58
65
14
21
38
30
11
9
Over 90 days
(3)
−
−
30
−
−
−
22
−
197
167
71
59
144
135
56
32
(1)
Loans less than 31 days past due are not presented as they are not considered past due from an administrative standpoint.
(2)
Includes customers’ liability under acceptances.
(3)
All loans more than 90 days past due, except for credit card receivables, are considered impaired (Stage 3).
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
49
Note 7 – Loans and Allowances for Credit Losses (cont.)
Impaired Loans
As at October 31
2023
2022
Gross
Allowances for
credit losses
Net
Gross
Allowances for
credit losses
Net
Loans
–
Residential mortgage
353
87
266
260
61
199
Personal
227
87
140
166
75
91
Credit card
(1)
−
−
−
−
−
−
Business and government
(2)
444
244
200
386
197
189
1,024
418
606
812
333
479
Loans
–
560
(110)
670
459
(92)
551
1,584
308
1,276
1,271
241
1,030
(1)
Credit card receivables are considered impaired, at the latest, when payment is 180 days past due, and they are written off at that time.
(2)
Includes customers’ liability under acceptances.
Maximum Exposure to Credit Risk of Impaired Loans
The following table presents the maximum exposure to credit risk of impaired loans, the percentage of exposure covered by guarantees, and the main
types of collateral and guarantees held for each loan category.
As at October 31
2023
2022
Gross
impaired loans
Percentage
covered by
guarantees
(1)
Gross
impaired loans
Percentage
covered by
guarantees
(1)
Types of collateral
and guarantees
Loans
–
Residential mortgage
353
97%
260
100 %
Residential buildings
Personal
227
59%
166
56 %
Buildings, land and automobiles
Business and government
(2)
444
51%
386
59 %
Buildings, land, equipment,
government and bank
guarantees
Loans
–
560
36%
459
52 %
Buildings and automobiles
(1)
For gross impaired loans, the ratio is calculated on a weighted average basis using the estimated value of the collateral and guarantees held for each loan category presented. The
value of the collateral and guarantees held for a specific loan may exceed the balance of the loan; when this is the case, the ratio is capped at 100%.
(2)
Includes customers’ liability under acceptances.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
50
Allowances for Credit Losses
The following tables present a reconciliation of the allowances for credit losses by Consolidated Balance Sheet item and by type of off-balance-sheet
commitment.
Year ended October 31, 2023
Allowances for
credit losses as at
October 31, 2022
Provisions for
credit losses
Write-offs
(1)
Disposals
Recoveries
and other
Allowances for
credit losses as
at October 31, 2023
Balance sheet
Cash and deposits with financial institutions
(2)(3)
5
5
−
−
−
10
Securities
(3)
At fair value through other comprehensive
income
(4)
2
1
−
−
−
3
At amortized cost
(2)
7
(3)
−
−
−
4
Securities purchased under reverse repurchase
agreements and securities borrowed
(2)(3)
−
−
−
−
−
−
Loans
(5)
Residential mortgage
118
36
(3)
−
3
154
Personal
239
114
(101)
−
19
271
Credit card
126
81
(83)
−
15
139
Business and government
418
150
(12)
−
11
567
Customers' liability under acceptances
54
(1)
−
−
−
53
955
380
(199)
−
48
1,184
Other assets
(2)(3)
−
−
−
−
−
−
Off-balance-sheet commitments
(6)
Letters of guarantee and documentary letters of
credit
13
3
−
−
−
16
Undrawn commitments
143
9
−
−
−
152
Backstop liquidity and credit enhancement facilities
6
2
−
−
−
8
162
14
−
−
−
176
1,131
397
(199)
−
48
1,377
Year ended October 31, 2022
Allowances for
credit losses as at
October 31, 2021
Provisions for
credit losses
Write-offs
(1)
Disposals
Recoveries
and other
Allowances for
credit losses as
at October 31, 2022
Balance sheet
Cash and deposits with financial institutions
(2)(3)
5
−
−
−
−
5
Securities
(3)
At fair value through other comprehensive
income
(4)
1
1
−
−
−
2
At amortized cost
(2)
3
4
−
−
−
7
Securities purchased under reverse repurchase
agreements and securities borrowed
(2)(3)
−
−
−
−
−
−
Loans
(5)
Residential mortgage
71
46
(3)
−
4
118
Personal
202
69
(52)
−
20
239
Credit card
122
49
(62)
−
17
126
Business and government
515
10
(116)
−
9
418
Customers' liability under acceptances
88
(34)
−
−
−
54
998
140
(233)
−
50
955
Other assets
(2)(3)
−
−
−
−
−
−
Off-balance-sheet commitments
(6)
Letters of guarantee and documentary letters of
credit
13
−
−
−
−
13
Undrawn commitments
143
−
−
−
−
143
Backstop liquidity and credit enhancement facilities
6
−
−
−
−
6
162
−
−
−
−
162
1,169
145
(233)
−
50
1,131
(1)
The contractual amount outstanding on financial assets that were written off during the year ended October 31, 2023 and that are still subject to enforcement activity was
$118 million ($91 million for the year ended October 31, 2022).
(2)
These financial assets are presented net of the allowances for credit losses on the Consolidated Balance Sheet.
(3)
As at October 31, 2023 and 2022, these financial assets were mainly classified in Stage 1 and their credit quality fell mostly within the
Excellent
(4)
The allowances for credit losses are reported in the
Accumulated other comprehensive income
item of the Consolidated Balance Sheet.
(5)
The allowances for credit losses are reported in the
Allowances for credit losses
(6)
The allowances for credit losses are reported in the
Other liabilities
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
51
Note 7 – Loans and Allowances for Credit Losses (cont.)
The following tables present the reconciliation of allowances for credit losses for each loan category at amortized cost according to ECL impairment
stage.
Year ended October 31
2023
2022
Allowances for
credit losses on
non-impaired loans
Allowances for
credit losses on
impaired loans
Total
Allowances for
credit losses on
non-impaired loans
Allowances for
credit losses on
impaired loans
Total
Stage 1
Stage 2
Stage 3
POCI
(1)
Stage 1
Stage 2
Stage 3
POCI
(1)
Residential mortgage
Balance at beginning
53
80
61
(76)
118
50
52
29
(60)
71
Originations or purchases
18
−
−
−
18
19
−
−
−
19
Transfers
(2)
:
to Stage 1
52
(48)
(4)
−
−
19
(17)
(2)
−
−
to Stage 2
(12)
30
(18)
−
−
(10)
13
(3)
−
−
to Stage 3
(2)
(33)
35
−
−
(1)
(7)
8
−
−
Net remeasurement of loss
allowances
(3)
(29)
65
21
(17)
40
(24)
39
29
(9)
35
Derecognitions
(4)
(7)
(9)
(8)
−
(24)
(3)
(3)
(3)
−
(9)
Changes to models
(5)
7
−
−
2
−
1
−
−
1
Provisions for credit losses
15
12
26
(17)
36
−
26
29
(9)
46
Write-offs
−
−
(3)
−
(3)
−
−
(3)
−
(3)
Disposals
−
−
−
−
−
−
−
−
−
−
Recoveries
−
−
2
−
2
−
−
3
−
3
Foreign exchange movements and other
1
1
1
(2)
1
3
2
3
(7)
1
Balance at end
69
93
87
(95)
154
53
80
61
(76)
118
Includes:
Amounts drawn
69
93
87
(95)
154
53
80
61
(76)
118
Undrawn commitments
(5)
−
−
−
−
−
−
−
−
−
−
Personal
Balance at beginning
70
117
75
(16)
246
73
103
63
(29)
210
Originations or purchases
47
−
−
−
47
45
−
−
−
45
Transfers
(2)
:
to Stage 1
91
(82)
(9)
−
−
61
(56)
(5)
−
−
to Stage 2
(25)
30
(5)
−
−
(21)
23
(2)
−
−
to Stage 3
(2)
(88)
90
−
−
−
(31)
31
−
−
Net remeasurement of loss
allowances
(3)
(77)
152
23
1
99
(72)
85
28
15
56
Derecognitions
(4)
(11)
(18)
(4)
−
(33)
(9)
(15)
(5)
−
(29)
Changes to models
1
3
−
−
4
(10)
6
−
−
(4)
Provisions for credit losses
24
(3)
95
1
117
(6)
12
47
15
68
Write-offs
−
−
(101)
−
(101)
−
−
(52)
−
(52)
Disposals
−
−
−
−
−
−
−
−
−
−
Recoveries
−
−
20
−
20
−
−
17
−
17
Foreign exchange movements and other
1
−
(2)
−
(1)
3
2
−
(2)
3
Balance at end
95
114
87
(15)
281
70
117
75
(16)
246
Includes:
Amounts drawn
91
108
87
(15)
271
67
113
75
(16)
239
Undrawn commitments
(5)
4
6
−
−
10
3
4
−
−
7
(1)
The total amount of undiscounted initially expected credit losses on the POCI loans acquired during the year ended October 31, 2023 was $93 million ($15 million for the year ended
October 31, 2022). The expected credit losses reflected in the purchase price have been discounted.
(2)
Represent stage transfers deemed to have taken place at the beginning of the quarter in which the transfer occurred.
(3)
Includes the net remeasurement of loss allowances (after transfers) attributable mainly to changes in volumes and in the credit quality of existing loans as well as to changes in
risk parameters.
(4)
Represent reversals to loss allowances arising from full loan repayments (excluding write-offs and disposals).
(5)
The allowances for credit losses on undrawn commitments are reported in the
Other liabilities
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
52
Year ended October 31
2023
2022
Allowances for
credit losses on
non-impaired loans
Allowances for
credit losses on
impaired loans
Total
Allowances for
credit losses on
non-impaired loans
Allowances for
credit losses on
impaired loans
Total
Stage 1
Stage 2
Stage 3
POCI
(1)
Stage 1
Stage 2
Stage 3
POCI
(1)
Credit card
Balance at beginning
53
112
−
−
165
57
101
−
−
158
Originations or purchases
11
−
−
−
11
12
−
−
−
12
Transfers
(2)
:
to Stage 1
100
(100)
−
−
−
84
(84)
−
−
−
to Stage 2
(19)
19
−
−
−
(16)
16
−
−
−
to Stage 3
−
(35)
35
−
−
(1)
(23)
24
−
−
Net remeasurement of loss allowances
(3)
(83)
133
33
−
83
(80)
104
21
−
45
Derecognitions
(4)
(3)
(2)
−
−
(5)
(2)
(1)
−
−
(3)
Changes to models
−
−
−
−
−
(1)
(1)
−
−
(2)
Provisions for credit losses
6
15
68
−
89
(4)
11
45
−
52
Write-offs
−
−
(83)
−
(83)
−
−
(62)
−
(62)
Disposals
−
−
−
−
−
−
−
−
−
−
Recoveries
−
−
15
−
15
−
−
17
−
17
Foreign exchange movements and other
−
−
−
−
−
−
−
−
−
−
Balance at end
59
127
−
−
186
53
112
−
−
165
Includes:
Amounts drawn
33
106
−
−
139
31
95
−
−
126
Undrawn commitments
(5)
26
21
−
−
47
22
17
−
−
39
Business and government
(6)
Balance at beginning
177
195
197
−
569
177
238
287
−
702
Originations or purchases
93
−
−
−
93
82
−
−
−
82
Transfers
(2)
:
to Stage 1
54
(54)
−
−
−
67
(65)
(2)
−
−
to Stage 2
(28)
36
(8)
−
−
(27)
31
(4)
−
−
to Stage 3
(1)
(6)
7
−
−
−
(3)
3
−
−
Net remeasurement of loss allowances
(3)
(24)
79
61
(7)
109
(93)
21
24
−
(48)
Derecognitions
(4)
(19)
(29)
(4)
−
(52)
(29)
(27)
(4)
−
(60)
Changes to models
(2)
(1)
−
−
(3)
−
−
−
−
−
Provisions for credit losses
73
25
56
(7)
147
−
(43)
17
−
(26)
Write-offs
−
−
(12)
−
(12)
−
−
(116)
−
(116)
Disposals
−
−
−
−
−
−
−
−
−
−
Recoveries
−
−
3
7
10
−
−
3
−
3
Foreign exchange movements and other
1
−
−
−
1
−
−
6
−
6
Balance at end
251
220
244
−
715
177
195
197
−
569
Includes:
Amounts drawn
182
194
244
−
620
115
160
197
−
472
Undrawn commitments
(5)
69
26
−
−
95
62
35
−
−
97
Total allowances for credit losses at end
(7)
474
554
418
(110)
1,336
353
504
333
(92)
1,098
Includes:
Amounts drawn
375
501
418
(110)
1,184
266
448
333
(92)
955
Undrawn commitments
(5)
99
53
−
−
152
87
56
−
−
143
(1)
The total amount of undiscounted initially expected credit losses on the POCI loans acquired during the year ended October 31, 2023 was $93 million ($15 million for the year ended
October 31, 2022). The expected credit losses reflected in the purchase price have been discounted.
(2)
Represent stage transfers deemed to have taken place at the beginning of the quarter in which the transfer occurred.
(3)
Includes the net remeasurement of loss allowances (after transfers) attributable mainly to changes in volumes and in the credit quality of existing loans as well as to changes in
risk parameters.
(4)
Represent reversals to loss allowances arising from full loan repayments (excluding write-offs and disposals).
(5)
The allowances for credit losses on undrawn commitments are reported in the
Other liabilities
(6)
Includes customers’ liability under acceptances.
(7)
Excludes allowances for credit losses on other financial assets at amortized cost and on off-balance-sheet commitments other than undrawn commitments.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
53
Note 7 – Loans and Allowances for Credit Losses (cont.)
Distribution of Gross and Impaired Loans by Borrower Category
Under the Basel Asset Classes
2023
2022
As at October 31
Year ended October 31
As at October 31
Year ended October 31
Gross
loans
(1)
Impaired
loans
(1)
Allowances
for credit
losses
on impaired
loans
(1)(2)
Provisions
for credit
losses
Write-offs
Gross
loans
(1)
Impaired
loans
(1)
Allowances
for credit
losses
loans
(1)(2)
Provisions
for credit
losses
Write-offs
Retail
Residential mortgage
(3)
99,910
405
91
28
2
95,575
299
64
31
4
Qualifying revolving retail
(4)
4,000
24
18
82
96
3,801
16
12
54
72
Other retail
(5)
16,696
157
67
81
88
14,899
102
58
36
41
120,606
586
176
191
186
114,275
417
134
121
117
Non-retail
Agriculture
8,545
67
4
2
−
8,109
31
2
(1)
−
Oil and gas
1,826
−
−
(7)
−
1,435
6
6
(19)
26
Mining
1,245
−
−
(4)
−
1,049
11
4
4
−
Utilities
12,427
−
−
(35)
−
9,682
35
35
(2)
59
Non-real-estate
(6)
1,739
38
31
−
−
1,935
38
32
5
−
Manufacturing
7,047
76
51
41
−
7,374
21
10
(4)
14
Wholesale
3,208
51
40
15
−
3,241
35
26
2
−
Retail
3,801
29
18
(1)
−
3,494
30
19
2
−
Transportation
2,631
14
9
3
1
2,209
8
7
−
−
Communications
2,556
17
14
5
2
1,830
11
10
2
−
Financial services
11,693
22
5
6
2
10,777
5
3
−
−
Real estate services and
(7)
25,967
19
5
−
3
22,382
26
6
1
12
Professional services
3,973
8
3
(1)
2
2,338
9
4
−
1
Education and health care
3,700
83
55
31
1
3,412
108
25
25
2
Other services
6,898
13
7
−
2
6,247
20
9
2
2
Government
1,727
−
−
−
−
1,661
−
−
−
−
Other
6,478
1
−
(1)
−
5,790
1
1
−
−
105,461
438
242
54
13
92,965
395
199
17
116
Excluding POCI loans
226,067
1,024
418
245
199
207,240
812
333
138
233
POCI
560
560
(110)
(23)
−
459
459
(92)
6
−
226,627
1,584
308
222
199
207,699
1,271
241
144
233
Stages 1 and 2
(8)
175
1
397
199
145
233
(1)
Includes customers’ liability under acceptances.
(2)
Allowances for credit losses on drawn amounts.
(3)
Includes residential mortgages on one-to-four-unit dwellings (Basel definition) and home equity lines of credit.
(4)
Includes lines of credit and credit card receivables.
(5)
Includes consumer loans and other retail loans but excludes SME loans.
(6)
Includes civil engineering loans, public-private partnership loans, and project finance loans.
(7)
Includes residential mortgages on dwellings of five or more units and SME loans.
(8)
Includes provisions for credit losses on other financial assets at amortized cost and on off-balance-sheet commitments.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
54
Main Macroeconomic Factors
The following tables show the main macroeconomic factors used to estimate the allowances for credit losses on loans. For each scenario, namely, the
base scenario, upside scenario, and downside scenario, the average values of the macroeconomic factors over the next 12 months (used for Stage 1
credit loss calculations) and over the remaining forecast period (used for Stage 2 credit loss calculations) are presented.
As at October 31, 2023
Base scenario
Upside scenario
Downside scenario
Next
12 months
Remaining
forecast period
Next
12 months
Remaining
forecast period
Next
12 months
Remaining
forecast period
Macroeconomic factors
(1)
GDP growth
(2)
−
%
1.7
%
0.4
%
1.9
%
(4.9)
%
2.6
%
Unemployment rate
6.3
%
6.5
%
5.9
%
5.9
%
7.7
%
7.2
%
Housing price index growth
(2)
(1.1)
%
1.9
%
2.5
%
2.4
%
(13.9)
%
0.3
%
BBB spread
(3)
2.4
%
2.1
%
1.9
%
1.8
%
3.1
%
2.3
%
S&P/TSX growth
(2)(4)
(10.0)
%
3.7
%
4.0
%
3.0
%
(25.6)
%
5.5
%
WTI oil price
(5)
(US$ per barrel)
77
80
91
86
46
56
As at July 31, 2023
Base scenario
Upside scenario
Downside scenario
Next
12 months
Remaining
forecast period
Next
12 months
Remaining
forecast period
Next
12 months
Remaining
forecast period
Macroeconomic factors
(1)
GDP growth
(2)
(0.4)
%
1.7
%
0.4
%
1.9
%
(4.9)
%
2.6
%
Unemployment rate
6.1
%
6.5
%
5.7
%
5.6
%
7.5
%
7.0
%
Housing price index growth
(2)
−
%
2.4
%
6.1
%
2.3
%
(13.9)
%
0.3
%
BBB spread
(3)
2.4
%
2.1
%
1.9
%
1.8
%
3.1
%
2.4
%
S&P/TSX growth
(2)(4)
(5.5)
%
3.7
%
4.0
%
3.0
%
(25.6)
%
5.5
%
WTI oil price
(5)
(US$ per barrel)
67
70
82
77
41
50
As at October 31, 2022
Base scenario
Upside scenario
Downside scenario
Next
12 months
Remaining
forecast period
Next
12 months
Remaining
forecast period
Next
12 months
Remaining
forecast period
Macroeconomic factors
(1)
GDP growth
(2)
0.6
%
1.7
%
1.1
%
1.6
%
(5.2)
%
2.9
%
Unemployment rate
6.0
%
6.1
%
5.4
%
5.4
%
7.4
%
6.4
%
Housing price index growth
(2)
(11.2)
%
0.7
%
−
%
0.2
%
(13.9)
%
0.3
%
BBB spread
(3)
2.4
%
2.1
%
2.0
%
1.9
%
3.4
%
2.6
%
S&P/TSX growth
(2)(4)
(4.3)
%
2.4
%
5.1
%
2.6
%
(25.6)
%
5.5
%
WTI oil price
(5)
(US$ per barrel)
78
77
102
97
44
51
(1)
All macroeconomic factors are based on the Canadian economy unless otherwise indicated.
(2)
Growth rate is annualized.
(3)
Yield on corporate BBB bonds less yield on Canadian federal government bonds with a 10-year maturity.
(4)
Main stock index in Canada.
(5)
The West Texas Intermediate (WTI) index is commonly used as a benchmark for the price of oil.
The main macroeconomic factors used for the personal credit portfolio are unemployment rate and growth in the housing price index, based on the
economy of Canada or Quebec. The main macroeconomic factors used for the business and government credit portfolio are unemployment rate,
spread on corporate BBB bonds, S&P/TSX growth, and WTI oil price.
An increase in unemployment rate or BBB spread will generally lead to higher allowances for credit losses, whereas an increase in the other
macroeconomic factors (GDP, S&P/TSX, housing price index, and WTI oil price) will generally lead to lower allowances for credit losses.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
55
Note 7 – Loans and Allowances for Credit Losses (cont.)
During the year ended October 31, 2023, the macroeconomic outlook remained essentially unchanged and uncertainty remains high.
The economic outlook is still marked by uncertainty, as central banks have become extremely determined to curb inflation, which remains too high in
many countries. With interest rates rising sharply, the year ahead could prove shaky for the global economy. Geopolitical instability could keep energy
prices relatively high, despite an expected economic slowdown. Our baseline forecast shows a few quarters of economic contraction in the United
States and Canada over the coming year. Of all the G7 countries, Canada has the most restrictive monetary policy, and signs of fragility are emerging,
in particular as GDP stagnates over the last two quarters and the unemployment rate rises. Moreover, data from household and business surveys do
not suggest an upswing but rather an economy that continues to deteriorate. As for real estate, the market is showing signs of weakness after a
fleeting reversal at the start of the year. In the base scenario, the unemployment rate stands at 6.5% after 12 months, up 1.0 percentage point, and
house prices are down 1.1% year over year. The S&P/TSX sits at 18,145 points after one year, and the price of oil hovers around US$73.
In the upside scenario, an easing of geopolitical tensions boosts confidence. Inflation continues to subside, as the pressure on supply chains eases
without the restrictive monetary policy having caused too much damage to the economy. The Canadian and U.S. governments continue to expand
spending, offsetting the effects of restrictive monetary policies. With the labour market holding up, consumer spending remains relatively resilient.
