Regulatory Announcement
RNS Number: 8435O
National Bank of Canada
December 4, 2024
2024 Management's Discussion and Analysis (Part 2)
National Bank of Canada (the "Bank") announces publication of its 2024 Annual Report, including the Management's Discussion and Analysis thereon (the "2024 MD&A"). The 2024 MD&A has been uploaded to the National Storage Mechanism and will shortly be available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism and is available on the Bank's website as part of the 2024 Annual Report at: https://www.nbc.ca/about-us/investors.html.
To view the full PDF of the 2024 MD&A, the 2024 Annual Report and the 2024 Annual CEO and CFO Certifications please click on the following link:
http://www.rns-pdf.londonstockexchange.com/rns/8421O_1-2024-12-4.pdf
http://www.rns-pdf.londonstockexchange.com/rns/8421O_2-2024-12-4.pdf
http://www.rns-pdf.londonstockexchange.com/rns/8421O_3-2024-12-4.pdf
Risk Management
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Risk-taking is intrinsic to a financial institution's business. The Bank views risk as an integral part of its development and the diversification of its activities. It advocates a risk management approach that is consistent with its business strategy. The Bank voluntarily exposes itself to certain risk categories, particularly credit and market risk, in order to generate revenue. It also assumes certain risks that are inherent in its activities-to which it does not choose to expose itself-and that do not generate revenue, i.e., mainly operational risks. The purpose of sound and effective risk management is to provide reasonable assurance that incurred risks do not exceed acceptable thresholds, to control the volatility in the Bank's results, and to ensure that risk-taking contributes to the creation of shareholder value.
Risk Management Framework
Risk is rigorously managed. Risks are identified, measured, and controlled to achieve an appropriate balance between returns obtained and risks assumed. Decision-making is therefore guided by risk assessments that align with the Bank's risk appetite and by prudent levels of capital and liquidity. Despite the exercise of stringent risk management and existing mitigation measures, risk cannot be eliminated entirely, and residual risks may occasionally cause losses.
The Bank has developed guidelines that support sound and effective risk management and that help preserve its reputation, brand, and long-term viability:
• risk is everyone's business: the business units, the risk management and oversight functions, and Internal Audit all play an important role in ensuring a risk management framework is in place; operational transformations and simplifications are conducted without compromising rigorous risk management;
• client-centric: having quality information is key to understanding clients, effectively managing risk, and delivering excellent client service;
• enterprise-wide: a good understanding and an integrated view of risk are the basis for sound and effective risk management and decision-making by management;
• human capital: employees are engaged, experienced, and have a high level of expertise; their curiosity supports continuous development and their rigour ensures that risk management is built into the corporate culture; incentive-based compensation programs are designed to adhere to the Bank's risk tolerance;
• fact-based: good risk management relies heavily on common sense and good judgment and on advanced systems and models.
Risk Appetite
Risk appetite represents how much risk an organization is willing to assume to achieve its business strategy. The Bank defines its risk appetite by setting tolerance thresholds, by aligning those thresholds with its business strategy, and by integrating risk management into its corporate culture. Risk appetite is built into decision-making processes as well as into strategic, financial, and capital planning.
The Bank's risk appetite framework consists of principles, statements, metrics as well as targets and is reinforced by policies and limits. When setting its risk appetite targets, the Bank considers regulatory constraints and the expectations of stakeholders, in particular clients, employees, the community, shareholders, regulatory agencies, governments, and rating agencies. The risk appetite framework is defined by the following principles and statements:
The Bank's reputation, brand, and long-term viability are at the centre of our decisions, which demand:
• a strong credit rating to be maintained;
• a strong capital and liquidity position;
• rigorous management of risks, including information security, regulatory compliance, and sales practices;
• attainment of environmental, social, and governance objectives.
The Bank understands the risks taken; they are aligned with our business strategy and translate into:
• the right risk-reward balance;
• a stable risk profile;
• a strategic level of concentration aligned with approved targets.
The Bank's transformation and simplification plan is being carried out without compromising rigorous risk management, which is reflected in:
• a low tolerance to operational and reputation risk;
• operational and information systems stability, both under normal circumstances and in times of crisis.
The Bank's management and business units are involved in the risk appetite setting process and are responsible for adequately monitoring the chosen risk indicators. These needs are assessed using the enterprise strategic planning process. The risk indicators are reported on a regular basis to ensure an effective alignment between the Bank's risk profile and its risk appetite, failing which corrective actions might be taken. Additional information on the key credit, market and liquidity risk indicators monitored by the Bank's management is presented on the following pages.
Enterprise-Wide Stress Testing
An enterprise-wide stress testing program is in place at the Bank. It is part of a more extensive process aimed at ensuring that the Bank maintains adequate capital levels commensurate with its business strategy and risk appetite. Stress testing can be defined as a risk management method that assesses the potential effects-on the Bank's financial position, capital and liquidity-of a series of specified changes in risk factors, corresponding to exceptional but plausible events. The program supports management's decision-making process by identifying potential vulnerabilities for the Bank as a whole and that are considered in setting limits as well as in longer term business planning. The scenarios and stress test results are approved by the Stress Testing Oversight Committee and are reviewed by the Global Risk Committee (GRC) and the Risk Management Committee (RMC). For additional information, see the Stress Testing section of this MD&A relating to credit risk, market risk, and liquidity risk.
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Incorporation of Risk Management Into the Corporate Culture
Risk management is supported by the Bank's cultural evolution through, notably, the following pillars:
· Tone set by management: The Bank's management promotes risk management through internal communications and demonstrates it through actions and decisions that are aligned with the risk appetite as well as the desired values and culture.
· Shared accountability: A balanced approach is advocated, whereby business development initiatives are combined with a constant focus on sound and effective risk management. In particular, risk is taken into consideration when preparing the business plans of the business segments, when analyzing strategic initiatives, and when launching new products.
· Transparency: A foundation of the business' values, transparency lets us communicate our concerns quickly without fear of reprisal. We are a learning‑focused organization where employees are allowed to make mistakes.
· Behaviour: Talent and performance management practices, including incentive compensation programs that consider performance and behaviours, strengthen risk management and promote desired behaviours.
· Continuous development: All employees must complete mandatory annual regulatory compliance training focused on the Bank's Code of Conduct and on anti-money laundering and anti-terrorist financing (AML/ATF) efforts as well as cybersecurity training. Risk management training is also offered across all of the Bank's business units.
In addition to these five pillars, Internal Audit carries out corporate cultural assessments as part of its engagements. Furthermore, to ensure the effectiveness of the existing risk management framework, the Bank has defined clear roles and responsibilities by reinforcing the concept of the three lines of defence. The Governance Structure section presented on the following pages defines this concept as well as the roles and responsibilities of these three lines of defence.
| First Line of Defence Risk Owner |
| Second Line of Defence Independent Oversight |
| Third Line of Defence Independent Assurance |
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| Business Units |
| Risk Management and Oversight Functions |
| Internal Audit |
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• Identify, manage, assess and mitigate risks in day-to-day activities.
• Ensure activities are aligned with the Bank's risk appetite and risk management policies. |
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• Oversee risk management by setting policies and standards.
• Provide independent oversight of management practices and an independent challenge of the first line of defence.
• Promote sound and effective risk management at the Bank.
• Monitor and report on risk.
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• Provide the Board and management with independent assurance as to the effectiveness of the main governance, risk management, and internal control processes and systems.
• Provide recommendations and advice to promote the Bank's long-term financial strength. |
Governance Structure(1)*
The following chart shows the Bank's overall governance architecture and the governance relationships established for risk management.
The Board of Directors (Board)
The Board is responsible for approving and overseeing management of the Bank's internal and commercial affairs, and it establishes strategic directions together with management. It also approves and oversees the Bank's overall risk philosophy and risk appetite, acknowledges and understands the main risks faced by the Bank, and makes sure appropriate systems are in place to effectively manage and control those risks. In addition, the Board ensures that the Bank operates in accordance with environmental, social and governance (ESG) practices and strategies. It carries out its mandate both directly and through its committees: the Audit Committee, the Risk Management Committee, the Human Resources Committee, the Conduct Review and Corporate Governance Committee, and the Technology Committee.
The Audit Committee
The Audit Committee provides functional oversight over Internal Audit, thereby ensuring its independence, and defines its responsibilities. It oversees the work of the Bank's internal auditor and independent auditor; ensures the Bank's financial strength; oversees the Bank's financial reporting, analysis processes, and internal controls; and reviews any reports of irregularities in accounting, internal controls, or audit. It also reviews ESG statements, including climate-related disclosures included in financial reports.
