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Thursday 30 May, 2019

Nat Bank of Canada

MD&A Q2 2019 (Part 1)

RNS Number : 6539A
National Bank of Canada
30 May 2019
 

 

National Bank of Canada

May 30, 2019

 

Regulatory Announcement (Part 1)

Q2 2019 Results

National Bank of Canada (the "Bank") announces publication of its Second Quarter 2019 Report to Shareholders. The Second 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 Second Quarter 2019 Report to Shareholders, please click on the following link:

http://www.rns-pdf.londonstockexchange.com/rns/6539A_1-2019-5-30.pdf

 

 

Report to Shareholders                                                                   Second Quarter 2019

 

National Bank reports its results for the Second Quarter of 2019 and raises its quarterly dividend by 3 cents to 68 cents per share

 

The financial information reported in this document is based on the unaudited interim condensed consolidated financial statements for the quarter and six-month period ended April 30, 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, May 30, 2019 - For the second quarter of 2019, National Bank is reporting net income of $558 million, a 2% increase from $547 million in the second quarter of 2018. Its diluted earnings per share stood at $1.51 in the second quarter of 2019 compared to $1.44 in the same quarter of 2018, a 5% increase driven essentially by growth in most business segments, tempered by a slowdown in the Financial Markets segment.

 

For the first six months of 2019, the Bank's net income totalled $1,110 million, a $13 million increase from $1,097 million in the same period of 2018. Diluted earnings per share stood at $3.01 for the first six months of 2019, up 4% from $2.90 in the same period of 2018.

 

"In the second quarter of fiscal 2019, the Bank delivered solid performance with earnings of $558 million and earnings per share of $1.51, up 5% from last year," said Louis Vachon, President and Chief Executive Officer of National Bank of Canada. "On the strength of favourable economic fundamentals, our performance was driven by positive momentum in our businesses, disciplined cost management, strong credit quality and solid capital ratios."

 

Highlights

 

(millions of Canadian dollars)

 

 

Quarter ended April 30

 

 

Six months ended April 30

 

 

 

 

 

2019

 

 

 

2018

 

 

% Change

 

 

2019

 

 

 

2018

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

558

 

 

 

547

 

 

2

 

 

1,110

 

 

 

1,097

 

 

1

 

Diluted earnings per share (dollars)

 

$

1.51

 

 

$

1.44

 

 

5

 

$

3.01

 

 

$

2.90

 

 

4

 

Return on common shareholders' equity

 

 

17.8

%

 

 

18.6

%

 

 

 

 

17.5

%

 

 

18.6

%

 

 

 

Dividend payout ratio

 

 

42

%

 

 

41

%

 

 

 

 

42

%

 

 

41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at

April 30,

 2019

 

 

As at

October 31, 2018

 

 

 

 

CET1 capital ratio under Basel III

 

 

 

 

 

 

 

 

 

 

 

 

11.5

%

 

 

11.7

%

 

 

 

Leverage ratio under Basel III

 

 

 

 

 

 

 

 

 

 

 

 

4.0

%

 

 

4.0

%

 

 

 

 

Report to Shareholders                                                                   Second Quarter 2019

 

Personal and Commercial

 

-        Net income totalled $234 million in the second quarter of 2019, up 9% from $215 million in the second quarter of 2018.

-        At $833 million, second-quarter total revenues rose $38 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 9% from a year ago.

-        Net interest margin was 2.23% in the second quarter of 2019, stable when compared to the second quarter of 2018.

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

-        At 54.3%, the second-quarter efficiency ratio improved from 56.0% in the second quarter of 2018.

 

Wealth Management

 

-        Net income totalled $118 million in the second quarter of 2019, a 5% increase from $112 million in the second quarter of 2018.

-        Second-quarter total revenues amounted to $426 million compared to $413 million in second quarter 2018, a $13 million increase driven by growth in net interest income and in fee-based revenues.

-        Second-quarter non-interest expenses stood at $266 million, up 2% from $260 million in the second quarter of 2018.

-        At 62.4%, the efficiency ratio improved from 63.0% in the second quarter of 2018.

 

Financial Markets

 

-        Net income totalled $160 million in the second quarter of 2019, down 16% from $190 million in the same quarter of 2018.

-        Second-quarter total revenues on a taxable equivalent basis(1) amounted to $404 million, a $33 million or 8% year-over-year decrease attributable mainly to lower revenues from the global markets revenue category.

-        Second-quarter non-interest expenses stood at $179 million compared to $176 million in the second quarter of 2018.

-        At 44.3%, the second-quarter efficiency ratio on a taxable equivalent basis(1) compares to 40.3% in the second quarter of 2018.

 

U.S. Specialty Finance and International

 

-        Net income totalled $72 million in the second quarter of 2019, a 14% increase from $63 million in the same quarter of 2018.

-        Second-quarter total revenues amounted to $178 million, a $4 million year-over-year increase driven by revenue growth at the ABA Bank subsidiary, partly offset by lower revenues at the Credigy subsidiary.

-        Second-quarter non-interest expenses stood at $74 million, a $12 million year-over-year increase attributable to the expansion of ABA Bank's banking network.

 

Other

 

-        The Other heading posted a net loss of $26 million in the second quarter of 2019 versus a $33 million net loss in the same quarter of 2018.

 

Capital Management

 

-        As at April 30, 2019, the Common Equity Tier 1 (CET1) capital ratio under Basel III was 11.5%, down when compared to 11.7% as at October 31, 2018.

-        As at April 30, 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

May 29, 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 six-month period ended April 30, 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 six-month period ended April 30, 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

 

Capital Management

17

Highlights

5

 

Risk Management

23

Economic Review and Outlook

6

 

Risk Disclosures

36

Financial Analysis 

7

 

Accounting Policies and Financial Disclosure

37

    Consolidated Results

7

 

    Accounting Policies and Critical Accounting Estimates

37

    Results by Segment

10

 

    Future Accounting Policy Changes

37

    Consolidated Balance Sheet

14

 

    Financial Disclosure

37

    Event After the Consolidated Balance Sheet Date

16

 

Quarterly Financial Information

38

    Exposures to Certain Activities

16

 

 

 

    Related Party Transactions

16

 

 

 

    Securitization and Off-Balance-Sheet Arrangements 

16

 

 

 

    Income Taxes

16

 

 

 

    Contingent Liabilities 

17

 

 

 

 

 

 

 

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 a standardized meaning 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 six-month period ended April 30, 2018 reflect this change.

 

Financial Information

 

(millions of Canadian dollars, except per share amounts)

 

Quarter ended April 30

 

 

Six months ended April 30

 

 

 

 

2019

 

 

 

2018

% Change

 

 

2019

 

 

 

2018

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal and Commercial

 

 

234

 

 

 

215

 

9

 

 

480

 

 

 

445

 

 

8

 

 

Wealth Management

 

 

118

 

 

 

112

 

5

 

 

243

 

 

 

226

 

 

8

 

 

Financial Markets

 

 

160

 

 

 

190

 

(16)

 

 

330

 

 

 

394

 

 

(16)

 

 

U.S. Specialty Finance and International

 

 

72

 

 

 

63

 

14

 

 

132

 

 

 

113

 

 

17

 

 

Other

 

 

(26)

 

 

 

(33)

 

 

 

 

(75)

 

 

 

(81)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

558

 

 

 

547

 

2

 

 

1,110

 

 

 

1,097

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

1.51

 

 

$

1.44

 

5

 

$

3.01

 

 

$

2.90

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on common shareholders' equity

 

 

17.8

%

 

 

18.6

%

 

 

 

17.5

%

 

 

18.6

%

 

 

 

 

(1)       For the quarter and six-month period ended April 30, 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.