House prices rise at a moderate pace against a backdrop of strong demographic growth. After one year, the unemployment rate in this scenario is
more favourable than in the base scenario (four-tenths lower). House prices rise 2.5%, the S&P/TSX is at 20,957 points after one year, and the price of
oil hovers around US$81.
In the downside scenario, central banks have underestimated the impact of simultaneous tightening measures, and the global economy sinks into a
recession as falling demand translates into reduced investment by businesses, which also lay off a large number of workers. Given budgetary
constraints, governments are unable to support households and businesses as they did during the pandemic. The geopolitical situation continues to
cause concern, with the risk of conflicts escalating. After 12 months, economic contraction pushes unemployment to 8.5%. House prices fall sharply (-
13.9%). The S&P/TSX sits at 14,994 points after one year, and the price of oil hovers around US$40.
Given uncertainty surrounding the key inputs used to measure credit losses, the Bank has applied expert credit judgment to adjust the modelled ECL
results.
Sensitivity Analysis of Allowances for Credit Losses on Non-Impaired Loans
Scenarios
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) as at October 31, 2023
based on the probability weightings of three scenarios with allowances for credit losses resulting from simulations of each scenario weighted at 100%.
Allowances for credit
losses on non-impaired
loans
Balance as at October 31, 2023
1,028
Simulations
100% upside scenario
716
100% base scenario
824
100% downside scenario
1,338
Migration
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) as at October 31, 2023 with
the estimated allowances for credit losses that would result if all these non-impaired loans were in Stage 1.
Allowances for credit
losses on non-impaired
loans
Balance as at October 31, 2023
1,028
Simulations
Non-impaired loans if they were all in Stage 1
801
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
56
Note 8 – Financial Assets Transferred But Not Derecognized
In the normal course of its business, the Bank enters into transactions in which it transfers financial assets such as securities or loans directly to
third parties, in particular structured entities. According to the terms of some of those transactions, the Bank retains substantially all of the risks and
rewards related to those financial assets. The risks include credit risk, interest rate risk, foreign exchange risk, prepayment risk, and other price risks,
whereas the rewards include the income streams associated with the financial assets. As such, those financial assets are not derecognized and the
transactions are treated as collateralized or secured borrowings. The nature of those transactions is described below.
Securities Sold Under Repurchase Agreements and Securities Loaned
When securities are sold under repurchase agreements and securities loaned under securities lending agreements, the Bank transfers financial
assets to third parties in accordance with the standard terms for such transactions. These third parties may have an unlimited right to resell or
repledge the financial assets received. If cash collateral is received, the Bank records the cash along with an obligation to return the cash, which is
included in
Obligations related to securities sold under repurchase agreements and securities loaned
on the Consolidated Balance Sheet. Where
securities are received as collateral, the Bank does not record the collateral on the Consolidated Balance Sheet.
Financial Assets Transferred to Structured Entities
Under the Canada Mortgage Bond (CMB) program, the Bank sells securities backed by insured residential mortgages and other securities to Canada
Housing Trust (CHT), which finances the purchase through the issuance of insured mortgage bonds. Third-party CMB investors have legal recourse
only to the transferred assets. The cash received for these transferred assets is treated as a secured borrowing, and a corresponding liability is
recorded in
Liabilities related to transferred receivables
on the Consolidated Balance Sheet.
The following table provides additional information about the nature of the transferred financial assets that do not qualify for derecognition and the
associated liabilities.
As at October 31
2023
2022
Carrying value of financial assets transferred but not derecognized
Securities
(1)
91,097
76,551
Residential mortgages
23,227
24,102
114,324
100,653
Carrying value of associated liabilities
(2)
62,295
56,555
Fair value of financial assets transferred but not derecognized
Securities
(1)
91,098
76,551
Residential mortgages
22,002
22,954
113,100
99,505
Fair value of associated liabilities
(2)
61,468
55,767
(1)
The amount related to the securities loaned is the maximum amount of Bank securities that can be lent. For obligations related to securities sold under repurchase agreements,
the amount includes the Bank’s own financial assets as well as those of third parties.
(2)
Associated liabilities include liabilities related to transferred receivables and obligations related to securities sold under repurchase agreements before the offsetting impact of
$6,994 million as at October 31, 2023 ($3,606 million as at October 31, 2022). Liabilities related to securities loaned are not included, as the Bank can lend its own financial assets
and those of third parties. The carrying value and fair value of liabilities related to securities loaned stood at $10,171 million before the offsetting impact of $2,090 million as at
October 31, 2023 ($8,843 million before the offsetting impact of $2,043 million as at October 31, 2022).
The following table specifies the nature of the transactions related to financial assets transferred but not derecognized.
As at October 31
2023
2022
Carrying value of financial assets transferred but not derecognized
Securities backed by insured residential mortgages and other securities sold to CHT
24,313
25,468
Securities sold under repurchase agreements
40,357
33,880
Securities loaned
49,654
41,305
114,324
100,653
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
57
Note 9 – Investments in Associates and Joint Ventures
As at October 31
2023
2022
Business
segment
Carrying
value
Carrying
value
Listed associate
TMX Group Limited
(1)
Other
−
96
Unlisted associates
49
44
49
140
(1)
On May 2, 2023, the Bank concluded that it had lost significant influence over TMX Group Limited (TMX) and therefore, as of this date, ceased using the equity method to account for
this investment. The Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Upon the
fair value measurement, a $91 million gain was recorded in the
Non-interest income
– Other
Other
segment results. As at October 31, 2022, the Bank was exercising significant influence over TMX, mainly through its equity interest, debt financing, and presence on TMX’s board of
directors, and the Bank’s ownership interest in TMX was 2.5%.
During the year ended October 31, 2023, TMX paid $3 million in dividends to the Bank ($7 million for the year ended
October 31, 2022).
As at October 31, 2023 and 2022, there were no significant restrictions limiting the ability of associates to transfer funds to the Bank in the form of
dividends or to repay any loans or advances. Furthermore, the Bank has not made any specific commitment or contracted any contingent liability with
respect to associates.
The table below provides summarized financial information related to the Bank’s proportionate share in all unlisted associates that are not individually
significant.
Year ended October 31
(1)
2023
2022
Net income
6
5
Other comprehensive income
−
−
Comprehensive income
6
5
(1)
The amounts are based on the cumulative balances for the 12-month periods ended September 30, 2023 and 2022.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
58
Note 10 – Premises and Equipment
Owned assets held
Right-of-
use
Total
Land
Head office
building under
construction
(1)
Buildings
Computer
equipment
Equipment
and furniture
Leasehold
improvements
Total
Real estate
Cost
As at October 31, 2021
71
248
68
255
110
338
1,090
732
1,822
Additions and modifications
3
183
2
53
14
46
301
69
370
Disposals
−
−
(7)
−
(3)
(2)
(12)
(12)
Fully depreciated assets
(7)
(38)
(7)
(10)
(62)
(8)
(70)
Impact of foreign currency translation
−
−
−
6
3
5
14
12
26
As at October 31, 2022
74
431
56
276
117
377
1,331
805
2,136
Additions and modifications
−
222
3
70
8
53
356
59
415
Disposals
−
−
(7)
−
(13)
(27)
(47)
(47)
Transfers
(2)
−
(397)
386
4
7
−
−
−
−
Fully depreciated assets
(2)
(35)
(3)
(8)
(48)
(4)
(52)
Impact of foreign currency translation
−
−
−
2
−
1
3
3
6
As at October 31, 2023
74
256
436
317
116
396
1,595
863
2,458
Accumulated depreciation
As at October 31, 2021
47
150
55
156
408
198
606
Depreciation for the year
2
48
15
32
97
105
202
Disposals
(4)
−
(3)
(2)
(9)
(9)
Fully depreciated assets
(7)
(38)
(7)
(10)
(62)
(8)
(70)
Impact of foreign currency translation
−
2
1
3
6
4
10
As at October 31, 2022
38
162
61
179
440
299
739
Depreciation for the year
4
55
10
36
105
106
211
Disposals
(5)
−
(13)
(27)
(45)
(45)
Impairment losses
(3)
−
−
−
−
−
11
11
Fully depreciated assets
(2)
(35)
(3)
(8)
(48)
(4)
(52)
Impact of foreign currency translation
−
1
−
−
1
1
2
As at October 31, 2023
35
183
55
180
453
413
866
Carrying value as at October 31, 2022
74
431
18
114
56
198
891
506
1,397
Carrying value as at October 31, 2023
74
256
401
134
61
216
1,142
450
1,592
(1)
As at October 31, 2023, contractual commitments related to the head office building under construction stood at $86 million, covering a period up to 2025.
(2)
During the year ended October 31, 2023, the Bank started occupying certain floors of the new head office building under construction. As a result, an amount related to significant
components being utilized was transferred to their corresponding asset categories.
(3)
During the year ended October 31, 2023, the Bank recorded $11 million in impairment losses related to right-of-use assets (no amount was recorded during the year ended
October 31, 2022). These impairment losses were recognized in the
Non-interest expenses – Occupancy
Other
heading of segment results.
Assets Leased Under Operating Leases
The Bank is a lessor under operating lease agreements for certain buildings. These leases have terms varying from one year to five years and do not
contain any bargain purchase options or contingent rent.
The future minimum payments receivable under these operating leases total $6 million and include sublease revenues of $5 million related to real
estate right-of-use assets.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
59
Note 10 – Premises and Equipment (cont.)
Leases Recognized in the Consolidated Statement of Income
Year ended October 31
2023
2022
Interest expense
17
16
Expense for leases of low-value assets
(1)
10
9
Expense relating to variable lease payments
100
94
Income from leasing and subleasing
(2)
4
4
(1)
The expense relates to lease payments for low-value assets that are part of the exemptions permitted by the practical expedients of IFRS 16.
(2)
These amounts for the years ended October 31, 2023 and 2022 include variable lease payments of $2 million.
For the year ended October 31, 2023, the cash outflows for leases amounted to $229 million (2022: $218 million).
Note 11 – Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying amounts of goodwill by cash-generating unit (CGU) and by business segment for the years ended
October 31, 2023 and 2022.
Personal and
Commercial
(1)
Wealth
Management
Markets
(1)
USSF&I
Other
Third-Party
Solutions
(1)
Securities
Brokerage
(1)
Managed
Solutions
(1)
Total
Credigy
Ltd.
(1)
Advanced
Bank of Asia
Limited
(1)
Total
Flinks
Technology
Inc.
(1)
Balance as at October 31, 2021
54
256
434
269
959
235
31
124
155
101
1,504
Impact of foreign currency
−
−
−
−
−
−
3
12
15
−
15
Balance as at October 31, 2022
54
256
434
269
959
235
34
136
170
101
1,519
Impact of foreign currency
−
−
−
−
−
−
−
2
2
−
2
Balance as at October 31, 2023
54
256
434
269
959
235
34
138
172
101
1,521
(1)
Constitutes a CGU.
Goodwill Impairment Testing and Significant Assumptions
For impairment testing purposes, goodwill resulting from a business combination must be allocated, as of the acquisition date, to a CGU or group of
CGUs expected to benefit from the synergies of the business combination. Goodwill is tested for impairment annually or more frequently if events or
circumstances indicate that the recoverable value of the CGU or group of CGUs may have fallen below its carrying amount.
Goodwill was tested for impairment during the years ended October 31, 2023 and 2022, and no impairment loss was recognized.
The recoverable value of a CGU or group of CGUs is based on the value in use that is calculated based on discounted after-tax cash flows. Future
after-tax cash flows are estimated based on a five-year period, which is the reference period used for the most recent financial forecasts approved by
management. Cash flows beyond that period are extrapolated using a long-term growth rate.
The discount rate used for each CGU or group of CGUs is calculated using the cost of debt financing and the cost related to the Bank’s equity. This rate
corresponds to the Bank’s weighted average cost of capital and reflects the risk specific to the CGU. The long-term growth rate used in calculating
discounted cash flow estimates is based on the forecasted growth rate plus a risk premium. The rate is constant over the entire five-year period for
which the cash flows were determined. Growth rates are determined, among other factors, based on past growth rates, economic trends, inflation,
competition, and the impact of the Bank’s strategic initiatives. As at October 31, 2023, for each CGU or CGU group, the discount rate (after tax) used was
9.78% (9.48% as at October 31, 2022), and the long-term growth rate varied between 2% and 5%, depending on the CGU, as at October 31, 2023 and 2022.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
60
Estimating a CGU’s value in use requires significant judgment regarding the inputs used in applying the discounted cash flow method. The Bank
conducts sensitivity analyses by varying the after-tax discount rate upward by 1% and the terminal growth rates downward by 1%. Such sensitivity
analyses demonstrate that a reasonable change in assumptions would not result in a CGU’s carrying value exceeding its value in use.
Intangible Assets
Indefinite useful life
Finite useful life
Total
Management
contracts
(1)
Trademark
Total
Internally-
generated
software
(2)
Other
software
Other
intangible
assets
Total
Cost
As at October 31, 2021
160
9
169
1,908
120
64
2,092
2,261
Acquisitions
−
−
−
346
28
−
374
374
Impairment losses
(3)
(1)
(1)
(2)
(7)
−
(2)
(9)
(11)
Fully amortized intangible assets
(138)
(21)
(2)
(161)
(161)
Impact of foreign currency translation
−
−
−
−
1
−
1
1
As at October 31, 2022
159
8
167
2,109
128
60
2,297
2,464
Acquisitions
−
−
−
282
17
−
299
299
Disposals
−
−
−
(19)
−
−
(19)
(19)
Impairment losses
(3)
(1)
(1)
(2)
(315)
−
−
(315)
(317)
Fully amortized intangible assets
(168)
(18)
−
(186)
(186)
As at October 31, 2023
158
7
165
1,889
127
60
2,076
2,241
Accumulated amortization
As at October 31, 2021
861
75
51
987
987
Amortization for the year
253
20
6
279
279
Impairment losses
(3)
(2)
−
(1)
(3)
(3)
Fully amortized intangible assets
(138)
(21)
(2)
(161)
(161)
Impact of foreign currency translation
−
2
−
2
2
As at October 31, 2022
974
76
54
1,104
1,104
Amortization for the year
287
20
6
313
313
Disposals
(6)
−
−
(6)
(6)
Impairment losses
(3)
(240)
−
−
(240)
(240)
Fully amortized intangible assets
(168)
(18)
−
(186)
(186)
As at October 31, 2023
847
78
60
985
985
Carrying value as at October 31, 2022
159
8
167
1,135
52
6
1,193
1,360
Carrying value as at October 31, 2023
158
7
165
1,042
49
−
1,091
1,256
(1)
For annual impairment testing purposes, management contracts are allocated to the Managed Solutions CGU.
(2)
The remaining amortization period for significant internally-generated software is four years.
(3)
During the year ended October 31, 2023, the Bank recorded $2 million in impairment losses resulting from the impairment test carried out on indefinite-life intangible assets
($2 million during the year ended October 31, 2022) as well as an amount of $75 million related to internally-generated software for which the Bank has decided to cease its use or
development ($5 million during the year ended October 31, 2022). The impairment losses related to internally-generated software were recognized in the
Non-interest expenses –
Technology
item of the Consolidated Statement of Income and reported in the Personal and Commercial ($59 million), Wealth Management ($8 million), Financial Markets ($7
million) segments and in the
Other
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
61
Note 12 – Other Assets
As at October 31
2023
2022
Receivables, prepaid expenses and other items
3,126
2,186
Interest and dividends receivable
1,605
1,057
Due from clients, dealers and brokers
538
842
Defined benefit asset (Note 23)
356
498
Deferred tax assets (Note 24)
634
389
Current tax assets
925
471
Reinsurance assets
14
6
Insurance assets
147
104
Commodities
(1)
544
405
7,889
5,958
(1)
Commodities are recorded at fair value based on quoted prices in active markets and are classified in Level 1 of the fair value measurement hierarchy. The commodities were
previously presented in
Receivables, prepaid expenses and other items
.
Note 13 – Deposits
As at October 31
2023
2022
On demand
(1)
After notice
(2)
Fixed term
(3)
Total
Total
Personal
4,335
35,289
48,259
87,883
78,811
Business and government
66,823
32,602
97,903
197,328
184,230
Deposit-taking institutions
1,579
114
1,269
2,962
3,353
72,737
68,005
147,431
288,173
266,394
(1)
Demand deposits are deposits for which the Bank does not have the right to require notice of withdrawal and consist essentially of deposits in chequing accounts.
(2)
Notice deposits are deposits for which the Bank may legally require a notice of withdrawal and consist mainly of deposits in savings accounts.
(3)
Fixed-term deposits are deposits that can be withdrawn by the holder on a specified date and include term deposits, guaranteed investment certificates, savings accounts and
plans, covered bonds, and other similar instruments.
The
item includes, among other items, covered bonds, as described below, and a $17.7 billion amount of deposits
as at October 31, 2023 ($12.8 billion as at October 31, 2022) that are subject to the bank bail-in conversion regulations issued by the Government of
Canada. These regulations provide certain powers to the Canada Deposit Insurance Corporation (CDIC), notably the power to convert certain eligible
Bank shares and liabilities into common shares should the Bank become non-viable.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC
Covered Bond Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the
bondholders. The Bank sold uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. During
the year ended October 31, 2023, the Bank issued 280 million Swiss francs and 1.0 billion euros in covered bonds, and 1.5 billion euros in covered bonds
came to maturity (the Bank issued 1.3 billion euros, US$1.5 billion and 750 million pounds sterling in covered bonds, and 1.0 billion euros and US$1.0
billion in covered bonds came to maturity during the year ended October 31, 2022). The covered bonds totalled $10.9 billion as at October 31, 2023
($10.4 billion as at October 31, 2022). For additional information, see Note 27 to these consolidated financial statements.
The Bank has limited access to the assets owned by this structured entity according to the terms of the agreements that apply to this transaction. The
assets owned by this entity totalled $20.9 billion as at October 31, 2023 ($18.2 billion as at October 31, 2022), of which $20.6 billion ($17.9 billion as at
October 31, 2022) is presented in
Residential mortgage
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
62
Note 14 – Other Liabilities
As at October 31
2023
2022
Accounts payable and accrued expenses
2,458
2,582
Subsidiaries
’
224
156
Interest and dividends payable
2,022
1,063
Lease liabilities
517
552
Due to clients, dealers and brokers
669
730
Defined benefit liability (Note 23)
94
111
Allowances for credit losses
–
176
162
Deferred tax liabilities (Note 24)
28
14
Current tax liabilities
208
67
Insurance liabilities
11
10
Other items
(1)(2)(3)
1,016
914
7,423
6,361
(1)
As at October 31, 2023,
Other items
(2)
As at October 31, 2023,
Other items
(3)
As at October 31, 2023,
Other items
as at October 31, 2022).
Note 15 – Subordinated Debt
The subordinated debt represents direct unsecured obligations, in the form of notes and debentures, to the Bank’s debt holders. The rights of the
Bank’s note and debenture holders are subordinate to the claims of depositors and certain other creditors. Approval from OSFI is required before the
Bank can redeem its subordinated notes and debentures in whole or in part.
On February 1, 2023, the Bank redeemed $750 million of medium-term notes maturing on February 1, 2028 at a price equal to their nominal value plus
accrued interest.
On August 31, 2022, the Bank had redeemed debentures denominated in a foreign currency and maturing on February 28, 2087 in an amount of
US$7 million at their nominal value plus accrued interest.
On July 25, 2022, the Bank had issued medium-term notes for an amount of $750 million, bearing interest at 5.426% and maturing on August 16, 2032.
As at October 31
2023
2022
Maturity date
Interest rate
Redemption date
February 2028
3.183%
February 1, 2023
−
750
August 2032
(1)
5.426%
(2)
August 16, 2027
(3)
750
750
750
1,500
Fair value hedge adjustment
(4)
−
2
Unamortized issuance costs
(5)
(2)
(3)
Total
748
1,499
(1)
These notes contain non-viability contingent capital (NVCC) provisions and qualify for the purposes of calculating regulatory capital under Basel III. In the case of a trigger event as
defined by OSFI, each note will be automatically and immediately converted, on a full and permanent basis, without the consent of the holder, into a specified number of common
shares of the Bank as determined using an automatic conversion formula with a multiplier of 1.5 and a conversion price based on the greater of: (i) a floor price of $5.00; (ii) the
current market price of common shares, which represents the volume weighted average price of common shares for the ten trading days ending on the trading day preceding the
date of the trigger event. If the common shares are not listed on an exchange when this price is being established, the price will be the fair value reasonably determined by the
Bank’s Board. The number of shares issued is determined by dividing the par value of the note (plus accrued and unpaid interest on such note) by the conversion price and then
applying the multiplier.
(2)
Bearing interest at a rate of 5.426%, payable semi-annually until August 16, 2027, and thereafter bearing interest at a floating rate equal to CORRA compounded daily plus 2.32%,
payable quarterly.
(3)
With the prior approval of OSFI, the Bank may, at its option, redeem these notes in whole or in part, at their nominal value plus accrued and unpaid interest.
(4)
The fair value hedge adjustment represents the impact of the hedging transactions applied to hedge changes in the fair value of subordinated debt caused by interest rate
fluctuations.
(5)
The unamortized costs related to the issuance of the subordinated debt represent the initial cost, net of accumulated amortization, calculated using the effective interest rate
method.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
63
Note 16 –
Derivative Financial Instruments
Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, equity price,
commodity price, credit spread, or index.
The main types of derivative financial instruments used are presented below.
Forwards and Futures
Forwards and futures are contractual obligations to buy or sell a specified amount of currency, interest rate, commodity, or financial instrument on a
specified future date at a specified price. Forwards are tailor-made agreements transacted in the over-the-counter market. Futures are traded on
organized exchanges and are subject to cash margining calculated daily by clearing houses.
Swaps
Swaps are over-the-counter contracts in which two parties agree to exchange cash flows. The Bank uses the following types of swap contracts:
●
Cross-currency swaps are transactions in which counterparties exchange fixed-rate interest payments and principal payments in different
currencies.
●
Interest rate swaps are transactions in which counterparties exchange fixed- and floating-rate interest payments based on the notional principal
value in the same currency.
