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Nat Bank of Canada (32SS)

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Wednesday 04 December, 2019

Nat Bank of Canada

Audited Financial Statements Part.2

RNS Number : 7156V
National Bank of Canada
04 December 2019
 

 

Regulatory Announcement

 

National Bank of Canada

December 4, 2019

2019 Annual Financial Statements Part 2

National Bank of Canada (the "Bank") announces publication of its 2019 Annual Report, including the audited consolidated financial statements for the years ended 31 October 2019 and 2018, together with the notes thereto and independent auditor's report thereon (the "2019 Financial Statements"). The 2019 Financial Statements have been uploaded to the National Storage Mechanism and will shortly be available at www.morningstar.co.uk/uk/nsm and are available on the Bank's website as part of the 2019 Annual Report at https://www.nbc.ca/en/about-us/investors/investor-relations/annual-reports-proxy-circulars-aif.html.

To view the full PDF of the 2019 Financial Statements, the 2019 Annual Report and the 2019 Annual CEO and CFO Certifications, please click on the following links:

http://www.rns-pdf.londonstockexchange.com/rns/7123V_1-2019-12-4.pdf

http://www.rns-pdf.londonstockexchange.com/rns/7123V_2-2019-12-4.pdf

http://www.rns-pdf.londonstockexchange.com/rns/7123V_3-2019-12-4.pdf

Note 15 - Subordinated Debt

 

The subordinated debt represents direct unsecured obligations, in the form of notes and debentures, to the Bank's debt holders. The rights of the Bank's note and debenture holders are subordinate to the claims of depositors and certain other creditors. Approval from OSFI is required before the Bank can redeem its subordinated notes and debentures in whole or in part.

 

On February 1, 2018, the Bank had issued medium-term notes for a total amount of $750 million, bearing interest at 3.183% and maturing on February 1, 2028.

 

As at October 31

 

 

 

 

2019

 

2018

 

Maturity date

Interest rate

 

Characteristics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February

2028

3.183%(1)

 

Redeemable(2)

750

 

750

 

February

2087

Variable(3)

 

Redeemable at the Bank's option since February 28, 1993

9

 

9

 

 

 

 

 

 

759

 

759

 

Fair value hedge adjustment

15

 

(10)

 

Unamortized issuance costs(4)

(1)

 

(2)

 

Total

 

 

 

 

773

 

747

 

 

(1)       Bearing interest at a rate of 3.183%, payable semi-annually until February 1, 2023, and thereafter bearing interest at a floating rate equal to the rate on three-month CDOR plus 0.72%, payable quarterly.

(2)       With the prior approval of OSFI, the Bank may, at its option, redeem these notes as of February 1, 2023, in whole or in part, at their nominal value plus accrued and unpaid interest. These notes contain non-viability contingent capital (NVCC) provisions and qualify for the purposes of calculating regulatory capital under Basel III. In the case of a trigger event as defined by OSFI, each note will be automatically and immediately converted, on a full and permanent basis, without the consent of the holder, into a specified number of common shares of the Bank as determined using an automatic conversion formula with a multiplier of 1.5 and a conversion price based on the greater of: (i) a floor price of $5.00; (ii) the current market price of common shares, which represents the volume weighted average price of common shares for the ten trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an exchange when this price is being established, the price will be the fair value reasonably determined by the Bank's Board. The number of shares issued is determined by dividing the par value of the note (plus accrued and unpaid interest on such note) by the conversion price and then applying the multiplier.

(3)       Debentures denominated in foreign currency totalling US$7 million as at October 31, 2019 (2018: US$7 million) and bearing interest at a rate of 1/8% above six-month LIBOR.

(4)       The unamortized costs related to the issuance of the subordinated debt represent the initial cost, net of accumulated amortization, calculated using the effective interest rate method.

 

 

Note 16 - Derivative Financial Instruments

 

Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, equity price, commodity price, credit spread or index.

 

The main types of derivative financial instruments used are presented below.

 

Forwards and Futures

Forwards and futures are contractual obligations to buy or deliver a specified amount of currency, interest rate, commodity, or financial instrument on a specified future date at a specified price. Forwards are tailor-made agreements transacted in the over-the-counter market. Futures are traded on organized exchanges and are subject to cash margining calculated daily by clearing houses.

 

Swaps

Swaps are over-the-counter contracts in which two parties agree to exchange cash flows. The Bank uses the following types of swap contracts:

 

·     Cross-currency swaps are transactions in which counterparties exchange fixed-rate interest payments and principal payments in different currencies.

·     Interest rate swaps are transactions in which counterparties exchange fixed and floating rate interest payments based on the notional principal value in the same currency.

·     Commodity swaps are transactions in which counterparties exchange fixed and floating rate payments based on the notional principal value of a commodity.

·     Equity swaps are transactions in which counterparties agree to exchange the return on one equity or group of equities for a payment based on a benchmark interest rate.

·     Credit default swaps are transactions in which one of the parties agrees to pay returns to the other party so that the latter can make a payment if a credit event occurs.

 

Options

Options are agreements between two parties in which the writer of the option grants the buyer the right, but not the obligation, to buy or sell, either at a specified date or dates or at any time prior to a predetermined expiry date, a specific amount of currency, commodity, or financial instrument at an agreed-upon price upon the sale of the option. The writer receives a premium for the sale of this instrument.

 

 

 

 

 

Note 16 - Derivative Financial Instruments (cont.)

 

Notional Amounts(1)

 

As at October 31

2019

2018

 

 

 

Term to maturity

 

Contracts held for trading purposes

 

Contracts

designated

as hedges

 

 

 

 

 

3 months

or less

 

Over 3

months to

 12 months

 

Over 1

year to

5 years

 

Over

5 years

 

Total

contracts

 

 

 

Total

contracts

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTC contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward rate agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not settled by central counterparties

4,241

 

1,028

 

 

 

5,269

 

5,269

 

 

1,680

 

 

Settled by central counterparties

 

174

 

580

 

 

754

 

754

 

 

2,172

 

Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not settled by central counterparties

8,831

 

15,315

 

60,765

 

42,462

 

127,373

 

124,832

 

2,541

 

129,201

 

 

Settled by central counterparties

157,753

 

157,638

 

207,824

 

66,612

 

589,827

 

552,774

 

37,053

 

408,729

 

Options purchased

28

 

1,777

 

3,668

 

2,989

 

8,462

 

8,252

 

210

 

5,438

 

Options written

114

 

207

 

1,253

 

4,021

 

5,595

 

4,506

 

1,089

 

2,018

 

 

170,967

 

176,139

 

274,090

 

116,084

 

737,280

 

696,387

 

40,893

 

549,238

 

Exchange-traded contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long positions

25,576

 

8,179

 

785

 

 

34,540

 

34,540

 

 

27,498

 

 

Short positions

9,020

 

7,750

 

4,479

 

 

21,249

 

21,249

 

 

26,556

 

Options purchased

15,400

 

2,698

 

 

 

18,098

 

18,098

 

 

26,189

 

Options written

165

 

1,698

 

 

 

1,863

 

1,863

 

 

 

 

50,161

 

20,325

 

5,264

 

 

75,750

 

75,750

 

 

80,243

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTC contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

12,960

 

8,731

 

6,090

 

1,167

 

28,948

 

28,948

 

 

32,178

 

Swaps

149,811

 

61,660

 

75,791

 

25,622

 

312,884

 

295,110

 

17,774

 

199,911

 

Options purchased

6,075

 

6,065

 

1,511

 

 

13,651

 

13,651

 

 

12,322

 

Options written

6,018

 

6,434

 

1,114

 

 

13,566

 

13,566

 

 

11,115

 

 

174,864

 

82,890

 

84,506

 

26,789

 

369,049

 

351,275

 

17,774

 

255,526

 

Exchange-traded contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long positions

80

 

 

 

 

80

 

80

 

 

59

 

 

Short positions

35

 

 

 

 

35

 

35

 

 

238

 

 

115

 

 

 

 

115

 

115

 

 

297

 

Equity, commodity and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

credit derivative contracts(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTC contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

24

 

61

 

1,551

 

197

 

1,833

 

1,833

 

 

1,976

 

Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not settled by central counterparties

45,955

 

20,859

 

7,250

 

342

 

74,406

 

74,406

 

 

46,874

 

 

Settled by central counterparties

220

 

154

 

4,054

 

2,026

 

6,454

 

6,454

 

 

2,438

 

Options purchased

269

 

40

 

797

 

2

 

1,108

 

1,108

 

 

1,523

 

Options written

83

 

174

 

984

 

117

 

1,358

 

1,358

 

 

1,436

 

 

46,551

 

21,288

 

14,636

 

2,684

 

85,159

 

85,159

 

 

54,247

 

Exchange-traded contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long positions

5,153

 

314

 

390

 

158

 

6,015

 

6,015

 

 

7,699

 

 

Short positions

11,865

 

1,605

 

777

 

 

14,247

 

14,247

 

 

11,691

 

Options purchased

2,902

 

305

 

220

 

 

3,427

 

3,427

 

 

2,243

 

Options written

2,224

 

703

 

942

 

4

 

3,873

 

3,873

 

 

3,468

 

 

22,144

 

2,927

 

2,329

 

162

 

27,562

 

27,562

 

 

25,101

 

 

464,802

 

303,569

 

380,825

 

145,719

 

1,294,915

 

1,236,248

 

58,667

 

964,652

 

 

(1)       Notional amounts are not presented in assets or liabilities on the Consolidated Balance Sheet. They represent the reference amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged.

(2)       Includes precious metal contracts.

 

 

Credit Risk 

Credit risk on derivative financial instruments is the risk of financial loss that the Bank will have to assume if a counterparty fails to honour its contractual obligations. Credit risk related to derivative financial instruments is subject to the same credit approval, credit limit and credit monitoring standards as those applied to the Bank's other credit transactions. Consequently, the Bank evaluates the creditworthiness of counterparties and manages the size of the portfolios as well as the diversification and maturity profiles of these financial instruments.

