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Wednesday 27 May, 2020

Nat Bank of Canada

MD&A Q2 2020 ( Part 1)

RNS Number : 1099O
National Bank of Canada
27 May 2020
 

 

 

 

Regulatory Announcement (Part 1)

Q2 2020 Results

National Bank of Canada (the "Bank") announces publication of its Second Quarter 2020 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 2020 Report to Shareholders, please click on the following link:

http://www.rns-pdf.londonstockexchange.com/rns/1099O_1-2020-5-27.pdf

 

 

 

Report to Shareholders  Second Quarter 2020

 

National Bank reports its results for the Second Quarter of 2020

 

The financial information reported in this document is based on the unaudited interim condensed consolidated financial statements for the quarter and the six-month period ended April 30, 2020 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 26, 2020 - For the second quarter of 2020, National Bank is reporting net income of $379   million compared to $558 million in the second quarter of 2019. Second-quarter diluted earnings per share stood at $1.01 compared to $1.51 in the second quarter of 2019. The decrease in net income stems from a considerable increase in provisions for credit losses recorded to reflect a significant deterioration in the macroeconomic outlook caused by COVID-19 and the expected impacts on our clients. However, income before provisions for credit losses and income taxes on a taxable equivalent basis totalled $991   million in the second quarter of 2020, a 20% year-over-year increase driven by revenue growth across all business segments.

 

" The world is enduring extremely challenging times, both from a health and financial perspective. Since the onset of the current crisis, we have prioritized the well-being of our employees, clients, and communities. We have deployed exceptional efforts to support clients by way of uninterrupted service, numerous financial relief measures, and an extension of our balance sheet," said Louis Vachon, President and Chief Executive Officer of National Bank of Canada.

 

"Despite these unprecedented events, our business has held up well with revenue growth being generated across all business segments, led by Financial Markets and Wealth Management. For the second quarter, we are reporting provisions for credit losses totalling $504   million, reflecting our most prudent estimate ahead of an uncertain macroeconomic outlook. At the same time, we have maintained strong capital and liquidity levels with a CET1 ratio of 11.4% and a liquidity coverage ratio of 149%,'' added Mr. Vachon.

 

"At this point in time, the severity and duration of the COVID-19 pandemic and its impact on the economy are impossible to predict. I am confident that the resilience of the Bank's franchise, our defensive positioning, the quality of our credit portfolios, and our strong balance sheet will serve us well as we manage through these uncertain times.''

 

Highlights

 

(millions of Canadian dollars)

 

 

Quarter ended April 30

 

 

Six months ended April 30

 

 

 

 

 

2020

 

 

 

2019

 

 

% Change

 

 

2020

 

 

 

2019

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

379

 

 

 

558

 

 

(32)

 

 

989

 

 

 

1,110

 

 

(11)

 

Diluted earnings per share (dollars)

 

$

1.01

 

 

$

1.51

 

 

(33)

 

$

2.68

 

 

$

3.01

 

 

(11)

 

Return on common shareholders' equity

 

 

10.7

%

 

 

17.8

%

 

 

 

 

14.3

%

 

 

17.5

%

 

 

 

Dividend payout ratio

 

 

45.9

%

 

 

41.6

%

 

 

 

 

45.9

%

 

 

41.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at

April 30,

 2020

 

 

As at

October 31, 2019

 

 

 

 

CET1 capital ratio under Basel III

 

 

 

 

 

 

 

 

 

 

 

 

11.4

%

 

 

11.7

%

 

 

 

Leverage ratio under Basel III

 

 

 

 

 

 

 

 

 

 

 

 

4.4

%

 

 

4.0

%

 

 

 

 

Report to Shareholders  Second Quarter 2020

 

Personal and Commercial

 

Net income totalled $65 million in the second quarter of 2020 compared to $230 million in the second quarter of 2019, a decrease essentially due to an increase in provisions for credit losses on non-impaired loans recorded to reflect a significant deterioration in the macroeconomic outlook caused by COVID-19 and the expected impacts on clients.

Income before provisions for credit losses and income taxes totalled $389 million in the second quarter of 2020, up 3% from $376 million in the second quarter of 2019.

At $848 million, second-quarter total revenues rose $14 million or 2% year over year.

Compared to a year ago, personal lending grew 4%, particularly due to mortgage lending, while commercial lending grew 6% from a year ago.

The net interest margin was 2.22% in the second quarter of 2020 compared to 2.23% in the second quarter of 2019.

Second-quarter non-interest expenses stood at $459 million, stable compared to the second quarter of 2019.

At 54.1%, the second-quarter efficiency ratio improved from 54.9% in the second quarter of 2019.

 

 

Wealth Management

 

Net income totalled $141 million in the second quarter of 2020, a 21% increase from $117 million in the second quarter of 2019.

Second-quarter total revenues amounted to $474 million compared to $426 million in second quarter 2019, a $48 million or 11% increase driven mainly by growth in transaction-based and other revenues as well as in fee-based revenues.

Second-quarter non-interest expenses stood at $278 million, up 4% from $267 million in the second quarter of 2019.

At 58.6%, the efficiency ratio improved from 62.7% in the second quarter of 2019.

 

 

Financial Markets

 

Net income totalled $159 million in the second quarter of 2020 compared to $158 million in the second quarter of 2019.

Income before provisions for credit losses and income taxes on a taxable equivalent basis(1) totalled $378 million in the second quarter of 2020, up 70% from $223 million in the second quarter of 2019.

Total revenues on a taxable equivalent basis(1) amounted to $598 million, a $193 million or 48% year-over-year increase attributable essentially to the global markets revenue category.

Second-quarter non-interest expenses stood at $220 million compared to $182 million in the second quarter of 2019.

The segment recorded $162 million in provisions for credit losses in the second quarter of 2020 versus $7 million in the second quarter of 2019, with the increase stemming from a significant deterioration in the macroeconomic outlook caused by COVID-19 and the expected impacts on clients.

At 36.8%, the second-quarter efficiency ratio on a taxable equivalent basis(1) improved from 44.9% in the second quarter of 2019.

 

 

U.S. Specialty Finance and International

 

Net income totalled $74 million in the second quarter of 2020, a 3% increase from $72 million in the second quarter of 2019.

Second-quarter total revenues amounted to $183 million, a 3% year-over-year increase driven by revenue growth at the ABA Bank subsidiary.

Second-quarter non-interest expenses stood at $82 million, an $8 million year-over-year increase attributable to the expansion of ABA Bank's banking network.

 

 

Other

 

The Other heading of segment results posted a net loss of $60 million in the second quarter of 2020 compared to a net loss of $19 million in the second quarter of 2019. This change came mainly from an increase in non-interest expenses, in particular expenses incurred to implement health and safety measures for employees and clients in response to the pandemic.

 

 

Capital Management

 

As at April 30, 2020, the Common Equity Tier 1 (CET1) capital ratio under Basel III was 11.4%, compared to 11.7% as at October 31, 2019.

As at April 30, 2020, the Basel III leverage ratio was 4.4%, an increase from October 31, 2019.

 




 

(1)  See the Financial Reporting Method section on page 12 for additional information on non-GAAP financial measures.

 


Management's Discussion

and Analysis

May 26, 2020

 

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, 2020 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, 2020 and with the 2019 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.

COVID-19 Pandemic

4


Securitization and Off-Balance-Sheet Arrangements 

22

Economic Review and Outlook

10


Income Taxes 

23

Highlights

11


Contingent Liabilities 

23

Financial Reporting Methods

12


Capital Management

24

Financial Analysis 

13


Risk Management

28

Consolidated Results

13


Risk Disclosures

42

Results by Segment

16


Accounting Policies and Financial Disclosure

43

Consolidated Balance Sheet

20


Accounting Policies and Critical Accounting Estimates

43

Event After the Consolidated Balance Sheet Date

22


Future Accounting Policy Changes

44

Exposures to Certain Activities

22


Financial Disclosure

44

Related Party Transactions

22


Quarterly Financial Information

45






 

 

 

Caution Regarding Forward-Looking Statements

From time to time, the Bank makes written and oral forward-looking statements such as those contained in this document, in other filings with Canadian securities regulators, and in other communications. All such statements are made in accordance with applicable securities legislation in Canada and the United States. Forward-looking statements in this document may include, but are not limited to, statements with respect to the economy-particularly the Canadian and U.S. economies-market changes, the Bank's objectives, outlook and priorities for fiscal year 2020 and beyond, its strategies or future actions for achieving them, expectations for the Bank's financial condition, the regulatory environment in which it operates, the potential impacts of - and the Bank's response to - the COVID-19 pandemic,  and certain risks it faces. These forward-looking statements are typically identified by words such as "outlook", "believe", "foresee", "forecast", "anticipate", "estimate", "project", "expect", "intend", "plan", and similar expressions of future or conditional verbs such as "will", "may", "should", "could" or "would".