The Risk Management Committee (RMC)
The Risk Management Committee examines the risk appetite framework and recommends it to the Board for approval. It approves the main risk management policies and risk tolerance limits. It ensures that appropriate resources, processes, and procedures are in place to properly and effectively manage risk on an ongoing basis. The Committee oversees top and emerging risks, including financial and non-financial risks. It regularly receives the risk profile and risk trends of the Bank's activities and ensures they are consistent with the risk appetite.
The Human Resources Committee
The Human Resources Committee examines compensation risks, and it reviews and approves the Bank's total compensation policies and programs, taking into consideration the risk appetite framework and ESG strategies, and recommends their approval to the Board. It recommends, for Board approval, the compensation of the President and Chief Executive Officer, of the members of the Senior Leadership Team, and of the heads of the oversight functions. This committee oversees all human resources practices, including employee health, safety and well-being, talent management matters such as succession planning for management and oversight functions, as well as diversity, equity and inclusion. Lastly, it oversees pension plans and employee benefits.
The Conduct Review and Corporate Governance Committee
The Conduct Review and Corporate Governance Committee ensures that the Bank maintains sound practices that comply with legislation and best practices, particularly in the area of ESG responsibilities, and that they align with the Bank's One Mission. It reviews and approves business conduct and ethical behaviour standards, including the Code of Conduct and the Whistleblower Protection Policy. The committee oversees the application of complaint review mechanisms and implements mechanisms that ensure compliance with consumer protection provisions. Lastly, it ensures that the directors are qualified by evaluating their performance and the effectiveness of the Board and by planning director succession and the composition of the Board.
The Technology Committee
The Technology Committee oversees the various components of the Bank's technology program. It reviews, among other things, the Bank's technology strategy and monitors technology risks, including cyber risks, cybercrime, privacy, and use of artificial intelligence.
(1) Additional information about the Bank's governance structure can be found in the Management Proxy Circular for the 2025 Annual Meeting of Holders of Common Shares, which will be available in March 2025 on the Bank's website at nbc.ca and on SEDAR+'s website at sedarplus.ca. The mandates of the Board and of its committees are available in their entirety at nbc.ca.
Senior Leadership Team of the Bank
Composed of the President and Chief Executive Officer and the officers responsible for the Bank's main functions and business units, the Bank's Senior Leadership Team ensures that risk management is sound and effective and aligned with the Bank's pursuit of its business objectives and strategies. The Senior Leadership Team promotes the integration of risk management into its corporate culture and manages the primary risks facing the Bank.
The Internal Audit Oversight Function
The Internal Audit Oversight Function is the third line of defence in the risk management framework. It is responsible for providing the Bank's Board and management with objective, independent assurance on the effectiveness of the main governance, risk management, and internal control processes and systems and for making recommendations and providing advice to promote the Bank's long-term strength.
The Finance Oversight Function
The Finance Oversight Function is responsible for optimizing management of financial resources and ensuring sound governance of financial information. It helps the business segments and support functions with their financial performance, ensures compliance with regulatory requirements, and handles the Bank's reporting to shareholders and the external reporting of the various units, entities, and subsidiaries of the Bank. It is responsible for capital management and actively participates in the activities of the Asset Liability Committee.
The Risk Management Oversight Function
The Risk Management Oversight Function is responsible for identifying, assessing and monitoring-independently and using an integrated approach-the various risks to which the Bank and its subsidiaries are exposed and for promoting a risk management culture throughout the Bank. The Risk Management team helps the Board and management understand and monitor the top risks. This service also develops, maintains, and communicates the risk appetite framework while overseeing the integrity and reliability of risk measures.
The Compliance Oversight Function
The Compliance Oversight Function is responsible for implementing a Bank-wide regulatory compliance risk management framework by relying on an organizational structure that includes functional links to the main business segments. It also exercises independent oversight and conducts assessments of the compliance of the Bank and its subsidiaries with regulatory compliance risk standards and policies.
The Global Risk Committee (GRC)
The Global Risk Committee is the overriding governing entity of all the Bank's risk committees, and it oversees every aspect of the overall management of the Bank's risks. It sets the parameters of the policies that determine risk tolerance and the overall risk strategy, for the Bank and its subsidiaries as a whole, and sets limits as well as tolerance and intervention thresholds enabling the Bank to properly manage the main risks to which it is exposed. The committee approves and monitors all large credit facilities using the limits set out in the Credit Risk Management Policy. It reports to the Board, and recommends for Board approval, the Bank's risk philosophy, risk appetite, and risk profile management. The Operational Risk Management Committee, the Financial Markets Risk Committee, and the Enterprise-Wide Risk Management Committee presented in the governance structure chart are the primary committees reporting to the Global Risk Committee. The Global Risk Committee also carries out its mandate through the Senior Complex Valuation Committee and the Model Oversight Committee, and through risk review committees.
The Compensation Risk Oversight Working Group
The Compensation Risk Oversight Working Group supports the Human Resources Committee in its compensation risk oversight role. It is made up of at least three members, namely, the Executive Vice-President and Chief Risk Officer, the Chief Financial Officer and Executive Vice-President, Finance; and the Executive Vice-President, Employee Experience. The working group helps to ensure that compensation policies and programs do not unduly encourage senior management members, leaders, material risk takers, and all employees to take risks beyond the Bank's risk tolerance thresholds. As part of that role, it ensures that the Bank is adhering to the Corporate Governance Guideline issued by OSFI and to the Principles for Sound Compensation Practices issued by the Financial Stability Board, for which the Canadian implementation and monitoring is conducted by OSFI. The RMC also reviews the reports presented by this working group.
The ESG Committee
Under the leadership of the Chief Financial Officer and Executive Vice-President, Finance and of the Senior Vice-President, Communications, Public Affairs and ESG, and made up of several leaders from different areas of the Bank, the ESG Committee's main role is to develop and support the Bank's environmental, social and governance initiatives. The ESG Committee is responsible, among other things, for implementing the recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD) and the UN Principles for Responsible Banking as well as the Bank's nine ESG principles and related commitments (for more details, see the Governance section of the ESG Report on the Bank's website, at nbc.ca). At least twice a year, the ESG Committee reports to the Conduct Review and Corporate Governance Committee on the progress made and on ongoing and upcoming ESG projects. In addition, and in a timely fashion, the ESG Committee makes presentations on topics of particular interest, such as extra-financial and climate risk disclosures, to the Audit Committee and the RMC.
The IT Risk Management Strategic Committee (ITRMSC)
The Bank's senior management and the Senior Vice-President, Integrated Risk Management, confer to the ITRMSC the responsibility for technology and cyber risk governance. The ITRMSC, under the leadership of the Vice-President, Technology, Cyber and Data Risk Management, has been mandated to ensure that technology strategies (including cybersecurity and technology resilience) are aligned with the Bank's risk appetite. This committee monitors key technology risk indicators and significant technology risk developments, ensures that emerging technology risks are monitored and follows their main trends. Lastly, it contributes to developing a sound risk culture by promoting ownership of technology risk management across the Bank.
The Privacy Office
The Privacy Office develops and implements the privacy program and the Bank's strategy for ensuring privacy and protection of personal information. It oversees the development, updating, and application of appropriate documentation in support of the Bank's privacy program, including policies, standards, and procedures. It also oversees the risk governance framework and the implementation of appropriate controls designed to mitigate privacy risk. It supports the business units in their execution of the Bank's strategic directions and ensures adherence to privacy best practices. Lastly, it participates in the work to develop and implement the program overseeing artificial intelligence in the organization.
The Business Units
As the first line of defence, the business units manage risks related to their operations within established limits and in accordance with risk management policies by identifying, analyzing, managing, and understanding the risks to which they are exposed and implementing risk mitigation mechanisms. The management of these units must ensure that employees are adhering to current policies and limits.
Asset Liability Committee
The Asset Liability Committee is composed of members of the Bank's Senior Leadership Team, Risk Management leaders, Finance unit leaders, and business unit leaders. It monitors and provides strategic actions on structural interest rate risk, structural foreign exchange risk, and liquidity risk. It is also charged with strategic coordination of the annual budget plan with respect to the balance sheet, capital, and funding.
