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Nat Bank of Canada (32SS)

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Wednesday 28 August, 2019

Nat Bank of Canada

MD&A Q3 2019 (Part 1)

RNS Number : 4507K
National Bank of Canada
28 August 2019
 

National Bank of Canada

August 28, 2019

 

Regulatory Announcement (Part 1)

Q3 2019 Results

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

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

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

 

 

 

Report to Shareholders                                                                       Third Quarter 2019

 

National Bank reports its results for the Third Quarter of 2019

 

The financial information reported in this document is based on the unaudited interim condensed consolidated financial statements for the quarter and nine-month period ended July 31, 2019 and is prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise indicated. IFRS represent Canadian generally accepted accounting principles (GAAP). All amounts are presented in Canadian dollars.

 

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

 

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

 

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

 

Highlights

 

(millions of Canadian dollars)

 

 

Quarter ended July 31

 

 

Nine months ended July 31

 

 

 

 

 

2019

 

 

 

2018

 

 

% Change

 

 

2019

 

 

 

2018

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

608

 

 

 

569

 

 

7

 

 

1,718

 

 

 

1,666

 

 

3

 

Diluted earnings per share (dollars)

 

$

1.66

 

 

$

1.52

 

 

9

 

$

4.67

 

 

$

4.42

 

 

6

 

Return on common shareholders' equity

 

 

18.7

%

 

 

18.4

%

 

 

 

 

17.9

%

 

 

18.5

%

 

 

 

Dividend payout ratio

 

 

42

%

 

 

41

%

 

 

 

 

42

%

 

 

41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding specified items(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income excluding specified items

 

 

606

 

 

 

569

 

 

7

 

 

1,716

 

 

 

1,666

 

 

3

 

Diluted earnings per share excluding specified items (dollars)

 

$

1.66

 

 

$

1.52

 

 

9

 

$

4.67

 

 

$

4.42

 

 

6

 

Return on common shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

excluding specified items

 

 

18.6

%

 

 

18.4

%

 

 

 

 

17.9

%

 

 

18.5

%

 

 

 

Dividend payout ratio excluding specified items

 

 

42

%

 

 

41

%

 

 

 

 

42

%

 

 

41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at

July 31,

 2019

 

 

As at

October 31, 2018

 

 

 

 

CET1 capital ratio under Basel III

 

 

 

 

 

 

 

 

 

 

 

 

11.7

%

 

 

11.7

%

 

 

 

Leverage ratio under Basel III

 

 

 

 

 

 

 

 

 

 

 

 

4.0

%

 

 

4.0

%

 

 

 

 

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

 

 

Report to Shareholders                                                                       Third Quarter 2019

 

Personal and Commercial

 

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

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

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

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

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

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

 

Wealth Management

 

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

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

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

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

 

Financial Markets

 

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

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

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

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

 

U.S. Specialty Finance and International

 

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

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

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

 

Other

 

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

 

Capital Management

 

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

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

 

 

 

 



 

 

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

 

 

Management's Discussion

and Analysis

August 27, 2019

 

The following Management's Discussion and Analysis (MD&A) presents the financial condition and operating results of National Bank of Canada (the Bank). This analysis was prepared in accordance with the requirements set out in National Instrument 51-102, Continuous Disclosure Obligations, released by the Canadian Securities Administrators (CSA). It is based on the unaudited interim condensed consolidated financial statements (the consolidated financial statements) for the quarter and nine-month period ended July 31, 2019 and prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise indicated. IFRS represent Canadian generally accepted accounting principles (GAAP). This MD&A should be read in conjunction with the consolidated financial statements and accompanying notes for the quarter and nine-month period ended July 31, 2019 and with the 2018 Annual Report. All amounts are presented in Canadian dollars. Additional information about the Bank, including the Annual Information Form, can be obtained from the Bank's website at nbc.ca and SEDAR's website at sedar.com.

Financial Reporting Method

4

 

Income Taxes

18

Highlights

6

 

Contingent Liabilities 

18

Economic Review and Outlook

7

 

Capital Management

19

Financial Analysis 

8

 

Risk Management

25

Consolidated Results

8

 

Risk Disclosures

38

Results by Segment

11

 

Accounting Policies and Financial Disclosure

39

Consolidated Balance Sheet

16

 

Accounting Policies and Critical Accounting Estimates

39

Disposal

17

 

Future Accounting Policy Changes

39

Exposures to Certain Activities

17

 

Financial Disclosure

39

Related Party Transactions

17

 

Quarterly Financial Information

40

Securitization and Off-Balance-Sheet Arrangements 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Caution Regarding Forward-Looking Statements

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

 

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

 

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

 

The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found in the Risk Management section of the 2018 Annual Report. Investors and others who rely on the Bank's forward-looking statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. Except as required by law, the Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time, by it or on its behalf.

 

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

 

 

Financial Reporting Method                                                               

 

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

 

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

 

Non-GAAP Financial Measures

 

The Bank uses a number of financial measures when assessing its results and measuring overall performance. Some of these financial measures are not calculated in accordance with GAAP, which are based on IFRS. Presenting non-GAAP financial measures helps readers to better understand how management analyzes results, shows the impacts of specified items on the results of the reported periods, and allows readers to assess results without the specified items if they consider such items not to be reflective of the underlying financial performance of the Bank's operations. Securities regulators require companies to caution readers that non-GAAP financial measures do not have standardized meanings under GAAP and therefore may not be comparable to similar measures used by other companies.

 

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

 

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

 

 

Financial Information

 

(millions of Canadian dollars, except per share amounts)

 

Quarter ended July 31

 

 

Nine months ended July 31

 

 

 

 

2019

 

 

 

2018

% Change

 

 

2019

 

 

 

2018

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income excluding specified items(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal and Commercial

 

 

277

 

 

 

250

 

11

 

 

757

 

 

 

695

 

 

9

 

 

Wealth Management

 

 

126

 

 

 

120

 

5

 

 

369

 

 

 

346

 

 

7

 

 

Financial Markets

 

 

182

 

 

 

178

 

2

 

 

512

 

 

 

572

 

 

(10)

 

 

U.S. Specialty Finance and International

 

 

69

 

 

 

54

 

28

 

 

201

 

 

 

167

 

 

20

 

 

Other

 

 

(48)

 

 

 

(33)

 

 

 

 

(123)

 

 

 

(114)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income excluding specified items

 

 

606

 

 

 

569

 

7

 

 

1,716

 

 

 

1,666

 

 

3

 

 

Gain on disposal of Fiera Capital shares(2)

 

 

68

 

 

 

 

 

 

 

68

 

 

 

 

 

 

 

 

Gain on disposal of premises and equipment(3)

 

 

43

 

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

Remeasurement at fair value of an investment(4)