 

Such forward-looking statements are made for the purpose of assisting the holders of the Bank's securities in understanding the Bank's financial position and results of operations as at and for the periods ended on the dates presented, as well as the Bank's financial performance objectives, vision and strategic goals, and may not be appropriate for other purposes.

 

By their very nature, these 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 2020, including in the context of the COVID-19 pandemic, 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, including provisions for credit losses. In determining its expectations for economic conditions, both broadly and in the financial services sector in particular, the Bank primarily considers historical economic data provided by the governments of Canada, the United States and certain other countries in which the Bank conducts business, as well as their agencies.

 

There is a strong possibility that the Bank's express or implied predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that its assumptions may not be correct and that its financial performance objectives, vision and strategic goals will not be achieved. The Bank recommends that readers not place undue reliance on forward-looking statements, as a number of factors, many of which are beyond the Bank's control, including the impacts of the COVID-19 pandemic, could cause actual results to differ significantly from the expectations, estimates or intentions expressed in these 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 58 of the Bank's 2019 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; regulatory changes affecting the Bank's business; geopolitical uncertainty; important changes in consumer behaviour; Canadian housing and household indebtedness; changes in the Bank's customers' and counterparties' performance and creditworthiness; 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; potential disruption to key suppliers of goods and services to the Bank; potential disruptions to the Bank's information technology systems, including evolving cyberattack risk; and possible impacts of catastrophic events affecting local and global economies, including natural disasters and public health emergencies such as the COVID-19 pandemic.

 

Statements about the expected impacts of the COVID-19 pandemic on the Bank's business, results of operations, corporate reputation, financial position and liquidity, and on the global economy may be inaccurate and differ, possibly materially, from what is currently expected as they depend on future developments that are highly uncertain and cannot be predicted.

 

The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found in the Risk Management section of the Bank's 2019 Annual Report and in the COVID-19 Pandemic section of this Report to Shareholders for the Second Quarter of 2020. 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 risks 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.

 


COVID-19 Pandemic 

 

COVID-19 emanates from an emerging infectious disease, namely, the coronavirus disease. The coronavirus strain was detected in November 2019 in the city of Wuhan in central China, and then spread throughout the world. In early January 2020, the Chinese government implemented strict lockdown procedures and forced several cities-and then an entire region-to remain under lockdown, closing many public sites and enforcing considerable sanitary measures. On January 13, 2020, a first case was reported outside mainland China, and on January 30, 2020, the World Health Organization (WHO) declared that the outbreak of the new coronavirus constituted an international public health emergency.

 

On March 11, 2020, the WHO declared that the COVID-19 outbreak constituted a pandemic, requiring important protective measures be taken to prevent overcrowding at intensive care units and also to strengthen preventive hygiene (limiting physical contact, prohibiting gatherings and major events as well as unnecessary travel and movement, promoting handwashing, enforcing lockdown, etc.). The global pandemic prompted many countries, including Canada, to implement lockdown and social distancing measures designed to slow the development of new contagion hotbeds. Those measures included the closing of borders in many countries and the cancellation of sporting and cultural events around the world, triggering a sudden and widespread drop in market capitalizations on all major stock exchanges around the world arising from the uncertainty and fears about the global economy.

 

In Canada, banking services are considered essential services and are therefore being maintained despite the lockdown and social distancing measures. Given the current economic and social conditions, the Bank is committed to supporting its employees, clients, and communities. The Bank has ensured the continuity of all its activities since the beginning of this unprecedented crisis. All of its experts have been mobilized to guide and support clients and answer their questions during this period of uncertainty.

 

Risk Factors

The spread of COVID-19 has had disruptive and adverse effects in countries in which the Bank operates and more broadly on the global economy. It has caused increased volatility and declines in financial markets, disruptions to global supply chains, a sharp and sudden rise in unemployment, and an economic slowdown. Governments, monetary authorities, and regulators have taken actions to support the economy and the financial system, including taking fiscal and monetary measures to increase liquidity and support incomes, as well as implementing regulatory flexibility measures in respect of capital and liquidity requirements for financial institutions. If the COVID-19 pandemic is prolonged, the adverse impact on the global economy could deepen, augmenting financial market volatility, corporate insolvency risks, and negative household wealth impacts.

 

The continuation or worsening of the economic conditions caused by the COVID-19 pandemic could have a significant adverse effect on the business, results of operations, corporate reputation, and financial condition of the Bank. It may also have the effect of heightening many of the top and emerging risks the Bank faces, including 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 in this report and in the Bank's 2019 Annual Report.

 

The spread of COVID-19 has put certain top and emerging risks to which the Bank is exposed into perspective, such as:

 

· Credit, market, and liquidity and funding risks: Sudden rise in unemployment, reduced demand for financial products and services, changes to payment terms leading to reduced margins or unprofitable loans, increased borrower defaults leading to increased credit losses and lower mortgaged property values, constraints on liquidity and capital.

· Technology and information security risk: Increased use of digital channels, massive teleworking (including for critical operations), increased reliance on certain shared technology infrastructures, and an increase in external threats.

· Third-party risk: Government restrictions and measures affecting service delivery, disruptions to key suppliers of goods and services, fourth-party risk , increased use of cloud computing (high concentration of suppliers), and potential financial difficulties among third parties deemed critical.

· Human capital risk: Business disruption resulting from potential absenteeism in the current context (preventive withdrawals, work-life balance, unpaid leave), increased work environment stress for employees who are in contact with clients (fear of being infected or infecting loved ones), challenges related to working from home (isolation and lack of interaction with peers), complexities of integrating and training new resources in the context of a pandemic , issues relating to health and safety at work (spread of the virus in the workplace, ergonomic risks linked to working from home)

· Execution risk and cybersecurity risk : Vulnerability related to errors, operational flexibility (government moratoriums and programs, indexing in the systems of these new programs, processes, controls and accountability to be defined and implemented) and processing capacity (accumulation and processing of delays, increase in client calls, increased use of digital solutions, and increase in transactions).

· Strategic risk (client focus): Increased use of remote services, managing government programs that address financial difficulties faced by clients, temporary closure of several branches, changes in behaviours resulting from COVID-19, and increased risk of fraud.

 


The extent to which the COVID-19 pandemic negatively affects the Bank's business, results of operations, corporate reputation and financial condition, including its regulatory capital and liquidity ratios and ability to meet regulatory and other requirements as well as the global economy and financial markets will depend on future developments that are highly uncertain and cannot be predicted. These future developments include the scope, severity and duration of the pandemic, actions and measures taken by governmental, monetary, and regulatory authorities and other third parties in response to the pandemic, and the impact and effectiveness of those actions and measures.

 

The Bank's processes are designed to detect and assess these risks as early as possible so that appropriate mitigating strategies can be applied. Decision-making is supported by risk assessments and management processes that are consistent with the Bank's risk appetite and by prudent levels of capital and liquidity. For additional information, see the sections entitled Risk Management in this MD&A and in the 2019 Annual Report.

 

During the quarter ended April 30, 2020, the Bank accelerated and increased the frequency of several activities as part of its risk management framework , including:

 

· Stress tests and crisis simulations: Identification of vulnerabilities, ability to absorb shocks, and remediation mechanisms.

· Enterprise-wide risk management committee: Regular reporting on credit risk, market risk, liquidity and funding risk, and operational and fraud risk as well as on the evolution of capital.

· Reports and forecasts provided to management and to the Office of the President on a regular basis (daily, bi-weekly and weekly, as applicable).

· Office of the Superintendent of Financial Institutions (Canada) (OSFI): Regular reporting and responses to several ad hoc requests.

· OSFI, Bank of Canada and Finance Minister of Canada: More frequent communications.

· Activation of the corporate crisis unit: Deployed to manage business continuity.

· Internal and external communications: More frequent communications to stakeholders, by the President and Chief Executive Officer, by management - Employee Experience, and by other members of management, depending on the target audience.