Reputation Risk Committee (RRC)
The Reputation Risk Committee is the central point for sharing information on the Bank's reputation risk practices. In particular, it ensures that appropriate frameworks are in place and being applied, that higher reputation risks are being adequately monitored, and that mitigation plans are in place. It sets risk appetite levels and proposes guidance and alignments that match this risk appetite. The RRC reports to the Senior Leadership Team and the RMC.
Risk Management Policies
The risk management policies and related standards and procedures set out responsibilities, define and describe the main business-related risks, specify the requirements that business units must fulfill when assessing and managing these risks, stipulate the authorization process for risk-taking, and set the risk limits to be adhered to. They also establish the reporting that must be provided to the various risk-related bodies, including the RMC. The policies cover the Bank's top risks, are reviewed regularly to ensure they are still relevant given market changes, regulatory changes and changes in the business plans of the Bank's business units, and they apply to the entire Bank and its subsidiaries, when applicable. Other policies, standards, and procedures complement the main policies and cover more specific aspects of risk management such as business continuity; the launch of new products, initiatives, or activities; or financial instrument measurement.
Model Risk Management Governance
The Bank uses several models to guide enterprise-wide risk management, financial markets strategy, economic and regulatory capital allocation, global credit risk management, operational risk management, and profitability measures. The model risk management policies as well as a rigorous model management process ensure that model usage is appropriate and effective.
The key components of the Bank's model risk management governance framework are the model risk management policies and standards, the model validation group, and the Model Oversight Committee. The policies and standards set the rules and principles applicable to the development and independent validation of models. The range of models covered is broad, from market risk pricing models and automated credit decision-making models to banking product fraud detection models, regulatory capital models, and expected credit losses models.
One of the cornerstones of the Bank's policies is the general principle that all models deemed important for the Bank or used for regulatory capital purposes require heightened lifecycle monitoring and independent validation. All models used by the Bank are therefore classified based on their risk level (low, medium, or high). Using this classification, the Bank applies strict guidelines regarding the requirements for model development and documentation, independent review thereof, performance monitoring thereof, and minimum review frequency. The Bank believes that the best defence against model risk is the implementation of a robust development and validation framework.
Independent Oversight by the Compliance Function
Compliance is an independent oversight function within the Bank. Its Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer has direct access to the RMC and to the President and Chief Executive Officer and can communicate directly with leaders and directors of the Bank and of its subsidiaries and foreign centres. The Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer regularly meets with the Chair of the RMC, in the absence of management, to review matters on the relationship between the Compliance function and the Bank's management and on access to the information required.
Business unit managers must oversee the implementation of mechanisms for the daily control of regulatory compliance risks arising from the operations under their responsibility. Compliance exercises independent oversight to assist managers in effectively managing these risks and to obtain reasonable assurance that the Bank complies with the regulatory requirements that apply to its operations, both in Canada and internationally.
Independent Assessment by Internal Audit
Internal Audit is an independent oversight function created by the Audit Committee. Its Senior Vice-President has direct access to the Chair of the Audit Committee and to the President and Chief Executive Officer and can communicate directly with leaders and directors of the Bank and its subsidiaries and foreign centres. The Senior Vice-President, Internal Audit, regularly meets with the Chair of the Audit Committee, in the absence of management, to review matters on the relationship between Internal Audit and the Bank's management.
Internal Audit is the third line of defence of the Bank's risk management framework. It provides reasonable assurance that the main governance, risk management, and internal control processes and systems are ensuring that, in all material respects, the Bank's key control procedures are effective and compliant. Internal Audit also provides recommendations and advice on how to strengthen these key control procedures. Business unit managers and senior management must ensure the effectiveness of the main governance, risk management, and internal control processes and systems, and they must implement corrective measures if needed.
Top and Emerging Risks
Managing risks requires a solid understanding of every type of risk faced by the Bank, as they could have a material adverse effect on the Bank's business, results of operations, financial position, and reputation. As part of its risk management approach, the Bank identifies, assesses, reviews and monitors the range of top and emerging risks to which it is exposed in order to proactively manage them and implement appropriate mitigation strategies. Identified top and emerging risks are presented to senior management and communicated to the RMC.
The Bank applies a risk taxonomy that categorizes, in two groups, the top risks to which the Bank is exposed in the normal course of business:
· Financial risks: Directly tied to the Bank's key business activities and are generally more quantifiable or predictable;
· Non-financial risks: Inherent in the Bank's activities and to which it does not choose to be exposed.
The Bank separately qualifies the risks to which it is exposed: a "top risk" is a risk that has been identified, is clearly defined, and could have a significant impact on the Bank's business, results of operations, financial position, and reputation, whereas an "emerging risk" is a risk that, while it may also have an impact on the Bank, is not yet well understood in terms of its likelihood, consequences, timing, or the magnitude of its potential impact.
In the normal course of business, the Bank is exposed to the following top risks.
| Financial risks | Non-financial risks | ||||||
| Credit risk | Market risk | Liquidity and funding risk | Operational risk | Regulatory compliance risk | Reputation risk | Strategic risk | Environmental and social risk |
The Bank is also exposed to other new, so-called emerging or significant risks, which are defined as follows.
| Risk and Trend | Description |
| Information security
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The use of technology in the financial sector drives innovation by increasing the operational efficiency and competitiveness of businesses to better meet the evolving needs of clients and market requirements. However, this digital transformation exposes banks to heightened information security risks. Cybercriminals, who are increasingly more organized and sophisticated, target confidential information and critical assets of organizations, causing system failures, financial losses, service disruptions, litigations, fines, and harm to the reputation of banking institutions.
In this context, the main risk for the Bank lies primarily in intentional or accidental breaches of data or a malicious code infection following a case of social engineering. In addition, the Bank has observed a growing number of hackers are specializing in corporate credentials theft, thereby pointing to continued ransomware-type attacks. Furthermore, the risk of the supply chain being compromised and attacks aimed at deteriorating the performance of websites or networks remain major sources of concern considering the growth in the supplier ecosystem and geopolitical conflicts.
With respect to emerging risks, the Bank identified the rise of sophisticated threats, such as the malicious use of artificial intelligence to replace a human characteristic like the voice or face with another (deepfake). In addition, the increased use of connected objects (Internet of Things or IoT) and the power of quantum computers create new security challenges requiring heightened vigilance and innovative defence strategies.
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| Risk and Trend | Description | |
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Information security (cont.)
| To mitigate these risks, the Bank makes ongoing investments aimed at strengthening information security, protecting its clients and preserving their trust. It collaborates with its partners and regulatory authorities, sets up specialized teams to anticipate and respond to cyber threats, and develops programs for its employees to raise awareness of good cybersecurity practices and social engineering techniques, for instance through its cybersecurity program. A governance and accountability structure is also in place to support decision-making based on sound risk management. In addition, the Technology Committee is regularly informed of the cybersecurity posture, trends and developments, such as lessons learned from operational incidents that have occurred in other large organizations, to gain a better understanding of cybersecurity and privacy risks.
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| Data risk and protection of personal information
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The Bank operates in an environment where data plays a crucial role, both as a driver of growth and as a potential source of risk. The Bank understands that the volume of data created, transformed and handled on a regular basis by all its segments generates a risk that could give rise to impacts on a financial level (regulatory penalties, increase in operating costs, etc.) and on a reputational level, but also on its clients. The importance of effective data governance and management has grown with the rapid evolution of technology. On the one hand, the use of artificial intelligence requires data quality and generates new risks, including ethical risks, such as potential biases. On the other hand, the regulatory requirements are constantly evolving.
The Bank recognizes data as a strategic asset and has set the objective of enhancing the quality and integrity of data to unlock its full strategic value and improve decision-making while complying with regulatory requirements. To support its efforts, the Bank applies industry best governance and risk management practices and relies notably on the Basel Committee principles, as well as internationally recognized principles that are adopted by major financial institutions. In addition, the Bank continues its efforts and investments to adopt new technologies and exploit the value of data to support informed decisions and meet clients' needs with greater agility.
The Bank's Data Office established a data governance framework emphasizing data quality, security, transparency, protection and risk management. The Data Council ensures data management is aligned with the corporate strategy. As for the Data Office, it ensures that the data strategy is deployed and operationalized in each segment. Committees are in place to monitor the progress of initiatives, ensure effective governance and sound data management, and oversee data risk across the Bank.