 

Highlights

 

(millions of Canadian dollars, except per share amounts)

 

Quarter ended April 30

 

 

Six months ended April 30

 

 

 

 

2019

 

 

 

2018

 

 

% Change

 

 

2019

 

 

 

2018

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

1,770

 

 

 

1,754

 

 

1

 

 

3,569

 

 

 

3,560

 

 

Total revenues on a taxable equivalent basis(1)

 

 

1,850

 

 

 

1,818

 

 

2

 

 

3,712

 

 

 

3,683

 

1

 

Net income

 

 

558

 

 

 

547

 

 

2

 

 

1,110

 

 

 

1,097

 

1

 

Net income attributable to the Bank's shareholders

 

 

539

 

 

 

522

 

 

3

 

 

1,075

 

 

 

1,049

 

2

 

Return on common shareholders' equity

 

 

17.8

%

 

 

18.6

%

 

 

 

 

17.5

%

 

 

18.6

%

 

 

Efficiency ratio on a taxable equivalent basis(1)

 

 

55.5

%

 

 

54.6

%

 

 

 

 

55.3

%

 

 

54.7

%

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.52

 

 

$

1.46

 

 

4

 

$

3.03

 

 

$

2.94

 

3

 

 

Diluted

 

 

1.51

 

 

 

1.44

 

 

5

 

 

3.01

 

 

 

2.90

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common share information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

$

0.65

 

 

$

0.60

 

 

 

 

$

1.30

 

 

$

1.20

 

 

 

Book value

 

 

 

 

 

 

 

 

 

 

 

 

35.49

 

 

 

32.64

 

 

 

Share price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

63.82

 

 

 

64.08

 

 

 

 

 

63.82

 

 

 

65.35

 

 

 

 

Low

 

 

60.31

 

 

 

58.69

 

 

 

 

 

54.97

 

 

 

58.69

 

 

 

 

Close

 

 

63.82

 

 

 

60.98

 

 

 

 

 

63.82

 

 

 

60.98

 

 

 

Number of common shares (thousands)

 

 

335,116

 

 

 

339,348

 

 

 

 

 

335,116

 

 

 

339,348

 

 

 

Market capitalization

 

 

21,387

 

 

 

20,693

 

 

 

 

 

21,387

 

 

 

20,693

 

 

 

 

(millions of Canadian dollars)

As at April 30,

2019

 

 

As at October 31,

2018

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Balance sheet and off-balance-sheet

 

 

 

 

 

 

 

 

Total assets

 

269,106

 

 

262,471

 

3

 

Loans and acceptances, net of allowances

 

148,742

 

 

146,082

 

2

 

Deposits

 

179,419

 

 

170,830

 

5

 

Equity attributable to common shareholders

 

11,892

 

 

11,526

 

3

 

Assets under administration and under management 

 

549,391

 

 

485,080

 

13

 

 

 

 

 

 

 

 

 

 

 

Regulatory ratios under Basel III

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (CET1)

 

11.5

%

 

11.7

%

 

 

 

Tier 1

 

15.1

%

 

15.5

%

 

 

 

Total

 

16.2

%

 

16.8

%

 

 

Leverage ratio

 

4.0

%

 

4.0

%

 

 

Liquidity coverage ratio (LCR)

 

141

%

 

147

%

 

 

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

Number of employees -  worldwide

 

24,137

 

 

23,450

 

3

 

Number of branches in Canada 

 

428

 

 

428

 

 

Number of banking machines in Canada

 

940

 

 

937

 

 

 

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

 

Economic Review and Outlook

 

Global Economy

In a context of trade tensions, financial markets have been volatile since the fourth quarter of 2018. This development has been exacerbated by disappointing economic data showing a weakening manufacturing sector while the service side of the global economy has shown resilience. Fortunately, activity in the emerging markets manufacturing sector stabilized early in 2019, supporting global economic growth this year above 3.0%(1). With inflation still under control, central banks should be more accommodative than previously thought, while certain governments, including China's, are using their flexibility to adopt fiscal stimulus measures. High frequency indicators such as West Texas Intermediate (WTI) oil prices being back above US$60, the resilience of copper prices, and a rebound in transportation costs do not suggest that the global economy is losing steam. After a year of strong growth, the U.S. economy is expected to slow down in 2019. Nevertheless, it should still grow at a rate of 2.5%(1) in 2019 thanks to fiscal stimulus and a non-restrictive monetary policy. Optimism among businesses remains high, which bodes well for employment and investment. Households are also showing high levels of confidence, mainly due to a 50-year low unemployment rate and improved wage growth, which should support consumer spending in the coming quarters. Nevertheless, in a still-uncertain geopolitical context, the U.S. Federal Reserve should maintain an accommodative monetary policy stance as inflation remains tame.

 

Canadian Economy

Despite weakness observed in the fourth quarter of 2018 and early in the first quarter of 2019, the Canadian economy should grow at potential in 2019 (1.6%(1)). The tighter conditions on granting credit for uninsured mortgages had the expected effect, cooling down residential real estate in the most expensive markets (British Columbia and Ontario). Given this context, the central bank will exercise caution before introducing any more rate hikes in order to gauge the impacts of steps already taken, especially since inflation remains essentially on target. However, current resale market conditions do not suggest a home price correction at this point. While economic growth softened recently, the labour market held firm, which translated into decent income gains and provided support for consumption and housing in 2019. Private sector jobs surged by 210,000 in the first four months of 2019, the best start to a year on record. Strong labour markets coupled with one of the most aggressive immigration policies in the Organisation for Economic Co-operation and Development (OECD) and that targets well-educated people is stimulating demand for housing in Canada's largest cities. The weak Canadian dollar remains favourable for exports, and the new United States-Mexico-Canada Agreement (USMCA) (not yet ratified) has somewhat reassured exporters, who may in turn increase investment. The accelerated depreciation measure implemented by the federal government and some provincial governments could further encourage businesses to do just that. A stabilization of the economies of oil-producing provinces cannot be ruled out, with Western Canada Select (WCS) prices bouncing back in the second quarter of 2019 to its highest level since 2014.

 

Quebec Economy

Unlike the rest of Canada, Quebec did not experience a soft patch in the fourth quarter of 2018. Gross domestic product (GDP) is rising at an annualized pace of 1.5% and is supported by generalized growth across industries. In 2019, Quebec is expected to outperform the Canadian economy for a second consecutive year (1.8% vs. 1.6%(1)). Consumption is still expected to contribute to growth this year, as households are demonstrating a high degree of optimism given the record low unemployment rate. Furthermore, with the strong wage gains seen since 2016, Quebec households have been able to maintain a savings rate that is much higher than the national average. This serves as a buffer that could support consumption in 2019. With very good housing affordability, Quebec maintains a lower household debt level than the rest of Canada, making the province's economy less vulnerable to a shock. In fact, the Quebec housing sector has been spared the slowdown seen in Ontario and British Columbia. Home resales in Quebec are at a record level so far in 2019. Despite a labour shortage, business confidence remains strong and should translate into a faster pace of investment to offset the scarcity of workers. The government had the luxury of surpluses to finance some election commitments. This, combined with a larger infrastructure plan compared to what was presented a year ago, means that the Quebec economy is being supported by fiscal stimulus in 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Financial Analysis

 

Consolidated Results

 

 

(millions of Canadian dollars)

 

Quarter ended April 30

 

Six months ended April 30

 

 

 

2019

 

 

2018

 

% Change

 

2019

 

 

2018

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

942

 

 

885

 

 

6

 

1,805

 

 

1,719

 

 

5

 

Non-interest income

 

828

 

 

869

 

 

(5)

 

1,764

 

 

1,841

 

 

(4)

 

Total revenues

 

1,770

 

 

1,754

 

 

1

 

3,569

 

 

3,560

 

 

 

Non-interest expenses

 

1,026

 

 

992

 

 

3

 

2,052

 

 

2,016

 

 

2

 

Contribution

 

744

 

 

762

 

 

(2)

 

1,517

 

 

1,544

 

 

(2)

 

Provisions for credit losses

 

84

 

 

91

 

 

(8)

 

172

 

 

178

 

 

(3)

 

Income before income taxes

 

660

 

 

671

 

 

(2)

 

1,345

 

 

1,366

 

 

(2)

 

Income taxes

 

102

 

 

124

 

 

(18)

 

235

 

 

269

 

 

(13)

 

Net income

 

558

 

 

547

 

 

2

 

1,110

 

 

1,097

 

 

1

 

Diluted earnings per share (dollars)

 

1.51

 

 

1.44

 

 

5

 

3.01

 

 

2.90

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable equivalent basis(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

45

 

 

36

 

 

 

 

80

 

 

74

 

 

 

 

Non-interest income

 

35

 

 

28

 

 

 

 

63

 

 

49

 

 

 

 

Income taxes

 

80

 

 

64

 

 

 

 

143

 

 

123

 

 

 

 

Impact of taxable equivalent basis on net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results on a taxable equivalent basis(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on a taxable equivalent basis

 

987

 

 

921

 

 

7

 

1,885

 

 

1,793

 

 

5

 

Non-interest income on a taxable equivalent basis

 

863

 

 

897

 

 

(4)

 

1,827

 

 

1,890

 

 

(3)

 

Total revenues on a taxable equivalent basis

 

1,850

 

 

1,818

 

 

2

 

3,712

 

 

3,683

 

 

1

 

Non-interest expenses

 

1,026

 

 

992

 

 

3

 

2,052

 

 

2,016

 

 

2

 

Contribution on a taxable equivalent basis

 

824

 

 

826

 

 

 

1,660

 

 

1,667

 

 

 

Provisions for credit losses

 

84

 

 

91

 

 

(8)

 

172

 

 

178

 

 

(3)

 

Income before income taxes on a taxable equivalent basis

740

 

 

735

 

 

1

 

1,488

 

 

1,489

 

 

 

Income taxes on a taxable equivalent basis

 

182

 

 

188

 

 

(3)

 

378

 

 

392

 

 

(4)

 

Net income

 

558

 

 

547

 

 

2

 

1,110

 

 

1,097

 

 

1

 

Diluted earnings per share (dollars)

 

1.51

 

 

1.44

 

 

5

 

3.01

 

 

2.90

 

 

4

 

Average assets

 

283,172

 

 

267,941

 

 

6

 

281,268

 

 

265,137

 

 

6

 

Average loans and acceptances

 

147,139

 

 

138,095

 

 

7

 

146,602

 

 

136,992

 

 

7

 

Average deposits

 

180,421

 

 

166,201

 

 

9

 

178,423

 

 

165,227

 

 

8

 

Efficiency ratio on a taxable equivalent basis(1)

 

55.5

%

 

54.6

%

 

 

 

55.3

%

 

54.7

%

 

 

 

 

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

 

 

Financial Results

For the second quarter of 2019, the Bank reported net income of $558 million, an $11 million or 2% increase from $547 million in the second quarter of 2018, and second-quarter diluted earnings per share stood at $1.51, up 5% from $1.44 in the second quarter of 2018. These increases were driven by net income growth of 9% in the Personal and Commercial segment, of 5% in the Wealth Management segment, and of 14% in the U.S. Specialty Finance and International (USSF&I) segment. However, a slowdown in capital markets activity continued to affect the performance of the Financial Markets segment, whose net income declined 16% year over year.