●
Commodity swaps are transactions in which counterparties exchange fixed- and floating-rate payments based on the notional principal value of a
commodity.
●
Equity swaps are transactions in which counterparties agree to exchange the return on one equity or group of equities for a payment based on an
interest rate
benchmark.
●
Credit default swaps are transactions in which one of the parties agrees to pay returns to the other party so that the latter can make a payment if
a credit event occurs.
Options
Options are agreements between two parties in which the writer of the option grants the buyer the right, but not the obligation, to buy or sell, either at
a specified date or dates or at any time prior to a predetermined expiry date, a specific amount of currency, commodity, or financial instrument at an
agreed-upon price upon the sale of the option. The writer receives a premium for the sale of this instrument.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
64
Notional Amounts
(1)
As at October 31
2023
2022
Term to maturity
Contracts held
for trading
purposes
Contracts
designated
as hedges
3 months
or less
Over 3
months to
Over 1
year to
5 years
Over
5 years
Total
contracts
Total
contracts
Interest rate contracts
OTC contracts
Forward rate agreements
Not settled by central counterparties
8,077
1,035
−
−
9,112
9,112
−
8,505
Swaps
Not settled by central counterparties
3,681
10,571
72,130
54,055
140,437
138,135
2,302
121,384
Settled by central counterparties
192,142
222,675
391,902
141,129
947,848
876,491
71,357
921,657
Options purchased
−
996
4,347
2,044
7,387
7,265
122
5,919
Options written
602
785
5,126
2,106
8,619
8,088
531
9,010
204,502
236,062
473,505
199,334
1,113,403
1,039,091
74,312
1,066,475
Exchange-traded contracts
Futures
Long positions
12,381
29,624
2,463
−
44,468
44,468
−
28,472
Short positions
24,066
30,587
8,765
−
63,418
63,418
−
62,205
Options purchased
14
−
−
−
14
14
−
3,000
Options written
14
−
−
−
14
14
−
1,362
36,475
60,211
11,228
−
107,914
107,914
−
95,039
Foreign exchange contracts
OTC contracts
Forwards
32,985
13,430
7,590
629
54,634
54,634
−
82,172
Swaps
259,006
98,177
109,135
34,523
500,841
480,017
20,824
515,684
Options purchased
16,564
15,029
4,445
−
36,038
36,038
−
34,831
Options written
17,596
19,312
4,253
−
41,161
41,161
−
39,477
326,151
145,948
125,423
35,152
632,674
611,850
20,824
672,164
Exchange-traded contracts
Futures
Long positions
69
−
−
−
69
69
−
72
Short positions
28
−
−
−
28
28
−
55
97
−
−
−
97
97
−
127
Equity, commodity and
credit derivative contracts
(2)
OTC contracts
Forwards
11
−
3,568
−
3,579
3,579
−
3,735
Swaps
Not settled by central counterparties
31,001
19,684
20,439
9,909
81,033
80,889
144
65,569
Settled by central counterparties
176
99
6,417
708
7,400
7,400
−
4,633
Options purchased
4,976
315
916
12
6,219
6,219
−
1,822
Options written
51
468
2,459
351
3,329
3,329
−
2,371
36,215
20,566
33,799
10,980
101,560
101,416
144
78,130
Exchange-traded contracts
Futures
Long positions
1,913
621
411
85
3,030
3,030
−
4,789
Short positions
19,161
2,135
1,146
3
22,445
22,445
−
13,452
Options purchased
10,536
1,880
2,204
−
14,620
14,620
−
9,142
Options written
10,187
2,324
3,677
137
16,325
16,325
−
11,490
41,797
6,960
7,438
225
56,420
56,420
−
38,873
645,237
469,747
651,393
245,691
2,012,068
1,916,788
95,280
1,950,808
(1)
Notional amounts are not presented in assets or liabilities on the Consolidated Balance Sheet. They represent the reference amount of the contract to which a rate or price is
applied to determine the amount of cash flows to be exchanged.
(2)
Includes precious metal contracts.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
65
Note 16
Derivative Financial Instruments (cont.)
Credit Risk
Credit risk on derivative financial instruments is the risk of financial loss that the Bank will have to assume if a counterparty fails to honour its
contractual obligations. Credit risk related to derivative financial instruments is subject to the same credit approval, credit limit, and credit monitoring
standards as those applied to the Bank’s other credit transactions. Consequently, the Bank evaluates the creditworthiness of counterparties and
manages the size of the portfolios as well as the diversification and maturity profiles of these financial instruments.
The Bank limits the credit risk of over-the-counter contracts by dealing with creditworthy counterparties and entering into contracts that provide for
the exchange of collateral between parties where the fair value of the outstanding transactions exceeds an agreed threshold. The Bank also
negotiates master netting agreements that provide for the simultaneous close-out and settling of all transactions with a given counterparty on a net
basis in the event of default, insolvency, or bankruptcy. However, overall exposure to credit risk, reduced through master netting agreements, may
change substantially after the balance sheet date because it is affected by all transactions subject to a contract as well as by changes in the market
rates of the underlying instruments.
The Bank also uses financial intermediaries to have access to established clearing houses in order to minimize the settlement risk arising from
financial derivative transactions. In some cases, the Bank has direct access to clearing houses for settling derivative financial instruments. In addition,
certain derivative financial instruments traded over the counter are settled directly or indirectly by central counterparties.
In the case of exchange-traded contracts, exposure to credit risk is limited because these transactions are standardized contracts executed on
established exchanges, each of which is associated with a well-capitalized clearing house that assumes the obligations of both counterparties and
guarantees their performance obligations. All exchange-traded contracts are subject to initial margins and daily settlement.
Terms Used
Replacement Cost
Replacement cost is the Bank’s maximum credit risk associated with derivative financial instruments as at the Consolidated Balance Sheet date. This
amount is the positive fair value of all derivative financial instruments, before all master netting agreements and collateral held.
Credit Risk Equivalent
The credit risk equivalent amount is the total replacement cost plus an amount representing the potential future credit risk exposure, as outlined in
OSFI’s
Capital Adequacy Requirements Guideline
.
Risk-Weighted Amount
The risk-weighted amount is determined by applying the OSFI guidance to the credit risk equivalent.
Credit Risk Exposure of the Derivative Financial Instrument Portfolio
As at October 31
2023
2022
Replacement
cost
Credit risk
equivalent
(1)
Risk-
weighted
amount
(1)
Replacement
cost
Credit risk
equivalent
(1)
Risk-
weighted
amount
(1)
Interest rate contracts
6,708
3,024
457
5,490
2,639
508
Foreign exchange contracts
7,233
5,607
1,582
8,775
5,926
1,847
Equity, commodity and credit derivative contracts
3,575
8,544
1,428
4,282
6,569
1,797
17,516
17,175
3,467
18,547
15,134
4,152
Impact of master netting agreements
(8,032)
(9,583)
9,484
17,175
3,467
8,964
15,134
4,152
(1)
The amounts are presented net of the Impact of master netting agreements.
Credit
Risk
Exposure
of
the
Derivative
Financial
Instrument
Portfolio
by Counterparty
As at October 31
2023
2022
Replacement
cost
Credit risk
equivalent
Replacement
cost
Credit risk
equivalent
OECD member-country governments
928
3,052
1,342
2,700
Banks of OECD member countries
606
3,236
589
3,292
Other
7,950
10,887
7,033
9,142
9,484
17,175
8,964
15,134
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
66
Fair Value of Derivative Financial Instruments
As at October 31
2023
2022
Positive
Negative
Net
Positive
Negative
Net
Contracts held for trading purposes
Interest rate contracts
Forwards
147
54
93
125
85
40
Swaps
4,753
4,700
53
3,267
3,620
(353)
Options
179
208
(29)
168
166
2
5,079
4,962
117
3,560
3,871
(311)
Foreign exchange contracts
Forwards
878
368
510
1,426
919
507
Swaps
5,550
6,004
(454)
6,461
7,140
(679)
Options
588
544
44
707
597
110
7,016
6,916
100
8,594
8,656
(62)
Equity, commodity and credit derivative contracts
Forwards
40
244
(204)
911
314
597
Swaps
2,573
3,741
(1,168)
1,926
3,717
(1,791)
Options
962
2,424
(1,462)
1,440
1,793
(353)
3,575
6,409
(2,834)
4,277
5,824
(1,547)
Total – Contracts held for trading purposes
15,670
18,287
(2,617)
16,431
18,351
(1,920)
Contracts designated as hedges
Interest rate contracts
Swaps
1,629
1,384
245
1,930
1,137
793
Options
−
11
(11)
−
35
(35)
1,629
1,395
234
1,930
1,172
758
Foreign exchange contracts
Swaps
217
181
36
182
109
73
217
181
36
182
109
73
Equity, commodity and credit derivative contracts
Swaps
−
25
(25)
4
−
4
−
25
(25)
4
−
4
Total – Contracts designated as hedges
1,846
1,601
245
2,116
1,281
835
Designated as fair value hedges
928
902
26
1,186
586
600
Designated as cash flow hedges
918
699
219
930
695
235
Total fair value
17,516
19,888
(2,372)
18,547
19,632
(1,085)
Impact of master netting agreements
(8,032)
(8,032)
−
(9,583)
(9,583)
−
9,484
11,856
(2,372)
8,964
10,049
(1,085)
Note 17 – Hedging Activities
The Bank’s market risk exposure, risk management objectives, policies and procedures, and risk measurement methods are presented in the Risk
Management section of the MD&A for the year ended October 31, 2023.
The Bank has elected, as permitted under IFRS 9, to continue applying the hedge accounting requirements of IAS 39. Some of the tables present
information on currencies, specifically, the U.S. dollar (USD), the Australian dollar (AUD), the Canadian dollar (CAD), the Hong Kong dollar (HKD), the
euro (EUR), the pound sterling (GBP) and the Swiss franc (CHF).
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
67
Note 17 – Hedging Activities (cont.)
The following table shows the notional amounts and the weighted average rates by term to maturity of the designated derivative instruments and their
fair value by type of hedging relationship.
As at October 31
2023
2022
Term to maturity
Total
Fair value
Total
Fair value
1 year
or less
Over 1
year to
2 years
Over 2
years to
5 years
Over
5 years
Assets
Liabilitie
s
Assets
Liabilitie
s
Fair value hedges
Interest rate risk
Interest rate swaps
928
858
1,176
527
Notional amount – CDOR reform
(1)
594
2,850
3,527
638
7,609
10,730
Notional amount – Other
10,515
2,317
9,768
6,268
28,868
11,559
Average fixed interest rate
–
0.4
%
1.2
%
2.2
%
3.3
%
2.1
%
1.7
%
Average fixed interest rate – Receive
fixed
5.3
%
3.4
%
3.0
%
3.3
%
4.1
%
2.0
%
Cross-currency swaps
−
33
10
24
Notional amount
−
−
−
112
112
192
Average USD-AUD exchange rate
−
−
−
$
0.6943
$
0.6943
$
0.7381
Average CAD-HKD exchange rate
−
−
−
−
−
$
0.1621
Average USD-EUR exchange rate
−
−
−
$
1.0513
$
1.0513
$
1.0513
Options
−
11
−
35
Notional amount – CDOR reform
(1)
−
30
Notional amount – Other
−
−
122
531
653
959
Average fixed interest rate – Purchased
−
−
(1.3)
%
−
(1.3)
%
(1.2)
%
Average fixed interest rate – Written
−
−
−
2.4
%
2.4
%
2.8
%
11,109
5,167
13,417
7,549
37,242
928
902
23,470
1,186
586
Cash flow hedges
Interest rate risk
Interest rate swaps
701
526
754
610
Notional amount – CDOR reform
(1)
371
1,605
3,693
1,550
7,219
12,400
Notional amount – Other
6,020
3,643
18,759
1,541
29,963
20,455
Average fixed interest rate – Pay fixed
2.8
%
3.5
%
3.4
%
3.5
%
3.3
%
1.9
%
Average fixed interest rate – Receive
fixed
3.1
%
0.7
%
2.5
%
3.4
%
2.6
%
1.9
%
Cross-currency swaps
217
148
172
85
Notional amount – CDOR reform
(1)
391
1,225
2,297
−
3,913
3,888
Notional amount – Other
3,301
4,337
9,151
−
16,789
9,202
Average CAD-USD exchange rate
$
1.3112
$
1.3093
$
1.3161
−
$
1.3133
$
1.2972
Average USD-EUR exchange rate
$
1.1534
$
1.1487
$
1.1308
−
$
1.1402
$
1.1691
Average USD-GBP exchange rate
$
1.2853
−
$
1.1945
−
$
1.2207
$
1.2375
Average CHF-USD exchange rate
−
−
$
1.0064
−
$
1.0064
Equity price risk
Equity swaps
Notional amount – CDOR reform
(1)
144
−
−
−
144
−
25
136
4
−
Average price
$
101.63
−
−
−
$
101.63
$
86.36
10,227
10,810
33,900
3,091
58,028
918
699
46,081
930
695
Hedges of net investments
(2)
Foreign exchange risk
Cross-currency swaps
Notional amount
10
−
−
−
10
−
−
10
−
−
Average CAD-USD exchange rate
$
1.3209
−
−
−
$
1.3209
$
1.3802
Average USD-HKD exchange rate
$
0.1280
−
−
−
$
0.1280
$
0.1275
10
−
−
−
10
−
−
10
−
−
21,346
15,977
47,317
10,640
95,280
1,846
1,601
69,561
2,116
1,281
(1)
Includes only contracts that reference CDOR and that mature after June 28, 2024.
(2)
As at October 31, 2023, the Bank also designated $1,892 million in foreign currency deposits denominated in U.S. dollars as net investment hedging instruments ($1,410 million as at
October 31, 2022).
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
68
Fair Value Hedges
Fair value hedge transactions consist of using derivative financial instruments (interest rate swaps and options) to hedge changes in the fair value of a
financial asset or financial liability caused by interest rate fluctuations. Changes in the fair values of derivative financial instruments used as hedging
instruments offset changes in the fair value of the hedged items. The Bank applies this strategy mainly to portfolios of securities measured at fair
value through other comprehensive income, fixed-rate mortgage loans, fixed-rate deposits, liabilities related to transferred receivables, and
subordinated debt.
In addition, when a fixed-rate asset or liability is denominated in a foreign currency, the Bank sometimes uses cross-currency swaps to hedge the
associated foreign exchange risk. The Bank may designate a cross-currency swap to exchange the fixed-rate foreign currency for the functional
currency at a floating rate in a single hedging relationship addressing both interest rate risk and foreign exchange risk. In certain cases, given that
interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not distinguish between interest
rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this strategy mainly to
foreign currency fixed-rate deposits.
Regression analysis is used to assess hedge effectiveness and determine the hedge ratio. For fair value hedges, the main source of potential hedge
ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show amounts related to hedged items as well as the results of the fair value hedges.
As at October 31, 2023
Year ended October 31, 2023
Carrying value
of hedged
items
Cumulative
hedge
adjustments
from active
hedges
Cumulative
adjustments
from
discontinued
hedges
Gains (losses)
on the hedged
items for
ineffectivenes
s
measurement
(1
)
Gains (losses)
on the hedging
instruments
for
ineffectivenes
s
measurement
(1
)
Hedge
ineffectiveness
(1
)
Securities at fair value through other comprehensive income
6,068
(332)
(211)
(191)
189
(2)
Mortgages
2,882
(213)
(224)
(12)
28
16
Deposits
17,728
(606)
(168)
214
(219)
(5)
Liabilities related to transferred receivables
4,155
(186)
13
202
(202)
−
213
(204)
9
As at October 31, 2022
Year ended October 31, 2022
Carrying value
of hedged
items
Cumulative
hedge
adjustments
from active
hedges
Cumulative
adjustments
from
discontinued
hedges
Gains (losses)
on the hedged
items for
ineffectiveness
measurement
(1
)
Gains (losses)
on the hedging
instruments
for
ineffectivenes
s
measurement
(1
)
Hedge
ineffectiveness
(1
)
Securities at fair value through other comprehensive income
6,805
(529)
(53)
(588)
589
1
Mortgages
6,488
(332)
(231)
(415)
453
38
Deposits
5,803
(595)
9
682
(677)
5
Liabilities related to transferred receivables
682
(3)
68
3
(3)
−
Subordinated debt
2
−
2
−
−
−
(318)
362
44
(1)
Amounts are presented on a pre-tax basis.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
69
Note 17 – Hedging Activities (cont.)
Cash Flow Hedges
Cash flow hedge transactions consist of using interest rate swaps to hedge the risk of changes in future cash flows caused by floating-rate assets or
liabilities. In addition, the Bank sometimes uses cross-currency swaps to hedge the foreign exchange risk caused by assets or liabilities denominated
in foreign currencies. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the
information below does not distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate
risk categories. The Bank applies this strategy mainly to its loan, personal credit line, acceptance, and deposit portfolios as well as liabilities related to
transferred receivables.
The Bank also uses total return swaps to hedge the risk of changes in future cash flows related to the Restricted Stock Unit (RSU) Plan. Some of these
swaps are designated as part of a cash flow hedge against a portion of the unrecognized obligation of the RSU Plan. In cash flow hedges, the
derivative financial instruments used as hedging instruments reduce the variability of the future cash flows related to the hedged items.
Regression analysis is used to assess hedge effectiveness and to determine the hedge ratio. For cash flow hedges, the main source of potential hedge
ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show the amounts related to hedged items as well as the results of the cash flow hedges.
As at October 31, 2023
Year ended October 31, 2023
Accumulated
other
comprehensive
income
active hedges
Accumulated
other
comprehensive
income
discontinued
hedges
Gains (losses)
on hedged items
for
ineffectiveness
measurement
(1)
Gains (losses)
on hedging
instruments for
ineffectiveness
measurement
(1)
Hedge
ineffectiveness
(1)
Unrealized gains
(losses)
included in
Other
comprehensive
income
effective portion
of the hedging
instrument
(1)
Losses (gains)
reclassified to
Net interest
income
(1)
Interest rate risk
Loans
(170)
(240)
127
(131)
(3)
(127)
128
Deposits
127
117
(666)
667
8
223
(17)
Acceptances
59
266
(54)
52
−
52
(52)
Liabilities related to transferred
receivables
11
49
6
(6)
−
(6)
(25)
27
192
(587)
582
5
142
34
Equity price risk
Other liabilities
(16)
−
17
(17)
−
(17)
−
11
192
(570)
565
5
125
34
As at October 31, 2022
Year ended October 31, 2022
Accumulated
other
comprehensive
income
active hedges
Accumulated
other
comprehensive
income
discontinued
hedges
Gains (losses)
on hedged items
for
ineffectiveness
measurement
(1)
Gains (losses)
on hedging
instruments for
ineffectiveness
measurement
(1)
Hedge
ineffectiveness
(1)
Unrealized gains
(losses)
included in
Other
comprehensive
income
effective portion
of the hedging
instrument
(1)
Losses (gains)
reclassified to
Net interest
income
(1)
Interest rate risk
Loans
(169)
(241)
357
(356)
−
(356)
33
Deposits
28
10
257
(253)
−
62
−
Acceptances
210
115
(253)
255
2
253
23
Liabilities related to transferred
receivables
64
27
(54)
55
1
54
(11)
133
(89)
307
(299)
3
13
45
Equity price risk
Other liabilities
−
−
47
(47)
−
(47)
−
133
(89)
354
(346)
3
(34)
45
(1)
Amounts are presented on a pre-tax basis.
Hedges of Net Investments in Foreign Operations
The Bank’s structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar.
The Bank measures this risk by assessing the impact of foreign currency fluctuations and hedges it using derivative and non-derivative financial
instruments (cross-currency swaps and deposits). In a hedge of a net investment in a foreign operation (net investment hedge), the financial
instruments used offset the foreign exchange gains and losses on the investments. When non-derivative financial instruments are designated as
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
70
foreign exchange risk hedges, only the changes in fair value that are attributable to foreign exchange risk are taken into account when assessing and
calculating the effectiveness of the hedge.
Assessing the effectiveness of net investment hedges consists of comparing changes in the carrying value of the deposits or the fair value of the
derivative attributable to exchange rate fluctuations with changes in the net investment in a foreign operation attributable to exchange rate
fluctuations. Inasmuch as the notional amount of the hedging instruments and the hedged net investments are aligned, no ineffectiveness is expected.
The following tables present the amounts related to hedged items as well as the results of the net investment hedges.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
71
As at October 31, 2023
Accumulated
other
comprehensive
income
from
active hedges
Accumulated
other
comprehensive
income
discontinued
hedges
Gains (losses)
on hedged items
for
ineffectiveness
measurement
(1)
Gains (losses)
on hedging
instruments for
ineffectiveness
measurement
(1)
Hedge
ineffectiveness
(1)
Unrealized gains
(losses)
included in
Other
comprehensive
income
effective portion
of the hedging
instrument
(1)
Losses (gains)
reclassified to
the
income
(1)
Net investments in foreign
operations denominated in:
38
(353)
66
(66)
−
(66)
−
As at October 31, 2022
Accumulated
other
comprehensive
income
from
active hedges
Accumulated
other
comprehensive
income
discontinued
hedges
Gains (losses)
on hedged items
for
ineffectiveness
measurement
(1)
Gains (losses)
on hedging
instruments for
ineffectiveness
measurement
(1)
Hedge
ineffectiveness
(1)
Unrealized gains
(losses)
included in
Other
comprehensive
income
effective portion
of the hedging
instrument
(1)
Losses (gains)
reclassified to
the
income
(1)
Net investments in foreign
operations denominated in:
26
(276)
166
(166)
−
(166)
−
(1)
Amounts are presented on a pre-tax basis.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
72
Note 17 – Hedging Activities (cont.)