 

To protect its clients and employees, the Bank has implemented measures to prevent the spread of COVID-19. It has temporarily adjusted the number of open service points and modified the business hours of its branches while ensuring safe access to banking services, with particular attention being paid to banking machines. In addition, since March 13, 2020, the Bank has asked all employees whose tasks allow them to work from home to do so until further notice. Employees who were required to work on site received clear health guidelines, and some have used alternate sites in order to comply with the requested social distancing.

 

The Bank's Financial Performance

In light of COVID-19 and its impact on global and local economies, Canadian banks are facing a difficult situation. This exceptional situation has led to significant changes in the overall market, such as business closures and temporary layoffs, low interest rates, declining and volatile stock markets, declining oil prices, and government measures implemented in response to COVID-19.

 

Macroeconomic Factors

Assumptions about the performance of the Canadian and U.S. economies in 2020, including in the context of the COVID-19 pandemic and how that will affect the Bank, are among the main factors considered in setting the Bank's strategic priorities and objectives, including provisions for credit losses. In determining its expectations for economic conditions, both broadly and in the financial services sector in particular, the Bank primarily considers historical economic data provided by the governments in Canada, the United States and certain other countries in which the Banks conducts business, as well as their agencies.

 

The main macroeconomic factors used when estimating allowances for credit losses on loans and other financial assets are as follows: gross domestic product (GDP), the unemployment rate, the housing price index, the rate spread on BBB bonds, the stock market (S&P/TSX), and the West Texas Intermediate (WTI) oil price. For each scenario, namely, the base scenario, upside scenario, and downside scenario, the average of the values over the next 12 months and the average of the values over the remaining forecast period for each macroeconomic factor are used to estimate the expected credit losses for the personal credit portfolio and for the business and government credit portfolio.

 

During the quarter ended April 30, 2020, the main macroeconomic factors deteriorated considerably given the shutdown of non-essential services. In the year ahead, the economic variables are expected to fluctuate significantly from one quarter to the next. In some instances, the next-12-month data obscures these significant fluctuations. For example, the 1.4% anticipated GDP growth rate in the base scenario for the next 12 months includes a 32% annualized contraction in the first quarter and a 42% rebound in the second quarter. With respect to the unemployment rate, the anticipated 8.5% for the next 12 months includes an 11.8% unemployment rate in the first quarter and a 7.8% rate in the second quarter.



According to the base scenario, the Canadian economy will rebound in the second half of the year as lockdown measures are lifted, but the unemployment rate will remain high at the end of 2020, i.e., above pre-recession levels. Oil will rebound slightly at year's end and rise by the end of 2021. Given a difficult labour market and reduced immigration, housing prices and the S&P/TSX will decline.

 

According to the upside scenario, the economy will rebound more strongly thanks to medical breakthroughs that help fight COVID-19. Fiscal and monetary stimulus measures will limit the damage in terms of destroyed capacity. The unemployment rate at the end of 2020 will be only slightly above pre-recession levels. At year's end, declines in housing prices and the S&P/TSX will be less pronounced and the price of oil will bounce back.

 

According to the downside scenario, the uncertainties surrounding COVID-19 will provoke a deeper recession. Global trade will remain depressed for longer, and disappointing corporate earnings will inflict a new round of stress on the financial markets. The result will be greater destruction of capacity than in the base scenario. Consequently, the unemployment rate will remain at higher levels.

 

Given uncertainty surrounding the key inputs used to measure credit losses, the Bank has applied expert credit judgment to adjust the modelled ECL results.   For additional information, see the Economic Review and Outlook section of this MD&A and Note 7 to the financial statements.

 

Impact on Results

Major disruptions in the global environment in which the Bank operates have affected its financial results, in particular its provisions for credit losses, which were increased considerably to reflect a significant deterioration in the macroeconomic outlook caused by COVID-19 and the expected impacts on our clients. However, income before provisions for credit losses and income taxes increased, as revenue was up across all business segments, especially in the Financial Markets segment, which experienced strong growth. Non-interest expenses were also affected by measures taken to protect the health and safety of employees serving clients in these exceptional circumstances as well as by decreases in certain variable expenses and other discretionary costs.

 

For additional information, refer to the Financial Analysis and Business Segment Analysis sections of this MD&A.

 

Relief Measures for Clients

In response to the economic and financial environment resulting from COVID-19, the Bank announced a series of support measures for the clients of its main business segments during March and April 2020. Some of these measures were initiated by the Canadian government and regulatory authorities, together with the Canadian banks, and were implemented quickly to come to the assistance of individuals and businesses. These measures are designed to provide financial support to clients facing the economic consequences of COVID-19. The main relief measures are described below.

 

Clients - Individuals

 

Mortgages

Personal loans


Credit cards


Transactions






· Payment deferrals of up to six months on mortgage loans.

· Deferral of minimum payment for up to three months on home equity lines of credit (All-In-OneTM).

· Payment deferrals of up to three months on personal loans.

 


· Deferral of minimum monthly payment for a period of up to 90 days.

· Annual interest rate reduced to 10.9% on purchases and cash advances during the deferral period, depending on an analysis of the file.

· Permanent or temporary increase to credit card limit.

 


· Temporary removal of certain transaction fees:

Interac e -Transfer service charge.

Charges for stop payment requests

by cheque or preauthorized debit.

Interest charges on an overdraft.

 

As at April 30, 2020, the Bank has approved payment deferral for approximately 114,000 Personal Banking clients. The gross carrying value of loans subject to these deferrals totalled $8.6 billion for residential mortgages, $756 million for personal loans, and $66 million for credit card receivables.

 

In addition, through its insurance subsidiary, the Bank offered easing measures on home and auto insurance products, including discounts of 15% for a period of three months. Approximately 13,000 clients elected to avail themselves of these easing measures during the quarter ended April 30, 2020.

 



 

Clients - Businesses

 

Loans


Credit cards


Transactions






· Canada Emergency Business Account (CEBA) for small- and medium-sized enterprises and non-profit organizations: A $40,000 interest-free loan up to December 31, 2022 supported by the Canadian government (Eligibility: have paid from $20,000 to $1.5 million in salaries in 2019).

· Concerted Temporary Action Program for Businesses (CTAPB): Working capital loan of at least $71,500 supported by Investissement Québec (Eligibility: history of satisfactory profitability).

· Business Credit Availability Program (BCAP) for exporting or non-exporting businesses, supported by Export Development Canada: Operating credit and cash flow term loans of up to $6.25 million in Canadian dollars only.

· Principal payment deferrals of up to six months.


· Deferral of minimum monthly payment for a period of up to 90 days on certain Business cards.

· Contactless payments over $100 at participating merchants.

 


· Increase to the weekly limit of incoming Interac e-transfers.

· Temporary removal of charges for stop payment requests.

 

As at April 30, 2020, the Bank had granted 20,714 loans under the CEBA program, 9 loans under the CTAPB program, and 5 loans under the BCAP program.

 

In addition, the Bank is addressing the specific needs of its Commercial Banking clients and Financial Markets clients to support them during this unprecedented crisis. As at April 30, 2020, the Bank had approved payment deferrals for approximately 3,100 Commercial Banking and Financial Markets clients. The gross carrying value of loans subject to these deferrals totalled $4.5 billion.

 

Key Measures Introduced by the Regulatory Authorities

Like all Canadian financial institutions, the Bank is facing regulatory changes that are being implemented at an increasing rate. As described below, as part of a coordinated effort by Government of Canada agencies, OSFI and other regulatory authorities governing the Bank's activities have taken a number of actions to reinforce the resilience of Canadian banks and improve the stability of the Canadian financial system and economy in response to challenges posed by COVID-19 and current market conditions. Regulatory authorities are also stepping up their oversight activities and focusing on the effects of the pandemic on the activities, capital strength, and liquidity of regulated entities.

 

OSFI, market participants, and financial institutions all recognize the critical need for strong capital and liquidity and effective risk management. OSFI has strengthened its requirements and its supervisory efforts in all of these areas since the 2008 global financial crisis. These measures have improved the resilience of Canadian banks in periods of stress.

 

OSFI continues to actively monitor the evolving COVID-19 situation and has been in frequent contact with banks to assess their operational capacity and actions to address the current environment. As a result of these discussions and the measures announced in March and April 2020, OSFI announced a continuance of the regulatory flexibility measures to support COVID-19-related efforts while promoting financial resilience and stability. The main key measures are described on the following pages.