 

For the six month-period ended April 30, 2019, the Bank's net income totalled $1,110 million, a $13 million increase from $1,097 million in the same six-month period of 2018, and its first-half diluted earnings per share stood at $3.01, up 4% from $2.90 in the same period of 2018. These increases were essentially driven by good performance in the Personal and Commercial segment, Wealth Management segment, and U.S. Specialty Finance and International (USSF&I) segment, while the Financial Markets segment experienced a slowdown in the first half of 2019.

 

Return on common shareholders' equity was 17.5% for the six months ended April 30, 2019 compared to 18.6% in the same period of 2018.

 

Total Revenues

For the second quarter of 2019, the Bank's total revenues amounted to $1,770 million, up $16 million from second quarter 2018. The Personal and Commercial segment's total revenues were up 5% owing to growth in loan and deposit volumes and to higher card revenues. The Wealth Management segment's total revenues were up 3% owing to growth in mutual fund revenues and trust service revenues. And the USSF&I segment's total revenues were up 2% owing essentially to revenue growth at the ABA Bank subsidiary, partly offset by lower revenues at the Credigy subsidiary. These increases in total revenues were tempered by a decrease in the Financial Markets segment's total revenues given a slowdown in capital markets activity during the second quarter of 2019 and also due to lower year-over-year gains on investments.

 

For the six-month period ended April 30, 2019, total revenues amounted to $3,569 million compared to $3,560 million in the same six-month period of 2018, a $9 million increase owing essentially to the same factors as those provided for the quarter as well as to an increase in the Wealth Management segment's net interest income arising from growth in loan and deposit volumes and improved deposit margins.

 

Non-Interest Expenses

For the second quarter of 2019, the Bank's non-interest expenses stood at $1,026 million, a 3% year-over-year increase resulting mainly from higher compensation and employee benefits (in particular compensation related to the expansion of ABA Bank's banking network), from higher technology investment expenses incurred as part of the Bank's transformation plan and for business development.

 

For the six-month period ended April 30, 2019, the Bank's non-interest expenses stood at $2,052 million, a 2% year-over-year increase attributable to higher occupancy fees resulting mainly from the expansion of ABA Bank's banking network, to growth in technology investment expenses, and to higher other expenses, particularly advertising expenses and external relations expenses. These increases were, however, tempered by a decrease in variable compensation attributable in part to the lower revenues generated by the Financial Markets segment.

 

Provisions for Credit Losses

For the second quarter of 2019, the Bank recorded $84 million in provisions for credit losses compared to $91 million in the same quarter of 2018. This decrease came mainly from lower provisions for credit losses on USSF&I loans, essentially attributable to the Credigy subsidiary, partly offset by higher credit loss provisions on commercial loans and Financial Markets loans.

 

For the six-month period ended April 30, 2019, the Bank recorded $172 million in provisions for credit losses, $6 million less than in the same period of 2018. This decrease was essentially due to the same reasons as those provided for the quarter as well as to a decrease in the credit loss provisions on personal loans, mainly provisions on non-impaired loans. 

 

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 April 30, 2019, gross impaired loans excluding POCI loans stood at $627 million compared to $630 million as at October 31, 2018. Net impaired loans excluding POCI loans stood at $379 million as at April 30, 2019 compared to $404 million as at October 31, 2018, a $25 million decrease mainly attributable to commercial loans. Gross POCI loans stood at $1,263 million as at April 30, 2019, whereas they had stood at $1,576 million as at October 31, 2018.

 

Income Taxes

For the second quarter of 2019, income taxes stood at $102 million compared to $124 million in the same quarter of 2018. The 2019 second-quarter effective tax rate was 15% compared to 18% in second quarter 2018. This change in effective tax rate was created mainly by an increase in income from lower tax rate jurisdictions and by a year-over-year increase in tax-exempt dividend income.

 

For the six months ended April 30, 2019, the effective income tax rate stood at 17% compared to 20% in the same period of 2018.

 

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 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 April 30

 

Six months ended April 30

 

 

 

2019

 

 

2018(1)

 

 

% Change

 

2019

 

 

2018(1)

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

577

 

 

547

 

 

5

 

1,166

 

 

1,107

 

 

5

 

Non-interest income

 

256

 

 

248

 

 

3

 

519

 

 

503

 

 

3

 

Total revenues

 

833

 

 

795

 

 

5

 

1,685

 

 

1,610

 

 

5

 

Non-interest expenses

 

452

 

 

445

 

 

2

 

910

 

 

888

 

 

2

 

Contribution

 

381

 

 

350

 

 

9

 

775

 

 

722

 

 

7

 

Provisions for credit losses

 

63

 

 

57

 

 

11

 

121

 

 

115

 

 

5

 

Income before income taxes

 

318

 

 

293

 

 

9

 

654

 

 

607

 

 

8

 

Income taxes

 

84

 

 

78

 

 

8

 

174

 

 

162

 

 

7

 

Net income

 

234

 

 

215

 

 

9

 

480

 

 

445

 

 

8

 

Net interest margin(2)

 

2.23

%

 

2.23

%

 

 

 

2.22

%

 

2.23

%

 

 

 

Average interest-bearing assets

 

106,074

 

 

100,515

 

 

6

 

105,726

 

 

99,950

 

 

6

 

Average assets

 

111,910

 

 

105,751

 

 

6

 

111,521

 

 

105,172

 

 

6

 

Average loans and acceptances

 

111,433

 

 

105,421

 

 

6

 

111,003

 

 

104,818

 

 

6

 

Net impaired loans(3)

 

357

 

 

369

 

 

(3)

 

357

 

 

369

 

 

(3)

 

Net impaired loans(3) as a % of average loans and acceptances

 

0.3

%

 

0.4

%

 

 

 

0.3

%

 

0.4

%

 

 

 

Average deposits

 

60,830

 

 

56,646

 

 

7

 

61,116

 

 

56,582

 

 

8

 

Efficiency ratio

 

54.3

%

 

56.0

%

 

 

 

54.0

%

 

55.2

%

 

 

 

                                     

 

(1)       For the quarter and six-month period ended April 30, 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)       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 $234 million in the second quarter of 2019, up 9% from $215 million in the second quarter of 2018. The segment's second-quarter total revenues increased by $38 million or 5% year over year owing to growth in net interest income, which rose $30 million, as well as to growth in non-interest income, which rose $8 million. The increase in net interest income was driven by higher personal and commercial loan and deposit volumes. The 2019 second-quarter net interest margin stood at 2.23%, unchanged from the second quarter of 2018.

 

Personal Banking's second-quarter total revenues rose $24 million year over year. This increase was essentially driven by growth in loan and deposit volumes and by higher card revenues. As for Commercial Banking's second-quarter total revenues, they rose $14 million year over year, mainly due to higher net interest income driven by growth in loan and deposit volumes and by higher bankers' acceptance revenues.

 

For the second quarter of 2019, the segment's non-interest expenses were up $7 million year over year, mainly due to higher operations support charges, in particular the amortization expense related to technology investments. At 54.3%, the second-quarter efficiency ratio improved by 1.7 percentage points when compared to the second quarter of 2018. The segment's second-quarter provisions for credit losses stood at $63 million, a $6 million year-over-year increase that was mainly due to higher provisions on Commercial Banking impaired loans, tempered by a slight decrease in provisions on personal loans.

 

For the six-month period ended April 30, 2019, the Personal and Commercial segment's net income totalled $480 million, up 8% from $445 million in the same period of 2018. The segment's first-half total revenues grew 5% year over year. The growth in Personal Banking's total revenues was due to the same reasons as those provided for the quarter, while the growth in Commercial Banking's total revenues came from higher loan and deposit volumes and from increases in revenues from credit fees, revenues from bankers' acceptances, and revenues from foreign exchange activities. The segment's first-half non-interest expenses rose $22 million year over year, mainly due to increases in operations support charges, compensation and employee benefits, and technology investment expenses. The segment's first-half contribution increased $53 million or 7%. At 54.0% for the six months ended April 30, 2019, the efficiency ratio improved by 1.2 percentage points compared with the same six-month period of 2018. The first-half provisions for credit losses were up $6 million compared to the same period in 2018, mainly due to higher credit loss provisions on commercial loans, tempered by lower provisions on personal loans, while first-half provisions on credit card receivables remained stable year over year.

