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Nat Bank of Canada (32SS)

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Wednesday 27 February, 2019

Nat Bank of Canada

Part 1 MD&A Q1 2019

RNS Number : 3197R
National Bank of Canada
27 February 2019
 

 

Regulatory Announcement (Part 1)

Q1 2019 Results

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

http://www.rns-pdf.londonstockexchange.com/rns/3197R_1-2019-2-27.pdf

 

Report to Shareholders                                                             First Quarter 2019

 

National Bank reports its results for the First Quarter of 2019

 

The financial information reported in this document is based on the unaudited interim condensed consolidated financial statements for the quarter ended January 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, February 27, 2019 - For the first quarter of 2019, National Bank is reporting net income of $552 million, an increase from $550 million in the first quarter of 2018. Its diluted earnings per share stood at $1.50 in the first quarter of 2019 compared to $1.46 in the same quarter of 2018, a 3% increase driven essentially by growth in most business segments, tempered by a slowdown in the Financial Markets segment.

 

Commenting on the Bank's financial results for the first quarter of 2019, Louis Vachon, President and Chief Executive Officer noted that "National Bank delivered good performance despite challenging markets." "We continue to benefit from the diversification of our business, a strong Quebec economy and our prudent approach to risk. Credit quality remains excellent, and the Bank posted solid capital ratios,'' added Mr. Vachon.

 

Highlights

 

(millions of Canadian dollars)

 

 

Quarter ended January 31

 

 

 

 

 

2019

 

 

 

2018

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

552

 

 

 

550

 

 

 

Diluted earnings per share (dollars)

 

$

1.50

 

 

$

1.46

 

 

3

 

Return on common shareholders' equity

 

 

17.2

%

 

 

18.7

%

 

 

 

Dividend payout ratio

 

 

41

%

 

 

42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at January 31, 2019

 

 

 

As at October 31,

 2018

 

 

 

 

CET1 capital ratio under Basel III

 

 

11.5

%

 

 

11.7

%

 

 

 

Leverage ratio under Basel III

 

 

4.1

%

 

 

4.0

%

 

 

 

 

Report to Shareholders                                                               First Quarter 2019

 

Personal and Commercial

 

-        Net income totalled $246 million in the first quarter of 2019, up 7% from $230 million in the first quarter of 2018.

-        At $852 million, the 2019 first-quarter total revenues rose $37 million or 5% year over year.

-        Personal lending was up 5%, particularly due to mortgage lending, while commercial lending grew 10% from a year ago.

-        Net interest margin stood at 2.22% in the first quarter of 2019 compared to 2.24% in the first quarter of 2018.

-        First-quarter non-interest expenses were up 3% year over year.

-        At 53.8%, the first-quarter efficiency ratio improved from 54.4% in the first quarter of 2018.

 

Wealth Management

 

-        Net income totalled $125 million in the first quarter of 2019, a 10% increase from $114 million in the same quarter of 2018.

-        The 2019 first-quarter total revenues amounted to $434 million compared to $424 million in the same quarter of 2018, a $10 million increase driven by growth in net interest income.

-        First-quarter non-interest expenses stood at $265 million compared to $269 million in the first quarter of 2018, a decrease owing to lower variable compensation and management fees associated with lower fee-based revenues.

-        At 61.1%, the first-quarter efficiency ratio improved from 63.4% in the first quarter of 2018.

 

Financial Markets

 

-        Net income totalled $170 million in the first quarter of 2019, down 17% from $204 million in the same quarter of 2018.

-        The 2019 first-quarter total revenues on a taxable equivalent basis(1) amounted to $410 million, a $44 million or 10% year-over-year decrease attributable mainly to lower investment banking revenues and lower gains on investments.

-        First-quarter non-interest expenses stood at $175 million, stable when compared to the first quarter of 2018.

-        At 42.7%, the first-quarter efficiency ratio on a taxable equivalent basis compares to 38.8% in the first quarter of 2018.

 

U.S. Specialty Finance and International

 

-        Net income totalled $60 million in the first quarter of 2019, a 20% increase from $50 million in the first quarter of 2018.

-        The 2019 first-quarter total revenues amounted to $171 million, a $10 million year-over-year increase owing to revenue growth at the ABA Bank subsidiary.

-        First-quarter non-interest expenses stood at $68 million, an $8 million year-over-year increase attributable to expansion of ABA Bank's banking network.

 

Other

 

-        The Other heading posted a net loss of $49 million in the first quarter of 2019 versus a $48 million net loss in the same quarter of 2018.

 

Capital Management

 

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

-        As at January 31, 2019, the Basel III leverage ratio was 4.1%, up from 4.0% as at 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

February 26, 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 ended January 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 ended January 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


Capital Management

16

Highlights

5


Risk Management

21

Economic Review and Outlook

6


Risk Disclosures

34

Financial Analysis 

7


Accounting Policies and Financial Disclosure

35

    Consolidated Results

7


    Accounting Policies and Critical Accounting Estimates

35

    Results by Segment

9


    Future Accounting Policy Changes

35

    Consolidated Balance Sheet

13


    Financial Disclosure

35

    Exposure to Certain Activities

14


Quarterly Financial Information

36

    Related Party Transactions

15




    Securitization and Off-Balance-Sheet Arrangements 

15




    Contingent Liabilities 

15




 

 

 

 

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; specifically, general economic environment and financial market conditions in Canada, the United States and certain other countries in which the Bank conducts business, including regulatory changes affecting the Bank's business; changes in the accounting policies the Bank uses to report its financial condition, including uncertainties associated with assumptions and critical accounting estimates; tax laws in the countries in which the Bank operates, primarily Canada and the United States (including the U.S. Foreign Account Tax Compliance Act (FATCA)); changes to capital and liquidity guidelines and to the manner in which they are to be presented and interpreted; changes to the credit ratings assigned to the Bank; and potential disruptions to the Bank's information technology systems, including evolving cyber attack risk.

 

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

 

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

 


Financial Reporting Method                                                               

 

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

 

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

 

Non-GAAP Financial Measures

 

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

 

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

 

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

 

Financial Information

 

(millions of Canadian dollars, except per share amounts)


Quarter ended January 31





2019




2018

% Change















Net income(1)












Personal and Commercial



246




230


7



Wealth Management



125




114


10



Financial Markets



170




204


(17)



U.S. Specialty Finance and International



60




50


20



Other



(49)




(48)




Net income



552




550
















Diluted earnings per share


$

1.50



$

1.46


3















Return on common shareholders' equity



17.2

%



18.7

%



 

(1)       For the quarter ended January 31, 2018, certain amounts have been reclassified from those previously reported, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth Management segment to the Personal and Commercial segment.

