MD&A 2023 Part 1

National Bank of Canada

01 December 2023

Regulatory Announcement

2023 Management's Discussion and Analysis (Part 1)

National Bank of Canada (the "Bank") announces publication of its 2023 Annual Report, including the Management's Discussion and Analysis thereon (the "2023 MD&A"). The 2023 MD&A has been uploaded to the National Storage Mechanism and will shortly be available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism and is available on the Bank's website as part of the 2023 Annual Report at: https://www.nbc.ca/about-us/investors.html.

To view the full PDF of the 2023 MD&A, the 2023 Annual Report and the 2023 Annual CEO and CFO Certifications please click on the following link:

http://www.rns-pdf.londonstockexchange.com/rns/4436V_1-2023-12-1.pdf
http://www.rns-pdf.londonstockexchange.com/rns/4436V_2-2023-12-1.pdf
http://www.rns-pdf.londonstockexchange.com/rns/4436V_3-2023-12-1.pdf

Management's Discussion

and Analysis

November 30, 2023

The following Management's Discussion and Analysis (MD&A) presents the financial condition and operating results of National Bank of Canada (the Bank). This analysis was prepared in accordance with the requirements set out in National Instrument 51-102 Continuous Disclosure Obligations, released by the Canadian Securities Administrators (CSA). It is based on the audited annual consolidated financial statements for the year ended October 31, 2023 (the consolidated financial statements) and prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise indicated. IFRS represent Canadian generally accepted accounting principles (GAAP). This MD&A should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended October 31, 2023. All amounts are presented in Canadian dollars. Additional information about the Bank, including the Annual Information Form, can be obtained from the Bank's website at nbc.ca and SEDAR+'s website at sedarplus.ca. The information found in the various documents and reports published by the Bank or the information available on the Bank's website and mentioned herein is not and should not be considered incorporated by reference into the 2023 Annual Report, the Management's Discussion and Analysis, or the Consolidated Financial Statements, unless expressly stated otherwise.

Financial Reporting Method	14	Quarterly Financial Information	47
Financial Disclosure	20	Analysis of the Consolidated Balance Sheet	48
Overview	21	Securitization and Off-Balance-Sheet Arrangements	51
Financial Analysis	25	Capital Management	53
Business Segment Analysis	28	Risk Management	62
Personal and Commercial	29	Critical Accounting Policies and Estimates	107
Wealth Management	33	Accounting Policy Changes	113
Financial Markets	36	Future Accounting Policy Changes	113
U.S. Specialty Finance and International (USSF&I)	41	Additional Financial Information	114
Other	46	Glossary	124

Caution Regarding Forward-Looking Statements

Certain statements in this document are forward-looking statements. All such statements are made in accordance with applicable securities legislation in Canada and the United States. The forward-looking statements in this document may include, but are not limited to, statements made in the Message From the President and Chief Executive Officer and other statements about the economy, market changes, the Bank's objectives, outlook, and priorities for fiscal year 2024 and beyond, the strategies or actions that will be taken to achieve them, expectations for the Bank's financial condition, its activities, the regulatory environment in which it operates, its environmental, social, and governance targets and commitments, and certain risks to which the Bank is exposed. These forward-looking statements are typically identified by verbs or words such as "outlook", "believe", "foresee", "forecast", "anticipate", "estimate", "project", "expect", "intend" and "plan", in their future or conditional forms, notably verbs such as "will", "may", "should", "could" or "would" as well as similar terms and expressions.

Such forward-looking statements are made for the purpose of assisting the holders of the Bank's securities in understanding the Bank's financial position and results of operations as at and for the periods ended on the dates presented, as well as the Bank's vision, strategic objectives, and performance targets, and may not be appropriate for other purposes. These forward-looking statements are based on current expectations, estimates, assumptions and intentions and are subject to uncertainty and inherent risks, many of which are beyond the Bank's control. There is a strong possibility that the Bank's express or implied predictions, forecasts, projections, expectations, or conclusions will not prove to be accurate, that its assumptions may not be confirmed and that its vision, strategic objectives, and performance targets will not be achieved. The Bank cautions investors that these forward-looking statements are not guarantees of future performance and that actual events or results may differ significantly from these statements due to a number of factors. Thus, the Bank recommends that readers not place undue reliance on these forward-looking statements, as a number of factors could cause actual results to differ significantly from the expectations, estimates, or intentions expressed in these forward-looking statements. Investors and others who rely on the Bank's forward-looking statements should carefully consider the factors listed below as well as the uncertainties they represent and the risk they entail. Except as required by law, the Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time, by it or on its behalf.

Assumptions about the performance of the Canadian and U.S. economies in 2024 and how that performance will affect the Bank's business are among the factors considered in setting the Bank's strategic priorities and objectives, including provisions for credit losses. These assumptions appear in the Economic Review and Outlook section and, for each business segment, in the Economic and Market Review sections, and may be updated in the quarterly reports to shareholders.

The forward-looking statements made in this document are based on a number of assumptions and are subject to risk factors, many of which are beyond the Bank's control and the impacts of which are difficult to predict. These risk factors include, among others, the general economic environment and financial market conditions in Canada, the United States, and the other countries where the Bank operates; the impact of upheavals in the U.S. banking industry; exchange rate and interest rate fluctuations; inflation; global supply chain disruptions; higher funding costs and greater market volatility; changes made to fiscal, monetary, and other public policies; changes made to regulations that affect the Bank's business; geopolitical and sociopolitical uncertainty; climate change, including physical risks and those related to the transition to a low-carbon economy, and the Bank's ability to satisfy stakeholder expectations on environmental and social issues; significant changes in consumer behaviour; the housing situation, real estate market, and household indebtedness in Canada; the Bank's ability to achieve its key short-term priorities and long-term strategies; the timely development and launch of new products and services; the Bank's ability to recruit and retain key personnel; technological innovation, including advances in artificial intelligence and the open banking system, and heightened competition from established companies and from competitors offering non-traditional services; changes in the performance and creditworthiness of the Bank's clients and counterparties; the Bank's exposure to significant regulatory matters or litigation; changes made to the accounting policies used by the Bank to report financial information, including the uncertainty inherent to assumptions and critical accounting estimates; changes to tax legislation in the countries where the Bank operates; changes made to capital and liquidity guidelines as well as to the presentation and interpretation thereof; changes to the credit ratings assigned to the Bank by financial and extra-financial rating agencies; potential disruptions to key suppliers of goods and services to the Bank; the potential impacts of disruptions to the Bank's information technology systems, including cyberattacks as well as identity theft and theft of personal information; the risk of fraudulent activity; and possible impacts of major events affecting the economy, market conditions, or the Bank's outlook, including international conflicts, natural disasters, public health crises, and the measures taken in response to these events.

The foregoing list of risk factors is not exhaustive, and the forward-looking statements made in this document are also subject to credit risk, market risk, liquidity and funding risk, operational risk, regulatory compliance risk, reputation risk, strategic risk, and social and environmental risk as well as certain emerging risks or risks deemed significant. Additional information about these risk factors is provided in the Risk Management section beginning on page 62 of the 2023 Annual Report and may be updated in the quarterly shareholder's reports subsequently published.

Financial Reporting Method

The Bank's consolidated financial statements are prepared in accordance with IFRS, as issued by the IASB. The financial statements also comply 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 consolidated financial statements are to be prepared in accordance with IFRS, which represent Canadian GAAP. None of the OSFI accounting requirements are exceptions to IFRS.

The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the fiscal year beginning November 1, 2022. This presentation reflects a revision to the method used for the sectoral allocation of technology investment expenses, which are now immediately allocated to the various business segments, whereas certain expenses, notably costs incurred during the research phase of projects, had previously been recorded in the Other heading of segment results. This revision is consistent with the accounting policy change related to cloud computing arrangements applied in fiscal 2022. For fiscal 2022, certain amounts in the Business Segment Analysis section were adjusted to reflect this revision.

Non-GAAP and Other Financial Measures

The Bank uses a number of financial measures when assessing its results and measuring overall performance. Some of these financial measures are not calculated in accordance with GAAP. Regulation 52-112 Respecting Non-GAAP and Other Financial Measures Disclosure (Regulation 52-112) prescribes disclosure requirements that apply to the following measures used by the Bank:

· non-GAAP financial measures;

· non-GAAP ratios;

· supplementary financial measures;

· capital management measures.

Non-GAAP Financial Measures

The Bank uses non-GAAP financial measures that do not have standardized meanings under GAAP and that therefore may not be comparable to similar measures used by other companies. Presenting non-GAAP financial measures helps readers to better understand how management analyzes results, shows the impacts of specified items on the results of the reported periods, and allows readers to better assess results without the specified items if they consider such items not to be reflective of the underlying performance of the Bank's operations. In addition, like many other financial institutions, the Bank uses the taxable equivalent basis to calculate net interest income, non-interest income, and income taxes. This calculation method 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. This adjustment is necessary in order to perform a uniform comparison of the return on different assets irrespective of their tax treatment.

The key non-GAAP financial measures used by the Bank to analyze its results are described below, and a quantitative reconciliation of these measures is presented in the tables in the Reconciliation of Non-GAAP Financial Measures section on pages 18 and 19 and in the Consolidated Results table on page 25. Note that, for the year ended October 31, 2023, the following items were excluded from results: a $91 million gain ($67 million net of income taxes) related to the fair value remeasurement of an equity interest, $86 million in impairment losses ($62 million net of income taxes) on intangible assets and premises and equipment, $35 million in litigation expenses ($26 million net of income taxes), a $25 million expense ($18 million net of income taxes) related to the retroactive impact of changes to the Excise Tax Act, $15 million in provisions for contracts ($11 million net of income taxes), and a $24 million income tax expense related to the Canadian government's 2022 tax measures. No specified items had been excluded from results for the year ended October 31, 2022.

Adjusted Net Interest Income

This item represents net interest income on a taxable equivalent basis and excluding specified items, if any. A taxable equivalent is added to net interest income so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any, are excluded so that net interest income can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Non-Interest Income

This item represents non-interest income on a taxable equivalent basis and excluding specified items, if any. A taxable equivalent is added to non-interest income so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any, are excluded so that non‑interest income can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Total Revenues

This item represents total revenues on a taxable equivalent basis and excluding specified items, if any. It consists of adjusted net interest income and adjusted non-interest income. A taxable equivalent is added to total revenues so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any, are excluded so that total revenues can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Non-Interest Expenses

This item represents non-interest expenses excluding specified items, if any. Specified items, if any, are excluded so that non-interest expenses can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Income Before Provisions for Credit Losses and Income Taxes

This item represents income before provisions for credit losses and income taxes on a taxable equivalent basis and excluding specified items, if any. It also represents the difference between adjusted total revenues and adjusted non-interest expenses. A taxable equivalent is added to income before provisions for credit losses and income taxes so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any, are excluded so that income before provisions for credit losses and income taxes can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Income Taxes

This item represents income taxes on a taxable equivalent basis and excluding income taxes on specified items, if any.

Adjusted Net Income

This item represents net income excluding specified items, if any. Specified items, if any, are excluded so that net income can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Net income Attributable to Common Shareholders

This item represents net income attributable to common shareholders excluding specified items, if any. Specified items, if any, are excluded so that net income attributable to common shareholders can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Basic Earnings Per Share

This item represents basic earnings per share excluding specified items, if any. Specified items, if any, are excluded so that basic earnings per share can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Diluted Earnings Per Share

This item represents diluted earnings per share excluding specified items, if any. Specified items, if any, are excluded so that diluted earnings per share can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

The Bank also uses the below-described measures to assess its results. A quantitative reconciliation of these non-GAAP financial measures is presented in the Reconciliation of Non-GAAP Financial Measures section on page 19 and in Table 5 on page 117.

Adjusted Non-Trading Net Interest Income

This item represents non-trading net interest income on a taxable equivalent basis. It includes revenues related to financial assets and financial liabilities associated with non-trading activities, net of interest expenses and interest income related to the financing of these financial assets and liabilities, and is used to calculate adjusted non-trading net interest margin. A taxable equivalent is added to non-trading net interest income so that the performance of the various assets can be compared irrespective of their tax treatment.

Net Interest Income From Trading Activities on a Taxable Equivalent Basis

This item represents net interest income from trading activities plus a taxable equivalent. It 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. A taxable equivalent is added to net interest income from trading activities so that the performance of the various assets can be compared irrespective of their tax treatment.

Non-Interest Income Related to Trading Activities on a Taxable Equivalent Basis

This item represents non-interest income related to trading activities to which a taxable equivalent amount is added. It 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 expense on obligations related to securities sold short, certain commission income as well as other trading activity revenues, and any applicable transaction costs. A taxable equivalent amount is added to the non-interest income related to trading activities such that the returns of different assets can be compared irrespective of their tax treatment.

Trading Activity Revenues on a Taxable Equivalent Basis

This item represents trading activity revenues plus a taxable equivalent. These revenues comprise dividends related to financial assets and liabilities associated with trading activities; certain interest income related to the financing of these financial assets and liabilities, net of interest expenses; 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 expense on obligations related to securities sold short; certain commission income as well as other trading activity revenues, and any applicable transaction costs. A taxable equivalent is added to trading activity revenues so that the performance of the various assets can be compared irrespective of their tax treatment.

Non-GAAP Ratios

The Bank uses non-GAAP ratios that do not have standardized meanings under GAAP and that may therefore not be comparable to similar measures used by other companies. A non-GAAP ratio is a ratio in which at least one component is a non-GAAP financial measure. The Bank uses non-GAAP ratios to present aspects of its financial performance or financial position.

The key non-GAAP ratios used by the Bank are described below.

Adjusted Return on Common Shareholders' Equity (ROE)

This item represents ROE excluding specified items, if any. It is adjusted net income attributable to common shareholders expressed as a percentage of average equity attributable to common shareholders. It is a general measure of the Bank's efficiency in using equity. Specified items, if any, are excluded so that ROE can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Dividend Payout Ratio

This item represents the dividend payout ratio excluding specified items, if any. It is dividends on common shares (per share amount) expressed as a percentage of adjusted basic earnings per share. This ratio is a measure of the proportion of earnings that is paid out to shareholders in the form of dividends. Specified items, if any, are excluded so that the dividend payout ratio can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Operating Leverage

This item represents operating leverage on a taxable equivalent basis and excluding specified items, if any. It is the difference between the growth rate of adjusted total revenues and the growth rate of adjusted non-interest expenses, and it measures the sensitivity of the Bank's results to changes in its revenues. Adjusted operating leverage is presented on a taxable equivalent basis so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any, are excluded so that the efficiency ratio can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Efficiency Ratio

This item represents the efficiency ratio on a taxable equivalent basis and excluding specified items, if any. The ratio represents adjusted non-interest expenses expressed as a percentage of adjusted total revenues. It measures the efficiency of the Bank's operations. The adjusted efficiency ratio is presented on a taxable equivalent basis so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any, are excluded so that the efficiency ratio can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.

Adjusted Net Interest Margin, Non-Trading

This item represents the non-trading net interest margin on a taxable equivalent basis. It is calculated by dividing net interest income related to adjusted non-trading activities by average non-trading interest-bearing assets. This ratio is a measure of the profitability of non-trading activities. The adjusted non-trading net interest margin includes adjusted non-trading net interest income, which includes a taxable equivalent amount so that the performance of the various assets can be compared irrespective of their tax treatment.

Supplementary Financial Measures

A supplementary financial measure is a financial measure that: (a) is not reported in the Bank's consolidated financial statements, and (b) is, or is intended to be, reported periodically to represent historical or expected financial performance, financial position, or cash flows. The composition of these supplementary financial measures is presented in table footnotes or in the Glossary section on pages 124 to 127 of this MD&A.

Capital Management Measures

The financial reporting framework used to prepare the financial statements requires disclosure that helps readers assess the Bank's capital management objectives, policies, and processes, as set out in IFRS in IAS 1 - Presentation of Financial Statements. The Bank has its own methods for managing capital and liquidity, and IFRS does not prescribe any particular calculation method. These measures are calculated using various guidelines and advisories issued by OSFI, which are based on the standards, recommendations, and best practices of the Basel Committee on Banking Supervision (BCBS), as presented in the following table.

OSFI guideline or advisory	Measure
Capital Adequacy Requirements	Common Equity Tier 1 (CET1) capital ratio Tier 1 capital ratio Total capital ratio CET1 capital Tier 1 capital Tier 2 capital Total capital Risk-weighted assets Maximum credit risk exposure under the Basel asset classes
Leverage Requirements	Leverage ratio Total exposure
Total Loss Absorbing Capacity (TLAC)	Key indicators - TLAC requirements Available TLAC TLAC ratio TLAC leverage ratio
Liquidity Adequacy Requirements	Liquid asset portfolio Encumbered assets and unencumbered assets Liquidity coverage ratio (LCR) High-quality liquid assets (HQLA) Cash inflows/outflows and net cash outflows Net stable funding ratio (NSFR) Available stable funding items Required stable funding items
Global Systemically Important Banks (G-SIBs) - Public Disclosure Requirements	G-SIB indicators

Reconciliation of Non-GAAP Financial Measures

Presentation of Results - Adjusted

Year ended October 31
(millions of Canadian dollars)						2023	2022
	Personal and Commercial	Wealth Management	Financial Markets	USSF&I	Other
	Personal and Commercial	Wealth Management	Financial Markets	USSF&I	Other
Net interest income	3,321	778	(1,378)	1,132	(267)	3,586	5,271
Taxable equivalent	−	−	324	−	8	332	234
Net interest income - Adjusted	3,321	778	(1,054)	1,132	(259)	3,918	5,505
Non-interest income	1,195	1,743	3,463	77	106	6,584	4,381
Taxable equivalent	−	−	247	−	−	247	48
Gain on the fair value remeasurement of an equity interest⁽¹⁾	−	−	−	−	(91)	(91)	−
Non-interest income - Adjusted	1,195	1,743	3,710	77	15	6,740	4,429
Total revenues - Adjusted	4,516	2,521	2,656	1,209	(244)	10,658	9,934
Non-interest expenses	2,510	1,534	1,161	402	194	5,801	5,230
Impairment losses on intangible assets and premises and equipment⁽²⁾	(59)	(8)	(7)	−	(12)	(86)	−
Litigation expenses⁽³⁾	−	(35)	−	−	−	(35)	−
Expense related to changes to the Excise Tax Act⁽⁴⁾	−	−	−	−	(25)	(25)	−
Provisions for contracts⁽⁵⁾	(9)	−	−	−	(6)	(15)	−
Non-interest expenses - Adjusted	2,442	1,491	1,154	402	151	5,640	5,230
Income before provisions for credit losses and income taxes - Adjusted	2,074	1,030	1,502	807	(395)	5,018	4,704
Provisions for credit losses	238	2	39	113	5	397	145
Income before income taxes - Adjusted	1,836	1,028	1,463	694	(400)	4,621	4,559
Income taxes	486	271	(170)	146	(96)	637	894
Taxable equivalent	−	−	571	−	8	579	282
Income taxes on the gain on the fair value remeasurement of an equity interest⁽¹⁾	−	−	−	−	(24)	(24)	−
Income taxes on the impairment losses on intangible assets and premises and equipment⁽²⁾	17	2	2	−	3	24	−
Income taxes on the litigation expenses⁽³⁾	−	9	−	−	−	9	−
Income taxes on the expense related to changes to the Excise Tax Act⁽⁴⁾	−	−	−	−	7	7	−
Income taxes on the provisions for contracts⁽⁵⁾	2	−	−	−	2	4	−
Income taxes related to the Canadian government's 2022 tax measures⁽⁶⁾	−	−	−	−	(24)	(24)	−
Income taxes - Adjusted	505	282	403	146	(124)	1,212	1,176
Net income - Adjusted	1,331	746	1,060	548	(276)	3,409	3,383
Specified items after income taxes	(49)	(32)	(5)	−	12	(74)	−
Net income	1,282	714	1,055	548	(264)	3,335	3,383
Non-controlling interests	−	−	−	−	(2)	(2)	(1)
Net income attributable to the Bank's shareholders and holders of other equity instruments	1,282	714	1,055	548	(262)	3,337	3,384
Net income attributable to the Bank's shareholders and holders of other equity instruments - Adjusted	1,331	746	1,060	548	(274)	3,411	3,384
Dividends on preferred shares and distributions on limited recourse capital notes						141	107
Net income attributable to common shareholders - Adjusted						3,270	3,277

(1) During the year ended October 31, 2023, the Bank concluded that it had lost significant influence over TMX Group Limited (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 gain of $91 million ($67 million net of income taxes) was recorded.