Reconciliation of Equity Components
The following table presents a reconciliation by risk category of
Accumulated other comprehensive income
As at October 31
2023
2022
Net gains (losses)
on cash flow hedges
Net foreign
currency
translation
adjustments
Net gains (losses)
on cash flow
hedges
Net foreign
currency
translation
adjustments
Balance at beginning
31
204
23
(129)
Hedges of net investments in foreign operations
(1)
Gains (losses) included as the effective portion
(66)
(166)
Net foreign currency translation gains (losses) on investments
152
458
Cash flow hedges
(1)
Gains (losses) included as the effective portion
Interest rate risk
142
13
Equity price risk
(17)
(47)
Losses (gains) reclassified to
Net interest income
Interest rate risk
34
45
Income taxes
(44)
17
(3)
41
Balance at end
146
307
31
204
(1)
Amounts are presented on a pre-tax basis.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
73
Note 18 – Share Capital and Other Equity Instruments
Authorized
Common Shares
An unlimited number of shares without par value.
First Preferred Shares
An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $5 billion.
First Preferred Shares and Other Equity Instruments
As at October 31, 2023
Redemption and
conversion date
(1)(2)
Redemption
share or LRCN
($)
(1)
Convertible into
preferred shares
(2)
Dividend per
share ($) or
interest rate
per LRCN
(3)
Reset premium of
the dividend rate
or interest rate
First preferred shares
issued and outstanding
Series 30
(4)
May 15, 2024
(5)(6)
25.00
Series 31
0.25156
(7)
2.40
%
Series 32
(4)
February 15, 2025
(5)(6)
25.00
Series 33
0.23994
(7)
2.25
%
Series 38
(4)
November 15, 2027
(5)(6)
25.00
Series 39
0.43919
(7)
3.43
%
Series 40
(4)
May 15, 2028
(5)(6)
25.00
Series 41
0.36363
(7)
2.58
%
Series 42
(4)
November 15, 2023
(5)(6)
25.00
Series 43
0.30938
(8)
2.77
%
Other equity instruments
issued and outstanding
Limited Recourse Capital Notes
(LRCN)
(9)(10)
October 15, 2025
(5)
1,000.00
Series 44
(9)
4.30
%
(11)
3.943
%
(9)(10)
July 15, 2026
(5)
1,000.00
Series 45
(9)
4.05
%
(11)
3.045
%
(9)(10)
October 16, 2027
(5)
1,000.00
Series 46
(9)
7.50
%
(11)
4.281
%
First preferred shares
authorized but not issued
Series 31
(4)
May 15, 2024
(5)
25.00
(12)
n.a.
Floating rate
(13)
2.40
%
Series 33
(4)
February 15, 2025
(5)
25.00
(12)
n.a.
Floating rate
(13)
2.25
%
Series 39
(4)
November 15, 2027
(5)
25.00
(12)
n.a.
Floating rate
(13)
3.43
%
Series 41
(4)
May 15, 2028
(5)
25.00
(12)
n.a.
Floating rate
(13)
2.58
%
Series 43
(4)
November 15, 2023
(5)
25.50
(14)
n.a.
Floating rate
(13)
2.77
%
n.a. Not applicable
(1)
Redeemable in cash at the Bank’s option, in whole or in part, subject to the provisions of the
Bank Act
prices are increased by all the declared and unpaid dividends on the preferred shares to the date fixed for redemption. In the case of LRCN, the redemption prices are increased
by interest accrued and unpaid up to the redemption date.
(2)
Convertible at the option of the holders of first preferred shares issued and outstanding, subject to certain conditions.
(3)
The dividends are non-cumulative and payable quarterly, whereas interest on the LRCN is payable semi-annually.
(4)
Upon the occurrence of a trigger event, as defined by OSFI, each outstanding preferred share will be automatically and immediately converted, on a full and permanent basis,
without the consent of the holder, into a number of Bank common shares determined pursuant to an automatic conversion formula. This conversion will be calculated by dividing
the value of the preferred shares, i.e., $25.00 per share, plus all declared and unpaid dividends as at the date of the trigger event, by the value of the common shares. The value of
the common shares will be the greater of a $5.00 floor price or the current market price of the common shares. Current market price means the volume weighted average
trading price of common shares for the ten consecutive trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an
exchange when this price is being established, the price will be the fair value reasonably determined by the Bank’s Board.
(5)
For the preferred shares, redeemable at the date fixed for redemption and on the same date every five years thereafter. In the case of LRCN, the redemption occurs automatically
upon the redemption of the preferred shares issued by the Bank in conjunction with the LRCN and held in a limited recourse trust. The preferred shares issued and held in a
limited recourse trust are redeemable for a period of one month from the date fixed for redemption and on the same dates every five years thereafter.
(6)
Convertible on the date fixed for conversion and on the same date every five years thereafter, subject to certain conditions.
(7)
The dividend amount is set for the five-year period commencing on May 16, 2019 for Series 30, on February 16, 2020 for Series 32, on November 16, 2022 for Series 38, and on
May 16, 2023 for Series 40 and ending on the redemption date. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per share determined by
multiplying the rate of interest equal to the sum of the five-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00, plus the reset premium.
(8)
The dividend amount is set for the initial period ending on the date fixed for redemption. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per
share determined by multiplying the rate of interest equal to the sum of the five-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00,
plus the reset premium.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
74
Note 18
Share Capital and Other Equity Instruments (cont.)
(9)
The LRCN – Series 1, LRCN – Series 2 and LRCN – Series 3 are notes for which recourse is limited to the assets held by an independent trustee in a consolidated limited recourse
trust. The trust assets consist of Series 44, Series 45 and Series 46 preferred shares issued by the Bank in conjunction with the LRCN – Series 1, LRCN – Series 2 and LRCN –
Series 3. In the event of (i) non-payment of interest on any of the interest payment dates, (ii) non-payment of the redemption amount upon redemption of the LRCN, (iii) non-
payment of the principal amount upon maturity of the LRCN, or (iv) an event of default in respect of the LRCN, the noteholders will have recourse only to the assets of the trust,
and each noteholder will be entitled to its pro rata share of the assets of the trust. In such circumstances, delivery of the assets of the trust will eliminate all of the Bank's
obligations with respect to the LRCN. The LRCN – Series 1, LRCN – Series 2 and LRCN – Series 3 are redeemable at maturity or earlier to the extent that the Bank redeems the
Series 44, Series 45 and Series 46 preferred shares from the date fixed for redemption, and subject to OSFI’s consent and approval.
(10)
The Series 44, Series 45 and Series 46 preferred shares issued by the Bank in conjunction with the LRCN – Series 1, LRCN – Series 2 and LRCN – Series 3 are held by a
consolidated limited recourse trust on the Bank's balance sheet and are therefore eliminated for financial reporting purposes. Upon the occurrence of a trigger event, as defined
by OSFI; (i) each LRCN will be automatically redeemed and the redemption price will be covered by delivery of the trust’s assets that consist of Series 44, Series 45 and Series 46
preferred shares; (ii) each outstanding preferred share will be automatically and immediately converted on a full and permanent basis, without the consent of the holder, into a
number of Bank common shares determined pursuant to an automatic conversion formula. This conversion will be calculated by dividing the value of the preferred shares, i.e.,
$1,000 per share, plus all accrued and unpaid interest as at the date of the trigger event, by the value of the common shares. The value of the common shares will be the greater
of a $5.00 floor price or the current market price of the common shares. Current market price means the volume weighted average trading price of common shares for the ten
consecutive trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an exchange when this price is being
established, the price will be the fair value reasonably determined by the Bank’s Board.
(11)
The interest rate is set for the initial period ending on the date fixed for redemption. Every five years thereafter until November 15, 2075 for the LRCN – Series 1, until August 15,
2076 for the LRCN – Series 2 and until November 16, 2077 for the LRCN – Series 3, the interest rate on the notes will be adjusted and will be an annual interest rate equal to the
five-year Government of Canada bond yield on the applicable interest rate calculation date, plus the interest rate reset premium.
(12)
As of the date fixed for redemption, and every five years thereafter, the redemption price will be $25.00 per share.
(13)
The dividend period begins as of the date fixed for redemption. The amount of the floating quarterly non-cumulative dividend is determined by multiplying by $25.00 the rate of
interest equal to the sum of the 90-day Government of Canada treasury bill yield on the floating rate calculation date, plus the reset premium.
(14)
As of the date fixed for redemption, the redemption price will be $25.50 per share. Thereafter, on the same date every five years, the redemption price will be $25.00 per share.
Second Preferred Shares
15 million shares without par value, issuable for a maximum aggregate consideration of $300 million. As at October 31, 2023, no shares had been
issued or traded.
Shares and
Other
Equity
Instruments
Outstanding
As at October 31
2023
2022
Number
of shares or LRCN
Shares or LRCN
$
Number
of shares or LRCN
Shares or LRCN
$
First Preferred Shares
Series 30
14,000,000
350
14,000,000
350
Series 32
12,000,000
300
12,000,000
300
Series 38
16,000,000
400
16,000,000
400
Series 40
12,000,000
300
12,000,000
300
Series 42
12,000,000
300
12,000,000
300
66,000,000
1,650
66,000,000
1,650
Other equity instruments
LRCN
–
500,000
500
500,000
500
LRCN – Series 2
500,000
500
500,000
500
LRCN – Series 3
500,000
500
500,000
500
1,500,000
1,500
1,500,000
1,500
Preferred shares and other equity instruments
67,500,000
3,150
67,500,000
3,150
Common shares at beginning of year
336,582,124
3,196
337,912,283
3,160
Issued pursuant to the Stock Option Plan
1,678,321
95
1,193,663
61
Repurchase of common shares for cancellation
−
−
(2,500,000)
(24)
Impact of shares purchased or sold for trading
(1)
31,975
3
(18,295)
(1)
Other
(7,791)
−
(5,527)
−
Common shares at end of year
338,284,629
3,294
336,582,124
3,196
(1)
As at October 31, 2023, a total of 26,725 shares were sold short for trading, representing an amount of $3 million (5,250 shares were held for trading, representing a negligible
amount as at October 31, 2022).
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
75
Dividends Declared
and Distributions on Other Equity Instruments
Year ended October 31
2023
2022
Dividends or interest
$
Dividends
per share
Dividends or interest
$
Dividends
per share
First Preferred Shares
Series 30
14
1.0063
14
1.0063
Series 32
12
0.9598
12
0.9598
Series 38
28
1.7568
18
1.1125
Series 40
16
1.3023
14
1.1500
Series 42
14
1.2375
14
1.2375
84
72
Other equity instruments
LRCN
–
(1)
21
21
LRCN – Series 2
(2)
20
20
LRCN – Series 3
(3)
38
6
79
47
Preferred shares and other equity instruments
163
119
Common shares
1,344
1,206
1,507
1,325
(1)
The LRCN – Series 1 bear interest at a fixed rate of 4.30% per annum.
(2)
The LRCN – Series 2 bear interest at a fixed rate of 4.05% per annum.
(3)
The LRCN – Series 3 bear interest at a fixed rate of 7.50% per annum.
Issuances of Other Equity Instruments
On September 8, 2022, the Bank had issued $500 million of LRCN – Series 3 for which recourse of the noteholders is limited to the assets held by an
independent trustee in a consolidated limited recourse trust. The trust's assets consist of $500 million of Series 46 first preferred shares issued by
the Bank in conjunction with the LRCN – Series 3. The LRCN – Series 3 sell for $1,000 each and bear interest at a fixed rate of 7.50% per annum until
November 16, 2027 exclusively and, thereafter, at an annual rate equal to the five-year Government of Canada bond yield plus 4.281% until
November 16, 2077. The LRCN – Series 3 mature on November 16, 2082.
In the event of (i) non-payment of interest on any of the interest payment dates, (ii) non-payment of the redemption amount upon redemption of the
LRCN, (iii) non-payment of the principal amount upon maturity of the LRCN, or (iv) an event of default in respect of the notes, the noteholders will have
recourse only to the assets of the trust, and each noteholder will be entitled to its pro rata share of the assets of the trust. In such circumstances,
delivery of the trust’s assets will eliminate all of the Bank’s obligations with respect to the LRCN. The LRCN – Series 3 are redeemable at maturity or
earlier to the extent that the Bank redeems the Series 46 preferred shares on certain redemption dates specified in the terms and conditions of said
preferred shares, and subject to OSFI’s consent and approval.
Given that the LRCN – Series 3 satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital
under Basel III.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
76
Note 18
Share Capital and Other Equity Instruments (cont.)
Repurchases of Common Shares
On December 12, 2022, the Bank began a normal course issuer bid to repurchase for cancellation up to 7,000,000 common shares (representing
approximately 2.1% of its then outstanding common shares) over the 12-month period ending on December 11, 2023. On December 10, 2021, the Bank
had begun a normal course issuer bid to repurchase for cancellation up to 7,000,000 common shares (representing approximately 2% of its then
outstanding common shares) over the 12-month period ended December 9, 2022. Any repurchase through the Toronto Stock Exchange is done at
market prices. The common shares may also be repurchased through other means authorized by the Toronto Stock Exchange and applicable
regulations, including private agreements or share repurchase programs under issuer bid exemption orders issued by the securities regulators. A
private purchase made under an exemption order issued by a securities regulator will be done at a discount to the prevailing market price. The
amounts that are paid above the average book value of the common shares are charged to
Retained earnings
. During the year ended October 31, 2023,
the Bank did not repurchase any common shares. During the year ended October 31, 2022, the Bank had repurchased 2,500,000 common shares for
$245 million, which had reduced
Common share
Retained earnings
Reserved Common Shares
As at October 31, 2023 and 2022, there were 15,507,568 common shares reserved under the Dividend Reinvestment and Share Purchase Plan. As at
October 31, 2023, there were 20,063,688 common shares reserved under the Stock Option Plan (21,742,009 as at October 31, 2022).
Restriction on the Payment of Dividends
The Bank is prohibited from declaring dividends on its common or preferred shares if there are reasonable grounds for believing that the Bank would,
by so doing, be in contravention of the regulations of the
Bank Act
pay common share dividends is restricted by the terms of the outstanding preferred shares pursuant to which the Bank may not pay dividends on its
common shares without the approval of the holders of the outstanding preferred shares, unless all preferred share dividends have been declared and
paid or set aside for payment.
Dividend Reinvestment and Share Purchase Plan
The Bank has a Dividend Reinvestment and Share Purchase Plan for holders of its common and preferred shares under which they can acquire
common shares of the Bank without paying commissions or administration fees. Participants acquire common shares through the reinvestment of
cash dividends paid on the shares they hold or through optional cash payments of at least $1 per payment, up to a maximum of $5,000 per quarter.
Common shares subscribed by participants are purchased on their behalf in the secondary market through the Bank’s transfer agent, Computershare
Trust Company of Canada, at a price equal to the average purchase price of the common shares during the three business days immediately following
the dividend payment date.
Note 19 – Non-Controlling Interests
As at October 31
2023
2022
Flinks Technology Inc.
(1)
2
2
(1)
As at October 31, 2023 and 2022, the non-controlling interest in Flinks stood at 14.1%.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
77
Note 20 – Capital Disclosure
Capital Management Objectives, Policies and Procedures
Capital management has a dual role of ensuring a competitive return to the Bank’s shareholders while maintaining a solid capital foundation that
covers the risks inherent to the Bank’s business, supports its business segments, and protects its clients.
The Bank’s capital management policy defines the guiding principles as well as the roles and responsibilities regarding its internal capital adequacy
assessment process. This process is a key tool in establishing the Bank’s capital strategy and is subject to quarterly reviews and periodic
amendments.
Capital Management
Capital ratios are obtained by dividing capital (as defined by OSFI’s
Capital Adequacy Requirements Guideline
) by risk-weighted assets and are
expressed as percentages. Risk-weighted assets are calculated in accordance with the rules established by OSFI for on- and off-balance-sheet risks.
Credit, market, and operational risks are factored into the risk-weighted assets calculation for regulatory purposes. The definition adopted by the
Basel Committee on Banking Supervision (BCBS) distinguishes between three types of capital. Common Equity Tier 1 (CET1) capital consists of common
shareholders’ equity less goodwill, intangible assets, and other CET1 capital deductions. Additional Tier 1 (AT1) capital consists of eligible non-
cumulative preferred shares, limited recourse capital notes, and other AT1 capital adjustments. The sum of CET1 and AT1 capital forms what is known
as Tier 1 capital. Tier 2 capital consists of the eligible portion of subordinated debt and certain allowances for credit losses. Total regulatory capital is
the sum of Tier 1 and Tier 2 capital.
The Bank and all other major Canadian banks have to maintain the following minimum capital ratios established by OSFI: a CET1 capital ratio of at least
11.0%, a Tier 1 capital ratio of at least 12.5%, and a Total capital ratio of at least 14.5%. All of these ratios include a capital conservation buffer of 2.5%
established by the Basel Committee on Banking Supervision and OSFI, a 1.0% surcharge applicable solely to Domestic Systemically Important Banks
(D-SIBs), and a 3.0% domestic stability buffer. On December 8, 2022, OSFI expanded the domestic stability buffer range, setting it at 0% to 4.0% instead
of the previous range of 0% to 2.5%, and it announced that the domestic stability buffer would rise from 2.5% to 3.0% effective February 1, 2023. On
June 20, 2023, OSFI raised the buffer by 50 bps to 3.5% effective November 1, 2023. The domestic stability buffer must consist exclusively of CET1
capital. A D-SIB that fails to meet this buffer requirement will not be subject to automatic constraints to reduce capital distributions but must provide a
remediation plan to OSFI. The Bank must also meet the requirements of an updated capital output floor that will ensure that its total calculated RWA is
not below 72.5% of the total RWA as calculated under the Basel III Standardized Approaches. OSFI is allowing a phase-in of the floor factor over three
years, starting at 65.0% in the second quarter of 2023 and rising 2.5% per year to reach 72.5% in fiscal 2026. If the capital requirement is less than the
capital output floor requirement after applying the floor factor, the difference is added to total RWA. Lastly, OSFI requires D-SIBs to maintain a Basel
III leverage ratio of at least 3.5%. Effective February 1, 2023, OSFI increased the leverage ratio minimum requirement by imposing a Tier 1 capital buffer
of 0.5% applicable only to D-SIBs.
OSFI also requires D-SIBs to maintain a risk-based total loss-absorbing capacity (TLAC) ratio of at least 24.5% (including the domestic stability buffer)
of risk-weighted assets and a TLAC leverage ratio of at least 7.25% (increase of 0.5% since February 1, 2023). The purpose of TLAC is to ensure that a
D-SIB has sufficient loss-absorbing capacity to support its recapitalization in the unlikely event it becomes non-viable.
In the second quarter of 2023, the Bank implemented OSFI’s finalized guidance relating to the Basel III reforms, consisting primarily of:
●
a revised Standardized Approach and Internal Ratings-Based (IRB) Approach for credit risk;
●
a revised Standardized Approach for operational risk;
●
a revised capital output floor;
●
a revised Leverage Ratio Framework; and
●
revised Pillar 3 disclosure requirements.
The Basel III reforms also affected the market risk and credit valuation adjustment (CVA) risk frameworks, which will be implemented in the first
quarter of 2024.
During the years ended October 31, 2023 and 2022, the Bank was in compliance with all of OSFI’s regulatory capital, leverage, and TLAC requirements.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
78
Note 20 – Capital Disclosure (cont.)
Regulatory Capital
(1)
,
Leverage Ratio
(1)
(2)
As at October 31
2023
2022
Capital
CET1
16,920
14,818
Tier 1
20,068
17,961
Total
21,056
19,727
Risk-weighted assets
125,592
116,840
Total exposure
456,478
401,780
Capital ratios
CET1
13.5
%
12.7
%
Tier 1
16.0
%
15.4
%
Total
16.8
%
16.9
%
Leverage ratio
4.4
%
4.5
%
Available TLAC
36,732
32,351
TLAC ratio
29.2
%
27.7
%
TLAC leverage ratio
8.0
%
8.1
%
(1)
Capital, risk-weighted assets, total exposure, the capital ratios, and the leverage ratio are calculated in accordance with the Basel III rules, as set out in OSFI's
Capital Adequacy
Requirements Guideline
Leverage Requirements Guideline
. The calculation of the figures as at October 31, 2022 had included the transitional measure applicable to expected
credit loss provisioning and the temporary measure regarding the exclusion of central bank reserves implemented by OSFI in response to the COVID-19 pandemic. These
provisions ceased to apply on November 1, 2022 and April 1, 2023, respectively.
(2)
Available TLAC, the TLAC ratio, and the TLAC leverage ratio are calculated in accordance with OSFI's
Total Loss Absorbing Capacity Guideline
.
Note 21 – Trading Activity Revenues
Trading activity revenues consist of the net interest income and the non-interest income related to trading activities.
Net interest income comprises dividends related to financial assets and liabilities associated with trading activities and certain interest income related
to the financing of these financial assets and liabilities, net of interest expenses.
Non-interest income consists of realized and unrealized gains and losses as well as interest income on securities measured at fair value through
profit or loss, income from held-for-trading derivative financial instruments, changes in the fair value of loans at fair value through profit or loss,
changes in the fair value of financial instruments designated at fair value through profit or loss, realized and unrealized gains and losses as well as
interest expenses on obligations related to securities sold short, certain commission income as well as other income related to trading activities, and
any applicable transaction costs.
Year ended October 31
2023
2022
Net interest income (loss)
(1,816)
682
Non-interest income
2,677
543
19
5
2,696
548
880
1,230
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
79
Note 22 – Share-Based Payments
The compensation expense information provided below excludes the impact of hedging.
Stock Option Plan
The Bank’s Stock Option Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, options are awarded
annually and provide participants with the right to purchase common shares at an exercise price equal to the closing price of the Bank’s common
share on the Toronto Stock Exchange on the day preceding the award. The options vest evenly over a four-year period and expire ten years from the
award date or, in certain circumstances set out in the plan, within specified time limits. The Stock Option Plan contains provisions for retiring
employees that allow the participant’s rights to continue vesting in accordance with the stated terms of the award agreement. The maximum number
of common shares that may be issued under the Stock Option Plan was 20,063,688 as at October 31, 2023 (21,742,009 as at October 31, 2022). The
number of common shares reserved for a participant may not exceed 5% of the total number of Bank shares issued and outstanding.