 

 

(27)

 

 

 

 

 

 

 

(27)

 

 

 

 

 

 

 

 

Impairment losses on premises and equipment and on intangible assets(5)

 

 

(42)

 

 

 

 

 

 

 

(42)

 

 

 

 

 

 

 

 

Provisions for onerous contracts(6)

 

 

(33)

 

 

 

 

 

 

 

(33)

 

 

 

 

 

 

 

 

Other(7)

 

 

(7)

 

 

 

 

 

 

 

(7)

 

 

 

 

 

 

 

Net income

 

 

608

 

 

 

569

 

7

 

 

1,718

 

 

 

1,666

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share excluding specified items

 

$

1.66

 

 

$

1.52

 

9

 

$

4.67

 

 

$

4.42

 

 

6

 

 

Gain on disposal of Fiera Capital shares(2)

 

 

0.20

 

 

 

 

 

 

 

0.20

 

 

 

 

 

 

 

 

Gain on disposal of premises and equipment(3)

 

 

0.12

 

 

 

 

 

 

 

0.12

 

 

 

 

 

 

 

 

Remeasurement at fair value of an investment(4)

 

 

(0.08)

 

 

 

 

 

 

 

(0.08)

 

 

 

 

 

 

 

 

Impairment losses on premises and equipment and on intangible assets(5)

 

 

(0.12)

 

 

 

 

 

 

 

(0.12)

 

 

 

 

 

 

 

 

Provisions for onerous contracts(6)

 

 

(0.10)

 

 

 

 

 

 

 

(0.10)

 

 

 

 

 

 

 

 

Other(7)

 

 

(0.02)

 

 

 

 

 

 

 

(0.02)

 

 

 

 

 

 

 

Diluted earnings per share

 

$

1.66

 

 

$

1.52

 

9

 

$

4.67

 

 

$

4.42

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on common shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Including specified items

 

 

18.7

%

 

 

18.4

%

 

 

 

17.9

%

 

 

18.5

%

 

 

 

 

Excluding specified items

 

 

18.6

%

 

 

18.4

%

 

 

 

17.9

%

 

 

18.5

%

 

 

 

 

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

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

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

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

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

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

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

 

 

Highlights

 

(millions of Canadian dollars, except per share amounts)

 

Quarter ended July 31

 

 

Nine months ended July 31

 

 

 

 

2019

 

 

 

2018

 

 

% Change

 

 

2019

 

 

 

2018

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

1,948

 

 

 

1,792

 

 

9

 

 

5,517

 

 

 

5,352

 

3

 

Net income

 

 

608

 

 

 

569

 

 

7

 

 

1,718

 

 

 

1,666

 

3

 

Net income attributable to the Bank's shareholders

 

 

591

 

 

 

546

 

 

8

 

 

1,666

 

 

 

1,595

 

4

 

Return on common shareholders' equity

 

 

18.7

%

 

 

18.4

%

 

 

 

 

17.9

%

 

 

18.5

%

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.68

 

 

$

1.54

 

 

9

 

$

4.71

 

 

$

4.48

 

5

 

 

Diluted

 

 

1.66

 

 

 

1.52

 

 

9

 

 

4.67

 

 

 

4.42

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results on a taxable equivalent basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and excluding specified items(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues on a taxable equivalent basis and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

excluding specified items

 

 

1,946

 

 

 

1,854

 

 

5

 

 

5,658

 

 

 

5,537

 

2

 

Net income excluding specified items

 

 

606

 

 

 

569

 

 

7

 

 

1,716

 

 

 

1,666

 

3

 

Return on common shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

excluding specified items

 

 

18.6

%

 

 

18.4

%

 

 

 

 

17.9

%

 

 

18.5

%

 

 

Efficiency ratio on a taxable equivalent basis and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

excluding specified items

 

 

53.5

%

 

 

54.5

%

 

 

 

 

54.7

%

 

 

54.7

%

 

 

Earnings per share excluding specified items(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.67

 

 

$

1.54

 

 

8

 

$

4.70

 

 

$

4.48

 

5

 

 

Diluted

 

 

1.66

 

 

 

1.52

 

 

9

 

 

4.67

 

 

 

4.42

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common share information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

$

0.68

 

 

$

0.62

 

 

 

 

$

1.98

 

 

$

1.82

 

 

 

Book value

 

 

36.12

 

 

 

33.91

 

 

 

 

 

36.12

 

 

 

33.91

 

 

 

Share price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

64.16

 

 

 

64.29

 

 

 

 

 

64.16

 

 

 

65.35

 

 

 

 

Low

 

 

60.71

 

 

 

61.26

 

 

 

 

 

54.97

 

 

 

58.69

 

 

 

 

Close

 

 

63.88

 

 

 

63.77

 

 

 

 

 

63.88

 

 

 

63.77

 

 

 

Number of common shares (thousands)

 

 

334,210

 

 

 

337,441

 

 

 

 

 

334,210

 

 

 

337,441

 

 

 

Market capitalization

 

 

21,349

 

 

 

21,519

 

 

 

 

 

21,349

 

 

 

21,519

 

 

 

 

(millions of Canadian dollars)

As at July 31,

2019

 

 

As at October 31,

2018

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Balance sheet and off-balance-sheet

 

 

 

 

 

 

 

 

Total assets

 

276,312

 

 

262,471

 

5

 

Loans and acceptances, net of allowances

 

151,348

 

 

146,082

 

4

 

Deposits

 

187,219

 

 

170,830

 

10

 

Equity attributable to common shareholders

 

12,070

 

 

11,526

 

5

 

Assets under administration and under management 

 

557,858

 

 

485,080

 

15

 

 

 

 

 

 

 

 

 

 

 

Regulatory ratios under Basel III

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (CET1)

 

11.7

%

 

11.7

%

 

 

 

Tier 1

 

15.2

%

 

15.5

%

 

 

 

Total

 

16.3

%

 

16.8

%

 

 

Leverage ratio

 

4.0

%

 

4.0

%

 

 

Liquidity coverage ratio (LCR)

 

154

%

 

147

%

 

 

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

Number of employees - Worldwide

 

24,881

 

 

23,450

 

6

 

Number of branches in Canada 

 

429

 

 

428

 

 

Number of banking machines in Canada

 

940

 

 

937

 

 

 

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

 

Economic Review and Outlook

 

Global Economy

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

 

Canadian Economy

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

 

Quebec Economy

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

 

 

 

 

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

 

Financial Analysis

 

Consolidated Results

 

 

(millions of Canadian dollars)

 

Quarter ended July 31

 

Nine months ended July 31

 

 

 

2019

 

 

2018

 

% Change

 

2019

 

 

2018

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

855

 

 

837

 

 

2

 

2,660

 

 