 

The Bank limits the credit risk of over-the-counter contracts by dealing with creditworthy counterparties and entering into contracts that provide for the exchange of collateral between parties where the fair value of the outstanding transactions exceeds an agreed threshold. The Bank also negotiates master netting agreements that provide for the simultaneous close-out and settling of all transactions with a given counterparty in the event of default, insolvency, or bankruptcy. However, overall exposure to credit risk, reduced through master netting agreements, may change substantially after the balance sheet date because it is affected by all transactions subject to a contract as well as by changes in the market rates of the underlying instruments.

 

The Bank also uses financial intermediaries to have access to established clearing houses in order to minimize the settlement risk arising from financial derivative transactions. In some cases, the Bank has direct access to clearing houses for settling derivative financial instruments. In addition, certain derivative financial instruments traded over the counter are settled directly or indirectly by central counterparties.

 

In the case of exchange-traded contracts, exposure to credit risk is limited because these transactions are standardized contracts executed on established exchanges, each of which is associated with a well-capitalized clearing house that assumes the obligations of both counterparties and guarantees their performance obligations. All exchange-traded contracts are subject to initial margins and daily settlement.

 

Terms Used

Replacement Cost

Replacement cost is the Bank's maximum credit risk associated with derivative financial instruments as at the Consolidated Balance Sheet date. This amount is the positive fair value of all derivative financial instruments, before all master netting agreements and collateral held.

 

Credit Risk Equivalent

The credit risk equivalent amount is the total replacement cost plus an amount representing the potential future credit risk exposure, as outlined in OSFI's Capital Adequacy Requirements Guideline.

 

Risk-Weighted Amount

The risk-weighted amount is determined by applying the OSFI guidance to the credit risk equivalent.

 

Credit Risk Exposure of the Derivative Financial Instrument Portfolio

 

As at October 31

 

2019

 

2018

 

 

 

 

Replacement

cost

 

Credit risk

equivalent(1)

 

Risk-

weighted

amount(1)

 

Replacement

cost(2)

 

Credit risk

equivalent

 

Risk-

weighted

amount

 

Interest rate contracts

 

2,603

 

6,685

 

968

 

1,943

 

7,961

 

649

 

Foreign exchange contracts

 

3,103

 

4,570

 

1,515

 

3,533

 

11,043

 

1,853

 

Equity, commodity and credit derivative contracts

 

2,423

 

2,917

 

1,119

 

3,034

 

6,919

 

673

 

 

 

 

8,129

 

14,172

 

3,602

 

8,510

 

25,923

 

3,175

 

Impact of master netting agreements

 

(3,415)

 

 

 

 

 

(3,151)

 

(8,300)

 

(863)

 

 

 

 

4,714

 

14,172

 

3,602

 

5,359

 

17,623

 

2,312

 

 

(1)       After application of the Standardized Approach for Measuring Counterparty Credit Risk on November 1, 2018, the amounts are presented net of the Impact of master netting agreements.

(2)       As at October 31, 2018, the total positive fair value of exchange-traded contracts amounting to $98 million was excluded.

 

Credit Risk Exposure of the Derivative Financial Instrument Portfolio by Counterparty

 

As at October 31

 

2019

 

2018

 

 

 

 

Replacement

cost

 

Credit risk

equivalent

 

Replacement

cost

 

Credit risk

equivalent

 

OECD(1) governments

 

1,048

 

2,077

 

1,051

 

1,855

 

Banks of OECD member countries

 

670

 

3,720

 

816

 

4,197

 

Other

 

2,996

 

8,375

 

3,492

 

11,571

 

 

 

 

4,714

 

14,172

 

5,359

 

17,623

 

 

(1)       Organisation for Economic Co-operation and Development. 

  

Note 16 - Derivative Financial Instruments (cont.)

 

Fair Value of Derivative Financial Instruments

 

As at October 31

 

2019

 

2018

 

 

 

 

Positive

 

Negative

 

Net

 

Positive

 

Negative

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts held for trading purposes

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

36

 

59

 

(23)

 

16

 

10

 

6

 

 

Swaps

 

1,808

 

1,742

 

66

 

1,392

 

1,486

 

(94)

 

 

Options

 

97

 

70

 

27

 

61

 

41

 

20

 

 

 

1,941

 

1,871

 

70

 

1,469

 

1,537

 

(68)

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

298

 

180

 

118

 

428

 

243

 

185

 

 

Swaps

 

2,618

 

2,263

 

355

 

2,892

 

1,956

 

936

 

 

Options

 

127

 

109

 

18

 

157

 

139

 

18

 

 

 

3,043

 

2,552

 

491

 

3,477

 

2,338

 

1,139

 

Equity, commodity and credit derivative contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

1,050

 

72

 

978

 

854

 

62

 

792

 

 

Swaps

 

1,030

 

1,439

 

(409)

 

1,929

 

997

 

932

 

 

Options

 

343

 

405

 

(62)

 

336

 

431

 

(95)

 

 

 

2,423

 

1,916

 

507

 

3,119

 

1,490

 

1,629

 

Total - Contracts held for trading purposes

 

7,407

 

6,339

 

1,068

 

8,065

 

5,365

 

2,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

 

Swaps

 

662

 

252

 

410

 

487

 

403

 

84

 

 

Options

 

 

206

 

(206)

 

 

81

 

(81)

 

 

 

662

 

458

 

204

 

487

 

484

 

3

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

 

Swaps

 

60

 

55

 

5

 

56

 

187

 

(131)

 

 

Options

 

 

 

 

 

 

 

 

 

60

 

55

 

5

 

56

 

187

 

(131)

 

Equity, commodity and credit derivative contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

 

Swaps

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total - Contracts designated as hedges

 

722

 

513

 

209

 

543

 

671

 

(128)

 

 

Designated as fair value hedges

 

461

 

320

 

141

 

197

 

476

 

(279)

 

 

Designated as cash flow hedges

 

261

 

193

 

68

 

346

 

195

 

151

 

 

Designated as a hedge of a net investment in a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

foreign operation

 

 

 

 

 

 

 

Total fair value

 

8,129

 

6,852

 

1,277

 

8,608

 

6,036

 

2,572

 

Impact of master netting agreements

 

(3,415)

 

(3,415)

 

 

(3,151)

 

(3,151)

 

 

 

 

 

4,714

 

3,437

 

1,277

 

5,457

 

2,885

 

2,572

 


 

Note 17 - Hedging Activities

 

The Bank's market risk exposure, risk management objectives, policies and procedures, and risk measurement methods are presented in the Risk Management section of the MD&A for the year ended October 31, 2019.

 

The Bank has elected, as permitted under IFRS 9, to continue applying the hedge accounting requirements of IAS 39. Some of the tables present information on currencies, specifically, the Canadian dollar (CAD), the Chinese yuan renminbi (CNH), the Hong Kong dollar (HKD), the U.S. dollar (USD), the euro (EUR), the pound sterling (GBP) and the Brazilian real (BRL).

 

The following table shows the notional amounts and the weighted average rates by term to maturity of the designated derivative instruments and their fair value by type of hedging relationship.

 

As at October 31

 

 

 

 

 

2019

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

Term to maturity

 

 

Total

 

 

Fair value

 

 

Total

 

 

Fair value

 

 

 

 

 

 

 

1 year

or less

 

 

 

Over

1 year

to 2 years

 

 

 

Over 2 years to 5 years

 

 

 

Over

5 years

 

 

 

 

 

Assets

 

Liabilities

 

 

 

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

451

 

114

 

 

14,019

 

 

193

 

357

 

 

 

Notional amount - LIBOR reform(1)

 

 

 

 

 

 

 

 

 

554

 

 

 

1,768

 

 

 

2,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional amount - Other

 

1,061

 

 

 

3,381

 

 

 

6,541

 

 

 

3,600

 

 

 

14,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average fixed interest rate - Pay fixed

 

%

 

1.7

%

 

2.0

%

 

1.9

%

 

 

1.9

%

 

 

 

 

 

 

1.8

%

 

 

 

 

 

 

 

Average fixed interest rate - Receive fixed

 

0.8

%

 

0.8

%

 

2.2

%

 

2.6

%

 

 

2.1

%

 

 

 

 

 

 

2.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cross-currency swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

888

 

 

4

 

38

 

 

 

Notional amount - LIBOR reform(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional amount - Other

 

112

 

 

 

 

 

 

116

 

 

 

 

 

 

228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average CAD-CNH exchange rate

$

0.1864

 

 

 

 

 

 

 

 

 

 

 

$

0.1864

 

 

 

 

 

 

$

0.1955

 

 

 

 

 

 

 

 

Average CAD-HKD exchange rate

 

 

 

 

 

 

$

0.1621

 

 

 

 

 

$

0.1621

 

 

 

 

 

 

$

0.1621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

206

 

 

1,454

 

 

 

81

 

 

 

Notional amount - LIBOR reform(1)

 

 

 

 

 

 

 

 

 

40

 

 

 

395

 

 

 

435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional amount - Other

 

314

 

 

 

35

 

 

 

22

 

 

 

493

 

 

 

864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average fixed interest rate - Purchased

 

0.1

%

 

0.1

%

 

(0.8)

%

 

%

 

 

0.1

%

 

 

 

 

 

 

%

 

 

 

 

 

 

 

Average fixed interest rate - Written

 

2.4

%

 

2.4

%

 

2.7

%

 

2.8

%

 

 

2.7

%

 

 

 

 

 

 

2.7

%

 

 

 

 

 

 

 

 

 

 

 

1,487

 

 

 

3,416

 

 

 

7,273

 

 

 

6,256

 

 

 

18,432

 

 

461

 

320

 

 

16,361

 

 

197

 

476

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

211

 

138

 

 

17,419

 