(2) During the year ended October 31, 2023, the Bank recorded $75 million in intangible asset impairment losses ($54 million net of income taxes) on technology development for which the Bank has decided to cease its use or development, and it recorded $11 million in premises and equipment impairment losses ($8 million net of income taxes) related to right-of-use assets.

(3) During the year ended October 31, 2023, the Bank recorded $35 million in litigation expenses ($26 million net of income taxes) to resolve litigations and other disputes arising from ongoing or potential claims against the Bank.

(4) During the year ended October 31, 2023, the Bank recorded a $25 million expense ($18 million net of income taxes) related to the retroactive impact of changes to the Excise Tax Act, indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax (HST).

(5) During the year ended October 31, 2023, the Bank recorded $15 million in charges ($11 million net of income taxes) for contract termination penalties and for provisions for onerous contracts.

(6) 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. For additional information on these tax measures, see the Income Taxes section on page 50.

Presentation of Basic and Diluted Earnings per Share - Adjusted

Year ended October 31
(Canadian dollars)		2023		2022
Basic earnings per share	$	9.47	$	9.72
Gain on the fair value remeasurement of an equity interest⁽¹⁾		(0.20)		−
Impairment losses on intangible assets and premises and equipment⁽²⁾		0.19		−
Litigation expenses⁽³⁾		0.08		−
Expense related to changes to the Excise Tax Act⁽⁴⁾		0.05		−
Provisions for contracts⁽⁵⁾		0.03		−
Income taxes related to the Canadian government's 2022 tax measures⁽⁶⁾		0.07		−
Basic earnings per share - Adjusted	$	9.69	$	9.72
Diluted earnings per share	$	9.38	$	9.61
Gain on the fair value remeasurement of an equity interest⁽¹⁾		(0.20)		−
Impairment losses on intangible assets and premises and equipment⁽²⁾		0.19		−
Litigation expenses⁽³⁾		0.08		−
Expense related to changes to the Excise Tax Act⁽⁴⁾		0.05		−
Provisions for contracts⁽⁵⁾		0.03		−
Income taxes related to the Canadian government's 2022 tax measures⁽⁶⁾		0.07		−
Diluted earnings per share - Adjusted	$	9.60	$	9.61

(1) During 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 gain of $91 million ($67 million net of income taxes) was recorded.

(5) During the year ended October 31, 2023, the Bank recorded $15 million in charges ($11 million net of income taxes) for contract termination penalties and for provisions for onerous contracts.

Presentation of Non-Trading Net Interest Income - Adjusted

Year ended October 31
(millions of Canadian dollars)	2023	2022
Net interest income − Adjusted	3,918	5,505
Less: Net interest (loss) income related to trading activities on a taxable equivalent basis	(1,495)	911
Net interest income, non-trading − Adjusted	5,413	4,594

Financial Disclosure

Disclosure Controls and Procedures

The Bank's financial information is prepared with the support of a set of disclosure controls and procedures (DC&P) that are implemented by the President and Chief Executive Officer (CEO) and by the Chief Financial Officer and Executive Vice-President, Finance (CFO). During the year ended October 31, 2023, in accordance with National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (National Instrument 52-109) released by the CSA, the design and operation of these controls and procedures were evaluated to determine their effectiveness.

As at October 31, 2023, the CEO and the CFO confirmed the effectiveness of the DC&P. These controls are designed to provide reasonable assurance that the information disclosed in annual and interim filings and in other reports filed or submitted under securities legislation is recorded, processed, summarized, and reported within the time periods specified by that legislation. These controls and procedures are also designed to ensure that such information is accumulated and communicated to the Bank's management, including its signing officers, as appropriate, to allow for timely decisions regarding disclosure.

This Annual Report was reviewed by the Bank's Disclosure Committee, Audit Committee, and the Board of Directors (the Board), which approved it prior to publication.

Internal Control Over Financial Reporting

The internal control over financial reporting (ICFR) is designed to provide reasonable assurance that the financial information presented is reliable and that the consolidated financial statements were prepared in accordance with GAAP, which are based on IFRS, unless indicated otherwise as explained on pages 14 to 19 of this MD&A. Due to inherent limitations of internal controls, the ICFR may not prevent or detect all misstatements in a timely manner.

The CEO and the CFO oversaw the evaluation work performed on the design and operation of the Bank's ICFR in accordance with National Instrument 52‑109. The ICFR was evaluated in accordance with the control framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO - 2013) for financial controls and in accordance with the control framework of the Control Objectives for Information and Related Technologies (COBIT) for information technology general controls.

Based on the evaluation results, the CEO and CFO concluded, as at October 31, 2023, that there are no material weaknesses, that the ICFR is effective and provides reasonable assurance that the financial reporting is reliable, and that the Bank's consolidated financial statements were prepared in accordance with GAAP.

Changes to Internal Control Over Financial Reporting

The CEO and CFO also undertook work that enabled them to conclude that, during the year ended October 31, 2023, no changes were made to the ICFR that have materially affected, or are reasonably likely to materially affect, the design or operation of the ICFR.

Disclosure Committee

The Bank's Disclosure Committee assists the CEO and CFO by ensuring the design, implementation, and operation of the DC&P and ICFR. In so doing, the committee ensures that the Bank is meeting its disclosure obligations under current regulations and that the CEO and CFO are producing the requisite certifications.

Overview

Highlights

As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)			2023			2022		% change
Operating results
Total revenues			10,170			9,652		5
Income before provisions for credit losses and income taxes			4,369			4,422		(1)
Net income			3,335			3,383		(1)
Net income attributable to the Bank's shareholders and holders of other equity instruments			3,337			3,384		(1)
Return on common shareholders' equity⁽¹⁾			16.5	%		18.8	%
Dividend payout ratio⁽¹⁾			42.0	%		36.8	%
Earnings per share
	Basic	$	9.47		$	9.72		(3)
	Diluted		9.38			9.61		(2)
Operating results - Adjusted⁽²⁾
Total revenues - Adjusted⁽²⁾			10,658			9,934		7
Income before provisions for credit losses and income taxes - Adjusted⁽²⁾			5,018			4,704		7
Net income - Adjusted⁽²⁾			3,409			3,383		1
Return on common shareholders' equity - Adjusted⁽³⁾			16.8	%		18.8	%
Dividend payout ratio - Adjusted⁽³⁾			41.1	%		36.8	%
Operating leverage - Adjusted⁽³⁾			(0.5)	%		2.1	%
Efficiency ratio - Adjusted⁽³⁾			52.9	%		52.6	%
Earnings per share - Adjusted⁽²⁾
	Basic	$	9.69		$	9.72		−
	Diluted		9.60			9.61		−
Common share information
Dividends declared		$	3.98		$	3.58		11
Book value⁽¹⁾			60.68			55.24
Share price
	High		103.58			105.44
	Low		84.97			83.12
	Close		86.22			92.76
Number of common shares (thousands)			338,285			336,582
Market capitalization			29,167			31,221
Balance sheet and off-balance-sheet
Total assets			423,578			403,740		5
Loans and acceptances, net of allowances			225,443			206,744		9
Deposits			288,173			266,394		8
Equity attributable to common shareholders			20,526			18,594		10
Assets under administration⁽¹⁾			652,631			616,165		6
Assets under management⁽¹⁾			120,858			112,346		8
Regulatory ratios under Basel III⁽⁴⁾
Capital ratios
	Common Equity Tier 1 (CET1) capital ratio		13.5	%		12.7	%
	Tier 1		16.0	%		15.4	%
	Total		16.8	%		16.9	%
Leverage ratio			4.4	%		4.5	%
TLAC ratio⁽⁴⁾			29.2	%		27.7	%
TLAC leverage ratio⁽⁴⁾			8.0	%		8.1	%
Liquidity coverage ratio (LCR)⁽⁴⁾			155	%		140	%
Net stable funding ratio (NSFR)⁽⁴⁾			118	%		117	%
Other information
Number of employees - Worldwide (full-time equivalent)			28,916			27,103		7
Number of branches in Canada			368			378		(3)
Number of banking machines in Canada			944			939		1

(1) See the Glossary section on pages 124 to 127 for details on the composition of these measures.

(2) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.

(3) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.

(4) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.

About National Bank

The Bank carries out its activities in four business segments: Personal and Commercial, Wealth Management, Financial Markets as well as U.S. Specialty Finance and International (USSF&I), which comprises the activities of the Credigy Ltd. (Credigy) and Advanced Bank of Asia Limited (ABA Bank) subsidiaries. Other operating activities, certain specified items, Treasury activities, and the operations of the Flinks Technology Inc. (Flinks) subsidiary are grouped in the Other heading of segment results. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy. For additional information, see the Business Segment Analysis section of this MD&A.

Objectives and 2023 Results

When setting its objectives, the Bank aims for a realistic challenge in the prevailing business environment by considering such factors as changes in banking industry financial results as well as the Bank's business development plan. When the Bank sets its medium-term objectives, it does not take into consideration specified items, if any, which are not reflective of the underlying financial performance of the Bank's operations. Management therefore excludes specified items when assessing the Bank's performance against its objectives.

For fiscal 2023, the Bank recorded $3,335 million in net income compared to $3,383 million in fiscal 2022, and its diluted earnings per share stood at $9.38 compared to $9.61 in fiscal 2022. The Bank's return on common shareholders' equity (ROE) was 16.5% in fiscal 2023 versus 18.8% in fiscal 2022. As for its adjusted diluted earnings per share, it stood at $9.60 in fiscal 2023, relatively stable compared to the $9.61 posted in fiscal 2022. Furthermore, adjusted ROE was 16.8% in fiscal 2023 compared to 18.8% in fiscal 2022.

The following table compares the Bank's medium-term objectives with its fiscal 2023 results.

	Medium-Term Objectives (%)	2023 Results
Growth in diluted earnings per share - Adjusted⁽¹⁾	5 - 10	(0.1)%

ROE - Adjusted⁽²⁾	15 - 20	16.8%

Dividend payout ratio - Adjusted⁽²⁾	40 - 50	41.1%

CET1 capital ratio⁽³⁾	Strong capital level	13.5%

Leverage ratio⁽³⁾	Strong capital level	4.4%

The Bank's financial results met all of its medium-term objectives, except for growth in adjusted diluted earnings per share. Adjusted diluted earnings per share for fiscal 2023 did not increase year over year and is below target due to higher provisions for credit losses, which more than offset the strong performance by all the business segments. For fiscal 2023, adjusted ROE was in the lower range of the target. The adjusted dividend payout ratio fell within the target distribution range as a result of higher dividends paid during the fiscal year. The CET1 capital ratio and the leverage ratio, at 13.5% and 4.4%, respectively, also met the objectives.

The Bank also examines its performance using the efficiency ratio and operating leverage. For fiscal 2023, the efficiency ratio was 57.0% compared to 54.2% in fiscal 2022, a deterioration that was notably due to the adverse effect of the specified items reported in Non-interest expenses in 2023. As for the adjusted efficiency ratio, it stood at 52.9% in fiscal 2023 compared to 52.6% in fiscal 2022, demonstrating disciplined expense management by all the Bank's segments in a more difficult economic environment. Also for fiscal 2023, operating leverage and adjusted operating leverage were (5.5)% and (0.5)%, respectively.

Net Income Year ended October 31 (millions of Canadian dollars)		Diluted Earnings Per Share Year ended October 31 (Canadian dollars)				Efficiency Ratio⁽⁴⁾ Year ended October 31 (%)

2022	2023	2022	2023		2019		2020	2021	2022	2023

Reported as per IFRS Adjusted⁽¹⁾		Reported as per IFRS Adjusted⁽¹⁾		Reported as per IFRS Adjusted⁽²⁾

(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.

(2) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.

(3) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.

(4) See the Glossary section on pages 124 to 127 for details on the composition of these measures.

Dividends

For fiscal 2023, the Bank declared $1,344 million in dividends to common shareholders (2022: $1,206 million), representing 42.0% of net income attributable to common shareholders (2022: 36.8%) and representing 41.1% of adjusted net income attributable to common shareholders (2022: 36.8%).

Solid Capital Levels⁽¹⁾

As at October 31, 2023, the Bank's CET1, Tier 1, and Total capital ratios were, respectively, 13.5%, 16.0% and 16.8%, compared to ratios of, respectively, 12.7%, 15.4% and 16.9% as at October 31, 2022. The CET1 and Tier 1 capital ratios increased since October 31, 2022, essentially due to the contribution from net income net of dividends, to common share issuances under the Stock Option Plan, and to the positive impact from the implementation of the Basel III reforms related to the credit and operational risk frameworks. These factors were partly offset by growth in RWA and by the end of the transitional measures applicable to expected credit loss provisioning implemented by OSFI at the beginning of the COVID-19 pandemic. The Total capital ratio increased due to the same factors mentioned above, but the increase was more than offset by the $750 million redemption of medium-term notes on February 1, 2023.

As at October 31, 2023, the leverage ratio was 4.4% compared to 4.5% as at October 31, 2022. The decrease in the leverage ratio was essentially due to the growth in total exposure and to the end of the temporary measure permitted by OSFI with respect to the exclusion of central bank reserves from the leverage exposure calculation. These factors were partly offset by the growth in Tier 1 capital.

High-Quality Loan Portfolio

Loans and acceptances, net of allowances for credit losses, accounted for 53% of the Bank's total assets and amounted to $225.4 billion as at October 31, 2023. For fiscal 2023, the Bank recorded $397 million in provisions for credit losses compared to $145 million in fiscal 2022. This increase was due to higher provisions for credit losses on non-impaired loans resulting from loan portfolio growth, from the migration of credit risk, and from updates and revisions to the probability weightings of scenarios, reflecting uncertainty in the macroeconomic outlook, uncertainties such as high inflationary pressure, high interest rates, and geopolitical instability. As for provisions for credit losses on impaired loans excluding POCI⁽¹⁾ loans, they increased year over year; these increases came from Personal Banking (including credit card receivables) and Commercial Banking, reflecting a normalization of credit risk, and from the USSF&I segment, essentially attributable to the Credigy subsidiary. Provisions for credit losses on POCI loans were down year over year due to favourable remeasurements of certain Credigy portfolios as well as to recoveries of credit losses following repayments of Commercial Banking POCI loans. Gross impaired loans totalled $1,584 million as at October 31, 2023 compared to $1,271 million as at October 31, 2022 and represented 0.70% of total loans and acceptances.

Risk Profile

As at October 31 or for the year ended October 31
(millions of Canadian dollars)	2023		2022
Provisions for credit losses	397		145
Provisions for credit losses as a % of average loans and acceptances⁽²⁾	0.18	%	0.07	%
Provisions for credit losses on impaired loans excluding POCI loans as a % of average loans and acceptances⁽²⁾	0.11	%	0.07	%
Net write-offs excluding POCI loans as a % of average loans and acceptances⁽²⁾	0.07	%	0.10	%
Gross impaired loans as a % of total loans and acceptances⁽²⁾	0.70	%	0.61	%
Gross impaired loans	1,584		1,271
Net impaired loans	1,276		1,030

Annual Dividend Per Common Share Year ended October 31 (Canadian dollars)						Evolution of Regulatory Ratios Under Basel III⁽¹⁾ As at October 31		Gross Impaired Loans As at October 31 (millions of Canadian dollars)

2019	2020	2021	2022	2023	2022		2023	2019	2020	2021	2022	2023
						CET1 Tier 1 Total Leverage ratio		Impaired loans - Stage 3 Impaired loans - POCI Gross impaired loans as a % of total loans and acceptances (bps)⁽²⁾ Gross impaired loans exlcuding POCI as a % of total loans and acceptances (bps)⁽²⁾

(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.

(2) See the Glossary section on pages 124 to 127 for details on the composition of these measures.

Economic Review and Outlook

Global Economy

Global manufacturing activity has slowed considerably of late, which appears to be impacting European plants in particular. Unfortunately, this weakness has been exacerbated by the European Central Bank's efforts to bring inflation down to the targeted level. These combined factors explain why the eurozone's GDP contracted during the third quarter of 2023. However, given that the non-annualized decrease of 0.1% came on the heels of mediocre results in previous quarters, it led to zero annual growth. In the past, such lacklustre growth over a 12-month period tended to herald a recession. This is what we expect to see again. Meanwhile, China continues to suffer setbacks due to a real estate crisis although it would appear that the Chinese government has finally decided to take the necessary steps to boost demand and avoid a deflationary spiral. On October 24, 2023, the authorities approved the issuance of an additional one thousand billion yuan (0.8% of GDP) of central government bonds to fund various recovery initiatives. Despite these announcements, we remain prudent and believe that after barely achieving its 5.0%⁽¹⁾ growth objective this year, China will see somewhat weaker growth in 2024. The global economy, for its part, is expected to grow by 3.0%⁽¹⁾ this year, followed by only 2.2%⁽¹⁾ growth next year.

U.S. GDP figures for the third quarter of 2023 point to 4.9% annualized growth-the best result in two years. While we recognize that the U.S. economy is showing surprising resilience in the face of the significant U.S. Federal Reserve (the Fed) monetary tightening, we still have some reservations regarding how long the current growth trend will last. Our doubts are largely attributable to the fact that higher household spending in the third quarter was not accompanied by an equivalent increase in disposable income, instead resulting from the sharp decline in the savings rate-which is counterintuitive in an environment with higher interest rates. This decline suggests that consumers have been forced to live beyond their means in the third quarter. The most recent credit data confirm this assumption, with a significant increase in the percentage of consumer loans that fell into serious delinquency in the third quarter, even before the resumption of student loan payments in the fourth quarter. A slowdown in consumer spending therefore seems inevitable, although the extent will depend on the resilience of the labour market. While the labour market has remained quite solid until now, a number of leading indicators point to a slowdown in the months to come, with sharp declines in hours worked and the job vacancy rate. We have some reservations regarding the scenario presented by the Fed, in which a mere slowdown would rebalance supply and demand. While the previous interest rate hikes will continue to impact the U.S. economy, we expect U.S. GDP to contract in the first half of 2024-a scenario that would result in only 0.3%⁽¹⁾ growth next year.

