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Wednesday 28 August, 2019

Nat Bank of Canada

MD&A Q3 2019 (Part 1)

RNS Number : 4507K

National Bank of Canada

28 August 2019

National Bank of Canada

August 28, 2019

Regulatory Announcement (Part 1)

Q3 2019 Results

National Bank of Canada (the "Bank") announces publication of its Third Quarter 2019 Report to Shareholders. The Third Quarter Results have been uploaded to the National Storage Mechanism and will shortly be available at www.morningstar.co.uk/uk/nsm and is available on the Bank's website at https://www.nbc.ca/en/about-us/investors/investor-relations/quarterly-results.html

To view the full PDF of this Third Quarter 2019 Report to Shareholders, please click on the following link:

http://www.rns-pdf.londonstockexchange.com/rns/4507K_1-2019-8-28.pdf

Report to Shareholders Third Quarter 2019

National Bank reports its results for the Third Quarter of 2019

The financial information reported in this document is based on the unaudited interim condensed consolidated financial statements for the quarter and nine-month period ended July 31, 2019 and is 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). All amounts are presented in Canadian dollars.

MONTREAL, August 28, 2019 - For the third quarter of 2019, National Bank is reporting net income of $608 million, a 7% increase from $569 million in the third quarter of 2018. Third-quarter diluted earnings per share stood at $1.66, up 9% from $1.52 in the same quarter of 2018. These increases were driven by net income growth across all the business segments. At $606 million, third-quarter net income excluding specified items rose 7% from $569 million in the same quarter of 2018. The specified items are described on page 5.

For the first nine months of 2019, the Bank's net income totalled $1,718 million, up $52 million or 3% from $1,666 million in the same period of 2018, and its diluted earnings per share stood at $4.67 versus $4.42 in the same nine-month period of 2018, a 6% increase owing essentially to growth across most of the business segments, tempered by a slowdown in the Financial Markets segment during the first six months of 2019.

"Each business segment contributed to earnings growth, helping the Bank to post solid performance in the third quarter of fiscal 2019," said Louis Vachon, President and Chief Executive Officer of National Bank of Canada. "In an environment of economic and geopolitical uncertainty, the Bank will maintain its disciplined approach to managing costs, credit and capital."

Highlights

(millions of Canadian dollars)			Quarter ended July 31							Nine months ended July 31
			2019			2018		% Change		2019			2018		% Change

Net income			608			569		7		1,718			1,666		3
Diluted earnings per share (dollars)		$	1.66		$	1.52		9	$	4.67		$	4.42		6
Return on common shareholders' equity			18.7	%		18.4	%			17.9	%		18.5	%
Dividend payout ratio			42	%		41	%			42	%		41	%

Excluding specified items⁽¹⁾
Net income excluding specified items			606			569		7		1,716			1,666		3
Diluted earnings per share excluding specified items (dollars)		$	1.66		$	1.52		9	$	4.67		$	4.42		6
Return on common shareholders' equity
	excluding specified items		18.6	%		18.4	%			17.9	%		18.5	%
Dividend payout ratio excluding specified items			42	%		41	%			42	%		41	%

									As at July 31, 2019			As at October 31, 2018
CET1 capital ratio under Basel III										11.7	%		11.7	%
Leverage ratio under Basel III										4.0	%		4.0	%

(1) See the Financial Reporting Method section on pages 4 and 5 for additional information on non-GAAP financial measures.

Report to Shareholders Third Quarter 2019

Personal and Commercial

- Net income totalled $277 million in the third quarter of 2019, up 11% from $250 million in the third quarter of 2018.

- At $891 million, the 2019 third-quarter total revenues rose $41 million or 5% year over year.

- Rising 4% from a year ago, personal lending experienced growth, particularly due to mortgage lending, while commercial lending grew 7% from a year ago.

- Net interest margin stood at 2.23% in the third quarter of 2019 versus 2.26% in the third quarter of 2018.

- Third-quarter non-interest expenses were up 2% year over year.

- At 51.2%, the third-quarter efficiency ratio improved from 52.7% in the third quarter of 2018.

Wealth Management

- Net income totalled $126 million in the third quarter of 2019, a 5% increase from $120 million in the third quarter of 2018.

- Third-quarter total revenues amounted to $437 million compared to $425 million in third quarter 2018, a $12 million or 3% increase driven mainly by growth in fee-based revenues.

- Third-quarter non-interest expenses stood at $267 million, up 2% from $262 million in the third quarter of 2018.

- At 61.1%, the efficiency ratio improved from 61.6% in the third quarter of 2018.

Financial Markets

- Net income totalled $182 million in the third quarter of 2019, a 2% increase from $178 million in the third quarter of 2018.

- Third-quarter total revenues on a taxable equivalent basis⁽¹⁾ amounted to $441 million, a $25 million or 6% year-over-year increase attributable mainly to the global markets revenue category.

- Third-quarter non-interest expenses stood at $183 million compared to $171 million in the third quarter of 2018.

- At 41.5%, the third-quarter efficiency ratio on a taxable equivalent basis⁽¹⁾ compares to 41.1% in the third quarter of 2018.

U.S. Specialty Finance and International

- Net income totalled $69 million in the third quarter of 2019, a 28% increase from $54 million in the same quarter of 2018.

- Third-quarter total revenues amounted to $174 million, a $28 million year-over-year increase driven by revenue growth at the ABA Bank subsidiary.

- Third-quarter non-interest expenses stood at $69 million, a $5 million year-over-year increase attributable to the expansion of ABA Bank's banking network.

Other

- The Other heading posted a net loss of $46 million in the third quarter of 2019 versus a $33 million net loss in the same quarter of 2018.

Capital Management

- As at July 31, 2019, the Common Equity Tier 1 (CET1) capital ratio under Basel III was 11.7%, stable compared to October 31, 2018.

- As at July 31, 2019, the Basel III leverage ratio was 4.0%, stable compared to October 31, 2018.

(1) See the Financial Reporting Method section on page 4 for additional information on non-GAAP financial measures.

Management's Discussion

and Analysis

August 27, 2019

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 unaudited interim condensed consolidated financial statements (the consolidated financial statements) for the quarter and nine-month period ended July 31, 2019 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 quarter and nine-month period ended July 31, 2019 and with the 2018 Annual Report. 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 sedar.com.

Financial Reporting Method	4	Income Taxes	18
Highlights	6	Contingent Liabilities	18
Economic Review and Outlook	7	Capital Management	19
Financial Analysis	8	Risk Management	25
Consolidated Results	8	Risk Disclosures	38
Results by Segment	11	Accounting Policies and Financial Disclosure	39
Consolidated Balance Sheet	16	Accounting Policies and Critical Accounting Estimates	39
Disposal	17	Future Accounting Policy Changes	39
Exposures to Certain Activities	17	Financial Disclosure	39
Related Party Transactions	17	Quarterly Financial Information	40
Securitization and Off-Balance-Sheet Arrangements	18

Caution Regarding Forward-Looking Statements

From time to time, the Bank makes written and oral forward-looking statements, such as those contained in the Economic Review and Outlook section of this Report to Shareholders and in the Major Economic Trends section of the 2018 Annual Report, in other filings with Canadian securities regulators, and in other communications, for the purpose of describing the economic environment in which the Bank will operate during fiscal 2019 and the objectives it hopes to achieve for that period. These forward-looking statements are made in accordance with current securities legislation in Canada and the United States. They include, among others, statements with respect to the economy-particularly the Canadian and U.S. economies-market changes, observations regarding the Bank's objectives and its strategies for achieving them, Bank-projected financial returns and certain risks faced by the Bank. These forward-looking statements are typically identified by future or conditional verbs or words such as "outlook," "believe," "anticipate," "estimate," "project," "expect," "intend," "plan," and similar terms and expressions.

By their very nature, such forward-looking statements require assumptions to be made and involve inherent risks and uncertainties, both general and specific. Assumptions about the performance of the Canadian and U.S. economies in 2019 and how that will affect the Bank's business are among the main factors considered in setting the Bank's strategic priorities and objectives and in determining its financial targets, including provisions for credit losses. In determining its expectations for economic growth, both broadly and in the financial services sector in particular, the Bank primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies.

There is a strong possibility that express or implied projections contained in these forward-looking statements will not materialize or will not be accurate. The Bank recommends that readers not place undue reliance on these statements, as a number of factors, many of which are beyond the Bank's control, could cause actual future results, conditions, actions or events to differ significantly from the targets, expectations, estimates or intentions expressed in the forward-looking statements. These factors include credit risk, market risk, liquidity and funding risk, operational risk, regulatory compliance risk, reputation risk, strategic risk and environmental risk, all of which are described in more detail in the Risk Management section beginning on page 52 of the 2018 Annual Report, and more specifically, general economic environment and financial market conditions in Canada, the United States and certain other countries in which the Bank conducts business, including regulatory changes affecting the Bank's business; changes in the accounting policies the Bank uses to report its financial condition, including uncertainties associated with assumptions and critical accounting estimates; tax laws in the countries in which the Bank operates, primarily Canada and the United States (including the U.S. Foreign Account Tax Compliance Act (FATCA)); changes to capital and liquidity guidelines and to the manner in which they are to be presented and interpreted; changes to the credit ratings assigned to the Bank; and potential disruptions to the Bank's information technology systems, including evolving cyber attack risk.

The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found in the Risk Management section of the 2018 Annual Report. Investors and others who rely on the Bank's forward-looking statements should carefully consider the above factors 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.

The forward-looking information contained in this document is presented for the purpose of interpreting the information contained herein and may not be appropriate for other purposes.

Financial Reporting Method

As stated in Note 2 to its audited annual consolidated financial statements for the year ended October 31, 2018, the Bank adopted IFRS 15 on November 1, 2018. As permitted by IFRS 15, the Bank did not restate comparative consolidated financial statements, and Note 2 to these consolidated financial statements presents the impact of IFRS 15 adoption on the Bank's Consolidated Balance Sheet as at November 1, 2018. Since interim consolidated financial statements do not include all of the annual financial statement disclosures required under IFRS, they should be read in conjunction with the audited annual consolidated financial statements and accompanying notes for the year ended October 31, 2018.

The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the year beginning November 1, 2018. This presentation reflects the fact that advisor banking service activities, which had previously been presented in the Wealth Management segment, are now presented in the Personal and Commercial segment. The Bank made this change to better align the monitoring of its activities with its management structure.

Non-GAAP 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, which are based on IFRS. 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 assess results without the specified items if they consider such items not to be reflective of the underlying financial performance of the Bank's operations. Securities regulators require companies to caution readers that non-GAAP financial measures do not have standardized meanings under GAAP and therefore may not be comparable to similar measures used by other companies.

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 tax-exempt income (particularly dividends) by the income tax that would have been otherwise payable. 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 regardless of their tax treatment.

The specified items related to the acquisitions of recent years (mainly those of the Wealth Management segment) are no longer presented as specified items as of November 1, 2018, since the amounts are not considered significant. The figures for the quarter and nine-month period ended July 31, 2018 reflect this change.