 

Highlights

 

(millions of Canadian dollars, except per share amounts)


Quarter ended January 31





2019




2018



% Change















Operating results












Total revenues



1,799




1,806




Total revenues on a taxable equivalent basis(1)



1,862




1,865




Net income



552




550




Net income attributable to the Bank's shareholders



536




527



2


Return on common shareholders' equity



17.2

%



18.7

%




Efficiency ratio on a taxable equivalent basis(1)



55.1

%



54.9

%




Earnings per share













Basic


$

1.51



$

1.48



2



Diluted



1.50




1.46



3















Common share information












Dividends declared


$

0.65



$

0.60





Book value



34.85




31.75





Share price













High



61.80




65.35






Low



54.97




62.33






Close



61.80




63.84





Number of common shares (thousands)



335,500




340,390





Market capitalization



20,734




21,730





 

(millions of Canadian dollars)

As at January 31, 2019



As at October 31,

 2018


% Change












Balance sheet and off-balance-sheet









Total assets


263,355



262,471



Loans and acceptances, net of allowances


146,710



146,082



Net impaired loans(2) as a % of loans and acceptances


0.3

%


0.3

%



Deposits


172,930



170,830


1


Equity attributable to common shareholders


11,693



11,526


1


Assets under administration and under management 


510,036



485,080


5












Regulatory ratios under Basel III









Capital ratios










Common Equity Tier 1 (CET1)


11.5

%


11.7

%




Tier 1


15.1

%


15.5

%




Total


16.3

%


16.8

%


 

Leverage ratio


4.1

%


4.0

%


 

Liquidity coverage ratio (LCR)


139

%


147

%


 











Other information









Number of employees -  worldwide


23,960



23,450


2


Number of branches in Canada 


428



428



Number of banking machines in Canada


938



937



 

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

(2)       Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and do not include purchased or originated credit-impaired (POCI) loans.

 

Economic Review and Outlook

 

Global Economy

In a context of trade tensions and the U.S. government shutdown, the financial markets have experienced significant volatility in recent months. This volatility has been further exacerbated by disappointing economic data. While China and the Eurozone appear on shaky ground, global economic growth this year is likely to slow to around 3.5%. Fortunately, with inflation still under control, the major central banks should be able to maintain accommodative monetary policies, while certain governments, including China's, still have flexibility to adopt fiscal stimulus measures should the risks of declining growth materialize. After a year of strong growth, the U.S. economy is also expected to lose momentum in 2019. Nevertheless, it should still grow at a rate of 2.3% in 2019 thanks to fiscal stimulus and a monetary policy that remains accommodative. Optimism among businesses remains high, which bodes well for employment and investment. And households are also showing high levels of confidence, mainly due to the very low unemployment rate and improved wage growth, which should support consumer spending in the coming quarters. Nevertheless, in a still-uncertain geopolitical context, it would be surprising to see the U.S. Federal Reserve increase rates again in the coming months, as inflation is under control and financing conditions have tightened recently.

 

Canadian Economy

The Canadian economy remained resilient in 2018 despite concerns over real estate and household debt as interest rates rise. Tighter lending conditions for uninsured mortgages had the desired effect, slowing the housing sector in the tightest and most expensive markets (Vancouver and Toronto). Despite a drop in market activity, home resales remained near their 10-year average, which suggests that prices will not drop much. What's more, the increase in national immigration quotas will bring considerable support to markets in the major urban centres. However, the real estate slowdown seems to have affected retail sales in the country, as reflected by weakness in certain categories, particularly furniture, appliances, and construction materials. Given this context, the Bank believes that the central bank will exercise caution before introducing any more rate hikes in order to gauge the impacts of steps already taken. Moreover, by maintaining the status quo for a few months, the Bank of Canada will be able to determine how the oil-producing provinces are coping with low prices. That being said, the labour market remains tight in Canada, which should translate into good wage growth and support consumer spending. The recent decline in the Canadian dollar favours exports, and exporters were relieved by the new United States-Mexico-Canada Agreement (USMCA). They may now pick up the pace of investment, especially because in late 2018, Ottawa and Quebec City introduced measures allowing for the accelerated depreciation of capital investments. The Canadian economy should grow by 1.8% in 2019, which is still above its potential.

 

The Quebec economy continues to perform well. Following GDP growth of 2.8% in 2017 and close to 2.5% in 2018, the pace should slow to 1.9% in 2019. Consumption is still expected to contribute to growth this year, as households are demonstrating a high degree of optimism given the record low unemployment rate. Furthermore, with the strong wage gains seen over the last year, Quebec households have been able to maintain a savings rate that is much higher than the national average. This serves as a buffer that could support consumption in 2019. Quebec has a lower household debt level than the rest of Canada, making the province's economy less sensitive to interest rates hikes. In fact, the housing sector in Quebec has been spared the slowdown seen in Ontario and British Columbia. Home resales in Quebec reached a record level in 2018. Despite a labour shortage, business confidence remains strong and should translate into a faster pace of investment to offset the scarcity of workers.

 

Financial Analysis

 

Consolidated Results

 

 

(millions of Canadian dollars)


Quarter ended January 31




2019



2018



% Change













Operating results










Net interest income


863



834



3


Non-interest income


936



972



(4)


Total revenues


1,799



1,806




Non-interest expenses


1,026



1,024




Contribution


773



782



(1)


Provisions for credit losses


88



87



1


Income before income taxes


685



695



(1)


Income taxes


133



145



(8)


Net income


552



550




Diluted earnings per share (dollars)


1.50



1.46



3













Taxable equivalent basis(1)










Net interest income


35



38





Non-interest income


28



21





Income taxes


63



59





Impact of taxable equivalent basis on net income



















Operating results on a taxable equivalent basis(1)










Net interest income on a taxable equivalent basis


898



872



3


Non-interest income on a taxable equivalent basis


964



993



(3)


Total revenues on a taxable equivalent basis


1,862



1,865




Non-interest expenses


1,026



1,024




Contribution on a taxable equivalent basis


836



841



(1)


Provisions for credit losses


88



87



1


Income before income taxes on a taxable equivalent basis

748



754



(1)


Income taxes on a taxable equivalent basis


196



204



(4)


Net income


552



550




Diluted earnings per share (dollars)


1.50



1.46



3


Average assets


279,426



262,425



6


Average loans and acceptances


146,083



135,925



7


Net impaired loans(2) as a % of average loans and acceptances


0.3

%


0.3

%




Average deposits


176,490



164,286



7


Efficiency ratio on a taxable equivalent basis(1)


55.1

%


54.9

%




 

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

(2)       Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and do not include POCI loans.

 


Financial Results

For the first quarter of 2019, the Bank reported net income of $552 million, a $2 million increase from $550 million in the first quarter of 2018. First-quarter diluted earnings per share stood at $1.50, up 3% from $1.46 in the same quarter of 2018. The growth was essentially driven by good performance in the Personal and Commercial, Wealth Management and U.S. Specialty Finance and International (USSF&I) segments, while the Financial Markets segment faced a slowdown in the first quarter of 2019.