2,556

 

 

4

 

Non-interest income

 

1,093

 

 

955

 

 

14

 

2,857

 

 

2,796

 

 

2

 

Total revenues

 

1,948

 

 

1,792

 

 

9

 

5,517

 

 

5,352

 

 

3

 

Non-interest expenses

 

1,154

 

 

1,011

 

 

14

 

3,206

 

 

3,027

 

 

6

 

Contribution

 

794

 

 

781

 

 

2

 

2,311

 

 

2,325

 

 

(1)

 

Provisions for credit losses

 

86

 

 

76

 

 

13

 

258

 

 

254

 

 

2

 

Income before income taxes

 

708

 

 

705

 

 

 

2,053

 

 

2,071

 

 

(1)

 

Income taxes

 

100

 

 

136

 

 

(26)

 

335

 

 

405

 

 

(17)

 

Net income

 

608

 

 

569

 

 

7

 

1,718

 

 

1,666

 

 

3

 

Diluted earnings per share (dollars)

 

1.66

 

 

1.52

 

 

9

 

4.67

 

 

4.42

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable equivalent basis(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

58

 

 

35

 

 

 

 

138

 

 

109

 

 

 

 

Non-interest income

 

36

 

 

27

 

 

 

 

99

 

 

76

 

 

 

 

Income taxes

 

94

 

 

62

 

 

 

 

237

 

 

185

 

 

 

 

Impact of taxable equivalent basis on net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specified items(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on disposal of Fiera Capital shares

 

79

 

 

 

 

 

 

79

 

 

 

 

 

 

Gain on disposal of premises and equipment

 

50

 

 

 

 

 

 

50

 

 

 

 

 

 

Remeasurement at fair value of an investment

 

(33)

 

 

 

 

 

 

(33)

 

 

 

 

 

 

Impairment losses on premises and equipment and on intangible assets

 

(57)

 

 

 

 

 

 

(57)

 

 

 

 

 

 

Provisions for onerous contracts

 

(45)

 

 

 

 

 

 

(45)

 

 

 

 

 

 

Other

 

(10)

 

 

 

 

 

 

(10)

 

 

 

 

 

 

Specified items before income taxes

 

(16)

 

 

 

 

 

 

(16)

 

 

 

 

 

 

Income taxes on specified items

 

(18)

 

 

 

 

 

 

(18)

 

 

 

 

 

 

Specified items after income taxes

 

2

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results on a taxable equivalent basis and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 excluding specified items(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on a taxable equivalent basis

 

913

 

 

872

 

 

5

 

2,798

 

 

2,665

 

 

5

 

Non-interest income on a taxable equivalent basis and excluding specified items

 

1,033

 

 

982

 

 

5

 

2,860

 

 

2,872

 

 

 

Total revenues on a taxable equivalent basis and excluding specified items

 

1,946

 

 

1,854

 

 

5

 

5,658

 

 

5,537

 

 

2

 

Non-interest expenses excluding specified items

 

1,042

 

 

1,011

 

 

3

 

3,094

 

 

3,027

 

 

2

 

Contribution on a taxable equivalent basis and excluding specified items

 

904

 

 

843

 

 

7

 

2,564

 

 

2,510

 

 

2

 

Provisions for credit losses

 

86

 

 

76

 

 

13

 

258

 

 

254

 

 

2

 

Income before income taxes on a taxable equivalent basis and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

excluding specified items

 

818

 

 

767

 

 

7

 

2,306

 

 

2,256

 

 

2

 

Income taxes on a taxable equivalent basis and excluding specified items

 

212

 

 

198

 

 

7

 

590

 

 

590

 

 

 

Net income excluding specified items

 

606

 

 

569

 

 

7

 

1,716

 

 

1,666

 

 

3

 

Diluted earnings per share excluding specified items (dollars)

 

1.66

 

 

1.52

 

 

9

 

4.67

 

 

4.42

 

 

6

 

Average assets

 

288,328

 

 

265,592

 

 

9

 

283,647

 

 

265,291

 

 

7

 

Average loans and acceptances

 

149,405

 

 

140,644

 

 

6

 

147,547

 

 

138,223

 

 

7

 

Average deposits

 

186,344

 

 

167,588

 

 

11

 

181,093

 

 

166,023

 

 

9

 

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

 

53.5

%

 

54.5

%

 

 

 

54.7

%

 

54.7

%

 

 

 

 

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

 

 

Financial Results

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

 

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

 

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

 

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

 

Total Revenues

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

 

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

 

Non-Interest Expenses

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

 

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

 

Provisions for Credit Losses

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

 

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

 

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

 

Income Taxes

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

 

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

 

Results by Segment

 

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

 

Personal and Commercial 

 

(millions of Canadian dollars)

 

 Quarter ended July 31

 

Nine months ended July 31

 

 

 

2019

 

 

2018(1)

 

 

% Change

 

2019

 

 

2018(1)

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

604

 

 

581

 

 

4

 

1,770

 

 

1,688

 

 

5

 

Non-interest income

 

287

 

 

269

 

 

7

 

806

 

 

772

 

 

4

 

Total revenues

 

891

 

 

850

 

 

5

 

2,576

 

 

2,460

 

 

5

 

Non-interest expenses

 

456

 

 

448

 

 

2

 

1,366

 

 

1,336

 

 

2

 

Contribution

 

435

 

 

402

 

 

8

 

1,210

 

 

1,124

 

 

8

 

Provisions for credit losses

 

57

 

 

61

 

 

(7)

 

178

 

 

176

 

 

1

 

Income before income taxes

 

378

 

 

341

 

 

11

 

1,032

 

 

948

 

 

9

 

Income taxes

 

101

 

 

91

 

 

11

 

275

 

 

253

 

 

9

 

Net income

 

277

 

 

250

 

 

11

 

757

 

 

695

 

 

9

 

Net interest margin(2)

 

2.23

%

 

2.26

%

 

 

 

2.23

%

 

2.24

%

 

 

 

Average interest-bearing assets

 

107,308

 

 

102,065

 

 

5

 

106,259

 

 

100,663

 

 

6

 

Average assets

 

113,132

 

 

107,539

 

 

5

 

112,064

 

 

105,970

 

 

6

 

Average loans and acceptances

 

112,629

 

 

107,240

 

 

5

 

111,551

 

 

105,635

 

 

6

 

Net impaired loans(3)

 

370

 

 

398

 

 

(7)

 

370

 

 

398

 

 

(7)

 

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

 

0.3

%

 

0.4

%

 

 

 

0.3

%

 

0.4

%

 

 

 

Average deposits

 

63,185

 

 

59,240

 

 

7

 

61,814

 

 

57,477

 

 

8

 

Efficiency ratio

 

51.2

%

 

52.7

%

 

 