 

Wealth Management

 

(millions of Canadian dollars)

 

 Quarter ended April 30

 

Six months ended April 30

 

 

 

2019

 

 

2018(1)

 

 

% Change

 

2019

 

 

2018(1)

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income 

 

112

 

 

109

 

 

3

 

240

 

 

217

 

 

11

 

Fee-based revenues

 

250

 

 

242

 

 

3

 

492

 

 

488

 

 

1

 

Transaction-based and other revenues

 

64

 

 

62

 

 

3

 

128

 

 

132

 

 

(3)

 

Total revenues 

 

426

 

 

413

 

 

3

 

860

 

 

837

 

 

3

 

Non-interest expenses 

 

266

 

 

260

 

 

2

 

531

 

 

529

 

 

 

Contribution

 

160

 

 

153

 

 

5

 

329

 

 

308

 

 

7

 

Provisions for credit losses

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

Income before income taxes 

 

160

 

 

152

 

 

5

 

329

 

 

307

 

 

7

 

Income taxes 

 

42

 

 

40

 

 

5

 

86

 

 

81

 

 

6

 

Net income

 

118

 

 

112

 

 

5

 

243

 

 

226

 

 

8

 

Average assets 

 

6,154

 

 

6,094

 

 

1

 

6,326

 

 

6,061

 

 

4

 

Average loans and acceptances

 

4,829

 

 

4,669

 

 

3

 

4,871

 

 

4,584

 

 

6

 

Net impaired loans(2)

 

3

 

 

1

 

 

 

 

3

 

 

1

 

 

 

 

Average deposits

 

32,486

 

 

31,134

 

 

4

 

32,813

 

 

31,069

 

 

6

 

Assets under administration and under management

 

549,391

 

 

495,422

 

 

11

 

549,391

 

 

495,422

 

 

11

 

Efficiency ratio

 

62.4

%

 

63.0

%

 

 

 

61.7

%

 

63.2

%

 

 

 

                                     

 

(1)       For the quarter and six-month period ended April 30, 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)       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 $118 million in the second quarter of 2019, a 5% increase from $112 million in the same quarter of 2018. The segment's second-quarter total revenues amounted to $426 million, up $13 million from $413 million in the second quarter of 2018. This increase was driven by higher net interest income (owing to growth in loan and deposit volumes) and by higher revenues from fee-based services, which rose 3% owing to growth in assets under administration and under management resulting from a stock market rebound during the second quarter of 2019. Transaction-based and other revenues were up 3%, essentially due to higher transaction volume during the second quarter of 2019.

 

For the second quarter of 2019, the segment's non-interest expenses stood at $266 million, a 2% year-over-year increase that was driven mainly by higher operations support charges. At 62.4%, the second-quarter efficiency ratio improved by 0.6 percentage points when compared to the second quarter of 2018. For the second quarter of 2019, the segment's provisions for credit losses were negligible, stable when compared to the second quarter of 2018.

 

For the six months ended April 30, 2019, the Wealth Management segment's net income totalled $243 million, up 8% from $226 million in the same six-month period of 2018. At $860 million, the segment's first-half total revenues grew from $837 million in the same period of 2018. First-half net interest income and fee-based revenues were up due to the same reasons as those provided for the quarter. First-half transaction-based and other revenues were down 3% year over year, essentially due to a decrease in transaction volume. Non-interest expenses stood at $531 million compared to $529 million in first-half 2018, for an increase resulting from higher operations support charges related to the segment's initiatives. At 61.7%, the efficiency ratio for the six-month period ended April 30, 2019 improved from 63.2% in the same period of 2018. Year over year, the first-half provisions for credit losses remained relatively stable.

 

Assets under administration and under management increased by $54.0 billion or 11% from a year ago, mainly due to net inflows into various solutions and to the stock market rebound.

 

Financial Markets

 

(taxable equivalent basis)(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

 Quarter ended April 30

 

Six months ended April 30

 

 

 

2019

 

 

2018(2)

 

 

% Change

 

2019

 

 

2018(2)

 

 

 % Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equities

 

124

 

 

162

 

 

(23)

 

261

 

 

300

 

 

(13)

 

 

Fixed-income

 

65

 

 

67

 

 

(3)

 

131

 

 

149

 

 

(12)

 

 

Commodities and foreign exchange

 

29

 

 

36

 

 

(19)

 

77

 

 

73

 

 

5

 

 

 

218

 

 

265

 

 

(18)

 

469

 

 

522

 

 

(10)

 

Corporate and investment banking

 

189

 

 

169

 

 

12

 

349

 

 

350

 

 

 

Gains on investments and other

 

(3)

 

 

3

 

 

 

 

(4)

 

 

19

 

 

 

 

Total revenues on a taxable equivalent basis

 

404

 

 

437

 

 

(8)

 

814

 

 

891

 

 

(9)

 

Non-interest expenses

 

179

 

 

176

 

 

2

 

354

 

 

352

 

 

1

 

Contribution on a taxable equivalent basis

 

225

 

 

261

 

 

(14)

 

460

 

 

539

 

 

(15)

 

Provisions for credit losses

 

7

 

 

2

 

 

 

 

10

 

 

2

 

 

 

 

Income before income taxes on a taxable equivalent basis

 

218

 

 

259

 

 

(16)

 

450

 

 

537

 

 

(16)

 

Income taxes on a taxable equivalent basis

 

58

 

 

69

 

 

(16)

 

120

 

 

143

 

 

(16)

 

Net income

 

160

 

 

190

 

 

(16)

 

330

 

 

394

 

 

(16)

 

Average assets

 

109,485

 

 

104,131

 

 

5

 

106,974

 

 

102,954

 

 

4

 

Average loans and acceptances

 

16,407

 

 

14,756

 

 

11

 

16,317

 

 

14,384

 

 

13

 

Net impaired loans(3)

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

Average deposits

 

28,793

 

 

22,827

 

 

26

 

27,933

 

 

22,625

 

 

23

 

Efficiency ratio on a taxable equivalent basis(1)

 

44.3

%

 

40.3

%

 

 

 

43.5

%

 

39.5

%

 

 

 

 

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

(2)       For the quarter and six-month period ended April 30, 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 $160 million in the second quarter of 2019 compared to $190 million in the same quarter of 2018, and total revenues on a taxable equivalent basis amounted to $404 million compared to $437 million in the second quarter of 2018. Global markets revenues declined 18% due to decreases across all types of revenue, primarily revenues from equity securities, which were down 23%. As for revenues from corporate and investment banking services, they were up 12% compared to second-quarter 2018, particularly due to growth in lending activity. Lastly, higher gains on investments and other revenues had been recorded during the second quarter of fiscal 2018.

 

Second-quarter non-interest expenses stood at $179 million, up $3 million from the second quarter of 2018. This increase was due to higher operations support charges and other expenses, partly offset by a decrease in variable compensation resulting from lower revenues. At 44.3%, the efficiency ratio on a taxable equivalent basis compares to 40.3% in the second quarter of 2018. The segment's provisions for credit losses stood at $7 million in the second quarter of 2019 compared to $2 million in the same quarter of 2018.

 

For the six months ended April 30, 2019, the segment's net income totalled $330 million, down 16% from the same six-month period in 2018. First-half total revenues on a taxable equivalent basis amounted to $814 million compared to $891 million for the six months ended April 30, 2018. First-half global markets revenues were down 10% year over year, as revenues from equity securities and from fixed-income securities were down 13% and 12%, respectively, whereas revenues from commodities and foreign exchange revenues were up 5%. First-half revenues from corporate banking and investment banking services remained stable year over year. Lastly, higher gains on investments and other revenues had been recorded in the first half of fiscal 2018.

 

The first-half non-interest expenses were up $2 million or 1% year over year, the reasons being the same as those provided for the second quarter. The first-half efficiency ratio on a taxable equivalent basis was 43.5% compared to 39.5% in the same period of 2018. During the first six months of fiscal 2019, the segment recorded $10 million in provisions for credit losses, particularly credit loss provisions on impaired loans, whereas they had stood at $2 million during the same six-month period of 2018.