 

294

 

46

 

 

 

Notional amount - LIBOR reform(1)

 

 

 

 

 

 

 

 

 

1,185

 

 

 

 

 

 

1,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional amount - Other

 

2,740

 

 

 

717

 

 

 

14,860

 

 

 

3,187

 

 

 

21,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average fixed interest rate - Pay fixed

 

2.1

%

 

2.1

%

 

2.0

%

 

 

2.2

%

 

 

2.0

%

 

 

 

 

 

 

2.1

%

 

 

 

 

 

 

 

Average fixed interest rate - Receive fixed

 

1.9

%

 

%

 

0.7

%

 

 

0.7

%

 

 

0.8

%

 

 

 

 

 

 

0.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cross-currency swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

55

 

 

12,144

 

 

52

 

149

 

 

 

Notional amount - LIBOR reform(1)

 

 

 

 

 

 

 

 

 

10,765

 

 

 

2,302

 

 

 

13,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional amount - Other

 

3,034

 

 

 

1,435

 

 

 

 

 

 

 

 

 

4,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average CAD-USD exchange rate

$

1.3076

 

$

1.3243

 

 

$

1.3101

 

 

$

1.2838

 

 

$

1.3074

 

 

 

 

 

 

$

1.2976

 

 

 

 

 

 

 

 

Average USD-EUR exchange rate

$

1.2278

 

$

1.1131

 

 

$

1.1351

 

 

$

1.2295

 

 

$

1.1626

 

 

 

 

 

 

$

1.1742

 

 

 

 

 

 

 

 

Average USD-GBP exchange rate

 

 

 

$

1.2921

 

 

 

 

 

 

 

 

$

1.2921

 

 

 

 

 

 

$

1.3012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity price risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

109

 

 

 

 

 

 

Average price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

62.42

 

 

 

 

 

 

 

 

 

 

 

 

5,774

 

 

 

2,152

 

 

 

26,810

 

 

 

5,489

 

 

 

40,225

 

 

261

 

193

 

 

29,672

 

 

346

 

195

 

Hedges of net investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in foreign operations(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cross-currency swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional amount

 

10

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

15

 

 

 

 

 

 

Average CAD-USD exchange rate

$

1.3286

 

 

 

 

 

 

 

 

 

 

 

$

1.3286

 

 

 

 

 

 

$

1.2929

 

 

 

 

 

 

 

 

Average USD-BRL exchange rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.2508

 

 

 

 

 

 

 

 

Average USD-HKD exchange rate

$

0.1277

 

 

 

 

 

 

 

 

 

 

 

$

0.1277

 

 

 

 

 

 

$

0.1281

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

7,271

 

 

 

5,568

 

 

 

34,083

 

 

 

11,745

 

 

 

58,667

 

 

722

 

513

 

 

46,048

 

 

543

 

671

 

 

(1)       The benchmark interest rate reform is a global initiative led and coordinated by central banks and governments around the world, including those in Canada. In July 2017, the UK Financial Conduct Committee (FCA) stated that, after 2021, it will no longer compel banks to submit rates used for the calculation of the London Interbank Offered Rate (LIBOR). The Bank has formed a team that is conducting a Bank-wide impact analysis. It is currently inventorying all of the Bank's contractual arrangements linked to LIBOR, assessing the Bank's exposures to LIBOR instruments and identifying impacts on the Bank's products, systems and processes with the intention of minimizing the impacts through appropriate mitigating actions. The Bank is also actively involved in industry working groups and will continue to monitor industry progress.

(2)       As at October 31, 2019, the Bank also designated $958 million in foreign currency deposits denominated in U.S. dollars as net investment hedging instruments ($1,035 million in foreign currency deposits denominated in U.S. dollars and euros as net investment hedging instruments as at October 31, 2018).

 

Note 17 - Hedging Activities (cont.)

 

Fair Value Hedges

 

Fair value hedge transactions consist of using derivative financial instruments (interest rate swaps and options) to hedge changes in the fair value of a financial asset or financial liability caused by interest rate fluctuations. Changes in the fair values of the derivative financial instruments used as hedging instruments offset changes in the fair value of the hedged items. The Bank applies this strategy mainly to portfolios of securities measured at fair value through other comprehensive income, fixed-rate deposits, liabilities related to transferred receivables, and subordinated debt.

 

In addition, when a fixed-rate asset or liability is denominated in a foreign currency, the Bank sometimes uses cross-currency swaps to hedge the associated foreign exchange risk. The Bank may designate a cross-currency swap to exchange the fixed-rate foreign currency for the functional currency at a floating rate in a single hedging relationship addressing both interest rate risk and foreign exchange risk. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this strategy mainly to foreign currency fixed-rate deposits.

 

Regression analysis is used to test hedge effectiveness and determine the hedge ratio. For fair value hedges, the main source of potential hedge ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.

 

The following tables show amounts related to hedged items as well as the results of the fair value hedges.

 

 

 

 

 

As at October 31, 2019

 

Year ended October 31, 2019

 

 

 

 

 

 

Carrying value

of hedged items

 

Cumulative

hedge

adjustments from active hedges

 

Cumulative

adjustments from

discontinued

hedges

 

Gains (losses) on the hedged items for ineffectiveness measurement(1)

 

Gains (losses) on the hedging instruments for ineffectiveness measurement(1)

 

Hedge ineffectiveness(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities at fair value through other comprehensive income

 

8,344

 

78

 

9

 

210

 

(208)

 

2

 

Deposits

 

4,667

 

112

 

48

 

(396)

 

395

 

(1)

 

Liabilities related to transferred receivables

 

3,663

 

59

 

79

 

(198)

 

197

 

(1)

 

Subordinated debt

 

752

 

15

 

 

(25)

 

26

 

1

 

 

 

 

 

 

 

 

 

 

 

 

(409)

 

410

 

1

 

 

 

 

 

 

As at October 31, 2018

 

Year ended October 31, 2018

 

 

 

 

 

 

Carrying value

of hedged items

 

Cumulative

hedge

adjustments from active hedges

 

Cumulative

adjustments from

discontinued

hedges

 

Gains (losses) on the hedged items for ineffectiveness measurement(1)

 

Gains (losses) on the hedging instruments for ineffectiveness measurement(1)

 

Hedge ineffectiveness(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities at fair value through other comprehensive income

 

3,315

 

(78)

 

(11)

 

(144)

 

144

 

 

Deposits

 

6,367

 

(258)

 

20

 

264

 

(262)

 

2

 

Liabilities related to transferred receivables

 

4,482

 

(89)

 

50

 

123

 

(122)

 

1

 

Subordinated debt

 

737

 

(10)

 

 

10

 

(10)

 

 

 

 

 

 

 

 

 

 

 

 

 

253

 

(250)

 

3

 

 

(1)       Amounts are presented on a pre-tax basis.

 

 

Cash Flow Hedges

 

Cash flow hedge transactions consist of using interest rate swaps to hedge the risk of changes in future cash flows caused by floating-rate assets or liabilities. In addition, the Bank sometimes uses cross-currency swaps to hedge the foreign exchange risk caused by assets or liabilities denominated in foreign currencies. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this strategy mainly to its loan, personal credit line, acceptance, and deposit portfolios.

 

The Bank also uses total return swaps to hedge the risk of changes in future cash flows related to the Restricted Stock Unit (RSU) Plan. Some of these swaps are designated as part of a cash flow hedge against a portion of the unrecognized obligation of the RSU Plan. In cash flow hedges, the derivative financial instruments used as hedging instruments reduce the variability of the future cash flows related to the hedged items.

 

Regression analysis is used to assess hedge effectiveness and to determine the hedge ratio. For cash flow hedges, the main source of potential hedge ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.

 

The following tables show the amounts related to hedged items as well as the results of the cash flow hedges.

 

 

 

As at October 31, 2019

 

 

 

 

 

Year ended October 31, 2019

 

 

 

 

 

Accumulated other comprehensive income from active hedges

 

Accumulated other comprehensive income from discontinued hedges

 

Gains (losses) on hedged items for ineffectiveness measurement(1)

 

Gains (losses) on hedging instruments for ineffectiveness measurement(1)

 

Hedge ineffectiveness(1)

 

Unrealized gains (losses) included in Other comprehensive income as the effective portion of the hedging instrument(1)

 

Losses (gains) reclassified to Net interest income(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

(14)

 

(45)

 

45

 

 

45

 

(16)

 

 

Deposits

 

30

 

9

 

154

 

(154)

 

 

(108)

 

(10)

 

 

Acceptances

 

4

 

(44)

 

133

 

(135)

 

(2)

 

(133)

 

2

 

 

 

 

 

34

 

(49)

 

242

 

(244)

 

(2)

 

(196)

 

(24)

 

Equity price risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

10

 

(6)

 

6

 

 

9

 

(3)

 

 

 

 

 

34

 

(39)

 

236

 

(238)

 

(2)

 

(187)

 

(27)

 

 

 

 

As at October 31, 2018

 

 

 

 

 

Year ended October 31, 2018

 

 

 

 

 

Accumulated other comprehensive income from active hedges

 

Accumulated other comprehensive income from discontinued hedges

 

Gains (losses) on hedged items for ineffectiveness measurement(1)

 

Gains (losses) on hedging instruments for ineffectiveness measurement(1)

 

Hedge ineffectiveness(1)

 

Unrealized gains (losses) included in Other comprehensive income as the effective portion of the hedging instrument(1)

 

Losses (gains) reclassified to Net interest income(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

(16)

 

(26)

 

54

 

(53)

 

 

(53)

 

(36)

 

 

Deposits

 

138

 

19

 

(84)

 

86

 

 

78

 

(10)

 

 

Acceptances

 

54

 

37

 

(70)

 

68

 

1

 

68

 

(17)

 

 

 

 

 

176

 

30

 

(100)

 

101

 

1

 

93

 

(63)

 

Equity price risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

(3)

 

7

 

23

 

(23)

 

 

(23)

 

 

 

 

 

 

173

 

37

 

(77)

 

78

 

1

 

70

 

(63)

 

 

(1)       Amounts are presented on a pre-tax basis.