 

53.0

%

 

54.3

%

 

 

 

                                     

 

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

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

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

 

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

 

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

 

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

 

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

 

Wealth Management

 

(millions of Canadian dollars)

 

 Quarter ended July 31

 

Nine months ended July 31

 

 

 

2019

 

 

2018(1)

 

 

% Change

 

2019

 

 

2018(1)

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income 

 

115

 

 

114

 

 

1

 

355

 

 

331

 

 

7

 

Fee-based revenues

 

259

 

 

248

 

 

4

 

751

 

 

736

 

 

2

 

Transaction-based and other revenues

 

63

 

 

63

 

 

 

191

 

 

195

 

 

(2)

 

Total revenues 

 

437

 

 

425

 

 

3

 

1,297

 

 

1,262

 

 

3

 

Non-interest expenses 

 

267

 

 

262

 

 

2

 

798

 

 

791

 

 

1

 

Contribution

 

170

 

 

163

 

 

4

 

499

 

 

471

 

 

6

 

Provisions for credit losses

 

 

 

 

 

 

 

 

 

1

 

 

 

 

Income before income taxes 

 

170

 

 

163

 

 

4

 

499

 

 

470

 

 

6

 

Income taxes 

 

44

 

 

43

 

 

2

 

130

 

 

124

 

 

5

 

Net income

 

126

 

 

120

 

 

5

 

369

 

 

346

 

 

7

 

Average assets 

 

6,146

 

 

6,187

 

 

(1)

 

6,265

 

 

6,104

 

 

3

 

Average loans and acceptances

 

4,855

 

 

4,784

 

 

1

 

4,865

 

 

4,651

 

 

5

 

Net impaired loans(2)

 

2

 

 

1

 

 

 

 

2

 

 

1

 

 

 

 

Average deposits

 

31,916

 

 

31,065

 

 

3

 

32,511

 

 

31,068

 

 

5

 

Assets under administration and under management

 

557,858

 

 

496,096

 

 

12

 

557,858

 

 

496,096

 

 

12

 

Efficiency ratio

 

61.1

%

 

61.6

%

 

 

 

61.5

%

 

62.7

%

 

 

 

                                     

 

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

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

 

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

 

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

 

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

 

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

 

Financial Markets

 

(taxable equivalent basis)(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

 Quarter ended July 31

 

Nine months ended July 31

 

 

 

2019

 

 

2018(2)

 

 

% Change

 

2019

 

 

2018(2)

 

 

 % Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equities

 

165

 

 

135

 

 

22

 

426

 

 

435

 

 

(2)

 

 

Fixed-income

 

79

 

 

53

 

 

49

 

210

 

 

202

 

 

4

 

 

Commodities and foreign exchange

 

25

 

 

28

 

 

(11)

 

102

 

 

101

 

 

1

 

 

 

269

 

 

216

 

 

25

 

738

 

 

738

 

 

 

Corporate and investment banking

 

174

 

 

198

 

 

(12)

 

523

 

 

548

 

 

(5)

 

Gains on investments and other

 

(2)

 

 

2

 

 

 

 

(6)

 

 

21

 

 

 

 

Total revenues on a taxable equivalent basis

 

441

 

 

416

 

 

6

 

1,255

 

 

1,307

 

 

(4)

 

Non-interest expenses

 

183

 

 

171

 

 

7

 

537

 

 

523

 

 

3

 

Contribution on a taxable equivalent basis

 

258

 

 

245

 

 

5

 

718

 

 

784

 

 

(8)

 

Provisions for credit losses

 

10

 

 

2

 

 

 

 

20

 

 

4

 

 

 

 

Income before income taxes on a taxable equivalent basis

 

248

 

 

243

 

 

2

 

698

 

 

780

 

 

(11)

 

Income taxes on a taxable equivalent basis

 

66

 

 

65

 

 

2

 

186

 

 

208

 

 

(11)

 

Net income

 

182

 

 

178

 

 

2

 

512

 

 

572

 

 

(10)

 

Average assets

 

116,601

 

 

99,067

 

 

18

 

110,218

 

 

101,644

 

 

8

 

Average loans and acceptances

 

16,706

 

 

15,667

 

 

7

 

16,448

 

 

14,817

 

 

11

 

Net impaired loans(3)

 

33

 

 

 

 

 

 

33

 

 

 

 

 

 

Average deposits

 

29,991

 

 

23,525

 

 

27

 

28,626

 

 

22,928

 

 

25

 

Efficiency ratio on a taxable equivalent basis(1)

 

41.5

%

 

41.1

%

 

 

 

42.8

%

 

40.0

%

 

 

 

 

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

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

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

 

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

 

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

 

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

 

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

 

U.S. Specialty Finance and International

 

(millions of Canadian dollars)

 

 Quarter ended July 31

 

Nine months ended July 31

 

 

 

2019

 

 

2018

 

 

% Change

 

2019

 

 

2018

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credigy

 

95

 

 

100

 

 

(5)

 

307

 

 

346

 

 

(11)

 

 

ABA Bank

 

79

 

 

47

 

 

68

 

213

 

 

135

 

 

58

 

 

International

 

 

 

(1)

 

 

 

 

3

 

 

 

 

 

 

 

 

 

174

 

 

146

 

 

19

 

523

 

 

481

 

 

9

 

Non-interest expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credigy

 

36

 

 

40

 

 

(10)

 

114

 

 

118

 

 

(3)

 

 

ABA Bank

 

33

 

 

24

 

 

38

 

95

 

 

66

 

 

44

 

 

International

 

 

 

 

 

 

 

2

 

 

2

 

 

 

 

 

 

69

 

 

64

 

 

8

 

211

 

 

186

 

 

13

 

Contribution

 

105

 

 

82

 

 

28

 

312

 

 

295

 

 

6

 

Provisions for credit losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credigy

 

15

 

 

9

 

 

67

 

50

 

 

63

 

 

(21)

 

 

ABA Bank

 

4

 

 

3

 

 

33

 

10

 

 

9

 

 

11

 

 

 

 

19

 

 

12

 

 

58

 

60

 

 

72

 

 

(17)

 

Income before income taxes

 

86

 

 

70

 

 

23

 

252

 

 

223

 

 

13

 

Income taxes

 

17

 

 

16

 

 

6

 

51

 

 

56

 

 

(9)

 

Net income

 

69

 

 

54

 

 

28

 

201

 

 

167

 

 

20

 

Non-controlling interests

 

11

 

 

10

 

 

10

 

33

 

 

30

 

 

10

 

Net income attributable to the Bank's shareholders

 

58

 

 

44

 

 

32

 

168

 

 

137

 

 

23

 

Average assets

 

10,972

 

 

9,233

 

 

19

 

10,674

 

 

9,037

 