 

U.S. Specialty Finance and International

 

(millions of Canadian dollars)

 

 Quarter ended April 30

 

Six months ended April 30

 

 

 

2019

 

 

2018

 

 

% Change

 

2019

 

 

2018

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credigy

 

107

 

 

129

 

 

(17)

 

212

 

 

246

 

 

(14)

 

 

ABA Bank

 

69

 

 

45

 

 

53

 

134

 

 

88

 

 

52

 

 

International

 

2

 

 

 

 

 

 

3

 

 

1

 

 

 

 

 

 

 

178

 

 

174

 

 

2

 

349

 

 

335

 

 

4

 

Non-interest expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credigy

 

42

 

 

39

 

 

8

 

78

 

 

78

 

 

 

 

ABA Bank

 

31

 

 

22

 

 

41

 

62

 

 

42

 

 

48

 

 

International

 

1

 

 

1

 

 

 

2

 

 

2

 

 

 

 

 

74

 

 

62

 

 

19

 

142

 

 

122

 

 

16

 

Contribution

 

104

 

 

112

 

 

(7)

 

207

 

 

213

 

 

(3)

 

Provisions for credit losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credigy

 

12

 

 

28

 

 

(57)

 

35

 

 

54

 

 

(35)

 

 

ABA Bank

 

2

 

 

3

 

 

(33)

 

6

 

 

6

 

 

 

 

 

 

14

 

 

31

 

 

(55)

 

41

 

 

60

 

 

(32)

 

Income before income taxes

 

90

 

 

81

 

 

11

 

166

 

 

153

 

 

8

 

Income taxes

 

18

 

 

18

 

 

 

34

 

 

40

 

 

(15)

 

Net income

 

72

 

 

63

 

 

14

 

132

 

 

113

 

 

17

 

Non-controlling interests

 

12

 

 

11

 

 

9

 

22

 

 

20

 

 

10

 

Net income attributable to the Bank's shareholders

 

60

 

 

52

 

 

15

 

110

 

 

93

 

 

18

 

Average assets

 

10,600

 

 

9,104

 

 

16

 

10,523

 

 

8,938

 

 

18

 

Average loans and receivables

 

8,711

 

 

7,856

 

 

11

 

8,760

 

 

7,778

 

 

13

 

Net impaired loans - Stage 3(1)

 

16

 

 

12

 

 

33

 

16

 

 

12

 

 

33

 

Purchased or originated credit-impaired (POCI) loans

 

1,263

 

 

1,475

 

 

(14)

 

1,263

 

 

1,475

 

 

(14)

 

Average deposits

 

3,238

 

 

1,795

 

 

80

 

2,994

 

 

1,661

 

 

80

 

Efficiency ratio

 

41.6

%

 

35.6

%

 

 

 

40.7

%

 

36.4

%

 

 

 

 

(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 $72 million in the second quarter of 2019, a 14% increase from $63 million in the same quarter of 2018. The segment's second-quarter total revenues amounted to $178 million compared to $174 million in the second quarter of 2018. A 53% increase in revenues at the ABA Bank subsidiary, driven by sustained loan and deposit volume growth, was partly offset by lower revenues at the Credigy subsidiary due to the loan portfolio mix when compared to the same quarter of 2018.

 

For the second quarter of 2019, the segment's non-interest expenses stood at $74 million, a $12 million year-over-year increase attributable mainly to ABA Bank's growing banking network. Second-quarter provisions for credit losses stood at $14 million compared to $31 million in the second quarter of 2018, a decrease stemming essentially from lower credit loss provisions recorded by Credigy given repayments and maturities of certain loan portfolios.

 

For the six months ended April 30, 2019, the USSF&I segment's net income totalled $132 million compared to $113 million in the same period of 2018. First-half total revenues amounted to $349 million versus $335 million in the same period of 2018, a 4% increase due to the same reasons as those provided for the quarter.

 

The segment's first-half non-interest expenses stood at $142 million, a $20 million year-over-year increase related to the expansion of ABA Bank's banking network. The first-half non-interest expenses of the Credigy subsidiary remained stable. The segment's provisions for credit losses stood at $41 million during the six-month period ended April 30, 2019, a $19 million year-over-year decrease resulting mainly from lower credit loss provisions recorded by Credigy, whereas the credit loss provisions recorded by ABA Bank remained stable.

 

The segment's effective tax rate was down in the six-month period ended April 30, 2019 versus the same six-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 April 30

 

Six months ended April 30

 

 

 

2019

 

2018(2)

 

2019

 

2018(2)

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

Net interest income on a taxable equivalent basis

 

(46)

 

(31)

 

(100)

 

(73)

 

Non-interest income on a taxable equivalent basis

 

55

 

30

 

104

 

83

 

Total revenues on a taxable equivalent basis

 

9

 

(1)

 

4

 

10

 

Non-interest expenses

 

55

 

49

 

115

 

125

 

Contribution on a taxable equivalent basis

 

(46)

 

(50)

 

(111)

 

(115)

 

Provisions for credit losses

 

 

 

 

 

Income before income taxes on a taxable equivalent basis

 

(46)

 

(50)

 

(111)

 

(115)

 

Income taxes (recovery) on a taxable equivalent basis

 

(20)

 

(17)

 

(36)

 

(34)

 

Net loss

 

(26)

 

(33)

 

(75)

 

(81)

 

Non-controlling interests

 

7

 

14

 

13

 

28

 

Net loss attributable to the Bank's shareholders

 

(33)

 

(47)

 

(88)

 

(109)

 

Average assets

 

45,023

 

42,861

 

45,924

 

42,012

 

 

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

(2)       For the quarter and six-month period ended April 30, 2018, certain amounts have been reclassified.

 

For the Other heading of segment results, there was a net loss of $26 million in the second quarter of 2019 compared to a net loss of $33 million in the same quarter of 2018. This change in net loss was mainly due to a higher contribution from Treasury activities during the second quarter of 2019. In addition, non-interest expenses were up, in particular those related to technology investments made as part of the Bank's transformation plan and for business development purposes.

 

For the six-month period ended April 30, 2019, there was a net loss of $75 million compared to a net loss of $81 million in the same six-month period of 2018. This change in net loss was mainly due to a decrease in non-interest expenses, in particular variable compensation and employee benefits.

 

Consolidated Balance Sheet

 

Consolidated Balance Sheet Summary

 

(millions of Canadian dollars)

 

As at April 30, 2019

 

As at October 31, 2018

 

% Change

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and deposits with financial institutions

 

10,498

 

12,756

 

(18)

 

Securities

 

78,621

 

69,783

 

13

 

Securities purchased under reverse repurchase agreements

 

 

 

 

 

 

 

 

and securities borrowed

 

17,193

 

18,159

 

(5)

 

Loans and acceptances, net of allowances

 

148,742

 

146,082

 

2

 

Other

 

14,052

 

15,691

 

(10)

 

 

 

 

269,106

 

262,471

 

3

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Deposits

 

179,419

 

170,830

 

5

 

Other

 

74,180

 

76,539

 

(3)

 

Subordinated debt

 

772

 

747

 

3

 

Equity attributable to the Bank's shareholders

 

14,342

 

13,976

 

3

 

Non-controlling interests

 

393

 

379

 

4

 

 

 

 

269,106

 

262,471

 

3

 

 

Assets

As at April 30, 2019, the Bank had total assets of $269.1 billion, a $6.6 billion or 3% increase from $262.5 billion as at October 31, 2018. Cash and deposits with financial institutions, totalling $10.5 billion as at April 30, 2019, decreased $2.3 billion or 18%, mainly due to deposits with financial institutions, particularly the U.S. Federal Reserve. Securities rose $8.8 billion since October 31, 2018, essentially due to a $7.7 billion or 14% increase in securities at fair value through profit or loss, which was mostly attributable to a $10.7 billion increase in equity securities and to a $3.2 billion increase in securities issued or guaranteed by Treasury, other U.S. agencies and other foreign governments. These increases were tempered by a $3.1 billion decrease in securities issued or guaranteed by the Canadian government and a $2.6 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 $1.1 billion. Securities purchased under reverse repurchase agreements and securities borrowed decreased by $1.0 billion, mainly related to Financial Markets operations. 

 

Totalling $148.7 billion as at April 30, 2019, loans and acceptances, net of allowances, rose $2.6 billion since October 31, 2018. The following table provides a breakdown of the main loan and acceptance portfolios.

 

 

(millions of Canadian dollars)

 

As at April 30, 2019

 

As at October 31, 2018

 

As at April 30, 2018

 

Loans and acceptances

 

 

 

 

 

 

 

Residential mortgage and home equity lines of credit

 

77,052

 

75,773

 

73,042

 

Personal

 

14,299

 

15,235

 

14,987

 

Credit card

 

2,324

 

2,325

 

2,245

 

Business and government

 

55,750

 

53,407

 

50,256

 

 

 

 

149,425

 

146,740

 

140,530

 

Allowances for credit losses

 

(683)

 

(658)

 

(666)

 

 

 

 

148,742

 

146,082

 

139,864

 

 

Since October 31, 2018, residential mortgage loans (including home equity lines of credit) rose $1.3 billion or 2%, personal loans were down $0.9 billion, credit card receivables remained stable, and loans and acceptances to business and government were up $2.3 billion or 4% owing to growth in Commercial Banking activities. When compared to a year ago, loans and acceptances grew $8.9 billion or 6% and residential mortgages (including home equity lines of credit) were up $4.1 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 $0.7 billion or 5%, partly due to the Credigy subsidiary's activities, whereas credit card receivables were up 4%, and loans and acceptances to businesses and governments grew $5.5 billion or 11% driven by Commercial Banking and corporate financing activities.