As at October 31
2023
2022
Number of
options
Weighted
average
exercise price
Number of
options
Weighted
average
exercise price
Stock Option Plan
Outstanding at beginning
11,861,749
$
64.80
11,348,680
$
57.93
Awarded
1,416,060
$
94.05
1,771,588
$
96.35
Exercised
(1,678,321)
$
50.43
(1,193,663)
$
45.73
Cancelled
(1)
(52,800)
$
87.49
(64,856)
$
76.10
Outstanding at end
11,546,688
$
70.37
11,861,749
$
64.80
Exercisable at end
7,471,041
$
61.18
7,344,536
$
55.50
(1)
Includes 8,096 expired options during the year ended October 31, 2023 (27,714 expired options during the year ended October 31, 2022).
Exercise price
Options
outstanding
Options
exercisable
Expiry date
$44.96
368,469
368,469
December 2023
$47.93
813,888
813,888
December 2024
$42.17
727,265
727,265
December 2025
$54.69
770,928
770,928
December 2026
$64.14
1,063,142
1,063,142
December 2027
$58.79
1,341,590
1,341,590
December 2028
$71.86
1,478,183
1,075,695
December 2029
$71.55
1,857,658
884,810
December 2030
$96.35
1,728,733
425,254
December 2031
$94.05
1,396,832
−
December 2032
11,546,688
7,471,041
During the year ended October 31, 2023, the Bank awarded 1,416,060 stock options (1,771,588 stock options during the year ended October 31, 2022) with
an average fair value of $14.76 per option ($13.24 for the year ended October 31, 2022).
The average fair value of options awarded was estimated on the award date using the Black-Scholes model as well as the following assumptions.
Year ended October 31
2023
2022
Risk-free interest rate
3.25%
1.79%
Expected life of options
7 years
7 years
Expected volatility
23.13%
22.68%
Expected dividend yield
4.23%
3.88%
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
80
Note 22 – Share-Based Payments (cont.)
The expected life of the options is based on historical data and is not necessarily representative of how the options will be exercised in the future.
Expected volatility is extrapolated from the implied volatility of the Bank’s share price and observable market inputs, which are not necessarily
representative of actual results. The expected dividend yield represents the annualized dividend divided by the Bank’s share price at the award date.
The risk-free interest rate is based on the Canadian dollar swap curve at the award date. The exercise price is equal to the Bank’s share price at the
award date. No other market parameter has been included in the fair value measurement of the options.
For the year ended October 31, 2023, an $18 million compensation expense related to this plan was recognized in the Consolidated Statement of
Income ($17 million for the year ended October 31, 2022).
Stock Appreciation Rights (SAR) Plan
The SAR Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, participants receive, upon exercising the
right, a cash amount equal to the difference between the closing price of the Bank’s common share on the Toronto Stock Exchange on the day
preceding the exercise date and the closing price on the day preceding the award date. SARs vest evenly over a four-year period and expire ten years
after the award date or, in certain circumstances set out in the plan, within specified time limits. The SAR Plan contains provisions for retiring
employees that allow the participant’s rights to continue vesting in accordance with the stated terms of the award agreement. For the years ended
October 31, 2023 and 2022, a negligible compensation expense related to this plan was recognized in the Consolidated Statement of Income.
As at October 31
2023
2022
of SARs
Weighted
average
exercise price
of SARs
Weighted
average
exercise price
SAR Plan
(1)
Outstanding at beginning
207,841
$
60.73
266,075
$
57.61
Awarded
19,072
$
94.05
21,464
$
96.35
Exercised
(41,241)
$
55.64
(79,698)
$
59.89
Outstanding at end
185,672
$
65.29
207,841
$
60.73
Exercisable at end
124,531
$
55.53
130,319
$
51.31
(1)
No SARs cancelled or expired during the years ended October 31, 2023 and 2022.
Exercise price
SARs
outstanding
SARs
exercisable
Expiry date
$44.96
9,886
9,886
December 2023
$47.93
28,824
28,824
December 2024
$42.17
19,748
19,748
December 2025
$54.69
16,320
16,320
December 2026
$64.14
16,236
16,236
December 2027
$58.79
16,604
16,604
December 2028
$71.86
22,266
11,547
December 2029
$71.55
15,252
−
December 2030
$96.35
21,464
5,366
December 2031
$94.05
19,072
−
December 2032
185,672
124,531
Deferred Stock Unit (DSU) Plans
The DSU Plans are for officers and other designated persons of the Bank and its subsidiaries as well as for directors. These plans allow the Bank to tie
a portion of the value of the compensation of participants to the future value of the Bank’s common shares. A DSU is a right that has a value equal to
the closing price of a common share of the Bank on the Toronto Stock Exchange on the day preceding the award. DSUs generally vest evenly over four
years. Additional DSUs are credited to the accounts of participants in an amount equal to the dividends declared on Bank common shares and vest
evenly over the same period as the reference DSUs. DSUs may be cashed only when participants retire or leave the Bank or, for directors, when their
term ends. The DSU Plans contain provisions for retiring employees whereby participants may continue vesting all units in accordance with the stated
terms of the award agreement.
During the year ended October 31, 2023, the Bank awarded 37,477 DSUs at a weighted average price of $97.45 (39,227 DSUs at a weighted average
price of $97.10 for the year ended October 31, 2022). A total of 483,735 DSUs were outstanding as at October 31, 2023 (551,539 DSUs as at October 31,
2022). For the year ended October 31, 2023, a $3 million compensation expense related to these plans was recognized in the Consolidated Statement of
Income ($1 million for the year ended October 31, 2022).
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
81
Restricted Stock Unit (RSU) Plan
The RSU Plan is for certain officers and other designated persons of the Bank and its subsidiaries. The objective of this plan is to ensure that the
compensation of certain officers and other designated persons is competitive and to foster retention. An RSU represents a right that has a value equal
to the average closing price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth
business day in December. RSUs generally vest evenly over three years, although some RSUs vest on the sixth business day of December of the third
year following the award date, i.e., the date on which all RSUs expire. Additional RSUs are credited to the accounts of participants in an amount equal
to the dividends declared on the Bank’s common shares and vest over the same period as the reference RSUs. The RSU Plan contains provisions for
retiring employees whereby participants may continue vesting units in accordance with the stated terms of the award agreement.
During the year ended October 31, 2023, the Bank awarded 2,058,936 RSUs at a weighted average price of $96.42 (1,895,489 RSUs at a weighted
average price of $99.59 for the year ended October 31, 2022). As at October 31, 2023, a total of 4,382,431 RSUs were outstanding (4,203,383 RSUs as at
October 31, 2022). For the year ended October 31, 2023, a $173 million compensation expense related to this plan was recognized in the Consolidated
Statement of Income ($172 million for the year ended October 31, 2022).
Performance Stock Unit (PSU) Plan
The PSU Plan is for officers and other designated persons of the Bank. The objective of this plan is to tie a portion of the value of the compensation of
these officers and other designated persons to the future value of the Bank’s common shares. A PSU represents a right that has a value equal to the
average closing price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth
business day in December, adjusted upward or downward according to performance criteria, which is based on the Bank’s total shareholder return
(TSR) growth index over three years compared to the average TSR growth index of the comparator group composed of Canadian banks over three
years. PSUs vest on the sixth business day of December of the third year following the award date, i.e., the date on which all PSUs expire. Additional
PSUs are credited to the accounts of participants in an amount equal to the dividends declared on the Bank’s common shares and vest over the same
period as the reference PSUs. The PSU Plan contains provisions for retiring employees whereby participants may continue vesting units in accordance
with the stated terms of the award agreement.
During the year ended October 31, 2023, the Bank awarded 234,706 PSUs at a weighted average price of $96.42 (238,082 PSUs at a weighted average
price of $99.59 for the year ended October 31, 2022). As at October 31, 2023, a total of 745,764 PSUs were outstanding (739,359 PSUs as at October 31,
2022). For the year ended October 31, 2023, a $27 million compensation expense related to this plan was recognized in the Consolidated Statement of
Income ($30 million for the year ended October 31, 2022).
Deferred Compensation Plan
This plan is exclusively for key employees of the Wealth Management segment. The purpose of this plan is to foster the retention of key employees and
promote revenue growth and continuous profitability improvement within the Wealth Management segment. Under this plan, participants can defer a
portion of their annual compensation, and the Bank may pay a contribution to key employees when certain financial objectives are met. Amounts
awarded by the Bank and the compensation deferred by participants are invested in, among other items, Bank common share units. These share units
represent a right that has a value equal to the closing price of the Bank’s common share on the Toronto Stock Exchange on the award date. Additional
units are credited to the accounts of participants in an amount equal to the dividends declared on the Bank’s common shares. Share units representing
the amounts awarded by the Bank vest evenly over four years. When a participant retires, or in certain cases when the participant’s employment
ceases, the participant receives a cash amount representing the value of the vested share units.
During the year ended October 31, 2023, the Bank awarded 161,713 share units at a weighted average price of $94.90 (129,464 share units at a weighted
average price of $94.87 for the year ended October 31, 2022). As at October 31, 2023, a total of 2,229,248 share units were outstanding (2,036,524 share
units as at October 31, 2022). For the year ended October 31, 2023, a $3 million compensation expense related to this plan was recognized in the
Consolidated Statement of Income (a $19 million reversal of the compensation expense for the year ended October 31, 2022).
Employee Share Ownership Plan
Under the Bank’s Employee Share Ownership Plan, employees who meet the eligibility criteria can contribute up to 8% of their annual gross salary by
way of payroll deductions. The Bank matches 25% of the employee contribution up to a maximum of $1,500 per annum. Bank contributions vest to the
employee after one year of uninterrupted participation in the plan. Subsequent contributions vest immediately. The Bank’s contributions, amounting to
$16 million for the year ended October 31, 2023 ($15 million for the year ended October 31, 2022), were recognized when paid in the
Compensation and
employee benefits
(6,304,689 common shares as at October 31, 2022).
Plan shares are purchased on the open market and are considered to be outstanding for earnings per share calculations. Dividends paid on the Bank’s
common shares held for the Employee Share Ownership Plan are used to purchase other common shares on the open market.
Plan Liabilities and Intrinsic Value
Total liabilities arising from the Bank’s share-based compensation plans amounted to $686 million as at October 31, 2023 ($716 million as at
October 31, 2022). The intrinsic value of these liabilities that had vested as at October 31, 2023 was $345 million ($359 million as at October 31, 2022).
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
82
Note 23 – Employee Benefits – Pension Plans and Other Post-Employment Benefit Plans
The Bank offers pension plans that have a defined benefit component and a defined contribution component. The Bank also offers other post-
employment benefit plans to eligible employees. The defined benefit component of the pension plans provides benefits based on years of plan
participation and average earnings at retirement. The other post-employment benefits include post-employment medical, dental, and life insurance
coverage. Since September 19, 2022, the Bank has been offering a new defined contribution component that is available to all new employees upon
hiring as well as to current participants of the defined benefit component. Therefore, as of that date, the defined benefit component is no longer offered
to new employees. For the defined contribution component, the Bank's base contribution equals a percentage of annual salary and the Bank’s
additional contribution varies according to the employee’s contributions, and the sum of the employee’s age and years of continuous service. The
defined benefit component of the pension plans is funded, whereas the defined contribution component and the other post-employment benefit plans
are not funded. The fair value of the defined benefit component and the present value of the defined benefit obligations were measured as at
October 31.
The Bank’s most significant pension plan is the
Employee Pension Plan of the National Bank of Canada
; it is registered with OSFI and the Canada
Revenue Agency and subject to the
Pension Benefits Standards Act, 1985
Income Tax Act
.
The defined benefit component of the pension plans and the other post-employment benefit plans exposes the Bank to specific risks such as
investment performance, changes to the discount rate used to calculate the obligation, the longevity of plan participants, and future inflation. While
management believes that the assumptions used in the actuarial valuation process are reasonable, there remains a degree of risk and uncertainty
that may cause future results to differ significantly from these assumptions, which could give rise to gains or losses.
According to the Bank’s governance rules, the policies and risk management related to the defined benefit component of the pension plans are
overseen at different levels by the pension committees, the Bank’s management, and the Board’s Human Resources Committee. The defined benefit
component of the pension plans are examined on an ongoing basis in order to monitor the funding and investment policies, the financial status of the
plans, and the Bank’s funding requirements.
The Bank’s funding policy for the defined benefit component of the pension plans is to make at least the minimum annual contributions required by
pension regulators.
For funded plans, the Bank determines whether an economic benefit exists in the form of potential reductions in future contributions and in the form of
refunds from the plan surplus, where permitted by applicable regulations and plan provisions.
Defined Benefit Obligation, Assets of the Plans, and Funded Status
As at October 31
Pension plans – Defined
benefit component
Other post-employment
benefit plans
2023
2022
2023
2022
Defined benefit obligation
Balance at beginning
3,971
4,745
111
143
Current service cost
92
129
−
1
Interest cost
218
171
6
5
Remeasurements
Actuarial (gains) losses arising from changes in demographic assumptions
(40)
55
1
1
Actuarial (gains) losses arising from changes in financial assumptions
(163)
(1,063)
(3)
(24)
Actuarial (gains) losses arising from experience adjustments
71
95
(12)
(6)
Employee contributions
72
65
Benefits paid
(201)
(226)
(9)
(9)
Balance at end
4,020
3,971
94
111
Plan assets
Fair value at beginning
4,469
5,436
Interest income
242
191
Administration cost
(3)
(3)
Remeasurements
Return on plan assets (excluding interest income)
(329)
(1,113)
Bank contributions
(1)
126
119
Employee contributions
72
65
Benefits paid
(201)
(226)
Fair value at end
4,376
4,469
Defined benefit asset (liability) at end
356
498
(94)
(111)
(1)
For fiscal 2024, the Bank expects to pay an employer contribution of $122 million to the defined benefit component of the pension plans.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
83
Defined Benefit Asset (Liability)
As at October 31
Pension plans – Defined
benefit component
Other post-employment
benefit plans
2023
2022
2023
2022
Defined benefit asset included in
Other assets
356
498
Defined benefit liability included in
Other liabilities
−
−
(94)
(111)
356
498
(94)
(111)
Cost for Pension Plans and Other Post-Employment Benefit Plans
Year ended October 31
Pension plans
Other post-employment benefit plans
2023
2022
2023
2022
Current service cost
92
129
−
1
Interest expense (income), net
(24)
(20)
6
5
Administration costs
3
3
Expense of the defined benefit component
71
112
6
6
Expense of the defined contribution component
11
−
Expense recognized in
Net income
82
112
6
6
Remeasurements
(1)
Actuarial (gains) losses on the defined benefit obligation
(132)
(913)
(14)
(29)
Return on plan assets
(2)
329
1,113
Remeasurements recognized in
Other comprehensive income
197
200
(14)
(29)
279
312
(8)
(23)
(1)
Changes related to the discount rate and to the return on plan assets are reviewed and updated on a quarterly basis. All other assumptions are updated annually.
(2)
Excludes interest income.
Allocation of the Fair Value of the Assets of the Defined Benefit Component of the Pensions
Plans
As at October 31
2023
2022
Quoted
in an active
market
(1)
Not quoted
in an active
market
Total
Quoted
in an active
market
(1)
Not quoted
in an active
market
Total
Asset classes
Cash and cash equivalents
−
378
378
−
273
273
Equity securities
841
1,300
2,141
988
1,150
2,138
Debt securities
Canadian government
(2)
(237)
−
(237)
114
−
114
Canadian provincial and municipal governments
−
2,128
2,128
−
1,769
1,769
Other issuers
−
171
171
−
264
264
Other
−
(205)
(205)
−
(89)
(89)
604
3,772
4,376
1,102
3,367
4,469
(1)
Unadjusted quoted prices in active markets for identical assets that the Bank can access at the measurement date.
(2)
Includes obligations related to securities sold short.
The Bank’s investment strategy for plan assets considers several factors, including the time horizon of pension plan obligations and investment risk.
For each plan, an allocation range per asset class is defined using a mix of equity and debt securities to optimize the risk-return profile of plan assets
and minimize asset/liability mismatching.
The assets of the pension plans may include investment securities issued by the Bank. As at October 31, 2023 and 2022, the assets of the pension plans
do not include any securities issued by the Bank.
For fiscal 2023, the Bank and its related entities received $20 million ($21 million in fiscal 2022) in fees from the pension plans for related
management, administration, and custodial services.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
84
Note 23 – Employee Benefits – Pension Plans and Other Post-Employment Benefit Plans (cont.)
Allocation of the Defined Benefit Obligation by the Status of the Participants in the Defined
Benefit Component of the Pension Plans
As at October 31
Pension plans – Defined benefit
component
Other post-employment benefit plans
2023
2022
2023
2022
Active employees
41
%
41
%
3
%
7
%
Retirees
54
%
53
%
97
%
93
%
Participants with deferred vested benefits
5
%
6
%
100
%
100
%
100
%
100
%
Weighted average duration of the
defined benefit obligation
(in years)
14
14
10
10
Significant Actuarial Assumptions (Weighted Average)
Discount Rate
The discount rate assumption is based on an interest rate curve that represents the yields on corporate AA bonds. Short-term maturities are obtained
using a curve based on observed data from corporate AA bonds. Long-term maturities are obtained using a curve based on actual data and
extrapolated data.
To measure the obligation related to the defined benefit component of the pension plans and related to the other post-employment benefit plans, the
vested benefits that the Bank expects to pay in each future period are discounted to the measurement date using the spot rate associated with each of
the respective periods based on the yield curve derived using the above methodology. The sum of discounted benefit amounts represents the defined
benefit obligation. An average discount rate that replicates this obligation is then computed.
To better reflect current service cost, a separate discount rate was determined to account for the timing of future benefit payments associated with
the additional year of service to be earned by the plan’s active participants. Since these benefits are, on average, being paid at a later date than the
benefits already earned by participants as a whole (i.e., longer duration), this method results in the use of a generally higher discount rate for
calculating current service cost than that used to measure obligations where the yield curve is positively sloped. The methodology used to determine
this discount rate is the same as the one used to establish the discount rate for measuring the obligation.
Other Assumptions
For measurement purposes, the estimated annual growth rate for health care costs was 4.94% as at October 31, 2023 (4.77% as at October 31, 2022).
Based on the assumption retained, this rate is expected to decrease gradually to 3.57% in 2040 and remain steady thereafter.
Mortality assumptions are a determining factor when measuring the defined benefit obligation. Determining the expected benefit payout period is
based on best estimate assumptions regarding mortality. Mortality tables are reviewed at least once a year, and the assumptions made are in
accordance with accepted actuarial practice. New results regarding the plans are reviewed and used in calculating best estimates of future mortality.
As at October 31
Pension plans – Defined benefit
component
Other post-employment benefit plans
2023
2022
2023
2022
Defined benefit obligation
Discount rate
5.65
%
5.45
%
5.65
%
5.45
%
Rate of compensation increase
4.00
%
3.00
%
2.00
%
3.00
%
Health care cost trend rate
4.94
%
4.77
%
Life expectancy
(in years)
Age 65
Men
22.4
22.4
22.4
22.4
Women
24.8
24.7
24.8
24.7
Age 45
Men
23.4
23.4
23.4
23.4
Women
25.7
25.6
25.7
25.6
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
85
Year ended October 31
Pension plans – Defined benefit
component
Other post-employment benefit plans
2023
2022
2023
2022
Pension plan expense
Discount rate – Current service
5.45
%
3.70
%
5.45
%
3.70
%
Discount rate – Interest expense (income), net
5.45
%
3.55
%
5.45
%
3.55
%
Rate of compensation increase
4.00
%
3.00
%
2.00
%
3.00
%
Health care cost trend rate
4.77
%
4.52
%
Life expectancy
Age 65
Men
22.4
21.4
22.4
21.4
Women
24.7
23.7
24.7
23.7
Age 45
Men
23.4
22.4
23.4
22.4
Women
25.6
24.7
25.6
24.7
Sensitivity of Significant Assumptions for 2023
The following table shows the potential impacts of changes to key assumptions on the defined benefit obligation of the pension plans and other
post-employment benefit plans as at October 31, 2023. These impacts are hypothetical and should be interpreted with caution, as changes in each
significant assumption may not be linear.
As at October 31, 2023
Pension plans – Defined
benefit component
Other post-employment
benefit plans
Change in the obligation
Change in the obligation
Impact of a 1.00% increase in the discount rate
(509)
(3)
Impact of a 1.00% decrease in the discount rate
642
3
Impact of a 0.25% increase in the rate of compensation increase
26
Impact of a 0.25% decrease in the rate of compensation increase
(25)
Impact of a 1.00% increase in the health care cost trend rate
4
Impact of a 1.00% decrease in the health care cost trend rate
(3)
Impact of an increase in the age of participants by one year
(81)
(1)
Impact of a decrease in the age of participants by one year
78
1
Projected Benefit Payments
Year ended October 31
Pension plans – Defined
benefit component
Other post-employment
benefit plans
2024
209
10
2025
217
9
2026
226
9
2027
233
8
2028
239
8
2029 to 2033
1,310
41
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
86
Note 24 – Income Taxes
The Bank’s income tax expense reported in the consolidated financial statements is as follows.
Year ended October 31
2023
2022
Consolidated Statement of Income
Current taxes
Current year
776
803
Canada Recovery Dividend
(1)
32
Change in income tax rate
(1)
10
Prior period adjustments
48
(19)
866
784
Deferred taxes
Origination and reversal of temporary differences
(148)
110
Change in income tax rate
(1)
(18)
Prior period adjustments
(63)
−
(229)
110
637
894
Consolidated Statement of Changes in Equity
Share issuance expenses, other equity instruments and other
(23)
(14)
Consolidated Statement of Comprehensive Income
Remeasurements of pension plans and other post-employment benefit plans
(43)
(45)
Net change in cash flow hedges
44
3
Net fair value change attributable to credit risk on financial liabilities designated at fair value through profit or loss
(63)
216
Other
(9)
(90)
(71)
84
Income taxes
543
964
The breakdown of the income tax expense is as follows.