Financial Information

(millions of Canadian dollars, except per share amounts)		Quarter ended July 31								Nine months ended July 31
			2019			2018	% Change			2019			2018		% Change

Net income excluding specified items⁽¹⁾
	Personal and Commercial		277			250		11		757			695			9
	Wealth Management		126			120		5		369			346			7
	Financial Markets		182			178		2		512			572			(10)
	U.S. Specialty Finance and International		69			54		28		201			167			20
	Other		(48)			(33)				(123)			(114)

Net income excluding specified items			606			569		7		1,716			1,666			3
	Gain on disposal of Fiera Capital shares⁽²⁾		68			−				68			−
	Gain on disposal of premises and equipment⁽³⁾		43			−				43			−
	Remeasurement at fair value of an investment⁽⁴⁾		(27)			−				(27)			−
	Impairment losses on premises and equipment and on intangible assets⁽⁵⁾		(42)			−				(42)			−
	Provisions for onerous contracts⁽⁶⁾		(33)			−				(33)			−
	Other⁽⁷⁾		(7)			−				(7)			−
Net income			608			569		7		1,718			1,666			3

Diluted earnings per share excluding specified items		$	1.66		$	1.52		9	$	4.67		$	4.42			6
	Gain on disposal of Fiera Capital shares⁽²⁾		0.20			−				0.20			−
	Gain on disposal of premises and equipment⁽³⁾		0.12			−				0.12			−
	Remeasurement at fair value of an investment⁽⁴⁾		(0.08)			−				(0.08)			−
	Impairment losses on premises and equipment and on intangible assets⁽⁵⁾		(0.12)			−				(0.12)			−
	Provisions for onerous contracts⁽⁶⁾		(0.10)			−				(0.10)			−
	Other⁽⁷⁾		(0.02)			−				(0.02)			−
Diluted earnings per share		$	1.66		$	1.52		9	$	4.67		$	4.42			6
																−
Return on common shareholders' equity
	Including specified items		18.7	%		18.4	%			17.9	%		18.5	%
	Excluding specified items		18.6	%		18.4	%			17.9	%		18.5	%

(1) For the quarter and nine-month period ended July 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth Management segment to the Personal and Commercial segment.

(2) During the quarter ended July 31, 2019, following the Bank's disposal of a portion of its investment in Fiera Capital Corporation (Fiera Capital), a gain on disposal of $79 million ($68 million net of income taxes), including a gain of $31 million ($27 million net of income taxes) upon remeasurement at fair value of the retained interest, was recorded in the Other heading of segment results.

(3) During the quarter ended July 31, 2019, the Bank completed the sale of its head office land and building located at 600 De La Gauchetière West, Montreal, Quebec, Canada, for gross proceeds of $187 million, and a gain on disposal of premises and equipment of $50 million ($43 million net of income taxes) was recorded in the Other heading of segment results.

(4) During the quarter ended July 31, 2019, the Bank remeasured at fair value its investment in NSIA Participations (NSIA) and recorded a loss of $33 million ($27 million net of income taxes) in the Other heading of segment results.

(5) During the quarter ended July 31, 2019, the Bank recorded $57 million ($42 million net of income taxes) in impairment losses on premises and equipment and on intangible assets related to computer equipment and technology developments in the Other heading of segment results.

(6) During the quarter ended July 31, 2019, the Bank reviewed all of its corporate building leases and recorded a provision for onerous contracts of $45 million ($33 million net of income taxes) in the Other heading of segment results.

(7) During the quarter ended July 31, 2019, following an optimization of certain organizational structures, the Bank recorded $10 million ($7 million net of income taxes) in severance pay in the Other heading of segment results.

Highlights

(millions of Canadian dollars, except per share amounts)			Quarter ended July 31							Nine months ended July 31
			2019			2018		% Change		2019			2018		% Change

Operating results
Total revenues			1,948			1,792		9		5,517			5,352		3
Net income			608			569		7		1,718			1,666		3
Net income attributable to the Bank's shareholders			591			546		8		1,666			1,595		4
Return on common shareholders' equity			18.7	%		18.4	%			17.9	%		18.5	%
Earnings per share
	Basic	$	1.68		$	1.54		9	$	4.71		$	4.48		5
	Diluted		1.66			1.52		9		4.67			4.42		6

Operating results on a taxable equivalent basis
	and excluding specified items⁽¹⁾
Total revenues on a taxable equivalent basis and
	excluding specified items		1,946			1,854		5		5,658			5,537		2
Net income excluding specified items			606			569		7		1,716			1,666		3
Return on common shareholders' equity
	excluding specified items		18.6	%		18.4	%			17.9	%		18.5	%
Efficiency ratio on a taxable equivalent basis and
	excluding specified items		53.5	%		54.5	%			54.7	%		54.7	%
Earnings per share excluding specified items⁽¹⁾
	Basic	$	1.67		$	1.54		8	$	4.70		$	4.48		5
	Diluted		1.66			1.52		9		4.67			4.42		6

Common share information
Dividends declared		$	0.68		$	0.62			$	1.98		$	1.82
Book value			36.12			33.91				36.12			33.91
Share price
	High		64.16			64.29				64.16			65.35
	Low		60.71			61.26				54.97			58.69
	Close		63.88			63.77				63.88			63.77
Number of common shares (thousands)			334,210			337,441				334,210			337,441
Market capitalization			21,349			21,519				21,349			21,519

(millions of Canadian dollars)		As at July 31, 2019			As at October 31, 2018		% Change

Balance sheet and off-balance-sheet
Total assets			276,312		262,471		5
Loans and acceptances, net of allowances			151,348		146,082		4
Deposits			187,219		170,830		10
Equity attributable to common shareholders			12,070		11,526		5
Assets under administration and under management			557,858		485,080		15

Regulatory ratios under Basel III
Capital ratios
	Common Equity Tier 1 (CET1)		11.7	%	11.7	%
	Tier 1		15.2	%	15.5	%
	Total		16.3	%	16.8	%
Leverage ratio			4.0	%	4.0	%
Liquidity coverage ratio (LCR)			154	%	147	%

Other information
Number of employees - Worldwide			24,881		23,450		6
Number of branches in Canada			429		428		−
Number of banking machines in Canada			940		937		−

(1) See the Financial Reporting Method section on pages 4 and 5 for additional information on non-GAAP financial measures.

Economic Review and Outlook

Global Economy

In a context of intensifying global uncertainty, financial markets have been volatile. In August, the trade war between the United States and China escalated with Washington opting to impose further tariffs on imports of Chinese goods. Meanwhile, growing tensions between the United States and Iran sent oil prices on a roller coaster ride. In the United Kingdom, the nomination of Boris Johnson as the new prime minister raised the probability of the country leaving the European Union on October 31, 2019 without a deal. News was not much better on the economic front, with the trade war disrupting supply chains and weighing on factory output worldwide. GDP growth decelerated in China and the eurozone as industrial production slowed markedly. In the U.S., factories are also struggling, but consumption spending is helping support growth thanks in part to a solid labour market. Things could have been worse for the world economy were it not for services-producing industries, which, for now, are helping offset the factory slump. Major central banks have taken the opportunity offered by relatively low inflation to further loosen monetary policy to support growth. In July, the Federal Reserve cut interest rates for the first time in a decade and signalled it would deliver additional stimulus to steepen the currently inverted yield curve. The European Central Bank went a step further by signalling it may restart quantitative easing in addition to cutting rates even deeper into negative territory. Those measures should help maintain global GDP growth at a level of at least 3.1% in 2019⁽¹⁾. At this point, it's difficult to see much of an improvement in 2020 unless we see a paradigm shift by world governments away from growth-restraining policies such as protectionism and towards growth-enhancing measures such as major fiscal stimulus and reforms.

Canadian Economy

The Canadian economy is now back in the saddle thanks to a rebound in exports, a stabilization in the housing market, and a return of oil production after previously mandated cuts. But because of the difficult start to the year, 2019 GDP growth is expected to come in at roughly 1.4%⁽¹⁾, or below the estimated potential. Employment creation has surpassed expectations in the first seven months of the year with the largest increase in private sector jobs since 2011. Related income gains have supported housing and consumption spending. Those two drivers of growth, however, are expected to take a breather amid the heavier debt load of households and as job creation returns to more sustainable levels. While the escalation of the U.S.-China trade war presents new risks, Canadian exporters have reason to be optimistic amid still-strong U.S. demand, a persistently weak Canadian dollar, and an opening up of new markets via the Comprehensive Economic and Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). As such, business investment could potentially improve from here, more so considering accelerated depreciation measures implemented by the federal government and some provincial governments. With the annual core inflation rate right on its 2% target, the Bank of Canada won't be as aggressive as the Federal Reserve in loosening monetary policy, unless of course financial conditions deteriorate enough as to jeopardize the outlook for the rest of the year and 2020.

Quebec Economy

The Quebec economy continues to grow at a relatively brisk pace. GDP has been expanding for eight consecutive months, the best performance since data recording in 1997. Accommodative monetary policy and fiscal stimulus are helping stimulate the domestic economy and labour market. More than 63,000 net new jobs have been created in the province so far in 2019, the best showing since 2007. Most of these new positions are concentrated in full-time employment and in the private sector. In July, the employment-to-population ratio for people aged 15-64 stood at a record 76.5%, two points above the national average and more than five points above that in the U.S. Tight labour market conditions with a record low unemployment rate (4.9%) are sustaining growth in labour income. Hourly wages for permanent workers were up 6.4% from year-ago levels in July, versus 4.5% for the national average. Household formation and rising disposable income are supporting activity in the residential sector: home sales are on track to establish a new record in 2019. Importantly, housing affordability remains above the national average. Mindful of geopolitical tensions, the Bank sees Quebec economy growing 2.2% in 2019 (compared to 1.4% for Canada)⁽¹⁾. As in Canada, this outlook is subject to revision if geopolitical tensions abate.

(1) GDP growth expectations, Economics group of National Bank Financial

Financial Analysis

Consolidated Results

(millions of Canadian dollars)		Quarter ended July 31						Nine months ended July 31
		2019		2018		% Change		2019		2018		% Change

Operating results
Net interest income		855		837			2	2,660		2,556			4
Non-interest income		1,093		955			14	2,857		2,796			2
Total revenues		1,948		1,792			9	5,517		5,352			3
Non-interest expenses		1,154		1,011			14	3,206		3,027			6
Contribution		794		781			2	2,311		2,325			(1)
Provisions for credit losses		86		76			13	258		254			2
Income before income taxes		708		705			−	2,053		2,071			(1)
Income taxes		100		136			(26)	335		405			(17)
Net income		608		569			7	1,718		1,666			3
Diluted earnings per share (dollars)		1.66		1.52			9	4.67		4.42			6

Taxable equivalent basis⁽¹⁾
Net interest income		58		35				138		109
Non-interest income		36		27				99		76
Income taxes		94		62				237		185
Impact of taxable equivalent basis on net income		−		−				−		−

Specified items⁽¹⁾
Gain on disposal of Fiera Capital shares		79		−				79		−
Gain on disposal of premises and equipment		50		−				50		−
Remeasurement at fair value of an investment		(33)		−				(33)		−
Impairment losses on premises and equipment and on intangible assets		(57)		−				(57)		−
Provisions for onerous contracts		(45)		−				(45)		−
Other		(10)		−				(10)		−
Specified items before income taxes		(16)		−				(16)		−
Income taxes on specified items		(18)		−				(18)		−
Specified items after income taxes		2		−				2		−

Operating results on a taxable equivalent basis and
	excluding specified items⁽¹⁾
Net interest income on a taxable equivalent basis		913		872			5	2,798		2,665			5
Non-interest income on a taxable equivalent basis and excluding specified items		1,033		982			5	2,860		2,872			−
Total revenues on a taxable equivalent basis and excluding specified items		1,946		1,854			5	5,658		5,537			2
Non-interest expenses excluding specified items		1,042		1,011			3	3,094		3,027			2
Contribution on a taxable equivalent basis and excluding specified items		904		843			7	2,564		2,510			2
Provisions for credit losses		86		76			13	258		254			2
Income before income taxes on a taxable equivalent basis and
	excluding specified items	818		767			7	2,306		2,256			2
Income taxes on a taxable equivalent basis and excluding specified items		212		198			7	590		590			−
Net income excluding specified items		606		569			7	1,716		1,666			3
Diluted earnings per share excluding specified items (dollars)		1.66		1.52			9	4.67		4.42			6
Average assets		288,328		265,592			9	283,647		265,291			7
Average loans and acceptances		149,405		140,644			6	147,547		138,223			7
Average deposits		186,344		167,588			11	181,093		166,023			9
Efficiency ratio on a taxable equivalent basis and excluding specified items⁽¹⁾		53.5	%	54.5	%			54.7	%	54.7	%

(1) See the Financial Reporting Method section on pages 4 and 5 for additional information on non-GAAP financial measures.