 



 

Capital Management

One of the requirements imposed by OSFI after the 2008 financial crisis was the creation of the Domestic Stability Buffer (the buffer) requirement applicable to Canadian domestic systemically important banks (D-SIBs). The buffer's countercyclical design enables D-SIBs to use the capital they have built up during good times when it may be needed most. On March 13, 2020, OSFI lowered the buffer from 2.25% of risk-weighted assets to 1.0%. This action is being taken in order to support D-SIBs' ability to supply credit to the economy during an expected period of disruption related to COVID-19 and market conditions. OSFI will continue to analyze the buffer level and could reduce it more as needed. OSFI also stated its commitment that any increases to the buffer will not take effect for at least 18 months from March 13, 2020 in addition to its expectation for all banks to interrupt any dividend increases and share buybacks for the time being.

 

On March 27, 2020, OSFI announced a series of additional measures for banks in response to the difficulties caused by the spread of COVID-19, including:

 

· Treatment of regulatory capital for expected credit loss (ECL) accounting purposes: As other regulatory agencies are doing, OSFI has introduced transitional arrangements applicable to the ECL provisioning method set out in the Basel framework. This will result in a portion of allowances that would otherwise be included in Tier 2 capital to be included in CET1 capital. Although the Basel Committee on Banking Supervision (BCBS) is allowing jurisdictions the option of applying a 100% add-back of allowances to CET1 capital, OSFI believes that a maximum add-back of 70% is appropriate. This increased amount is adjusted for tax effects and multiplied by a scaling factor that decreases over time. The scaling factor will be set at 70% in fiscal 2020, 50% in fiscal 2021, and 25% in fiscal 2022. The three-year transition will help banks to phase-in the impact of increased ECL allowances in CET1 capital while also acknowledging that these provisions are being taken.

· Deferral of loan payments: The bank loans subject to payment deferrals, such as mortgage loans, personal loans, and small business loans, continue to be treated as performing loans under the Capital Adequacy Requirement guideline. This is to assist banks in responding to clients managing through hardships caused by the crisis.

· Reduction of stressed Value-at-Risk (VaR) multipliers under market risk: On a temporary basis, banks subject to market risk capital requirements and using the AIRB approach may reduce the stressed VaR multiplier that was being applied at the end of first quarter 2020 by two. This reduction can be applied retrospectively for the entirety of the second quarter of 2020.

· Removal of funding valuation adjustment (FVA) hedges in market risk: Banks must remove hedges of FVA from the calculation of market risk capital. Doing so addresses an asymmetry in the current rule where these hedges of FVA are included in the calculation while the underlying exposures to FVA are not. This treatment should be back-dated to the beginning of the second quarter of 2020.

· Capital floor: OSFI is lowering the floor factor from 75% to 70%. The 70% floor factor is expected to stay in place until the domestic implementation of the Basel III capital floor in the first quarter of 2023. The 70% factor ensures that the floor continues to protect against model risk while maintaining the risk sensitivity of the capital framework for banks subject to the Advanced IRB approach.

· Leverage ratio: Banks can temporarily exclude the following exposures from the leverage ratio exposure measure: (1) Central bank reserves; (2) Sovereign-issued securities by borrowers that qualify as high-quality liquid assets (HQLA) under the Liquidity Adequacy Requirements guideline. This treatment will remain in place until April 30, 2021 unless OSFI decides to maintain the exclusion for a longer period. Capital freed up through this measure should not be distributed (e.g., as dividends or bonus payments) and should rather be used to support lending and financial intermediation activities.

· Margin required for non-centrally cleared derivatives: In line with a decision by the BCBS and International Organization of Securities Commissions, OSFI is extending the deadline for the implementation of the final two phases of the initial margin requirements for non-centrally cleared derivatives outlined in OSFI's E-22 guideline by one year. With this extension, the final implementation phase will take place on September 1, 2022, at which point covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than $12 billion will be subject to the requirements. As an intermediate step, from September 1, 2021, covered entities with an AANA of non-centrally cleared derivatives greater than $75 billion will be subject to the requirements.

· Delaying implementation of the Basel III reforms: The Group of Central Bank Governors and Heads of Supervision (GHOS), which oversees the BCBS, announced a postponement to the implementation of the reforms of the Basel III capital international standard published in December 2017. OSFI has therefore postponed until the first quarter of 2023 the implementation dates applicable to the revisions to the Standardized Approach and AIRB Approach to credit risk, the operational risk framework, and the leverage ratio framework, as well as the introduction of a more risk-sensitive capital floor. Implementation of the Pillar 3 financial disclosure requirements finalized by the BCBS in December 2018 has also been delayed until at least the first quarter of 2023. Lastly, implementation of the final set of revisions to the new market risk framework entitled Fundamental Review of theTrading Book published in January 2019 as well as the revised credit valuation adjustment (CVA) risk framework is being delayed to the first quarter of 2024.

 

For additional information, refer to the Capital Management section of this MD&A.

 



 

Liquidity Management

To help Canadians through this difficult period caused by the COVID-19 crisis, the Bank of Canada has taken policy actions designed to restore financial market functioning, to ensure that financial institutions have adequate liquidity, and to provide households and businesses with access to the credit they need. To ensure banks have sufficient liquidity to support clients and to alleviate impaired market liquidity in Canada, the central bank has implemented liquidity facilities and asset purchase programs. The liquidity facilities include the existing term repo facility where the terms of the loans have been extended and the list of eligible collateral has been expanded. Also, a new standing term liquidity facility (STLF) has been introduced to complement the existing liquidity tools and to further strengthen   the resilience of the Canadian financial system . Asset purchase programs implemented by the Bank of Canada and the Canada Mortgage and Housing Corporation (CMHC) cover a wide range of securities (treasury bills, bankers' acceptances, bonds, and mortgage-backed securities) and issuers (government and corporate). All of these programs have stabilized the funding markets and supported the flow of credit to households and businesses.

 

The Bank of Canada has also used monetary policy to respond to the COVID-19 crisis. It has lowered its target for the overnight rate by 150 basis points to 0.25%. Longer-term interest rates have also gone down significantly, and the interest rates of the Government of Canada curve are now mostly below 1%. Also, the limit for covered bonds has been temporarily increased to provide better access to Bank of Canada facilities, and banks are allowed to draw on their HQLA assets, thereby falling below the 100% threshold required by the Liquidity Adequacy Requirements guideline for the liquidity coverage ratio (LCR).

 

The Bank entered the crisis with a strong liquidity position, and it has maintained sound and prudent liquidity management throughout the quarter ended April 30, 2020.  Deposit levels continued to grow, and the Bank has participated in certain Bank of Canada programs designed to provide credit to its clients and to substitute some short-term funding. In light of the government liquidity facilities and household and business needs, the Bank is maintaining a liquidity buffer that will enable it to further support its clients.

 

For additional information, refer to the Risk Management - Liquidity and Funding Risk section of the MD&A.

 


Economic Review and Outlook

 

Global Economy

The global economy clearly entered a recession in the first quarter of 2020. The cause of the crisis is unprecedented, as it involves an intentional closing of non-essential services by governments to limit the spread of COVID-19. Also unprecedented are the fiscal and monetary measures that have been taken by political leaders to limit economic damage and prepare for recovery. The combined actions of governments has alleviated financial stress, but much uncertainty remains about the magnitude of the economic shock. Ultimately, the impact will depend on the pace at which the economy reopens, whether new waves of infections occur, and whether medical breakthroughs lead to a vaccine or drug that relieves symptoms. The pandemic may also compel governments to review industrial policies and return to local production of critical supplies, including health equipment and pharmaceuticals. A process of deglobalization could accelerate, and belligerent rhetoric between the White House and China does not bode well for relations between the two great economic powers. While an economic rebound is expected in the second half of the year, global GDP should contract by 4%(1) this year.

 

The longest economic expansion in the United States since World War II has officially ended. The lockdowns declared by governments in March brought the economy to an abrupt halt, triggering a recession that began with a 4.8% annualized contraction in GDP in the first quarter. Since the resulting shutdown of non-essential services lasted several weeks, a much larger contraction is expected in the second quarter. The impact on the labour market in April was apocalyptic, as 22 million jobs were eliminated in the blink of an eye. Within the course of two months, all the jobs created since 1999 disappeared. Millions of these jobs will quickly reappear as the lockdown is gradually lifted and economic growth returns, but the recovery will not be complete, as a certain amount of industrial capacity will likely be permanently destroyed. Even though the U.S. federal government pulled out the big guns and may record a deficit of about 17%(1)  of GDP, we expect U.S. GDP to decline 6%(1)  in 2020, representing its worst performance since 1946.