Year ended October 31
2023
2022
Current taxes
774
933
Deferred taxes
(231)
31
543
964
(1)
During the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and
2020 average taxable income above $1 billion, as well as an $8 million tax recovery related to the 1.5% increase in the statutory tax rate, which includes the impact related to
current and deferred taxes for fiscal 2022.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
87
The temporary differences and tax loss carryforwards resulting in deferred tax assets and liabilities are as follows.
As at October 31
Year ended October 31
Year ended October 31
Consolidated
Balance Sheet
Consolidated Statement
of Income
Consolidated Statement
of Comprehensive Income
2023
2022
2023
2022
2023
2022
Deferred tax assets
Allowances for credit losses
314
235
79
10
−
−
Deferred charges
362
317
45
(37)
−
−
Defined benefit liability – Other post-employment
benefit plans
36
38
2
(1)
(4)
(8)
Investments in associates
−
23
(23)
(34)
−
−
Leases liabilities
108
118
(10)
(14)
−
−
Deferred revenue
91
62
29
11
−
−
Tax loss carryforwards
50
35
15
2
−
−
Other items
(1)
31
32
(1)
1
−
−
992
860
136
(62)
(4)
(8)
Deferred tax liabilities
Premises and equipment and intangible assets
(225)
(312)
87
(13)
−
−
Defined benefit asset – Pension plans
(89)
(127)
(3)
(2)
41
53
Investments in associates
(12)
(2)
(2)
(2)
(8)
−
Other items
(60)
(44)
11
(31)
(27)
32
(386)
(485)
93
(48)
6
85
Net deferred tax assets (liabilities)
606
375
229
(110)
2
77
(1)
As at October 31, 2023, the Consolidated Balance Sheet included a negligible amount of deferred tax asset related to share issuance costs ($2 million as at October 31, 2022)
reported in
Retained earnings
Net deferred tax assets are included in
Other assets
Other liabilities
.
As at October 31
2023
2022
Deferred tax assets
634
389
Deferred tax liabilities
(28)
(14)
606
375
According to forecasts, which are based on information available as at October 31, 2023, the Bank believes that the results of future operations will
likely generate sufficient taxable income to utilize all the deferred tax assets before they expire.
As at October 31, 2023, the total amount of temporary differences, unused tax loss carryforwards, and unused tax credits for which no deferred tax
asset has been recognized was $536 million ($561 million as at October 31, 2022).
As at October 31, 2023, the total amount of temporary differences related to investments in subsidiaries, associates, and joint ventures for which no
deferred tax liability has been recognized was $5,762 million ($5,636 million as at October 31, 2022).
Note 24
– Income Taxes (cont.)
The following table provides a reconciliation of the Bank’s income tax rate.
Year ended October 31
2023
2022
$
%
$
%
Income before income taxes
3,972
100.0
4,277
100.0
Income taxes at Canadian statutory income tax rate
1,112
28.0
1,133
26.5
Reduction in income tax rate due to
Tax-exempt income from securities
(310)
(7.8)
(191)
(4.5)
Non-taxable portion of capital gains
(1)
−
(1)
−
Impact of enacted tax measures
(1)
24
0.6
Tax rates of subsidiaries, foreign entities and associates
(178)
(4.5)
(71)
(1.7)
Other items
(10)
(0.3)
24
0.6
(475)
(12.0)
(239)
(5.6)
Income taxes reported in the Consolidated Statement of Income and
effective income tax rate
637
16.0
894
20.9
(1)
During the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and
2020 average taxable income above $1 billion, as well as an $8 million tax recovery related to the 1.5% increase in the statutory tax rate, which includes the impact related to
current and deferred taxes for fiscal 2022.
Notice of Assessment
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
88
In March 2023, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $90 million
(including estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2018 taxation year.
In prior fiscal years, the Bank had been reassessed for additional income tax and interest of approximately $875 million (including provincial tax and
interest) in respect of certain Canadian dividends received by the Bank during the 2012-2017 taxation years.
In the reassessments, the CRA alleges that the dividends were received as part of a “dividend rental arrangement”.
In October 2023, the Bank filed a notice of appeal with the Tax Court of Canada, and the matter is now in litigation. The CRA may issue reassessments
to the Bank for taxation years subsequent to 2018 in regard to certain activities similar to those that were the subject of the above-mentioned
reassessments. The Bank remains confident that its tax position was appropriate and intends to vigorously defend its position. As a result, no amount
has been recognized in the consolidated financial statements as at October 31, 2023.
Canadian Government’s 2022 Tax Measures
On November 4, 2022, the Government of Canada introduced Bill C-32 –
An Act to implement certain provisions of the fall economic statement tabled
in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022
certain entities of banking and life insurer groups, as presented in its April 7, 2022 budget. These tax measures include the Canada Recovery Dividend
(CRD), which is a one-time, 15% tax on the fiscal 2021 and 2020 average taxable income above $1 billion, as well as a 1.5% increase in the statutory tax
rate. On December 15, 2022, Bill C-32 received royal assent. Given that these tax measures were in effect at the financial reporting date, a $32 million
tax expense for the CRD and an $8 million tax recovery for the tax rate increase, including the impact related to current and deferred taxes for fiscal
2022, were recognized in the consolidated financial statements for the year ended October 31, 2023.
Proposed Legislation
On November 28, 2023, the Government of Canada released draft legislation entitled
measures applicable to the Bank. The measures include the denial of the deduction in respect of dividends received after 2023 on shares that are
mark-to-market property for tax purposes (except for dividends received on “taxable preferred shares” as defined in the Income Tax Act), as well as
the application of a 2% tax on the net value of equity repurchases occurring as of January 1, 2024.
In its March 28, 2023 budget, the Government of Canada also proposed to implement the Pillar 2 rules (global minimum tax) published by the
Organisation for Economic Co-operation and Development (OECD) for fiscal years beginning as of December 31, 2023. To date, the Pillar 2 rules have
not yet been included in a bill in Canada. During fiscal 2023, the Pillar 2 rules were included in a bill in certain jurisdictions where the Bank operates.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
89
Note 25 – Earnings Per Share
Diluted earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common
shares outstanding after taking into account the dilution effect of stock options using the treasury stock method and any gain (loss) on the redemption
of preferred shares.
Year ended October 31
2023
2022
Basic earnings per share
Net income attributable to the Bank’s shareholders and holders of other equity instruments
3,337
3,384
Dividends on preferred shares and distributions on other equity instruments
141
107
Net income attributable to common shareholders
3,196
3,277
Weighted average basic number of common shares outstanding
(thousands)
337,660
337,099
Basic earnings per share
(dollars)
9.47
9.72
Diluted earnings per share
Net income attributable to common shareholders
3,196
3,277
Weighted average basic number of common shares outstanding
(thousands)
337,660
337,099
Adjustment to average number of common shares
(thousands)
Stock options
(1)
3,108
3,738
Weighted average diluted number of common shares outstanding
(thousands)
340,768
340,837
Diluted earnings per share
(dollars)
9.38
9.61
(1)
For the year ended October 31, 2023, given that the exercise price of the options was lower than the average price of the Bank’s common shares, no options were excluded from
the diluted earnings per share calculation. For the year ended October 31, 2022, the calculation of diluted earnings per share excluded an average number of 1,575,093 options
outstanding with a weighted average exercise price of $96.35, given that the exercise price of these options was greater than the average price of the Bank’s common shares.
Note 26 – Guarantees, Commitments and Contingent Liabilities
Guarantees
The maximum potential amount of future payments represents the maximum risk of loss if there were a total default by the guaranteed parties,
without consideration of recoveries under recourse provisions or insurance policies or from collateral held or pledged. The maximum potential
amount of future payments under significant guarantees issued by the Bank is presented in the following table.
As at October 31
2023
2022
Letters of guarantee
(1)
8,339
6,618
Backstop liquidity, credit enhancement facilities and other
(1)
10,101
8,707
Securities lending
147
180
(1)
For additional information on allowances for credit losses related to off-balance-sheet commitments, see Note 7 to these consolidated financial statements.
Letters of Guarantee
In the normal course of business, the Bank issues letters of guarantee. These letters of guarantee represent irrevocable commitments that the Bank
will make payments in the event that a client cannot meet its obligations to third parties. The Bank’s policy for requiring collateral security with
respect to letters of guarantee is similar to that for loans. Generally, the term of these letters of guarantee is less than two years.
Backstop Liquidity and Credit Enhancement Facilities
Facilities to Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing asset-backed
commercial paper. The Bank provides backstop liquidity facilities to these multi-seller conduits. As at October 31, 2023, the notional amount of the
global-style backstop liquidity facilities totalled $4.6 billion ($3.2 billion as at October 31, 2022), representing the total amount of commercial paper
outstanding.
These backstop liquidity facilities can be drawn if the conduits are unable to access the commercial paper market, even if there is no general market
disruption. These facilities have terms of less than one year and can be periodically renewed. The terms and conditions of these backstop liquidity
facilities do not require the Bank to advance money to the conduits if the conduits are insolvent or involved in bankruptcy proceedings or to fund non-
performing assets beyond the amount of the available credit enhancements. The backstop liquidity facilities provided by the Bank have not been drawn
to date.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
90
Note 26 – Guarantees, Commitments and Contingent Liabilities (cont.)
The Bank also provides credit enhancement facilities to these multi-seller conduits. These facilities have terms of less than one year and are
automatically renewable unless the Bank sends a non-renewal notice. As at October 31, 2023 and 2022, the committed notional value for these
facilities was $30 million. To date, the credit enhancement facilities provided by the Bank have not been drawn.
The maximum risk of loss for the Bank cannot exceed the total amount of commercial paper outstanding, i.e., $4.6 billion as at October 31, 2023
($3.2 billion as at October 31, 2022). As at October 31, 2023, the Bank held $67 million ($35 million as at October 31, 2022) of this commercial paper and,
consequently, the maximum potential amount of future payments, taking into account the credit enhancement facilities, was $4.5 billion ($3.2 billion as
at October 31, 2022).
CDCC Overnight Liquidity Facility
Canadian Derivatives Clearing Corporation (CDCC) acts as a central clearing counterparty for multiple financial instrument transactions in Canada.
Certain fixed-income clearing members of CDCC have provided an equally shared committed and uncommitted global overnight liquidity facility for the
purpose of supporting CDCC in its clearing activities of securities purchased under reverse repurchase agreements or sold under repurchase
agreements. The objective of this facility is to maintain sufficient liquidity in the event of a clearing member’s default. As a fixed-income clearing
member providing support to CDCC, the Bank provided a liquidity facility. As at October 31, 2023, the notional amount of the overnight uncommitted
liquidity facility amounted to $5.6 billion ($5.6 billion as at October 31, 2022). As at October 31, 2023 and 2022, no amount had been drawn.
Securities Lending
Under securities lending agreements that the Bank has entered into with certain clients who have entrusted it with the safekeeping of their securities,
the Bank lends the securities to third parties and indemnifies its clients in the event of loss. To protect itself against any contingent loss, the Bank
obtains, as security from the borrower, a cash amount or extremely liquid marketable securities with a fair value greater than that of the securities
loaned. No amount has been recognized on the Consolidated Balance Sheet with respect to potential indemnities resulting from securities lending
agreements.
Other Indemnification Agreements
In the normal course of business, including securitization transactions and discontinuances of businesses and operations, the Bank enters into
numerous contractual agreements under which it undertakes to compensate the counterparty for costs incurred as a result of litigation, changes in
laws and regulations (including tax legislation), claims with respect to past performance, incorrect representations or the non-performance of certain
restrictive covenants. The Bank also undertakes to indemnify any person acting as a director or officer or performing a similar function within the
Bank or one of its subsidiaries or another entity, at the request of the Bank, for all expenses incurred by that person in proceedings or investigations
to which he or she is party in that capacity. Moreover, as a member of a securities transfer network and pursuant to the membership agreement and
the regulations governing the operation of the network, the Bank granted collateral in favour of the Bank of Canada to guarantee any obligation of the
Bank towards the Bank of Canada that could result from the Bank’s participation in the securities transfer network. The durations of the
indemnification agreements vary according to circumstance; as at October 31, 2023 and 2022, given the nature of the agreements, the Bank is unable to
make a reasonable estimate of the maximum potential liability it could be required to pay to counterparties. No amount related to these agreements
has been recognized on the Consolidated Balance Sheet.
Commitments
Credit Instruments
In the normal course of business, the Bank enters into various off-balance-sheet commitments. The credit instruments used to meet the financing
needs of its clients represent the maximum amount of additional credit that the Bank could be obligated to extend if the commitments were fully
drawn.
As at October 31
2023
2022
Letters of guarantee
(1)
8,339
6,618
Documentary letters of credit
(2)
157
161
Credit card receivables
(3)
9,802
9,337
Commitments to extend credit
(3)
90,706
82,117
(1)
See the
Letters of Guarantee
(2)
Documentary letters of credit are documents issued by the Bank and used in international trade to enable a third party to present a payment request to the Bank for up to an
amount established under specific terms and conditions; these instruments are collateralized by the delivery of the goods to which they are related.
(3)
Credit card receivables and commitments to extend credit represent unused portions of authorizations to extend credit, under certain conditions, in the form of loans or bankers’
acceptances.
Financial Assets Received as Collateral
As at October 31, 2023, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge was $87.9 billion
($92.3 billion as at October 31, 2022). These financial assets received as collateral consist of securities related to securities financing and derivative
transactions as well as securities purchased under reverse repurchase agreements and securities borrowed.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
91
Other Commitments
The Bank acts as an investor in investment banking activities whereby it enters into agreements to finance external private equity funds and
investments in equity and debt securities at market value at the time the agreements are signed. In connection with these activities, the Bank had
commitments to invest up to $127 million as at October 31, 2023 ($102 million as at October 31, 2022). In addition, through one of its subsidiaries, the
Bank purchases retail loans originated by other financial institutions at market value at the time of purchase. As at October 31, 2023, the Bank had
commitments to purchase loans of a negligible amount ($60 million as at October 31, 2022).
Pledged Assets
In the normal course of business, the Bank pledges securities and other assets as collateral. A breakdown of encumbered assets pledged as
collateral is provided in the following table. These transactions are concluded in accordance with standard terms and conditions.
As at October 31
2023
2022
Assets pledged to
Bank of Canada
300
325
Direct clearing organizations
(1)
3,046
1,634
Assets pledged in relation to
Derivative financial instrument transactions
6,628
5,368
Borrowing, securities lending and securities sold under reverse repurchase agreements
85,673
68,458
Securitization transactions
25,088
26,361
Covered bonds
(2)
12,120
11,590
Other
752
159
Total
133,607
113,895
(1)
Includes assets pledged as collateral for activities in the systemically important payment system (designated as Lynx) as at October 31, 2023 and 2022.
(2)
The Bank has a covered bond program. For additional information, see Notes 13 and 27 to these consolidated financial statements.
Contingent Liabilities
Litigation
In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios,
investment portfolios, and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions, or other
legal remedies of varied natures.
More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting,
inter alia
, certain transaction fees or who
wish to avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal proceeding
involving the Bank are as follows:
Defrance
On January 21, 2019, the Quebec Superior Court authorized a class action against the National Bank and several other Canadian financial institutions.
The originating application was served to the Bank on April 23, 2019. The class action was initiated on behalf of consumers residing in Quebec. The
plaintiffs allege that non-sufficient funds charges, billed by all of the defendants when a payment order is refused due to non-sufficient funds, are
illegal and prohibited by the
Consumer Protection Act
. The plaintiffs are claiming, in the form of damages, the repayment of these charges as well as
punitive damages.
It is impossible to determine the outcome of the claims instituted or which may be instituted against the Bank and its subsidiaries. The Bank estimates,
based on the information at its disposal, that while the amount of contingent liabilities pertaining to these claims, taken individually or in the
aggregate, could have a material impact on the Bank’s consolidated results of operations for a particular period, it would not have a material adverse
impact on the Bank’s consolidated financial position.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
92
Note 27 – Structured Entities
A structured entity is an entity created to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the
dominant factor in deciding who controls the entity, such as when any voting rights relate solely to administrative tasks and the relevant activities are
directed by means of contractual arrangements. Structured entities are assessed for consolidation in accordance with the accounting treatment
described in Note 1 to these consolidated financial statements. The Bank’s maximum exposure to loss resulting from its interests in these structured
entities consists primarily of the investments in these entities, the fair value of derivative financial instrument contracts entered into with them, and
the backstop liquidity and credit enhancement facilities granted to certain structured entities.
In the normal course of business, the Bank may enter into financing transactions with third-party structured entities, including commercial loans,
reverse repurchase agreements, prime brokerage margin lending, and similar collateralized lending transactions. While such transactions expose the
Bank to the counterparty credit risk of the structured entities, this exposure is mitigated by the collateral related to these transactions. The Bank
typically has neither power nor significant variable returns resulting from financing transactions with structured entities and does not consolidate
such entities. Financing transactions with third-party-sponsored structured entities are included in the Bank's consolidated financial statements and
are not included in the table accompanying this note on the next page.
Non-Consolidated Structured Entities
Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper
backed by the assets acquired. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs, while continuing
to manage the financial assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide
additional credit loss protection. The Bank acts as a financial agent and provides these conduits with administrative and transaction structuring
services as well as backstop liquidity and credit enhancement facilities under the commercial paper program. These facilities are presented and
described in Note 26. The Bank has concluded derivative financial instrument contracts with these conduits, the fair value of which is presented on the
Bank’s Consolidated Balance Sheet. Although the Bank has the ability to direct the relevant activities of these conduits, it cannot use its power to affect
the amount of the returns it obtains, as it acts as an agent. Consequently, the Bank does not control these conduits and does not consolidate them.
Investment Funds
The Bank enters into derivative or other financial instrument contracts with third parties to provide them with the desired exposure to certain
investment funds. The Bank economically hedges the risks related to these derivatives by investing in those investment funds. The Bank can also hold
economic interests in certain investment funds as part of its investing activities. In addition, the Bank is sponsor and investment manager of mutual
funds in which it has insignificant or no interest. The Bank does not control the funds where its holdings are not significant given that, in these
circumstances, the Bank either acts only as an agent or does not have any power over the relevant activities. In both cases, it does not have significant
exposure to the variable returns of the funds. Therefore, the Bank does not consolidate these funds.
Private Investments
The Bank invests in several limited liability partnerships and other incorporated entities. These investment companies in turn invest in operating
companies with a view to reselling these investments at a profit over the medium or long term. The Bank does not intervene in the operations of these
entities; its only role is that of an investor. Consequently, it does not control these companies and does not consolidate them.
Third-Party Structured Entities
The Bank has invested in third-party structured entities, some of which are asset-backed. The underlying assets consist of residential mortgages,
consumer loans, equipment loans, leases, and securities. The Bank does not have the ability to direct the relevant activities of these structured entities
and has no exposure to their variable returns, other than the right to receive interest income and dividend income from its investments. Consequently,
the Bank does not control these structured entities and does not consolidate them.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
93
The following table presents the carrying amounts of the assets and liabilities relating to the Bank’s interests in non-consolidated structured entities,
the Bank’s maximum exposure to loss from these interests, as well as the total assets of these structured entities. The structured entity Canada
Housing Trust is not presented. For additional information, see Note 8 to these consolidated financial statements.
As at October 31, 2023
Multi-seller
conduits
(1)
Investment
funds
(2)
Private
investments
(3)
Third-party
structured
entities
(4)
Assets on the Consolidated Balance Sheet
Securities at fair value through profit or loss
67
1,042
92
−
Securities at amortized cost
−
−
−
3,106
Derivative financial instruments
−
−
−
341
67
1,042
92
3,447
As at October 31, 2022
35
335
77
5,201
Liabilities on the Consolidated Balance Sheet
Derivative financial instruments
(82)
−
−
(90)
(82)
−
−
(90)
As at October 31, 2022
(71)
−
−
(91)
Maximum exposure to loss
Securities
67
1,042
92
3,447
Liquidity, credit enhancement facilities and commitments
4,549
−
−
469
4,616
1,042
92
3,916
As at October 31, 2022
3,190
335
77
5,669
Total assets of the structured entities
4,587
2,583
651
11,390
As at October 31, 2022
3,183
1,772
535
11,197
(1)
The main underlying assets, located in Canada, are residential mortgages, automobile loans, automobile inventory financings, and other receivables. As at October 31, 2023, the
notional committed amount of the global-style liquidity facilities totalled $4.6 billion ($3.2 billion as at October 31, 2022), representing the total amount of commercial paper
outstanding. The Bank also provides series-wide credit enhancement facilities for a notional committed amount of $30 million ($30 million as at October 31, 2022). The maximum
exposure to loss cannot exceed the amount of commercial paper outstanding. As at October 31, 2023, the Bank held $67 million in commercial paper ($35 million as at October 31,
2022) and, consequently, the maximum potential amount of future payments as at October 31, 2023 was limited to $4.5 billion ($3.2 billion as at October 31, 2022), which represents
the undrawn liquidity and credit enhancement facilities.
(2)
The underlying assets are various financial instruments and are presented on a net asset basis. Certain investment funds are in a trading portfolio.
(3)
The underlying assets are private investments. The amount of total assets of the structured entities corresponds to the amount for the most recent available period.
(4)
The underlying assets are residential mortgages, consumer loans, equipment loans, leases, and securities.
Consolidated Structured Entities
Securitization Entity for the Bank’s Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II (CCCT II) to continue its credit card securitization program on a revolving basis and to use
the entity for capital management and funding purposes.
The Bank provides first-loss protection against the losses, since it retains the excess spread from the portfolio of sold receivables. The excess spread
represents the residual net interest income after all the expenses related to this structure have been paid. The Bank also provides second-loss
protection as it holds subordinated notes issued by CCCT II. In addition, the Bank acts as an administrative agent and servicer and as such is
responsible for the daily administration and management of CCCT II’s credit card receivables. The Bank therefore has the ability to direct the relevant
activities of CCCT II and can exercise its power to affect the amount of returns it obtains. Consequently, the Bank controls CCCT II and consolidates it.