Canadian Economy

In Canada, it appears that the rate hikes announced since the start of the monetary tightening cycle are starting to produce results. Preliminary data published by Statistics Canada suggest zero growth in the third quarter of 2023-a particularly weak performance when soaring demographic growth is taken into consideration. In the past four quarters, per capita GDP decreased by 2.4%, something which, historically, was only seen in a recession. A slowing labour market is also evident, with hiring not keeping pace with demographic growth. As a result, after reaching a cyclical low of 4.9%, the unemployment rate jumped eight-tenths of a percentage point to 5.7% in October. An increase of such magnitude, other than in a recessionary period in Canada, has been seen once since the early 1980s, that is, when the tech bubble burst in 2001. This is even more concerning in a broader context where the rate hikes announced until now have not produced their full impact on the economy. According to our calculations, no less than 42% of the impacts of interest rate hikes have yet to be felt in terms of consumption. Moreover, with no apparent signs of an economic recovery in the months to come, the level of confidence among consumers and small and medium-sized businesses will be more akin to levels seen during a recession. In this broader context, a contraction in GDP cannot be ruled out in the months to come, which would lead to a stagnant economy in 2024⁽¹⁾.

Quebec Economy

The Quebec economy experienced a difficult second quarter compared to the rest of the country in terms of economic growth, which declined by 1.9% compared to a slight decline for Canada as a whole (-0.2%). In the next few quarters, weaker demographic growth than in the rest of Canada and the growing impact of interest rate hikes will continue to temper growth. We nonetheless remain confident that this sluggish performance is temporary and believe that Quebec's economy could be more resilient relatively speaking. Quebec households are carrying less debt than in the rest of Canada and, therefore, are less susceptible to interest payment shock. Moreover, housing is more accessible in Quebec compared to elsewhere in Canada, and the predominant use of hydroelectricity means that households are less exposed to soaring electricity costs. Quebec also has a highly diversified economy and the government provides a series of fiscal support measures. Finally, Quebec's real policy rate (defined as the policy rate minus inflation and not including groceries and energy) was the lowest among all provinces in September, indicating that Quebec's monetary policy is less restrictive. When all these factors are taken into account, we predict that Quebec's economy will not grow in 2024⁽¹⁾, which is consistent with the rest of Canada in spite of less favourable demographic growth. According to these same predictions, Quebec's unemployment rate should remain among the lowest of all ten provinces.

(1) Real GDP growth forecasts, National Bank Financial's Economics and Strategy group

Financial Analysis

Consolidated Results

Year ended October 31
(millions of Canadian dollars)	2023		2022		% change
Operating results
Net interest income	3,586		5,271		(32)
Non-interest income	6,584		4,381		50
Total revenues	10,170		9,652		5
Non-interest expenses	5,801		5,230		11
Income before provisions for credit losses and income taxes	4,369		4,422		(1)
Provisions for credit losses	397		145
Income before income taxes	3,972		4,277		(7)
Income taxes	637		894		(29)
Net income	3,335		3,383		(1)
Diluted earnings per share (dollars)	9.38		9.61		(2)
Taxable equivalent basis⁽¹⁾
Net interest income	332		234
Non-interest income	247		48
Income taxes	579		282
Impact of taxable equivalent basis on net income	−		−
Specified items⁽¹⁾
Gain on the fair value remeasurement of an equity interest	91		−
Impairment losses on premises and equipment and intangible assets	(86)		−
Litigation expenses	(35)		−
Expense related to changes to the Excise Tax Act	(25)		−
Provisions for contracts	(15)		−
Specified items before income taxes	(70)		−
Income taxes related to the Canadian government's 2022 tax measures	24		−
Income taxes on specified items	(20)		−
Specified items after income taxes	(74)		−
Operating results - Adjusted⁽¹⁾
Net interest income - Adjusted	3,918		5,505		(29)
Non-interest income - Adjusted	6,740		4,429		52
Total revenues - Adjusted	10,658		9,934		7
Non-interest expenses - Adjusted	5,640		5,230		8
Income before provisions for credit losses and income taxes - Adjusted	5,018		4,704		7
Provisions for credit losses	397		145
Income before income taxes - Adjusted	4,621		4,559		1
Income taxes - Adjusted	1,212		1,176		3
Net income - Adjusted	3,409		3,383		1
Diluted earnings per share - Adjusted (dollars)	9.60		9.61		−
Average assets⁽²⁾	430,646		393,847		9
Average loans and acceptances⁽²⁾	215,976		194,340		11
Average deposits⁽²⁾	284,570		258,929		10
Operating leverage⁽³⁾	(5.5)	%	1.4	%
Operating leverage - Adjusted⁽⁴⁾	(0.5)	%	2.1	%
Efficiency ratio⁽³⁾	57.0	%	54.2	%
Efficiency ratio - Adjusted⁽⁴⁾	52.9	%	52.6	%
Net interest margin, non-trading - Adjusted⁽⁴⁾	2.15	%	1.96	%

(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.

(2) Represents an average of the daily balances for the period.

(3) See the Glossary section on pages 124 to 127 for details on the composition of these measures.

(4) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.

Analysis of Consolidated Results

Financial Results

For fiscal 2023, the Bank's net income totalled $3,335 million, down 1% from $3,383 million in fiscal 2022. Revenue growth in all of the business segments was more than offset by higher non-interest expenses (partly due to the specified items⁽¹⁾ recorded during fiscal 2023) and by significantly higher provisions for credit losses. The fiscal 2023 income before provisions for credit losses and income taxes was down 1% compared to fiscal 2022.

As for adjusted net income, it totalled $3,409 million in fiscal 2023, up 1% from $3,383 million in fiscal 2022. The fiscal 2023 specified items had a $74 million unfavourable impact on net income in fiscal 2023. Revenue growth in all of the business segments was offset by higher non-interest expenses and higher provisions for credit losses. As for adjusted income before provisions for credit losses and income taxes, it rose 7% year over year.

Total Revenues

For fiscal 2023, the Bank's total revenues amounted to $10,170 million versus $9,652 million in fiscal 2022, a $518 million or 5% increase that was driven by total revenue growth in all of the Bank's business segments. For additional information on total revenues, see Table 2 on page 116. As for adjusted total revenues, they amounted to $10,658 million in fiscal 2023, up $724 million or 7% from $9,934 million in fiscal 2022.

Net Interest Income

For fiscal 2023, the Bank's net interest income totalled $3,586 million, down 32% from $5,271 million in fiscal 2022 (see Table 3, page 116). Adjusted net interest income was $3,918 million in fiscal 2023, down 29% from $5,505 million in fiscal 2022.

In the Personal and Commercial segment, net interest income totalled $3,321 million in fiscal 2023, a $456 million or 16% year-over-year increase that was essentially driven by a higher net interest margin (owing to interest rate hikes), which was 2.35% in 2023 versus 2.15% in 2022 and mainly due to the deposit margin. The increase was also driven by year-over-year growth in loans and deposits, which rose 6% and 5%, respectively. The loan growth came mainly from mortgage credit and business and government lending. In the Wealth Management segment, net interest income totalled $778 million, a 31% year-over-year increase that was attributable to the interest rate hikes that occurred in fiscal years 2023 and 2022.

In the Financial Markets segment, net interest income on a taxable equivalent basis was down considerably from fiscal 2022, mainly due to trading activities, and should be examined together with the other items of trading activity revenues. In the USSF&I segment, net interest income rose $42 million or 4% year over year, essentially due to business growth at the ABA Bank subsidiary, notably sustained growth in loans.

Non-Interest Income

For fiscal 2023, the Bank's non-interest income totalled $6,584 million, up 50% from $4,381 million in fiscal 2022. For additional information on non-interest income, see Table 4 on page 117. As for adjusted non-interest income, it totalled $6,740 million in fiscal 2023, up 52% year over year.

The fiscal 2023 revenues from underwriting and advisory fees were up 17% year over year, notably due to capital markets activities and merger and acquisition activity in the Financial Markets segment. Revenues from securities brokerage commissions were down 15% year over year, essentially due to a decrease in commissions on transactions in the Wealth Management segment. Combined, mutual fund revenues and revenues from investment management and trust service fees totalled $1,583 million, down $1 million year over year.

Combined, the fiscal 2023 credit fee revenues and revenues from acceptances and letters of credit and guarantee rose $84 million year over year owing to growth in credit lending at Commercial Banking, in the Financial Markets segment, and at Credigy. In addition, card revenues grew 9% year over year due to a notable increase in purchasing volume, and revenues from deposit and payment service charges rose 1%.

(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures.

Non-interest income related to trading activity on a taxable equivalent basis totalled $2,943 million in fiscal 2023, up from $596 million in fiscal 2022 (Table 5, page 117). Including the portion recorded in net interest income, trading activity revenues on a taxable equivalent basis amounted to $1,448 million in fiscal 2023, a $59 million year-over-year decrease that was attributable to equity securities revenues, whereas there were increases in revenues from fixed-income securities and revenues from commodities and foreign exchange activities in the Financial Markets segment. The trading activity revenues on a taxable equivalent basis from the Bank's other business segments decreased year over year.

The fiscal 2023 gains on non-trading securities were down $43 million year over year, mainly due to business activity at Financial Markets and to Treasury activities. Insurance revenues were up $13 million year over year, reflecting revisions to actuarial reserves. Foreign exchange revenues and the share in the net income of associates and joint ventures decreased by $28 million and $17 million, respectively, year over year. Lastly, other revenues amounted to $261 million in fiscal 2023, a $19 million year-over-year increase that was notably due to a $91 million gain recorded upon the fair value remeasurement of an equity interest, partly offset by a higher unfavourable impact of a fair value remeasurement of certain Credigy portfolios during fiscal 2022.

Non-Interest Expenses

For fiscal 2023, the Bank's non-interest expenses stood at $5,801 million, up $571 million or 11% from fiscal 2022 (Table 6, page 118). They included the following specified items: $86 million in impairment losses on premises and equipment and intangible assets, $35 million in litigation expenses, a $25 million expense related to changes to the Excise Tax Act, and $15 million in provisions for contracts. As for adjusted non-interest expenses, they stood at $5,640 million in fiscal 2023, up $410 million or 8% from non-interest expenses of $5,230 million in fiscal 2022.

Compensation and employee benefits stood at $3,452 million in fiscal 2023, a 5% year-over-year increase that was mainly due to wage growth and a greater number of employees. Occupancy expense, including amortization expense on premises and equipment, was also up, partly due to the expanding banking network at ABA Bank, to expenses related to the Bank's new head office building, and to impairment losses on premises and equipment. An increase in technology expenses, including amortization, came from the significant investments made to support the Bank's technological evolution and business development plan as well as from the intangible asset impairment losses recorded in fiscal 2023. The fiscal 2023 communication expenses remained relatively stable year over year, whereas professional fees were up slightly. In addition, higher advertising and business development expenses came from travel expenses, as activities with clients resumed, and from an increase in advertising expenses. Other expenses were also up year over year due in part to litigation expenses, an expense related to changes to the Excise Tax Act, and provisions for contracts recorded during fiscal 2023.

Provisions for Credit Losses

For fiscal 2023, the Bank recorded $397 million in provisions for credit losses compared to $145 million in fiscal 2022 (Table 7, page 119). The increase came mainly from a $174 million increase in provisions for credit losses on non-impaired loans resulting from growth in the loan portfolios, a migration of credit risk, a recalibration of certain risk parameters, and updates and revisions to the probability weightings of scenarios, reflecting the uncertainties in the macroeconomic outlook, uncertainties such as rising inflationary pressure, high interest rates, and geopolitical instability. As for provisions for credit losses on impaired loans excluding POCI⁽¹⁾ loans, they stood at $245 million, rising $107 million year over year; these increases came from Personal Banking (including credit card receivables) and Commercial Banking, which rose $44 million and $35 million, respectively, reflecting a normalization of credit risk, and from the USSF&I segment, which rose $28 million, essentially attributable to the Credigy subsidiary. Provisions for credit losses on POCI loans were down $29 million year over year due to favourable remeasurements of certain Credigy portfolios during fiscal 2023 as well as to recoveries of credit losses following repayments of POCI loans at Commercial Banking. For fiscal 2023, the provisions for credit losses on impaired loans excluding POCI loans⁽¹⁾ represented 0.11% of average loans and acceptances compared to 0.07% in fiscal 2022.

Income Taxes

Detailed information about the Bank's income taxes is provided in Note 24 to the consolidated financial statements. For fiscal 2023, income taxes stood at $637 million, representing an effective income tax rate of 16%, which compares to income taxes of $894 million and a 21% effective income tax rate in fiscal 2022. The change in effective income tax rate stems mainly from a higher level and proportion of tax-exempt dividend income and from higher income in lower tax-rate jurisdictions during fiscal 2023. These factors were partly offset by the impact of the Canadian government's 2022 tax measures recorded in the first quarter of 2023, namely, the Canada Recovery Dividend and the additional 1.5% tax on banks and life insurers.

(1) See the Glossary section on pages 124 to 127 for details on the composition of these measures.

Business Segment Analysis

The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other heading of segment results. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy.

National Bank of Canada

Business

Segments

Personal and

Commercial

Wealth

Management

Financial

Markets

U.S. Specialty

Finance and
International

Core
Activities

> Banking services

> Credit services

> Financing

> Investment solutions

> Insurance

> Full-service brokerage

> Private banking

> Direct brokerage

> Investment solutions

> Administrative and trade execution services

> Transaction products

> Trust and estate services

> Equities, fixed-income, commodities and foreign exchange

> Corporate banking

> Investment banking

> U.S. Specialty Finance

- Credigy

> International

- ABA Bank (Cambodia)

- Minority interests in emerging markets

Other: Treasury activities, liquidity management, Bank funding, asset/liability management, Flinks Technology Inc. subsidiary activities (a fintech specialized in financial data aggregation and distribution), and corporate units.

Total Revenues by

Business Segment⁽¹⁾

Year ended October 31, 2023

Income Before Provisions for

Credit Losses and Income Taxes by Business Segment⁽¹⁾

Year ended October 31, 2023

Net Income by Business Segment⁽¹⁾

Year ended October 31, 2023

Personal and Commercial (2022: 40%)

Wealth Mangement (2022: 24%)

Financial Markets (2022: 25%)

USSF&I (2022: 11%)

Personal and Commercial (2022: 36%)

Wealth Mangement (2022: 20%)

Financial Markets (2022: 29%)

USSF&I (2022: 15%)

Personal and Commercial (2022: 35%)

Wealth Management (2022: 20%)

Financial Markets (2022: 30%)

USSF&I (2022: 15%)

(1) Excluding the Other heading.

Personal and Commercial

The Personal and Commercial segment meets the financial needs of close to 2.7 million individuals and over 147,000 businesses across Canada. These clients entrust the Bank to manage, invest, and safeguard their assets and to finance their projects. Clients turn to the Bank's experienced advisors who take the time to understand their specific needs and help them reach their financial goals. Thanks to the Bank's convenient self-banking channels, 368 branches, and 944 banking machines across Canada, clients can do their daily banking whenever and wherever they wish.

Total Revenues by Category

Year ended October 31, 2023

Text Box: $2,006 million Income before provisions for credit losses and income taxes Text Box: $1,282 million Net income Text Box: $4,516 million Total revenues

Total Revenues by Geographic Distribution

Year ended October 31, 2023

Retail (2022: 42%)

Payment Solutions (2022: 11%)

Insurance (2022: 5%)

Commercial Banking (2022: 42%)

Province of Quebec (2022: 76%)

Other provinces (2022: 24%)

Personal Banking

Personal Banking provides a complete range of financing and investment

products and services to help clients reach their financial goals throughout

every stage in their lives. It offers everyday transaction solutions, mortgage loans and home equity lines of credit, consumer loans, payment solutions, savings and investment solutions as well as a range of insurance products.

Commercial Banking

Commercial Banking serves the financial needs of small- and medium-sized enterprises (SMEs) and large corporations, helping them to achieve growth. It offers a full line of financial products and services, including credit, deposit, and investment solutions as well as international trade, foreign exchange transaction, payroll, cash management, insurance, electronic transaction, and complementary services. With deep roots in the entrepreneur community for over 160 years, Commercial Banking is the leading bank in the Quebec market.

Economic and Market Review

In Canada, signs of an economic slowdown in response to rapidly rising interest rates are evident, with GDP essentially stagnating in recent months. Against a backdrop of galloping population growth, this is a major setback, reflected in a seven-tenths rise in the unemployment rate since April 2023. The impact of restrictive monetary policy has been particularly visible in the housing market, where sales are contracting due to deteriorating affordability despite strong population growth. In this context, and with purchasing power reduced by the recent surge in inflation, household confidence is at a lower level than in the last two recessions. According to surveys, businesses also share this pessimism, with a large proportion reporting weak domestic demand and a less optimistic sales outlook for the year ahead. This situation is reflected in a rapid slowdown in investment and hiring intentions. Given the lags in monetary policy transmission, the economy is set to weaken further in 2024. In Quebec, economic growth is also expected to be sluggish in 2024, but the province has the strengths to weather the current headwinds, including households with lower debt levels and a greater proportion of dual-income households.

The economic environment in 2023 and the outlook for 2024 are discussed in more detail in the Economic Review and Outlook section on page 24.

Objectives and Strategic Priorities

The Personal and Commercial segment is targeting growth by becoming a more simple, efficient bank focused on constantly improving the client experience.

2023 Achievements and Highlights

2024 Priorities

Accelerate net client acquisition

> Delivered unparalleled performance in terms of total client acquisition, notably through:

· Targeted strategies aimed at priority markets and our differentiated offerings to the professional, newcomer and young client segments.

· Greater contact frequency and more joint meetings with clients by our Commercial Banking and Private Banking 1859 (PB1859) sales forces to better serve entrepreneur clients and meet their business, family, and personal needs.

> Adopted more competitive pricing following a review of banking packages, the purpose being to meet our clients' digital needs.

> Launched a unique, digital appointment-booking capability free of any geographical constraints.

> Acquired the loan portfolio of the Canadian branch of the Silicon Valley Bank, thereby enhancing our Technology Activities and Health Sciences sector of activity.

> Enhanced our ESG impact by taking concrete action to promote the transition of clients to a sustainable environment and social inclusion.

> Enhance the visibility of our brand image across Canada by accentuating our distinguishing characteristics.

> Focus on our priority clientele and high-potential niche markets outside Quebec by developing our digital acquisition capabilities and by building on our personalized advice.

> Expand our sales and sales support teams in Western Canada for key sectors.

> Continue developing our offerings and joint Commercial Banking and PB1859 advice to generate business and market opportunities.

> Expand client support by improving the customer journey through innovative technological capabilities.

> Maintain a good proportion of our growth in CMHC insured loans in the Commercial Banking segment and maintain our mix of business activities.

> Strengthen the ESG culture and performance of our own activities in order to leverage client acquisition.

Improve client engagement

> Accelerated our shift to advice and synergy initiatives, resulting in more core clients and more clients conducting business with more than one segment of the Bank.

> Promoted savings among our clients by being the first bank to offer them a first home savings account (FHSA).

> Deployed significantly enhanced client interaction capabilities, enabling us to offer proactive advice through customer journeys and personalized advice banners.

> Enhanced our digital capabilities in order to improve the ability of clients to independently manage their personal finances, transactions, and personal profiles.

> Enhanced user experience and autonomy by modernizing the cash management features most used by our clients.

> Implemented a series of initiatives to ensure accessibility to our Client Contact Centres, in particular by setting up a dedicated, no-wait telephone line for joint Commercial Banking and PB1859 clients.

> Implemented a strategy of proactive support and advice for our clients most affected by the market fluctuations caused by rapidly rising rates, in particular to help them meet their mortgage obligations.