 

Liabilities

As at April 30, 2019, the Bank had total liabilities of $254.4 billion compared to $248.1 billion as at October 31, 2018.

 

The Bank's total deposit liability stood at $179.4 billion as at April 30, 2019 compared to $170.8 billion as at October 31, 2018, an $8.6 billion increase arising essentially from growth in personal deposits and business and government deposits. The following table provides a breakdown of total personal savings.

 

(millions of Canadian dollars)

 

As at April 30, 2019

 

As at October 31, 2018

 

As at April 30, 2018

 

 

 

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

 

Deposits

 

58,170

 

55,688

 

53,969

 

 

 

 

 

 

 

 

 

 

Off-balance-sheet

 

 

 

 

 

 

 

Brokerage

 

136,641

 

123,458

 

122,827

 

Mutual funds

 

34,407

 

31,874

 

32,911

 

Other

 

452

 

440

 

457

 

 

 

 

171,500

 

155,772

 

156,195

 

Total personal savings

 

229,670

 

211,460

 

210,164

 

 

As at April 30, 2019, personal deposits stood at $58.2 billion, rising $2.5 billion since October 31, 2018. Since April 30, 2018, personal deposits rose 8%, 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 April 30, 2019, total personal savings amounted to $229.7 billion, up from $211.5 billion as at October 31, 2018 and from $210.2 billion as at April 30, 2018. Overall, off-balance-sheet personal savings stood at $171.5 billion as at April 30, 2019, rising $15.3 billion or 10% from a year ago given net inflows in brokerage operations and growth in stock markets.

 

At $116.1 billion, business and government deposits rose $5.8 billion since October 31, 2018, essentially due to Treasury activities, and include $1.2 billion in deposits subject to bank recapitalization (bail-in) conversion regulations. Other liabilities stood at $74.2 billion as at April 30, 2019, declining 3% since October 31, 2018 due to a $2.4 billion decrease in obligations related to securities sold short. 

 

Equity

As at April 30, 2019, equity attributable to the Bank's shareholders was $14.3 billion, rising $0.3 billion from October 31, 2018. This increase came essentially from net income net of dividends, partly offset by a net change in gains (losses) on cash flow hedges. The repurchases of common shares for cancellation were partly offset by issuances of common shares under the Stock Option Plan and the impact of shares purchased or sold for trading.

 

Event After the Consolidated Balance Sheet Date

 

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 is now 7%. A gain on disposal of Fiera Capital shares of approximately $75 million ($65 million net of income taxes), including a gain on remeasurement at fair value of the retained interest of $30 million ($26 million net of income taxes) will be recognized in the Non-interest income - Other item of the Consolidated Statement of Income. 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 $414 million as at April 30, 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 April 30, 2019, total commitments for this type of loan stood at $3,725 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 March 2019, the Bank received a written proposal (the Proposal) from the Canada Revenue Agency (CRA) proposing to reassess the Bank for additional income tax and interest of approximately $131 million (including estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2014. 

 

The Bank was previously reassessed in 2018 and 2017 for additional income tax and interest (including provincial tax and interest) of approximately $130 million and $77 million, respectively, in respect of certain Canadian dividends received by the Bank during the 2013 and 2012 taxation years.

 

The transactions to which the Proposal and 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 Proposal and 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 April 30, 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 operating income 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 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 April 30, 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 April 30, 2019

 

 

Minimum

 

 

Capital

conservation

buffer

 

 

Minimum

set by

 BCBS

 

 

D-SIB surcharge

 

 

Minimum

set by

OSFI(1)

 

 

Domestic

stability

buffer

 

 

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.

 

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 six-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 December 13, 2018, the BCBS issued a consultative document Revisions to Leverage Ratio Disclosure Requirements, which aims to address leverage ratio window-dressing concerns. The potential revised disclosure is to be applied by all internationally active banks and is to be implemented no later than January 2022.

 

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.

 

Management Activities

During the six-month period ended April 30, 2019, the Bank repurchased 2,047,200 common shares for $122 million, which reduced Common share capital by $17 million and Retained earnings by $105 million. This repurchase was part of the normal course issuer bid to repurchase for cancellation program that the Bank launched on June 6, 2018.

 

Shares and Stock Options

 

 

 

As at April 30, 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

 

335,116,246

 

2,901

 

Stock options

 

13,728,085

 

 

 

 

As at May 24, 2019, there were 335,191,028 common shares and 13,625,859 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 722,552,000 Bank common shares, which would have a 68.3% dilutive effect based on the number of Bank common shares outstanding as at April 30, 2019.

 

Movement in Regulatory Capital

 

(millions of Canadian dollars)

 

 

 

Six months ended

April 30, 2019

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (CET1) capital

 

 

 

 

 

Balance at beginning

 

 

 

8,608

 

 

Issuance of common shares (including Stock Option Plan)

 

 

 

44

 

 

Impact of shares purchased or sold for trading

 

 

 

45

 

 

Repurchase of common shares

 

 

 

(122)

 

 

Other contributed surplus

 

 

 

2

 

 

Dividends on preferred and common shares

 

 

 

(494)

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Bank's shareholders

 

 

 

1,075

 

 

Common share capital issued by subsidiaries and held by third parties

 

 

 

5

 

 

Removal of own credit spread (net of income taxes)

 

 

 

3

 

 

Impact of adopting IFRS 15 on November 1, 2018

 

 

 

(4)

 

 

Other

 

 

 

(55)

 

 

 

 

 

 

 

 

 

 

Movements in accumulated other comprehensive income

 

 

 

 

 

 

 

Translation adjustments

 

 

 

27

 

 

 

Debt securities at fair value through other comprehensive income

 

 

 

1

 

 

 

Other

 

 

 

4

 

 

 

 

 

 

 

 

 

 

Change in goodwill and intangible assets (net of related tax liability)

 

 

 

(60)

 

 

Other, including regulatory adjustments and transitional arrangements

 

 

 

 

 

 

 

Change in defined benefit pension plan asset (net of related tax liability)

 

 

 

4

 

 

 

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

 

 

 

9,092

 

 

 

 

 

 

 

 

 

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

 

 

 

2

 

Balance at end

 

 

 

2,804

 

 

 

 

 

 

 

 

 

Total Tier 1 capital

 

 

 

11,896

 

 

 

 

 

 

 

 

 

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

 

 

 

1

 

 

Change in certain allowances for credit losses

 

 

 

6

 

 

Other, including regulatory adjustments and transitional arrangements

 

 

 

(55)

 

Balance at end

 

 

 

894

 

 

 

 

 

 

 

 

 

Total regulatory capital

 

 

 

12,790

 

 

(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 $79.0 billion as at April 30, 2019 compared to $73.7 billion as at October 31, 2018, a $5.3 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

 

 

April 30, 2019

 

January 31, 2019

 

October 31, 2018

 

 

 

 

Non-counterparty

 credit risk

 

Counterparty

credit risk

 

Total

 

Total

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit risk - Risk-weighted assets at beginning

56,699

 

5,463

 

62,162

 

59,476

 

57,974

 

 

Book size

729

 

860

 

1,589

 

1,273

 

1,629

 

 

Book quality

49

 

7

 

56

 

(198)

 

(203)

 

 

Model updates

30

 

3

 

33

 

1,634

 

(72)

 

 

Methodology and policy

 

 

 

 

 

 

Acquisitions and disposals

 

 

 

 

 

 

Foreign exchange movements

232

 

52

 

284

 

(23)

 

148

 

Credit risk - Risk-weighted assets at end

57,739

 

6,385

 

64,124

 

62,162

 

59,476

 

 

 

 

 

 

 

 

 

 

 

 

Market risk - Risk-weighted assets at beginning

 

 

 

 

3,964

 

3,435

 

4,755

 

 

Movement in risk levels(1)

 

 

 

 

(176)

 

529

 

(406)

 

 

Model updates

 

 

 

 

 

 

(914)

 

 

Methodology and policy

 

 

 

 

 

 

 

 

Acquisitions and disposals

 

 

 

 

 

 

 

Market risk - Risk-weighted assets at end

 

 

 

 

3,788

 

3,964

 

3,435

 

 

 

 

 

 

 

 

 

 

 

 

Operational risk - Risk-weighted assets at beginning

 

 

 

 

10,910

 

10,743

 

10,539

 

 

Movement in risk levels

 

 

 

 

186

 

167

 

204

 

 

Acquisitions and disposals

 

 

 

 

 

 

 

Operational risk - Risk-weighted assets at end

 

 

 

 

11,096

 

10,910

 

10,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets at end

 

 

 

 

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 January 31, 2019, the Bank implemented the SA-CCR rules for measuring counterparty credit risk under the standardized approach, as required by the BCBS.

 

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.