 

Canadian Economy

To counter the adverse impact of social distancing measures, Canadian governments acted swiftly and decisively to support household income and provide financial support to businesses. The International Monetary Fund (IMF) data indicates that Canadian governments are expected to report the largest change in fiscal balance among advanced countries, suggesting the largest stimulus. The Bank of Canada lowered its key rate and provided a massive injection of liquidity into financial markets, which helped ease tensions. While containment measures were fully implemented in April, the employment data gives us an idea of the short-term economic damage. Cumulative job losses arising from closures of non-essential services totalled three million in March and April, representing a dramatic 16% decline in the workforce. However, there is reason to believe that the job loss data underestimates the scale of the economic shock. Some workers have lost their jobs, while others have seen their hours worked greatly reduced. The number of hours worked has tumbled 28% since February in Canada. More restrictive social distancing measures and the economic shock in the energy sector could mean a sharper contraction in Canada than in the United States. GDP is expected to contract by 7.1%(1)  in 2020.

 

Quebec Economy

The Quebec government was one of the first in Canada to order a closure of non-essential services and took a broader approach to 'non-essential' than elsewhere in the country, which meant also shutting down the construction and mining sectors. It is therefore no surprise that economic contraction in the second quarter has been sharper in Quebec, as corroborated by a larger decline in hours worked in April (34%). Since Montreal is the epicentre of the pandemic in Canada, the city's economy may be opened more gradually than elsewhere. While economic activity is poised to rebound as early as May in Quebec, as social distancing measures are gradually lifted, the fact remains that unused labour market capacity is expected to persist for some time.   In Quebec as in Canada as a whole, more than one-fifth of jobs are concentrated in sectors that will be tested in the coming months, in particular the retail, hospitality and restaurant, arts and entertainment, and air transport sectors. After Quebec's economy outpaced the rest of Canada's for two years, the year 2020 could see a reversal with an 8.0%(1) contraction in the province's economy. Still, we remain optimistic that the province's economy will rebound more strongly in the coming quarters, as the Quebec government has some fiscal room to maneuver, households are in better financial positions, and housing prices are lower, making them less vulnerable to a correction.  

 

 

 

 

 

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

 


Highlights

 

(millions of Canadian dollars, except per share amounts)


Quarter ended April 30



Six months ended April 30





2020




2019



% Change



2020




2019


% Change


Operating results





















Total revenues



2,036




1,770



15



3,959




3,569


11


Income before provisions for credit losses and income taxes



915




744



23



1,747




1,517


15


Net income



379




558



(32)



989




1,110


(11)


Net income attributable to the Bank's shareholders



368




539



(32)



962




1,075


(11)


Return on common shareholders' equity



10.7

%



17.8

%





14.3

%



17.5

%



Earnings per share






















Basic


$

1.01



$

1.52



(34)


$

2.70



$

3.03


(11)



Diluted



1.01




1.51



(33)



2.68




3.01


(11)


Operating results on a taxable equivalent basis






















and excluding specified items (1)





















Total revenues on a taxable equivalent basis



2,112




1,850



14



4,122




3,712


11


Income before provisions for credit losses and income taxes






















on a taxable equivalent basis and excluding specified items


991




824



20



1,923




1,660


16


Net income excluding specified items



379




558



(32)



999




1,110


(10)


Return on common shareholders' equity






















excluding specified items



10.7

%



17.8

%





14.5

%



17.5

%



Efficiency ratio on a taxable equivalent basis and






















excluding specified items



53.1

%



55.5

%





53.3

%



55.3

%



Earnings per share excluding specified items (1)






















Basic


$

1.01



$

1.52



(34)


$

2.73



$

3.03


(10)



Diluted



1.01




1.51



(33)



2.71




3.01


(10)


Common share information





















Dividends declared


$

0.71



$

0.65





$

1.42



$

1.30




Book value



38.74




35.49






38.74




35.49




Share price






















High



74.79




63.82






74.79




63.82





Low



38.73




60.31






38.73




54.97





Close



56.14




63.82






56.14




63.82




Number of common shares (thousands)



335,400




335,116






335,400




335,116




Market capitalization



18,829




21,387






18,829




21,387




 

(millions of Canadian dollars)

As at

April 30,

2020



As at

October 31,

2019


% Change












Balance sheet and off-balance-sheet









Total assets


316,950



281,458


13


Loans and acceptances, net of allowances


162,728



153,251


6


Deposits


201,445



189,566


6


Equity attributable to common shareholders


12,995



12,328


5


Assets under administration and under management 


548,677



565,396


(3)












Regulatory ratios under Basel III (2)









Capital ratios










Common Equity Tier 1 (CET1)


11.4

%


11.7

%




Tier 1


14.4

%


15.0

%




Total


15.5

%


16.1

%


 

Leverage ratio


4.4

%


4.0

%


 

Liquidity coverage ratio (LCR)


149

%


146

%


 











Regulatory ratios under Basel III (adjusted) (3)









Capital ratios










CET1


11.2

%







Tier 1


14.2

%







Total


15.5

%





 

Leverage ratio


4.3

%





 











Other information









Number of employees - Worldwide


26,589



25,487


4


Number of branches in Canada 


413



422


(2)


Number of banking machines in Canada


933



939


(1)


 

(1)  See the Financial Reporting Method section on page 12 for additional information on non-GAAP financial measures.

(2)  The ratios as at April 30, 2020 do not include the transitional measures granted by OSFI. For additional information, see the section entitled COVID-19 Pandemic - Key Measures Introduced by the Regulatory Authorities on pages 7 to 9 of this MD&A.

(3)  The adjusted ratios as at April 30, 2020 do not include the transitional measure applicable to expected credit loss provisioning. For additional information, see the section entitled COVID-19 Pandemic - Key Measures Introduced by the Regulatory Authorities on pages 7 to 9 of this MD&A.


Financial Reporting Method 

 

As stated in Note 2 to its audited annual consolidated financial statements for the year ended October 31, 2019, the Bank adopted IFRS 16 on November 1, 2019. As permitted by the IFRS 16 transitional provisions, the Bank elected to apply IFRS 16 using the modified retrospective basis, with no restatement of comparative periods. Note 2 to these consolidated financial statements presents the impacts of IFRS 16 adoption on the Bank's Consolidated Balance Sheet as at November 1, 2019 and additional information on adoption of IFRS 16. 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, 2019.

 

 

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 performance of the Bank's operations. Securities regulators require companies to caution readers that non-GAAP financial measures do not have standardized meanings under GAAP and therefore may not be comparable to similar measures used by other companies.

 

Like many other financial institutions, the Bank uses the taxable equivalent basis to calculate net interest income, non-interest income, and income taxes. This calculation method consists of grossing up certain tax-exempt income (particularly dividends) by the income tax that would have been otherwise payable. An equivalent amount is added to income taxes. This adjustment is necessary in order to perform a uniform comparison of the return on different assets regardless of their tax treatment.



Financial Information

 

(millions of Canadian dollars, except per share amounts)


Quarter ended April 30



Six months ended April 30





2020




2019


% Change



2020




2019


% Change

























Net income excluding specified items (1)






















Personal and Commercial



65




230


(72)



316




472



(33)



Wealth Management



141




117


21



276




240



15



Financial Markets



159




158


1



343




326



5



U.S. Specialty Finance and International



74




72


3



159




132



20



Other



(60)




(19)





(95)




(60)


























Net income excluding specified items



379




558


(32)



999




1,110



(10)



Charge related to Maple(2)










(10)








Net income



379




558


(32)



989




1,110



(11)

























Diluted earnings per share excluding specified items


$

1.01



$

1.51


(33)


$

2.71



$

3.01



(10)



Charge related to Maple(2)










(0.03)








Diluted earnings per share


$

1.01



$

1.51


(33)


$

2.68



$

3.01



(11)

























Return on common shareholders' equity






















Including specified items



10.7

%



17.8

%




14.3

%



17.5

%





Excluding specified items



10.7

%



17.8

%




14.5

%



17.5

%




 

(1)  For the quarter and six-month period ended April 30, 2019, certain amounts have been reclassified .