 

Return on common shareholders' equity was 17.2% for the quarter ended January 31, 2019 compared to 18.7% in the first quarter of 2018.

 

Total Revenues

For the first quarter of 2019, the Bank's total revenues amounted to $1,799 million, relatively stable when compared to the first quarter of 2018. The Personal and Commercial segment's total revenues were up 5% owing to growth in loan and deposit volumes, and the Wealth Management segment's revenues were up 2% owing to growth in deposit volumes and improved deposit margins. Furthermore, the USSF&I segment's total revenues grew 6%, essentially due to revenue growth at the ABA Bank subsidiary. These increases were tempered by a decrease in the Financial Markets segment's revenues given a slowdown in financial markets activity during the first quarter of 2019 and lower year-over-year gains on investments.

 

Non-Interest Expenses

During the first quarter of 2019, non-interest expenses stood at $1,026 million, up $2 million year over year. Higher occupancy and other expenses, partly attributable to the ABA Bank subsidiary's growing banking network, were partly offset by a decrease in compensation and employee benefits, in particular lower variable compensation resulting from lower revenues generated by the Financial Markets segment.

 

Provisions for Credit Losses

For the first quarter of 2019, the Bank recorded $88 million in provisions for credit losses, relatively stable when compared to $87 million in the same quarter of 2018. Higher provisions for credit losses on non-impaired Commercial Banking loans and on Financial Markets loans were largely offset by lower provisions for credit losses on Personal Banking loans and on USSF&I segment loans, particularly lower credit loss provisions on non-impaired loans at the Credigy subsidiary.

 

As at January 31, 2019, gross impaired loans stood at $603 million compared to $630 million as at October 31, 2018, while net impaired loans stood at $373 million compared to $404 million as at October 31, 2018, a $31 million decrease attributable to commercial loans. All loans classified in Stage 3 of the expected credit loss model are impaired loans and do not include purchased or originated credit-impaired loans.

 

Income Taxes

For the first quarter of 2019, income taxes stood at $133 million compared to $145 million in the same quarter of 2018. The 2019 first-quarter effective income tax rate was 19% versus 21% in the same quarter of 2018. This change in the effective income tax rate was mainly due to a lower tax rate for the Credigy subsidiary arising from the U.S. tax reform.

 

Results by Segment

 

The Bank carries out its activities in four business segments. For presentation purposes, other operating activities and Corporate Treasury activities are grouped in the Other heading. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy.

 

Personal and Commercial 

 

(millions of Canadian dollars)


 Quarter ended January 31




2019



2018(1)



% Change













Operating results










Net interest income


589



560



5


Non-interest income


263



255



3


Total revenues


852



815



5


Non-interest expenses


458



443



3


Contribution


394



372



6


Provisions for credit losses


58



58




Income before income taxes


336



314



7


Income taxes


90



84



7


Net income


246



230



7


Net interest margin(2)


2.22

%


2.24

%




Average interest-bearing assets


105,389



99,403



6


Average assets


111,145



104,612



6


Average loans and acceptances


110,589



104,237



6


Net impaired loans(3)


347



355



(2)


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


0.3

%


0.3

%




Average deposits


61,393



56,519



9


Efficiency ratio


53.8

%


54.4

%




 

(1)       For the quarter ended January 31, 2018, certain amounts have been reclassified from those previously reported, 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 $246 million in the first quarter of 2019, up 7% from $230 million in the first quarter of 2018. The segment's 2019 first-quarter total revenues were up $37 million year over year owing to a $29 million increase in net interest income and an $8 million increase in non-interest income. The increase in net interest income was driven by higher personal and commercial loan and deposit volumes. This growth was tempered by a slight narrowing of the net interest margin, which was 2.22% in the first quarter of 2019 versus 2.24% in the first quarter of 2018, a decrease arising mainly from loan margins.

 

Personal Banking's first-quarter total revenues rose $7 million year over year. This increase was essentially driven by growth in loan and deposit volumes, tempered by a slight narrowing of loan margins, and by higher insurance revenues. Commercial Banking's first-quarter total revenues rose $30 million year over year, mainly due to higher net interest income driven by growth in deposit and loan volumes and by improved deposit margins. Also contributing to Commercial Banking's revenue growth were increases in revenues from credit fees as well as revenues from derivative financial instruments and foreign exchange activities.

 

Year over year, the Personal and Commercial segment's first-quarter non-interest expenses increased by $15 million, mainly due to higher compensation and employee benefits and higher operations support charges. At 53.8%, its first-quarter efficiency ratio improved by 0.6 percentage points from first-quarter 2018. At $58 million, the first-quarter provisions for credit losses remained stable year over year, with higher provisions on commercial loans-essentially non‑impaired loans-being offset by lower provisions on personal loans.

 

Wealth Management

 

(millions of Canadian dollars)


 Quarter ended January 31




2019



2018(1)



% Change













Operating results










Net interest income 


128



108



19


Fee-based revenues


242



246



(2)


Transaction-based and other revenues


64



70



(9)


Total revenues 


434



424



2


Non-interest expenses 


265



269



(1)


Contribution


169



155



9


Provisions for credit losses







Income before income taxes 


169



155



9


Income taxes 


44



41



7


Net income


125



114



10


Average assets 


6,492



6,030



8


Average loans and acceptances


4,911



4,501



9


Net impaired loans(2)


3



3




Average deposits


33,129



31,006



7


Assets under administration and under management


510,036



495,702



3


Efficiency ratio


61.1

%


63.4

%




 

(1)       For the quarter ended January 31, 2018, certain amounts have been reclassified from those previously reported, 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 $125 million for the first quarter of 2019, a 10% increase from $114 million in the same quarter of 2018. The segment's first-quarter total revenues amounted to $434 million compared to $424 million in the first quarter of 2018, a $10 million increase stemming mainly from higher net interest income, which was up due to growth in deposit volumes and to an improved deposit margin. Transaction-based and other revenues were down 9%, essentially due to a decrease in transaction volume during the first quarter of 2019. Fee-based revenues were down 2%, as volume growth for assets under administration and assets under management generated by net inflows into various solutions was offset by a decline in stock market prices during the quarter ended January 31, 2019.

 

Wealth Management's first-quarter non-interest expenses stood at $265 million, a 1% year-over-year decrease that was mainly due to lower variable compensation and external management fees associated with lower fee-based revenues. At 61.1%, the segment's first-quarter efficiency ratio improved by 2.3 percentage points from first-quarter 2018. The segment's provisions for credit losses were nil in both the first quarters of 2019 and 2018.