A significant proportion of the data held by the Bank is personal information about its clients and employees. Privacy risks exist throughout the data life cycle and are explained in particular by the volume and sensitivity of the information that a financial institution must hold about its clients as well as the constantly evolving legislative requirements. These risks are also related to the fact that information could be created, collected, used, communicated, stored or destroyed inappropriately. The exposure to such risks may become greater when the Bank uses external service providers to process personal information. Collecting, using, disclosing and managing personal information, as well as personal information governance, are among the priorities of the Bank, which is investing in technology solutions and innovations based on the development of its business activities.
These risks could lead to the loss or theft of personal information, decline of the client base, financial losses, non-compliance with the legislation in effect, investigations, legal disputes, penalties, punitive damages or regulatory orders, compliance costs, corrective actions, and cost hikes to maintain and upgrade technological infrastructures and systems; all of which could affect the Bank's operating results or financial position, in addition to having an impact on its reputation.
In recent years, innovations and the proliferation of technological solutions that process or store personal information such as cloud computing, artificial intelligence, machine learning, and open banking, gave rise to significant legislative changes in many jurisdictions, including Canada and Quebec. For more information on recent legislative changes, refer to the Regulatory Compliance Risk section of this MD&A.
The Bank continues to monitor relevant legislative developments and enhance its governance by updating its policies, standards and practices and by deploying a privacy program that reflects its determination to maintain the trust of its clients.
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| Risk and Trend | Description |
| Technological innovation and competition
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Changes in technology and the offering of niche products by non-banking suppliers continue to shape the financial services industry. These businesses represent competitors to watch, especially since they are not subject to the same regulatory requirements as financial institutions. These developments drive the Bank to remain relevant by offering innovative solutions and services that meet the evolving tastes and needs of clients. In addition, new business models are making their way. As a result, the Bank must be agile to stand out. Whether by focusing on different partnership models for greater complementarity or by integrating more financial services into its platforms, the Bank strives to better meet its clients' needs, particularly in terms of financial independence and well-being.
In the continuous spirit of offering a quality client experience, the Bank continues to work on integrating artificial intelligence to improve its business processes and increase their effectiveness. Using this technology involves both operational and reputation risks, and this is why the principles governing the development, acquisition and use of artificial intelligence, defined as part of model risk management, entail the participation of multidisciplinary teams and set out the roles and responsibilities of each sector. These principles ensure a quality execution and oversight as well as common rules and positionings for a responsible use of artificial intelligence at the Bank. A series of guidelines and good practices, such as overseeing the use of generative artificial intelligence, enables the Bank to optimize its operations through the use of these tools while managing the associated risks, including risks related to confidentiality and execution quality.
The Bank remains alert to the risks that could arise from the transformation of financial services and continues to invest in the development of its operational and technological capabilities. The Bank remains strongly committed to innovation by collaborating closely with the financial industry and regulatory authorities to set up the open banking regulatory framework and through its specialized venture capital arm, NAventuresTM, which makes investments in start-up or growing businesses to establish solid partnerships that will shape the financial institution of the future.
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| Reliance on technology and third-party providers
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The Bank's clients have higher expectations regarding the accessibility to products and services on various platforms that house substantial amounts of data. To diligently meet client expectations and respond to the rapid pace of technological changes and the growing presence of new actors in the banking sector, the Bank makes significant and ongoing investments in its technology while maintaining the operational resilience and robustness of its controls. Inadequate implementation of technological improvements or new products or services could significantly affect the Bank's ability to serve and retain clients.
Third parties provide essential components of the Bank's technological infrastructure such as Internet connections, access to networks and other communication services. The Bank also relies on the services of third parties to support certain business processes and to handle certain IT activities. An interruption of these services or a breach of security could have an unfavourable impact on the Bank's ability to provide products and services to its clients and on its operational resilience, not to mention the impact that such events would have on the Bank's reputation. The systemic concentration of third parties and subcontractors of our third parties also increases the risk of disruption across the banking industry, and the geographic concentration of third parties could generate disruptions caused by other risks, such as natural disasters, weather and geopolitical events. To mitigate these risks, the Bank has a third-party risk management framework that includes various validations in terms of information security, financial health, beneficiary and entity screening, regulatory compliance, business continuity, internal and systemic concentration, execution, privacy, etc. that are carried out both before entering into an agreement and throughout its life. The extent of the due diligence review is based on the specific features of the agreement and is commensurate with the level of risk of the agreement. The framework also includes business continuity and technological succession plans as well as exit or contingency plans to ensure effectiveness in the event critical suppliers are not available. A governance and accountability structure has also been established to support decision-making based on sound risk management.
Despite these preventive measures and the efforts deployed by the Bank to manage third parties, it is possible that some risks may materialize. In such cases, the Bank would rely on mitigation mechanisms developed in collaboration with the various concerned agreement owners and third parties. As the industry is facing a broader ecosystem of third parties, OSFI issued a new version of its Third-Party Risk Management Guideline (B-10), which has been in effect since May 1, 2024. Mindful of the significance of third-party risk, the Bank makes sure that its third-party management practices and policies evolve in collaboration with its financial sector partners and with regulatory authorities.
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| Risk and Trend | Description |
| Geopolitical risks
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Government decisions and international relations can have a significant impact on the environment in which the Bank operates. Geopolitical events can lead to volatility, have a negative impact on risky assets, and cause financial conditions to deteriorate. They can also directly or indirectly affect banking activities by having repercussions on clients. The war in Ukraine, which has temporarily disrupted energy and agricultural supply chains, is a good example. The economic sanctions taken against Russia for its invasion of Ukraine and the steps taken by Russia to significantly reduce natural gas supply to Europe have led to soaring energy costs. In turn, this situation triggered the economic headwinds now facing Europe and heightened the risk of a political reaction in the form of new governments taking power and social unrest. Even if the war were to end, the shattered trust suggests that Europe and Russia will continue to take measures to become less dependent on one another, notably regarding energy matters. In addition, the clashes between Israel and Hamas add a new risk of regional escalation in the Middle East. At the time of writing this document, there is an escalation between Israel and Hezbollah in Lebanon, which is supported by Iran. The greatest risk is that this conflict spreads and develops into a more direct and lengthy confrontation between Iran and Israel, which could complicate oil deliveries in the Persian Gulf. This would have negative consequences on the global geopolitical and economic landscape, as well as on energy prices.
While new risks could arise at any time, certain concerns are compelling us to monitor other situations at this time. The geopolitical power struggle that for years has pitted the United States against China is one such concern. Businesses, in particular those operating in sectors deemed strategic, run an increasing risk of finding themselves in a maze of contradictory regulations, where complying with U.S. regulations means violating Chinese law, and vice versa. These tensions could also partially undo some of the ties forged between these two superpowers in the financial markets, which means that Canada is being increasingly caught in the crossfires between the two countries. The tariffs on Chinese electric vehicles is just one of many examples.
Tensions between China and the United States on the subject of Taiwan is another source of disagreement between the two superpowers. While we do not believe an invasion is imminent, China will continue to exert pressure on Taiwan through a combination of unprecedented military exercises and economic sanctions. Taiwan's importance is highlighted by the fact that it is by far the leading global producer of advanced microchips (over 90% of the market share).
Closer to home, Canada is also dealing with some tensions. Until recently, India represented an alternative to China as a potential trading partner against a backdrop of persistent tensions with the Middle Kingdom (detention of two Canadians in China and Chinese interference in Canadian elections). However, Ottawa's accusations that the Indian government was involved in the murder of a Canadian citizen have soured relations with India, and the conflict could affect companies that have forged trade relationships or made investments there.
However, the potential for confrontation does not end there, as protectionism is gaining popularity, and a growing number of countries are implementing measures to both financially support domestic businesses in key sectors (high tech, health care, and food) and to protect them against global competition through business restrictions. The combined effects of supply shortages experienced during the COVID-19 pandemic and geopolitical tensions have shifted the focus from efficiency to supply security.
In addition, the combined effect of climate change and armed conflicts could lead to massive involuntary migration, which has already risen sharply in recent years. This could have economic and political repercussions, with Europe being particularly vulnerable. Lastly, with rising debt levels and interest rates, some governments could face a dilemma as they try to satisfy public demands to maintain social safety nets and respond to pressure from the financial markets to improve their fiscal balance, causing political tensions in the developed countries.
We will continue to monitor all of these developments, analyze any new risks that arise, and assess the impacts that they may have on our organization.