(2)  During the six-month period ended April 30, 2020, the Bank recorded a charge of $13 million ($10 million net of income taxes) related to Maple Financial Group Inc. (Maple) in the Other heading of segment results following the event that occurred in December 2019, as described in the Contingent Liabilities section on page 23 of this MD&A.

 

Financial Analysis

 

Consolidated Results

 

(millions of Canadian dollars)


Quarter ended April 30


Six months ended April 30




2020



2019


% Change


2020



2019


% Change





















Operating results


















Net interest income


1,105



942



17


2,035



1,805



13


Non-interest income


931



828



12


1,924



1,764



9


Total revenues


2,036



1,770



15


3,959



3,569



11


Non-interest expenses


1,121



1,026



9


2,212



2,052



8


Income before provisions for credit losses and income taxes


915



744



23


1,747



1,517



15


Provisions for credit losses


504



84



500


593



172



245


Income before income taxes


411



660



(38)


1,154



1,345



(14)


Income taxes


32



102



(69)


165



235



(30)


Net income


379



558



(32)


989



1,110



(11)


Diluted earnings per share (dollars)


1.01



1.51



(33)


2.68



3.01



(11)





















Taxable equivalent basis (1)


















Net interest income


56



45





113



80





Non-interest income


20



35





50



63





Income taxes


76



80





163



143





Impact of taxable equivalent basis on net income

































Specified items (1)


















Charge related to Maple








(13)







Specified items before income taxes








(13)







Income taxes on specified items








(3)







Specified items after income taxes








(10)


























Operating results on a taxable equivalent basis and



















 excluding specified items (1)


















Net interest income on a taxable equivalent basis


1,161



987



18


2,148



1,885



14


Non-interest income on a taxable equivalent basis


951



863



10


1,974



1,827



8


Total revenues on a taxable equivalent basis


2,112



1,850



14


4,122



3,712



11


Non-interest expenses excluding specified items


1,121



1,026



9


2,199



2,052



7


Income before provisions for credit losses and income taxes on a



















taxable equivalent basis and excluding specified items


991



824



20


1,923



1,660



16


Provisions for credit losses


504



84



500


593



172



245


Income before income taxes on a taxable equivalent basis and


















excluding specified items


487



740



(34)


1,330



1,488



(11)


Income taxes on a taxable equivalent basis and excluding specified items


108



182



(41)


331



378



(12)


Net income excluding specified items


379



558



(32)


999



1,110



(10)


Diluted earnings per share excluding specified items (dollars)


1.01



1.51



(33)


2.71



3.01



(10)


Average assets


312,788



283,172



10


307,087



281,268



9


Average loans and acceptances


160,008



147,139



9


157,253



146,602



7


Average deposits


205,097



180,421



14


202,002



178,423



13


Efficiency ratio on a taxable equivalent basis and excluding specified items(1)


53.1

%


55.5

%




53.3

%


55.3

%




 

(1)  See the Financial Reporting Method section on page 12 for additional information on non-GAAP financial measures.

 


Financial Results

For the second quarter of 2020, the Bank reported net income of $379 million compared to $558 million in the second quarter of 2019. Second-quarter diluted earnings per share stood at $1.01 compared to $1.51 in the second quarter of 2019. The decrease in net income was due to a considerable increase in provisions for credit losses recorded to reflect a significant deterioration in the macroeconomic outlook caused by COVID-19 and the expected impacts on our clients. However, income before provisions for credit losses and income taxes on a taxable equivalent basis totalled $991 million in the second quarter of 2020, a 20% year-over-year increase driven by revenue growth across all business segments.

 

For the six month-period ended April 30, 2020, the Bank's net income totalled $989 million, down 11% from $1,110 million in the same period of 2019, and its first-half diluted earnings per share stood at $2.68, down 11% from $3.01 in the same period of 2019. These decreases were essentially due to the credit loss provisions recorded in second quarter 2020 to reflect the impacts of COVID-19. However, income before provisions for credit losses and income taxes on a taxable equivalent basis and excluding specified items totalled $1,923 million for the six-month period ended April 30, 2020, a 16% year-over-year increase driven by revenue growth across all business segments. The first-half specified item, net of income taxes, consisted of a $10 million charge related to Maple.

 

Return on common shareholders' equity was 14.3% for the six months ended April 30, 2020 compared to 17.5% in the same period of 2019.

 

Total Revenues

For the second quarter of 2020, the Bank's total revenues amounted to $2,036 million, rising $266 million or 15% year over year. The Personal and Commercial Banking's second-quarter total revenues were up 2%, driven by growth in loan and deposit volumes and by an increase in revenues from derivative financial instruments. These increases were tempered by a decrease in credit card revenues, as credit card transactions fell due to pandemic-related circumstances, in particular temporary closures of businesses and non-essential services and the lockdown imposed by governments. The Wealth Management segment's total revenues were up 11% owing mainly to an increase in fee-based revenues and in transaction-based and other revenues. In the Financial Markets segment, total revenues on taxable equivalent basis rose 48% owing mainly to a solid increase in global markets revenues. And the USSF&I segment's total revenues were up 3% owing essentially to revenue growth at the ABA Bank subsidiary, partly offset by a decrease in revenues at the Credigy subsidiary, as the fair values of certain loan portfolios were revised downward to reflect unfavourable market conditions. Total revenues on a taxable equivalent basis amounted to $2,112 million in the second quarter of 2020, up 14% from $1,850 million in the second quarter of 2019.

 

For the six-month period ended April 30, 2020, total revenues amounted to $3,959 million, up $390 million or 11% from $3,569 million in the same six-month period of 2019. The Personal and Commercial segment's first-half total revenues were up 3%, mainly due to growth in loan and deposit volumes tempered by lower credit card revenues. The increase in total revenues was also due to higher fee-based revenues and transaction-based and other revenues in the Wealth Management segment. In the Financial Markets segment, first-half total revenues on a taxable equivalent basis rose $241 million year over year, mainly due to an increase in global markets revenues. Lastly, in the USSF&I segment, first-half total revenues were up 8%, as business growth at ABA Bank drove higher loan and deposit volumes, whereas Credigy's first-half revenues declined year over year. First-half total revenues on a taxable equivalent basis amounted to $4,122 million, up 11% from $3,712 million in the same period of 2019.

 

Non-Interest Expenses

In the second quarter of 2020, non-interest expenses stood at $1,121 million, up 9% from the second quarter of 2019. The increase in non-interest expenses was mainly due to an increase in compensation and employee benefits, in particular the variable compensation associated with the revenue growth experienced across all business segments. Also contributing to the increase in second-quarter non-interest expenses were the expenses incurred by the Bank to implement health and safety measures for its employees and clients during the exceptional pandemic-related circumstances. These increases were tempered by decreases in certain variable expenses and other discretionary costs.

 

The first-half non-interest expenses stood at $2,212 million, up 8% year over year, essentially due to the same reasons as those provided for the second quarter. Other factors contributing to the first-half year-over-year increase in non-interest expenses were higher occupancy fees resulting mainly from the expansion of ABA Bank's banking network as well as higher technology investment expenses incurred as part of the Bank's transformation plan and for business development. In addition, the other expenses item included a $13 million charge related to Maple in the first six months of 2020.  

 

Provisions for Credit Losses  

For the second quarter of 2020, the Bank recorded $504 million in provisions for credit losses compared to $84 million in the same quarter of 2019. This considerable increase mainly reflects a significant deterioration in the macroeconomic outlook (in particular GDP growth, the unemployment rate, and oil prices) caused by COVID-19 and the expected impacts of the pandemic on the Bank's clients. The higher credit loss provisions recorded in all business segments relate essentially to provisions on non-impaired loans. Furthermore, Commercial Banking and the Financial Markets segment increased credit loss provisions on impaired loans.

 

For the six-month period ended April 30, 2020, the Bank recorded $593 million in provisions for credit losses compared to $172 million in the same period of 2019. This increase stems from the same reasons as those provided for the second quarter, in particular the significant deterioration in the macroeconomic outlook caused by COVID-19. The higher credit loss provisions on impaired loans recorded by Commercial Banking and by the Financial Markets segment were tempered somewhat by a decrease in the credit loss provisions on impaired loans recorded by the Credigy subsidiary as a result of repayments and maturities in certain loan portfolios.

 

Income Taxes  

For the second quarter of 2020, income taxes stood at $32 million compared to $102 million in the same quarter of 2019. The 2020 second-quarter effective tax rate was 8% compared to 15% in second quarter 2019. This change in effective tax rate stems mainly from a decrease in the income tax rate applicable to the ABA subsidiary, as the Cambodian government has granted tax incentive measures, and from a higher proportion of tax-exempt dividend income compared to the same quarter of 2019.