> Continue to improve our advisory services by focusing on learning and skills development for all our banking advisors.

> Develop new, modernized technological interfaces to provide our Commercial Banking clients with an enhanced, high-performance digital experience.

> Engage clients by relying on our conversational capabilities, personalized customer journeys, and proactive advice.

> Finalize the deployment of the New Experience across all our branches, supporting our experts and promoting digital engagement.

> Enhance our payment offering by modernizing our digital payment ecosystem.

2023 Achievements and Highlights

2024 Priorities

Leverage our simplification, and enhance operational efficiency

> Continuously improved our customer journey, notably by:

· Simplifying the experience when opening a bank account 100% remotely, thereby providing greater flexibility to clients.

· Reducing disbursement times for commercial financing thanks to a reorganization of our work, streamlined business processes, and simplified support models.

> Modernized our more sophisticated cash management product line to suit the needs of large Corporate Banking clients.

> Simplified our support to clients in Western Canada with self-service solutions, flexible advisory services integrated into our virtual branch, and cashless branches.

> Operate closer to clients by reviewing our branch operational support structure and maximize sales force activities.

> Modify our support model to better serve our Commercial Banking and PB1859 clients according to their needs.

> Capitalize on our acceleration of digital services to simplify the transactional offering across all our channels.

> Emphasize our high-potential investments in terms of operational efficiency and effectiveness.

> Focus on the modernization and transformation of our Client Contact Centres to improve accessibility and client experience.

> Continue automating our business processes and thereby enhance operational efficiency.

Segment Results - Personal and Commercial

Year ended October 31
(millions of Canadian dollars)	2023		2022⁽¹⁾		% change
Net interest income	3,321		2,865		16
Non-interest income	1,195		1,169		2
Total revenues	4,516		4,034		12
Non-interest expenses	2,510		2,241		12
Income before provisions for credit losses and income taxes	2,006		1,793		12
Provisions for credit losses	238		97
Income before income taxes	1,768		1,696		4
Income taxes	486		449		8
Net income	1,282		1,247		3
Less: Specified items after income taxes ⁽²⁾	(49)		−
Net income - Adjusted⁽²⁾	1,331		1,247		7
Net interest margin⁽³⁾	2.35	%	2.15	%
Average interest-bearing assets⁽³⁾	141,458		133,543		6
Average assets⁽⁴⁾	148,511		140,300		6
Average loans and acceptances⁽⁴⁾	147,716		139,538		6
Net impaired loans⁽³⁾	285		193		48
Net impaired loans as a % of total loans and acceptances⁽³⁾	0.2	%	0.1	%
Average deposits⁽⁴⁾	85,955		81,996		5
Efficiency ratio⁽³⁾	55.6	%	55.6	%
Efficiency ratio - Adjusted⁽⁵⁾	54.1	%	55.6	%

(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) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures. During fiscal 2023, the segment recorded, in the Non-interest expenses item, $59 million in intangible asset impairment losses ($42 million net of income taxes) on technology development as well as charges of $9 million ($7 million net of income taxes) for contract termination penalties.

(3) See the Glossary section on pages 124 to 127 for details on the composition of these measures.

(4) Represents an average of the daily balances for the period.

(5) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.

Financial Results

In the Personal and Commercial segment, net income totalled $1,282 million in fiscal 2023, a 3% increase from $1,247 million in fiscal 2022 that was due to growth of $482 million in the segment's total revenues, partly offset by higher non-interest expenses (including the fiscal 2023 specified items) and by significantly higher provisions for credit losses. As for the segment's adjusted net income in fiscal 2023, it totalled $1,331 million, up 7% year over year. For fiscal 2023, the segment's income before provisions for credit losses and income taxes amounted to $2,006 million, up 12% year over year, while its adjusted income before provisions for credit losses and income taxes rose 16%. The segment's total revenues grew year over year, essentially due to a $456 million increase in net interest income that was driven mainly by a higher deposit margin (partly offset by a lower loan margin) given the interest rate hikes that occurred during fiscal 2023. This increase had a favourable impact on the segment's net interest margin, which stood at 2.35% in fiscal 2023 versus 2.15% in fiscal 2022. The increase in net interest income also came from growth in personal and commercial loans and deposits.

For fiscal 2023, the Personal and Commercial segment's non-interest expenses stood at $2,510 million, a 12% year-over-year increase that was mainly due to $68 million in specified items recorded during fiscal 2023 as well as to higher compensation and employee benefits (resulting from wage growth), to greater investments made as part of the segment's technological evolution, and to increases in operations support charges. At 55.6%, the segment's efficiency ratio remained stable compared to October 31, 2022. As for the segment's adjusted non-interest expenses for fiscal 2023, they stood at $2,442 million, up 9% year over year. At 54.1%, the segment's 2023 adjusted efficiency ratio improved by 1.5 percentage points from 55.6% in 2022.

The segment recorded $238 million in provisions for credit losses in fiscal 2023, which is $141 million more than the $97 million recorded in fiscal 2022. This increase was mainly due to higher provisions for credit losses on impaired Personal Banking loans (including credit card receivables) and impaired Commercial Banking loans, reflecting a normalization of credit performance. As for the segment's provisions for credit losses on non-impaired loans, they were up due to growth in the loan portfolios, to the migration of credit risk, and to a less favourable macroeconomic outlook during fiscal 2023. Also during fiscal 2023, the segment recorded recoveries of credit losses on Commercial Banking's POCI loans as a result of loan repayments.

Personal Banking

Personal Banking's total revenues amounted to $2,539 million in fiscal 2023, an 8% increase from $2,360 million in fiscal 2022. Its net interest income increased, as there was 3% growth in loan volumes, 5% growth in deposit volumes, and a higher deposit margin that was partly offset by a lower loan margin. Non-interest income was also up, rising $17 million year over year, essentially due to higher credit card revenues given a notable increase in purchasing volume and higher insurance revenues (reflecting revisions to actuarial reserves). Personal Banking's non-interest expenses rose $188 million in fiscal 2023, mainly due to the fiscal 2023 specified items as well as to higher compensation and employee benefits (resulting from wage growth), to greater investments made as part of the segment's technological evolution, and to an increase in operations support charges.

Commercial Banking

Commercial Banking's total revenues amounted to $1,977 million in fiscal 2023, rising 18% from $1,674 million in fiscal 2022. Net interest income was up, essentially due to an improved net interest margin on deposits given the interest rate hikes that occurred in fiscal 2023 as well as to 11% growth in loans and 5% growth in deposits. Non-interest income was also up, rising $9 million compared to fiscal 2022, mainly due to increases in revenues from bankers' acceptances, partly offset by a decrease in revenues from foreign exchange activities. Commercial Banking's non-interest expenses rose $81 million in fiscal 2023, mainly due to higher compensation and employee benefits (resulting from wage growth), to the fiscal 2023 specified items, and to an increase in operations support charges.

Average Loans and Acceptances Year ended October 31 (millions of Canadian dollars)		Average Deposits Year ended October 31 (millions of Canadian Dollars)

2022	2023		2022	2023
Total - Personal and Commercial Banking Personal Banking Commercial Banking		Total - Personal and Commercial Banking Personal Banking Commercial Banking

Wealth Management

As a leader in Quebec and firmly established across Canada, the Wealth Management segment serves all market segments by emphasizing advisory-based service and close client relationships. It delivers a full range of wealth management products and solutions through an omnichannel distribution network and a differentiated business model. Wealth Management also provides services to independent advisors and institutional clients.

Total Revenues by Category

Year ended October 31, 2023

Text Box: $714 million Net income Text Box: $987 million Income before provisions for credit losses and income taxes Text Box: $2,521 million Total revenues

Total Revenues by Geographic Distribution

Year ended October 31, 2023

Net interest income (2022: 25%)

Fee-based services (2022: 60%)

Transaction-based and other revenues (2022: 15%)

Province of Quebec (2022: 63%)

Other provinces (2022: 37%)

Full-Service Brokerage

Drawing on the largest network of investment advisors in Quebec, National Bank Financial Wealth Management (NBFWM) provides wealth management advisory services through 800-plus advisors at close to 100 service points across Canada. Its advisors serve their clients, proposing portfolio management services, financial and succession planning services, and insurance services while working in close collaboration with other segments of the Bank.

Private Banking

Private Banking 1859 (PB1859) offers highly personalized wealth management services and advice across Canada, helping affluent clients benefit from comprehensive management of their personal and family fortunes. As a true market leader in Quebec, PB1859 is continuing to expand throughout Canada with its extensive range of banking services, financial solutions and strategies for the protection, growth, and transmission of wealth.

Direct Brokerage

National Bank Direct Brokerage (NBDB) offers a multitude of financial products and investment tools to self-directed investors across Canada through its online investment solution. NBDB helps customers manage their investments through digital platforms or by speaking directly to a representative on the phone.

Investment Solutions

National Bank Investments Inc. (NBI) manufactures and offers mutual funds, exchange-traded funds (ETFs), investment solutions, and services to consumers and institutional investors through the Bank's extended network. Thanks to its open architecture model, NBI is Canada's largest investment fund manager to entrust the management of its investments exclusively to external portfolio managers.

Administrative and Trade Execution Services

National Bank Independent Network (NBIN) is a Canadian leader in providing administrative services such as trade execution, custodial services, and brokerage solutions to many independent financial services firms across Canada, in particular to introducing brokers, portfolio managers, and investment fund managers.

Transaction Products

The Wealth Management segment provides independent advisors across Canada with a vast array of investment products, including guaranteed investment certificates (GICs), mutual funds, notes, structured products, and monetization, helping to support their own business needs and client relationships.

Trust and Estate Services

Through National Bank Trust Inc. (NBT), Wealth Management provides retail and institutional clients with turnkey services and solutions. Its team of experts offers a full range of high value-added services designed to consolidate, protect, and transfer its customers' wealth and give them peace of mind. NBT also provides integrated trustee and depository services as well as securities custody services.

Economic and Market Review

While the U.S. Federal Reserve's aggressive tightening of monetary policy appears to be coming to an end, the U.S. economy has been surprisingly resilient. The confluence of good economic growth and weakening price pressures has convinced proponents of the "immaculate disinflation" scenario that it is materializing. This has spurred gains in equity markets, notably the S&P 500, which has risen sharply since the start of the year. In Canada, the transmission of monetary policy to the economy has been more rapid, and S&P/TSX performance has therefore been more modest. However, it is premature to assert that the fight against inflation is over and that there is no longer any risk of economic damage. Given the lags in transmission and the low savings rate of U.S. households, the risks of recession remain high for 2024. On the housing front, signs of a slowdown are already noticeable on both sides of the border, as high interest rates have caused a sharp deterioration in affordability. Under the weight of declining purchasing power caused by high interest rates and inflation, consumer confidence has plummeted in recent months. Businesses share this sentiment, forecasting fewer sales and hiring in the months ahead.

The economic environment in 2023 and the outlook for 2024 are discussed in more detail in the Economic Review and Outlook section on page 24.

Objectives and Strategic Priorities

The Wealth Management segment will capitalize on the strength of the Bank's brand by generating sustained earnings growth, further improving client satisfaction, and maintaining high employee engagement. Wealth Management distinguishes itself in the market through its strategic positioning, offering an outstanding client experience with its advisory services, innovative solutions, and exceptional service delivered by agile and aligned multifunctional teams. This segment aims to continue penetrating this market across Canada through organic growth, targeted initiatives, and its unique market positioning.

	2023 Achievements and Highlights	2024 Priorities
Create highly engaged clients thanks to an exceptional advisory‑based experience	> Leveraged our growth strategies (intersegment synergies, high-potential segments and markets). > Further developed a distinctive offering for clients who are in both our PB1859 and Commercial Banking sectors by adding differentiating revenue-generating components. > Continued to see improved results from our client satisfaction surveys. > Increased net client acquisition, exceeding forecasts in most areas of activity. > Developed new tools to help manage client relationships.		> Apply client knowledge to help meet expectations and use data responsibly. Continue developing analytic foundations in order to put data (360-degree holistic view) at the service of clients. > Foster strong client engagement with an advisory-driven experience. > Increase client acquisition activities in promising markets and rapidly growing segments. > Simplify our IT ecosystem and automate certain operating processes more quickly.
Have best-in-class investment and digital solutions	> Continued to develop new investment solutions to meet client needs (with an emphasis on responsible investing, ETFs and alternative solutions). > Continually simplified and improved digital solutions to reflect client needs, in particular brokerage clients. > Continued to improve our advisory solutions.		> Foster client engagement with enhanced digital capabilities. > Improve the advisor experience by developing and improving available digital capabilities. > Strengthen the client/advisor relationship through responsible investing and meet the growing appetite among investors for this type of investment. > Continue to develop fully integrated solutions to support advisors and independent firms.
Encourage entrepreneurial culture and talent development	> Created a team composed of members from all segments to propose major Diversity and Inclusion initiatives.		> Leverage our culture of integration to attract and retain talent. > Foster a culture of continuous professional development.

Segment Results - Wealth Management

Year ended October 31
(millions of Canadian dollars)		2023		2022⁽¹⁾		% change
Net interest income		778		594		31
Fee-based revenues		1,432		1,429		−
Transaction and other revenues		311		352		(12)
Total revenues		2,521		2,375		6
Non-interest expenses		1,534		1,417		8
Income before provisions for credit losses and income taxes		987		958		3
Provisions for credit losses		2		3		(33)
Income before income taxes		985		955		3
Income taxes		271		254		7
Net income		714		701		2
Less: Specified items after income taxes⁽²⁾		(32)		−
Net income - Adjusted⁽²⁾		746		701		6
Average assets⁽³⁾		8,560		8,440		1
Average loans and acceptances⁽³⁾		7,582		7,343		3
Net impaired loans⁽⁴⁾		8		15		(47)
Average deposits⁽³⁾		40,216		35,334		14
Efficiency ratio⁽⁴⁾		60.8	%	59.7	%
Efficiency ratio - Adjusted⁽⁵⁾		59.1	%	59.7	%


Assets under administration⁽⁴⁾		652,631		616,165		6
Assets under management⁽⁴⁾
	Individual	72,245		65,214		11
	Mutual funds	48,613		47,132		3
		120,858		112,346		8

(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) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures. During fiscal 2023, the segment recorded, in the Non-interest expenses item, $8 million in intangible asset impairment losses ($6 million net of income taxes) on technology development as well as $35 million in litigation expenses ($26 million net of income taxes) to resolve litigations and other disputes on various ongoing or potential claims against the Bank.

(3) Represents an average of the daily balances for the period.

(4) See the Glossary section on pages 124 to 127 for details on the composition of these measures.

(5) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.

Financial Results

In the Wealth Management segment, net income totalled $714 million in fiscal 2023 compared to $701 million in fiscal 2022, a 2% increase that was due to growth in the segment's total revenues, partly offset by higher non-interest expenses (including the specified items recorded in fiscal 2023). As for the segment's adjusted net income in fiscal 2023, it totalled $746 million, up 6% from $701 million in fiscal 2022. The segment's total revenues amounted to $2,521 million in fiscal 2023, up 6% from $2,375 million in fiscal 2022. The segment's net interest income was up, rising $184 million or 31% as a result of the interest rate hikes that occurred during fiscal years 2023 and 2022. The fiscal 2023 fee-based revenues remained relatively stable compared to fiscal 2022. As for transaction and other revenues, they were down 12% year over year given a decrease in trading commissions during fiscal 2023.

The segment's non-interest expenses stood at $1,534 million in fiscal 2023 versus $1,417 million in fiscal 2022, for an 8% increase that was due to higher compensation and employee benefits, to higher technology expenses related to the segment's initiatives, and to $43 million in specified items recorded in fiscal 2023. At 60.8% in fiscal 2023, the segment's efficiency ratio deteriorated, essentially due to the fiscal 2023 specified items. As for the segment's adjusted non-interest expenses, they stood at $1,491 million, up 5% from $1,417 million in fiscal 2022. At 59.1%, the adjusted efficiency ratio improved by 0.6 percentage points from 59.7% in fiscal 2022.

Wealth Management recorded $2 million in provisions for credit losses in fiscal 2023 compared to $3 million recorded in fiscal 2022.

Assets Under Administration

and Assets Under Management

Year ended October 31

(millions of Canadian dollars)

2022

2023

Assets under administration

Assets under management

Financial Markets

The Financial Markets segment offers a complete suite of products and services to corporations, institutional clients, and public-sector entities. Whether providing comprehensive advisory services and research or capital markets products and services, the segment focuses on relationships with clients and their growth. Over 900 professionals serve clients through its offices in North America, Europe, the UK, and Asia.

Total Revenues by Category

Year ended October 31, 2023

Text Box: $1,495 million Income before provisions for credit losses and income taxes Text Box: $1,055 million Net income Text Box: $2,656 million Total revenues

Total Revenues by Geographic Distribution

Year ended October 31, 2023

Global Markets (2022: 61%)

Corporate and Investment Banking (2022: 39%)

Province of Quebec (2022: 31%)

Other provinces (2022: 52%)

Outside of Canada (2022: 17%)

Key Success Factors

> Pan-Canadian franchise with established leadership in government debt underwriting and ETF market-making in addition to securities lending and recognized capabilities in risk management solutions, structured products, and equity derivatives.

> Client-centric business with a differentiated and diversified revenue mix.

> Sound risk management.

> Flexible approach to capital allocation and proven ability to adapt to evolving capital market conditions and to deliver consistent financial performance.

> Entrepreneurial culture: Integrated approach, teamwork, and alignment among all groups, including other segments of the Bank.

Global Markets

Financial Markets is a Canadian leader in risk management solutions, structured products, and market-making in ETFs by volume. The segment offers solutions in the areas of fixed-income securities, currencies, equities, and commodities in order to mitigate the financial and business risks of clients. It also provides new product development expertise to asset managers and fund companies and supports their success by providing liquidity, research, and counterparty services. Financial Markets also provides tailored investment products across all asset classes to institutional and retail distribution channels.

Corporate and Investment Banking

Financial Markets provides corporate banking, advisory, and capital markets services. It offers loan origination and syndication to large corporations for project financing, merger and acquisition transactions, and corporate financing solutions. The segment is also an investment banking leader in Quebec and across Canada. Its comprehensive services include strategic advisory for financing and merger and acquisition initiatives as well as for debt and equity

underwriting. It is the Canadian leader in government debt and corporate high‑yield debt underwriting. Dominant in Quebec, the segment is the leader in debt underwriting for provincial and municipal governments across Canada while growing its national position in infrastructure and project financing. Financial Markets is active in securitization financing, mainly mortgages insured by the Government of Canada and mortgage-backed securities.

Economic and Market Review

In an attempt to curb inflation, central banks have tightened monetary policy considerably in recent months, historically the main cause of recessions in the G7 countries. Since this tightening has been highly synchronized, and the impact of interest rate hikes is usually felt with a lag, the risks of lackluster economic performance are high for the global economy in 2024. Slowing inflation means that interest rates are becoming increasingly restrictive in real terms. With the exception of the U.S., several economies are already showing signs of significant weakening, notably the eurozone and China. What's more, the geopolitical context remains uncertain, with rising tensions in the Middle East and the continuing war in Ukraine. Given this highly uncertain backdrop and the high cost of capital, North American companies are likely to be very cautious about investing and hiring, pointing to a sluggish year marked by high market volatility.

The economic environment in 2023 and the outlook for 2024 are discussed in more detail in the Economic Review and Outlook section on page 24.