Financial Results

For the third quarter of 2019, the Bank is reporting net income of $608 million, up $39 million or 7% from $569 million in the third quarter of 2018 as well as diluted earnings per share of $1.66, up 9% from $1.52 in the same quarter of 2018. These increases were driven by net income growth across all the business segments.

Net income excluding specified items totalled $606 million in the third quarter of 2019, up 7% from $569 million in the third quarter of 2018. Third-quarter diluted earnings per share excluding specified items stood at $1.66, a 9% increase from $1.52 in the same quarter of 2018. For the third quarter of 2019, the specified items, net of income taxes, include a $68 million gain on disposal of Fiera Capital shares, a $43 million gain on disposal of premises and equipment, a $27 million loss on the remeasurement at fair value of the Bank's investment in NSIA, $42 million in impairment losses on premises and equipment and on intangible assets, $33 million in provisions for onerous contracts, and $7 million in severance pay.

For the first nine months of 2019, the Bank's net income totalled $1,718 million, up $52 million or 3% from $1,666 million in the same period of 2018, and its nine-month diluted earnings per share stood at $4.67, up 6% from $4.42 in the same period of 2018. These nine-month increases were driven by net income growth of 9% in the Personal and Commercial segment, of 7% in the Wealth Management segment, and of 20% in the U.S. Specialty Finance and International (USSF&I) segment. However, a slowdown in financial markets activity during the first six months of 2019 affected the performance of the Financial Markets segment, whose nine-month net income declined 10% year over year. Nine-month net income excluding specified items totalled $1,716 million, a 3% increase from $1,666 million in the same period of 2018, and nine-month diluted earnings per share excluding specified items stood at $4.67 compared to $4.42 in the same period of 2018. For the nine-month period, the specified items in a net amount of $2 million, net of income taxes, are the same as those provided for the quarter.

Return on common shareholders' equity excluding specified items was 17.9% for the nine months ended July 31, 2019 compared to 18.5% in the same period of 2018.

Total Revenues

For the third quarter of 2019, the Bank's total revenues amounted to $1,948 million, rising $156 million year over year. The 2019 third-quarter total revenues include a $79 million gain on disposal of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the remeasurement at fair value of the Bank's investment in NSIA. In addition, the Personal and Commercial segment's total revenues were up 5% owing to growth in loan and deposit volumes and to higher insurance revenues, the Wealth Management segment's total revenues were up 3% owing to growth in mutual fund revenues and trust service revenues, the Financial Markets segment's revenues were up 6% owing to an increase in global markets revenue, and the USSF&I segment's total revenues were up 19% owing essentially to revenue growth at the ABA Bank subsidiary. Total revenues on a taxable equivalent basis and excluding specified items amounted to $1,946 million in the third quarter of 2019, up 5% from $1,854 million in the third quarter of 2018.

For the nine months ended July 31, 2019, total revenues amounted to $5,517 million, up $165 million from $5,352 million in the same period of 2018. This increase was essentially due to the same factors as those provided for the quarter, except for the Financial Markets segment's revenues, which decreased year over year given a slowdown in financial markets activity during the first six months of 2019. The nine-month increase in total revenues was also driven by higher card revenues and higher net interest income in the Wealth Management segment arising from growth in loan and deposit volumes. Conversely, revenues from securities brokerage commissions were down given a decrease in transaction volume during the nine-month period ended July 31, 2019. Nine-month total revenues on a taxable equivalent basis and excluding specified items amounted to $5,658 million, up 2% from $5,537 million in the same period of 2018.

Non-Interest Expenses

For the third quarter of 2019, non-interest expenses stood at $1,154 million, up 14% from the third quarter of 2018. The 2019 third-quarter non-interest expenses include $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts, and $10 million in severance pay. Other factors contributing to the increase in non-interest expenses were higher compensation and employee benefits, in particular compensation related to the expansion of ABA Bank's banking network, as well as higher technology investment expenses incurred as part of the Bank's transformation plan and for business development. Third-quarter non-interest expenses excluding specified items stood at $1,042 million, up 3% from $1,011 million in the third quarter of 2018.

For the nine months ended July 31, 2019, non-interest expenses stood at $3,206 million, up 6% year over year. The reasons for this increase are the same as those provided above for the third quarter. These increases were, however, tempered by a decrease in variable compensation attributable in part to the lower revenues generated by the Financial Markets segment. Non-interest expenses excluding specified items stood at $3,094 million for the nine months ended July 31, 2019, up 2% from $3,027 million in the same period of 2018.

Provisions for Credit Losses

For the third quarter of 2019, the Bank recorded $86 million in provisions for credit losses compared to $76 million in the same quarter of 2018. This increase was due to higher credit loss provisions on personal loans, credit card receivables, and loans in the Financial Markets segment. The credit loss provisions recorded for U.S. Specialty Finance and International loans were also up, essentially attributable to the Credigy subsidiary. These increases were tempered by a decrease in the credit loss provisions recorded for Commercial Banking loans, mainly due to provisions on impaired loans.

For the nine months ended July 31, 2019, the Bank recorded $258 million in provisions for credit losses, $4 million more than in the same period of 2018. This increase came mainly from higher credit loss provisions on loans in the Financial Markets segment, partly offset by lower credit loss provisions on loans in the USSF&I segment, essentially attributable to the Credigy subsidiary.

Impaired loans include loans classified in Stage 3 of the expected credit loss model and the purchased or originated credit-impaired (POCI) loans of the Credigy subsidiary. As at July 31, 2019, gross impaired loans excluding POCI loans stood at $674 million compared to $630 million as at October 31, 2018. Net impaired loans excluding POCI loans stood at $420 million as at July 31, 2019 compared to $404 million as at October 31, 2018, a $16 million increase attributable mainly to loans in the Financial Markets segment. Gross POCI loans stood at $1,260 million as at July 31, 2019, down from $1,576 million as at October 31, 2018 as a result of maturities and repayments of certain portfolios.

Income Taxes

For the third quarter of 2019, income taxes stood at $100 million compared to $136 million in the same quarter of 2018. The 2019 third-quarter effective tax rate was 14% compared to 19% in the same quarter of 2018. This change in effective tax rate was created mainly by a realization of capital gains taxed at a lower rate, by higher income from lower tax rate jurisdictions, and by a year-over-year increase in tax-exempt dividend income.

For the nine months ended July 31, 2019, the effective tax rate was 16% versus 20% in the same nine-month period of 2018. This change in effective tax rate was due to the same reasons as those provided for the quarter.

Results by Segment

The Bank carries out its activities in four business segments: Personal and Commercial, Wealth Management, Financial Markets, and U.S. Specialty Finance and International. For presentation purposes, other operating activities, certain non-recurring items and Corporate Treasury activities are grouped in the Other heading. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy.

Personal and Commercial

(millions of Canadian dollars)	Quarter ended July 31					Nine months ended July 31
	2019		2018⁽¹⁾		% Change	2019		2018⁽¹⁾		% Change

Operating results
Net interest income	604		581		4	1,770		1,688		5
Non-interest income	287		269		7	806		772		4
Total revenues	891		850		5	2,576		2,460		5
Non-interest expenses	456		448		2	1,366		1,336		2
Contribution	435		402		8	1,210		1,124		8
Provisions for credit losses	57		61		(7)	178		176		1
Income before income taxes	378		341		11	1,032		948		9
Income taxes	101		91		11	275		253		9
Net income	277		250		11	757		695		9
Net interest margin⁽²⁾	2.23	%	2.26	%		2.23	%	2.24	%
Average interest-bearing assets	107,308		102,065		5	106,259		100,663		6
Average assets	113,132		107,539		5	112,064		105,970		6
Average loans and acceptances	112,629		107,240		5	111,551		105,635		6
Net impaired loans⁽³⁾	370		398		(7)	370		398		(7)
Net impaired loans⁽³⁾ as a % of average loans and acceptances	0.3	%	0.4	%		0.3	%	0.4	%
Average deposits	63,185		59,240		7	61,814		57,477		8
Efficiency ratio	51.2	%	52.7	%		53.0	%	54.3	%

(2) Net interest margin is calculated by dividing net interest income by average interest-bearing assets.

(3) Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.

In the Personal and Commercial segment, net income totalled $277 million in the third quarter of 2019, up 11% from $250 million in the third quarter of 2018. The segment's third-quarter total revenues increased by $41 million or 5% year over year owing to growth in net interest income, which rose $23 million, as well as to growth in non-interest income, which rose $18 million. The increase in net interest income was driven by higher personal and commercial loan and deposit volumes. This growth was tempered by a narrowing of the net interest margin, which was 2.23% in the third quarter of 2019 versus 2.26% in the third quarter of 2018, a decrease arising mainly from loan margins.

Personal Banking's third-quarter total revenues rose $33 million year over year. This growth was mostly due to higher net interest income, attributable to growth in loan and deposit volumes, as well as to an increase in insurance revenues owing to a revision to actuarial reserves. As for Commercial Banking's third-quarter total revenues, they rose $8 million due to higher net interest income driven by growth in loan and deposit volumes, by higher bankers' acceptance revenues, and by higher derivative financial instrument revenues.

For the third quarter of 2019, Personal and Commercial's non-interest expenses were up $8 million year over year, mainly due to an increase in operations support charges arising from the segment's initiatives. At 51.2%, the third-quarter efficiency ratio improved by 1.5 percentage points when compared to the third quarter of 2018. The segment's third-quarter provisions for credit losses stood at $57 million, a $4 million year-over-year decrease that was mainly due to lower provisions on Commercial Banking impaired loans, tempered by an increase in provisions on personal loans and on credit card receivables.