 

18

 

Average loans and receivables

 

8,769

 

 

7,637

 

 

15

 

8,763

 

 

7,730

 

 

13

 

Net impaired loans - Stage 3(1)

 

15

 

 

14

 

 

7

 

15

 

 

14

 

 

7

 

Purchased or originated credit-impaired (POCI) loans

 

1,260

 

 

1,333

 

 

(5)

 

1,260

 

 

1,333

 

 

(5)

 

Average deposits

 

3,665

 

 

2,007

 

 

83

 

3,220

 

 

1,778

 

 

81

 

Efficiency ratio

 

39.7

%

 

43.8

%

 

 

 

40.3

%

 

38.7

%

 

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Other

 

(taxable equivalent basis)(1)

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

Quarter ended July 31

 

Nine months ended July 31

 

 

 

2019

 

2018(2)

 

2019

 

2018(2)

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

Net interest income on a taxable equivalent basis

 

(48)

 

(56)

 

(148)

 

(129)

 

Non-interest income on a taxable equivalent basis

 

147

 

73

 

251

 

156

 

Total revenues on a taxable equivalent basis

 

99

 

17

 

103

 

27

 

Non-interest expenses

 

179

 

66

 

294

 

191

 

Contribution on a taxable equivalent basis

 

(80)

 

(49)

 

(191)

 

(164)

 

Provisions for credit losses

 

 

1

 

 

1

 

Income before income taxes on a taxable equivalent basis

 

(80)

 

(50)

 

(191)

 

(165)

 

Income taxes (recovery) on a taxable equivalent basis

 

(34)

 

(17)

 

(70)

 

(51)

 

Net loss

 

(46)

 

(33)

 

(121)

 

(114)

 

Non-controlling interests

 

6

 

13

 

19

 

41

 

Net loss attributable to the Bank's shareholders

 

(52)

 

(46)

 

(140)

 

(155)

 

Specified items after income taxes(1)

 

(2)

 

 

(2)

 

 

Net loss excluding specified items(1)

 

(48)

 

(33)

 

(123)

 

(114)

 

Average assets

 

41,477

 

43,566

 

44,426

 

42,536

 

 

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

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

 

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

 

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

 

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

 

 

Consolidated Balance Sheet

 

Consolidated Balance Sheet Summary

 

(millions of Canadian dollars)

 

As at July 31, 2019

 

As at October 31, 2018

 

% Change

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and deposits with financial institutions

 

11,552

 

12,756

 

(9)

 

Securities

 

84,732

 

69,783

 

21

 

Securities purchased under reverse repurchase agreements

 

 

 

 

 

 

 

 

and securities borrowed

 

13,928

 

18,159

 

(23)

 

Loans and acceptances, net of allowances

 

151,348

 

146,082

 

4

 

Other

 

14,752

 

15,691

 

(6)

 

 

 

 

276,312

 

262,471

 

5

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Deposits

 

187,219

 

170,830

 

10

 

Other

 

73,425

 

76,539

 

(4)

 

Subordinated debt

 

773

 

747

 

3

 

Equity attributable to the Bank's shareholders

 

14,520

 

13,976

 

4

 

Non-controlling interests

 

375

 

379

 

(1)

 

 

 

 

276,312

 

262,471

 

5

 

 

Assets

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

 

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

 

(millions of Canadian dollars)

 

As at July 31, 2019

 

As at October 31, 2018

 

As at July 31, 2018

 

Loans and acceptances

 

 

 

 

 

 

 

Residential mortgage and home equity lines of credit

 

78,744

 

75,773

 

74,446

 

Personal

 

14,185

 

15,235

 

14,744

 

Credit card

 

2,322

 

2,325

 

2,285

 

Business and government

 

56,784

 

53,407

 

52,019

 

 

 

 

152,035

 

146,740

 

143,494

 

Allowances for credit losses

 

(687)

 

(658)

 

(658)

 

 

 

 

151,348

 

146,082

 

142,836

 

 

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

 

Liabilities

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

 

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

 

 

(millions of Canadian dollars)

 

As at July 31, 2019

 

As at October 31, 2018

 

As at July 31, 2018

 

 

 

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

 

Deposits

 

58,951

 

55,688

 

54,277

 

 

 

 

 

 

 

 

 

 

Off-balance-sheet

 

 

 

 

 

 

 

Brokerage

 

134,510

 

123,458

 

127,945

 

Mutual funds

 

36,353

 

31,874

 

33,741

 

Other

 

305

 

440

 

453

 

 

 

 

171,168

 

155,772

 

162,139

 

Total personal savings

 

230,119

 

211,460

 

216,416

 

 

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

 

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

Equity

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

 

 

Disposal

 

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

 

 

Exposures to Certain Activities

 

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

 

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

 

 

Related Party Transactions

 

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

 

Securitization and Off-Balance-Sheet Arrangements

 

In the normal course of business, the Bank is party to various financial arrangements that, under IFRS, are not required to be recorded on the Consolidated Balance Sheet or are recorded at amounts other than their notional or contractual values. These arrangements include, among others, transactions with structured entities, derivative financial instruments, issuances of guarantees, credit instruments, and financial assets received as collateral. A complete analysis of these types of arrangements, including their nature, business purpose and importance, is provided on pages 41 and 42 of the 2018 Annual Report.

 

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

 

 

Income Taxes

 

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

 

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

 

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

 

The CRA may issue reassessments to the Bank for taxation years subsequent to 2014 in regard to activities similar to those that were the subject of the reassessments described above. The Bank remains confident that its tax position was appropriate and intends to vigorously defend its position. As a result, no amount has been recognized in the consolidated financial statements as at July 31, 2019.

 

 

Contingent Liabilities

 

Litigation

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

 

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

 

Watson

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

 

Defrance

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

 

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

 

 

Capital Management

 

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

 

Basel Accord

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

 

In addition to those measures, OSFI is requiring that regulatory capital instruments other than common equity have a non-viability contingent capital (NVCC) clause to ensure that investors bear losses before taxpayers should the government determine that it is in the public interest to rescue a non-viable financial institution. Instruments issued before January 1, 2013 that would be Basel III compliant if not for the absence of the NVCC clause are grandfathered and will be phased out over a period of ten years. The Bank expects to phase out all of its non-NVCC instruments without resorting to any regulatory event redemption clause.