Objectives and Strategic Priorities

2023 Achievements and Highlights

2024 Priorities

Maintain our leadership in established businesses and leverage our strengths onto other businesses

> Ranked number one in Canadian government debt underwriting for a ninth consecutive year.

> First leading role for a public sector client in the U.S. market with a joint lead role on an Ontario Teachers' Finance Trust US$1.5 billion 5-year bond offering.

> Won the coveted 1-month and 3-month CORRA market-making mandates, which enabled us to participate in the Montréal Exchange's panel discussions on CORRA in various cities around the world.

> Won Best Client Service at the 2023 Structured Products Intelligence Awards.

> Received five awards at the inaugural Canadian ETF Express awards:

· Best ETF Research Provider in Canada

· Best Institutional ETF Broker in Canada

· Best Market Maker/Authorised Participant - Equity ETFs in Canada

· Best Market Maker/Authorised Participant - Fixed Income ETFs in Canada

· Best Overall ETF Liquidity Provider/Market Maker in Canada

> Maintain our leadership through quality and innovation.

Carry on international expansion supported by an innovative offering

> Continued U.S. coverage enhancement in key sectors and distribution of select products.

> National Bank Financial's inaugural role as a joint bookrunner on a World Bank (International Bank for Reconstruction and Development (IBRD)) US$500 million 7-year sustainable development floating-rate note.

> Exclusive financial advisor to Triple Flag Precious Metals Corp. on its combination with Maverix Metals Inc. for a total consideration of US$606 million. The transaction positioned Triple Flag as a gold-focused, emerging senior streaming and royalty company, with a portfolio of 229 streams and royalties on 29 producing mines and 200 development- and exploration-stage projects, predominantly located in the Americas and Australia.

> Financial advisor to Alpha Auto Group on its acquisition, by its related company Global Auto Holdings Limited, of UK-listed Lookers plc for £504 million.

> Exclusive financial advisor to North American Construction Group Ltd. on its $395 million acquisition of Australian-based MacKellar Group.

> Assist our clients in their growth ambitions and funding needs.

2023 Achievements and Highlights

2024 Priorities

Strengthen our leadership role in sustainable financing solutions

> Guided and advised our clients in their energy transitions.

> Created the role of Head of Sustainable Finance in order to better spearhead our vision and strategy with the rest of the Bank.

> Exclusive financial advisor, lead left underwriter, joint bookrunner, and co-sustainability advisor for $1.45 billion of green bonds and construction revolver facilities to support the Connect 6ix⁽¹⁾ $9.0 billion, 39-year public-private partnership for the Ontario Line Rolling Stock, Systems, Operations and Maintenance project in Toronto, Ontario.

> Co-financial advisor to Certarus Ltd. on its $1.05 billion sale to Superior Plus Corp. The transaction establishes a lower carbon and renewable fuels platform via the addition of compressed natural gas, renewable natural gas, and hydrogen to Superior's extensive distribution platform.

> Joint lead placement agent, joint bookrunner, and financial advisor on Nautilus Solar Energy, LLC's inaugural US$202.3 million institutional investment-grade community solar private placement issuance. The issuance was backed by a 185 megawatt portfolio of 58 operating community solar projects located across the Northeastern United States, Colorado, and Minnesota.

> Exclusive financial advisor to Eavor Technologies Inc. on its latest financing round, which will enable Eavor to accelerate the development and deployment of its revolutionary geothermal technology.

> Sustainability swap provider to Bell Canada on its first sustainability-linked derivative to support its ESG objectives.

> Continue discussions with clients, employees, and other stakeholders to achieve net-zero greenhouse gas (GHG) emissions by 2050.

> Ensure depth and quality of our coverage regarding the global energy transition.

> Make ESG principles a growth lever and impact multiplier for Financial Markets.

Ensure continued growth by recruiting, coaching, and retaining a diversified workforce

> Continued to advance our Inclusion and Diversity strategy through scholarship and sponsorship programs.

> Coached and retained our talent at all levels through mentorship and executive development programs.

> Launched an employee development roadmap to help make career paths clearer.

> Implement innovative practices for employee recruitment, coaching, and retention while fostering inclusion.

Further strengthen information technology to enhance and accelerate our execution

> Invested in technology and talent to deploy technology enhancements.

> Improved alignment of IT projects through a newly created project governance committee.

> Used the latest advances in deep learning to automate and scale our platform.

> Continue to create differentiated technology across all Financial Markets' business lines.

(1) The members are: Plenary Americas LP, Hitachi Rail STS S.p.A, Webuild - Canada Holding Inc., and Transdev Canada Inc.

2023 Achievements and Highlights

2024 Priorities

Strengthen our ability to deliver integrated advice and solutions to clients

> Through collaborative efforts within Corporate and Investment Banking and a focus on energy infrastructure, acted as joint bookrunner on $4.4 billion of senior, hybrid and sustainability-linked debt offerings for Enbridge Inc., Enbridge Gas Inc., and Enbridge Pipelines Inc. for acquisition and ongoing capital needs.

> Exclusive financial advisor to Sun Life Financial Inc. in the divestiture of its association and affinity and group creditor business in Canada to Canadian Premier Life Insurance Company.

> Exclusive financial advisor to Dialogue Health Technologies Inc. in its acquisition by Sun Life Financial Inc. for $365 million.

> Exclusive financial advisor to Northleaf Capital Partners on its majority acquisition of Provident Energy Management Inc.; administrative agent, sole bookrunner, and lead arranger of senior secured credit facilities to finance the acquisition.

> Sponsored the annual Bloomberg Canadian Finance Conference for the eleventh year in a row.

> Deepen our relationships with corporations, institutional clients, and public-sector entities and help support their growth.

Segment Results - Financial Markets

Year ended October 31
(taxable equivalent basis)⁽¹⁾
(millions of Canadian dollars)		2023		2022⁽²⁾		% change
Global markets
	Equities	904		979		(8)
	Fixed-income	417		367		14
	Commodities and foreign exchange	173		156		11
		1,494		1,502		(1)
Corporate and investment banking		1,162		966		20
Total revenues⁽¹⁾		2,656		2,468		8
Non-interest expenses		1,161		1,029		13
Income before provisions for credit losses and income taxes		1,495		1,439		4
Provisions for credit losses		39		(23)
Income before income taxes		1,456		1,462		−
Income taxes⁽¹⁾		401		388		3
Net income		1,055		1,074		(2)
Less: Specified items after income taxes⁽³⁾		(5)		−
Net income - Adjusted⁽³⁾		1,060		1,074		(1)
Average assets⁽⁴⁾		180,837		154,349		17
Average loans and acceptances⁽⁴⁾ (Corporate Banking only)		29,027		22,311		30
Net impaired loans⁽⁵⁾		30		91		(67)
Net impaired loans as a % of total loans and acceptances⁽⁵⁾		0.1	%	0.4	%
Average deposits⁽⁴⁾		57,459		47,242		22
Efficiency ratio⁽⁵⁾		43.7	%	41.7	%
Efficiency ratio - Adjusted⁽⁶⁾		43.4	%	41.7	%

(1) The Total revenues and Income taxes items of the Financial Markets segment are presented on a taxable equivalent basis. Taxable equivalent basis is a calculation method that consists in grossing up certain revenues taxed at lower rates by the income tax to a level that would make it comparable to revenues from taxable sources in Canada. For the year ended October 31, 2023, Total revenues were grossed up by $571 million ($277 million in 2022), and an equivalent amount was recognized in Income taxes. The effect of these adjustments is reversed under the Other heading of segment results.

(2) 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.

(3) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures. During fiscal 2023, the segment recorded, in the Non-interest expenses item, $7 million in intangible asset impairment losses ($5 million net of income taxes) on technology development.

(4) Represents an average of the daily balances for the period.

(5) See the Glossary section on pages 124 to 127 for details on the composition of these measures.

(6) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP ratios.

Financial Results

In the Financial Markets segment, net income totalled $1,055 million in fiscal 2023, down 2% year over year. Growth in the segment's total revenues was more than offset by higher non-interest expenses and higher provisions for credit losses. As for adjusted net income, which excludes intangible asset impairment losses, it totalled $1,060 million, down 1% from $1,074 million in fiscal 2022. The segment's income before provisions for credit losses and income taxes stood at $1,495 million in fiscal 2023, up $56 million or 4% from fiscal 2022. Its fiscal 2023 total revenues on a taxable equivalent basis amounted to $2,656 million, a $188 million or 8% year-over-year increase. Global markets revenues were down 1% due to an 8% decrease in revenues from equity securities, whereas revenues from fixed-income securities rose 14% and revenues from commodities and foreign exchange activities rose 11%. As for the fiscal 2023 corporate and investment banking revenues, were up 20% year over year given growth in banking service revenues, revenues from capital markets activity, and revenues from merger and acquisition activity.

For fiscal 2023, the segment's non-interest expenses rose 13% year over year. This increase was due to higher compensation and employee benefits (notably wage growth and the variable compensation associated with revenue growth), to higher technology investment expenses, and to expenses related to the segment's business growth. At 43.7%, the fiscal 2023 efficiency ratio deteriorated when compared to 41.7% in fiscal 2022. As for the segment's adjusted non-interest expenses, they stood at $1,154 million in fiscal 2023 versus $1,029 million in fiscal 2022. And as for the adjusted efficiency ratio, it was 43.4% versus 41.7% in fiscal 2022.

Financial Markets recorded $39 million in provisions for credit losses during fiscal 2023 compared to $23 million in recoveries of credit losses in fiscal 2022. This increase was mainly due to a $60 million increase in provisions for credit losses on non-impaired loans, as there was loan portfolio growth in fiscal 2023 and the fiscal 2023 macroeconomic conditions were less favourable than those of fiscal 2022. As for provisions for credit losses on impaired loans, they were up slightly year over year.

Total Revenues by Category

Year ended October 31

(millions of Canadian dollars)



2022	2023
Global markets - Equities Global markets - Fixed income Global markets - Commodities and foreign exchange Corporate and investment banking

U.S. Specialty Finance and International

The Bank complements its Canadian growth with a targeted, disciplined international strategy that aims for superior returns. The Bank is currently focused on specialty finance in the U.S. through its Credigy subsidiary and on personal and commercial banking in Cambodia through its ABA Bank subsidiary. The Bank also holds minority positions in financial groups operating in French-speaking Africa and Africa-Asia. The Bank currently has a moratorium on any new significant investments in emerging markets. During fiscal 2023, the U.S. Specialty Finance and International (USSF&I) segment generated 12% of the Bank's consolidated total revenue and 16% of its net income.

Text Box: $207 million Net income Text Box: $343 million Income before provisions for credit losses and income taxes Text Box: $483 million Total revenues Credigy

Breakdown of Total Revenues

Year ended October 31, 2023

Credigy (2022: 40%)

ABA Bank (2022: 60%)

Text Box: $726 million Total revenues Text Box: $466 million Income before provisions for credit losses and income taxes Text Box: $343 million Net income ABA Bank

U.S. Specialty Finance - Credigy

Key Success Factors
> Proven investment strategy that is adaptable to rapidly changing market conditions.

> Diversification across several classes of performing assets.

> Market credibility achieved through 370-plus transactions and over US$25 billion in total investments life-to-date.

> Rigorous underwriting approach with continuous refinement of modelling and analytics capabilities.

> Resilience to unfavourable economic conditions owing to credit quality and structural enhancements that provide downside protection.

> Emphasis on recruiting and retaining exceptional talent.

Founded in 2001 and based in Atlanta, Georgia, Credigy is a specialty finance company primarily active in financing and acquiring a diverse range of performing assets. Its portfolio is mostly comprised of diversified secured consumer receivables in the U.S. market. Through its best-in-class modelling expertise, flexibility, and client-centric approach, Credigy is a partner of choice for financial services institutions.

Economic and Market Review

The progress made in recent months in the United States towards achieving the Federal Reserve's dual mandate of maintaining full employment and keeping inflation stable around 2% has certainly been greeted with enthusiasm. Indeed, there seems to be a growing number of investors who now expect a greater possibility of a soft landing for the economy. But the fact that inflation has so far fallen without too much damage to growth does not guarantee that future progress towards price stability will be painless.

It's a safe bet that inflation will continue to fall in 2024, as the U.S. central

bank believes, but there's a significant risk that this will be to the detriment of

economic activity. It turns out that rate hikes tend to affect the economy with a long lag, especially in the U.S. where most mortgages are fixed over a long period. But with the cost of servicing non-mortgage debt rising, consumers may well have to show more restraint in the quarters ahead, especially as the excess savings accumulated during the pandemic may have been fully deployed. This hypothesis seems to be borne out by data already showing a significant increase in the percentage of consumer loans that have fallen into serious delinquency (90 days or more overdue) in the third quarter of 2023. High interest rates are likely to dissuade consumers from making major purchases, and cause businesses to postpone investments as they face an interest payment shock for refinancing. In such a context, the U.S. economy is expected to slide into contraction in the first half of 2024, a scenario that would translate into growth of just 0.3% next year.

The economic environment in 2023 and the outlook for 2024 are discussed in more detail in the Economic Review and Outlook section on page 24.

Objectives and Strategic Priorities - Credigy

Credigy aims to provide customized solutions for the acquisition or financing of consumer assets in pursuit of the best risk-adjusted returns and a pre-tax return on assets (ROA) of at least 2.5%.

	2023 Achievements and Highlights	2024 Priorities
Sustain deal flow by being a partner of choice for institutions facing complex challenges and strategic changes	> Achieved balance sheet growth through a disciplined investment approach. > Invested by establishing new relationships and leveraging existing partners. > Maintained average assets of approximately $9.8 billion.		> Leverage relationships with current and prospective partners. > Remain prepared to seize opportunities in rapidly evolving markets.
Maintain a diversified mix of performing assets	> Invested in prime performing secured assets that lengthened the average life of the business book. > Continued asset class diversification that is focused on high-quality consumer, mortgage, and insurance assets. > Leveraged flexibility to invest via financing and direct acquisitions.		> Favour asset diversification and a prudent investment profile. > Maintain a stable risk-reward balance while optimizing for capital efficiency.
Achieve best risk-adjusted returns	> Actively monitored the economy for opportunities. > Refined and calibrated credit models to target the best risk-return investments. > Maintained a prudent approach to achieve a risk-return balance.		> Actively monitor macroeconomic conditions to implement risk mitigation strategies. > Deliver asset growth through a balanced mix of financing and direct acquisitions.

International - ABA Bank

Established in 1996, ABA Bank provides financial services to individuals and businesses in Cambodia. It is now the largest by assets and the fastest growing commercial bank in Cambodia. ABA Bank offers a full spectrum of financial services to micro, small and medium enterprises (MSMEs) as well as to individuals through 87 branches, 43 self-banking units, 1,395 automated teller machines (ATMs) and other self-service machines, and advanced online banking and mobile banking platforms. It has been selected as the Best Bank in Cambodia by financial magazines The Banker, Global Finance (ninth consecutive year), Euromoney (tenth consecutive year) and Asiamoney.

Economic and Market Review

Signs of economic slowdown in China continue to affect Cambodia's tourism industry as well as foreign direct investments. Garment and textile exports are impacted by weakening global external demand from the U.S. and Europe, while regional exports continue to benefit from recent free-trade agreements⁽¹⁾ and from the diversification of the manufacturing sector. The highly dollarized nature of the Cambodian economy (80%+) helps to keep the inflation under control. After peaking at around 8% in mid-2022, economic growth currently stands at around 2.5%. The economy grew by 5.2% in 2022 and is expected to grow between 5.5% and 6.0% in 2023. In 2024, growth rates should remain between 5% and 6%, as tourism and investments trend towards more normalized levels. Cambodia will also continue to benefit from increased regional economic integration under the ASEAN trade association. The Cambodian market is underbanked; there is a high adoption and use of mobile technology and social media in the country, and over 65% of the population of 17 million is under 35 years of age.

(1) Regional Comprehensive Trade Partnership between the Association of Southeast Asian Nations (ASEAN), Australia, New Zealand, Brunei Darussalam, China and Japan, Cambodia-China, Cambodia-South Korea.

Objectives and Strategic Priorities - ABA Bank

ABA Bank is pursuing an omnichannel banking strategy with the goal of becoming the lending partner of choice to MSMEs while increasing market penetration in deposits and transactional services for retail and business clients.

	2023 Achievements and Highlights	2024 Priorities
Grow market share in MSME lending	> Achieved 27% growth in loan volumes. > Maintained its leading market position while continuing to grow the business. > Continued to adapt the MSME lending strategy to support the growing needs of customers as their businesses become more mature. > Opened six new branches, bringing the total to 87 throughout the country.	> Open 8 branches and 15 self-banking units in 2024 to extend its reach in Cambodia, continue modernizing its branch network, and gain direct access to a larger pool of MSME customers and retail deposits. > Focus on MSME clients in industries that have been minimally affected by the current economic slowdown. > Continue to adapt the lending strategy in line with the growing needs of MSME customers as their businesses become more mature.
Maintain credit quality	> Maintained a well-diversified portfolio (98% of loans are secured with an average loan-to-value between 40 and 50). > At 3.3% of the loan portfolio as at October 31, 2023, non-performing loans were below market average. > Closely monitored clients that are impacted by the current economic slowdown. > Standard & Poor's maintained ABA Bank's long-term credit rating at B+ with a "Stable" outlook, based on its strong financial profile underpinned by its advanced digital platforms and transactional banking.	> Maintain strong governance, disciplined risk management, and sound business processes. > Ensure good credit quality across the loan portfolio to keep non-performing loan levels below market averages. > Continue to focus on secured lending.
Sustain growth in deposits and transactional services	> Grew deposit volume by 25% from fiscal 2022. > Continued to enhance self-banking capabilities, including the market-leading full-scale mobile banking application in Cambodia. > Self-banking transactions made up 99% of total transactions. > Further expanded ABA 24/7, a network of standalone self-banking locations that provide customers with round-the-clock access to their accounts and that now has 43 locations throughout the country.	> Further develop the transactional banking model to accelerate the migration of cash transactions, payments, and money transfers to self-service and digital banking channels. > Adapt the product offering to support the growth and evolving needs of clients. > Increase the deposit base by providing convenience to retail customers through an advanced digital and self-banking infrastructure and by expanding the network of self-service locations.

Segment Results - USSF&I

Year ended October 31
(millions of Canadian dollars)		2023		2022		% change
Total revenues
	Credigy	483		439		10
	ABA Bank	726		669		9
	International	−		2
		1,209		1,110		9
Non-interest expenses
	Credigy	140		131		7
	ABA Bank	260		212		23
	International	2		1
		402		344		17
Income before provisions for credit losses and income taxes		807		766		5
Provisions for credit losses
	Credigy	81		35
	ABA Bank	32		31		3
		113		66		71
Income before income taxes		694		700		(1)
Income taxes
	Credigy	55		57		(4)
	ABA Bank	91		86		6
		146		143		2
Net income
	Credigy	207		216		(4)
	ABA Bank	343		340		1
	International	(2)		1
		548		557		(2)
Average assets⁽¹⁾		23,007		18,890		22
Average loans and receivables⁽¹⁾		18,789		15,283		23
Purchased or originated credit-impaired (POCI) loans		511		459		11
Net impaired loans excluding POCI loans⁽²⁾		283		180
Average deposits⁽¹⁾		10,692		8,577		25
Efficiency ratio⁽²⁾		33.3	%	31.0	%

(1) Represents an average of the daily balances for the period.