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| Risk and Trend | Description |
| Economic risk
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Global economic growth remains relatively healthy, but still seems to have slowed down in recent months. Once again, the manufacturing sector is the source of this downturn, as the worldwide demand for goods continued to wane after the post-pandemic rush. Geographically, the eurozone and China are the main areas responsible for the tempered growth. In the single currency zone, the consequences of the invasion of Ukraine by Russia are still being felt, especially in Germany, where energy price increases accelerated the erosion of the industrial base and resulted in GDP stagnation and a rise in the unemployment rate. The determination of the European Central Bank (ECB) to reduce key interest rates is certainly good news, but due to the significant lag in the transmission of monetary policy, it may be a long time before the ECB's actions succeed in boosting growth once and for all. Meanwhile, China continues to face a painful deleveraging process in the real estate sector that undermines household confidence and could lead to an international reduction in commodities demand. Low, or even negative inflation, is another factor to monitor, not only because it reflects weak domestic demand, but also because a potential entrenchment of deflation could make debt service more challenging in the world's second largest economy.
Even in the United States, where growth remains solid, some risk factors persist, such as the lagged effects of the monetary policy tightening or the regional banks' exposure to commercial real estate. The growing popularity of protectionist policies on both sides of the political aisle is another source of concern, as it may further strain commercial relations with China.
While the economic risks mentioned up to this point are more short-term, other risks carry weight on a longer term, such as the significant deterioration of the fiscal position of many countries. Many governments became much more indebted during the pandemic and are now facing an interest payment shock as bonds come due. Government financing needs will be considerable in the years to come, with demographic changes, the fight against climate change, and reindustrialization, which might exacerbate the pressure on public finances. There is reason to believe that investors could demand compensation for financing more fragile governments. This could limit the power of governments to act in the event of economic weakness.
Lastly, climate issues are an added risk in the current context. If too few measures are adopted on the climate front, severe weather events will intensify and result in economic woes over the long term. Conversely, a too swift transition could result in other risks, particularly short- and medium-term economic costs and rising pressure on production costs.
In short, given the ongoing uncertainties in this economic environment, the Bank remains vigilant in the face of numerous factors and will continue to rely on its strong risk management framework to identify, assess, and mitigate the negative impacts while also remaining within its risk appetite limits.
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| Real estate and household indebtedness
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With interest rates remaining high and central banks continuing to be concerned about inflation, it is normal to wonder how these circumstances are affecting Canadian households with high levels of debt. Canadian household debt, on a global scale, is high in relation to disposable income, as is the case in other countries with generous social safety nets. In recent years, policymakers have introduced a number of financial stability measures to limit Canadian household debt. This has paid off, as shown by the debt ratio, which had been relatively unchanged since 2016 and has decreased since the start of monetary policy tightening. Nonetheless, indebted households are feeling the impact of high interest rates. For now, job layoffs have remained limited, which cushioned late payments on loans, but we are not immune to a potential recession that could make matters worse. The Bank offers variable rate/variable payment mortgage loans. This means that clients in this situation have been able to gradually adjust their budgets since the start of the multiple rate hikes and avoid an overly high payment shock when they renew their mortgage term, as is the case for borrowers that have variable rate/fixed payment mortgages with other lending institutions.
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| Risk and Trend | Description |
| Real estate and household indebtedness (cont.)
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Soaring house prices have been one of the causes of the country's high indebtedness since the early 2000s. For the time being, property prices have been resilient in the face of rising interest rates, since their impact has been offset by record population growth over the past few quarters. But, as mentioned above, a less buoyant job market could push the real estate sector into another slump. A severe recession could cause house prices to plunge, giving rise to an increase in strategic defaults. Lower debt levels in Quebec compared to the rest of Canada, due to more affordable housing prices, combined with the fact that the province has a higher percentage of households where both spouses are employed, helps limit the Bank's exposure to a significant increase in credit risk.
The Bank takes all these risks into account when establishing lending criteria and estimating allowances for credit losses. It should be noted that borrowers are closely monitored on an ongoing basis, and portfolio stress tests are conducted periodically to detect any vulnerable borrowers. The Bank proactively contacts those who are identified and proposes appropriate solutions to enable them to continue to meet their commitments.
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| Climate change
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Climate-related risk may have an impact on the traditional risks that are inherent in a financial institution's operations, including credit risk, market risk, liquidity and funding risk, and operational risk, among others. Climate risk could result in financial losses for the Bank, affect its operations and how it conducts them, in addition to harming its reputation and increasing its regulatory compliance risk, or have repercussions on the operations and financial position of its clients. It is possible that the Bank's or its clients' business models fail to align with a low-carbon economy or that their responses to government strategies and regulatory changes prove inadequate or fail to achieve the objectives within the predetermined deadlines. Consequently, to better assess this risk and adequately manage it, the Bank has integrated a climate dimension to its risk management and risk appetite frameworks to identify, measure, manage, monitor and report the impact of this risk and business opportunities. The roles and responsibilities of the three lines of defence were also defined in a climate-related risk management standard, and several other internal risk management policies now include climate-related risk in their assessment and management of these risks. The Bank also optimized some of its scenario analysis processes to assess the impact of climate on its portfolios.
In addition, the rapid evolution of the global regulatory environment, the commitments and frameworks to which we adhere, and stakeholder expectations concerning our objectives, as well as the actions we take to meet them and disclosures may constitute a reputation risk and regulatory compliance risk, including due to potential imbalances among their requirements, in addition to increasing the risk of lawsuits. The many regulatory standards and projects that have been issued, such as OSFI's guideline B-15, Climate Risk Management; the standards of the International Sustainability Standards Board (ISSBtm), the proposed standards of the Canadian Sustainability Standards Board (CSSB), the European Corporate Sustainability Reporting Directive (CSRD) designed to govern the disclosure of sustainability-related and climate-related financial information, and the CSA's proposed National Instrument 51-107 - Disclosure of Climate-Related Matters, are an illustration.
The actual impacts of these risks will depend on future events, many of which are beyond the Bank's control, such as the effectiveness of targets set by government climate strategies or regulatory developments. The Bank must therefore devote special attention to reducing its exposure to these factors and, at the same time, to seizing new growth opportunities. Its strategies and policies have therefore been designed to consider climate-related risks while also supporting the transition to a low-carbon economy.
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| Risk and Trend | Description |
| Climate change (cont.)
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The Bank strives to support and advise its clients in their own transition. From this perspective, we continue to deliver climate-related risk management training across the organization.
To better understand and mitigate climate-related risks, the Bank also takes part in major national and international initiatives, including the United Nations Principles for Responsible Banking (UNPRB), the United Nations Principles for Responsible Investing (UNPRI), the Net-Zero Banking Alliance (NZBA), the Partnership for Carbon Accounting Financials (PCAF), among others.
The Bank continues to closely monitor regulatory developments and the development of frameworks, commitments, and stakeholder expectations, so that it can enhance its climate-related risk management framework and further adapt its disclosures. For additional information, see the Environmental and Social Risk section of this MD&A.
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Other Factors That Can Affect the Bank's Business, Operating Results, Financial Position, and Reputation
Ability to Recruit and Retain Key Resources
The Bank's current and future performance depends greatly on its ability to recruit, develop, and retain key resources. Overall, attracting and retaining personnel improved in 2024 compared to 2023 and 2022. These results are explained by contextual factors such as immigration and higher unemployment. Challenges remain for some administrative and client-facing positions, and targeted actions are taken for these groups. Despite our improved ability to attract and retain key talents, we continue to monitor this risk. Reports are submitted quarterly to the Board's Human Resources Committee. In addition, we make significant improvements to our talent recruiting, integration and development processes. A new recruitment experience was deployed in 2024 and will continue to be enhanced. We will also begin to gradually deploy a new development experience platform at the end of 2024.
International Risks
Through the operations of some of the Bank's units (mainly its New York and London offices) and subsidiaries in Canada and abroad (in particular Credigy Ltd., NBC Global Finance Limited, and Advanced Bank of Asia Limited), the Bank is exposed to risks arising from its presence in international markets and foreign jurisdictions. While these risks do not affect a significant proportion of the Bank's portfolios, their impact must not be overlooked, especially those that are of a legal or regulatory nature. International risks can be particularly high in territories where the enforceability of agreements signed by the Bank is uncertain, in countries and regions facing political or socioeconomic disturbances, or in countries that may be subject to international sanctions. Generally speaking, there are many ways in which the Bank may be exposed to the risks posed by other countries, not the least of which being foreign laws and regulations. In all such situations, it is important to consider what is referred to as "country risk." Country risk affects not only the activities that the Bank carries out abroad, but also the business that it conducts with non-resident clients as well as the services it provides to clients doing business abroad, such as electronic funds transfers or international products, and operations made from Canada in foreign currencies.