For the nine months ended July 31, 2019, the Personal and Commercial segment posted net income of $757 million, up 9% from $695 million in the same nine-month period of 2018. The segment's nine-month total revenues grew 5% year over year. The growth in Personal Banking's nine-month total revenues was due to the same reasons as those provided for the quarter as well as to an increase in card revenues. The growth in Commercial Banking's total revenues was due to the same reasons as those provided for the quarter. For the nine months ended July 31, 2019, the segment's non-interest expenses rose $30 million year over year, mainly due to increases in operations support charges, compensation and employee benefits, and technology investment expenses. The segment's nine-month contribution increased $86 million or 8%. At 53.0% for the nine months ended July 31, 2019, the efficiency ratio improved by 1.3 percentage points versus the same nine-month period of 2018. The nine-month provisions for credit losses were up $2 million compared to the same period in 2018, mainly due to higher credit loss provisions on commercial loans and on credit card receivables, tempered by lower provisions on personal loans.

Wealth Management

(millions of Canadian dollars)	Quarter ended July 31					Nine months ended July 31
	2019		2018⁽¹⁾		% Change	2019		2018⁽¹⁾		% Change

Operating results
Net interest income	115		114		1	355		331		7
Fee-based revenues	259		248		4	751		736		2
Transaction-based and other revenues	63		63		−	191		195		(2)
Total revenues	437		425		3	1,297		1,262		3
Non-interest expenses	267		262		2	798		791		1
Contribution	170		163		4	499		471		6
Provisions for credit losses	−		−			−		1
Income before income taxes	170		163		4	499		470		6
Income taxes	44		43		2	130		124		5
Net income	126		120		5	369		346		7
Average assets	6,146		6,187		(1)	6,265		6,104		3
Average loans and acceptances	4,855		4,784		1	4,865		4,651		5
Net impaired loans⁽²⁾	2		1			2		1
Average deposits	31,916		31,065		3	32,511		31,068		5
Assets under administration and under management	557,858		496,096		12	557,858		496,096		12
Efficiency ratio	61.1	%	61.6	%		61.5	%	62.7	%

(2) Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.

In the Wealth Management segment, net income totalled $126 million in the third quarter of 2019, a 5% increase from $120 million in the same quarter of 2018. The segment's third-quarter total revenues amounted to $437 million, up $12 million or 3% from $425 million in the third quarter of 2018. This increase was mainly driven by higher fee-based revenues, which rose 4% owing to growth in assets under administration and under management resulting from stock market growth during the third quarter of 2019. Net interest income was relatively stable owing to growth in loan and deposit volumes, tempered by lower deposit margins.

For the third quarter of 2019, the segment's non-interest expenses stood at $267 million, a 2% year-over-year increase that was driven mainly by higher compensation and employee benefits and by higher operations support charges. At 61.1%, the third-quarter efficiency ratio improved by 0.5 percentage points when compared to the third quarter of 2018. The segment's provisions for credit losses were nil in the third quarters of both 2019 and 2018.

For the first nine months of 2019, the Wealth Management segment's net income totalled $369 million, up 7% from $346 million in the same period of 2018. The segment's total revenues amounted to $1,297 million for the nine months ended July 31, 2019, up 3% from $1,262 million in the same period of 2018. The nine-month net interest income was up 7% owing to growth in loan and deposit volumes, and fee-based revenues were up owing to growth in assets under administration and under management. Nine-month transaction-based and other revenues were down 2% year over year, essentially due to a decrease in transaction volume. Nine-month non-interest expenses stood at $798 million compared to $791 million in the same period of 2018, for an increase resulting from higher operations support charges arising from the segment's initiatives. At 61.5%, the nine-month efficiency ratio improved from 62.7% in the same nine-month period of 2018.

Assets under administration and under management increased by $61.8 billion or 12% from a year ago, mainly due to net inflows into various solutions and to stock market growth.

Financial Markets

(taxable equivalent basis)⁽¹⁾
(millions of Canadian dollars)		Quarter ended July 31					Nine months ended July 31
		2019		2018⁽²⁾		% Change	2019		2018⁽²⁾		% Change

Operating results
Global markets
	Equities	165		135		22	426		435		(2)
	Fixed-income	79		53		49	210		202		4
	Commodities and foreign exchange	25		28		(11)	102		101		1
		269		216		25	738		738		−
Corporate and investment banking		174		198		(12)	523		548		(5)
Gains on investments and other		(2)		2			(6)		21
Total revenues on a taxable equivalent basis		441		416		6	1,255		1,307		(4)
Non-interest expenses		183		171		7	537		523		3
Contribution on a taxable equivalent basis		258		245		5	718		784		(8)
Provisions for credit losses		10		2			20		4
Income before income taxes on a taxable equivalent basis		248		243		2	698		780		(11)
Income taxes on a taxable equivalent basis		66		65		2	186		208		(11)
Net income		182		178		2	512		572		(10)
Average assets		116,601		99,067		18	110,218		101,644		8
Average loans and acceptances		16,706		15,667		7	16,448		14,817		11
Net impaired loans⁽³⁾		33		−			33		−
Average deposits		29,991		23,525		27	28,626		22,928		25
Efficiency ratio on a taxable equivalent basis⁽¹⁾		41.5	%	41.1	%		42.8	%	40.0	%

(1) See the Financial Reporting Method section on page 4 for additional information on non-GAAP financial measures.

(2) For the quarter and nine-month period ended July 31, 2018, certain amounts have been reclassified.

(3) Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.

In the Financial Markets segment, net income totalled $182 million in the third quarter of 2019 compared to $178 million in the same quarter of 2018, and total revenues on a taxable equivalent basis amounted to $441 million, rising 6% from $416 million in the third quarter of 2018. Third-quarter global markets revenues grew 25% year over year, as revenues from equity securities and from fixed-income securities were up 22% and 49%, respectively, whereas revenues from commodities and foreign exchange activities were down 11%. Third-quarter revenues from corporate and investment banking services were down 12% compared to the third quarter of 2018 as higher revenues from banking services and merger and acquisition activity was more than offset by a decrease in share issuance transactions.

Third-quarter non-interest expenses stood at $183 million, a 7% year-over-year increase that was due to higher variable compensation resulting from revenue growth, technology investment expenses, and operations support charges. At 41.5%, the efficiency ratio on a taxable equivalent basis compares to 41.1% in the third quarter of 2018. The segment's third-quarter provisions for credit losses stood at $10 million compared to $2 million in the third quarter of 2018, an increase that stems mainly from provisions on impaired loans.

For the nine months ended July 31, 2019, the segment posted net income of $512 million, down 10% year over year. Total revenues on a taxable equivalent basis amounted to $1,255 million versus $1,307 million for the nine months ended July 31, 2018. Nine-month global markets revenues remained stable when compared to the same period of 2018. Nine-month revenues from fixed-income securities and from commodity and foreign exchange activities grew 4% and 1%, respectively, tempered by a decrease in revenues from equity securities. Nine-month revenues from corporate and investment banking services were down 5% year over year. Lastly, the gains on investments and other item was higher during the nine-month period ended July 31, 2018.

For the nine months ended July 31, 2019, non-interest expenses rose $14 million or 3% year over year due to higher technology investment expenses, operations support charges, and other expenses, tempered by a decrease in variable compensation resulting from lower revenues during the nine months ended July 31, 2019. The segment's nine-month efficiency ratio on a taxable equivalent basis was 42.8% compared to 40.0% in the same period of 2018. The segment recorded $20 million in provisions for credit losses during the nine-month period ended July 31, 2019 compared to $4 million during the same nine-month period of 2018, an increase that stems essentially from credit loss provisions on impaired loans.

U.S. Specialty Finance and International

(millions of Canadian dollars)		Quarter ended July 31					Nine months ended July 31
		2019		2018		% Change	2019		2018		% Change

Total revenues
	Credigy	95		100		(5)	307		346		(11)
	ABA Bank	79		47		68	213		135		58
	International	−		(1)			3		−
		174		146		19	523		481		9
Non-interest expenses
	Credigy	36		40		(10)	114		118		(3)
	ABA Bank	33		24		38	95		66		44
	International	−		−			2		2
		69		64		8	211		186		13
Contribution		105		82		28	312		295		6
Provisions for credit losses
	Credigy	15		9		67	50		63		(21)
	ABA Bank	4		3		33	10		9		11
		19		12		58	60		72		(17)
Income before income taxes		86		70		23	252		223		13
Income taxes		17		16		6	51		56		(9)
Net income		69		54		28	201		167		20
Non-controlling interests		11		10		10	33		30		10
Net income attributable to the Bank's shareholders		58		44		32	168		137		23
Average assets		10,972		9,233		19	10,674		9,037		18
Average loans and receivables		8,769		7,637		15	8,763		7,730		13
Net impaired loans - Stage 3⁽¹⁾		15		14		7	15		14		7
Purchased or originated credit-impaired (POCI) loans		1,260		1,333		(5)	1,260		1,333		(5)
Average deposits		3,665		2,007		83	3,220		1,778		81
Efficiency ratio		39.7	%	43.8	%		40.3	%	38.7	%

(1) Net impaired loans - Stage 3 exclude POCI loans and are presented net of allowances for credit losses on Stage 3 loan amounts drawn.

In the U.S. Specialty Finance and International segment, net income totalled $69 million in the third quarter of 2019, a 28% increase from $54 million in the same quarter of 2018. The segment's third-quarter total revenues amounted to $174 million compared to $146 million in the third quarter of 2018. A 68% year-over-year increase in revenues at the ABA Bank subsidiary, driven by sustained loan and deposit volume growth, was tempered by lower year-over-year revenues at the Credigy subsidiary as a result of the loan portfolio mix.

For the third quarter of 2019, the segment's non-interest expenses stood at $69 million, a $5 million year-over-year increase attributable mainly to ABA Bank's growing banking network. The segment recorded $19 million in provisions for credit losses compared to $12 million in the same quarter of 2018, an increase that stems essentially from the credit loss provisions recorded by the Credigy subsidiary.

For the nine months ended July 31, 2019, the segment generated net income of $201 million compared to $167 million in the same nine-month period of 2018. Nine-month total revenues amounted to $523 million versus $481 million in the same period of 2018, a 9% increase owing to the same reasons as those provided for the quarter.

The segment's nine-month non-interest expenses stood at $211 million, a $25 million year-over-year increase related to the expansion of ABA Bank's banking network. As for the non-interest expenses of the Credigy subsidiary, they were down slightly. The segment recorded $60 million in provisions for credit losses for the nine months ended July 31, 2019, a $12 million year-over-year decrease that was mainly due to lower credit loss provisions recorded by the Credigy subsidiary following repayments and maturities of certain loan portfolios, whereas the credit loss provisions recorded by the ABA Bank subsidiary rose $1 million.

The segment's effective tax rate was down in the nine-month period ended July 31, 2019 versus the same nine-month period in 2018, as the U.S. tax reform resulted in a lower income tax rate for Credigy.