 

Financial Markets

 

(taxable equivalent basis)(1)










(millions of Canadian dollars)


 Quarter ended January 31




2019



2018(2)



% Change












Operating results










Global markets











Equities


137



138



(1)



Fixed-income


66



82



(20)



Commodities and foreign exchange


48



37



30




251



257



(2)


Corporate and investment banking


160



181



(12)


Gains on investments and other


(1)



16





Total revenues on a taxable equivalent basis


410



454



(10)


Non-interest expenses


175



176



(1)


Contribution on a taxable equivalent basis


235



278



(15)


Provisions for credit losses


3







Income before income taxes on a taxable equivalent basis


232



278



(17)


Income taxes on a taxable equivalent basis


62



74



(16)


Net income


170



204



(17)


Average assets


104,545



101,816



3


Average loans and acceptances


16,230



14,025



16


Net impaired loans(3)


7







Average deposits


27,100



22,430



21


Efficiency ratio on a taxable equivalent basis(1)


42.7

%


38.8

%




 

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

(2)       For the quarter ended January 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, the 2019 first-quarter net income totalled $170 million compared to $204 million in the same quarter of 2018, and first‑quarter total revenues on a taxable equivalent basis amounted to $410 million compared to $454 million in the same quarter of 2018. Global markets revenues were down 2%, mainly due to decreases in revenues from fixed-income securities, partly offset by an increase in revenues from commodities and foreign exchange activities. As for revenues from corporate and investment banking services, they were down 12% compared to first-quarter 2018 due to a decline in the number of investment banking transactions during first-quarter 2019, partly offset by growth in lending activity. Lastly, higher gains on investments and other revenues were recorded in the first quarter of fiscal 2018.

 

The segment's first-quarter non-interest expenses stood at $175 million, down $1 million year over year for a relatively stable result. Lower variable compensation arising from lower revenues was offset by an increase in operations support charges. At 42.7%, the efficiency ratio on a taxable equivalent basis compares to 38.8% in the first quarter of 2018. The segment's provisions for credit losses stood at $3 million in the first quarter of 2019 compared to nil in the same quarter of 2018.

 

U.S. Specialty Finance and International

 

(millions of Canadian dollars)


 Quarter ended January 31




2019



2018



% Change













Total revenues











Credigy


105



117



(10)



ABA Bank


65



43



51



International


1



1







171



161



6


Non-interest expenses











Credigy


36



39



(8)



ABA Bank


31



20



55



International


1



1






68



60



13


Contribution


103



101



2


Provisions for credit losses











Credigy


23



26



(12)



ABA Bank


4



3



33





27



29



(7)


Income before income taxes


76



72



6


Income taxes


16



22



(27)


Net income


60



50



20


Non-controlling interests


10



9



11


Net income attributable to the Bank's shareholders


50



41



22


Average assets


10,448



8,777



19


Average loans and receivables


8,808



7,702



14


Net impaired loans(1)


16



13



23


Purchased or originated credit-impaired (POCI) loans


1,395



1,352



3


Average deposits


2,758



1,532



80


Efficiency ratio


39.8

%


37.3

%




 

(1)       Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and do not include POCI loans.

 

In the U.S. Specialty Finance and International segment, net income totalled $60 million in the first quarter of 2019, a 20% increase from $50 million in the same quarter of 2018. The segment's first-quarter total revenues amounted to $171 million compared to $161 million in the first quarter of 2018. A 51% increase in revenues at the ABA Bank subsidiary, driven by loan and deposit growth, was offset by lower revenues at the Credigy subsidiary when compared to the first quarter of 2018.

 

For the first quarter of 2019, the segment's non-interest expenses stood at $68 million, an $8 million year-over-year increase attributable to ABA Bank's growing banking network. At the Credigy subsidiary, non-interest expenses were down 8% as a result of lower revenues. The segment's first-quarter provisions for credit losses were $27 million, a $2 million year-over-year decrease due essentially to lower provisions for credit losses on non-impaired loans of the Credigy subsidiary.

 

The segment's effective tax rate was down in the first quarter of 2019 compared to the same quarter of 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 January 31




2019


2018(2)








Operating results






Net interest income on a taxable equivalent basis


(54)


(42)


Non-interest income on a taxable equivalent basis


49


53


Total revenues on a taxable equivalent basis


(5)


11


Non-interest expenses


60


76


Contribution on a taxable equivalent basis


(65)


(65)


Provisions for credit losses




Income before income taxes on a taxable equivalent basis


(65)


(65)


Income taxes (recovery) on a taxable equivalent basis


(16)


(17)


Net loss


(49)


(48)


Non-controlling interests


6


14


Net loss attributable to the Bank's shareholders


(55)


(62)


Average assets


46,796


41,190


 

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

(2)       For the quarter ended January 31, 2018, certain amounts have been reclassified.

 

For the Other heading of segment results, there was a net loss of $49 million in the first quarter of 2019 compared to a net loss of $48 million in the same quarter of 2018. First-quarter total revenues declined year over year, mainly due to the impact of market volatility on the Bank's asset/liability management portfolio. As for the first-quarter non-interest expenses, they were down due to decreases in variable compensation and employee benefits.

 

 

Consolidated Balance Sheet

 

Consolidated Balance Sheet Summary

 

(millions of Canadian dollars)


As at January 31, 2019


As at October 31, 2018


% Change











Assets








Cash and deposits with financial institutions


12,353


12,756


(3)


Securities


74,713


69,783


7


Securities purchased under reverse repurchase agreements









and securities borrowed


15,162


18,159


(17)


Loans and acceptances, net of allowances


146,710


146,082



Other


14,417


15,691


(8)





263,355


262,471











Liabilities and equity








Deposits


172,930


170,830


1


Other


75,146


76,539


(2)


Subordinated debt


764


747


2


Equity attributable to the Bank's shareholders


14,143


13,976


1


Non-controlling interests


372


379


(2)





263,355


262,471



 

Assets

As at January 31, 2019, the Bank had total assets of $263.4 billion, up $0.9 billion from $262.5 billion as at October 31, 2018. At $12.4 billion as at January 31, 2019, cash and deposits with financial institutions were down $0.4 billion. Securities rose $4.9 billion since October 31, 2018, essentially due to a $3.6 billion or 6% increase in securities at fair value through profit or loss, which was mostly attributable to a $4.0 billion increase in securities issued or guaranteed by U.S. Treasury, other U.S. agencies, and other foreign governments and to a $4.3 billion increase in equity securities, partly offset by a $1.1 billion decrease in securities issued or guaranteed by the Canadian government and a $3.4 billion decrease in securities issued or guaranteed by Canadian provincial and municipal governments. Securities other than those measured at fair value through profit or loss were up $1.3 billion. Securities purchased under reverse repurchase agreements and securities borrowed decreased by $3.0 billion, mainly related to the activities of the Financial Markets segment.



At $147.4 billion as at January 31, 2019, loans and acceptances rose $0.6 billion since October 31, 2018. Specifically, residential mortgages (including home equity lines of credit) grew $0.5 billion, personal loans and credit card receivables decreased by $0.7 billion and $0.1 billion, respectively, and loans and acceptances to business and government were up 2% owing to growth in Commercial Banking activities. The following table provides a breakdown of the main loan and acceptance portfolios.