 

 

Note 17 - Hedging Activities (cont.)

 

Hedges of Net Investments in Foreign Operations

 

The Bank's structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. The Bank measures this risk by assessing the impact of foreign currency fluctuations and hedges it using derivative and non-derivative financial instruments (cross-currency swaps and deposits). In a hedge of a net investment in a foreign operation (net investment hedge), the financial instruments used offset the foreign exchange gains and losses on the investments. When non-derivative financial instruments are designated as foreign exchange risk hedges, only the changes in fair value that are attributable to foreign exchange risk are taken into account when assessing and calculating the effectiveness of the hedge. 

 

Assessing the effectiveness of net investment hedges consists of comparing changes in the carrying value of the deposits or the fair value of the derivative attributable to exchange rate fluctuations with changes in the net investment in a foreign operation attributable to exchange rate fluctuations. Inasmuch as the notional amount of the hedging instruments and the hedged net investments are aligned, no ineffectiveness is expected.

 

The following tables present the amounts related to hedged items as well as the results of the net investment hedges.

 

 

 

As at October 31, 2019

 

 

 

 

 

 Year ended October 31, 2019

 

 

 

 

Accumulated other comprehensive income from active hedges

 

Accumulated other comprehensive income from discontinued hedges

 

Gains (losses) on hedged items for ineffectiveness measurement(1)

 

Gains (losses) on hedging instruments for ineffectiveness measurement(1)

 

Hedge ineffectiveness(1)

 

Unrealized gains (losses) included in Other comprehensive income as the effective portion of the hedging instrument(1)

 

Losses (gains) reclassified to the Non-interest income item(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investments in foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

operations denominated in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD

 

7

 

(191)

 

(5)

 

5

 

 

5

 

 

 

EUR

 

 

 

 

 

 

 

3

 

 

BRL

 

 

36

 

 

 

 

 

 

 

Other currencies

 

 

 

(1)

 

1

 

 

1

 

(1)

 

 

 

 

7

 

(155)

 

(6)

 

6

 

 

6

 

2

 

 

 

 

As at October 31, 2018

 

 

 

 

 

 Year ended October 31, 2018

 

 

 

 

Accumulated other comprehensive income from active hedges

 

Accumulated other comprehensive income from discontinued hedges

 

Gains (losses) on hedged items for ineffectiveness measurement(1)

 

Gains (losses) on hedging instruments for ineffectiveness measurement(1)

 

Hedge ineffectiveness(1)

 

Unrealized gains (losses) included in Other comprehensive income as the effective portion of the hedging instrument(1)

 

Losses (gains) reclassified to the Non-interest income item(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investments in foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

operations denominated in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD

 

(2)

 

(187)

 

17

 

(17)

 

 

(17)

 

 

 

EUR

 

1

 

(4)

 

(1)

 

1

 

 

1

 

 

 

BRL

 

(1)

 

37

 

(3)

 

3

 

 

3

 

 

 

Other currencies

 

 

 

 

 

 

 

 

 

 

 

(2)

 

(154)

 

13

 

(13)

 

 

(13)

 

 

 

(1)       Amounts are presented on a pre-tax basis.

 

Reconciliation of Equity Components

 

The following table presents a reconciliation by risk category of Accumulated other comprehensive income attributable to hedge accounting.

 

As at October 31

 

2019

 

2018

 

 

 

 

 

Net gains (losses) on cash flow hedges

 

Net foreign currency translation adjustments

 

Net gains (losses) on cash flow hedges

 

Net foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning

 

151

 

14

 

146

 

(13)

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedges of net investments in foreign operations(1)

 

 

 

 

 

 

 

 

 

 

Gains (losses) included as the effective portion

 

 

 

6

 

 

 

(13)

 

 

Losses (gains) reclassified to Non-interest income

 

 

 

2

 

 

 

 

 

Foreign currency translation gains (losses) on investments in foreign operations

 

 

 

(9)

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges(1)

 

 

 

 

 

 

 

 

 

 

Gains (losses) included as the effective portion

 

 

 

 

 

 

 

 

 

 

 

Interest rate risk

 

(196)

 

 

 

93

 

 

 

 

 

Equity price risk

 

9

 

 

 

(23)

 

 

 

 

Losses (gains) reclassified to Net interest income

 

 

 

 

 

 

 

 

 

 

 

Interest rate risk

 

(24)

 

 

 

(63)

 

 

 

 

 

Equity price risk

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income attributable to non-controlling interests

 

 

1

 

 

(1)

 

Income taxes

 

57

 

(6)

 

(2)

 

(1)

 

Balance at end

 

(6)

 

8

 

151

 

14

 

 

(1)       Amounts are presented on a pre-tax basis.

 

Note 18 - Share Capital

 

Authorized

Common Shares

An unlimited number of shares without par value.

 

First Preferred Shares

An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $5 billion.

 

First Preferred Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at October 31, 2019

 

 

 

 

 

Redemption and

conversion date(1)(2)

 

 

Redemption

 price per

share ($)(1)

 

 

Convertible into

preferred shares(2)

 

 

Dividend per share ($)(3)

 

 

Reset premium

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

issued and outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series 30(4)

 

May 15, 2024

(5)(6)

 

25.00

 

 

Series 31

 

 

0.25156

(7)

 

2.40

%

 

 

 

Series 32(4)

 

February 15, 2020

(5)(6)

 

25.00

 

 

Series 33

 

 

0.24375

(8)

 

2.25

%

 

 

 

Series 34(4)

 

May 15, 2021

(5)(6)

 

25.00

 

 

Series 35

 

 

0.35000

(8)

 

4.90

%

 

 

 

Series 36(4)

 

August 15, 2021

(5)(6)

 

25.00

 

 

Series 37

 

 

0.33750

(8)

 

4.66

%

 

 

 

Series 38(4)

 

November 15, 2022

(5)(6)

 

25.00

 

 

Series 39

 

 

0.27813

(8)

 

3.43

%

 

 

 

Series 40(4)

 

May 15, 2023

(5)(6)

 

25.00

 

 

Series 41

 

 

0.28750

(8)

 

2.58

%

 

 

 

Series 42(4)

 

November 15, 2023

(5)(6)

 

25.00

 

 

Series 43

 

 

0.30938

(8)

 

2.77

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First preferred shares 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

authorized but not issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series 23(9)

 

July 31, 2013

 

 

25.00

 

 

n.a.

 

 

0.75000

 

 

n.a.

 

 

 

 

Series 31(4)

 

May 15, 2024

(5)

 

25.00

(10)

 

n.a.

 

 

Floating rate

(11)

 

2.40

%

 

 

 

Series 33(4)

 

February 15, 2020

(5)

 

25.50

(12)

 

n.a.

 

 

Floating rate

(11)

 

2.25

%

 

 

 

Series 35(4)

 

May 15, 2021

(5)

 

25.50

(12)

 

n.a.

 

 

Floating rate

(11)

 

4.90

%

 

 

 

Series 37(4)

 

August 15, 2021

(5)

 

25.50

(12)

 

n.a.

 

 

Floating rate

(11)

 

4.66

%

 

 

 

Series 39(4)

 

November 15, 2022

(5)

 

25.50

(12)

 

n.a.

 

 

Floating rate

(11)

 

3.43

%

 

 

 

Series 41(4)

 

May 15, 2023

(5)

 

25.50

(12)

 

n.a.

 

 

Floating rate

(11)

 

2.58

%

 

 

 

Series 43(4)

 

November 15, 2023

(5)

 

25.50

(12)

 

n.a.

 

 

Floating rate

(11)

 

2.77

%

 

 

n.a.        Not applicable

(1)         Redeemable in cash at the Bank's option, in whole or in part, subject to the provisions of the Bank Act (Canada) and to OSFI approval. Redemption prices are increased by all the declared and unpaid dividends on the preferred shares to the date fixed for redemption.

(2)         Convertible at the option of the holders of first preferred shares, subject to certain conditions.

(3)         The dividends are non-cumulative and payable quarterly, except for Series 23, for which the dividends are payable semi-annually.

(4)         Upon the occurrence of a trigger event as defined by OSFI, each outstanding preferred share will be automatically and immediately converted, on a full and permanent basis, without the consent of the holder, into a number of common shares of the Bank determined pursuant to an automatic conversion formula. This conversion will be calculated by dividing the value of the preferred shares, i.e., $25.00 per share, plus all declared and unpaid dividends as at the date of the trigger event, by the value of the common shares. The value of the common shares will be the greater of a $5.00 floor price or the current market price of the common shares. Current market price means the volume weighted average trading price of common shares for the ten consecutive trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an exchange when this price is being established, the price will be the fair value reasonably determined by the Bank's Board.

(5)         Redeemable on the date fixed for redemption and on the same date every five years thereafter.

(6)         Convertible on the date fixed for conversion and on the same date every five years thereafter, subject to certain conditions.

(7)         The dividend amount is set for the five-year period commencing on May 16, 2019 and ending on the date fixed for redemption. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per share determined by multiplying the rate of interest equal to the sum of the 5-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00, plus the reset premium.

(8)         The dividend amount is set for the initial period ending on the date fixed for redemption. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per share determined by multiplying the rate of interest equal to the sum of the 5-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00, plus the reset premium.

(9)         For additional information, see Note 19 to these consolidated financial statements.

(10)      As of the date fixed for redemption, and every five years thereafter, the redemption price will be $25.00 per share.

(11)      The dividend period begins as of the date fixed for redemption. The amount of the floating quarterly non-cumulative dividend is determined by multiplying the rate of interest equal to the sum of the 90-day Government of Canada treasury bill yield on the floating rate calculation date by $25.00, plus the reset premium.