 

Regulatory Capital Ratios

As at April 30, 2019, the Bank's CET1, Tier 1 and Total capital ratios were, respectively, 11.5%, 15.1% and 16.2%, i.e., above the regulatory requirements, compared to ratios of, respectively, 11.7%, 15.5% and 16.8% as at October 31, 2018. The decrease in the CET1 capital ratio came essentially from the application of the SA-CCR rules for measuring counterparty credit risk. Net income net of dividends and common share issuances under the Stock Option Plan more than offset growth in risk-weighted assets, the common share repurchases during the six-month period ended April 30, 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 April 30, 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 April 30, 2019

 

 

As at October 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

 

 

CET1

 

9,092

 

 

8,608

 

 

 

Tier 1

 

11,896

 

 

11,410

 

 

 

Total

 

12,790

 

 

12,352

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

 

 

 

 

 

 

 

CET1 capital

 

79,008

 

 

73,654

 

 

 

Tier 1 capital

 

79,008

 

 

73,670

 

 

 

Total capital

 

79,008

 

 

73,685

 

 

 

 

 

 

 

 

 

 

 

Total exposure

 

296,118

 

 

284,337

 

 

 

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

CET1

 

11.5

%

 

11.7

%

 

 

Tier 1

 

15.1

%

 

15.5

%

 

 

Total

 

16.2

%

 

16.8

%

 

Leverage ratio

 

4.0

%

 

4.0

%

 

 

Dividends

On May 29, 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, up 3 cents or 4.6%, payable on August 1, 2019 to shareholders of record on June 25, 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 April 30,

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

 

47,063

 

8,544

 

 

 

 

 

 

55,607

 

54,213

 

 

Qualifying revolving retail

 

2,581

 

2,692

 

 

 

 

 

 

5,273

 

6,276

 

 

Other retail

 

14,623

 

1,554

 

 

 

 

14

 

 

16,191

 

17,064

 

 

 

64,267

 

12,790

 

 

 

 

14

 

 

77,071

 

77,553

 

Non-retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

53,979

 

19,109

 

15,155

 

 

6

 

4,382

 

 

92,631

 

88,527

 

 

Sovereign

 

25,509

 

5,218

 

33,663

 

 

201

 

153

 

 

64,744

 

73,915

 

 

Financial institutions

 

3,058

 

427

 

80,972

 

 

1,562

 

620

 

 

86,639

 

85,109

 

 

 

82,546

 

24,754

 

129,790

 

 

1,769

 

5,155

 

 

244,014

 

247,551

 

Trading portfolio

 

 

 

 

 

11,359

 

 

 

11,359

 

9,620

 

Securitization

 

1,402

 

 

 

 

 

3,595

 

 

4,997

 

4,746

 

Total - Gross credit risk

 

148,215

 

37,544

 

129,790

 

 

13,128

 

8,764

 

 

337,441

 

339,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standardized Approach

 

14,293

 

117

 

18,780

 

 

1,438

 

217

 

 

34,845

 

32,303

 

AIRB Approach

 

133,922

 

37,427

 

111,010

 

 

11,690

 

8,547

 

 

302,596

 

307,167

 

Total - Gross credit risk

 

148,215

 

37,544

 

129,790

 

 

13,128

 

8,764

 

 

337,441

 

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 - Second Quarter 2019 and in Supplementary Regulatory Capital and Pillar 3 Disclosure - Second 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 April 30, 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

10,498

 

232

 

9,980

 

286

 

Interest rate(3)

 

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

At fair value through profit or loss

63,474

 

59,768

 

3,706

 

 

Interest rate(3) and equity

 

 

 

At fair value through other comprehensive income

6,633

 

 

6,633

 

 

Interest rate(3) and equity(4)

 

 

 

At amortized cost

8,514

 

 

8,514

 

 

Interest rate(3)

 

 

Securities purchased under reverse repurchase

 

 

 

 

 

 

 

 

 

 

 

 

agreements and securities borrowed

17,193

 

 

17,193

 

 

Interest rate(3)(5)

 

 

Loans and acceptances, net of allowances

148,742

 

5,530

 

143,212

 

 

Interest rate(3)

 

 

Derivative financial instruments

7,274

 

6,617

 

657

 

 

Interest rate and exchange rate

 

 

Defined benefit asset

48

 

 

48

 

 

Other

 

 

Other

6,730

 

 

 

6,730

 

 

 

 

 

 

269,106

 

72,147

 

189,943

 

7,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

179,419

 

9,564

 

169,855

 

 

Interest rate(3)

 

 

Acceptances

6,854

 

 

6,854

 

 

Interest rate(3)

 

 

Obligations related to securities sold short

15,394

 

15,394

 

 

 

 

 

 

Obligations related to securities sold under repurchase

 

 

 

 

 

 

 

 

 

 

 

 

agreements and securities loaned

20,378

 

 

20,378

 

 

Interest rate(3)(5)

 

 

Derivative financial instruments

5,481

 

4,890

 

591

 

 

Interest rate and exchange rate

 

 

Liabilities related to transferred receivables

20,236

 

4,208

 

16,028

 

 

Interest rate(3)

 

 

Defined benefit liability

241

 

 

241

 

 

Other

 

 

Other

5,596

 

24

 

911

 

4,661

 

Interest rate(3)

 

 

Subordinated debt

772

 

 

772

 

 

Interest rate(3)

 

 

 

254,371

 

34,080

 

215,630

 

4,661

 

 

 

 

(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

 

 

 

 

(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 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

 

Six months ended

 

 

 

April 30, 2019

 

January 31, 2019

 

April 30, 2018

 

April 30, 2019

 

April 30, 2018

 

 

 

Low

 

High

 

Average

 

Period end

 

Average

 

Period end

 

Average

 

Period end

 

Average

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

(4.0)

 

(6.4)

 

(5.1)

 

(4.4)

 

(5.7)

 

(5.4)

 

(4.2)

 

(3.9)

 

(5.4)

 

(4.0)

 

Exchange rate

 

(0.5)

 

(1.0)

 

(0.8)

 

(0.6)

 

(0.9)

 

(0.9)

 

(1.0)

 

(1.2)

 

(0.8)

 

(0.9)

 

Equity

 

(3.1)

 

(5.2)

 

(4.0)

 

(3.1)

 

(4.5)

 

(3.6)

 

(2.9)

 

(3.9)

 

(4.2)

 

(2.7)

 

Commodity

 

(0.5)

 

(1.5)

 

(1.0)

 

(1.1)

 

(1.2)

 

(1.3)

 

(1.1)

 

(1.1)

 

(1.1)

 

(0.9)

 

Correlation effect(2)

 

n.m.

 

n.m.

 

5.2

 

4.9

 

5.9

 

5.8

 

4.1

 

3.7

 

5.4

 

4.0

 

Total trading VaR

 

(4.3)

 

(7.7)

 

(5.7)

 

(4.3)

 

(6.4)

 

(5.4)

 

(5.1)

 

(6.4)

 

(6.1)

 

(4.5)

 

 

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

 

Six months ended

 

 

 

April 30, 2019

 

January 31, 2019

 

April 30, 2018

 

April 30, 2019

 

April 30, 2018

 

 

 

Low

 

High

 

Average

 

Period end

 

Average

 

Period end

 

Average

 

Period end

 

Average

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

(12.9)

 

(18.6)

 

(15.5)

 

(15.2)

 

(14.4)

 

(14.2)

 

(12.0)

 

(14.9)

 

(14.9)

 

(11.3)

 

Exchange rate

 

(0.7)

 

(1.6)

 

(1.1)

 

(0.9)

 

(1.5)

 

(1.2)

 

(1.0)

 

(1.4)

 

(1.3)

 

(1.0)

 

Equity

 

(4.6)

 

(9.1)

 

(6.1)

 

(5.3)

 

(8.3)

 

(7.0)

 

(2.9)

 

(3.5)

 

(7.2)

 

(2.6)

 

Commodity

 

(1.4)

 

(3.2)

 

(2.0)

 

(2.3)

 

(2.3)

 

(1.5)

 

(2.0)

 

(2.4)

 

(2.2)

 

(1.4)

 

Correlation effect(2)

 

n.m.

 

n.m.

 

12.3

 

12.3

 

14.6

 

11.2

 

6.9

 

8.5

 

13.4

 

7.3

 

Total trading SVaR

 

(10.0)

 

(17.0)

 

(12.4)

 

(11.4)

 

(11.9)

 

(12.7)

 

(11.0)

 

(13.7)

 

(12.2)

 

(9.0)

 

 

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 decreased from $6.4 million to $5.7 million between the first and second quarter of 2019 as a result of some tail scenarios moving out of the two-year VaR history window. In addition, the average trading SVaR increased from $11.9 million to $12.4 million during the second quarter of 2019, mostly explained by 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 95% of the days for the quarter ended April 30, 2019. Two trading days were marked by daily trading and underwriting net losses of more than $1 million. These losses did not exceed the VaR.

 

Quarter Ended April 30, 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 April 30, 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

 

(145)

 

(1)

 

(146)

 

39

 

7

 

46

 

100-basis-point decrease in the interest rate

 

154

 

28

 

182

 

21

 

22

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

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 page 75 of the Risk Management section in the 2018 Annual Report. Since November 1, 2018, the below-described regulatory development should also be considered.