 

(millions of Canadian dollars)


As at January 31, 2019


As at October 31, 2018


As at January 31, 2018


Loans and acceptances








Residential mortgage and home equity lines of credit


76,312


75,773


72,371


Personal


14,517


15,235


14,734


Credit card


2,249


2,325


2,206


Business and government


54,296


53,407


47,704





147,374


146,740


137,015


 

When compared to a year ago, loans and acceptances grew $10.4 billion or 8%. Residential mortgages (including home equity lines of credit) were up 5% 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 1%, whereas credit card receivables rose 2%, and loans and acceptances to businesses and governments grew 14%, i.e., a $6.6 billion increase driven by Commercial Banking and corporate financing activities.

 

Liabilities

As at January 31, 2019, the Bank had total liabilities of $248.8 billion compared to $248.1 billion as at October 31, 2018.

 

The Bank's total deposit liability stood at $172.9 billion as at January 31, 2019 compared $170.8 billion as at October 31, 2018, a $2.1 billion increase arising essentially from growth in personal deposits. The following table provides a breakdown of total personal savings.

 

(millions of Canadian dollars)


As at January 31, 2019


As at October 31, 2018


As at January 31, 2018











Balance sheet








Deposits


57,726


55,688


53,329











Off-balance-sheet








Brokerage


128,312


123,458


125,834


Mutual funds


32,255


31,874


32,838


Other


436


440


469





161,003


155,772


159,141


Total personal savings


218,729


211,460


212,470


 

As at January 31, 2019, personal deposits stood at $57.7 billion, rising $2.0 billion since October 31, 2018. Since January 31, 2018, personal deposits rose 8%, essentially due to the Bank's initiatives to increase this type of deposit as well as to growth at the ABA Bank subsidiary. As at January 31, 2019, total personal savings amounted to $218.7 billion, up from $211.5 billion as at October 31, 2018 and from $212.5 billion as at January 31, 2018. Overall, off‑balance-sheet personal savings stood at $161.0 billion as at January 31, 2019, rising $1.9 billion or 1% from a year ago given net inflows in brokerage operations.

 

At $110.2 billion, business and government deposits decreased $0.1 billion since October 31, 2018. Other liabilities stood at $75.1 billion as at January 31, 2019, declining 2% since October 31, 2018 due to a $2.5 billion decrease in obligations related to securities sold short, partly offset by a $1.3 billion increase in obligations related to securities sold under repurchase agreements and securities loaned.

 

Equity

As at January 31, 2019, equity attributable to the Bank's shareholders was $14.1 billion, rising $0.1 billion from October 31, 2018. This increase came essentially from net income net of dividends, partly offset by a net change in gains (losses) on cash flow hedges and by remeasurements of pension plans and other post-employment benefit plans. The repurchases of common shares for cancellation were partly offset by issuances of common shares under the stock option plan and the impact of shares purchased or sold for trading.

 

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 $421 million as at January 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 January 31, 2019, total commitments for this type of loan stood at $3,052 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.

 

Contingent Liabilities

 

Litigation

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

 

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

 

Watson

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

 

Defrance

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

 

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

 


Capital Management

 

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

 

Basel Accord

The Bank and all other major Canadian banks have to maintain a CET1 capital ratio of at least 8.0%, a Tier 1 capital ratio of at least 9.5%, and a Total capital ratio of at least 11.5%. All of these ratios are to include a capital conservation buffer of 2.5% (set by the Basel Committee on Banking Supervision and OSFI) and a 1% surcharge (set by OSFI) applicable to Domestic Systemically Important Banks (D-SIBs). The banks also have to meet the revised capital floor that sets the regulatory capital level according to the Basel II standardized approach. If the capital requirement under Basel III is less than 75% of the capital requirements as calculated under Basel II, the difference is added to risk-weighted assets. In addition, during the year ended October 31, 2018, OSFI introduced a domestic stability buffer (the buffer) applicable to D-SIBs. The buffer level varies between 0% and 2.5% of risk-weighted assets and currently stands at 1.5%. 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.

 

Requirements - Regulatory ratios under Basel III

 


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

%


1.5

%


9.5

%



Tier 1

6.0

%


2.5

%


8.5

%


1.0

%


9.5

%


1.5

%


11.0

%



Total

8.0

%


2.5

%


10.5

%


1.0

%


11.5

%


1.5

%


13.0

%


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 December 12, 2018, OSFI raised the buffer level such that it will be at 1.75% starting April 30, 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 quarter 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 also 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 grandfathering of the current capital treatment for one year through a negative adjustment to RWA that eliminates the initial increase in risk weights. OSFI is also providing transitional arrangements for all securitization transactions completed by December 31, 2018 for a maximum of two years.

 

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

 

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

 

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

 

Management Activities

During the quarter ended January 31, 2019, the Bank repurchased 1,047,200 common shares for $60 million, which reduced Common share capital by $9 million and Retained earnings by $51 million. This repurchase was part of the normal course issuer bid to repurchase for cancellation program that the Bank launched on June 6, 2018.

 

Shares and Stock Options

 



As at January 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


335,499,661


2,880


Stock options


14,384,526




 

As at February 22, 2019, there were 335,569,580 common shares and 14,334,267 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 724,416,000 Bank common shares, which would have a 68.4% dilutive effect based on the number of Bank common shares outstanding as at January 31, 2019.

 

Movement in Regulatory Capital

 

(millions of Canadian dollars)




Quarter ended

January 31, 2019










Common Equity Tier 1 (CET1) capital






Balance at beginning




8,608



Issuance of common shares (including Stock Option Plan)




20



Impact of shares purchased or sold for trading




44



Repurchase of common shares




(60)



Other contributed surplus




(1)



Dividends on preferred and common shares




(247)











Net income attributable to the Bank's shareholders




536



Common share capital issued by subsidiaries and held by third parties




2



Removal of own credit spread (net of income taxes)




(55)



Impact of adopting IFRS 15 on November 1, 2018




(4)



Other




(11)











Movements in accumulated other comprehensive income








Translation adjustments




(6)




Debt securities at fair value through other comprehensive income




(2)




Other




1











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




(18)



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




8,822










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





Balance at end




2,802










Total Tier 1 capital




11,624










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






Change in certain allowances for credit losses




9



Other, including regulatory adjustments and transitional arrangements




(28)


Balance at end




923










Total regulatory capital




12,547


 

(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 $77.0 billion as at January 31, 2019 compared to $73.7 billion as at October 31, 2018, a $3.3 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 Movement by Key Drivers

 

(millions of Canadian dollars)



Quarter ended


January 31, 2019





Non-counterparty

 credit risk


Counterparty

credit risk


Total











Credit risk - Risk-weighted assets at beginning

56,027


3,449


59,476



Book size

946


327


1,273



Book quality

(254)