(12)      As of the date fixed for redemption, the redemption price will be $25.50 per share. Thereafter, on the same date every five years, the redemption price will be $25.00 per share.

 

Second Preferred Shares

15 million shares without par value, issuable for a total maximum consideration of $300 million. As at October 31, 2019, no shares had been issued or traded.

 

Shares Outstanding

 

As at October 31

 

2019

 

2018

 

 

 

 

 

Number

of shares

 

Shares

$

 

Number

of shares

 

Shares

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Preferred Shares

 

 

 

 

 

 

 

 

 

 

 

Series 30

 

14,000,000

 

350

 

14,000,000

 

350

 

 

 

Series 32

 

12,000,000

 

300

 

12,000,000

 

300

 

 

 

Series 34

 

16,000,000

 

400

 

16,000,000

 

400

 

 

 

Series 36

 

16,000,000

 

400

 

16,000,000

 

400

 

 

 

Series 38

 

16,000,000

 

400

 

16,000,000

 

400

 

 

 

Series 40

 

12,000,000

 

300

 

12,000,000

 

300

 

 

 

Series 42

 

12,000,000

 

300

 

12,000,000

 

300

 

 

 

 

 

98,000,000

 

2,450

 

98,000,000

 

2,450

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares at beginning of the fiscal year

 

335,070,642

 

2,822

 

339,591,965

 

2,768

 

Issued pursuant to the Stock Option Plan

 

2,950,922

 

122

 

3,129,313

 

128

 

Repurchase of common shares for cancellation

 

(4,547,200)

 

(40)

 

(7,500,000)

 

(64)

 

Impact of shares purchased or sold for trading(1)

 

699,564

 

45

 

(149,430)

 

(10)

 

Other

 

(1,517)

 

 

(1,206)

 

 

Common shares at end of year

 

334,172,411

 

2,949

 

335,070,642

 

2,822

 

 

(1)       As at October 31, 2019, there were 3,846 shares held for trading, representing a negligible amount (703,410 shares held for trading representing $45 million as at October 31, 2018).

 

Dividends Declared 

 

Year ended October 31

 

2019

 

2018

 

 

 

 

 

Dividends

$

 

Dividends

per share

 

Dividends

$

 

Dividends

per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Preferred Shares

 

 

 

 

 

 

 

 

 

 

 

Series 30

 

14

 

1.0156

 

14

 

1.0250

 

 

 

Series 32

 

12

 

0.9750

 

12

 

0.9750

 

 

 

Series 34

 

22

 

1.4000

 

22

 

1.4000

 

 

 

Series 36

 

22

 

1.3500

 

22

 

1.3500

 

 

 

Series 38

 

18

 

1.1125

 

18

 

1.1125

 

 

 

Series 40

 

14

 

1.1500

 

11

 

0.9310

 

 

 

Series 42

 

14

 

1.2375

 

6

 

0.5323

 

 

 

 

 

116

 

 

 

105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

892

 

2.6600

 

829

 

2.4400

 

 

 

 

 

1,008

 

 

 

934

 

 

 

 

Issuances of Preferred Shares

On June 11, 2018, the Bank had issued 12,000,000 Non-Cumulative 5-Year Rate-Reset Series 42 First Preferred Shares at a price equal to $25.00 per share for gross proceeds of $300 million. Given that the Series 42 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under Basel III.

 

On January 22, 2018, the Bank had issued 12,000,000 Non-Cumulative 5-Year Rate-Reset Series 40 First Preferred Shares at a price equal to $25.00 per share for gross proceeds of $300 million. Given that the Series 40 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under Basel III.

 

 

 

Note 18 - Share Capital (cont.)

 

Repurchases of Common Shares

On June 10, 2019, the Bank began a normal course issuer bid to repurchase for cancellation up to 6,000,000 common shares (representing approximately 1.80% of its outstanding common shares) over the 12-month period ending no later than June 9, 2020. On June 6, 2018, the Bank had begun a normal course issuer bid to repurchase for cancellation up to 8,000,000 common shares (representing approximately 2.36% of its outstanding common shares) over the 12‑month period ended June 5, 2019. Any repurchase through the Toronto Stock Exchange will be done at market prices. The common shares may also be repurchased through other means authorized by the Toronto Stock Exchange and applicable regulations, including private agreements or share repurchase programs under issuer bid exemption orders issued by the securities regulators. A private purchase made under an exemption order issued by a securities regulator will be done at a discount to the prevailing market price. The amounts that are paid above the average book value of the common shares are charged to Retained earnings. During the year ended October 31, 2019, the Bank repurchased 4,547,200 common shares for $281 million, which reduced Common share capital by $40 million and Retained earnings by $241 million. During the year ended October 31, 2018, the Bank had repurchased 7,500,000 common shares for $467 million, which had reduced Common share capital by $64 million and Retained earnings by $403 million.

 

Reserved Common Shares

As at October 31, 2019 and 2018, there were 15,507,568 common shares reserved under the Dividend Reinvestment and Share Purchase Plan. As at October 31, 2019, there were 20,377,278 common shares (22,894,802 as at October 31, 2018) reserved under the Stock Option Plan.

 

Common Shares Held in Escrow

As part of the acquisition of Wellington West Holdings Inc. in 2011, the Bank had issued common shares held in escrow. In December 2016, a total of 799,563 of these shares were released to shareholders, and 108,341 shares were cancelled, mainly upon the settlement of certain indemnifications guaranteed by those shares. During the year ended October 31, 2019, a total of 870 of these shares were released to shareholders, and 1,517 shares were cancelled (during the year ended October 31, 2018, a total of 3,778 of these shares were released, and 1,206 shares were cancelled). As at October 31, 2019, the number of common shares held in escrow was 21,510 (23,897 as at October 31, 2018). The Bank expects that the remaining shares in escrow will be settled by the end of calendar year 2020.

 

Restriction on the Payment of Dividends

The Bank is prohibited from declaring dividends on its common or preferred shares if there are reasonable grounds for believing that the Bank would, by so doing, be in contravention of the regulations of the Bank Act (Canada) or OSFI's capital adequacy and liquidity guidelines. In addition, the ability to pay common share dividends is restricted by the terms of the outstanding preferred shares pursuant to which the Bank may not pay dividends on its common shares without the approval of the holders of the outstanding preferred shares, unless all preferred share dividends have been declared and paid or set aside for payment. Moreover, if NBC Asset Trust were unable to pay the full amount of distributions on the trust units, the Bank would withhold from declaring dividends on any of its preferred and common shares during a determined period. For additional information, see Notes 19 and 27 to these consolidated financial statements.

 

Dividend Reinvestment Plan

The Bank has a dividend reinvestment plan for common and preferred shareholders. Participation in the plan is optional. Under the terms and conditions of the plan, participants acquire shares through the reinvestment of cash dividends paid on the shares they hold or through optional cash payments. Common shares subscribed by participants are purchased on their behalf in the secondary market through the Bank's transfer agent, Computershare Trust Company of Canada, at a price equal to the average purchase price of the common shares during the ten business days immediately following the dividend payment date.

 

 

 

Note 19 - Non-Controlling Interests

 

As at October 31

 

2019

 

2018

 

 

 

 

 

 

 

 

Trust units issued by NBC Asset Trust (NBC CapS II) -  Series 2(1)

 

359

 

359

 

Other(2)

 

(1)

 

20

 

 

 

358

 

379

 

             

 

(1)       Includes $9 million in accrued interest as at October 31, 2019 ($9 million as at October 31, 2018).

(2)       During the year ended October 31, 2019, the Bank acquired the entire remaining non-controlling interest in the Cambodian subsidiary Advanced Bank of Asia Limited. For additional information, see Note 31 to these consolidated financial statements.

 

Trust Units Issued by NBC Asset Trust

Through structured entity NBC Asset Trust (the Trust), a closed-end trust established under the laws of the Province of Ontario, the Bank issued transferable non-voting trust units called "Trust Capital Securities" or "NBC CapS II." These securities are not redeemable or exchangeable for Bank preferred shares at the option of the holder. The gross proceeds from the issuance were used by the Trust to finance the acquisition of mortgage loans from the Bank. For additional information, see Note 27 to these consolidated financial statements.

 

The main terms and characteristics of the NBC CapS II trust units outstanding as at October 31, 2019 are presented below.

 

 

 

Number

 

Issuance date

 

Annual yield

 

 

Distribution dates

 

 

Semi-annual

distribution

by NBC CapS II(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series 2

 

350,000

 

June 30, 2008

 

7.447

%

 

June 30,

December 31

 

 

$37.235(2)

 

 

(1)       For each unit with a face value of $1,000.

(2)       For each distribution date after June 30, 2020, the distribution will be paid at a rate equal to one-half the sum of the 180-day bankers' acceptance rate in effect plus 4.09%.

 

Distribution

No cash distributions will be payable by the Trust on NBC CapS II if the Bank fails to declare regular dividends on its preferred shares or, if no preferred shares are then outstanding, on its outstanding common shares. In this case, the net distributable funds of the Trust will be paid to the Bank as the sole holder of the special trust securities, representing the residual interest in the Trust. Should the Trust fail to pay the semi-annual distributions in full on the NBC CapS II, the Bank will withhold from declaring dividends on any of its preferred and common shares during a determined period.

 

Automatic Exchange

Each NBC CapS II - Series 2 can be exchanged automatically, without the consent of the holders, for 40 Series 23 First Preferred Shares of the Bank upon the occurrence of one of the following events: (i) proceedings are commenced for the winding-up of the Bank; (ii) OSFI takes control of the Bank; (iii) the Bank posts a Tier 1 capital ratio of less than 5% or a Total capital ratio of less than 8%; or (iv) OSFI has directed the Bank to increase its capital or to provide additional liquidity and the Bank elects such automatic exchange or the Bank fails to comply with such direction to the satisfaction of OSFI. On an automatic exchange, the Bank will hold all outstanding trust capital securities of the Trust.