(2) See the Glossary section on pages 124 to 127 for details on the composition of these measures.

Financial Results

In the USSF&I segment, net income totalled $548 million in fiscal 2023 compared to $557 million in fiscal 2022, as growth in total revenues was more than offset by higher non-interest expenses and higher provisions for credit losses. The segment's total revenues amounted to $1,209 million in fiscal 2023 versus $1,110 million in fiscal 2022, a 9% increase driven by a $44 million increase in Credigy's revenues and a $57 million increase in ABA Bank's revenues.

For fiscal 2023, the segment's non-interest expenses stood at $402 million compared to $344 million in fiscal 2022, a 17% increase attributable mainly to higher non-interest expenses at ABA Bank resulting from business growth.

The segment's fiscal 2023 provisions for credit losses were up $47 million year over year, with the increase being essentially attributable to Credigy.

Credigy

For fiscal 2023, the Credigy subsidiary's net income totalled $207 million, a 4% year-over-year decrease that was due to significantly higher provisions for credit losses. The subsidiary's income before provisions for credit losses and income taxes totalled $343 million in fiscal 2023, up 11% year over year. Its total revenues amounted to $483 million in fiscal 2023, up from $439 million in fiscal 2022. A decrease in net interest income was more than offset by growth in non-interest income, as there was a higher unfavourable impact from fair value remeasurements of certain portfolios during fiscal 2022. For fiscal 2023, Credigy's non-interest expenses rose $9 million year over year, mainly due to compensation and employee benefits. Its provisions for credit losses increased by $46 million year over year, due to an increase in provisions for credit losses on non-impaired loans (associated with growth in the loan portfolio and a deterioration in certain risk parameters) and on impaired loans. These increases were partly offset by a decrease in provisions for credit losses on POCI loans, as there were favourable remeasurements of certain portfolios during fiscal 2023.

ABA Bank

For fiscal 2023, the ABA Bank subsidiary's net income totalled $343 million, up $3 million or 1% from fiscal 2022. Growth in the subsidiary's business activities, mainly sustained loan growth, drove total revenues up 9% year over year. This increase was, however, partly offset by higher interest rates on deposits and lower interest rates on loans given a competitive environment in Cambodia. ABA Bank's fiscal 2023 non-interest expenses stood at $260 million, a 23% year-over-year increase resulting from higher compensation and employee benefits (notably higher wage expense given a greater number of employees), from higher occupancy expenses given business growth and the opening of new branches, and from higher advertising expenses. Its provisions for credit losses stood at $32 million in fiscal 2023, a $1 million year-over-year increase that stems from higher provisions for credit losses on non-impaired loans, partly offset by lower provisions for credit losses on impaired loans.

Average Loans and Receivables - Credigy Year ended October 31 (millions of Canadian dollars)			Average Loans and Average Deposits - ABA Bank and International Year ended October 31 (millions of Canadian dollars)

	2022	2023		2022 2023
Loans POCI loans			Loans Deposits

Other

The Other heading reports on Treasury operations; liquidity management; Bank funding; asset and liability management; 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. Corporate units include Technology and Operations, Risk Management, Employee Experience, and Finance. These units provide advice and guidance throughout the Bank and to its business segments in addition to expertise and support in their respective fields.

Segment Results - Other

Year ended October 31
(millions of Canadian dollars)	2023	2022⁽¹⁾
Net interest income⁽²⁾	(591)	(536)
Non-interest income⁽²⁾	(141)	201
Total revenues	(732)	(335)
Non-interest expenses	194	199
Income before provisions for credit losses and income taxes	(926)	(534)
Provisions for credit losses	5	2
Income before income taxes	(931)	(536)
Income taxes (recovery)⁽²⁾	(667)	(340)
Net loss	(264)	(196)
Non-controlling interests	(2)	(1)
Net loss attributable to the Bank's shareholders and holders of other equity instruments	(262)	(195)
Less: Specified items after income taxes⁽³⁾	12	−
Net loss − Adjusted⁽³⁾	(276)	(196)
Average assets⁽⁴⁾	69,731	71,868

(1) For the year ended October 31, 2022, certain amounts were reclassified, notably due to a revised method for the sectoral allocation of technology investment expenses.

(2) For the year ended October 31, 2023, Net interest income was reduced by $332 million ($234 million in 2022), Non-interest income was reduced by $247 million ($48 million in 2022), and an equivalent amount was recorded in Income taxes (recovery). These adjustments include a reversal of the taxable equivalent of the Financial Markets segment and the Other heading. Taxable equivalent basis is a calculation method that consists of grossing up certain revenues taxed at lower rates by the income tax to a level that would make it comparable to revenues from taxable sources in Canada.

(3) See the Financial Reporting Method section on pages 14 to 19 for additional information on non-GAAP financial measures. The Bank recorded a $91 million gain ($67 million net of income taxes) upon the fair value measurement of an equity interest, a $25 million expense ($18 million net of income taxes) related to the retroactive impact of changes to the Excise Tax Act, $12 million in impairment losses ($9 million net of income taxes) on premises and equipment and intangible assets, $6 million in charges ($4 million net of income taxes) related to penalties on onerous contracts, and a $24 million income tax expense related to the Canadian government's 2022 tax measures.

(4) Represents an average of the daily balances for the period.

Financial Results

For the Other heading of segment results, there was a net loss of $264 million in fiscal 2023 compared to a net loss of $196 million in fiscal 2022. The change in net loss was notably attributable to lower gains on investments in fiscal 2023, partly offset by a higher contribution from Treasury activities and a $91 million gain recorded upon the fair value measurement of an equity interest during fiscal 2023. For fiscal 2023, non-interest expenses were down slightly year over year, mainly due to variable compensation, partly offset by certain specified items recorded in fiscal 2023, notably a $25 million expense related to the retroactive impact of changes to the Excise Tax Act, $12 million in impairment losses on premises and equipment and intangible assets, and $6 million in charges related to penalties on onerous contracts.

The fiscal 2023 specified items had a $12 million favourable impact on net loss. As for adjusted net loss, it stood at $276 million in fiscal 2023 compared to a $196 million net loss in fiscal 2022.

Quarterly Financial Information

Several trends and factors have an impact on the Bank's quarterly net income, revenues, non-interest expenses and provisions for credit losses. The following table presents a summary of results for the past eight quarters.

Quarterly Results Summary⁽¹⁾

(millions of Canadian dollars)		2023							2022
		Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1
Statement of income data
Net interest income		735	870	882	1,099	1,207	1,419	1,313	1,332
Non-interest income		1,859	1,645	1,597	1,483	1,127	994	1,126	1,134
Total revenues		2,594	2,515	2,479	2,582	2,334	2,413	2,439	2,466
Non-interest expenses		1,607	1,417	1,374	1,403	1,346	1,305	1,299	1,280
Income before provisions for credit losses and
	income taxes	987	1,098	1,105	1,179	988	1,108	1,140	1,186
Provisions for credit losses		115	111	85	86	87	57	3	(2)
Income taxes		104	148	173	212	163	225	248	258
Net income		768	839	847	881	738	826	889	930

(1) For additional information about the 2023 fourth-quarter results, visit the Bank's website at nbc.ca or the SEDAR+ website at sedarplus.ca to consult the Bank's Press Release for the Fourth Quarter of 2023, published on December 1, 2023. Also, a summary of results for the past 12 quarters is provided in Table 1 on pages 114 and 115 of this MD&A.

The analysis of the past eight quarters reflects the sustained performance of all the business segments and helps readers identify the items that have favourably or unfavourably affected results. In the third and fourth quarters of fiscal 2023, the Bank's net income results increased year over year owing to growth in total revenues, partly offset by higher non-interest expenses and higher provisions for credit losses. Conversely, in the first two quarters of fiscal 2023, net income was down year over year due to net income decreases in the Financial Markets and USSF&I segments as well as to higher provisions for credit losses during those quarters of fiscal 2023, as there were more favourable macroeconomic conditions during the same quarters of fiscal 2022.

Year over year, net interest income was down in every quarter of fiscal 2023. These decreases were essentially due to the trading activity revenues of the Financial Markets segment. However, the fiscal 2023 net interest income generated by all the other business segments was up year over year in every quarter (except the second quarter for USSF&I). These increases were driven by loan and deposit growth in both the Personal and Commercial and Wealth Management segments, by loan portfolio growth and by the good performance of certain Credigy portfolios, and by an increase in ABA Bank's net interest income owing to sustained business growth. Moreover, the interest rate hikes that occurred in fiscal 2023 and 2022 had a favourable impact on net interest income in every quarter of fiscal 2023.

For fiscal 2023, non-interest income increased year over year in every quarter, essentially due to the trading activity revenues of the Financial Markets segment, which had a favourable impact on non-interest income in every quarter of fiscal 2023. These increases were also due to sustained business growth in the Personal and Commercial segment, particularly in the area of card revenues, where there was a notable increase in purchasing volume, as well as to revenues from bankers' acceptances. In the Wealth Management segment, non-interest income experienced notable year-over-year decreases in the first and second quarters of fiscal 2023 due to a decrease in fee-based revenues, as stock market performance was weaker compared to the same quarters of fiscal 2022, as well as to a decrease in transaction-based and other revenues. The third-quarter increase in non-interest income was notably due to a $91 million gain recorded upon a fair value remeasurement of an equity interest.

For fiscal 2023, non-interest expenses posted year-over-year increases in every quarter. These increases came from compensation and employee benefits, notably due to wage growth and a greater number of employees, as well as from investments made as part of the Bank's technological evolution. Occupancy expense was also up in every quarter of fiscal 2023, due to expansion of the ABA Bank network and to expenses arising from the Bank's new head office building. Travel and business development expenses were also up in every quarter of fiscal 2023 as activities with clients resumed. In the third quarter of fiscal 2023, non-interest expenses included a $25 million expense related to the retroactive impact of changes to the Excise Tax Act, and in the fourth quarter of fiscal 2023, the Bank recorded $86 million in impairment losses on premises and equipment and intangible assets, $35 million in litigation expenses, and $15 million in provisions for contracts.

Year over year, provisions for credit losses were up in every quarter of fiscal 2023. These increases were due to higher provisions for credit losses on impaired loans at Personal Banking and Commercial Banking, reflecting a normalization of credit risk, as well as to higher provisions for credit losses on Credigy's impaired loans. However, in the first quarter of fiscal 2023, provisions for credit losses on impaired loans were down year over year, as the Financial Markets segment recorded higher recoveries of credit losses in the first quarter. Year over year, provisions for credit losses on non-impaired loans were up in every quarter of fiscal 2023 due to growth in the loan portfolios, to the migration of credit risk, and to updates and revisions to the probability weightings of scenarios, reflecting uncertainties in the macroeconomic outlook. In the first and second quarters of fiscal 2022, the Bank had posted reversals of allowances for credit losses on non-impaired loans to reflect improvements in both the macroeconomic outlook and credit conditions at that time.

For fiscal 2023, the year-over-year change in effective income tax rate stems essentially from a higher level and proportion of tax-exempt dividend income and from higher income in lower tax-rate jurisdictions, factors that were partly offset by the additional 1.5% tax. In addition, in the first quarter of fiscal 2023, the tax rate reflects the impact of the Canadian government's 2022 tax measures, namely, the Canada Recovery Dividend and the $24 million impact related to current and deferred taxes for fiscal 2022.

Analysis of the Consolidated Balance Sheet

Consolidated Balance Sheet Summary

As at October 31
(millions of Canadian dollars)	2023	2022	% change
Assets
Cash and deposits with financial institutions	35,234	31,870	11
Securities	121,818	109,719	11
Securities purchased under reverse repurchase agreements and securities borrowed	11,260	26,486	(57)
Loans and acceptances, net of allowances	225,443	206,744	9
Other	29,823	28,921	3
	423,578	403,740	5
Liabilities and equity
Deposits	288,173	266,394	8
Other	110,979	114,101	(3)
Subordinated debt	748	1,499	(50)
Equity attributable to the Bank's shareholders and holders of other equity instruments	23,676	21,744	9
Non-controlling interests	2	2	−
	423,578	403,740	5

As at October 31, 2023, the Bank had total assets of $423.6 billion, up $19.9 billion or 5% from $403.7 billion since the end of fiscal 2022.

Cash and Deposits With Financial Institutions

At $35.2 billion as at October 31, 2023, cash and deposits with financial institutions were up $3.3 billion since October 31, 2022, mainly due to an increase in deposits with the U.S. Federal Reserve, partly offset by a decrease in deposits with the Bank of Canada. The high level of cash and deposits with financial institutions is explained in part by the excess liquidity related to the accommodative monetary policies that have been applied by central banks since 2020. The Bank's liquidity and funding risk management practices are described on pages 91 to 100 of this MD&A.

Securities

Securities rose $12.1 billion since October 31, 2022, due to a $12.6 billion or 14% increase in securities at fair value through profit or loss, an increase that was essentially attributable to equity securities and securities issued or guaranteed by the Canadian government, partly offset by a decrease in securities issued or guaranteed by U.S. Treasury, other U.S. agencies, and other foreign governments. As for securities other than those measured at fair value through profit or loss, they decreased by $0.5 billion. Securities purchased under reverse repurchase agreements and securities borrowed decreased by $15.2 billion since October 31, 2022, mainly due to the activities of the Financial Markets segment and Treasury. The Bank's market risk management policies are described on pages 84 to 90 of this MD&A.

Loans and Acceptances

As at October 31, 2023, loans and acceptances, net of allowances for credit losses, accounted for 53% of total assets and totalled $225.4 billion, rising $18.7 billion or 9% since October 31, 2022.

Residential mortgage loans outstanding amounted to $86.8 billion as at October 31, 2023, rising $6.7 billion or 8% since October 31, 2022. This growth was mainly driven by sustained demand for mortgage credit in the Personal and Commercial segment as well as by the activities of the Financial Markets segment and the ABA Bank and Credigy subsidiaries. Personal loans totalled $46.4 billion at year-end 2023, rising $1.1 billion from $45.3 billion since October 31, 2022. This increase came mainly from business growth at Personal Banking and ABA Bank. At $2.6 billion, credit card receivables rose $0.2 billion since October 31, 2022.

As at October 31, 2023, loans and acceptances to business and government totalled $90.8 billion, a $10.9 billion or 14% increase since October 31, 2022 that was mainly due to business growth at Commercial Banking, in corporate financial services, and at ABA Bank.

Table 9 (page 121) shows, among other information, gross loans and acceptances by borrower category as at October 31, 2023. At $99.9 billion as at October 31, 2023, residential mortgages (including home equity lines of credit) have posted strong growth since 2019 and accounted for 44% of total loans and acceptances. The growth in residential mortgages was driven by sustained demand for mortgage credit in the Personal and Commercial segment and by the business activity at Financial Markets, ABA Bank, and Credigy. As for personal loans (including credit card receivables), they totalled $20.7 billion as at October 31, 2023, rising $2.0 billion since October 31, 2022. As for loans to businesses, the key increases were recorded in the utilities, communications, financial services, real estate and real-estate-construction, professional services, and other services categories. As at October 31, 2023, certain sectors were down year over year, notably non-real-estate construction and manufacturing. POCI loans rose since October 31, 2022, an increase that was due to portfolios acquired by Credigy and Commercial Banking during fiscal 2023.

Impaired Loans

Impaired loans include all loans classified in Stage 3 of the expected credit loss model and POCI loans.

As at October 31, 2023, gross impaired loans stood at $1,584 million compared to $1,271 million as at October 31, 2022 (Table 10, page 122). As for net impaired loans, they totalled $1,276 million as at October 31, 2023 compared to $1,030 million as at October 31, 2022. Net impaired loans excluding POCI loans amounted to $606 million, rising $127 million from $479 million as at October 31, 2022. This increase was due to an increase in the net impaired loans of the loan portfolios of Personal and Commercial Banking and of the Credigy (excluding POCI loans) and ABA Bank subsidiaries, partly offset by a decrease in the net impaired loans of the loan portfolios of the Wealth Management and Financial Markets segments. The net POCI loans stood at $670 million as at October 31, 2023 compared to $551 million as at October 31, 2022, an increase due to portfolio acquisitions conducted by Credigy and Commercial Banking during fiscal 2023.

A detailed description of the Bank's credit risk management practices is provided on pages 74 to 83 of this MD&A as well as in Note 7 to the consolidated financial statements.

Other Assets

As at October 31, 2023, other assets totalled $29.8 billion compared to $28.9 billion as at October 31, 2022, a $0.9 billion increase that was mainly due to a $1.9 billion increase in other assets, notably receivables, prepaid expenses and other items; interest and dividends receivable; and current tax assets, with these increases being partly offset by a decrease in amounts due from clients, dealers and brokers. Furthermore, derivative financial instruments were down $1.0 billion, with this result being related to the activities of the Financial Markets segment.

Deposits

As at October 31, 2023, deposits stood at $288.2 billion, rising $21.8 billion or 8% since the end of fiscal 2022. At $87.9 billion, personal deposits, as presented in Table 12 (page 123), accounted for 31% of all deposits, and had increased $9.1 billion since October 31, 2022. This increase was driven by business growth at Personal Banking, in both the Wealth Management and Financial Markets segments, and at ABA Bank.

As shown in Table 12, business and government deposits totalled $197.3 billion as at October 31, 2023, rising $13.1 billion from $184.2 billion as at October 31, 2022. This increase came from the funding activities of the Financial Markets segment and of Treasury, including $4.9 billion in deposits subject to bank recapitalization (bail-in) conversion regulations, as well as from Commercial Banking activities. Deposits from deposit-taking institutions totalled $3.0 billion as at October 31, 2023, declining $0.4 billion since the end of fiscal 2022.

Other Liabilities

Other liabilities, totalling $111.0 billion as at October 31, 2023, decreased $3.1 billion since October 31, 2022, resulting essentially from an $8.1 billion decrease in obligations related to securities sold short and a $1.3 billion decrease in liabilities related to transferred receivables. These decreases were partly offset by a $4.8 billion increase in obligations related to securities sold under repurchase agreements and securities loaned and a $1.1 billion increase in other liabilities, notably interest and dividends payable.

Subordinated Debt and Other Contractual Obligations

Subordinated debt decreased since October 31, 2022 as a result of the Bank's redemption, on February 1, 2023, of $750 million in medium-term notes. The contractual obligations are presented in detail in Note 29 to the consolidated financial statements.

Equity

As at October 31, 2023, equity attributable to the Bank's shareholders and holders of other equity instruments totalled $23.7 billion, rising $2.0 billion from $21.7 billion since October 31, 2022. This increase was due to net income net of dividends; to the issuances of common shares under the Stock Option Plan; and to accumulated other comprehensive income, notably net unrealized foreign currency translation gains on investments in foreign operations and net gains on instruments designated as cash flow hedges. These increases were partly offset by remeasurements of pension plans and other post-employment benefit plans as well as by the net fair value change attributable to the credit risk on financial liabilities designated at fair value through profit or loss.

The Consolidated Statements of Changes in Equity on page 138 of this Annual Report present the items that make up equity. In addition, an analysis of the Bank's regulatory capital is presented in the Capital Management section of this MD&A.

Related Party Transactions

In the normal course of business, the Bank provides various banking services and enters into contractual agreements and other transactions with associates, joint ventures, directors, key officers and other related parties. These agreements and transactions are entered into under conditions similar to those offered to non-related third parties.