 

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 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.

 

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 April 30,

 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

 

Unencumbered                                                                                                                                                                                         liquid assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and deposits with financial institutions

 

10,498

 

 

10,498

 

3,330

 

7,168

 

10,287

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued or guaranteed by the Canadian government, U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury, other U.S. agencies and other foreign governments

 

24,340

 

18,243

 

42,583

 

22,589

 

19,994

 

20,825

 

 

Issued or guaranteed by Canadian provincial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

municipal governments

 

11,659

 

6,674

 

18,333

 

12,298

 

6,035

 

6,540

 

 

Other debt securities

 

4,968

 

2,418

 

7,386

 

3,172

 

4,214

 

5,398

 

 

Equity securities

 

37,654

 

30,436

 

68,090

 

40,968

 

27,122

 

16,611

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities backed by insured residential mortgages

 

7,319

 

 

7,319

 

4,109

 

3,210

 

3,286

 

As at April 30, 2019

 

96,438

 

57,771

 

154,209

 

86,466

 

67,743

 

 

 

As at October 31, 2018

 

91,640

 

57,483

 

149,123

 

86,176

 

 

 

62,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

As at April 30, 2019

 

As at October 31, 2018

 

 

 

 

 

 

 

 

 

Unencumbered liquid assets by entity

 

 

 

 

 

 

National Bank (parent)

 

26,926

 

30,205

 

 

Domestic subsidiaries

 

13,248

 

11,543

 

 

Foreign subsidiaries and branches

 

27,569

 

21,199

 

 

 

 

 

67,743

 

62,947

 


 

(millions of Canadian dollars)

 

As at April 30, 2019

 

As at October 31, 2018

 

 

 

 

 

 

 

 

 

Unencumbered liquid assets by currency

 

 

 

 

 

 

Canadian dollar

 

36,739

 

35,838

 

 

U.S. dollar

 

17,534

 

22,663

 

 

Other currencies

 

13,470

 

4,446

 

 

 

 

 

67,743

 

62,947

 

 

Liquid Asset Portfolio - Average(4)

 

(millions of Canadian dollars)

 

 

 

 

 

 

Quarter ended April 30, 2019

 

 

 

 

Bank-owned

liquid assets(1)

 

Liquid assets

received(2)

 

Total

liquid assets

 

Encumbered

liquid assets(3)

 

Unencumbered                                                                                                                                                                                         liquid assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and deposits with financial institutions

11,705

 

 

11,705

 

2,896

 

8,809

 

Securities

 

 

 

 

 

 

 

 

 

 

 

Issued or guaranteed by the Canadian government, U.S.

 

 

 

 

 

 

 

 

 

 

 

 

Treasury, other U.S. agencies and other foreign governments

27,308

 

21,487

 

48,795

 

26,746

 

22,049

 

 

Issued or guaranteed by Canadian provincial and

 

 

 

 

 

 

 

 

 

 

 

 

municipal governments

11,120

 

7,679

 

18,799

 

14,966

 

3,833

 

 

Other debt securities

5,320

 

2,681

 

8,001

 

3,416

 

4,585

 

 

Equity securities

36,102

 

30,555

 

66,657

 

41,760

 

24,897

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Securities backed by insured residential mortgages

7,789

 

 

7,789

 

4,576

 

3,213

 

 

99,344

 

62,402

 

161,746

 

94,360

 

67,386

 

 

(1)       Bank-owned liquid assets include assets for which there are no legal or geographic restrictions.

(2)       Securities received as collateral with respect to securities financing and derivative transactions and securities purchased under reverse repurchase agreements and securities borrowed.

(3)       In the normal course of its funding activities, the Bank pledges assets as collateral in accordance with standard terms. Encumbered liquid assets include assets used to cover short sales, obligations related to securities sold under repurchase agreements and securities loaned, guarantees related to security-backed loans and borrowings, collateral related to derivative financial instrument transactions, asset-backed securities and liquid assets legally restricted from transfers.

(4)       The average is based on the sum of the end-of-period balances of the three months of the quarter divided by three.

Summary of Encumbered and Unencumbered Assets

 

(millions of Canadian dollars)

 

 

 

 

 

 

 

 

 

As at April 30, 2019

 

 

 

 

Encumbered

assets(1)

 

Unencumbered

assets

 

Total

 

Encumbered

assets as a %

of total assets

 

 

 

 

Pledged as

collateral

 

Other(2)

 

Available as

collateral

 

Other(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and deposits with financial institutions

 

101

 

3,229

 

7,168

 

 

10,498

 

1.2

 

Securities

 

23,055

 

 

55,566

 

 

78,621

 

8.6

 

Securities purchased under reverse repurchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

agreements and securities borrowed

 

 

15,394

 

1,799

 

 

17,193

 

5.7

 

Loans and acceptances, net of allowances

 

29,564

 

 

3,210

 

115,968

 

148,742

 

11.0

 

Derivative financial instruments

 

 

 

 

7,274

 

7,274

 

 

Investments in associates and joint ventures

 

 

 

 

655

 

655

 

 

Premises and equipment

 

 

 

 

609

 

609

 

 

Goodwill

 

 

 

 

1,415

 

1,415

 

 

Intangible assets

 

 

 

 

1,373

 

1,373

 

 

Other assets

 

 

 

 

2,726

 

2,726

 

 

 

 

52,720

 

18,623

 

67,743

 

130,020

 

269,106

 

26.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

 

 

 

 

 

 

 

 

As at October 31, 2018

 

 

 

 

Encumbered

assets(1)

 

Unencumbered

assets

 

Total

 

Encumbered

assets as a %

of total assets

 

 

 

 

Pledged as

collateral

 

Other(2)

 

Available as

collateral

 

Other(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and deposits with financial institutions

 

87

 

2,382

 

10,287

 

 

12,756

 

0.9

 

Securities

 

20,787

 

 

48,996

 

 

69,783

 

7.9

 

Securities purchased under reverse repurchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

agreements and securities borrowed

 

 

17,781

 

378

 

 

18,159

 

6.8

 

Loans and acceptances, net of allowances

 

28,670

 

 

3,286

 

114,126

 

146,082

 

10.9

 

Derivative financial instruments

 

 

 

 

8,608

 

8,608

 

 

Investments in associates and joint ventures

 

 

 

 

645

 

645

 

 

Premises and equipment

 

 

 

 

601

 

601

 

 

Goodwill

 

 

 

 

1,412

 

1,412

 

 

Intangible assets

 

 

 

 

1,314

 

1,314

 

 

Other assets

 

 

 

 

3,111

 

3,111

 

 

 

 

49,544

 

20,163

 

62,947

 

129,817

 

262,471

 

26.5

 

 

(1)       In the normal course of its funding activities, the Bank pledges assets as collateral in accordance with standard terms. Encumbered assets include assets used to cover short sales, obligations related to securities sold under repurchase agreements and securities loaned, guarantees related to security-backed loans and borrowings, collateral related to derivative financial instrument transactions, asset-backed securities, residential mortgage loans securitized and transferred under the Canada Mortgage Bond program, assets held in consolidated trusts supporting the Bank's funding activities and mortgage loans transferred under the covered bond program.

(2)       Other encumbered assets include assets for which there are restrictions and that cannot therefore be used for collateral or funding purposes as well as assets used to cover short sales.

(3)       Other unencumbered assets are assets that cannot be used for collateral or funding purposes in their current form. This category includes assets that are potentially eligible as funding program collateral (for example, mortgages insured by the Canada Mortgage and Housing Corporation that can be securitized into mortgage-backed securities under the National Housing Act (Canada)). 

 

Liquidity Coverage Ratio (LCR)

The LCR was introduced primarily to ensure that banks maintain sufficient liquidity to withstand periods of severe short-term stress. OSFI has been requiring Canadian banks to maintain a minimum LCR of 100%. An LCR above 100% ensures that banks are holding sufficient high-quality liquid assets (HQLA) to cover net cash outflows given a severe, 30‑day liquidity crisis. The assumptions underlying the LCR scenario were established by the BCBS and OSFI.

 

The following table provides average LCR data calculated using the daily figures in the quarter. For the quarter ended April 30, 2019, the Bank's average LCR was 141%, well above the 100% regulatory requirement and demonstrating the Bank's solid liquidity position.

 

LCR Disclosure Requirements(1)

 

(millions of Canadian dollars)

 

 

 

 

For the quarter ended

 

 

 

 

April 30, 2019

 

 

January 31, 2019

 

 

 

 

 

Total unweighted

value(2) (average)

 

Total weighted

value(3) (average)

 

 

Total weighted

value(3) (average)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High-quality liquid assets (HQLA)

 

 

 

 

 

 

 

 

 

 

1

 

Total HQLA

 

n.a.

 

46,451

 

 

48,894

 

 

 

Cash outflows

 

 

 

 

 

 

 

 

 

 

2

 

Retail deposits and deposits from small business customers, of which:

 

40,067

 

2,850

 

 

2,863

 

 

 

3