 

Redemption at the Option of the Trust

On any distribution date, the Trust may, subject to prior written notice and OSFI approval, redeem, at its option, the NBC CapS II - Series 2, in whole but not in part, without the consent of the holders.

 

Purchase for Cancellation

The Trust may, with OSFI approval, purchase NBC CapS II - Series 2, in whole or in part, on the open market or by tender or private contract at any price. The NBC CapS II purchased by the Trust, if any, will be cancelled and will not be reissued.

 

Regulatory Capital

The NBC CapS II - Series 2 qualify as innovative capital instruments and are eligible as additional Tier 1 capital, but because these instruments do not satisfy the non-viability contingent capital requirements, they are to be phased out at a rate of 10% per year between 2013 and 2022.

Note 20 - Capital Disclosure

 

Capital Management Objectives, Policies and Procedures

Capital management has a dual role of ensuring a competitive return to the Bank's shareholders while maintaining a solid capital foundation that covers the risks inherent to the Bank's business, supports its business segments and protects its clients.

 

The Bank's capital management policy defines the guiding principles as well as the roles and responsibilities regarding its internal capital adequacy assessment process. This process is a key tool in establishing the Bank's capital strategy and is subject to quarterly reviews and periodic amendments.

 

Capital Management

Capital ratios are obtained by dividing regulatory capital by risk-weighted assets and are expressed as a percentage. Risk-weighted assets are calculated in accordance with the rules established by OSFI for on- and off-balance-sheet risks. Credit, market and operational risks are factored into the risk-weighted assets calculation for regulatory purposes. The definition adopted by the Basel Committee on Banking Supervision (BCBS) distinguishes between three types of capital. Common Equity Tier 1 (CET1) capital consists of common shareholders' equity less goodwill, intangible assets and other capital deductions. The Additional Tier 1 instruments comprise eligible non-cumulative preferred shares and the eligible amount of innovative instruments. The sum of CET1 and Additional Tier 1 capital forms what is known as Tier 1 capital. Tier 2 capital consists of the eligible portion of subordinated debt and certain allowances for credit losses. Total regulatory capital is the sum of Tier 1 and Tier 2 capital.

 

The Bank and all other major Canadian banks have to maintain minimum capital ratios established by OSFI: a CET1 capital ratio of at least 10.0%, a Tier 1 capital ratio of at least 11.5%, and a Total capital ratio of at least 13.5%. All of these ratios are to include a capital conservation buffer of 2.5%, a 1% surcharge applicable solely to D-SIBs, and a 2.0% domestic stability buffer. The domestic stability buffer, which can vary from 0% to 2.5% of risk-weighted assets, consists exclusively of CET1 capital. A D-SIB that fails to meet this buffer requirement will not be subject to automatic constraints to reduce capital distributions but will have to provide a remediation plan to OSFI. The banks also have to meet the 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. OSFI requires Canadian banks to meet a Basel III leverage ratio of at least 3.0%. The leverage ratio is a measure independent of risk that is calculated by dividing the amount of Tier 1 capital by total exposure. Total exposure is defined as the sum of on-balance-sheet assets (including derivative exposures and securities financing transaction exposures) and off-balance-sheet items. The assets deducted from Tier 1 capital are also deducted from total exposure.

 

During the years ended October 31, 2019 and 2018, the Bank was in compliance with all of OSFI's regulatory capital requirements.

 

 

Regulatory Capital and Ratios Under Basel III

 

As at October 31

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

 

 

CET1

 

9,692

 

 

8,608

 

 

 

Tier 1

 

12,492

 

 

11,410

 

 

 

Total

 

13,366

 

 

12,352

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

 

 

 

 

 

 

 

CET1 capital

 

83,039

 

 

73,654

 

 

 

Tier 1 capital

 

83,039

 

 

73,670

 

 

 

Total capital

 

83,039

 

 

73,685

 

 

Total exposure

 

308,902

 

 

284,337

 

 

 

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

CET1

 

11.7

%

 

11.7

%

 

 

Tier 1

 

15.0

%

 

15.5

%

 

 

Total

 

16.1

%

 

16.8

%

 

 

 

 

 

 

 

 

 

 

Leverage ratio

 

4.0

%

 

4.0

%

 

 

 

Note 21 - Trading Activity Revenues

 

Trading activity revenues consist of the net interest income from trading activities and of trading revenues recognized in Non-interest income in the Consolidated Statement of Income.

 

Net interest income comprises dividends related to financial assets and liabilities associated with trading activities, net of interest expenses and interest income related to the financing of these financial assets and liabilities.

 

Non-interest income consists of realized and unrealized gains and losses as well as interest income on securities measured at fair value through profit or loss, income from held-for-trading derivative financial instruments, changes in the fair value of loans at fair value through profit or loss, changes in the fair value of financial instruments designated at fair value through profit or loss, and transaction costs if applicable.

 

Year ended October 31

 

2019

 

2018

 

 

 

 

 

 

 

Net interest income

 

47

 

70

 

Non-interest income 

 

829

 

840

 

 

 

876

 

910

 

Note 22 - Share-Based Payments

 

The compensation expense information provided below excludes the impact of hedging.

 

Stock Option Plan

The Bank's Stock Option Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, options are awarded annually and provide participants with the right to purchase common shares at an exercise price equal to the closing price of the Bank's common share on the Toronto Stock Exchange on the day preceding the award. The options vest evenly over a four-year period and expire ten years from the award date or, in certain circumstances set out in the plan, within specified time limits. The Stock Option Plan contains provisions for retiring employees that allow the participant's rights to continue vesting in accordance with the stated terms of the grant agreement. The maximum number of common shares that may be issued under the Stock Option Plan was 20,377,278 as at October 31, 2019 (22,894,802 as at October 31, 2018). The number of common shares reserved for a participant may not exceed 5% of the total number of Bank shares issued and outstanding.

 

As at October 31

 

2019

 

 

2018

 

 

 

Number of

options

 

Weighted

average

exercise price

 

 

Number of

options

 

Weighted

average

exercise price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Option Plan

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning

 

13,064,746

 

$

44.78

 

 

14,575,894

 

$

40.46

 

Awarded

 

2,116,892

 

$

58.79

 

 

1,836,348

 

$

64.14

 

Exercised

 

(2,950,922)

 

$

36.40

 

 

(3,129,313)

 

$

35.75

 

Cancelled(1)

 

(127,090)

 

$

56.86

 

 

(218,183)

 

$

48.85

 

Outstanding at end

 

12,103,626

 

$

49.15

 

 

13,064,746

 

$

44.78

 

Exercisable at end

 

7,421,662

 

$

43.59

 

 

8,378,530

 

$

39.17

 

 

(1)       Includes 13,662 expired options during the year ended October 31, 2019 (13,784 expired options during the year ended October 31, 2018).

 

 

Exercise price

 

Options

outstanding

 

Options

exercisable

 

 

 

Expiry date

 

 

 

 

 

 

 

 

 

 

 

$29.25

 

373,908

 

373,908

 

 

 

 December 2019

 

$34.34

 

580,874

 

580,874

 

 

 

 December 2020

 

$34.09

 

778,732

 

778,732

 

 

 

 December 2021

 

$38.36

 

965,378

 

965,378

 

 

 

December 2022

 

$44.96

 

1,213,605

 

1,213,605

 

 

 

December 2023

 

$47.93

 

1,529,319

 

1,529,319

 

 

 

December 2024

 

$42.17

 

1,339,479

 

884,759

 

 

 

December 2025

 

$54.69

 

1,493,427

 

671,513

 

 

 

December 2026

 

$64.14

 

1,734,064

 

423,574

 

 

 

December 2027

 

$58.79

 

2,094,840

 

 

 

 

December 2028

 

 

 

12,103,626

 

7,421,662

 

 

 

 

 

 

During the year ended October 31, 2019, the Bank awarded 2,116,892 stock options (1,836,348 stock options during the year ended October 31, 2018) with an average fair value of $6.14 per option ($7.42 for the year ended October 31, 2018).

 

The average fair value of options awarded was estimated on the award date using the Black-Scholes model as well as the following assumptions.

 

Year ended October 31

 

2019

 

2018

 

 

 

 

 

 

 

Risk-free interest rate

 

2.50%

 

2.11%

 

Expected life of options

 

7 years

 

7 years

 

Expected volatility

 

18.40%

 

18.87%

 

Expected dividend yield

 

4.37%

 

3.80%

 

The expected life of the options is based on historical data and is not necessarily representative of how options will be exercised in the future. Expected volatility is extrapolated from the implied volatility of the Bank's share price and observable market inputs, which are not necessarily representative of actual results. The expected dividend yield represents the annualized dividend divided by the Bank's share price at the award date. The risk-free interest rate is based on the Canadian dollar swap curve at the award date. The exercise price is equal to the Bank's share price at the award date. No other market parameter has been included in the fair value measurement of the options.

 

The compensation expense recorded for this plan for the year ended October 31, 2019 was $11 million ($12 million for the year ended October 31, 2018).

 

Stock Appreciation Rights (SAR) Plan

The SAR Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, participants receive, upon exercising the right, a cash amount equal to the difference between the closing price of the Bank's common share on the Toronto Stock Exchange on the day preceding the exercise date and the closing price on the day preceding the award date. SARs vest evenly over a four-year period and expire 10 years after the award date or, in certain circumstances set out in the plan, within specified time limits. The SAR Plan contains provisions for retiring employees that allow the participant's rights to continue vesting in accordance with the stated terms of the grant agreement. A compensation expense of $2 million was recognized for the year ended October 31, 2019 with respect to this plan ($1 million for the year ended October 31, 2018).