Other

(taxable equivalent basis)⁽¹⁾
(millions of Canadian dollars)	Quarter ended July 31		Nine months ended July 31
	2019	2018⁽²⁾	2019	2018⁽²⁾

Operating results
Net interest income on a taxable equivalent basis	(48)	(56)	(148)	(129)
Non-interest income on a taxable equivalent basis	147	73	251	156
Total revenues on a taxable equivalent basis	99	17	103	27
Non-interest expenses	179	66	294	191
Contribution on a taxable equivalent basis	(80)	(49)	(191)	(164)
Provisions for credit losses	−	1	−	1
Income before income taxes on a taxable equivalent basis	(80)	(50)	(191)	(165)
Income taxes (recovery) on a taxable equivalent basis	(34)	(17)	(70)	(51)
Net loss	(46)	(33)	(121)	(114)
Non-controlling interests	6	13	19	41
Net loss attributable to the Bank's shareholders	(52)	(46)	(140)	(155)
Specified items after income taxes⁽¹⁾	(2)	−	(2)	−
Net loss excluding specified items⁽¹⁾	(48)	(33)	(123)	(114)
Average assets	41,477	43,566	44,426	42,536

(1) See the Financial Reporting Method section on pages 4 and 5 for additional information on non-GAAP financial measures.

(2) For the quarter and nine-month period ended July 31, 2018, certain amounts have been reclassified.

For the Other heading of segment results, there was a net loss of $46 million in the third quarter of 2019 compared to a net loss of $33 million in the same quarter of 2018. This change in net loss was partly due to a lower contribution from Treasury activities during the third quarter of 2019. The specified items recorded for the third quarter of 2019 had a $2 million favourable impact on the net income recorded in the Other heading of segment results. The third-quarter net loss excluding specified items was $48 million compared to a $33 million net loss in the same quarter of 2018.

Total revenues on a taxable equivalent basis were up, mainly due to the specified items recorded for the third quarter of 2019, which include a $79 million gain on disposal of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the fair value remeasurement of the Bank's investment in NSIA. The third-quarter non-interest expenses were also up as a result of the following specified items: $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts, and $10 million in severance pay.

For the nine months ended July 31, 2019, net loss stood at $121 million compared to a net loss of $114 million in the same nine-month period of 2018. This change in net loss was mainly due to the same reasons as those provided for the quarter. The specified items recorded for the nine-month period ended July 31, 2019 are the same as those provided for the quarter. As for the nine-month non-interest expenses excluding specified items, they were down due to decreases in compensation and employee benefits. The nine-month net loss excluding specified items was $123 million compared to a $114 million net loss in the same period of 2018.

Consolidated Balance Sheet

Consolidated Balance Sheet Summary

(millions of Canadian dollars)		As at July 31, 2019	As at October 31, 2018	% Change

Assets
Cash and deposits with financial institutions		11,552	12,756	(9)
Securities		84,732	69,783	21
Securities purchased under reverse repurchase agreements
	and securities borrowed	13,928	18,159	(23)
Loans and acceptances, net of allowances		151,348	146,082	4
Other		14,752	15,691	(6)
		276,312	262,471	5

Liabilities and equity
Deposits		187,219	170,830	10
Other		73,425	76,539	(4)
Subordinated debt		773	747	3
Equity attributable to the Bank's shareholders		14,520	13,976	4
Non-controlling interests		375	379	(1)
		276,312	262,471	5

Assets

As at July 31, 2019, the Bank had total assets of $276.3 billion compared to $262.5 billion as at October 31, 2018, a $13.8 billion or 5% increase. Cash and deposits with financial institutions, totalling $11.6 billion as at July 31, 2019, decreased $1.2 billion or 9% since October 31, 2018, mainly due to deposits with financial institutions, particularly deposits with the U.S. Federal Reserve. Securities rose $14.9 billion since October 31, 2018, essentially due to an $11.6 billion or 21% increase in securities at fair value through profit or loss, attributable to a $14.5 billion increase in equity securities and to a $5.3 billion increase in securities issued or guaranteed by the U.S. Treasury, other U.S. agencies and other foreign governments. These increases were tempered by a $3.7 billion decrease in securities issued or guaranteed by the Canadian government and a $3.6 billion decrease in securities issued or guaranteed by Canadian provincial and municipal governments. Securities other than those measured at fair value through profit or loss were up $3.3 billion, essentially due to a $1.4 billion increase in securities issued or guaranteed by the Canadian government and to a $2.3 billion increase in securities issued or guaranteed by the U.S. Treasury, other U.S. agencies, and other foreign governments. Securities purchased under reverse repurchase agreements and securities borrowed decreased by $4.3 billion, mainly related to the activities of the Financial Markets segment.

Totalling $151.3 billion as at July 31, 2019, loans and acceptances, net of allowances, rose $5.2 billion since October 31, 2018. The following table provides a breakdown of the main loan and acceptance portfolios.

(millions of Canadian dollars)	As at July 31, 2019	As at October 31, 2018	As at July 31, 2018
Loans and acceptances
Residential mortgage and home equity lines of credit	78,744	75,773	74,446
Personal	14,185	15,235	14,744
Credit card	2,322	2,325	2,285
Business and government	56,784	53,407	52,019
	152,035	146,740	143,494
Allowances for credit losses	(687)	(658)	(658)
	151,348	146,082	142,836

Since October 31, 2018, residential mortgage loans (including home equity lines of credit) rose $2.9 billion or 4%, personal loans were down $1.0 billion (partly due to Credigy's activities), credit card receivables remained stable, and loans and acceptances to business and government were up $3.4 billion or 6% owing to growth in Commercial Banking activities. When compared to July 31, 2018, loans and acceptances grew $8.5 billion or 6% and residential mortgages (including home equity lines of credit) were up $4.3 billion or 6% due to sustained demand for mortgage credit and business growth at the ABA Bank subsidiary. Also compared to a year ago, personal loans were down 3%, whereas credit card receivables were up 2%, and loans and acceptances to businesses and governments grew $4.8 billion or 9% driven by the activities of Commercial Banking and of the Financial Markets segment.

Liabilities

As at July 31, 2019, the Bank had total liabilities of $261.4 billion compared to $248.1 billion as at October 31, 2018.

The Bank's total deposit liability stood at $187.2 billion as at July 31, 2019 compared to $170.8 billion as at October 31, 2018, a $16.4 billion increase arising essentially from growth in business and government deposits. The table on the following page provides a breakdown of total personal savings.

(millions of Canadian dollars)	As at July 31, 2019	As at October 31, 2018	As at July 31, 2018

Balance sheet
Deposits	58,951	55,688	54,277

Off-balance-sheet
Brokerage	134,510	123,458	127,945
Mutual funds	36,353	31,874	33,741
Other	305	440	453
	171,168	155,772	162,139
Total personal savings	230,119	211,460	216,416

As at July 31, 2019, personal deposits stood at $59.0 billion, rising $3.3 billion since October 31, 2018. Since July 31, 2018, personal deposits rose 9%, essentially due to the Bank's initiatives to increase this type of deposit as well as to growth at the ABA Bank subsidiary. As at July 31, 2019, total personal savings amounted to $230.1 billion, up from $211.5 billion as at October 31, 2018 and from $216.4 billion as at July 31, 2018. Overall, off-balance-sheet personal savings stood at $171.2 billion as at July 31, 2019, rising $9.1 billion or 6% from a year ago given net inflows in brokerage operations and growth in stock markets.

At $123.7 billion as at July 31, 2019, business and government deposits rose $13.4 billion since October 31, 2018, essentially due to Treasury activities (including $2.2 billion in deposits subject to bank recapitalization (bail-in) conversion regulations), corporate financing activities, and issuances of structured notes. Other liabilities stood at $73.4 billion as at July 31, 2019, declining 4% since October 31, 2018 due to a $3.9 billion decrease in obligations related to securities sold short.

Equity

As at July 31, 2019, equity attributable to the Bank's shareholders was $14.5 billion, rising $0.5 billion from October 31, 2018. This increase came essentially from net income net of dividends, tempered by remeasurements of pension plans and other post-employment benefit plans, by a net change in gains (losses) on cash flow hedges, and by repurchases of common shares for cancellation, factors which themselves were partly offset by issuances of common shares under the Stock Option Plan and the impact of shares purchased or sold for trading.

Disposal

On May 9, 2019, through one of its subsidiaries, the Bank disposed of 10,680,000 Class A subordinate voting shares of Fiera Capital Corporation (Fiera Capital) at a per-share price of $12.00 for gross proceeds of $128 million. Before the transaction, the Bank's investment in Fiera Capital stood at 18% and was accounted for using the equity method. After the transaction, the Bank's ownership percentage stands at 7%. A gain on disposal of Fiera Capital shares of $79 million ($68 million net of income taxes), including a gain on remeasurement at fair value of the retained interest of $31 million ($27 million net of income taxes) has been recognized in the Non-interest income - Other item of the Consolidated Statement of Income for the quarter ended July 31, 2019 and reported in the Other heading of segment results. After the transaction, the Bank designated the 7% retained interest as a financial asset measured at fair value through other comprehensive income.

Exposures to Certain Activities

The recommendations made by the Financial Stability Board's Enhanced Disclosure Task Force (EDTF) seek to enhance the transparency and measurement of certain exposures, in particular structured entities, subprime and Alt-A exposures, collateralized debt obligations, residential and commercial mortgage-backed securities, and leveraged financing structures. The Bank does not market any specific mortgage financing program to subprime or Alt-A clients. Alt-A loans are granted to borrowers who cannot provide standard proof of income. The Bank's Alt-A loan volume was $403 million as at July 31, 2019 ($425 million as at October 31, 2018). The Bank does not have any significant direct position in residential and commercial mortgage-backed securities that are not insured by the CMHC. Credit derivative positions are presented in the Supplementary Regulatory Capital and Pillar 3 Disclosure report, which is available on the Bank's website at nbc.ca.

Leveraged finance is commonly employed to achieve a specific objective, for example, to make an acquisition, complete a buy-out or repurchase shares. Leveraged finance risk exposure takes the form of both funded and unfunded commitments. As at July 31, 2019, total commitments for this type of loan stood at $3,643 million ($2,967 million as at October 31, 2018). Details about other exposures are provided in the table on structured entities in Note 28 to the audited annual consolidated financial statements for the year ended October 31, 2018.

Related Party Transactions

The Bank's policies and procedures regarding related party transactions have not significantly changed since October 31, 2018. For additional information, see Note 29 to the audited annual consolidated financial statements for the year ended October 31, 2018.

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 at amounts other than their notional or contractual values. These arrangements include, among others, transactions with structured entities, derivative financial instruments, issuances of guarantees, credit instruments, and financial assets received as collateral. A complete analysis of these types of arrangements, including their nature, business purpose and importance, is provided on pages 41 and 42 of the 2018 Annual Report.

For additional information on guarantees, commitments and structured entities, see Notes 27 and 28 to the audited annual consolidated financial statements for the year ended October 31, 2018. For additional information about financial assets transferred but not derecognized, see Note 8 to these consolidated financial statements.

Income Taxes

In June 2019, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $150 million (including estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2014.

In prior fiscal years, the Bank was reassessed for additional income tax and interest of approximately $220 million (including provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2013 and 2012 taxation years.

The transactions to which the above-mentioned reassessments relate are similar to those prospectively addressed by income tax legislation enacted as a result of the 2015 Canadian federal budget.

The CRA may issue reassessments to the Bank for taxation years subsequent to 2014 in regard to activities similar to those that were the subject of the reassessments described above. 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 July 31, 2019.

Contingent Liabilities

Litigation

In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment portfolios and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions or other legal remedies of varied natures.