 

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

 

Requirements - Regulatory Ratios Under Basel III

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at July 31, 2019

 

 

Minimum

 

 

Capital

conservation

buffer

 

 

Minimum

set by

 BCBS

 

 

D-SIB surcharge

 

 

Minimum

set by

OSFI(1)

 

 

Domestic

stability

buffer(2)

 

 

Minimum set by OSFI(1), including the buffer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1

4.5

%

 

2.5

%

 

7.0

%

 

1.0

%

 

8.0

%

 

1.75

%

 

9.75

%

 

 

Tier 1

6.0

%

 

2.5

%

 

8.5

%

 

1.0

%

 

9.5

%

 

1.75

%

 

11.25

%

 

 

Total

8.0

%

 

2.5

%

 

10.5

%

 

1.0

%

 

11.5

%

 

1.75

%

 

13.25

%

 

Leverage ratio

3.0

%

 

n.a.

 

 

n.a.

 

 

n.a.

 

 

3.0

%

 

n.a.

 

 

3.0

%

 

 

n.a.   Not applicable

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

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

 

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

 

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

 

 

Regulatory Developments

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

 

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

 

If the Bank cannot use the SEC-IRBA, it must use the Securitization External Ratings-Based Approach (SEC-ERBA) for the securitization exposures that are externally rated. This approach assigns risk weights to exposures using external ratings. The Bank uses the ratings assigned by Moody's, Standard & Poor's (S&P), Fitch, DBRS or a combination of these ratings. The Bank uses the Internal Assessment Approach (IAA) for unrated securitization exposures relating to the asset-backed commercial paper conduits it sponsors. If the Bank cannot apply the SEC-ERBA or the IAA, it must use the supervisory formula under the Securitization Standardized Approach (SEC-SA). Under this approach, RWA is derived from inputs specific to the securitization exposure such as the implicit capital charge related to the underlying exposures calculated under the standardized credit risk approach as well as credit enhancement and delinquency levels.

 

If none of the above approaches can be used, the securitization exposure must be assigned a risk weight of 1,250%. The Bank can apply a reduced capital charge for securitization exposures that meet the criteria of the Simple, Transparent and Comparable (STC) framework. To mitigate the impact of the revised securitization framework, OSFI has provided for grandfathering of the current capital treatment for one year through a negative adjustment to RWA that eliminates the initial increase in risk weights. OSFI is also providing transitional arrangements for all securitization transactions completed by December 31, 2018 for a maximum of two years.

 

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

 

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

 

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

 

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

 

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

 

Management Activities

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

 

Shares and Stock Options

 

 

 

As at July 31, 2019

 

 

 

Number of shares

 

$ million

 

 

 

 

 

 

 

 

First preferred shares

 

 

 

 

 

 

Series 30

 

14,000,000

 

350

 

 

Series 32

 

12,000,000

 

300

 

 

Series 34

 

16,000,000

 

400

 

 

Series 36

 

16,000,000

 

400

 

 

Series 38

 

16,000,000

 

400

 

 

Series 40

 

12,000,000

 

300

 

 

Series 42

 

12,000,000

 

300

 

 

 

 

98,000,000

 

2,450

 

Common shares

 

334,210,123

 

2,914

 

Stock options

 

13,107,629

 

 

 

 

As at August 23, 2019, there were 334,217,386 common shares and 13,099,501 stock options outstanding. NVCC provisions require the conversion of capital instruments into a variable number of common shares should OSFI deem a bank to be non-viable or should the government publicly announce that a bank has accepted or agreed to accept an injection of capital. If an NVCC trigger event were to occur, all of the Bank's preferred shares and medium-term notes maturing on February 1, 2028, which are NVCC capital instruments, would be converted into common shares of the Bank according to an automatic conversion formula at a conversion price corresponding to the greater of the following amounts: (i) a $5.00 contractual floor price; or (ii) the market price of the Bank's common shares on the date of the trigger event (10-day weighted average price). Based on a $5.00 floor price and including an estimate for accrued dividends and interest, these NVCC capital instruments would be converted into a maximum of 724,344,000 Bank common shares, which would have a 68.4% dilutive effect based on the number of Bank common shares outstanding as at July 31, 2019.

 

Movement in Regulatory Capital

 

(millions of Canadian dollars)

 

 

 

Nine months ended

July 31, 2019

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (CET1) capital

 

 

 

 

 

Balance at beginning

 

 

 

8,608

 

 

Issuance of common shares (including Stock Option Plan)

 

 

 

68

 

 

Impact of shares purchased or sold for trading

 

 

 

45

 

 

Repurchase of common shares

 

 

 

(215)

 

 

Other contributed surplus

 

 

 

6

 

 

Dividends on preferred and common shares

 

 

 

(751)

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Bank's shareholders

 

 

 

1,666

 

 

Common share capital issued by subsidiaries and held by third parties

 

 

 

9

 

 

Removal of own credit spread (net of income taxes)

 

 

 

9

 

 

Impact of adopting IFRS 15 on November 1, 2018

 

 

 

(4)

 

 

Other

 

 

 

(155)

 

 

 

 

 

 

 

 

 

 

Movements in accumulated other comprehensive income

 

 

 

 

 

 

 

Translation adjustments

 

 

 

1

 

 

 

Debt securities at fair value through other comprehensive income

 

 

 

(2)

 

 

 

Other

 

 

 

4

 

 

 

 

 

 

 

 

 

 

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

 

 

 

171

 

 

Other, including regulatory adjustments and transitional arrangements

 

 

 

 

 

 

 

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

 

 

 

6

 

 

 

Change in amount exceeding 15% threshold

 

 

 

 

 

 

 

  Deferred tax assets

 

 

 

 

 

 

  Significant investment in common shares of financial institutions

 

 

 

 

 

 

Change in other regulatory adjustments(1)

 

 

 

9

 

Balance at end

 

 

 

9,475

 

 

 

 

 

 

 

 

 

Additional Tier 1 capital

 

 

 

 

 

Balance at beginning

 

 

 

2,802

 

 

New Tier 1 eligible capital issuances

 

 

 

 

 

Redeemed capital

 

 

 

 

 

Change in non-qualifying Additional Tier 1 subject to phase-out

 

 

 

 

 

Other, including regulatory adjustments and transitional arrangements

 

 

 

3

 

Balance at end

 

 

 

2,805

 

 

 

 

 

 

 

 

 

Total Tier 1 capital

 

 

 

12,280

 

 

 

 

 

 

 

 

 

Tier 2 capital

 

 

 

 

 

Balance at beginning

 

 

 

942

 

 

New Tier 2 eligible capital issuances

 

 

 

 

 

Redeemed capital

 

 

 

 

 

Change in non-qualifying Tier 2 subject to phase-out

 

 

 

 

 

Tier 2 instruments issued by subsidiaries and held by third parties

 

 

 

2

 

 

Change in certain allowances for credit losses

 

 

 

4

 

 

Other, including regulatory adjustments and transitional arrangements

 

 

 

(35)

 

Balance at end

 

 

 

913

 

 

 

 

 

 

 

 

 

Total regulatory capital

 

 

 

13,193

 

 

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

 

 