56


(198)



Model updates


1,634


1,634



Methodology and policy





Acquisitions and disposals





Foreign exchange movements

(20)


(3)


(23)


Credit risk - Risk-weighted assets at end

56,699


5,463


62,162









Market risk - Risk-weighted assets at beginning





3,435



Movement in risk levels(1)





529



Model updates







Methodology and policy







Acquisitions and disposals






Market risk - Risk-weighted assets at end





3,964









Operational risk - Risk-weighted assets at beginning





10,743



Movement in risk levels





167



Acquisitions and disposals






Operational risk - Risk-weighted assets at end





10,910











Risk-weighted assets at end





77,036


 

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

 

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

 

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

 

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

 

The Model updates item is used to reflect implementations of new models, changes in model scope, and any other change applied to address model malfunctions. During the quarter ended January 31, 2019, the Bank implemented the SA-CCR rules for measuring counterparty credit risk under the standardized approach, as required by the BCBS.

 

The Methodology and policy item presents the impact of changes in calculation methods stemming from changes in regulatory policies as a result, for example, of new regulations.

 

Regulatory Capital Ratios

As at January 31, 2019, the Bank's CET1, Tier 1 and Total capital ratios were, respectively, 11.5%, 15.1% 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 decrease in the CET1 capital ratio came essentially from the application of the SA-CCR rules for measuring counterparty credit risk. Net income net of dividends and common share issuances under the Stock Option Plan more than offset growth in risk-weighted assets, the common share repurchases during the quarter ended January 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 January 31, 2019, the leverage ratio was 4.1%, up from 4.0% as at October 31, 2018. 

 

Regulatory Capital and Ratios Under Basel III

 

(millions of Canadian dollars)


As at January 31, 2019



As at October 31, 2018












Capital









CET1


8,822



8,608




Tier 1


11,624



11,410




Total


12,547



12,352












Risk-weighted assets









CET1 capital


77,036



73,654




Tier 1 capital


77,036



73,670




Total capital


77,036



73,685












Total exposure


286,655



284,337












Capital ratios









CET1


11.5

%


11.7

%



Tier 1


15.1

%


15.5

%



Total


16.3

%


16.8

%


Leverage ratio


4.1

%


4.0

%


 

Dividends

On February 26, 2019, the Board of Directors declared regular dividends on the various series of first preferred shares and a dividend of 65 cents per common share, payable on May 1, 2019 to shareholders of record on March 25, 2019. 

 


Risk Management

 

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

 

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

 

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

 

Credit Risk

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

 

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

 

Maximum Credit Risk Exposure Under the Basel Asset Categories

 

(millions of Canadian dollars)


As at January 31,

2019


As at October 31,

2018





Drawn


Undrawn

commitments


Repo-style

transactions(1)



OTC

derivatives


Other

off-balance-

sheet items(2)



Total


Total





















Retail



















Residential mortgages


46,320


8,418







54,738


54,213



Qualifying revolving retail


2,617


3,122







5,739


6,276



Other retail


14,758


1,592





14



16,364


17,064




63,695


13,132





14



76,841


77,553


Non-retail



















Corporate


51,847


18,342


14,370



7


4,469



89,035


88,527



Sovereign


27,177


5,439


37,831



241


156



70,844


73,915



Financial institutions


4,202


426


74,144



3,402


755



82,929


85,109




83,226


24,207


126,345



3,650


5,380



242,808


247,551


Trading portfolio






9,343




9,343


9,620


Securitization


1,521






3,389



4,910


4,746


Total - Gross credit risk


148,442


37,339


126,345



12,993


8,783



333,902


339,470





















Standardized Approach


13,613


69


17,612



3,639


353



35,286


32,303


AIRB Approach


134,829


37,270


108,733



9,354


8,430



298,616


307,167


Total - Gross credit risk


148,442


37,339


126,345



12,993


8,783



333,902


339,470


 

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

(2)       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.

 

In order to meet OSFI's mortgage loan disclosure requirements, additional information has been provided in Supplementary Financial Information - First Quarter 2019 and in Supplementary Regulatory Capital and Pillar 3 Disclosure - First 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 January 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

12,353


475


11,371


507


Interest rate(3)



Securities













At fair value through profit or loss

59,411


55,539


3,872



Interest rate(3) and equity




At fair value through other comprehensive income

6,575



6,575



Interest rate(3) and equity(4)




At amortized cost

8,727



8,727



Interest rate(3)



Securities purchased under reverse repurchase













agreements and securities borrowed

15,162



15,162



Interest rate(3)(5)



Loans and acceptances, net of allowances

146,710


5,368


141,342



Interest rate(3)



Derivative financial instruments

7,157


6,477


680



Interest rate and exchange rate



Defined benefit asset

49



49



Other



Other

7,211




7,211







263,355


67,859


187,778


7,718

















Liabilities












Deposits

172,930


8,363


164,567



Interest rate(3)



Acceptances

6,827



6,827



Interest rate(3)



Obligations related to securities sold short

15,306


15,306







Obligations related to securities sold under repurchase













agreements and securities loaned

21,311



21,311



Interest rate(3)(5)



Derivative financial instruments

6,251


5,539


712



Interest rate and exchange rate



Liabilities related to transferred receivables

19,298


3,713


15,585



Interest rate(3)



Defined benefit liability

249



249



Other



Other

5,904


21


910


4,973


Interest rate(3)



Subordinated debt

764



764



Interest rate(3)




248,840


32,942


210,925


4,973




 

(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 transactions with maturities of more than one day, interest rate risk is included in the VaR and SVaR measures when they relate to trading activities. 

 

(millions of Canadian dollars)

As at October 31, 2018






Market risk measures









Balance

sheet


Trading(1)


Non-Trading(2)


Not subject to market risk


Non-traded risk primary

risk sensitivity















Assets












Cash and deposits with financial institutions

12,756


226


12,269


261


Interest rate(3)



Securities













At fair value through profit or loss

55,817


51,575


4,242



Interest rate(3) and equity(4)




At fair value through other comprehensive income

5,668



5,668



Interest rate(3) and equity(5)




Amortized cost

8,298



8,298



Interest rate(3)



Securities purchased under reverse repurchase













agreements and securities borrowed

18,159



18,159



Interest rate(3)(6)



Loans and acceptances, net of allowances

146,082


5,417


140,665



Interest rate(3)



Derivative financial instruments

8,608


7,625


983



Interest rate(7)  and exchange rate(7)



Defined benefit asset

64



64



Other(8)



Other

7,019










262,471


64,843


190,348


















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




January 31, 2019


October 31, 2018


January 31, 2018




Low


High


Average


Period end


Average


Period end


Average


Period end




















Interest rate


(4.7)


(7.1)


(5.7)


(5.4)


(4.3)


(5.9)


(3.8)


(3.5)


Exchange rate


(0.5)


(1.8)


(0.9)


(0.9)


(1.4)


(1.4)


(0.8)


(1.2)


Equity


(3.3)


(6.0)


(4.5)


(3.6)


(4.3)


(4.7)


(2.4)


(1.9)


Commodity


(0.9)


(1.5)


(1.2)


(1.3)


(1.0)


(0.9)


(0.7)


(0.6)


Correlation effect(2)


n.m.


n.m.