Multi-Seller Conduit
The Bank administers a multi-seller conduit that purchases various financial assets from clients and finances those purchases by issuing debt
securities (including commercial paper) backed by the assets acquired. The clients use this multi-seller conduit to diversify their funding sources and
reduce borrowing costs, while continuing to manage the financial assets and providing some amount of first-loss protection. The Bank holds the sole
note issued by the conduit and has concluded a derivative financial instrument contract with the conduit. The Bank controls the relevant activities of
this conduit through its involvement as a financial agent, agent for administrative and transaction structuring services as well as investor in the
conduit’s sole note. The Bank’s functions and investment in the conduit confer to it decision-making power over the composition of assets acquired by
the conduit and the selection of the seller as well as some exposure to the conduit’s variable returns. Therefore, the Bank consolidates this conduit.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
94
Note 27 – Structured Entities (cont.)
Investment Funds
The Bank enters into derivative or other financial instrument contracts with third parties to provide them with the desired exposure to certain
investment funds. The Bank economically hedges the risks related to these derivatives by investing in those investment funds. The Bank can also hold
economic interests in certain investment funds as part of its investing activities. The Bank controls the relevant activities of certain funds through its
involvement as an investor and its significant exposure to their variable returns. Therefore, the Bank consolidates these funds.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC
Covered Bond Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the
bondholders. The Bank sold uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. The
Bank acts as manager of the partnership and has decision-making authority over its relevant activities in accordance with the contractual terms
governing the covered bond legislative program. In addition, the Bank is able, in accordance with the contractual terms governing the covered bond
legislative program, to affect the variable returns of the partnership, which are directly related to the return on the mortgage loan portfolio and the
interest on the loans from the Bank. Consequently, the Bank controls the partnership and consolidates it.
Third-Party Structured Entities
In 2018, the Bank, through one of its subsidiaries, provided financing to a third-party structured entity in exchange for a 100% interest in a loan
portfolio, the sole asset held by that entity. The Bank controls and therefore consolidates the structured entity, as it has the ability to direct the entity’s
relevant activities through its involvement in the decision-making process. The Bank is also exposed to the entity’s variable returns.
The following table presents the Bank’s investments and other assets in the consolidated structured entities as well as the total assets of these
entities.
As at October 31
2023
2022
Investments
and other assets
Total
assets
(1)
Investments
and other assets
Total
assets
(1)
Consolidated structured entities
Securitization entity for the Bank
’
s credit card receivables
(2)(3)
2,176
2,272
1,916
2,073
Multiseller conduit
(4)
1,655
1,655
802
802
Investment funds
(5)
26
26
56
56
Covered bonds
(6)
20,458
20,869
17,900
18,237
Third-party structured entities
(7)
147
147
166
166
24,462
24,969
20,840
21,334
(1)
There are restrictions, arising essentially from regulatory requirements, corporate or securities laws, and contractual arrangements, that limit the ability of some of the Bank’s
consolidated structured entities to transfer funds to the Bank.
(2)
The underlying assets are credit card receivables.
(3)
The Bank’s investment is presented net of third-party holdings.
(4)
The underlying assets, located in Canada, are mainly residential mortgages.
(5)
The underlying assets are various financial instruments and are presented on a net asset basis. Certain investment funds are in a trading portfolio.
(6)
The underlying assets are uninsured residential mortgage loans of the Bank. The average maturity of these underlying assets is two years. As at October 31, 2023, the total amount
of transferred mortgage loans was $20.6 billion ($17.9 billion as at October 31, 2022), and the total amount of covered bonds of $10.9 billion was recognized in
Deposits
on the
Consolidated Balance Sheet ($10.4 billion as at October 31, 2022). For additional information, see Note 13 to these consolidated financial statements.
(7)
The underlying assets consist of a loan portfolio.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
95
Note 28 – Related Party Disclosures
In the normal course of business, the Bank provides various banking services to related parties and enters into contractual agreements and other
operations with related parties. The Bank considers the following to be related parties:
●
its key officers and directors and members of their immediate family, i.e., spouses and children under 18 living in the same household;
●
entities over which its key officers and directors and their immediate family have control or significant influence through their significant voting
power;
●
the Bank’s associates and joint ventures;
●
the Bank’s pension plans (for additional information, see Note 23 to these consolidated financial statements).
According to the established definition, the Bank’s key officers are those persons having authority and responsibility for planning, directing, and
controlling the Bank’s activities, directly or indirectly.
Related Party Transactions
As at October 31
Key officers
and directors
(1)
Related entities
2023
2022
2023
2022
Assets
Mortgage loans and other loans
24
22
223
(2)
449
(2)
Liabilities
Deposits
45
58
230
(3)
80
(3)
Other
−
−
3
6
(1)
As at October 31, 2023, key officers and directors and their immediate family members were holding $28 million of the Bank’s common and preferred shares ($68 million as at
October 31, 2022).
(2)
As at October 31, 2023, mortgage loans and other loans consisted of: (i) $7 million in loans to the Bank’s associates ($1 million as at October 31, 2022) and (ii) $216 million in loans to
entities over which the Bank’s key officers or directors or their immediate family members exercise control or significant influence through significant voting power ($448 million
as at October 31, 2022).
(3)
As at October 31, 2023, deposits consisted of: (i) $1 million in deposits to the Bank’s associates (nil as at October 31, 2022) and (ii) $229 million in deposits from entities over which
the Bank’s key officers or directors and their immediate family members exercise control or significant influence through significant voting power ($80 million as at
October 31, 2022).
The contractual agreements and other transactions with related entities as well as with directors and key officers are entered into under conditions
similar to those offered to non-related third parties. These agreements did not have a significant impact on the Bank’s results. The Bank also offers a
deferred stock unit plan to directors who are not Bank employees. For additional information, see Notes 9, 22 and 27 to these consolidated financial
statements.
Compensation of Key Officers and Directors
Year ended October 31
2023
2022
Compensation and other short-term and long-term benefits
24
24
Share-based payments
26
21
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
96
Note 28 – Related Party Disclosures (cont.)
Principal Subsidiaries of the Bank
(1)
As at October 31, 2023
Name
Business activity
Principal office address
Voting
shares
(2)
Investment
at cost
Canada and United States
National Bank Acquisition Holding Inc.
Holding company
Montreal, Canada
100%
1,785
National Bank Financial Inc.
Investment dealer
Montreal, Canada
100%
NBF International Holdings Inc.
Holding company
Montreal, Canada
100%
National Bank of Canada Financial Group Inc.
Holding company
New York, NY, United States
100%
Credigy Ltd.
Holding company
Atlanta, GA, United States
100%
National Bank of Canada Financial Inc.
Investment dealer
New York, NY, United States
100%
National Bank Investments Inc.
Mutual funds dealer
Montreal, Canada
100%
441
National Bank Life Insurance Company
Insurance
Montreal, Canada
100%
Natcan Trust Company
Trustee
Montreal, Canada
100%
238
National Bank Trust Inc.
Trustee
Montreal, Canada
100%
195
National Bank Realty Inc.
Real estate
Montreal, Canada
100%
80
NatBC Holding Corporation
Holding company
Hollywood, FL, United States
100%
44
Natbank, National Association
Commercial bank
Hollywood, FL, United States
100%
Flinks Technology Inc.
Information technology
Montreal, Canada
86%
144
Other countries
Natcan Global Holdings Ltd.
Holding company
Sliema, Malta
100%
22
NBC Global Finance Limited
Investment services
Dublin, Ireland
100%
NBC Financial Markets Asia Limited
Investment dealer
Hong Kong, China
100%
5
Advanced Bank of Asia Limited
Commercial bank
Phnom Penh, Cambodia
100%
941
ATA IT Ltd.
Information technology
Bangkok, Thailand
100%
3
(1)
Excludes consolidated structured entities. For additional information, see Note 27 to these consolidated financial statements.
(2)
The Bank’s percentage of voting rights in these subsidiaries.
Note 29 – Management of the Risks Associated With Financial Instruments
The Bank is exposed to credit risk, market risk, and liquidity and funding risk. The Bank’s objectives, policies, and procedures for managing risk and
the risk measurement methods are presented in the Risk Management section of the MD&A for the year ended October 31, 2023. Text in grey shading
and tables identified with an asterisk (*) in the Risk Management section of the MD&A for the year ended October 31, 2023 are integral parts of these
consolidated financial statements.
Residual Contractual Maturities of Balance Sheet Items and Off-Balance-Sheet Commitments
The following tables present balance sheet items and off-balance-sheet commitments by residual contractual maturity as at October 31, 2023 and
2022. The information gathered from this maturity analysis is a component of liquidity and funding management. However, this maturity profile does
not represent how the Bank manages its interest rate risk nor its liquidity risk and funding needs. The Bank considers factors other than contractual
maturity when assessing liquid assets or determining expected future cash flows.
In the normal course of business, the Bank enters into various off-balance-sheet commitments. The credit instruments used to meet the funding
needs of its clients represent the maximum amount of additional credit that the Bank could be obligated to extend if the commitments were fully
drawn.
The Bank also has future minimum commitments under leases for premises as well as under other contracts, mainly commitments to purchase loans
and contracts for outsourced information technology services. Most of the lease commitments are related to operating leases.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
97
As at October 31, 2023
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
Assets
Cash and deposits
with financial institutions
25,374
448
354
50
216
−
−
−
8,792
35,234
Securities
At fair value through
profit or loss
694
258
1,663
1,758
2,260
3,667
10,823
12,813
66,058
99,994
At fair value through
other comprehensive income
3
30
154
224
426
538
4,548
2,660
659
9,242
At amortized cost
4
158
508
338
1,399
4,110
4,713
1,352
−
12,582
701
446
2,325
2,320
4,085
8,315
20,084
16,825
66,717
121,818
Securities purchased under
reverse repurchase
agreements and
securities borrowed
2,275
1,641
716
72
416
693
−
−
5,447
11,260
Loans
(1)
Residential mortgage
1,409
1,250
1,990
3,126
2,990
15,339
51,112
9,089
542
86,847
Personal
613
637
1,060
1,271
1,396
6,258
15,656
5,713
13,754
46,358
Credit card
2,603
2,603
Business and government
21,406
4,262
4,007
3,204
2,783
6,695
11,322
5,414
25,099
84,192
Customers’ liability under
acceptances
6,191
373
50
13
−
−
−
−
−
6,627
Allowances for credit losses
(1,184)
(1,184)
29,619
6,522
7,107
7,614
7,169
28,292
78,090
20,216
40,814
225,443
Other
Derivative financial instruments
2,040
1,982
1,367
1,197
611
1,696
2,399
6,224
−
17,516
Investments in associates and
joint ventures
49
49
Premises and equipment
1,592
1,592
Goodwill
1,521
1,521
Intangible assets
1,256
1,256
Other assets
(1)
2,639
746
166
1,206
546
597
249
659
1,081
7,889
4,679
2,728
1,533
2,403
1,157
2,293
2,648
6,883
5,499
29,823
62,648
11,785
12,035
12,459
13,043
39,593
100,822
43,924
127,269
423,578
(1)
Amounts collectible on demand are considered to have no specified maturity.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
98
Note 29 – Management of the Risks Associated With Financial Instruments (cont.)
As at October 31, 2023
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
Liabilities and equity
Deposits
(1)(2)
Personal
4,648
3,722
4,491
6,056
5,145
8,398
11,635
4,164
39,624
87,883
Business and government
32,642
10,044
17,495
4,271
3,498
9,127
15,768
5,058
99,425
197,328
Deposit-taking institutions
646
408
32
109
18
8
15
33
1,693
2,962
37,936
14,174
22,018
10,436
8,661
17,533
27,418
9,255
140,742
288,173
Other
Acceptances
6,191
373
50
13
−
−
−
−
−
6,627
Obligations related
to securities sold short
(3)
35
155
129
73
76
347
2,332
4,123
6,390
13,660
Obligations related to
securities sold under
repurchase agreements and
securities loaned
23,041
2,719
1,040
3,467
−
274
−
−
7,806
38,347
Derivative financial instruments
1,912
2,697
1,186
1,086
467
2,415
3,068
7,057
−
19,888
Liabilities related to transferred
receivables
(4)
−
1,760
829
2,142
618
3,915
8,678
7,092
−
25,034
Securitization – Credit card
(5)
−
−
−
−
−
48
−
−
−
48
Lease liabilities
(5)
9
28
25
24
23
83
197
128
−
517
Other liabilities – Other items
(1)(5)
1,417
309
174
7
27
37
58
105
4,724
6,858
32,605
8,041
3,433
6,812
1,211
7,119
14,333
18,505
18,920
110,979
Subordinated debt
−
−
−
−
−
−
−
748
−
748
Equity
23,678
23,678
70,541
22,215
25,451
17,248
9,872
24,652
41,751
28,508
183,340
423,578
Off-balance-sheet commitments
Letters of guarantee and
documentary letters of credit
89
1,287
1,975
2,185
1,490
1,165
255
50
−
8,496
Credit card receivables
(6)
9,802
9,802
Backstop liquidity and credit
enhancement facilities
(7)
−
15
5,552
15
−
−
−
−
4,519
10,101
Commitments to extend credit
(8)
3,186
10,675
8,445
7,562
4,316
4,579
3,312
39
48,592
90,706
Obligations related to:
Lease commitments
(9)
1
1
1
2
2
6
7
1
−
21
Other contracts
(10)
11
22
34
33
36
46
138
13
127
460
(1)
Amounts payable upon demand or notice are considered to have no specified maturity.
(2)
The
Deposits
(3)
Amounts are disclosed according to the residual contractual maturity of the underlying security.
(4)
These amounts mainly include liabilities related to the securitization of mortgage loans.
(5)
The
Other
liabilities
(6)
These amounts are unconditionally revocable at the Bank’s discretion at any time.
(7)
In the event of payment on one of the backstop liquidity facilities, the Bank will receive as collateral government bonds in an amount up to $5.6 billion.
(8)
These amounts include $46.7 billion that is unconditionally revocable at the Bank’s discretion at any time.
(9)
These amounts include leases for which the underlying asset is of low value and leases other than for real estate of less than one year.
(10)
These amounts include $0.1 billion in contractual commitments related to the portion of the head office building under construction.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
99
As at October 31, 2022
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
Assets
Cash and deposits
with financial institutions
23,141
142
311
18
685
−
−
−
7,573
31,870
Securities
At fair value through
profit or loss
1,527
6,450
5,405
2,267
2,337
3,369
8,634
10,661
46,725
87,375
At fair value through
other comprehensive income
5
30
13
20
46
952
4,910
2,296
556
8,828
At amortized cost
602
196
1,876
1,032
95
2,840
5,802
1,073
−
13,516
2,134
6,676
7,294
3,319
2,478
7,161
19,346
14,030
47,281
109,719
Securities purchased under
reverse repurchase
agreements and
securities borrowed
12,489
1,231
890
−
409
1,044
−
−
10,423
26,486
Loans
(1)
Residential mortgage
1,155
1,124
1,899
2,716
2,364
8,910
53,335
8,059
567
80,129
Personal
423
449
878
1,208
1,036
3,701
17,792
5,085
14,751
45,323
Credit card
2,389
2,389
Business and government
19,980
3,491
3,971
3,586
2,604
6,167
11,452
2,985
19,081
73,317
Customers
’
acceptances
5,967
554
20
−
−
−
−
−
−
6,541
Allowances for credit losses
(955)
(955)
27,525
5,618
6,768
7,510
6,004
18,778
82,579
16,129
35,833
206,744
Other
Derivative financial instruments
2,046
2,804
1,853
1,190
698
1,742
5,182
3,032
−
18,547
Investments in associates and
joint ventures
140
140
Premises and equipment
1,397
1,397
Goodwill
1,519
1,519
Intangible assets
1,360
1,360
Other assets
(1)
2,228
527
472
161
94
502
107
491
1,376
5,958
4,274
3,331
2,325
1,351
792
2,244
5,289
3,523
5,792
28,921
69,563
16,998
17,588
12,198
10,368
29,227
107,214
33,682
106,902
403,740
(1)
Amounts collectible on demand are considered to have no specified maturity.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
100
Note 29
Management of the Risks Associated With Financial Instruments (cont.)
As at October 31, 2022
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
Liabilities and equity
Deposits
(1)(2)
Personal
1,482
1,493
2,955
6,013
6,141
6,418
7,942
4,252
42,115
78,811
Business and government
36,864
11,605
10,644
4,875
3,728
5,988
13,659
4,227
92,640
184,230
Deposit-taking institutions
724
624
54
122
30
−
7
36
1,756
3,353
39,070
13,722
13,653
11,010
9,899
12,406
21,608
8,515
136,511
266,394
Other
Acceptances
5,967
554
20
−
−
−
−
−
−
6,541
Obligations related
to securities sold short
(3)
428
394
634
74
920
1,493
3,948
6,386
7,540
21,817
Obligations related to
securities sold under
repurchase agreements and
securities loaned
16,233
5,445
1,567
3,406
−
22
−
−
6,800
33,473
Derivative financial instruments
2,584
2,302
1,640
1,009
595
2,047
3,570
5,885
−
19,632
Liabilities related to transferred
receivables
(4)
−
2,672
422
1,329
2,288
4,558
9,612
5,396
−
26,277
Securitization – Credit card
(5)
−
−
−
29
−
−
49
−
−
78
Lease liabilities
(5)
8
16
23
23
24
87
219
152
−
552
Other liabilities – Other items
(1)(5)
1,076
46
99
23
39
27
42
92
4,287
5,731
26,296
11,429
4,405
5,893
3,866
8,234
17,440
17,911
18,627
114,101
Subordinated debt
−
−
−
−
−
−
−
1,499
−
1,499
Equity
21,746
21,746
65,366
25,151
18,058
16,903
13,765
20,640
39,048
27,925
176,884
403,740
Off-balance-sheet commitments
Letters of guarantee and
documentary letters of credit
180
1,451
1,338
982
1,398
1,292
138
−
−
6,779
Credit card receivables
(6)
9,337
9,337
Backstop liquidity and credit
enhancement facilities
(7)
−
15
5,552
15
−
−
−
−
3,125
8,707
Commitments to extend credit
(8)
3,126
9,205
6,179
6,678
3,270
4,066
3,186
39
46,368
82,117
Obligations related to:
Lease commitments
(9)
1
1
2
2
2
6
9
8
−
31
Other contracts
(10)
38
42
47
46
47
21
34
−
102
377
(1)
Amounts payable upon demand or notice are considered to have no specified maturity.
(2)
The
Deposits
(3)
Amounts have been disclosed according to the residual contractual maturity of the underlying security.
(4)
These amounts mainly include liabilities related to the securitization of mortgage loans.
(5)
The
Other
liabilities
(6)
These amounts are unconditionally revocable at the Bank’s discretion at any time.
(7)
In the event of payment on one of the backstop liquidity facilities, the Bank will receive as collateral government bonds in an amount up to $5.6 billion.
(8)
These amounts include $44.8 billion that is unconditionally revocable at the Bank’s discretion at any time.
(9)
These amounts include leases for which the underlying asset is of low value and leases other than for real estate of less than one year.
(10)
These amounts include $0.2 billion in contractual commitments related to the head office building under construction.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
101
Note 30 – Segment Disclosures
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the
Other
disclosures is consistent with the presentation adopted by the Bank for the fiscal year beginning November 1, 2022. This presentation reflects a
revision to the method used for the sectoral allocation of technology investment expenses, which are now immediately allocated to the various
business segments, whereas certain expenses, notably costs incurred during the research phase of projects, had previously been recorded in the
Other
arrangements.
Personal and Commercial
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals, advisors and businesses as
well as insurance operations.
Wealth Management
The Wealth Management segment comprises investment solutions, trust services, banking services, lending services and other wealth management
solutions offered through internal and third-party distribution networks.
Financial Markets
The Financial Markets segment encompasses corporate banking and investment banking and financial solutions for large and mid-size corporations,
public sector organizations, and institutional investors.
U.S. Specialty Finance and International (USSF&I)
The USSF&I segment encompasses the specialty finance expertise provided by the Credigy subsidiary; the activities of the ABA Bank subsidiary, which
offers financial products and services to individuals and businesses in Cambodia; and the activities of targeted investments in certain emerging
markets.
Other
This heading encompasses treasury activities; liquidity management; Bank funding; asset/liability management activities; the activities of the Flinks
subsidiary, a fintech company specialized in financial data aggregation and distribution; certain specified items; and the unallocated portion of
corporate units.
The segment disclosures are prepared in accordance with the accounting policies described in Note 1 to these consolidated financial statements,
except for the net interest income, non-interest income, and income taxes (recovery) of the operating segments, which are presented on a taxable
equivalent basis. Taxable equivalent basis is a calculation method that consists of grossing up certain revenues taxed at lower rates (notably
dividends) by the income tax to a level that would make it comparable to revenues from taxable sources in Canada. An equivalent amount is added to
income taxes (recovery). The effect of these adjustments is reversed under the
Other
operating segment presented in the business segment results. The Bank assesses performance based on the net income attributable to the Bank’s
shareholders and holders of other equity instruments. Intersegment revenues are recognized at the exchange amount.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
102
Note 30 – Segment Disclosures (cont.)