More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal proceedings involving the Bank are as follows:

Watson

In 2011, a class action was filed in the Supreme Court of British Columbia against Visa Corporation Canada (Visa) and MasterCard International Incorporated (MasterCard) (the Networks) as well as National Bank and a number of other Canadian financial institutions. A similar action was also initiated in Quebec, Ontario, Alberta and Saskatchewan. In each of the actions, the Networks and financial institutions are alleged to have been involved in a price-fixing system to maintain and increase the fees paid by merchants on transactions executed using the credit cards of the Networks. In so doing, they would notably be in breach of the Competition Act. An unspecified amount of compensatory and punitive damages is being claimed. In 2017, a settlement was reached with the plaintiffs; in 2018 it was then approved by the trial courts in each of the five jurisdictions where the action was initiated. The rulings approving the settlement are now the subject of appeal proceedings in multiple jurisdictions.

Defrance

On January 21, 2019, the Quebec Superior Court authorized a class action against National Bank and several other Canadian financial institutions on behalf of consumers residing in Quebec. The plaintiffs allege that non-sufficient funds charges, billed by all of the defendants when a payment order is refused due to non-sufficient funds, are illegal and prohibited by the Consumer Protection Act. The plaintiffs are claiming, in the form of damages, the repayment of these charges as well as punitive damages.

It is impossible to determine the outcome of the claims instituted or which may be instituted against the Bank and its subsidiaries. The Bank estimates, based on the information at its disposal, that while the amount of contingent liabilities pertaining to these claims, taken individually or in the aggregate, could have a material impact on the Bank's consolidated results of operations for a particular period, it would not have a material adverse impact on the Bank's consolidated financial position.

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 risks inherent to the Bank's business, supports its business segments and protects its clients. The Bank's capital management policy defines guiding principles as well as the roles and responsibilities of its internal capital adequacy assessment process. This process aims to determine the capital that the Bank needs to pursue its business operations and to accommodate unexpected losses arising from extremely adverse economic and operational conditions. For additional information on the capital management framework, see the Capital Management section on pages 43 to 51 of the Bank's 2018 Annual Report.

Basel Accord

The Bank and all other major Canadian banks must maintain a CET1 capital ratio of at least 8.0%, a Tier 1 capital ratio of at least 9.5%, and a Total capital ratio of at least 11.5%. All of these ratios are to include a capital conservation buffer of 2.5% (set by the Basel Committee on Banking Supervision (BCBS) and OSFI) and a 1% surcharge (set by OSFI) applicable to Domestic Systemically Important Banks (D-SIBs). The banks also have to meet the revised capital floor that sets the regulatory capital level according to the Basel II standardized approach. If the capital requirement under Basel III is less than 75% of the capital requirements as calculated under Basel II, the difference is added to risk-weighted assets. In addition, during the year ended October 31, 2018, OSFI introduced a domestic stability buffer (the buffer) applicable to D-SIBs. The buffer level varies between 0% and 2.5% of risk-weighted assets and stood at 1.75% as at July 31, 2019. A D‑SIB that fails to meet the buffer requirement will not be subject to automatic constraints to reduce capital distributions but will have to provide a remediation plan to OSFI. OSFI has also been requiring Canadian banks to meet a Basel III leverage ratio of at least 3.0%.

In addition to those measures, OSFI is requiring that regulatory capital instruments other than common equity 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. Instruments issued before January 1, 2013 that would be Basel III compliant if not for the absence of the NVCC clause are grandfathered and will be phased out over a period of ten years. The Bank expects to phase out all of its non-NVCC instruments without resorting to any regulatory event redemption clause.

OSFI's Total Loss Absorbing Capacity (TLAC) guideline, which applies to all D-SIBs under the federal government's bail-in regulations, came into effect on September 23, 2018. The purpose of the TLAC guideline is to ensure that a D-SIB has sufficient loss-absorbing capacity to support its recapitalization in the unlikely event it becomes non-viable. OSFI is requiring D-SIBs to maintain a minimum risk-based TLAC ratio of 23.25% (including the domestic stability buffer) of risk-weighted assets and a minimum TLAC leverage ratio of 6.75% by November 1, 2021. During the quarter ended April 30, 2019, the Bank started to issue qualifying bail-in debt and expects its TLAC ratios to improve through the normal refinancing of its maturing unsecured term debt. The Bank does not anticipate any challenges in meeting these TLAC requirements.

Requirements - Regulatory Ratios Under Basel III

										As at July 31, 2019
		Minimum		Capital conservation buffer		Minimum set by BCBS		D-SIB surcharge		Minimum set by OSFI⁽¹⁾		Domestic stability buffer⁽²⁾		Minimum set by OSFI⁽¹⁾, including the buffer
		Minimum		Capital conservation buffer		Minimum set by BCBS		D-SIB surcharge		Minimum set by OSFI⁽¹⁾		Domestic stability buffer⁽²⁾		Minimum set by OSFI⁽¹⁾, including the buffer

Capital ratios
	CET1	4.5	%	2.5	%	7.0	%	1.0	%	8.0	%	1.75	%	9.75	%
	Tier 1	6.0	%	2.5	%	8.5	%	1.0	%	9.5	%	1.75	%	11.25	%
	Total	8.0	%	2.5	%	10.5	%	1.0	%	11.5	%	1.75	%	13.25	%
Leverage ratio		3.0	%	n.a.		n.a.		n.a.		3.0	%	n.a.		3.0	%

n.a. Not applicable

(1) The capital ratios include the capital conservation buffer and the D-SIB surcharge.

(2) On June 4, 2019, OSFI raised the buffer level such that it will be 2.0% starting October 31, 2019.

The Bank ensures that its capital levels are always above the minimum regulatory capital requirements. 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 Developments

The Bank closely monitors regulatory developments and participates actively in the various consultative processes. For additional information on the regulatory context as at October 31, 2018, which is still the current context, see pages 46 and 47 of the Capital Management section in the 2018 Annual Report. As had been planned, during the first nine-month period of 2019, the Bank applied several new regulatory requirements, in particular the SA-CCR (Standardized Approach for Measuring Counterparty Credit Risk) rules and the revised securitization framework.

Under the revised securitization framework, the capital treatment of the Bank's securitization exposures 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, the 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 loss given default (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, DBRS or a combination of these ratings. The Bank uses the Internal Assessment Approach (IAA) for unrated securitization exposures relating to the asset-backed commercial paper conduits it sponsors. If the Bank cannot apply the SEC-ERBA or the 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. To mitigate the impact of the revised securitization framework, OSFI has provided for grandfathering of the current capital treatment for one year through a negative adjustment to RWA that eliminates the initial increase in risk weights. OSFI is also providing transitional arrangements for all securitization transactions completed by December 31, 2018 for a maximum of two years.

Since November 1, 2018, the below-described regulatory developments should also be considered.

On January 14, 2019, the BCBS published a revised version of Minimum Capital Requirements for Market Risk. This finalized standard incorporates changes that were proposed in the consultative document issued in March 2018. The proposed implementation date is January 1, 2022.

On April 10, 2019, OSFI released the final version of its B-2 guideline, Large Exposure Limits for Domestic Systemically Important Banks. Large exposure limits help to restrict the maximum loss that an institution could face in the event of a sudden failure of a counterparty. This new version of the B-2 guideline tightens exposures limits applicable to Global Systemically Important Banks (G-SIBs) and to other Canadian D-SIBs. It recognizes eligible credit risk mitigation techniques by measuring exposures on a net basis rather than a gross basis, and it reduces the eligible capital base by replacing Total capital with Tier 1 capital. All D-SIBs are expected to comply with the B-2 guideline for the period beginning November 1, 2019.

On May 30, 2019, OSFI released a revised version of its B-12 guideline, Interest Rate Risk Management. The guideline outlines OSFI's expectations regarding the management of Interest Rate Risk in the Banking Book (IRRBB) in areas such as governance processes, risk measurement, development of stress test scenarios as well as key behavioural and modelling assumptions. D-SIBs will have to apply this revised guideline as of January 1, 2020.

On June 26, 2019, the BCBS finalized revisions to the leverage ratio's treatment of client-cleared derivatives and to disclosure requirements in order to address concerns about balance sheet window-dressing. The treatment of client-cleared derivatives was revised to align the leverage ratio measurement with the measurement determined by the SA-CCR rules as used for risk-based capital requirements. The revision to Revisions to Leverage Ratio Disclosure Requirements aims to alleviate leverage ratio balance sheet window-dressing concerns. Internationally active banks will be required to disclose their leverage ratios based on quarter-end values and on an average of daily values for securities financing transactions. These revisions will come into effect on January 1, 2022.

Management Activities

During the nine-month period ended July 31, 2019, the Bank repurchased 3,547,200 common shares for $215 million, which reduced Common share capital by $31 million and Retained earnings by $184 million. The repurchase of 2,347,200 common shares (of which 300,000 common shares during the quarter ended July 31, 2019) was part of the normal course issuer bid to repurchase for cancellation program that the Bank had launched on June 6, 2018 and that ended on June 5, 2019; under this program, the Bank repurchased a total of 6,847,200 common shares. On June 10, 2019, the Bank began a new normal course issuer bid to repurchase for cancellation up to 6,000,000 common shares over the 12-month period ending no later than June 9, 2020. During the quarter ended July 31, 2019, the Bank repurchased 1,200,000 common shares under this new program.

Shares and Stock Options

		As at July 31, 2019
		Number of shares	$ million

First preferred shares
	Series 30	14,000,000	350
	Series 32	12,000,000	300
	Series 34	16,000,000	400
	Series 36	16,000,000	400
	Series 38	16,000,000	400
	Series 40	12,000,000	300
	Series 42	12,000,000	300
		98,000,000	2,450
Common shares		334,210,123	2,914
Stock options		13,107,629

As at August 23, 2019, there were 334,217,386 common shares and 13,099,501 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 an injection of capital. If an NVCC trigger event were to occur, all of the Bank's preferred shares and medium-term notes maturing on February 1, 2028, 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 724,344,000 Bank common shares, which would have a 68.4% dilutive effect based on the number of Bank common shares outstanding as at July 31, 2019.

Movement in Regulatory Capital

(millions of Canadian dollars)			Nine months ended July 31, 2019

Common Equity Tier 1 (CET1) capital
Balance at beginning			8,608
	Issuance of common shares (including Stock Option Plan)		68
	Impact of shares purchased or sold for trading		45
	Repurchase of common shares		(215)
	Other contributed surplus		6
	Dividends on preferred and common shares		(751)

	Net income attributable to the Bank's shareholders		1,666
	Common share capital issued by subsidiaries and held by third parties		9
	Removal of own credit spread (net of income taxes)		9
	Impact of adopting IFRS 15 on November 1, 2018		(4)
	Other		(155)

	Movements in accumulated other comprehensive income
		Translation adjustments	1
		Debt securities at fair value through other comprehensive income	(2)
		Other	4

	Change in goodwill and intangible assets (net of related tax liability)		171
	Other, including regulatory adjustments and transitional arrangements
		Change in defined benefit pension plan asset (net of related tax liability)	6
		Change in amount exceeding 15% threshold
		Deferred tax assets	−
		Significant investment in common shares of financial institutions	−
		Change in other regulatory adjustments⁽¹⁾	9
Balance at end			9,475

Additional Tier 1 capital
Balance at beginning			2,802
	New Tier 1 eligible capital issuances		−
	Redeemed capital		−
	Change in non-qualifying Additional Tier 1 subject to phase-out		−
	Other, including regulatory adjustments and transitional arrangements		3
Balance at end			2,805

Total Tier 1 capital			12,280

Tier 2 capital
Balance at beginning			942
	New Tier 2 eligible capital issuances		−
	Redeemed capital		−
	Change in non-qualifying Tier 2 subject to phase-out		−
	Tier 2 instruments issued by subsidiaries and held by third parties		2
	Change in certain allowances for credit losses		4
	Other, including regulatory adjustments and transitional arrangements		(35)
Balance at end			913

Total regulatory capital			13,193

(1) Represents the change in investments in the Bank's own CET1 capital.