In accordance with the Bank Act (Canada), the aggregate of loans granted to key officers of the Bank, excluding mortgage loans granted on their principal residence, cannot exceed twice the officer's annual salary.

Loans to eligible key officers are granted under the same conditions as those granted to any other employee of the Bank. The main conditions are as follows:

· the employee must meet the same credit requirements as a client;

· mortgage loans are offered at the preferential employee rate;

· home equity lines of credit bear interest at Canadian prime less 0.5%, but never lower than Canadian prime divided by two;

· personal loans bear interest at a risk-based regular client rate;

· credit card advances bear interest at a prescribed fixed rate in accordance with Bank policy;

· personal lines of credit bear interest at Canadian prime less 0.5%, but never lower than Canadian prime divided by two.

The Bank also offers a deferred stock unit plan to directors who are not Bank employees. For additional information, see Note 22 to the consolidated financial statements. Additional information about related parties is presented in Notes 9, 27 and 28 to the consolidated financial statements.

Income Taxes

Notice of Assessment

In March 2023, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $90 million (including estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2018 taxation year.

In prior fiscal years, the Bank had been reassessed for additional income tax and interest of approximately $875 million (including provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2012-2017 taxation years.

In the reassessments, the CRA alleges that the dividends were received as part of a "dividend rental arrangement".

In October 2023, the Bank filed a notice of appeal with the Tax Court of Canada, and the matter is now in litigation. The CRA may issue reassessments to the Bank for taxation years subsequent to 2018 in regard to certain activities similar to those that were the subject of the above-mentioned reassessments. The Bank remains confident that its tax position was appropriate and intends to vigorously defend its position. As a result, no amount has been recognized in the consolidated financial statements as at October 31, 2023.

Canadian Government's 2022 Tax Measures

On November 4, 2022, the Government of Canada introduced Bill C-32 - An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022 to implement tax measures applicable to certain entities of banking and life insurer groups, as presented in its April 7, 2022 budget. These tax measures include the Canada Recovery Dividend (CRD), which is a one-time, 15% tax on the fiscal 2021 and 2020 average taxable income above $1 billion, as well as a 1.5% increase in the statutory tax rate. On December 15, 2022, Bill C-32 received royal assent. Given that these tax measures were in effect at the financial reporting date, a $32 million tax expense for the CRD and an $8 million tax recovery for the tax rate increase, including the impact related to current and deferred taxes for fiscal 2022, were recognized in the consolidated financial statements for the year ended October 31, 2023.

Proposed Legislation

On November 28, 2023, the Government of Canada released draft legislation entitled An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023 to implement tax measures applicable to the Bank. The measures include the denial of the deduction in respect of dividends received after 2023 on shares that are mark-to-market property for tax purposes (except for dividends received on "taxable preferred shares" as defined in the Income Tax Act), as well as the application of a 2% tax on the net value of equity repurchases occurring as of January 1, 2024.

In its March 28, 2023 budget, the Government of Canada also proposed to implement the Pillar 2 rules (global minimum tax) published by the Organisation for Economic Co-operation and Development (OECD) for fiscal years beginning as of December 31, 2023. To date, the Pillar 2 rules have not yet been included in a bill in Canada. During fiscal 2023, the Pillar 2 rules were included in a bill in certain jurisdictions where the Bank operates.

The federal budget of March 28, 2023 also included another tax measure on amendments to the Excise Tax Act, indicating that payment card clearing services rendered by a payment card network operator are subject to the goods and services tax (GST) and the harmonized sales tax (HST). On April 20, 2023, the Government of Canada tabled Bill C-47 - An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023 to implement, among other things, these amendments to the GST/HST for payment cards. On June 22, 2023, Bill C-47 received royal assent. Given that the amendment to the Excise Tax Act had been adopted at the reporting date, an expense of $25 million was recognized in the consolidated financial statements for the year ended October 31, 2023.

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).

Securitization and Off-Balance-Sheet Arrangements

In the normal course of business, the Bank is party to various financial arrangements that, under IFRS, are not required to be recorded on the Consolidated Balance Sheet or are recorded under amounts other than their notional or contractual values. These arrangements include, among others, transactions with structured entities, derivative financial instruments, the issuance of guarantees, credit instruments, and financial assets received as collateral.

Structured Entities

The Bank uses structured entities, among other means, to diversify its funding sources and to offer services to clients, in particular to help them securitize their financial assets or provide them with investment opportunities. Under IFRS, a structured entity must be consolidated if the Bank controls the entity. Note 1 to the consolidated financial statements describes the accounting policy and criteria used for consolidating structured entities. Additional information on consolidated and non-consolidated structured entities is provided in Note 27 to the consolidated financial statements.

Securitization of the Bank's Financial Assets

Mortgage Loans

The Bank participates in two Canada Mortgage and Housing Corporation (CMHC) securitization programs: the Mortgage-Backed Securities (MBS) Program under the National Housing Act (Canada) (NHA) and the Canada Mortgage Bond (CMB) Program. Under the first program, the Bank issues NHA securities backed by insured residential mortgage loans and, under the second, the Bank sells NHA securities to Canada Housing Trust (CHT), which finances the purchase through the issuance of mortgage bonds insured by CMHC. Moreover, these mortgage bonds feature an interest rate swap agreement under which a CMHC-certified counterparty pays CHT the interest due to investors and receives the interest on the NHA securities. As at October 31, 2023, the outstanding amount of NHA securities issued by the Bank and sold to CHT was $23.2 billion. The mortgage loans sold consist of fixed- or variable-rate residential loans that are insured against potential losses by a loan insurer. In accordance with the NHA-MBS Program, the Bank advances the funds required to cover late payments and, if necessary, obtains reimbursement from the insurer that insured the loan. The NHA-MBS and CMB programs do not use liquidity guarantee arrangements. The Bank uses these securitization programs mainly to diversify its funding sources. In accordance with IFRS, because the Bank retains substantially all of the risks and rewards of ownership of the mortgage loans transferred to CHT, the derecognition criteria are not met. Therefore, the insured mortgage loans securitized under the CMB Program continue to be recognized in Loans on the Bank's Consolidated Balance Sheet, and the liabilities for the considerations received from the transfer are recognized in Liabilities related to transferred receivables on the Consolidated Balance Sheet. For additional information, see Note 8 to the consolidated financial statements.

Credit Card Receivables

In April 2015, the Bank set up Canadian Credit Card Trust II (CCCT II) to continue its program of securitizing credit card receivables on a revolving basis. The Bank uses this entity for capital management and funding purposes. The Bank acts as the servicer of the receivables sold and maintains the client relationship. Furthermore, it administers the securitization program and ensures that all related procedures are stringently followed and that investors are paid according to the provisions of the program.

As at October 31, 2023, the credit card receivables portfolio held by CCCT II represented an amount outstanding of $2.3 billion. CCCT II issued notes to investors, $0.1 billion of which is held by third parties and $0.8 billion is held by the Bank. CCCT II also issued a bank certificate held by the Bank that stood at $1.4 billion as at October 31, 2023. New receivables are periodically sold to the structure on a revolving basis to replace the receivables reimbursed by clients.

Every series of notes is rated by the Fitch and DBRS Morningstar (DBRS) rating agencies. From this portfolio of sold receivables, the Bank retains the excess spread, i.e., the residual net interest income after all the expenses related to this structure have been paid, and thus provides first-loss protection. Furthermore, second-loss protection for issued series is provided by notes subordinated to the senior notes, representing 5.8% of the total amount of the series issued. The Bank controls CCCT II and thus consolidates it.

Securitization of Third-Party Financial Assets

The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the acquired assets. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs while continuing to service 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 administrative and transaction structuring services to these conduits. The Bank provides backstop liquidity and credit enhancement facilities under the commercial paper program. These facilities are presented and described in Notes 26 and 27 to the consolidated financial statements. The Bank has entered into derivative financial instrument contracts with these conduits, the fair value of which is presented on the Bank's Consolidated Balance Sheet. The Bank is not required to consolidate these conduits, as it does not control them.

Derivative Financial Instruments

The Bank uses various types of derivative financial instruments to meet its clients' needs, generate trading activity revenues, and manage its exposure to interest rate, foreign exchange, and credit risk as well as other market risks. All derivative financial instruments are accounted for at fair value on the Consolidated Balance Sheet. Transactions in derivative financial instruments are expressed as notional amounts. These amounts are not presented as assets or liabilities on the Consolidated Balance Sheet. They represent the face amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged. Notes 1 and 16 to the consolidated financial statements provide additional information on the types of derivative financial instruments used by the Bank and their accounting basis.

Guarantees

In the normal course of business, the Bank enters into various guarantee contracts. The principal types of guarantees are letters of guarantee, backstop liquidity and credit enhancement facilities, certain securities lending activities, and certain indemnification agreements. Note 26 to the consolidated financial statements provides detailed information on these guarantees.

Credit Instruments

In the normal course of business, the Bank enters into various off-balance-sheet credit 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 required to extend if the commitments were fully drawn. For additional information on these off-balance-sheet credit instruments and other items, see Note 26 to the consolidated financial statements.

Financial Assets Received as Collateral

In the normal course of business, the Bank receives financial assets as collateral as a result of transactions involving securities purchased under reverse repurchase agreements, securities borrowing and lending agreements, and derivative financial instrument transactions. For additional information on financial assets received as collateral, see Note 26 to the consolidated financial statements.

Capital Management

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 activities, supports its business segments, and protects its clients.

Capital Management Framework

The Bank's capital management policy defines the guiding principles as well as the roles and responsibilities of its internal capital adequacy assessment process. This process aims to determine the capital level that the Bank must maintain to pursue its business activities and accommodate unexpected losses arising from extremely adverse economic and operational conditions. The Bank has implemented a rigorous internal capital adequacy assessment process that comprises the following procedures:

· conducting an overall risk assessment;

· measuring significant risks and the capital requirements related to the Bank's financial budget for the next fiscal year and current and prospective risk profiles;

· integrating stress tests across the organization and executing sensitivity analyses to determine the capital buffer above minimum regulatory levels (for additional information on enterprise-wide stress testing, see the Risk Management section of this MD&A);

· aggregating capital and monitoring the reasonableness of internal capital compared with regulatory capital;

· comparing projected internal capital against regulatory capital levels, internal operating targets, and competing banks;

· attesting to the adequacy of the Bank's capital levels.

Assessing capital adequacy is an integral part of capital planning and strategy. The Bank sets internal operating targets that include a discretionary cushion in excess of the minimum regulatory requirements, which provides a solid financial structure and sufficient capital to meet management's business needs in accordance with its risk appetite, along with competitive returns to shareholders, under both normal market conditions and a range of severe but plausible stress testing scenarios. The internal capital adequacy assessment process is a key tool in establishing the Bank's capital strategy and is subject to quarterly reviews and periodic amendments.

Risk-adjusted return on capital and shareholder value added (SVA), which are obtained from an assessment of required economic capital, are calculated quarterly for each of the Bank's business segments. The results are then used to guide management in allocating capital among the various business segments.

Structure and Governance

Along with its partners from Risk Management, the Global Funding and Treasury Group, and Finance, the Capital Management team is responsible for maintaining integrated control methods and processes so that an overall assessment of capital adequacy may be performed.

The Board oversees the structure and development of the Bank's capital management policy and ensures that the Bank maintains sufficient capital in accordance with regulatory requirements and in consideration of market conditions. The Board delegates certain responsibilities to the Risk Management Committee (RMC), which in turn recommends capital management policies and oversees application thereof. The Board, on the recommendation of the RMC, assumes the following responsibilities:

· reviewing and approving the capital management policy;

· reviewing and approving the Bank's risk appetite, including the main capital and risk targets and the corresponding limits;

· reviewing and approving the capital plan and strategy on an annual basis, including the Bank's internal capital adequacy assessment process;

· reviewing and approving the implementation of significant measures respecting capital, including contingency measures;

· reviewing significant capital disclosures, including Basel capital adequacy ratios;

· ensuring the appropriateness of the regulatory capital adequacy assessment.

The Senior Leadership Team is responsible for defining the Bank's strategy and plays a key role in guiding capital-related measures and decisions. The Enterprise‑Wide Risk Management Committee oversees capital management, which consists of reviewing the capital plan and strategy and implementing significant capital-related measures, including contingency measures, and making recommendations about these measures.

Basel Accord and Regulatory Environment

Basel Accord

The Basel Accord proposes a range of approaches of varying complexity, the choice of which determines the sensitivity of capital to risks. A less complex approach, such as the Standardized Approach, uses regulatory weightings, while a more complex approach uses the Bank's internal estimates of risk components to establish risk-weighted assets (RWA) and calculate regulatory capital.

As required under Basel, risk-weighted assets are calculated for each credit risk, market risk, and operational risk. Some of OSFI's revision to its capital, leverage, liquidity, and disclosure rules, made as part of the Basel III reforms, took effect during the second quarter of 2023, notably the implementation of the revised Standardized Approach and IRB Approach to credit risk, the revision of the operational framework of the leverage ratio framework, and the introduction of a more risk-sensitive capital floor. The Bank uses the Internal Ratings-Based (IRB) Approaches for credit risk to determine minimum regulatory capital requirements for most of its portfolios. The Bank must use the Foundation Internal Ratings-Based (FIRB) Approach for certain specific exposure types such as large corporates and financial institutions. For all other exposure types treated under an IRB Approach, the Bank uses the Advanced Internal Ratings-Based (AIRB) Approach. Under the FIRB Approach, the Bank can use its own estimate of probability of default (PD) but must also rely on OSFI estimates for loss given default (LGD) and exposure at default (EAD) risk parameters. Under the AIRB Approach, the Bank can use its own estimates for all risk parameters: PD, LGD, EAD. Under both IRB Approaches, the risk parameters are subject to specific input floors. The credit risk of certain portfolios considered to be less significant is weighted according to the revised Standardized Approach, which uses prescribed regulatory weightings. Exposure to banking book equity securities is also weighted according to the revised Standardized Approach.

With respect to the risk related to securitization operations, the capital treatment depends on the type of underlying exposures and on the information available about the exposures. The Bank must use the Securitization: Internal Ratings-Based Approach (SEC-IRBA) if it is able to apply an approved internal ratings-based model and has sufficient information to calculate the capital requirements for all underlying exposures in the securitization pool. Under this approach, RWA is derived from a combination of supervisory inputs and inputs specific to the securitization exposure, such as the implicit capital charge related to the underlying exposures, the credit enhancement level, the effective maturity, the number of exposures, and the weighted average LGD.

If the Bank cannot use the SEC-IRBA, it must use the Securitization: External Ratings-Based Approach (SEC-ERBA) for the securitization exposures that are externally rated. This approach assigns risk weights to exposures using external ratings. The Bank uses the ratings assigned by Moody's, Standard & Poor's (S&P), Fitch, Kroll Bond Rating Agency, or DBRS or a combination of these ratings. The Bank uses the Securitization: Internal Assessment Approach (SEC-IAA) for unrated securitization exposures relating to the asset-backed commercial paper conduits it sponsors. The SEC-IAA rating methodologies used are mainly based on criteria published by the above-mentioned credit rating agencies and consider risk factors that the Bank deems relevant to assessing the credit quality of the exposures. The Bank's SEC-IAA includes an assessment of the extent by which the credit enhancement available for loss protection provides coverage of expected losses. The levels of stressed coverage the Bank requires for each internal risk rating are consistent with the requirements published by the rating agencies for equivalent external ratings by asset class. If the Bank cannot apply the SEC-ERBA or the SEC-IAA, it must use the supervisory formula under the Securitization Standardized Approach (SEC-SA). Under this approach, RWA is derived from inputs specific to the securitization exposure, such as the implicit capital charge related to the underlying exposures calculated under the standardized credit risk approach as well as credit enhancement and delinquency levels.

If none of the above approaches can be used, the securitization exposure must be assigned a risk weight of 1,250%. The Bank can apply a reduced capital charge for securitization exposures that meet the criteria of the Simple, Transparent and Comparable (STC) framework.

For operational risk, the Bank applies the revised Standardized Approach, which now incorporates the Bank's internal operational risk loss experience in the RWA calculation.

Market risk-weighted assets are primarily determined using the Internal Model-Based Approach, while the Standardized Approach is used to assess interest-rate-specific risk. Credit valuation adjustment (CVA) risk-weighted assets are determined under a prescribed Standardized Approach. In the first quarter of 2024, the Bank will implement the revised market risk and CVA frameworks in accordance with the Basel III reforms.

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 three-year phase-in of the floor factor, 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.

Capital ratios are calculated by dividing capital by RWA. Credit, market, and operational risks are factored into the RWA calculation for regulatory purposes. Basel rules apply at the consolidated level of the Bank. The assets of non-consolidated entities for regulatory purposes are therefore excluded from the RWA calculation.

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 (LRCN), 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 eligible subordinated debts and certain allowances for credit losses. Total regulatory capital is the sum of Tier 1 and Tier 2 capital.

OSFI is responsible for applying the Basel Accord in Canada. As required under the Basel Accord, OSFI requires that recognized regulatory capital instruments other than common equity must have a non-viability contingent capital (NVCC) clause to ensure that investors bear losses before taxpayers should the government determine that it is in the public interest to rescue a non-viable financial institution. As at October 31, 2023, all of the Bank's regulatory capital instruments, other than common shares, have an NVCC clause. Furthermore, in the regulations of the Canada Deposit Insurance Corporation (CDIC) Act and the Bank Act (Canada), the Government of Canada has provided detailed information on conversion, issuance, and compensation regimes for bail-in instruments issued by Domestic Systemically Important Banks (D-SIBs) (collectively the Bail-In Regulations). Pursuant to the CDIC Act, in circumstances where OSFI has determined that the Bank has ceased, or is about to cease, to be viable, the Governor in Council may, upon a Minister of Finance recommendation indicating that he or she believes that it is in the public interest to do so, grant an order directing CDIC to convert all or a portion of certain shares and liabilities of the Bank into common shares (a "Bail-In Conversion").

The Bail-In Regulations governing the conversion and issuance of bail-in instruments came into force on September 23, 2018, and those governing compensation for holders of converted instruments came into force on March 27, 2018. Any shares and liabilities issued before the effective date of the Bail-In Regulations are not subject to a Bail-In Conversion, unless, in the case of a liability, the terms of said liability are, on or after that day, amended to increase its principal amount or to extend its term to maturity, and the liability, as amended, meets the requirements to be subject to a Bail-In Conversion.

The Bail-In Regulations prescribe the types of shares and liabilities that are subject to a Bail-In Conversion. In general, any senior debt securities with an initial or amended term-to-maturity greater than 400 days that are unsecured or partially secured and have been assigned a Committee on Uniform Securities Identification Procedures (CUSIP), an International Securities Identification Number (ISIN), or similar identification number are subject to a Bail-In Conversion. However, certain other debt obligations of the Bank, such as structured notes (as defined in the Bail-In Regulations), covered bonds, deposits, and certain derivative financial instruments, are not subject to a Bail-In Conversion.