 

For the six months ended April 30, 2020, the effective income tax rate stood at 14% compared to 17% in the same period of 2019. This change in effective tax rate was due to the same reasons as those provided above for the second quarter.

 

Results by Segment

 

The Bank carries out its activities in four business segments: Personal and Commercial, Wealth Management, Financial Markets, and U.S. Specialty Finance and International. For presentation purposes, other operating activities, certain non-recurring items and 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




2020



2019(1)



% Change


2020



2019(1)



% Change





















Operating results


















Net interest income


607



578



5


1,218



1,167



4


Non-interest income


241



256



(6)


510



518



(2)


Total revenues


848



834



2


1,728



1,685



3


Non-interest expenses


459



458




927



921



1


Income before provisions for credit losses and income taxes


389



376



3


801



764



5


Provisions for credit losses


301



63





371



121





Income before income taxes


88



313



(72)


430



643



(33)


Income taxes


23



83



(72)


114



171



(33)


Net income


65



230



(72)


316



472



(33)


Net interest margin(2)


2.22

%


2.23

%




2.21

%


2.23

%




Average interest-bearing assets


111,161



106,074



5


110,585



105,726



5


Average assets


117,052



111,910



5


116,493



111,521



4


Average loans and acceptances


116,536



111,433



5


115,986



111,003



4


Net impaired loans(3)


399



357



12


399



357



12


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


0.3

%


0.3

%




0.3

%


0.3

%




Average deposits


63,869



60,578



5


64,131



60,848



5


Efficiency ratio


54.1

%


54.9

%




53.6

%


54.7

%




 

(1)  For the quarter and six-month period ended April 30, 2019, certain amounts have been reclassified .

(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 $65 million in the second quarter of 2020 compared to $230 million in the second quarter of 2019. This decrease stems essentially from the impacts of the COVID-19 pandemic, in particular a considerable increase in provisions for credit losses recorded to reflect a significant deterioration in the macroeconomic outlook and the expected impacts on the segment's clients. However, the segment's second-quarter income before provisions for credit losses and income taxes was up 3% year over year. The segment's total revenues grew $14 million, or 2%, mainly due to a $29 million increase in net interest income driven by growth in personal and commercial loan and deposit volumes, which more than offset the impact of lower interest rates on the segment's revenues. This revenue increase was tempered by a $15 million decrease in second-quarter non-interest income resulting from lower credit card revenues.

 

Personal Banking's second-quarter total revenues declined $3 million year over year. An increase in net interest income, driven by growth in loan and deposit volumes, was tempered by a decrease in credit card revenues, as credit card transactions fell due to pandemic-related circumstances, in particular temporary closures of businesses and non-essential services and the lockdown imposed by governments. As for Commercial Banking's second-quarter total revenues, they rose $17 million due to higher net interest income and to higher derivative financial instrument revenues.

 

For the second quarter of 2020, the Personal and Commercial segment's non-interest expenses stood at $459 million, stable compared to the second quarter of 2019. An increase in compensation and employee benefits was offset by a decrease in operations support charges. At 54.1%, the segment's second-quarter efficiency ratio improved by 0.8 percentage points compared to the second quarter of 2019. The segment recorded $301 million in provisions for credit losses, a $238 million year-over-year increase related mainly to higher provisions on non-impaired Personal Banking and Commercial Banking loans and on non-impaired credit card receivables, to reflect a significant deterioration in the macroeconomic outlook caused by COVID-19 and the expected impacts of the pandemic on the segment's clients. The provisions for credit losses on Commercial Banking's impaired loans were also up compared to the same quarter in 2019.  

 

For the six-month period ended April 30, 2020, the Personal and Commercial segment's net income totalled $316 million, down from $472 million in the same period of 2019, mainly due to an increase in provisions for credit losses related to the impacts of COVID-19. However, the segment's income before provisions for credit losses and income taxes rose $37 million or 5%, and its first-half total revenues grew 3% year over year. The growth in Personal Banking's first-half total revenues was due to growth in loan and deposit volumes, tempered by a decrease in card revenues. As for Commercial Banking's first-half total revenues, they were up due to growth in loan and deposit volumes as well as to an increase in bankers' acceptance revenues and an increase in derivative financial instrument revenues. First-half non-interest expenses rose $6 million or 1% year over year, due to increases in compensation and employee benefits and in technology expenses. These increases were tempered by a decrease in operations support charges and in amortization expense arising from the segment's activities. At 53.6% for the six months ended April 30, 2020, the efficiency ratio improved by 1.1 percentage points compared with the same six-month period of 2019. The segment's first-half provisions for credit losses rose $250 million year over year, with this increase being due to the same reasons as those provided for the quarter.

 

Wealth Management

 



















(millions of Canadian dollars)


 Quarter ended April 30


Six months ended April 30




2020



2019(1)



% Change


2020



2019(1)



% Change





















Operating results


















Net interest income


110



108



2


229



232



(1)


Fee-based revenues


267



249



7


540



491



10


Transaction-based and other revenues


97



69



41


170



137



24


Total revenues


474



426



11


939



860



9


Non-interest expenses 


278



267



4


560



534



5


Income before provisions for credit losses and income taxes


196



159



23


379



326



16


Provisions for credit losses


4







4







Income before income taxes


192



159



21


375



326



15


Income taxes


51



42



21


99



86



15


Net income


141



117



21


276



240



15


Average assets 


5,984



6,154



(3)


5,963



6,326



(6)


Average loans and acceptances


4,793



4,829



(1)


4,779



4,871



(2)


Net impaired loans(2)


3



3




3



3




Average deposits


34,474



32,486



6


33,441



32,813



2


Assets under administration and under management


548,677



549,391




548,677



549,391




Efficiency ratio


58.6

%


62.7

%




59.6

%


62.1

%




 

(1)  For the quarter and six-month period ended April 30, 2019, certain amounts have been reclassified.

(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 $141 million in the second quarter of 2020, a 21% increase from $117 million in the second quarter of 2019. The segment's second-quarter total revenues amounted to $474 million, up $48 million or 11% from $426 million in the second quarter of 2019. This revenue growth was driven mainly by a 41% increase in transaction-based and other revenues, as volatility in the financial markets during the second quarter of 2020 led to greater trading volume. Fee-based revenues also increased, rising 7%, as the average assets under administration and under management exceeded the average of the second quarter of 2019, despite a decline in value of the assets in the second quarter of 2020 attributable to the current crisis.

 

For the second quarter of 2020, Wealth Management's non-interest expenses stood at $278 million, a 4% year-over-year increase arising mainly from higher variable compensation associated with growth in the segment's revenues. At 58.6%, the segment's second-quarter efficiency ratio on a taxable equivalent basis improved by 4.1 percentage points compared to the second quarter of 2019. The segment's second-quarter provisions for credit losses stood at $4 million; they represent provisions on non-impaired loans and were recorded to reflect a significant deterioration in the macroeconomic outlook caused by COVID-19.

 

For the six months ended April 30, 2020, the Wealth Management segment's net income totalled $276 million, up 15% from $240 million in the same six-month period of 2019. The segment's first-half total revenues amounted to $939 million, up 9% from $860 million in the same period of 2019. This increase in fee-based revenues was driven by net inflows into various solutions. First-half transaction-based and other revenues grew 24% year over year owing to an increase in trading volume resulting from stock market volatility during this period. Net interest income was down slightly as a result of smaller deposit margins. First-half non-interest expenses stood at $560 million compared to $534 million in first-half 2019, with the increase resulting from higher compensation and employee benefits and higher operations support charges related to the segment's initiatives. At 59.6%, the efficiency ratio for the six-month period ended April 30, 2020 improved from 62.1% in the same period of 2019. The segment's first-half credit loss provisions were up $4 million year over year, as provisions for credit losses on non-impaired loans were recorded during the second quarter of 2020 to reflect a significant deterioration in the macroeconomic outlook caused by COVID-19.