As part of its activities, the Bank must adhere to AML/ATF regulatory requirements in effect in each jurisdiction where it conducts business. It must also comply with the requirements pertaining to current international sanctions in these various jurisdictions. AML/ATF risk is a financial, regulatory, and reputation risk. For additional information, see the Regulatory Compliance Risk Management section of this MD&A.
The Bank is exposed to financial risks outside Canada and the United States primarily through its interbank transactions on international financial markets or through international trade financing activities. This geographic loan exposure represents a moderate proportion of the Bank's total risk. The geographic spread of loans is disclosed in the quarterly Supplementary Financial Information report available on the Bank's website at nbc.ca. To control country risk, the Bank sets credit concentration limits by country and reviews and submits them to the Board for approval upon renewal of the Credit Risk Management Policy. These limits are based on a percentage of the Bank's regulatory capital, in line with the level of risk represented by each country, particularly emerging countries. The risk is rated using a classification mechanism similar to the one used for credit default risk. In addition to the country limits, authorization caps and limits are established, as a percentage of equity, for the world's high-risk regions, i.e., essentially all regions except for North America, Western Europe, and the developed countries of Asia.
Acquisitions
The Bank's ability to successfully complete an acquisition is often conditional on regulatory approval. The Bank cannot be certain of the timing or conditions of regulatory decisions. Acquisitions could affect future results should the Bank experience difficulty integrating the acquired business. If the Bank does encounter difficulty integrating an acquired business, maintaining an appropriate governance level over it or retaining key officers within said business, these factors could prevent the Bank from realizing expected revenue growth, cost savings, market share gains, and other projected benefits of the acquisition.
Intellectual Property
The Bank adopts various strategies to protect its intellectual property rights. However, the protection measures that it may obtain or implement do not guarantee that it will be able to dissuade or prevent anyone from infringing its rights or to obtain compensation when infringement occurs. Moreover, the goods and services developed by the Bank are provided in a competitive market where third parties could hold intellectual property rights prior to those held by the Bank. In addition, financial technologies are the subject of numerous developments in intellectual property and patent applications, both in Canada and internationally. Therefore, in certain situations, the Bank could be limited in its ability to acquire intellectual property rights, develop tools, or market certain products and services. It could also infringe the rights of third parties, which could lead to legal action brought against the Bank.
Judicial and Regulatory Proceedings
The Bank takes reasonable measures to comply with the laws and regulations in effect in the jurisdictions where it operates. Still, the Bank could be subject to judicial or regulatory decisions resulting in fines, damages or other costs, or to restrictions likely to adversely affect its operating results or its reputation. The Bank may also be subject to litigations in the normal course of business. Although the Bank establishes provisions for the measures it is subject to under accounting requirements, actual losses resulting from such litigations could differ significantly from the recognized amounts, and unfavourable outcomes in such cases could have a significant adverse effect on the Bank's operating results. The resulting reputational damage could also affect the Bank's future business prospects. For additional information, see Note 28 to the Consolidated Financial Statements.
Tax Risk
The tax laws applicable to the Bank are numerous, complex, and subject to amendment at any time. This complexity can result in differing legal interpretations between the Bank and the respective tax authorities it deals with. In addition, legislative changes and changes in tax policy, including the interpretation thereof by tax authorities and courts, could affect the Bank's earnings. International and domestic initiatives may also result in changes to tax laws and policies, including international efforts by the G20 and the Organisation for Economic Co-operation and Development (OECD) to broaden the tax base. For additional information on income taxes, see the Income Taxes and Material Accounting Policies and Accounting Estimates sections of this MD&A, and Note 26 to the Consolidated Financial Statements.
Accounting Policies, Methods and Estimates Used by the Bank
The accounting policies and methods used by the Bank determine how the Bank reports its financial position and operating results and require management to make estimates or assumptions about matters that are inherently uncertain. Any changes to these estimates and assumptions may have a significant impact on the Bank's operating results and financial position.
Additional Factors
Lastly, several other factors could have an impact on the Bank's operations, operating results, financial position, and reputation, including: unexpected changes in consumer spending and saving habits; the timely development and launch of new products and services; the ability to successfully align its organizational structure, resources, and processes; the ability to activate a business continuity plan within a reasonable time; the repercussions on the Bank's activities of international conflicts, natural disasters or public health emergencies such as pandemics; and the Bank's ability to foresee and effectively manage the risks resulting from these factors through rigorous risk management.
Credit Risk
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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, guarantors or counterparties. Credit risk is the most significant risk facing the Bank in the normal course of its business. The Bank is exposed to credit risk not only through its direct lending activities and transactions but also through commitments to extend credit and through letters of guarantee, letters of credit, over-the-counter derivatives trading, debt securities, securities purchased under reverse repurchase agreements, deposits with financial institutions, brokerage activities, and transactions carrying a settlement risk for the Bank such as irrevocable fund transfers to third parties via electronic payment systems.
Governance
A policy framework centrally governs the activities that generate credit risk for the Bank and its subsidiaries and is supplemented by a series of subordinate internal policies and standards. These policies and standards address specific management issues such as concentration limits by borrower group and business sector, credit limits, collateral requirements, and risk quantification or issues that provide more thorough guidance for given business segments.
For example, the institutional activities of the Bank and its subsidiaries on financial markets and international commercial transactions are governed by business unit directives that set out standards adapted to the specific environment of these activities. This also applies to retail brokerage subsidiaries. In isolated cases, a business unit or subsidiary may have its own credit policy, and that policy must always fall within the spirit of the Bank's policy framework. Risk Management's leadership team defines the scope of the universe of subsidiaries carrying significant credit risks and the magnitude of the risks incurred.
Credit risk is controlled through a rigorous process that comprises the following elements:
• credit risk rating and assessment;
• economic capital assessment;
• stress testing;
• credit granting process;
• revision and renewal process;
• risk mitigation;
• follow-up of monitored accounts and recovery;
• counterparty risk assessment;
• settlement risk assessment;
• environmental risk assessment.
Concentration Limits
The risk appetite is allocated based on the setting of concentration limits. The Bank sets credit concentration and settlement limits by obligor group, by business sector, by country, and by region. These limits are subject to the approval of the RMC. Certain types of financing or financing programs are also subject to specific limits. Breaches of concentration limits by obligor group or by region are reported to the RMC each quarter. Furthermore, every business sector, country, and region whose exposure equals a predetermined percentage of the corresponding authorized limit is reported to the Bank's Risk Management leadership team. At least once a year, the Bank revises these exposures by business sector, by country, and by region in order to determine the appropriateness of the corresponding concentration limits.
Reporting
Every quarter, an integrated risk management report is presented to senior management and the RMC. It presents changes in the credit portfolio and highlights on the following matters:
• credit portfolio volume growth by business segment;
• breakdown of the credit portfolio according to various criteria for which concentration limits have been set;
• changes in provisions and allowances for credit losses;
• changes in impaired loans;
• changes in monitored accounts;
• changes in delinquency;
• monitoring of OSFI's Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures.
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Before a sound and prudent credit decision can be made, an obligor's or counterparty's credit risk must be accurately assessed. This is the first step in processing credit applications. Using a credit risk rating system developed by the Bank, each application is analyzed and assigned one of 19 grades on a scale of 1 to 10 for all portfolios exposed to credit risk. As each grade corresponds to an obligor's, counterparty's, or third party's probability of default, the Bank can estimate the credit risk. The credit risk assessment method varies according to portfolio type. There are two main methods for assessing credit risk to determine minimum regulatory capital requirements for most of its portfolios, the Internal Ratings-Based (IRB) Approach and the revised Standardized Approach, as defined by the Basel Accord. The IRB Approach applies to most of its credit portfolios. Since the implementation of the Basel III reforms in April 2023, the Bank must use the Foundation Internal Ratings-Based (FIRB) Approach for certain specific exposure types such as financial institutions, including insurance companies, or large corporations that belong to a group whose consolidated annual sales exceed $750 million. For all other exposure types treated under an IRB Approach, the Bank uses the Advanced Internal Ratings-Based (AIRB) Approach.