Risk-Weighted Assets by Key Risk Drivers

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

 

Risk-Weighted Assets Movements by Key Drivers

 

(millions of Canadian dollars)

 

 

Quarter ended

 

 

July 31, 2019

 

April 30, 2019

 

January 31, 2019

 

October 31, 2018

 

 

 

 

Non-counterparty

 credit risk

 

Counterparty

credit risk

 

Total

 

Total

 

Total

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit risk - Risk-weighted assets at beginning

57,739

 

6,385

 

64,124

 

62,162

 

59,476

 

57,974

 

 

Book size

1,443

 

145

 

1,588

 

1,589

 

1,273

 

1,629

 

 

Book quality

(127)

 

(28)

 

(155)

 

56

 

(198)

 

(203)

 

 

Model updates

397

 

19

 

416

 

33

 

 

(72)

 

 

Methodology and policy

 

 

 

 

1,634

 

 

 

Acquisitions and disposals

 

 

 

 

 

 

 

Foreign exchange movements

(230)

 

(50)

 

(280)

 

284

 

(23)

 

148

 

Credit risk - Risk-weighted assets at end

59,222

 

6,471

 

65,693

 

64,124

 

62,162

 

59,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market risk - Risk-weighted assets at beginning

 

 

 

 

3,788

 

3,964

 

3,435

 

4,755

 

 

Movement in risk levels(1)

 

 

 

 

184

 

(176)

 

529

 

(406)

 

 

Model updates

 

 

 

 

 

 

 

(914)

 

 

Methodology and policy

 

 

 

 

 

 

 

 

 

Acquisitions and disposals

 

 

 

 

 

 

 

 

Market risk - Risk-weighted assets at end

 

 

 

 

3,972

 

3,788

 

3,964

 

3,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operational risk - Risk-weighted assets at beginning

 

 

 

 

11,096

 

10,910

 

10,743

 

10,539

 

 

Movement in risk levels

 

 

 

 

223

 

186

 

167

 

204

 

 

Acquisitions and disposals

 

 

 

 

 

 

 

 

Operational risk - Risk-weighted assets at end

 

 

 

 

11,319

 

11,096

 

10,910

 

10,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets at end

 

 

 

 

80,984

 

79,008

 

77,036

 

73,654

 

 

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

 

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

 

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

 

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

 

The Model updates item is used to reflect implementations of new models, changes in model scope, and any other change applied to address model malfunctions. During the quarter ended July 31, 2019, the Bank updated its models for credit card portfolios and energy sector loans.

 

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

 

Regulatory Capital Ratios

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

 

Regulatory Capital and Ratios Under Basel III

 

(millions of Canadian dollars)

 

As at July 31, 2019

 

 

As at October 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

 

 

CET1

 

9,475

 

 

8,608

 

 

 

Tier 1

 

12,280

 

 

11,410

 

 

 

Total

 

13,193

 

 

12,352

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

 

 

 

 

 

 

 

CET1 capital

 

80,984

 

 

73,654

 

 

 

Tier 1 capital

 

80,984

 

 

73,670

 

 

 

Total capital

 

80,984

 

 

73,685

 

 

 

 

 

 

 

 

 

 

 

Total exposure

 

303,961

 

 

284,337

 

 

 

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

CET1

 

11.7

%

 

11.7

%

 

 

Tier 1

 

15.2

%

 

15.5

%

 

 

Total

 

16.3

%

 

16.8

%

 

Leverage ratio

 

4.0

%

 

4.0

%

 

 

Dividends

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

 

 

Risk Management

 

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

 

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

 

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

 

Credit Risk

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

 

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

 

Maximum Credit Risk Exposure Under the Basel Asset Categories

 

(millions of Canadian dollars)

 

As at July 31,

2019

 

As at October 31,

2018

 

 

 

 

Drawn

 

Undrawn

commitments

 

Repo-style

transactions(1)

 

 

Derivatives(2)

 

Other

off-balance-

sheet items(3)

 

 

Total

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgages

 

48,966

 

8,690

 

 

 

 

 

 

57,656

 

54,213

 

 

Qualifying revolving retail

 

2,560

 

3,120

 

 

 

 

 

 

5,680

 

6,276

 

 

Other retail

 

14,522

 

1,623

 

 

 

 

15

 

 

16,160

 

17,064

 

 

 

66,048

 

13,433

 

 

 

 

15

 

 

79,496

 

77,553

 

Non-retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

55,386

 

19,771

 

19,715

 

 

 

4,054

 

 

98,926

 

88,527

 

 

Sovereign

 

28,687

 

5,191

 

39,182

 

 

215

 

144

 

 

73,419

 

73,915

 

 

Financial institutions

 

2,819

 

425

 

94,263

 

 

1,666

 

632

 

 

99,805

 

85,109

 

 

 

86,892

 

25,387

 

153,160

 

 

1,881

 

4,830

 

 

272,150

 

247,551

 

Trading portfolio

 

 

 

 

 

11,895

 

 

 

11,895

 

9,620

 

Securitization

 

1,432

 

 

 

 

 

3,784

 

 

5,216

 

4,746

 

Total - Gross credit risk

 

154,372

 

38,820

 

153,160

 

 

13,776

 

8,629

 

 

368,757

 

339,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standardized Approach

 

15,051

 

126

 

22,844

 

 

1,648

 

256

 

 

39,925

 

32,303

 

AIRB Approach

 

139,321

 

38,694

 

130,316

 

 

12,128

 

8,373

 

 

328,832

 

307,167

 

Total - Gross credit risk

 

154,372

 

38,820

 

153,160

 

 

13,776

 

8,629

 

 

368,757

 

339,470

 

 

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

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

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

 

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

 

 

Market Risk

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

 

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

 

Reconciliation of Market Risk With Consolidated Balance Sheet Items

 

(millions of Canadian dollars)

As at July 31, 2019

 

 

 

 

 

Market risk measures

 

 

 

 

 

 

 

 

Balance

sheet

 

Trading(1)

 

Non-Trading(2)

 

Not subject to market risk

 

Non-traded risk

primary risk sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and deposits with financial institutions

11,552

 

255

 

11,150

 

147

 

Interest rate(3)

 

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

At fair value through profit or loss

67,444

 

63,821

 

3,623

 

 

Interest rate(3) and equity

 

 

 

At fair value through other comprehensive income

9,091

 

 

9,091

 

 

Interest rate(3) and equity(4)

 

 

 

At amortized cost

8,197

 

 

8,197

 

 

Interest rate(3)

 

 

Securities purchased under reverse repurchase

 

 

 

 

 

 

 

 

 

 

 

 

agreements and securities borrowed

13,928

 

 

13,928

 

 

Interest rate(3)(5)

 

 

Loans and acceptances, net of allowances

151,348

 