 

Financial Markets

 

(taxable equivalent basis)(1)


















(millions of Canadian dollars)


 Quarter ended April 30


Six months ended April 30




2020



2019(2)



% Change


2020



2019(2)



 % Change




















Operating results


















Global markets



















Equities


227



123



85


401



260



54



Fixed-income


105



64



64


190



129



47



Commodities and foreign exchange


64



29



121


94



77



22




396



216



83


685



466



47


Corporate and investment banking


202



189



7


371



349



6


Total revenues on a taxable equivalent basis


598



405



48


1,056



815



30


Non-interest expenses


220



182



21


419



360



16


Income before provisions for credit losses and income taxes



















on a taxable equivalent basis


378



223



70


637



455



40


Provisions for credit losses


162



7





171



10





Income before income taxes on a taxable equivalent basis


216



216




466



445



5


Income taxes on a taxable equivalent basis


57



58



(2)


123



119



3


Net income


159



158



1


343



326



5


Average assets


120,474



109,485



10


121,049



106,974



13


Average loans and acceptances (Corporate Banking only)


19,436



16,407



18


18,217



16,317



12


Net impaired loans(3)


56



3





56



3





Average deposits


37,039



29,045



28


35,587



28,201



26


Efficiency ratio on a taxable equivalent basis (1)


36.8

%


44.9

%




39.7

%


44.2

%




 

(1)  See the Financial Reporting Method section on page 12 for additional information on non-GAAP financial measures.

(2)  For the quarter and six-month period ended April 30, 2019, 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 $159 million in the second quarter of 2020, up 1% from $158 million in the second quarter of 2019. Increases across all of the segment's revenue categories were tempered by an increase in provisions for credit losses recorded to reflect a significant deterioration in the macroeconomic outlook caused by COVID-19 and the expected impacts on this segment's clients. Income before provisions for credit losses and income taxes on a taxable equivalent basis totalled $378 million in the second quarter of 2020, rising $155 million or 70% from the second quarter of 2019, as the segment was able to benefit from greater business activity in all its business lines. Total revenues on a taxable equivalent basis amounted to $598 million, up 48% from $405 million in the second quarter of 2019. Second-quarter global markets revenues grew 83% year over year, as revenues from equity securities and from fixed-income securities were up 85% and 64%, respectively, and revenues from commodities and foreign exchange activities also increased. The segment's second-quarter revenues from corporate and investment banking services were up 7% year over year as a result of higher revenues from merger and acquisition activities and of government bond issuances.

 

Second-quarter non-interest expenses stood at $220 million, a 21% year-over-year increase that was essentially due to higher variable compensation associated with revenue growth in the second quarter of 2020 as well as to higher transaction costs associated with business growth. At 36.8%, the second-quarter efficiency ratio on a taxable equivalent basis improved by 8.1 percentage points compared to 44.9% in the second quarter of 2019, with the improvement owing to a sharp increase in the segment's revenues. The segment's second-quarter provisions for credit losses stood at $162 million compared to $7 million in the same quarter of 2019. This increase, representing mainly provisions on non-impaired loans, reflects the environment created by COVID-19, in particular a significant deterioration in the macroeconomic outlook and the expected impacts on the segment's clients. As for second-quarter provisions for credit losses on impaired loans, they were up $15 million year over year.

 

For the six months ended April 30, 2020, the segment's net income totalled $343 million, up 5% from the same six-month period in 2019. First-half total revenues on a taxable equivalent basis amounted to $1,056 million compared to $815 million for the six months ended April 30, 2019. Income before provisions for credit losses and income taxes on a taxable equivalent basis were up $182 million or 40% for the six-month period ended April 30, 2020 compared to the same period in 2019. First-half revenues from the Global Markets category increased 47% year over year, with the growth coming from all types of revenues. As for corporate and investment banking revenues, they were up 6% year over year due to revenue growth generated by merger and acquisition activities and by capital markets activities.

 

First-half non-interest expenses rose $59 million or 16% year over year, due to an increase in compensation and employee benefits and higher transaction costs associated with business growth. At 39.7%, the first-half efficiency ratio on a taxable equivalent basis improved from 44.2% in the same period of 2019. The segment recorded $171 million in provisions for credit losses during the six-month period ended April 30, 2020 compared to $10 million during the same six-month period of 2019, an increase that stems mainly from credit loss provisions on non-impaired loans recorded during the second quarter of 2020 in response to the economic environment created by COVID-19.

 

U.S. Specialty Finance and International (USSF&I)

 

(millions of Canadian dollars)


 Quarter ended April 30


Six months ended April 30




2020



2019



% Change


2020



2019



% Change





















Total revenues



















Credigy


82



107



(23)


180



212



(15)



ABA Bank


99



69



43


194



134



45



International


2



2





4



3








183



178



3


378



349



8


Non-interest expenses



















Credigy


34



42



(19)


70



78



(10)



ABA Bank


47



31



52


88



62



42



International


1



1





2



2







82



74



11


160



142



13


Income before provisions for credit losses and income taxes


101



104



(3)


218



207



5


Provisions for credit losses



















Credigy


24



12





31



35



(11)



ABA Bank


8



2





11



6



83





32



14



129


42



41



2


Income before income taxes


69



90



(23)


176



166



6


Income taxes


(5)



18





17



34





Net income


74



72



3


159



132



20


Non-controlling interests


4



12



(67)


13



22



(41)


Net income attributable to the Bank's shareholders


70



60



17


146



110



33


Average assets


14,715



10,600



39


13,592



10,523



29


Average loans and receivables


11,733



8,711



35


10,796



8,760



23


Net impaired loans - Stage 3(1)


21



16



31


21



16



31


Purchased or originated credit-impaired (POCI) loans


1,105



1,263



(13)


1,105



1,263



(13)


Average deposits


4,813



3,238



49


4,591



2,994



53


Efficiency ratio


44.8

%


41.6

%




42.3

%


40.7

%




 

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

 

In the USSF&I segment, net income totalled $74 million in the second quarter of 2020, a 3% increase from $72 million in the same quarter of 2019. Revenue growth posted by the ABA Bank subsidiary was tempered by lower revenues at the Credigy subsidiary, the latter's results having been affected by the economic environment created by the global pandemic. For the six months ended April 30, 2020, the USSF&I segment's net income totalled $159 million, a 20% increase from $132 million in the same six-month period of 2019.

 

Credigy

For the second quarter of 2020, the Credigy subsidiary's net income totalled $19 million, a 55% decrease from the same quarter of 2019. Credigy's second-quarter total revenues amounted to $82 million, down from $107 million in the second quarter of 2019, as the fair values of certain loan portfolios were revised downward to reflect unfavourable market conditions. The subsidiary's second-quarter non-interest expenses were down $8 million year over year, mainly due to a decrease in variable compensation and collection costs. Credigy recorded $24 million in credit loss provisions for the second quarter of 2020 compared to $12 million in the same quarter of 2019, an increase that reflects the significant deterioration in the macroeconomic outlook caused by COVID-19 and the expected impacts on the subsidiary's portfolios.

 

For the six month-period ended April 30, 2020, the Credigy subsidiary's net income totalled $62 million, down 21% from the same period of 2019. Credigy's first-half total revenues amounted to $180 million, down from $212 million in the first half of 2019 arising from changes in the loan portfolio mix and the impacts of COVID-19. The subsidiary's first-half non-interest expenses were down $8 million as a result of a decrease in variable compensation and collection costs. Its provisions for credit losses, which totalled $31 million in the first half of 2020, fell $4 million from $35 million in the first half of 2019 as a result of repayments and maturities of certain loan portfolios.

 

ABA Bank

For the second quarter of 2020, the ABA Bank subsidiary's net income totalled $54 million, rising 86% from the second quarter of 2019. A 43% increase in ABA Bank's second-quarter revenues was driven by sustained growth in loan and deposit volumes. The subsidiary's second-quarter non-interest expenses rose 52% year over year, mainly due to its growing banking network. For the second quarter of 2020, ABA Bank recorded $8 million in provisions for credit losses, a year-over-year increase that reflects the expected impacts of the global pandemic on the subsidiary's clients.

 

For the six month-period ended April 30, 2020, ABA Bank's net income totalled $95 million, up 79% from the same period in 2019. Year over year, ABA Bank's first-half total revenues rose 45% and its first-half non-interest expenses rose 42%, with both increases owing to the subsidiary's business growth. ABA Bank's provisions for credit losses, totalling $11 million in the first half of 2020, rose $5 million year over year.

 

The subsidiary's effective tax rate was down in both the second quarter and first-half period ended April 30, 2020 due to tax incentive measures granted by the Cambodian government and recorded during the second quarter of 2020.

 

Other

 

(taxable equivalent basis)(1)