Risk-Weighted Assets by Key Risk Drivers

CET1 risk-weighted assets (RWA) amounted to $81.0 billion as at July 31, 2019 compared to $73.7 billion as at October 31, 2018, a $7.3 billion increase resulting mainly from organic growth in RWA and from a change in the method used to measure the counterparty credit risk (SA-CCR). The changes in the Bank's risk-weighted assets by risk type are presented in the following table.

Risk-Weighted Assets Movements by Key Drivers

(millions of Canadian dollars)			Quarter ended
		July 31, 2019			April 30, 2019	January 31, 2019	October 31, 2018
		Non-counterparty credit risk	Counterparty credit risk	Total	Total	Total	Total

Credit risk - Risk-weighted assets at beginning		57,739	6,385	64,124	62,162	59,476	57,974
	Book size	1,443	145	1,588	1,589	1,273	1,629
	Book quality	(127)	(28)	(155)	56	(198)	(203)
	Model updates	397	19	416	33	−	(72)
	Methodology and policy	−	−	−	−	1,634	−
	Acquisitions and disposals	−	−	−	−	−	−
	Foreign exchange movements	(230)	(50)	(280)	284	(23)	148
Credit risk - Risk-weighted assets at end		59,222	6,471	65,693	64,124	62,162	59,476

Market risk - Risk-weighted assets at beginning				3,788	3,964	3,435	4,755
	Movement in risk levels⁽¹⁾			184	(176)	529	(406)
	Model updates			−	−	−	(914)
	Methodology and policy			−	−	−	−
	Acquisitions and disposals			−	−	−	−
Market risk - Risk-weighted assets at end				3,972	3,788	3,964	3,435

Operational risk - Risk-weighted assets at beginning				11,096	10,910	10,743	10,539
	Movement in risk levels			223	186	167	204
	Acquisitions and disposals			−	−	−	−
Operational risk - Risk-weighted assets at end				11,319	11,096	10,910	10,743

Risk-weighted assets at end				80,984	79,008	77,036	73,654

(1) 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 exposure 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 quarter ended July 31, 2019, the Bank updated its models for credit card portfolios and energy sector loans.

The Methodology and policy item presents the impact of changes in calculation methods stemming from changes in regulatory policies as a result, for example, of new regulations. During the quarter ended January 31, 2019, the Bank implemented the SA-CCR rules for measuring counterparty credit risk under the standardized approach, as required by the BCBS.

Regulatory Capital Ratios

As at July 31, 2019, the Bank's CET1, Tier 1 and Total capital ratios were, respectively, 11.7%, 15.2% and 16.3%, i.e., above the regulatory requirements, compared to ratios of, respectively, 11.7%, 15.5% and 16.8% as at October 31, 2018. The CET1 capital ratio remained stable. Net income net of dividends, and common share issuances under the Stock Option Plan offset the application of the SA-CCR rules for measuring counterparty credit risk, growth in risk-weighted assets, the common share repurchases during the nine-month period ended July 31, 2019, and remeasurements of pension plans and other post-employment benefit plans. The decreases in the Tier 1 capital ratio and the Total capital ratio were essentially due to the same factors. As at July 31, 2019, the leverage ratio was 4.0%, stable compared to October 31, 2018.

Regulatory Capital and Ratios Under Basel III

(millions of Canadian dollars)		As at July 31, 2019		As at October 31, 2018

Capital
	CET1	9,475		8,608
	Tier 1	12,280		11,410
	Total	13,193		12,352

Risk-weighted assets
	CET1 capital	80,984		73,654
	Tier 1 capital	80,984		73,670
	Total capital	80,984		73,685

Total exposure		303,961		284,337

Capital ratios
	CET1	11.7	%	11.7	%
	Tier 1	15.2	%	15.5	%
	Total	16.3	%	16.8	%
Leverage ratio		4.0	%	4.0	%

Dividends

On August 27, 2019, the Board of Directors declared regular dividends on the various series of first preferred shares and a dividend of 68 cents per common share payable on November 1, 2019 to shareholders of record on September 30, 2019.

Risk Management

The Bank aims to maintain its financial performance by continuing to ensure prudent management and a sound balance between return and the risks assumed. The Bank views risk as an integral part of its development and the diversification of its activities and advocates a risk management approach consistent with its business expansion strategy. The Bank's governance structure for risk management has remained largely unchanged from that described in the 2018 Annual Report.

Managing risk requires a solid understanding of every type of risk found across the Bank. In addition to providing assurance that risk levels do not exceed acceptable thresholds, effective risk management can help to control the volatility of the Bank's results. Despite the exercise of stringent risk management and the mitigation measures in place, risk cannot be suppressed entirely, and the residual risks may occasionally cause significant losses.

Certain risks are discussed hereafter. For additional information, see the Risk Management section on pages 52 to 87 of the 2018 Annual Report. Risk management information is also provided in Note 7 to the consolidated financial statements, which covers loans.

Credit Risk

Credit risk is the risk of incurring a financial loss if an obligor does not fully honour its contractual commitments to the Bank. Obligors may be borrowers, issuers, counterparties or guarantors. Credit risk is the most significant risk facing the Bank in the normal course of business.

The amounts shown in the following table represent the Bank's maximum exposure to credit risk as at the financial reporting date without taking into account any collateral held or any other credit enhancements. These amounts do not take into account allowances for credit losses nor amounts pledged as collateral. The table also excludes equity securities.

Maximum Credit Risk Exposure Under the Basel Asset Categories

(millions of Canadian dollars)		As at July 31, 2019						As at October 31, 2018
		Drawn	Undrawn commitments	Repo-style transactions⁽¹⁾	Derivatives⁽²⁾	Other off-balance- sheet items⁽³⁾	Total	Total

Retail
	Residential mortgages	48,966	8,690	−	−	−	57,656	54,213
	Qualifying revolving retail	2,560	3,120	−	−	−	5,680	6,276
	Other retail	14,522	1,623	−	−	15	16,160	17,064
		66,048	13,433	−	−	15	79,496	77,553
Non-retail
	Corporate	55,386	19,771	19,715	−	4,054	98,926	88,527
	Sovereign	28,687	5,191	39,182	215	144	73,419	73,915
	Financial institutions	2,819	425	94,263	1,666	632	99,805	85,109
		86,892	25,387	153,160	1,881	4,830	272,150	247,551
Trading portfolio		−	−	−	11,895	−	11,895	9,620
Securitization		1,432	−	−	−	3,784	5,216	4,746
Total - Gross credit risk		154,372	38,820	153,160	13,776	8,629	368,757	339,470

Standardized Approach		15,051	126	22,844	1,648	256	39,925	32,303
AIRB Approach		139,321	38,694	130,316	12,128	8,373	328,832	307,167
Total - Gross credit risk		154,372	38,820	153,160	13,776	8,629	368,757	339,470

(1) Securities purchased under reverse repurchase agreements and sold under repurchase agreements as well as securities loaned and borrowed.

(2) Exposure presented using the SA-CCR method since the first quarter of 2019.

(3) Letters of guarantee, documentary letters of credit and securitized assets that represent the Bank's commitment to make payments in the event that a client cannot meet its financial obligations to third parties.

To meet OSFI's mortgage loan disclosure requirements, additional information has been provided in Supplementary Financial Information - Third Quarter 2019 and in Supplementary Regulatory Capital and Pillar 3 Disclosure - Third Quarter 2019, which are available on the Bank's website at nbc.ca.

Market Risk

Market risk is the risk of losses in on- and off-balance-sheet positions arising from movements in market parameters. Managing this risk is a core competency for the Bank in its market making, trading, investing and asset/liability management activities.

The following tables provide a breakdown of the Bank's Consolidated Balance Sheet into financial assets and liabilities by those that carry market risk and those that do not carry market risk, distinguishing between trading positions whose main risk measures are Value-at-Risk (VaR) and stressed VaR (SVaR) and non-trading positions that use other risk measures.

Reconciliation of Market Risk With Consolidated Balance Sheet Items

(millions of Canadian dollars)			As at July 31, 2019
				Market risk measures
			Balance sheet	Trading⁽¹⁾	Non-Trading⁽²⁾	Not subject to market risk	Non-traded risk primary risk sensitivity

Assets
	Cash and deposits with financial institutions		11,552	255	11,150	147	Interest rate⁽³⁾
	Securities
		At fair value through profit or loss	67,444	63,821	3,623	−	Interest rate⁽³⁾and equity
		At fair value through other comprehensive income	9,091	−	9,091	−	Interest rate⁽³⁾ and equity⁽⁴⁾
		At amortized cost	8,197	−	8,197	−	Interest rate⁽³⁾
	Securities purchased under reverse repurchase
		agreements and securities borrowed	13,928	−	13,928	−	Interest rate⁽³⁾⁽⁵⁾
	Loans and acceptances, net of allowances		151,348	5,868	145,480	−	Interest rate⁽³⁾
	Derivative financial instruments		8,515	7,629	886	−	Interest rate and exchange rate
	Defined benefit asset		38	−	38	−	Other
	Other		6,199	−	−	6,199
			276,312	77,573	192,393	6,346

Liabilities
	Deposits		187,219	9,813	177,406	−	Interest rate⁽³⁾
	Acceptances		6,834	−	6,834	−	Interest rate⁽³⁾
	Obligations related to securities sold short		13,917	13,917	−	−
	Obligations related to securities sold under repurchase
		agreements and securities loaned	19,764	−	19,764	−	Interest rate⁽³⁾⁽⁵⁾
	Derivative financial instruments		6,211	5,406	805	−	Interest rate and exchange rate
	Liabilities related to transferred receivables		20,549	4,336	16,213	−	Interest rate⁽³⁾
	Defined benefit liability		305	−	305	−	Other
	Other		5,845	25	911	4,909	Interest rate⁽³⁾
	Subordinated debt		773	−	773	−	Interest rate⁽³⁾
			261,417	33,497	223,011	4,909

(1) Trading positions whose risk measures are VaR and SVaR. For additional information, see the tables that show the VaR and SVaR distributions of the trading portfolios by risk category as well as their correlation effect, which are presented on the following pages and in the Market Risk Management section of the 2018 Annual Report.

(2) Non-trading positions that use other risk measures.

(3) For additional information, see the tables that show the VaR and SVaR distributions of the trading portfolios by risk category and their correlation effect as well as the interest rate sensitivity tables, which are presented on the following pages and in the Market Risk Management section of the 2018 Annual Report.