 

As at October 31

 

2019

 

2018

 

 

 

 Number

of SARs

 

 

Weighted

average

exercise price

 

 Number

of SARs

 

 

Weighted

average

exercise price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SAR Plan(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning

 

332,211

 

 

$

46.86

 

395,334

 

 

$

42.29

 

Awarded

 

46,968

 

 

$

58.79

 

62,820

 

 

$

64.14

 

Exercised

 

(44,182)

 

 

$

38.69

 

(125,943)

 

 

$

41.13

 

Outstanding at end

 

334,997

 

 

$

49.61

 

332,211

 

 

$

46.86

 

Exercisable at end

 

190,691

 

 

$

43.65

 

163,971

 

 

$

38.91

 

 

(1)       No SARs cancelled or expired during the years ended October 31, 2019 and 2018.

 

 

Exercise price

 

SARs

outstanding

 

 

 

SARs

exercisable

 

Expiry date

 

 

 

 

 

 

 

 

 

 

 

$29.25

 

9,320

 

 

 

9,320

 

 December 2019

 

$34.34

 

21,060

 

 

 

21,060

 

 December 2020

 

$34.09

 

24,608

 

 

 

24,608

 

 December 2021

 

$38.36

 

24,216

 

 

 

24,216

 

December 2022

 

$44.96

 

29,480

 

 

 

29,480

 

December 2023

 

$47.93

 

31,572

 

 

 

31,572

 

December 2024

 

$42.17

 

33,356

 

 

 

14,811

 

December 2025

 

$54.69

 

51,597

 

 

 

19,919

 

December 2026

 

$64.14

 

62,820

 

 

 

15,705

 

December 2027

 

$58.79

 

46,968

 

 

 

 

December 2028

 

 

 

334,997

 

 

 

190,691

 

 

 

 

Deferred Stock Unit (DSU) Plans

The DSU Plans are for officers and other designated persons of the Bank and its subsidiaries as well as directors. These plans allow the Bank to tie a portion of the value of the compensation of participants to the future value of the Bank's common shares. A DSU is a right that has a value equal to the closing price of a common share of the Bank on the Toronto Stock Exchange on the day preceding the award. DSUs generally vest evenly over four years. Additional DSUs are credited to the accounts of participants in an amount equal to the dividends declared on Bank common shares and vest evenly over the same period as the reference DSUs. DSUs may only be cashed when participants retire or leave the Bank or, for directors, when their term ends. The DSU Plans contain provisions for retiring employees whereby participants may continue vesting units in accordance with the stated terms of the grant agreement.

 

During the year ended October 31, 2019, the Bank awarded 51,839 DSUs at a weighted average price of $60.33 (44,713 DSUs at a weighted average price of $63.68 for the year ended October 31, 2018). A total of 569,402 DSUs were outstanding as at October 31, 2019 (591,360 DSUs as at October 31, 2018). A compensation expense of $9 million was recognized for the year ended October 31, 2019 with respect to these plans ($7 million for the year ended October 31, 2018).

 

 

Note 22 - Share-Based Payments (cont.)

 

Restricted Stock Unit (RSU) Plan

The RSU Plan is for certain officers and other designated persons of the Bank and its subsidiaries. The objective of this plan is to ensure that the compensation of certain officers and other designated persons is competitive and to foster retention. An RSU represents a right that has a value equal to the average closing price of the Bank's common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December. RSUs generally vest evenly over three years, although some RSUs vest on the sixth business day of December of the third year following the date of the award, the date on which all RSUs expire. Additional RSUs are credited to the accounts of participants in an amount equal to the dividends declared on the Bank common shares and vest evenly over the same period as the reference RSUs. The RSU Plan contains provisions for retiring employees whereby participants may continue vesting units in accordance with the stated terms of the award agreement.

 

During the year ended October 31, 2019, the Bank awarded 2,396,501 RSUs at a weighted average price of $60.07 (2,158,594 RSUs at a weighted average price of $63.57 for the year ended October 31, 2018). As at October 31, 2019, a total of 4,977,984 RSUs were outstanding (5,072,615 RSUs as at October 31, 2018). A compensation expense of $175 million was recognized for the year ended October 31, 2019 with respect to this plan ($140 million for the year ended October 31, 2018).

 

Performance Stock Unit (PSU) Plan

The PSU Plan is for officers and other designated persons of the Bank. The objective of this plan is to tie a portion of the value of the compensation of these officers and other designated persons to the future value of the Bank's common shares. A PSU represents a right that has a value equal to the average closing price of the Bank's common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December, adjusted upward or downward according to performance criteria, which is based on the Bank's total shareholder return (TSR) growth index over three years compared to the average TSR growth index of the comparator group composed of Canadian banks over three years. PSUs vest on the sixth business day of December of the third year following the date of the award, the date on which all PSUs expire. Additional PSUs are credited to the accounts of participants in an amount equal to the dividends declared on the Bank's common shares and vest evenly over the same period as the reference PSUs. The PSU Plan contains provisions for retiring employees whereby participants may continue vesting units in accordance with the stated terms of the award agreement.

 

During the year ended October 31, 2019, the Bank awarded 351,956 PSUs at a weighted average price of $60.07 (287,206 PSUs at a weighted average price of $63.57 for the year ended October 31, 2018). As at October 31, 2019, a total of 843,250 PSUs were outstanding (969,322 PSUs as at October 31, 2018). A compensation expense of $29 million was recognized for the year ended October 31, 2019 with respect to this plan ($21 million for the year ended October 31, 2018).

 

Deferred Compensation Plan of National Bank Financial (NBF)

This plan is exclusively for key employees of NBF Wealth Management. The purpose of this plan is to foster the retention of key employees and promote the growth in income and the continuous improvement in profitability at Wealth Management. Under this plan, participants can defer a portion of their annual compensation, and NBF may pay a contribution to key employees when certain financial objectives are met. Amounts awarded by NBF and the compensation deferred by participants are invested in, among others, Bank common share units. These share units represent a right, the value of which corresponds to the closing price of the Bank's common share on the Toronto Stock Exchange on the award date. Additional units are paid to the accounts of participants in an amount equal to the dividends declared on Bank common shares. Share units representing the amounts awarded by NBF vest evenly over four years. When a participant retires, or in certain cases when the participant's employment is terminated, the participant receives a cash amount representing the value of the vested share units.

 

During the year ended October 31, 2019, NBF awarded 147,927 share units at a weighted average price of $59.94 (132,544 share units at a weighted average price of $63.63 for the year ended October 31, 2018). As at October 31, 2019, a total of 1,764,789 share units were outstanding (1,618,166 share units as at October 31, 2018). During the year ended October 31, 2019, a $22 million compensation expense was recognized for this plan (recovery of a $3 million compensation expense related to a decline in share value for the year ended October 31, 2018).

 

Employee Share Ownership Plan

Under the Bank's Employee Share Ownership Plan, employees who meet the eligibility criteria can contribute up to 8% of their annual gross salary by way of payroll deductions. The Bank matches 25% of the employee contribution up to a maximum of $1,500 per annum. Bank contributions vest to the employee after one year of uninterrupted participation in the plan. Subsequent contributions vest immediately. The Bank's contributions, amounting to $12 million for the year ended October 31, 2019 ($9 million for the year ended October 31, 2018), were charged to Compensation and employee benefits when paid. As at October 31, 2019, a total of 5,813,172 common shares were held for this plan (5,718,242 common shares as at October 31, 2018).

 

Plan shares are purchased on the open market and are considered to be outstanding for earnings per share calculations. Dividends paid on the Bank's common shares held for the Employee Share Ownership Plan are used to purchase other common shares on the open market.

 

Plan Liabilities and Intrinsic Value

Total liabilities arising from the Bank's share-based compensation plans amounted to $549 million as at October 31, 2019 ($494 million as at October 31, 2018). The intrinsic value of these liabilities that had vested as at October 31, 2019 was $217 million ($182 million as at October 31, 2018).

 

Note 23 - Employee Benefits - Pension Plans and Other Post-Employment Benefits

 

The Bank offers defined benefit pension plans and other post-employment benefit plans to eligible employees. The pension plans provide benefits based on years of plan participation and average earnings at retirement. The other post-employment benefit plans include post-retirement medical, dental and life insurance coverage. The pension plans are funded whereas the other plans are not funded. The fair value of plan assets and the present value of the defined benefit obligation are measured as at October 31.

 

The Bank's most significant pension plan is the Employee Pension Plan of the National Bank of Canada; it is registered with OSFI and the Canada Revenue Agency and subject to the Pension Benefits Standards Act, 1985 and the Income Tax Act.

 

The defined benefit plans expose the Bank to specific risks such as investment performance, changes to the discount rate used to calculate the obligation, the longevity of plan members and future inflation. While management believes that the assumptions used in the actuarial valuation process are reasonable, there remains a degree of risk and uncertainty that may cause future results to differ significantly from these assumptions, which could give rise to gains or losses.

 

According to the Bank's governance rules, the policies and risk management related to the defined benefit plans are overseen at different levels by the pension committees, the Bank's management and the Board's Human Resources Committee. The defined benefit plans are examined on an ongoing basis in order to monitor the funding and investment policies, the plans' financial status and the Bank's funding requirements.

 

The Bank's funding policy for the defined benefit pension plans is to make at least the minimum annual contributions required by pension regulators.

 

For funded plans, the Bank determines whether an economic benefit exists in the form of potential reductions in future contributions and in the form of refunds from the plan surplus, where permitted by applicable regulations and plan provisions.