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 are to include a capital conservation buffer of 2.5% established by the BCBS and OSFI, a 1.0% surcharge applicable solely to D-SIBs, and a 3.0% domestic stability buffer (DSB) established by OSFI. On December 8, 2022, OSFI expanded the DSB range, setting it at 0% to 4.0% instead of the previous range of 0% to 2.5%, and it announced that the DSB would rise from 2.5% to 3.0% effective February 1, 2023. On June 20, 2023, OSFI raised the DSB by 50 bps to 3.5% effective November 1, 2023. The DSB consists exclusively of CET1 capital. A D-SIB that fails to meet this buffer requirement is not subject to automatic constraints to reduce capital distributions but must provide a remediation plan to OSFI. Additionally, OSFI requires D-SIBs to meet 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. The leverage ratio is a measure independent of risk that is calculated by dividing the amount of Tier 1 capital by total exposure. Total exposure is defined as the sum of on-balance-sheet assets (including derivative financial instrument exposures and securities financing transaction exposures) and off‑balance-sheet items. The assets deducted from Tier 1 capital are also deducted from total exposure.

OSFI's Total Loss Absorbing Capacity (TLAC) Guideline, which applies to all D-SIBs under the federal government's Bail-In Regulations, is to ensure that a D-SIB has sufficient loss-absorbing capacity to support its recapitalization in the unlikely event it becomes non-viable. Available TLAC includes total capital as well as certain senior unsecured debts that satisfy all of the eligibility criteria of OSFI's TLAC guideline. OSFI requires D-SIBs to maintain a risk-based TLAC ratio of at least 24.5% (including the DSB) of risk-weighted assets and a TLAC leverage ratio of at least 7.25% (increased by 0.5% effective February 1, 2023). As at October 31, 2023, outstanding liabilities of $17.7 billion ($12.8 billion as at October 31, 2022) were subject to conversion under the Bail-In Regulations.

Requirements - Regulatory Capital⁽¹⁾, Leverage⁽¹⁾, and TLAC⁽²⁾ Ratios

										Requirements as at October 31, 2023						Ratios as at October 31, 2023
		Minimum		Capital conservation buffer		Minimum set by BCBS		D-SIB surcharge		Minimum set by OSFI⁽³⁾		Domestic stability buffer⁽⁴⁾		Minimum set by OSFI⁽³⁾, including the domestic stability buffer
		Minimum		Capital conservation buffer		Minimum set by BCBS		D-SIB surcharge		Minimum set by OSFI⁽³⁾		Domestic stability buffer⁽⁴⁾
Capital ratios
	CET1	4.5	%	2.5	%	7.0	%	1.0	%	8.0	%	3.0	%	11.0	%	13.5	%
	Tier 1	6.0	%	2.5	%	8.5	%	1.0	%	9.5	%	3.0	%	12.5	%	16.0	%
	Total	8.0	%	2.5	%	10.5	%	1.0	%	11.5	%	3.0	%	14.5	%	16.8	%
Leverage ratio		3.0	%	n.a.		3.0	%	0.5	%	3.5	%	n.a.		3.5	%	4.4	%
TLAC ratio		21.5	%	n.a.		21.5	%	n.a.		21.5	%	3.0	%	24.5	%	29.2	%
TLAC leverage ratio		6.75	%	n.a.		6.75	%	0.5	%	7.25	%	n.a.		7.25	%	8.0	%

n.a. Not applicable

(1) The capital ratios and the leverage ratio are calculated in accordance with the Basel III rules, as set out in OSFI's Capital Adequacy Requirements Guideline and Leverage Requirements Guideline.

(2) The TLAC ratio and the TLAC leverage ratio are calculated in accordance with OSFI's Total Loss Absorbing Capacity Guideline.

(3) The capital ratios and the TLAC ratio include the capital conservation buffer and the D-SIB surcharge. On February 1, 2023, OSFI raised the minimum leverage ratio and the TLAC leverage ratio by imposing a Tier 1 capital buffer of 0.5% (surcharge related to D-SIBs).

(4) On December 8, 2022, OSFI announced that the DSB would rise from 2.5% to 3.0%, effective February 1, 2023. On June 20, 2023, OSFI announced that the DSB will rise from 3.0% to 3.5% effective November 1, 2023.

The Bank ensures that its capital levels are always above the minimum capital requirements set by OSFI, including the DSB. By maintaining a strong capital structure, the Bank can cover the risks inherent to its business activities, support its business segments, and protect its clients.

Other disclosure requirements pursuant to Pillar 3 of the Basel Accord and a set of recommendations defined by the EDTF are presented in the Supplementary Regulatory Capital and Pillar 3 Disclosure report published quarterly and available on the Bank's website at nbc.ca. Furthermore, a complete list of capital instruments and their main features is also available on the Bank's website.

Regulatory Context

The Bank closely monitors regulatory developments and participates actively in various consultative processes. In response to the impact of the COVID‑19 pandemic, on March 27, 2020 OSFI had announced a series of regulatory adjustments to support the financial and operational resilience of banks. Listed below are the OSFI measures that had an impact during fiscal 2023 but that are no longer applicable as at October 31, 2023.

· Capital floor: OSFI lowered the capital floor factor from 75% to 70% in accordance with the Basel II Standardized Approach; this factor stayed in place until the domestic implementation of the Basel III capital floor in the second quarter of 2023.

· Leverage ratio: OSFI continued to allow banks to temporarily exclude exposures from central bank reserves for leverage ratio purposes until April 1, 2023.

A brief description of ongoing regulatory projects is presented below.

Basel III Reforms

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 affect the market risk and CVA risk frameworks, which will take effect in the first quarter of 2024.

Other Projects

On September 12, 2023, OSFI released the final Parental Stand-Alone (Solo) TLAC Framework for Domestic Systemically Important Banks Guideline. This guideline focuses on the loss-absorbing capacity of Canadian parent banks rather than its consolidated operations, allowing OSFI to assess the stand-alone financial strength of the parent bank and its ability to act as a source of financial strength for its subsidiaries and branches. The framework complements OSFI's existing TLAC guideline for D-SIBs on a group consolidated basis, providing an additional layer of protection to safeguard the rights and interests of depositors, policyholders, and creditors. D-SIBs must adhere to this guideline effective November 1, 2023.

Capital Management in 2023

Management Activities

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 no later than December 11, 2023. During the year ended October 31, 2023, the Bank did not repurchase any common shares.

On February 1, 2023, the Bank redeemed $750 million of medium-term notes maturing on February 1, 2028. These instruments were excluded from the capital ratio calculations as at January 31, 2023.

As at October 31, 2023, the Bank had 338,284,629 issued and outstanding common shares compared to 336,582,124 a year earlier. It also had 66,000,000 issued and outstanding preferred shares and 1,500,000 LRCN, unchanged from October 31, 2022. For additional information on capital instruments, see Notes 15 and 18 to the consolidated financial statements.

Dividends

The Bank's strategy for common share dividends is to aim for a dividend payout ratio between 40% and 50% of net income attributable to common shareholders, taking into account such factors as financial position, cash needs, regulatory requirements, and any other factor deemed relevant by the Board.

For fiscal 2023, the Bank declared $1,344 million in dividends to common shareholders, representing 42.0% of net income attributable to common shareholders (2022: 36.8%) and representing 41.1% of adjusted net income attributable to common shareholders (2022: 36.8%). The declared dividends are within the target payout range as a result of the dividend increase during the fiscal year. Given the economic conditions during fiscal 2023, the Bank has taken a prudent approach to managing regulatory capital and remains confident in its ability to increase earnings going forward.

Shares, Other Equity Instruments, and Stock Options

		As at October 31, 2023
		Number of shares or LRCN	$ million
First preferred shares
	Series 30	14,000,000	350
	Series 32	12,000,000	300
	Series 38	16,000,000	400
	Series 40	12,000,000	300
	Series 42	12,000,000	300
		66,000,000	1,650
Other equity instruments
	LRCN - Series 1	500,000	500
	LRCN - Series 2	500,000	500
	LRCN - Series 3	500,000	500
		1,500,000	1,500
		67,500,000	3,150
Common shares		338,284,629	3,294
Stock options		11,546,688

As at November 24, 2023, there were 338,269,824 common shares and 11,534,768 stock options outstanding. NVCC provisions require the conversion of capital instruments into a variable number of common shares should OSFI deem a bank to be non-viable or should the government publicly announce that a bank has accepted or agreed to accept a capital injection. If an NVCC trigger event were to occur, all of the Bank's preferred shares, LRCNs, and medium-term notes maturing on August 16, 2032, which are NVCC capital instruments, would be converted into common shares of the Bank according to an automatic conversion formula at a conversion price corresponding to the greater of the following amounts: (i) a $5.00 contractual floor price; or (ii) the market price of the Bank's common shares on the date of the trigger event (10-day weighted average price). Based on a $5.00 floor price and including an estimate for accrued dividends and interest, these NVCC capital instruments would be converted into a maximum of 868 million Bank common shares, which would have a 72.0% dilutive effect based on the number of Bank common shares outstanding as at October 31, 2023.

Regulatory Capital Ratios, Leverage Ratio, and TLAC Ratios

As at October 31, 2023, the Bank's CET1, Tier 1, and Total capital ratios were, respectively, 13.5%, 16.0% and 16.8%, compared to ratios of, respectively, 12.7%, 15.4% and 16.9% as at October 31, 2022. The CET1 and Tier 1 capital ratios increased since October 31, 2022, essentially due to the contribution from net income net of dividends, to common share issuances under the Stock Option Plan, and to the positive impact from the implementation of the Basel III reforms related to the credit and operational risk frameworks. These factors were partly offset by growth in RWA and by the end of the transitional measures applicable to ECL provisioning implemented by OSFI at the beginning of the COVID-19 pandemic. The Total capital ratio increased due to the same factors mentioned above, but the increase was more than offset by the $750 million redemption of medium-term notes on February 1, 2023.

As at October 31, 2023, the leverage ratio was 4.4% compared to 4.5% as at October 31, 2022. The decrease in the leverage ratio is essentially due to the growth in total exposure and to the end of the temporary measure permitted by OSFI with respect to the exclusion of central bank reserves from the leverage exposure calculation. These factors were partly offset by the growth in Tier 1 capital.

As at October 31, 2023, the Bank's TLAC ratio and TLAC leverage ratio were, respectively, 29.2% and 8.0%, compared with 27.7% and 8.1%, respectively, as at October 31, 2022. The increase in the TLAC ratio was due to the same factors described for the Total capital ratio as well as to the net instrument issuances that met the TLAC eligibility criteria during the period. The decrease in the TLAC leverage ratio was due to the same factors as those provided for the leverage ratio, partly offset by the net TLAC instrument issuances.

During the year ended October 31, 2023, the Bank was in compliance with all of OSFI's regulatory capital, leverage, and TLAC requirements.

Regulatory Capital⁽¹⁾, Leverage Ratio⁽¹⁾, and TLAC⁽²⁾

As at October 31		2023		2022
Capital
	CET1	16,920		14,818
	Tier 1	20,068		17,961
	Total	21,056		19,727
Risk-weighted assets		125,592		116,840
Total exposure		456,478		401,780
Capital ratios
	CET1	13.5	%	12.7	%
	Tier 1	16.0	%	15.4	%
	Total	16.8	%	16.9	%
Leverage ratio		4.4	%	4.5	%
Available TLAC		36,732		32,351
TLAC ratio		29.2	%	27.7	%
TLAC leverage ratio		8.0	%	8.1	%

(1) Capital, risk-weighted assets, total exposure, the capital ratios, and the leverage ratio are calculated in accordance with the Basel III rules, as set out in OSFI's Capital Adequacy Requirements Guideline and Leverage Requirements Guideline. The calculation of the figures as at October 31, 2022 had included the transitional measure applicable to expected credit loss provisioning and the temporary measure regarding the exclusion of central bank reserves implemented by OSFI in response to the COVID-19 pandemic. These provisions ceased to apply on November 1, 2022 and April 1, 2023, respectively.

(2) Available TLAC, the TLAC ratio, and the TLAC leverage ratio are calculated in accordance with OSFI's Total Loss Absorbing Capacity Guideline.

Movement in Regulatory Capital⁽¹⁾

Year ended October 31
(millions of Canadian dollars)			2023	2022
Common Equity Tier 1 (CET1) capital
Balance at beginning			14,818	12,973
	Issuance of common shares (including Stock Option Plan)		85	54
	Impact of shares purchased or sold for trading		3	(1)
	Repurchase of common shares		−	(245)
	Other contributed surplus		22	16
	Dividends on preferred and common shares and distributions on other equity instruments		(1,507)	(1,325)

	Net income attributable to the Bank's shareholders and holders of other equity instruments		3,337	3,384
	Removal of own credit spread net of income taxes		232	(733)
	Other		(226)	448

	Movements in accumulated other comprehensive income
		Translation adjustments	103	333
		Debt securities at fair value through other comprehensive income	(1)	(105)
		Other	1	(2)

	Change in goodwill and intangible assets (net of related tax liability)		37	(67)
	Other, including regulatory adjustments and transitional arrangements
		Change in defined benefit pension plan asset (net of related tax liability)	101	145
		Change in amount exceeding 15% threshold
		Deferred tax assets	−	−
		Significant investment in common shares of financial institutions	−	−
		Deferred tax assets, unless they result from temporary differences (net of related tax liability)	(25)	(5)
		Other deductions of regulatory adjustments to CET1 implemented by OSFI⁽²⁾	(60)	(52)
		Change in other regulatory adjustments	−	−
Balance at end			16,920	14,818
Additional Tier 1 capital
Balance at beginning			3,143	2,649
	New Tier 1 eligible capital issuances		−	500
	Redeemed capital		−	−
	Other, including regulatory adjustments and transitional arrangements		5	(6)
Balance at end			3,148	3,143

Total Tier 1 capital			20,068	17,961
Tier 2 capital
Balance at beginning			1,766	1,021
	New Tier 2 eligible capital issuances		−	750
	Redeemed capital		(750)	−
	Tier 2 instruments issued by subsidiaries and held by third parties		−	−
	Change in certain allowances for credit losses		(54)	21
	Other, including regulatory adjustments and transitional arrangements		26	(26)
Balance at end			988	1,766
Total regulatory capital			21,056	19,727

(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.

(2) As at October 31, 2022, this item included the transitional measure applicable to expected credit loss provisioning implemented by OSFI in response to the COVID-19 pandemic. This provision ceased to apply on November 1, 2022.

RWA by Key Risk Drivers

Risk-weighted assets (RWA) amounted to $125.6 billion as at October 31, 2023 compared to $116.8 billion as at October 31, 2022, an $8.8 billion increase resulting mainly from organic growth in RWA, a deterioration in the credit quality of the loan portfolio, and by foreign exchange movements, partly offset by methodology changes related to the implementation of the Basel III reforms, notably for operational risk and credit risk. Changes in the Bank's RWA by risk type are presented in the following table.

Risk-Weighted Assets Movement by Key Drivers⁽¹⁾

Quarter ended
(millions of Canadian dollars)		October 31, 2023	July 31, 2023		April 30, 2023	January 31, 2023	October 31, 2022
		Total		Total	Total	Total	Total
Credit risk - Risk-weighted assets at beginning		102,087		101,986	100,820	96,141	91,229
	Book size	2,288		578	572	4,439	2,405
	Book quality	1,045		467	951	697	93
	Model updates	(107)		−	116	172	300
	Methodology and policy	−		−	(1,051)	106	339
	Acquisitions and disposals	−		−	−	−	−
	Foreign exchange movements	1,832		(944)	578	(735)	1,775
Credit risk - Risk-weighted assets at end		107,145		102,087	101,986	100,820	96,141
Market risk - Risk-weighted assets at beginning		5,985		5,060	5,960	6,025	5,696
	Movement in risk levels⁽²⁾	(323)		925	(900)	(65)	329
	Model updates	−		−	−	−	−
	Methodology and policy	−		−	−	−	−
	Acquisitions and disposals	−		−	−	−	−
Market risk - Risk-weighted assets at end		5,662		5,985	5,060	5,960	6,025
Operational risk - Risk-weighted assets at beginning		12,490		12,065	15,033	14,674	14,452
	Movement in risk levels	295		425	93	359	222
	Methodology and policy	−		−	(3,061)	−	−
	Acquisitions and disposals	−		−	−	−	−
Operational risk - Risk-weighted assets at end		12,785		12,490	12,065	15,033	14,674
Risk-weighted assets at end		125,592		120,562	119,111	121,813	116,840

(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.

(2) Also includes foreign exchange rate movements that are not considered material.

The table above provides the risk-weighted assets movements by the key drivers underlying the different risk categories.

The Book size item reflects organic changes in book size and composition (including new loans and maturing loans). RWA movements attributable to book size include increases or decreases in exposures, measured by exposure at default, assuming a stable risk profile.

The Book quality item is the Bank's best estimate of changes in book quality related to experience such as underlying customer behaviour or demographics, including changes resulting from model recalibrations or realignments and also including risk mitigation factors.

The Model updates item is used to reflect implementations of new models, changes in model scope, and any other change applied to address model malfunctions. During the year ended October 31, 2023, the Bank updated the models used for certain retail exposures, mortgages, and non-retail exposures.

The Methodology and policy item presents the impact of changes in calculation methods resulting from changes in regulatory policies or from new regulations. During the quarter ended April 30, 2023, the Bank finalized the implementation of the Basel III reform requirements related to credit risk, operational risk, and capital output floor.

Allocation of Economic Capital and Regulatory RWA

Economic capital is an internal measure that the Bank uses to determine the capital it needs to remain solvent and to pursue its business operations. Economic capital takes into consideration the credit, market, operational, business, and other risks to which the Bank is exposed as well as the risk diversification effect among them and among the business segments. Economic capital thus helps the Bank to determine the capital required to protect itself against such risks and ensure its long-term viability. The by-segment allocation of economic capital and regulatory RWA was carried out on a stand-alone basis before attribution of goodwill and intangible assets. The method used to assess economic capital is reviewed regularly in order to accurately quantify these risks.

The Risk Management section of this MD&A provides comprehensive information about the main types of risk. The "Other risks" presented below include risks such as business risk and structural interest rate risk in addition to the benefit of diversification among types of risk.

Allocation of Risks by Business Segment

As at October 31, 2023

(millions of Canadian dollars)

Text Box: National Bank of Canada

Business

segments

Personal and Commercial

Wealth Management

Financial Markets

U.S. Specialty Finance and International

Other

Major activities

> Banking services

> Credit services

> Financing

> Investment solutions

> Insurance

> Full-service brokerage

> Private banking

> Direct brokerage

> Investment solutions

> Administrative and trade execution services

> Transaction products

> Trust and estate services

> Equities, fixed-income, commodities and foreign exchange

> Corporate banking

> Investment banking

> U.S. Specialty Finance

• Credigy

> International

• ABA Bank (Cambodia)

• Minority interests in emerging markets

> Treasury activities

> Liquidity management

> Bank funding

> Asset and liability management

> Corporate units

> Fintech services

• Flinks Technology Inc.

Economic capital by type of risk

Credit

Market

Operational

Other risks

3,781

410

403

Credit

Market

Operational

Other risks

183

564

Credit

Market

Operational

Other risks

3,116

314

394

968

Credit

Market

Operational

Other risks

1,330

102

Credit

Market

Operational

Other risks

202

(128)

(1,125)

Total

4,594

Total

833

Total

4,792

Total

1,469

Total

(1,051)

Risk-weighted

assets⁽¹⁾

Credit

Market

Operational

48,479

5,120

Credit

Market

Operational

1,833

2,281

Credit

Market

Operational

32,042

5,524

4,928

Credit

Market

Operational

16,100

456

Credit

Market

Operational

8,691

138

Total

53,599

Total

4,114

Total

42,494

Total

16,556

Total

8,829

(1) See the Financial Reporting Method section on pages 14 to 19 for additional information on capital management measures.

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