5.9


5.8


5.0


7.0


3.8


3.8


Total trading VaR


(5.1)


(8.9)


(6.4)


(5.4)


(6.0)


(5.9)


(3.9)


(3.4)


 

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




January 31, 2019


October 31, 2018


January 31, 2018




Low


High


Average


Period end


Average


Period end


Average


Period end




















Interest rate


(11.8)


(19.3)


(14.4)


(14.2)


(12.2)


(13.6)


(10.6)


(9.1)


Exchange rate


(0.7)


(3.1)


(1.5)


(1.2)


(2.3)


(2.4)


(0.9)


(1.5)


Equity


(4.5)


(14.4)


(8.3)


(7.0)


(4.8)


(9.3)


(2.3)


(1.9)


Commodity


(1.4)


(3.6)


(2.3)


(1.5)


(2.0)


(2.2)


(0.8)


(0.9)


Correlation effect(2)


n.m.


n.m.


14.6


11.2


12.4


17.7


7.6


7.4


Total trading SVaR


(9.4)


(16.3)


(11.9)


(12.7)


(8.9)


(9.8)


(7.0)


(6.0)


 

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 Bank's average trading VaR was up, rising from $6.0 million in the quarter ended October 31, 2018 to $6.4 million in the quarter ended January 31, 2019. In addition, average trading SVaR rose from $8.9 million to $11.9 million during the first quarter of 2019. These increases were primarily attributable to higher interest rate risk and equity 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 98% of the days for the quarter ended January 31, 2019. One trading day was marked by a daily trading and underwriting net loss less than $1 million, and this loss did not exceed the VaR.

 

Quarter ended January 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 January 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


(120)


13


(107)


39


24


63


100-basis-point decrease in the interest rate


146


(13)


133


13


(22)


(9)
















(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 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. All questions and comments received by OSFI no later than February 1, 2019 will be taken into consideration. OSFI plans on making the NSFR standard applicable to D-SIBs as 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 January 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


















Cash and deposits with financial institutions


12,353



12,353


2,755


9,598


10,287


Securities















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
















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


26,756


21,718


48,474


26,046


22,428


20,825



Issued or guaranteed by Canadian provincial and
















municipal governments


11,174


9,441


20,615


16,984


3,631


6,540



Other debt securities


5,576


2,889


8,465


2,913


5,552


5,398



Equity securities


31,207


23,414


54,621


35,305


19,316


16,611


Loans















Securities backed by insured residential mortgages


7,872



7,872


4,424


3,448


3,286


As at January 31, 2019


94,938


57,462


152,400


88,427


63,973




As at October 31, 2018


91,640


57,483


149,123


86,176




62,947


































(millions of Canadian dollars)


As at January 31, 2019


As at October 31, 2018










Unencumbered liquid assets by entity







National Bank (parent)


25,208


30,205



Domestic subsidiaries


13,606


11,543



Foreign subsidiaries and branches


25,159


21,199






63,973


62,947




(millions of Canadian dollars)


As at January 31, 2019


As at October 31, 2018










Unencumbered liquid assets by currency







Canadian dollar


32,805


35,838



U.S. dollar


22,150


22,663



Other currencies


9,018


4,446






63,973


62,947


 

Liquid Asset Portfolio - Average(4)

 

(millions of Canadian dollars)







Quarter ended January 31, 2019





Bank-owned

liquid assets(1)


Liquid assets

received(2)


Total

liquid assets


Encumbered

liquid assets(3)


Unencumbered                                                                                                                                                                                         liquid assets















Cash and deposits with financial institutions

12,141



12,141


3,194


8,947


Securities












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













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

26,595


26,883


53,478


29,606


23,872



Issued or guaranteed by Canadian provincial and













municipal governments

11,639


9,042


20,681


16,902


3,779



Other debt securities

5,676


2,840


8,516


2,926


5,590



Equity securities

33,259


26,653


59,912


39,897


20,015


Loans












Securities backed by insured residential mortgages

8,157



8,157


4,465


3,692



97,467


65,418


162,885


96,990


65,895


 

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

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

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

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

Summary of Encumbered and Unencumbered Assets

 

(millions of Canadian dollars)










As at January 31, 2019





Encumbered

assets(1)


Unencumbered

assets


Total


Encumbered

assets as a %

of total assets





Pledged as

collateral


Other(2)


Available as

collateral


Other(3)





















Cash and deposits with financial institutions


98


2,657


9,598



12,353


1.0


Securities


23,786



50,927



74,713


9.0


Securities purchased under reverse repurchase















agreements and securities borrowed



15,162




15,162


5.8


Loans and acceptances, net of allowances


28,848



3,448


114,414


146,710


11.0


Derivative financial instruments





7,157


7,157



Investments in associates and joint ventures





649


649



Premises and equipment





606


606



Goodwill





1,412


1,412



Intangible assets





1,332


1,332



Other assets





3,261


3,261





52,732


17,819


63,973


128,831


263,355


26.8
































(millions of Canadian dollars)










As at October 31, 2018





Encumbered

assets(1)


Unencumbered

assets


Total


Encumbered

assets as a %

of total assets





Pledged as

collateral


Other(2)


Available as

collateral


Other(3)





















Cash and deposits with financial institutions


87


2,382


10,287



12,756


0.9


Securities


20,787



48,996



69,783


7.9


Securities purchased under reverse repurchase















agreements and securities borrowed



17,781


378



18,159


6.8


Loans and acceptances, net of allowances


28,670



3,286


114,126


146,082


10.9


Derivative financial instruments





8,608


8,608



Investments in associates and joint ventures





645


645



Premises and equipment





601


601



Goodwill





1,412


1,412



Intangible assets





1,314


1,314



Other assets





3,111


3,111





49,544


20,163


62,947


129,817


262,471


26.5


 

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

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

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

 

Liquidity Coverage Ratio (LCR)

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

 

The following table provides average LCR data calculated using the daily figures in the quarter. For the quarter ended January 31, 2019, the Bank's average LCR was 139%, well above the 100% regulatory requirement and demonstrating the Bank's solid liquidity position.

 

LCR Disclosure Requirements(1)

 

(millions of Canadian dollars)





For the quarter ended





January 31, 2019



October 31, 2018






Total unweighted

value(2) (average)


Total weighted

value(3) (average)



Total weighted

value(3) (average)


















High-quality liquid assets (HQLA)











1


Total HQLA


n.a.