 

Defined Benefit Obligation, Plan Assets and Funded Status

 

As at October 31

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plans

 

Other post-employment benefit plans

 

 

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit obligation

 

 

 

 

 

 

 

 

 

Balance at beginning

 

3,864

 

3,984

 

176

 

191

 

 

Current service cost

 

93

 

114

 

3

 

5

 

 

Interest cost

 

158

 

148

 

6

 

7

 

 

Remeasurements

 

 

 

 

 

 

 

 

 

 

 

Actuarial (gains) losses arising from changes in demographic assumptions

 

(121)

 

37

 

8

 

 

 

 

Actuarial (gains) losses arising from changes in financial assumptions

 

712

 

(276)

 

18

 

(16)

 

 

 

Actuarial (gains) losses arising from experience adjustments

 

141

 

 

 

(1)

 

 

Employee contributions

 

53

 

47

 

 

 

 

 

 

Benefits paid

 

(197)

 

(190)

 

(9)

 

(10)

 

Balance at end

 

4,703

 

3,864

 

202

 

176

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan assets

 

 

 

 

 

 

 

 

 

Fair value at beginning

 

3,918

 

3,979

 

 

 

 

 

 

Interest income

 

157

 

144

 

 

 

 

 

 

Administration cost

 

(4)

 

(4)

 

 

 

 

 

 

Remeasurements

 

 

 

 

 

 

 

 

 

 

 

Return on plan assets (excluding interest income)

 

575

 

(116)

 

 

 

 

 

 

Bank contributions(1)

 

67

 

58

 

 

 

 

 

 

Employee contributions

 

53

 

47

 

 

 

 

 

 

Benefits paid

 

(197)

 

(190)

 

 

 

 

 

Fair value at end

 

4,569

 

3,918

 

 

 

 

 

Defined benefit asset (liability) at end

 

(134)

 

54

 

(202)

 

(176)

 

 

(1)       For fiscal 2020, the Bank expects to pay an employer contribution of $62 million to the defined benefit pension plans.

 

 

Note 23 - Employee Benefits - Pension Plans and Other Post-Employment Benefits (cont.)

 

Defined Benefit Asset (Liability) 

 

As at October 31

 

 

 

 

 

 

 

 

 

 

 

Pension plans

 

Other post-employment benefit plans

 

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit asset included in Other assets

 

38

 

64

 

 

 

 

 

Defined benefit liability included in Other liabilities

 

(172)

 

(10)

 

(202)

 

(176)

 

 

 

(134)

 

54

 

(202)

 

(176)

 

 

Cost for Pension Plans and Other Post-Employment Benefits

 

Year ended October 31

 

 

 

 

 

 

 

 

 

 

 

Pension plans

 

Other post-employment benefit plans

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

Current service cost

 

93

 

114

 

3

 

5

 

Interest expense (income), net

 

1

 

4

 

6

 

7

 

Administration costs

 

4

 

4

 

 

 

 

 

Expense recognized in Net income

 

98

 

122

 

9

 

12

 

Remeasurements(1)

 

 

 

 

 

 

 

 

 

 

Actuarial (gains) losses on defined benefit obligation

 

732

 

(239)

 

26

 

(17)

 

 

Return on plan assets(2)

 

(575)

 

116

 

 

 

 

 

Remeasurements recognized in Other comprehensive income

 

157

 

(123)

 

26

 

(17)

 

 

 

255

 

(1)

 

35

 

(5)

 

 

(1)       Changes related to the discount rate and to the return on plan assets are reviewed and updated on a quarterly basis. All other assumptions are updated annually.

(2)       Excluding interest income.

 

Allocation of the Fair Value of Pension Plan Assets

 

As at October 31

 

2019

 

2018

 

 

 

 

 

Quoted

in an active

market(1)

 

Not quoted

in an active

market

 

Total

 

Quoted

in an active

market(1)

 

Not quoted

in an active

market

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset classes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

63

 

63

 

 

91

 

91

 

 

Equity securities

 

1,458

 

478

 

1,936

 

1,482

 

482

 

1,964

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canadian government

 

306

 

 

306

 

223

 

 

223

 

 

 

Canadian provincial and municipal governments

 

 

1,491

 

1,491

 

 

1,115

 

1,115

 

 

 

Other issuers

 

 

571

 

571

 

 

383

 

383

 

 

Other

 

 

202

 

202

 

 

142

 

142

 

 

 

 

 

1,764

 

2,805

 

4,569

 

1,705

 

2,213

 

3,918

 

 

(1)       Unadjusted quoted prices in active markets for identical assets that the Bank can access at the measurement date.

 

The Bank's investment strategy for plan assets considers several factors, including the time horizon of pension plan obligations and investment risk. For each plan, an allocation range per asset class is defined using a mix of equity and debt securities to optimize the risk-return profile of plan assets and minimize asset/liability mismatching.

 

The pension plan assets may include investment securities issued by the Bank. As at October 31, 2019 and 2018, the pension plan assets do not include any securities issued by the Bank.

 

For fiscal 2019, the Bank and its related entities received $3 million ($5 million in fiscal 2018) in fees from the pension plans for related management, administration and custodial services.

 

 

 

Allocation of the Defined Benefit Obligation by the Status of

Defined Benefit Plan Participants

 

As at October 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plans

 

 

Other post-employment benefit plans

 

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active employees

 

42

%

 

45

%

 

22

%

 

31

%

 

Retirees

 

52

%

 

51

%

 

78

%

 

69

%

 

Participants with deferred vested benefits

 

6

%

 

4

%

 

 

 

 

 

 

 

 

 

100

%

 

100

%

 

100

%

 

100

%

 

Weighted average duration of the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

defined benefit obligation (in years)

 

17

 

 

16

 

 

13

 

 

14

 

 

 

Significant Actuarial Assumptions (Weighted Average)

 

Discount Rate

The discount rate assumption is based on an interest rate curve that represents the yields on corporate AA bonds. Short-term maturities are obtained using a curve based on observed data from corporate AA bonds. Long-term maturities are obtained using a curve based on observed data and extrapolated data.

 

To measure the pension plan and other post-employment plan obligation, the vested benefits that the Bank expects to pay in each future period are discounted to the measurement date using the spot rate associated with each of the respective periods based on the yield curve derived using the above methodology. The sum of discounted benefit amounts represents the defined benefit obligation. An average discount rate that replicates this obligation is then computed.

 

To better reflect current service cost, a separate discount rate was determined to account for the timing of future benefit payments associated with the additional year of service to be earned by the plan's active participants. Since these benefits are, on average, being paid at a later date than the benefits already earned by participants as a whole (i.e., longer duration), this method results in the use of a generally higher discount rate for calculating current service cost than that used to measure obligations where the yield curve is positively sloped. The methodology used to determine this discount rate is the same as the one used to establish the discount rate for measuring the obligation.

 

Other Assumptions

For measurement purposes, the estimated annual growth rate for health care costs was 5.17% as at October 31, 2019 (5.23% as at October 31, 2018). Based on the assumption retained, this rate is expected to decrease gradually to 3.50% in 2038 and remain steady thereafter.

 

Mortality assumptions are a determining factor when measuring the defined benefit obligation. Determining the expected benefit payout period is based on best estimate assumptions regarding mortality. Mortality tables are reviewed at least once a year, and the assumptions made are in accordance with accepted actuarial practice. New results regarding the plans are reviewed and used in calculating best estimates of future mortality.

 

As at October 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plans

 

 

Other post-employment benefit plans

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

3.10

%

 

4.05

%

 

3.10

%

 

4.05

%

 

 

Rate of compensation increase

 

3.00

%

 

3.00

%

 

3.00

%

 

3.00

%

 

 

Health care cost trend rate

 

 

 

 

 

 

 

5.17

%

 

5.23

%

 

 

Life expectancy (in years)  at 65 for a participant currently at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age 65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Men

 

21.3

 

 

21.2

 

 

21.3

 

 

21.2

 

 

 

 

 

Women

 

23.6

 

 

23.6

 

 

23.6

 

 

23.6

 

 

 

 

Age 45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Men

 

22.3

 

 

22.3

 

 

22.3

 

 

22.3

 

 

 

 

 

Women

 

24.6

 

 

24.5

 

 

24.6

 

 

24.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 23 - Employee Benefits - Pension Plans and Other Post-Employment Benefits (cont.)

 

Year ended October 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plans

 

 

Other post-employment benefit plans

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plan expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate - Current service

 

4.15

%

 

3.75

%

 

4.15

%

 

3.75

%

 

 

Discount rate - Interest expense (income), net

 

4.05

%

 

3.65

%

 

4.05

%

 

3.65

%

 

 

Rate of compensation increase

 

3.00

%

 

3.00

%

 

3.00

%

 

3.00

%

 

 

Health care cost trend rate

 

 

 

 

 

 

 

5.23

%

 

5.28

%

 

 

Life expectancy (in years) at 65 for a participant currently at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age 65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Men

 

21.2

 

 

21.2

 

 

21.2

 

 

21.2

 

 

 

 

 

Women

 

23.6

 

 

23.5

 

 

23.6

 

 

23.5

 

 

 

 

Age 45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Men

 

22.3

 

 

22.2

 

 

22.3

 

 

22.2

 

 

 

 

 

Women

 

24.5

 

 

24.5

 

 

24.5

 

 

24.5

 

 

 

Sensitivity of Significant Assumptions for 2019

 

The following table shows the potential impacts of changes to key assumptions on the defined benefit obligation of the pension plans and other post-employment benefit plans as at October 31, 2019. These impacts are hypothetical and should be interpreted with caution as changes in each significant assumption may not be linear.

 

 

 

Pension plans

 

Other post-employment

benefit plans

 

 

 

Change in the obligation

 

Change in the obligation

 

 

 

 

 

 

 

Impact of a 0.25% increase in the discount rate

 

(191)

 

(5)

 

Impact of a 0.25% decrease in the discount rate

 

204

 

5

 

Impact of a 0.25% increase in the rate of compensation increase

 

34

 

 

Impact of a 0.25% decrease in the rate of compensation increase

 

(35)

 

 

Impact of a 1.00% increase in the health care cost trend rate

 

 

 

9

 

Impact of a 1.00% decrease in the health care cost trend rate

 

 

 

(7)

 

Impact of an increase in the age of participants by one year

 

(123)

 

(3)

 

Impact of a decrease in the age of participants by one year

 

119

 

3