5,868

 

145,480

 

 

Interest rate(3)

 

 

Derivative financial instruments

8,515

 

7,629

 

886

 

 

Interest rate and exchange rate

 

 

Defined benefit asset

38

 

 

38

 

 

Other

 

 

Other

6,199

 

 

 

6,199

 

 

 

 

 

 

276,312

 

77,573

 

192,393

 

6,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

187,219

 

9,813

 

177,406

 

 

Interest rate(3)

 

 

Acceptances

6,834

 

 

6,834

 

 

Interest rate(3)

 

 

Obligations related to securities sold short

13,917

 

13,917

 

 

 

 

 

 

Obligations related to securities sold under repurchase

 

 

 

 

 

 

 

 

 

 

 

 

agreements and securities loaned

19,764

 

 

19,764

 

 

Interest rate(3)(5)

 

 

Derivative financial instruments

6,211

 

5,406

 

805

 

 

Interest rate and exchange rate

 

 

Liabilities related to transferred receivables

20,549

 

4,336

 

16,213

 

 

Interest rate(3)

 

 

Defined benefit liability

305

 

 

305

 

 

Other

 

 

Other

5,845

 

25

 

911

 

4,909

 

Interest rate(3)

 

 

Subordinated debt

773

 

 

773

 

 

Interest rate(3)

 

 

 

261,417

 

33,497

 

223,011

 

4,909

 

 

 

 

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

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

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

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

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

 

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

 

Nine months ended

 

 

 

July 31, 2019

 

April 30, 2019

 

July 31, 2018

 

July 31, 2019

 

July 31, 2018

 

 

 

Low

 

High

 

Average

 

Period end

 

Average

 

Period end

 

Average

 

Period end

 

Average

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

(4.3)

 

(6.9)

 

(5.5)

 

(4.7)

 

(5.1)

 

(4.4)

 

(3.9)

 

(3.4)

 

(5.4)

 

(4.0)

 

Exchange rate

 

(0.4)

 

(1.2)

 

(0.7)

 

(0.6)

 

(0.8)

 

(0.6)

 

(1.4)

 

(1.7)

 

(0.8)

 

(1.1)

 

Equity

 

(3.0)

 

(4.1)

 

(3.5)

 

(3.4)

 

(4.0)

 

(3.1)

 

(4.1)

 

(4.5)

 

(4.0)

 

(3.2)

 

Commodity

 

(0.6)

 

(1.5)

 

(0.9)

 

(1.0)

 

(1.0)

 

(1.1)

 

(1.2)

 

(1.3)

 

(1.0)

 

(1.0)

 

Correlation effect(2)

 

n.m.

 

n.m.

 

4.5

 

4.0

 

5.2

 

4.9

 

4.7

 

4.7

 

5.1

 

4.3

 

Total trading VaR

 

(3.8)

 

(8.3)

 

(6.1)

 

(5.7)

 

(5.7)

 

(4.3)

 

(5.9)

 

(6.2)

 

(6.1)

 

(5.0)

 

 

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

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

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

  

 

SVaR of Trading Portfolios by Risk Category(1)

 

(millions of Canadian dollars)

 

 

 

Quarter ended

 

Nine months ended

 

 

 

July 31, 2019

 

April 30, 2019

 

July 31, 2018

 

July 31, 2019

 

July 31, 2018

 

 

 

Low

 

High

 

Average

 

Period end

 

Average

 

Period end

 

Average

 

Period end

 

Average

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

(12.1)

 

(23.2)

 

(16.8)

 

(19.4)

 

(15.5)

 

(15.2)

 

(12.3)

 

(11.3)

 

(15.6)

 

(11.6)

 

Exchange rate

 

(0.6)

 

(4.1)

 

(1.5)

 

(1.0)

 

(1.1)

 

(0.9)

 

(1.9)

 

(2.5)

 

(1.3)

 

(1.3)

 

Equity

 

(4.5)

 

(9.9)

 

(6.3)

 

(7.0)

 

(6.1)

 

(5.3)

 

(3.8)

 

(4.1)

 

(6.9)

 

(3.0)

 

Commodity

 

(1.1)

 

(2.7)

 

(2.1)

 

(2.2)

 

(2.0)

 

(2.3)

 

(2.4)

 

(1.6)

 

(2.1)

 

(1.7)

 

Correlation effect(2)

 

n.m.

 

n.m.

 

14.1

 

16.8

 

12.3

 

12.3

 

8.3

 

8.1

 

13.6

 

7.6

 

Total trading SVaR

 

(9.0)

 

(15.2)

 

(12.6)

 

(12.8)

 

(12.4)

 

(11.4)

 

(12.1)

 

(11.4)

 

(12.3)

 

(10.0)

 

 

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

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

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

 

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

 

Daily Trading and Underwriting Revenues

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

 

Quarter Ended July 31, 2019

(millions of Canadian dollars)

 

 

 

 

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

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

 

(millions of Canadian dollars)

 

 

 

 

 

 

 

 

 

As at July 31, 2019

 

 

 

Impact on equity

 

Impact on net interest income

 

 

 

Canadian dollar

 

Other currencies

 

Total

 

Canadian dollar

 

Other currencies

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100-basis-point increase in the interest rate

 

(207)

 

3

 

(204)

 

(50)

 

9

 

(41)

 

100-basis-point decrease in the interest rate

 

202

 

 

202

 

65

 

(4)

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

 

 

 

 

 

 

 

 

As at October 31, 2018

 

 

 

Impact on equity

 

Impact on net interest income

 

 

 

Canadian dollar

 

Other currencies

 

Total

 

Canadian dollar

 

Other currencies

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100-basis-point increase in the interest rate

 

(140)

 

9

 

(131)

 

10

 

19

 

29

 

100-basis-point decrease in the interest rate

 

154

 

17

 

171

 

34

 

8

 

42

 

 

Liquidity Risk

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

 

Regulatory Developments

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 the final version of Net Stable Funding Ratio Disclosure Requirements, a guideline that sets out the NSFR disclosure requirements applicable to D-SIBs. These requirements will be applicable as of January 1, 2020, but since OSFI has introduced an additional year to implement the disclosure framework, they will take effect on January 1, 2021.

 

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

 

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

 

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

 

Liquid Assets

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

 

 

Liquid Asset Portfolio

 

(millions of Canadian dollars)

 

 

 

 

 

 

 

As at July 31,

 2019

 

As at October 31,

2018

 

 

 

 

 

Bank-owned                                                                                                                                                                                                     liquid assets(1)

 

Liquid assets

received(2)

 

Total

liquid assets

 

Encumbered

liquid assets(3)

 

Unencumbered                                                                                                                                                                                         liquid assets

 

Unencumbered                                                                                                                                                                                         liquid assets