(4) The fair value of equity securities designated at fair value through other comprehensive income is presented in Notes 4 and 6 to the consolidated financial statements.

(5) These instruments are recorded at amortized cost and are subject to credit risk for capital management purposes. For trading-related transactions with maturities of more than one day, interest rate risk is included in the VaR and SVaR measures.

(millions of Canadian dollars)			As at October 31, 2018
				Market risk measures
			Balance sheet	Trading⁽¹⁾	Non-Trading⁽²⁾	Not subject to market risk	Non-traded risk primary risk sensitivity

Assets
	Cash and deposits with financial institutions		12,756	226	12,269	261	Interest rate⁽³⁾
	Securities
		At fair value through profit or loss	55,817	51,575	4,242	−	Interest rate⁽³⁾ and equity⁽⁴⁾
		At fair value through other comprehensive income	5,668	−	5,668	−	Interest rate⁽³⁾ and equity⁽⁵⁾
		Amortized cost	8,298	−	8,298	−	Interest rate⁽³⁾
	Securities purchased under reverse repurchase
		agreements and securities borrowed	18,159	−	18,159	−	Interest rate⁽³⁾⁽⁶⁾
	Loans and acceptances, net of allowances		146,082	5,417	140,665	−	Interest rate⁽³⁾
	Derivative financial instruments		8,608	7,625	983	−	Interest rate⁽⁷⁾ and exchange rate⁽⁷⁾
	Defined benefit asset		64	−	64	−	Other⁽⁸⁾
	Other		7,019	−	−	7,019
			262,471	64,843	190,348	7,280

Liabilities
	Deposits		170,830	7,187	163,643	−	Interest rate⁽³⁾
	Acceptances		6,801	−	6,801	−	Interest rate⁽³⁾
	Obligations related to securities sold short		17,780	17,780	−	−
	Obligations related to securities sold under repurchase
		agreements and securities loaned	19,998	−	19,998	−	Interest rate⁽³⁾⁽⁶⁾
	Derivative financial instruments		6,036	4,807	1,229	−	Interest rate⁽⁷⁾ and exchange rate⁽⁷⁾
	Liabilities related to transferred receivables		20,100	3,733	16,367	−	Interest rate⁽³⁾
	Defined benefit liability		186	−	186	−	Other⁽⁸⁾
	Other		5,638	21	910	4,707	Interest rate⁽³⁾
	Subordinated debt		747	−	747	−	Interest rate⁽³⁾
			248,116	33,528	209,881	4,707

(2) Non-trading positions that use other risk measures.

(3) For additional information, see the tables that show the VaR and SVaR distributions of the trading portfolios by risk category and their correlation effect as well as the interest rate sensitivity tables, which are presented below and on the following page as well as in the Market Risk Management section of the 2018 Annual Report.

(4) For additional information, see Note 7 to the audited annual consolidated financial statements for the fiscal year ended October 31, 2018.

(5) The fair value of equity securities designated at fair value through other comprehensive income is presented in Notes 4 and 6 to the consolidated financial statements.

(6) These instruments are recorded at amortized cost and are subject to credit risk for capital management purposes. For trading-related transactions with maturities of more than one day, interest rate risk is included in the VaR and SVaR measures.

(7) For additional information, see Notes 17 and 18 to the audited annual consolidated financial statements for the year ended October 31, 2018.

(8) For additional information, see Note 24 to the audited annual consolidated financial statements for the year ended October 31, 2018.

Trading Activities

The first table below shows the VaR distribution of trading portfolios by risk category as well as their correlation effect. The second table on the next page shows the SVaR distribution, i.e., the VaR of the Bank's current portfolios obtained following the calibration of risk factors over a 12-month stress period.

VaR of Trading Portfolios by Risk Category⁽¹⁾

(millions of Canadian dollars)					Quarter ended				Nine months ended
	July 31, 2019				April 30, 2019		July 31, 2018		July 31, 2019	July 31, 2018
	Low	High	Average	Period end	Average	Period end	Average	Period end	Average	Average

Interest rate	(4.3)	(6.9)	(5.5)	(4.7)	(5.1)	(4.4)	(3.9)	(3.4)	(5.4)	(4.0)
Exchange rate	(0.4)	(1.2)	(0.7)	(0.6)	(0.8)	(0.6)	(1.4)	(1.7)	(0.8)	(1.1)
Equity	(3.0)	(4.1)	(3.5)	(3.4)	(4.0)	(3.1)	(4.1)	(4.5)	(4.0)	(3.2)
Commodity	(0.6)	(1.5)	(0.9)	(1.0)	(1.0)	(1.1)	(1.2)	(1.3)	(1.0)	(1.0)
Correlation effect⁽²⁾	n.m.	n.m.	4.5	4.0	5.2	4.9	4.7	4.7	5.1	4.3
Total trading VaR	(3.8)	(8.3)	(6.1)	(5.7)	(5.7)	(4.3)	(5.9)	(6.2)	(6.1)	(5.0)

n.m. Computation of a correlation effect for the high and low is not meaningful, as highs and lows may occur on different days and be attributable to different types of risk.

(1) Amounts are presented on a pre-tax basis and represent one-day VaR using a 99% confidence level.

(2) The total trading VaR is less than the sum of the individual risk factor VaR results due to the correlation effect.

SVaR of Trading Portfolios by Risk Category⁽¹⁾

(millions of Canadian dollars)					Quarter ended				Nine months ended
	July 31, 2019				April 30, 2019		July 31, 2018		July 31, 2019	July 31, 2018
	Low	High	Average	Period end	Average	Period end	Average	Period end	Average	Average

Interest rate	(12.1)	(23.2)	(16.8)	(19.4)	(15.5)	(15.2)	(12.3)	(11.3)	(15.6)	(11.6)
Exchange rate	(0.6)	(4.1)	(1.5)	(1.0)	(1.1)	(0.9)	(1.9)	(2.5)	(1.3)	(1.3)
Equity	(4.5)	(9.9)	(6.3)	(7.0)	(6.1)	(5.3)	(3.8)	(4.1)	(6.9)	(3.0)
Commodity	(1.1)	(2.7)	(2.1)	(2.2)	(2.0)	(2.3)	(2.4)	(1.6)	(2.1)	(1.7)
Correlation effect⁽²⁾	n.m.	n.m.	14.1	16.8	12.3	12.3	8.3	8.1	13.6	7.6
Total trading SVaR	(9.0)	(15.2)	(12.6)	(12.8)	(12.4)	(11.4)	(12.1)	(11.4)	(12.3)	(10.0)

n.m. Computation of a correlation effect for the high and low is not meaningful, as highs and lows may occur on different days and be attributable to different types of risk.

(1) Amounts are presented on a pre-tax basis and represent one-day SVaR using a 99% confidence level.

(2) The total trading SVaR is less than the sum of the individual risk factor SVaR results due to the correlation effect.

The average trading VaR increased from $5.7 million to $6.1 million between the second and third quarters of 2019. Over the same period, the average trading SVaR increased from $12.4 million to $12.6 million. These increases were mostly due to an increase in interest rate risk.

Daily Trading and Underwriting Revenues

The following table shows daily trading and underwriting revenues as well as VaR. Daily trading and underwriting revenues were positive 97% of the days for the quarter ended July 31, 2019. No trading day was marked by daily trading and underwriting net losses of more than $1 million. None of the 2019 third‑quarter losses exceeded the VaR.

Quarter Ended July 31, 2019

(millions of Canadian dollars)

Interest Rate Sensitivity - Non-Trading Activities (Before Tax)

The following tables present the potential before-tax impact of an immediate and sustained 100-basis-point increase or decrease in interest rates on the economic value of equity and on net interest income for the next 12 months in the Bank's non-trading portfolios, assuming no further hedging is undertaken.

(millions of Canadian dollars)					As at July 31, 2019
	Impact on equity			Impact on net interest income
	Canadian dollar	Other currencies	Total	Canadian dollar	Other currencies	Total

100-basis-point increase in the interest rate	(207)	3	(204)	(50)	9	(41)
100-basis-point decrease in the interest rate	202	−	202	65	(4)	61

(millions of Canadian dollars)					As at October 31, 2018
	Impact on equity			Impact on net interest income
	Canadian dollar	Other currencies	Total	Canadian dollar	Other currencies	Total

100-basis-point increase in the interest rate	(140)	9	(131)	10	19	29
100-basis-point decrease in the interest rate	154	17	171	34	8	42

Liquidity Risk

Liquidity risk is the risk that the Bank will be unable to honour daily cash and financial obligations without resorting to costly and untimely measures. Liquidity risk arises when sources of funds become insufficient to meet scheduled payments under the Bank's commitments. Liquidity risk stems from mismatched cash flows related to assets and liabilities as well as from the characteristics of certain products such as credit commitments and non-fixed-term deposits.

Regulatory Developments

On December 19, 2018, OSFI published a draft version of the Liquidity Adequacy Requirements guideline that includes certain changes involving the Net Stable Funding Ratio (NSFR). The updated guideline requires institutions to maintain a stable funding profile relative to the composition of their off-balance-sheet assets and activities. A viable funding structure should reduce the likelihood that disruptions to a bank's regular funding sources would erode its liquidity position and thereby increase its risk of failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance-sheet items, and favours funding stability. On April 11, 2019, OSFI issued the final version of Net Stable Funding Ratio Disclosure Requirements, a guideline that sets out the NSFR disclosure requirements applicable to D-SIBs. These requirements will be applicable as of January 1, 2020, but since OSFI has introduced an additional year to implement the disclosure framework, they will take effect on January 1, 2021.

On April 11, 2019, OSFI also issued a new version of its Liquidity Adequacy Requirements guideline, which will come into effect on January 1, 2020. This version differs from the previous one and seeks to ensure that liquidity risk measuring and monitoring standards reflect current sound practices.

On May 23, 2019, OSFI updated the covered bond limit calculation. Effective August 1, 2019, total assets pledged by a deposit-taking institution for covered bonds must not, at any time, represent more than 5.5% of the issuer's on-balance-sheet assets.

On July 18, 2019, OSFI published proposed changes to guideline B-6 - Liquidity Principles for public consultation. The current version was last updated in 2012, and the proposed changes aim to ensure that the guideline remains current, relevant, and appropriate to the scale and complexity of institutions. OSFI is targeting an implementation date of January 1, 2020.

Liquid Assets

To protect depositors and creditors from unexpected crisis situations, the Bank holds a portfolio of unencumbered liquid assets that can be readily liquidated to meet financial obligations. This portfolio consists of highly liquid securities, most of which are issued or guaranteed by governments, and of cash loans maturing in less than 30 days. The majority of unencumbered liquid assets are held in Canadian or U.S. dollars. Moreover, all assets that can be quickly monetized are considered liquid assets. The Bank's liquidity reserves do not factor in the availability of central bank emergency liquidity facilities. The following tables provide information on the Bank's encumbered and unencumbered assets.

Liquid Asset Portfolio

(millions of Canadian dollars)

As at July 31,

2019

As at October 31,

2018

Bank-owned liquid assets⁽¹⁾

Liquid assets

received⁽²⁾

Total

liquid assets

Encumbered

liquid assets⁽³⁾

Unencumbered liquid assets

Cash and deposits with financial institut