The main parameters used to measure credit risk in accordance with the IRB Approach are as follows:
· probability of default (PD), which is the probability of through-the-cycle 12-month default by the obligor, calibrated on a long-run average PD throughout a full economic cycle;
· loss given default (LGD), which represents the magnitude of the loss from the obligor's default that would be expected in an economic downturn and subject to certain regulatory floors, expressed as a percentage of exposure at default;
· exposure at default (EAD), which is an estimate of the amount drawn and of the expected use of any undrawn portion prior to default, and cannot be lower than the current balance.
Under the FIRB approach, the Bank provides its own estimates of PD and applies OSFI's estimates for LGD and EAD. Under both IRB Approaches, risk parameters are subject to specific input floors.
The methodology as well as the data and the downturn periods used to estimate LGD under the AIRB Approach are described in the table below.
| AIRB APPROACH |
| DATA(1) | DOWNTURN PERIOD(1) | METHODOLOGY FOR CALCULATING LGD |
| Retail | | The Bank's internal historical data from 1996 to 2022 | 1996-1998 and 2008-2009 | LGD based on the Bank's historical internal data on recoveries and losses |
| Corporate | |
The Bank's internal historical data from 2000 to 2023
Benchmarking results using: • Moody's observed default price of bonds, from 1983 to 2021 • Global Credit Data Consortium historical loss and recovery database from 1998 to 2021
| 2000-2003, 2008-2009 and 2020 | LGD based on the Bank's historical recoveries and losses internal data and on Moody's data |
| Sovereign | | Moody's observed default price of bonds, from 1983 to 2020
S&P rating history from 1975 to 2023 | 1999-2001 and 2008-2012 | Based on implied market LGD using observed bond price decreases following the issuer's default |
| Financial institutions | | Global Credit Data Consortium historical loss and recovery database from 1991 to 2013(2) | 1991-1992, 1994, 1997-1998, 2001‑2002, and 2008-2009 | Model for predicting LGD based on different issue- and issuer-related risk drivers |
(1) The performance of the models resulting from the AIRB Approach is measured quarterly, and the methodologies are validated by an independent third party annually. A report on model performance under the AIRB Approach is presented annually to the RMC. According to the most recent performance report, the models continue to perform well and do not require the addition of new data.
(2) An in-depth revision, including more recent data, is currently being validated and will be deployed in the coming quarters.
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This category comprises portfolios of residential mortgage loans, consumer loans, and loans to certain small businesses. To assess credit risk, AIRB models are in place for the main portfolios, particularly mortgage loans, home equity lines of credit, credit cards, budget loans, lines of credit, and SME retail. A risk analysis based on loan grouping in pools of homogeneous obligor and product profiles is used for overall management of personal credit portfolios. This personal credit assessment approach, which has proven effective particularly for estimating credit defaults and losses, takes a number of factors into account, namely:
· attributes from credit rating agencies (scoring) related to behaviour;
· loan product characteristics;
· collateral provided;
· the length of time on the Bank's balance sheet;
· loan status (active, delinquent, or defaulted).
This mechanism provides adequate risk measurement inasmuch as it effectively differentiates risk levels by pool. Therefore, the results are periodically reviewed and, if necessary, adjustments are made to the models. Obligor migrations between pools are among the factors considered when assessing credit risk.
Loan pools are also established based on PD, LGD, and EAD, which are measured based on the characteristics of the obligor and the transaction itself. The credit risk of these portfolios is estimated using credit scoring models that determine the obligor's PD. LGD is estimated based on transaction-specific factors such as loan product characteristics (for example, a line of credit versus a term loan), loan-to-value ratio, and types of collateral.
Credit scoring models are also used to grant credit. These models use proven statistical methods that measure an obligor's demand characteristics and history based on internal and external historical information to estimate the obligor's future credit behaviour and assign a probability of default. The underlying data include obligor information such as current and past employment, historical loan data in the Bank's management systems, and information from external sources such as credit rating agencies.
The Bank also uses behaviour scoring models to manage and monitor current commitments. The risk assessment is based on statistical analyses of the past behaviour of obligors with which the Bank has a long-term relationship in an effort to predict their future behaviour. The underlying information includes the obligor's cash flows and borrowing trends. Information on characteristics that determine behaviour in these models also comes from both internal sources on current commitments and external sources. The table on the following page presents the PD categories and credit quality of the associated personal credit portfolio.
Mortgage Loan Underwriting
To mitigate the impact of an economic slowdown and ensure the long-term quality of its portfolio, the Bank uses sound risk management when granting residential mortgages to confirm: (i) the obligor's intention to meet its financial obligations, (ii) the obligor's ability to repay its debts, and (iii) the quality of the collateral. In addition, in accordance with the applicable rules, the Bank takes a prudent approach to client qualification by using, for example, a higher interest rate to mitigate the risk of short- or medium-term rate hikes.
Nonetheless, the risk of economic slowdown could adversely affect the profitability of the mortgage portfolio. In its stress test analyses, the Bank considers a variety of scenarios to measure the impact of adverse market conditions. In such circumstances, our analyses show higher credit losses, which would decrease profitability and reduce the Bank's capital ratios. However, it should be recalled that our mortgagors showed great resilience to interest rate increases.
Between March 2, 2022 and July 12, 2023, the Bank of Canada had raised its policy interest rate ten times, from 0.25% to 5%. This rapid increase in rates, undertaken primarily to counter inflation in Canada, continues to put pressure on the ability of borrowers to make payments, notably borrowers with variable-rate mortgages or for whom the mortgage term is up for renewal. Over the course of its last four announcements, which occurred on June 5, July 24, September 4, and October 23, 2024, the Bank of Canada lowered its policy interest rate from 5% to 3.75%.
New Regulatory Developments
The Bank also closely monitors regulatory developments and is actively involved in the various consultation processes. Regulatory developments since November 1, 2023 that should be considered are presented below.
In December 2023, OSFI stated that the stress test rule should not apply to insured mortgage switch applications between financial institutions. More specifically, insured mortgage holders should not have to requalify under the minimum qualifying rate when they switch lending institutions upon renewing their mortgage loans.
On February 5, 2024, the Prohibition on the Purchase of Residential Property by Non-Canadians Act, which should have been in effect until January 1, 2025, was extended to January 1, 2027. The purpose of this law is to help Canadians access the property market and to reduce speculative purchasing that risks raising the prices of properties in some already overheated markets.
During fiscal 2024, OSFI implemented a loan-to-income (LTI) limit applicable to new uninsured mortgage loans. This limit, which is intended to restrict the banks' exposure to households with high levels of debt, will come into effect in the first quarter of 2025.
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This category comprises business (other than some small businesses that are classified in personal credit portfolios), government, and financial institution credit portfolios.
These credit portfolios are assigned a risk rating that is based on a detailed individual analysis of the financial and non-financial aspects of the obligor, including the obligor's financial strength, sector of economic activity, competitive ability, access to funds, and number of years in business. The Bank uses risk-rating tools and models to specifically assess the risk represented by an obligor in relation to its business sector and peers. The models used are adapted to the obligor's broad sector of activity. Models are in place for ten sectors: business/commercial, large business, financial institutions, sovereigns, investment funds, energy, real estate, agriculture, insurance, and public-private partnership project financing.
This risk assessment method assigns a default risk rating to an obligor that reflects its credit quality. To each default credit risk rating corresponds a PD (see the table below). Using this classification of obligor credit risk, the Bank can differentiate appropriately between the various assessments of an obligor's capacity to meet its contractual obligations. Default risk ratings are assigned according to an assessment of an obligor's commercial and financial risks based on a solvency review. Various risk quantification models, described below, are used to perform this assessment.
The business and government default risk rating scale used by the Bank is similar to the systems used by major external rating agencies. The following table presents a grouping of the ratings by major risk category and compares them with the ratings of two major rating agencies.