Results
by Business
Segment
Year ended October 31
(1)
Personal and
Commercial
Wealth
Management
Financial
Markets
USSF&I
Other
Total
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
Net interest income
(2)
3,321
2,865
778
594
(1,054)
1,258
1,132
1,090
(591)
(536)
3,586
5,271
Non-interest income
(2)(3)
1,195
1,169
1,743
1,781
3,710
1,210
77
20
(141)
201
6,584
4,381
Total revenues
4,516
4,034
2,521
2,375
2,656
2,468
1,209
1,110
(732)
(335)
10,170
9,652
Non-interest expenses
(4)(5)(6)(7)
2,510
2,241
1,534
1,417
1,161
1,029
402
344
194
199
5,801
5,230
Income before provisions for
credit losses and income
taxes
2,006
1,793
987
958
1,495
1,439
807
766
(926)
(534)
4,369
4,422
Provisions for credit losses
238
97
2
3
39
(23)
113
66
5
2
397
145
Income before income taxes
(recovery)
1,768
1,696
985
955
1,456
1,462
694
700
(931)
(536)
3,972
4,277
Income taxes (recovery)
(2)(8)
486
449
271
254
401
388
146
143
(667)
(340)
637
894
Net income
1,282
1,247
714
701
1,055
1,074
548
557
(264)
(196)
3,335
3,383
Non-controlling interests
−
−
−
−
−
−
−
−
(2)
(1)
(2)
(1)
Net income attributable to the
Bank’s shareholders and
holders of other equity
instruments
1,282
1,247
714
701
1,055
1,074
548
557
(262)
(195)
3,337
3,384
Average assets
(9)
148,511
140,300
8,560
8,440
180,837
154,349
23,007
18,890
69,731
71,868
430,646
393,847
Total assets
154,728
146,668
8,666
8,486
178,784
157,803
25,308
21,217
56,092
69,566
423,578
403,740
(1)
For the year ended October 31, 2022, certain amounts were reclassified, notably due to a revised method for the sectoral allocation of technology investment expenses.
(2)
For the year ended October 31, 2023,
Net interest income
Non-interest income
in 2022), and an equivalent amount was recognized in
Income taxes (recovery).
Other
(3)
For the year ended October 31, 2023, the Bank concluded that it had lost significant influence over TMX and therefore ceased using the equity method to account for this investment.
The Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Upon the fair value
measurement, a $91 million gain was recorded in the
Non-interest income
Other
(4)
For the year ended October 31, 2023, the Bank recorded $75 million in intangible asset impairment losses on technology development in the
Non-interest expenses
following segments: Personal and Commercial ($59 million), Wealth Management ($8 million), Financial Markets ($7 million), and in the
Other
recorded $11 million in premises and equipment impairment losses related to right-of-use assets in the
Non-interest expenses
Other
(5)
For the year ended October 31, 2023, the Bank recorded $35 million in litigation expenses to resolve litigations and other disputes arising from various ongoing or potential claims
against the Bank in the
Non-interest expenses
(6)
For the year ended October 31, 2023, the
Non-interest expenses
Other
Excise Tax Act
, indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized
sales tax (HST).
(7)
For the year ended October 31, 2023, the Bank recorded in the
Non-interest expenses
segment: $9 million) and for (ii) provisions for onerous contracts (Other heading: $6 million).
(8)
For the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million tax recovery related to a 1.5% increase in the statutory tax rate, which includes the impact related to current and
deferred taxes for fiscal 2022. These items are recorded in the
Other
heading. For additional information on these tax measures, see Note 24.
(9)
Represents an average of the daily balances for the period, which is also the basis on which sectoral assets are reported in the business segments.
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
103
Results by Geographic Segment
Year ended October 31
Canada
United States
Other
Total
2023
2022
2023
2022
2023
2022
2023
2022
Net interest income
1,901
3,758
1,051
773
634
740
3,586
5,271
Non-interest income
(1)
5,812
4,299
98
18
674
64
6,584
4,381
Total revenues
7,713
8,057
1,149
791
1,308
804
10,170
9,652
Non-interest expenses
(2)(3)(4)(5)
5,261
4,760
226
209
314
261
5,801
5,230
Income before provisions for credit losses and income taxes
2,452
3,297
923
582
994
543
4,369
4,422
Provisions for credit losses
284
79
81
35
32
31
397
145
Income before income taxes
2,168
3,218
842
547
962
512
3,972
4,277
Income taxes
(6)
371
723
68
67
198
104
637
894
Net income
1,797
2,495
774
480
764
408
3,335
3,383
Non-controlling interests
(2)
(1)
−
−
−
−
(2)
(1)
Net income attributable to the Bank’s shareholders and
1,799
2,496
774
480
764
408
3,337
3,384
Average assets
(7)
355,337
324,415
29,116
29,988
46,193
39,444
430,646
393,847
Total assets
348,073
336,215
29,968
27,986
45,537
39,539
423,578
403,740
(1)
For the year ended October 31, 2023, the Bank concluded that it had lost significant influence over TMX and therefore ceased using the equity method to account for this investment.
The Bank designated its investment in TMX as a financial asset measured at fair value through other comprehensive income in an amount of $191 million. Following the fair value
measurement, a $91 million gain was recorded in the
Non-interest income item
(2)
For the year ended October 31, 2023, the Bank recorded $75 million in intangible asset impairment losses on technology development, and it recorded $11 million in premises and
equipment impairment losses related to right-of-use assets in the
Non-interest expenses
(3)
For the year ended October 31, 2023, the Bank recorded $35 million in litigation expenses to resolve litigations and other disputes arising from various ongoing or potential claims
against the Bank in the
Non-interest expenses
(4)
For the year ended October 31, 2023, the
Non-interest expenses
Excise
Tax Act
, indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax
(HST).
(5)
For the year ended October 31, 2023, the Bank recorded, in the
Non-interest expenses
(ii) provisions for onerous contracts.
(6)
For the year ended October 31, 2023, the Bank recorded a $32 million tax expense with respect to the Canada Recovery Dividend, i.e., a one-time, 15% tax on the fiscal 2021 and 2020
average taxable income above $1 billion, as well as an $8 million tax recovery related to a 1.5% increase in the statutory tax rate, which includes the impact related to current and
deferred taxes for fiscal 2022. These items are recorded in Canada. For additional information on these tax measures, see Note 24.
(7)
Represents an average of the daily balances for the period.
Note 31 – Event After the Consolidated Balance Sheet Date
Repurchase of Common Shares
On November 30, 2023, the Bank’s Board of Directors approved a normal course issuer bid, beginning December 12, 2023, to repurchase for
cancellation up to 7,000,000 common shares (representing approximately 2.07% of its then outstanding common shares) over the 12-month period
ending December 11, 2024. Any repurchase through the Toronto Stock Exchange will be done at market prices. The common shares may also be
repurchased through other means authorized by the Toronto Stock Exchange and applicable regulations, including private agreements or share
repurchase programs under issuer bid exemption orders issued by the securities regulators. A private purchase made under an exemption order
issued by a securities regulator will be done at a discount to the prevailing market price. The amounts that are paid above the average book value of
the common shares are charged to
Retained earnings
. This normal course issuer bid is subject to the approval of OSFI and the Toronto Stock
Exchange (TSX).
Supplementary
Information
Statistical Review
234
Information for Shareholders
236
Supplementary Information
106
Statistical Review
As at October 31 or
(1)
(millions of Canadian dollars)
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
Consolidated Balance Sheet data
Cash and deposits with financial institutions
35,234
31,870
33,879
29,142
13,698
12,756
8,802
8,183
7,567
8,086
Securities
121,818
109,719
106,304
102,131
82,226
69,783
65,343
64,541
56,040
52,953
Securities purchased under reverse
repurchase agreements and
securities borrowed
11,260
26,486
7,516
14,512
17,723
18,159
20,789
13,948
17,702
24,525
Loans and acceptances, net of allowances
225,443
206,744
182,689
164,740
153,251
146,082
136,457
128,036
116,676
106,959
Other assets
29,823
28,921
25,233
20,963
14,475
15,661
14,433
17,498
18,105
12,906
Total assets
423,578
403,740
355,621
331,488
281,373
262,441
245,824
232,206
216,090
205,429
Deposits
288,173
266,394
240,938
215,878
189,566
170,830
156,671
142,066
130,458
119,883
Other liabilities
110,979
114,101
95,233
98,589
75,983
76,539
75,589
77,026
72,755
73,163
Subordinated debt
748
1,499
768
775
773
747
9
1,012
1,522
1,881
Share capital and other equity instruments
Preferred shares and other equity
instruments
3,150
3,150
2,650
2,950
2,450
2,450
2,050
1,650
1,023
1,223
Common shares
3,294
3,196
3,160
3,057
2,949
2,822
2,768
2,645
2,614
2,293
Contributed surplus
68
56
47
47
51
57
58
73
67
52
Retained earnings
16,744
15,140
12,854
10,307
9,227
8,442
7,703
6,706
6,705
5,850
Accumulated other comprehensive income
420
202
(32)
(118)
16
175
168
218
145
289
Non-controlling interests
2
2
3
3
358
379
808
810
801
795
Total liabilities and equity
423,578
403,740
355,621
331,488
281,373
262,441
245,824
232,206
216,090
205,429
Average assets
(2)
430,646
393,847
363,506
318,087
286,162
265,940
248,351
235,913
222,929
206,680
Net impaired loans excluding POCI loans
(3)(4)
606
479
283
465
450
404
Net impaired loans excluding POCI loans
(4)
206
281
254
248
Consolidated Statement of Income data
Net interest income
3,586
5,271
4,783
4,255
3,596
3,382
3,436
3,205
2,929
2,761
Non-interest income
6,584
4,381
4,144
3,672
3,836
3,784
3,173
2,635
2,817
2,703
Total revenues
10,170
9,652
8,927
7,927
7,432
7,166
6,609
5,840
5,746
5,464
Non-interest expenses
5,801
5,230
4,903
4,616
4,375
4,100
3,861
3,875
3,665
3,423
Income before provisions for credit losses
4,369
4,422
4,024
3,311
3,057
3,066
2,748
1,965
2,081
2,041
Provisions for credit losses
397
145
2
846
347
327
244
484
228
208
Income taxes
637
894
882
434
443
534
483
225
234
295
Net income
3,335
3,383
3,140
2,031
2,267
2,205
2,021
1,256
1,619
1,538
Non-controlling interests
(2)
(1)
−
42
66
87
84
75
70
69
Net income attributable to the Bank
’
s
shareholders and holders of other equity
instruments
3,337
3,384
3,140
1,989
2,201
2,118
1,937
1,181
1,549
1,469
(1)
Certain amounts from fiscal years 2017 to 2021 were adjusted in 2022 to reflect an accounting policy change applicable to cloud computing arrangements, aside from the average
assets figures for fiscal years 2017 to 2019.
(2)
Represents an average of the daily balances for the period.
(3)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to
different criteria. Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and, in this table, the net impaired loans presented exclude
POCI loans.
(4)
Includes customers’ liability under acceptances.
Supplementary Information
Statistical Review
107
As at October 31
(1)
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
Number of common
shares
(2)
(thousands)
338,285
336,582
337,912
335,998
334,172
335,071
339,592
338,053
337,236
329,297
Basic earnings per share
(2)
$
9.47
$
9.72
$
8.95
$
5.57
$
6.22
$
5.93
$
5.43
$
3.31
$
4.56
$
4.36
Diluted earnings per share
(2)
$
9.38
$
9.61
$
8.85
$
5.54
$
6.17
$
5.86
$
5.37
$
3.29
$
4.51
$
4.32
Dividend per share
(2)
$
3.98
$
3.58
$
2.84
$
2.84
$
2.66
$
2.44
$
2.28
$
2.18
$
2.04
$
1.88
Share price
(2)
High
$
103.58
$
105.44
$
104.32
$
74.79
$
68.02
$
65.63
$
62.74
$
47.88
$
55.06
$
53.88
Low
$
84.97
$
83.12
$
65.54
$
38.73
$
54.97
$
58.69
$
46.83
$
35.83
$
40.75
$
41.60
Close
$
86.22
$
92.76
$
102.46
$
63.94
$
68.02
$
59.76
$
62.61
$
47.88
$
43.31
$
52.68
Book value
(2)(3)
$
60.68
$
55.24
$
47.44
$
39.56
$
36.64
$
34.31
$
31.50
$
28.52
$
28.26
$
25.76
Dividends on preferred
shares
–
–
–
–
–
–
–
–
–
$
1.2125
–
–
–
–
–
–
–
–
$
1.5000
$
1.5000
–
–
–
–
–
–
–
–
–
$
0.4125
–
–
–
–
–
–
–
–
–
$
0.4125
–
–
–
–
–
–
$
0.9500
$
0.9500
$
0.9500
$
0.9500
$
1.0063
$
1.0063
$
1.0063
$
1.0063
$
1.0156
$
1.0250
$
1.0250
$
1.0250
$
1.0250
$
0.7849
$
0.9598
$
0.9598
$
0.9598
$
0.9636
$
0.9750
$
0.9750
$
0.9750
$
0.9750
$
1.0760
–
–
–
$
0.7000
$
1.4000
$
1.4000
$
1.4000
$
1.4000
$
1.1373
–
–
–
–
$
1.0125
$
1.3500
$
1.3500
$
1.3500
$
1.3500
$
0.5733
–
–
$
1.7568
$
1.1125
$
1.1125
$
1.1125
$
1.1125
$
1.1125
$
0.4724
–
–
–
$
1.3023
$
1.1500
$
1.1500
$
1.1500
$
1.1500
$
0.9310
–
–
–
–
$
1.2375
$
1.2375
$
1.2375
$
1.2375
$
1.2375
$
0.5323
–
–
–
–
LRCN interests
Series 1
4.30
%
4.30
%
4.30
%
4.30
%
–
–
–
–
–
–
Series 2
4.05
%
4.05
%
4.05
%
–
–
–
–
–
–
–
Series 3
7.50
%
7.50
%
–
–
–
–
–
–
–
–
Financial ratios
Return on common
shareholders
’
(3)
16.5
%
18.8
%
20.7
%
14.6
%
18.0
%
18.4
%
18.1
%
11.7
%
16.9
%
17.9
%
Return on average assets
(3)
0.77
%
0.86
%
0.86
%
0.64
%
0.81
%
0.84
%
0.81
%
0.53
%
0.73
%
0.74
%
Regulatory ratios under
(4)
Capital ratios
CET1
13.5
%
12.7
%
12.4
%
11.8
%
11.7
%
11.7
%
11.2
%
10.1
%
9.9
%
9.2
%
Tier 1
16.0
%
15.4
%
15.0
%
14.9
%
15.0
%
15.5
%
14.9
%
(5)
13.5
%
12.5
%
(6)
12.3
%
(7)
Total
16.8
%
16.9
%
15.9
%
16.0
%
16.1
%
16.8
%
15.1
%
(5)
15.3
%
14.0
%
(8)
15.1
%
(7)
Leverage ratio
4.4
%
4.5
%
4.4
%
4.4
%
4.0
%
4.0
%
4.0
%
3.7
%
4.0
%
TLAC ratio
(9)
29.2
%
27.7
%
26.3
%
23.7
%
TLAC leverage ratio
(9)
8.0
%
8.1
%
7.8
%
7.0
%
Liquidity coverage ratio
(10)
155
%
140
%
154
%
161
%
146
%
147
%
132
%
134
%
131
%
Net stable funding ratio
(10)
118
%
117
%
117
%
Other information
Number of employees
(11)
28,916
27,103
24,495
25,604
24,557
22,426
20,584
20,600
19,026
18,725
Branches in Canada
368
378
384
403
422
428
429
450
452
452
Banking machines in
Canada
944
939
927
940
939
937
931
938
930
935
(1)
Certain amounts from fiscal years 2017 to 2021 have been adjusted to reflect an accounting policy change in 2022 applicable to cloud computing arrangements, aside from the
return on common shareholders’ equity and return on average assets figures for fiscal years 2017 to 2019.
(2)
The figures for 2014 have been adjusted to reflect the stock dividend paid in 2014.
(3)
See the Glossary section on pages 124 to 127 for details on the composition of these measures.
(4)
Ratios as at October 31, 2022, 2021 and 2020 are calculated in accordance with the Basel III rules, as set out in OSFI’s
Capital Adequacy Requirements
Guideline
and
Leverage
Requirements Guideline,
(5)
Taking into account the redemption of the Series 28 preferred shares on November 15, 2017.
(6)
Taking into account the redemption of the Series 20 preferred shares on November 15, 2015.
(7)
Taking into account the redemption of the Series 16 preferred shares on November 15, 2014.
(8)
Taking into account the redemption of the Series 20 preferred shares on November 15, 2015 and the $500 million redemption of notes on November 2, 2015.
(9)
The TLAC ratio and the TLAC leverage ratio are calculated in accordance with OSFI’s
Total Loss Absorbing Capacity Guideline
.
(10)
The LCR ratio and the NSFR ratio are calculated in accordance with OSFI’s
Liquidity Adequacy Requirements Guideline
.
(11)
Full-time equivalent. The methodology was refined during fiscal 2023 and the fiscal 2022 and 2021 figures have been restated.
Supplementary Information
108
Information for Shareholders
Description of Share Capital
The authorized share capital of the Bank consists of an unlimited number
of common shares, without par value, an unlimited number of first
preferred shares, without par value, issuable for a maximum aggregate
consideration of $5 billion, and 15 million second preferred shares,
without par value, issuable for a maximum aggregate consideration of
$300 million. As at October 31, 2023, the Bank had a total of 338,284,629
common shares and 66,000,000 first preferred shares issued and
outstanding.
Stock Exchange Listings
The Bank’s common shares and Series 30, 32, 38, 40 and 42 First
Preferred Shares are listed on the Toronto Stock Exchange in Canada.
Issue or class
Ticker symbol
Common shares
NA
First Preferred Shares
Series 30
NA.PR.S
Series 32
NA.PR.W
Series 38
NA.PR.C
Series 40
NA.PR.E
Series 42
NA.PR.G
Number of Registered Shareholders
As at October 31, 2023, there were 19,881 common shareholders recorded
in the Bank’s common share register.
Dividends
Dividend Dates in Fiscal 2024
(subject to approval by the Board of Directors of the Bank)
Record date
Payment date
Common shares
December 25, 2023
February 1, 2024
March 25, 2024
May 1, 2024
June 24, 2024
August 1, 2024
September 30, 2024
November 1, 2024
Preferred shares,
Series 30, 32, 38, 40 and 42
January 8, 2024
February 15, 2024
April 5, 2024
May 15, 2024
July 8, 2024
August 15, 2024
October 7, 2024
November 15, 2024
Dividends Declared on Common Shares During Fiscal 2023
Record date
Payment date
Dividend per share ($)
December 26, 2022
February 1, 2023
0.97
March 27, 2023
May 1, 2023
0.97
June 26, 2023
August 1, 2023
1.02
September 25, 2023
November 1, 2023
1.02
Dividends Declared on Preferred Shares During Fiscal 2023
Record
date
Dividend per share ($)
Payment
date
Series
30
Series
32
Series
38
Series
40
Series
42
January 6, 2023
February 15, 2023
0.2516
0.2399
0.4392
0.2875
0.3094
April 5, 2023
May 15, 2023
0.2515
0.2400
0.4392
0.2875
0.3094
July 6, 2023
August 15, 2023
0.2516
0.2399
0.4392
0.3636
0.3093
October 6, 2023
November 15, 2023
0.2516
0.2400
0.4392
0.3637
0.3094
Dividends paid are “eligible dividends” in accordance with the
Income Tax
Act
Dividend Reinvestment and Share Purchase
Plan
National Bank has a Dividend Reinvestment and Share Purchase Plan for
holders of its common and preferred shares under which they can
acquire common shares of the Bank without paying commissions or
administration fees. Participants acquire common shares through the
reinvestment of cash dividends paid on the shares they hold or through
optional cash payments of at least $1 per payment, up to a maximum of
$5,000 per quarter.
For additional information, shareholders may contact National Bank’s
registrar and transfer agent, Computershare Trust Company of Canada,
at 1-888-838-1407. To participate in the plan, National Bank’s beneficial
or non-registered common shareholders must contact their financial
institution or broker.
Direct Deposit
Shareholders may elect to have their dividend payments deposited
directly via electronic funds transfer to their bank account at any
financial institution that is a member of the Canadian Payments
Association. To do so, they must send a written request to the transfer
agent, Computershare Trust Company of Canada.
Head Office
Telephone: 514-394-5000
Website: nbc.ca
Annual Meeting
The Annual Meeting of Holders of Common Shares of the Bank will be
held on April 19, 2024.
Corporate Social Responsibility Statement
The information will be available in March
2024 on the Bank’s website at
nbc.ca.
Communication with Shareholders
For information about stock transfers, address changes, dividends, lost
certificates, tax forms and estate transfers, shareholders of record may
contact the transfer agent at the following address:
Computershare Trust Company of Canada
Share Ownership Management
100 University Avenue, 8
th
Toronto, Ontario M5J 2Y1 Canada
Telephone: 1-888-838-1407
Fax: 1-888-453-0330
E-mail:
service@computershare.com
Website: computershare.com
Shareholders whose shares are held by a market intermediary are asked
to contact the market intermediary concerned.
Other shareholder inquiries can be addressed to:
Investor Relations
National Bank of Canada
600 De La Gauchetière Street West, 7
th
Montreal, Quebec H3B 4L2 Canada
Telephone: 1-866-517-5455
E-mail: investorrelations@nbc.ca
Website: nbc.ca/investorrelations
Caution Regarding Forward-Looking Statements
From time to time, National Bank of Canada makes written and oral
forward-looking statements, including in this Annual Report, in other filings
with Canadian regulators, in reports to shareholders, in press releases
and in other communications. These statements are made pursuant to the
Canadian and American securities legislation.
The Caution Regarding Forward-Looking Statements section can be
found on page
13 of this Annual Report.
Trademarks
The trademarks belonging to
report include National Bank of Canada, National Bank, NBC, NBC
Financial Markets, National Bank Financial, NAventures, National Bank
Financial-Wealth Management, Private Banking 1859, National Bank
Direct Brokerage, National Bank Investments, NBI, National Bank
Independent Network, National Bank Trust, National Bank Life Insurance,
Natcan Trust Company, National Bank Realty, Natbank and their
respective logos. Certain trademarks owned by third parties are also
mentioned in this report.
Pour obtenir une version française du Rapport annuel,
veuillez vous adresser à :
Relations avec les investisseurs
Banque Nationale du Canada
600, rue De La Gauchetière Ouest, 7
e
Montréal (Québec) H3B 4L2
Téléphone : 1 866 517-5455
Adresse électronique
: relationsinvestisseurs@bnc.ca
Legal Deposit
ISBN 978-2-921835-79-4
Legal deposit – Bibliothèque et Archives nationales du Québec, 2023
Legal deposit – Library and Archives Canada, 2023
Printing
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