48,894



44,699




Cash outflows











2


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


42,043


2,863



2,784




3



Stable deposits


19,149


574



575




4



Less stable deposits


22,894


2,289



2,209




5


Unsecured wholesale funding, of which:


64,150


34,163



32,021




6



Operational deposits (all counterparties)


11,842


2,836



2,908




7



Non-operational deposits (all counterparties)


45,130


24,149



22,255




8



Unsecured debt


7,178


7,178



6,858




9


Secured wholesale funding


n.a.


16,648



17,048




10


Additional requirements, of which:


34,060


9,597



9,169




11



Outflows related to derivative exposures and other collateral requirements


7,524


4,118



4,273




12



Outflows related to loss of funding on secured debt securities


1,502


1,502



1,169




13



Backstop liquidity and credit enhancement facilities and commitments to extend credit


25,034


3,977



3,727




14


Other contractual commitments to extend credit


1,747


725



534




15


Other contingent commitments to extend credit


92,083


1,408



1,325




16


Total cash outflows


n.a.


65,404



62,881


















Cash inflows











17


Secured lending (e.g., reverse repos)


92,077


16,383



19,175




18


Inflows from fully performing exposures


8,429


5,030



5,040




19


Other cash inflows


8,691


8,691



8,286




20


Total cash inflows


109,197


30,104



32,501

























Total adjusted

value(4)



Total adjusted

value(4)


















21


Total HQLA


n.a.


48,894



44,699




22


Total net cash outflows


n.a.


35,300



30,380




23


Liquidity coverage ratio (%)(5)


n.a.


139

%


147

%

 

n.a.     Not applicable

(1)      OSFI prescribed a table format in order to standardize disclosure throughout the banking industry.

(2)       Unweighted values are calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows).

(3)       Weighted values are calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates.

(4)       Total adjusted values are calculated after the application of both haircuts and inflow and outflow rates and any applicable caps.

(5)       The data in this table has been calculated using averages of the daily figures in the quarter.

 

Level 1 liquid assets represent 86% of the Bank's HQLA, which includes cash, central bank deposits, and bonds issued or guaranteed by the Canadian government and Canadian provincial governments.

 

Cash outflows arise from the application of OSFI-prescribed assumptions on deposits, debt, secured funding, commitments and additional collateral requirements. The cash outflows are partly offset by cash inflows, which come mainly from secured loans and performing loans. The Bank expects some quarter-over-quarter variation between reported LCRs, and such variation may not be indicative of a trend. The variation between the quarter ended January 31, 2019 and the preceding quarter was a result of normal business activities. The Bank's liquid asset buffer is well in excess of its total net cash outflows.

 

The LCR assumptions differ from the assumptions used for the liquidity disclosures provided in the tables on the preceding pages or those used for internal liquidity management rules. While the liquidity disclosure framework was prescribed by the EDTF, the Bank's internal liquidity metrics use assumptions that are calibrated according to its business model and experience.

Funding Risk

Funding risk is defined as the risk to the Bank's ongoing ability to raise sufficient funds to finance actual or proposed business activities on an unsecured or secured basis at an acceptable price. The Bank maintains a good balance of its funding through appropriate diversification of its unsecured funding vehicles, securitization programs and secured funding. The Bank also diversifies its funding by currency, geography and maturity. The funding management priority is to achieve an optimal balance between deposits, securitization, secured funding and unsecured funding. This brings optimal stability to the funding and reduces vulnerability to unpredictable events.

 

The Bank's balance sheet is well diversified and is supported by a funding strategy. The Bank continuously monitors and analyzes the possibilities for accessing less expensive funding. The Bank is aiming to fund its core banking activities through personal, commercial and government deposits and through securitization programs. In addition to core deposits, the Bank also receives non‑marketable deposits from governments and large corporations. Wholesale funding is invested in cash and securities. The table below presents the residual contractual maturities of the Bank's wholesale funding. The information has been presented in accordance with the categories recommended by the EDTF for comparison purposes with other banks.

 

Residual Contractual Maturities of Wholesale Funding(1)

 

(millions of Canadian dollars)














As at January 31, 2019





1 month or less


Over 1

month to

3 months


Over 3

months to

6 months


Over 6

months to

12 months


Subtotal

1 year

or less


Over 1

year to

2 years


Over 2

 years


Total





















Deposits from banks(2)


808


33


7



848



73


921


Certificates of deposit and commercial paper(3)


1,628


3,060


3,290


345


8,323


131



8,454


Senior unsecured medium-term notes(4)



190


1,542


1,412


3,144


6,020


3,007


12,171


Senior unsecured structured notes




131


883


1,014


260


3,886


5,160


Covered bonds and asset-backed securities



















Mortgage securitization



224


941


1,525


2,690


3,356


13,252


19,298



Covered bonds







355


7,976


8,331



Securitization of credit card receivables







873


37


910


Subordinated liabilities(5)








764


764




2,436


3,507


5,911


4,165


16,019


10,995


28,995


56,009




















Secured funding



224


941


1,525


2,690


4,584


21,265


28,539


Unsecured funding


2,436


3,283


4,970


2,640


13,329


6,411


7,730


27,470




2,436


3,507


5,911


4,165


16,019


10,995


28,995


56,009


As at October 31, 2018


1,944


7,261


4,339


5,143


18,687


9,856


28,950


57,493


 

(1)       Bankers' acceptances are not included in this table.

(2)       Deposits from banks include all non-negotiable term deposits from banks.

(3)       Includes bearer deposit notes.

(4)       Certificates of deposit denominated in euros are included in senior unsecured medium-term notes.

(5)       Subordinated debt is presented in this table but the Bank does not consider it as part of its wholesale funding.

 

As part of a comprehensive liquidity management framework, the Bank regularly reviews its contracts that stipulate that additional collateral could be required in the event of a downgrade of the Bank's credit rating. The Bank's liquidity position management approach already incorporates additional collateral requirements in the event of a one-notch to three-notch downgrade. The table below presents the additional collateral requirements in the event of a one-notch or three-notch credit rating downgrade.

 

(millions of Canadian dollars)



As at January 31, 2019





One-notch

downgrade


Three-notch

downgrade









Derivatives(1)


26


40


 

(1)       Contractual requirements related to agreements known as Credit Support Annexes.

 

Residual Contractual Maturities of Balance Sheet Items and Off-Balance-Sheet Commitments

The following tables present balance sheet items and off-balance-sheet commitments by residual contractual maturity as at January 31, 2019 with comparative figures as at October 31, 2018. The information gathered from this maturity analysis is a component of liquidity and funding management. However, this maturity profile does not represent how the Bank manages its interest rate risk or its liquidity risk and funding needs. The Bank considers factors other than contractual maturity in the assessment of liquid assets or in determining expected future cash flows.