Internal Default Risk Ratings*
| Description(1) | | Personal credit portfolios | | Description(1) | | Business and government credit portfolios | | ||||||||
| | | PD (%) - Retail | | | | Ratings | | PD (%) - Corporate and financial institutions | | PD (%) - Sovereign | | Standard & Poor's | | Moody's | |
| Excellent | | 0.000-0.144 | | Excellent | | 1-2.5 | | 0.000-0.111 | | 0.000-0.059 |
| AAA to A- | | Aaa to A3 | |
| Good | | 0.145-0.506 | | Good | | 3-4 | | 0.112-0.383 | | 0.060-0.330 |
| BBB+ to BBB- | | Baa1 to Baa3 | |
| Satisfactory | | 0.507-2.681 | | Satisfactory | | 4.5-6.5 | | 0.384-4.234 | | 0.331-5.737 |
| BB+ to B | | Ba1 to B2 | |
| Special mention | | 2.682-9.348 | | Special mention | | 7-7.5 | | 4.235-10.181 | | 5.738-17.963 |
| B- to CCC+ | | B3 to Caa1 | |
| Substandard | | 9.349-99.999 | | Substandard | | 8-8.5 | | 10.182-99.999 | | 17.964-99.999 |
| CCC & CCC- | | Caa2 & Caa3 | |
| Default | | 100 | | Default | | 9-10 | | 100 | | 100 |
| CC, C & D | | Ca, C & D | |
(1) Additional information is provided in Note 8 - Loans and Allowances for Credit Losses to the Consolidated Financial Statements.
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The Bank's default risk ratings and LGD risk ratings as well as the related risk parameters contribute directly to informed credit-granting, renewal, and monitoring decisions. They are also used to determine and analyze risk-based pricing. In addition, from a credit portfolio management perspective, they are used to establish counterparty credit concentration limits and sector concentration limits and limits to decision-making power as well as to determine the credit risk appetite of these portfolios. Moreover, they represent an important component in estimating expected and unexpected losses, measuring minimum required economic capital, and measuring the minimum level of capital required, as prescribed by the regulatory authorities.
The credit risk of obligors and their facilities is assessed with the PD and LGD parameters at least once a year or more often if significant changes (triggers) are observed when updating financial information or if another qualitative indicator of a deterioration in the obligor's solvency or in the collateral associated with the obligor's facilities is noted. The Bank also uses a watchlist to more actively monitor the financial position of obligors whose default-risk rating is greater than or equal to 7.0. This process seeks to minimize an obligor's default risk and allows for proactive credit risk management.
Validation
The Risk Management Group monitors the effectiveness of the risk-rating systems and associated parameters, which is also reviewed regularly in accordance with the Bank's policies. Backtesting is performed at regular intervals to validate the effectiveness of the models used to estimate PD, LGD, and EAD. For PD in particular, this backtesting takes the form of sequentially applied measures designed to assess the following criteria:
• discriminatory power of the model;
• proportion of overrides;
• model calibration;
• stability of the model's inputs and outputs.
The credit risk quantification models are developed and tested by a team of specialists with model performance being monitored by the applicable business units and related credit risk management services. Models are validated by a unit that is independent of both the specialists who developed the model and the concerned business units. Approvals of new models or changes to existing models are subject to an escalation process established by the model risk management policy. Furthermore, new models or changes to existing models that markedly impact regulatory capital must be approved by the Board before being submitted to the regulatory agencies.
The facility and default risk-rating systems, methods, and models are also subject to periodic validation, which is a responsibility shared between the development and validation teams, the frequency of which depends on the model's risk level. Models that have a significant impact on regulatory capital must be reviewed regularly, thereby further increasing the certainty that these quantification mechanisms are working as expected.
The key aspects to be validated are risk factors allowing for accurate classification of default risk by level, adequate quantification of exposure, use of assessment techniques that consider external factors such as economic conditions and credit status and, lastly, compliance with internal policies and regulatory provisions.
The Bank's credit risk assessment and rating systems are overseen by the Model Oversight Committee, the GRC, and the RMC, and these systems constitute an integral part of a comprehensive Bank-wide credit risk oversight framework. Along with the above-mentioned elements, the Bank documents and periodically reviews the policies, definitions of responsibilities, resource allocation, and existing processes.
Assessment of Economic Capital
The assessment of the Bank's minimum required economic capital is based on the credit risk assessments of obligors. These two activities are therefore interlinked. The different models used to assess the credit risk of a given portfolio type also enable the Bank to determine the default risk correlation among obligors. This information is a critical component in the evaluation of potential losses for all portfolios with credit risk. Estimates of potential losses, whether expected or not, are based on historical loss experience, portfolio monitoring, market data, and statistical modelling. Expected and unexpected losses are used in assessing the minimum required economic capital for all of the Bank's credit portfolios. The assessment of economic capital also considers the anticipated potential migrations of the default risk ratings of obligors during the remaining term of their credit commitments. The main risk factors that have an impact on economic capital are as follows:
• the obligor's PD;
• the obligor's EAD;
• the obligor's LGD;
• the default correlation among various obligors;
• the residual term of credit commitments;
• the impact of economic and sector-based cycles on asset quality.
|
Stress Testing
|
Credit-Granting Process
Credit-granting decisions are based first and foremost on the results of the risk assessment. Aside from a clients' solvency, credit-granting decisions are also influenced by factors such as available collateral and guarantees, transaction compliance with policies, standards and procedures, and the Bank's overall risk-adjusted return objective. Each credit-granting decision is made by various authorities within the risk management teams and management, who are independent of the business units, which are determined based on the size of the proposed credit transaction and the associated risk. Decision-making authority is determined in compliance with the delegation of authority set out in the Credit Risk Management Policy. A person in a senior position in the organization approves credit facilities that are substantial or carry a higher risk for the Bank. The GRC approves and monitors all substantial credit facilities. Credit applications that exceed management's latitudes are submitted to the Board for approval. The credit-granting process demands a high level of accountability from managers, who must proactively manage the credit portfolio.
Review and Renewal Processes
The Bank periodically reviews credit files. The review process enables the Bank to update information on the quality of the facilities and covers, among other things, risk ratings, compliance with credit conditions, collateral, and obligor behaviour. For business credit portfolios, the credit risk of all obligors is reviewed at least once per year. After this periodic review, for on-demand or unused credit, the Bank decides whether to pursue its business relationship with the obligor and, if so, revises the credit conditions. For personal credit portfolios, the credit risk of all obligors is reviewed on a continual basis.
Risk Mitigation
The Bank also controls credit risk using various risk mitigation techniques. In addition to the standard practice of requiring collateral to guarantee repayment of the credit it grants, the Bank also uses protection mechanisms such as credit derivative financial instruments, syndication, and loan assignments as well as an orderly reduction in the amount of credit granted.
The most common method used to mitigate credit risk is obtaining quality collateral from obligors. Obtaining collateral cannot replace a rigorous assessment of an obligor's ability to meet its financial obligations, but, beyond a certain risk threshold, it is an essential complement. Obtaining collateral depends on the level of risk presented by the obligor and the type of loan granted. The legal validity and enforceability of any collateral obtained and the Bank's ability to regularly and correctly measure the collateral's value are critical for this mechanism to play its proper role in risk mitigation.
|
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• accounts receivable;
• inventories;
• machinery and equipment and rolling stock;
• residential and commercial real estate, office buildings and industrial facilities;
• cash and marketable securities.
Portfolio Diversification and Management
The Bank is exposed to credit risk, not only through outstanding loans and undrawn amounts of commitments to a particular obligor but also through the distribution by business sector of the outstanding loans and undrawn amounts and through the exposure of its various credit portfolios to geographical, concentration, and settlement risks.
The Bank's approach to controlling these diverse risks begins with a diversification of exposures. Measures designed to maintain a healthy degree of credit risk diversification in its portfolios are set out in the Bank's policies, standards, and procedures. These instructions are mainly reflected in the application of various exposure limits: credit concentration limits by counterparty and credit concentration limits by business sector, country, region, product, and type of financial instrument. These limits are determined based on the Bank's credit risk appetite framework and are reviewed periodically. Compliance with these limits, particularly exceptions, is monitored through periodic reports submitted by the Risk Management Group's officers to the Board.
Continuous analyses are performed in order to anticipate problems with a sector or obligor before they materialize, notably as defaulted payments.
Other Risk Mitigation Methods
Credit risk mitigation measures for transactions in derivative financial instruments, which are regularly used by the Bank, are described in detail in the Counterparty Risk section.
Credit Derivative Financial Instruments and Financial Guarantee Contracts
The Bank also reduces credit risk by using the protection provided by credit derivative financial instruments such as credit default swaps. When the Bank acquires credit protection, it pays a premium on the swap to the counterparty in exchange for the counterparty's commitment to pay if the underlying entity defaults or another event involving the counterparty and covered by the legal agreement occurs. Since, like obligors, providers of credit protection must receive a default risk rating, the Bank's standards set out all the criteria under which a counterparty may be judged eligible to mitigate the Bank's credit risk. The Bank may also reduce its credit risk by entering into financial guarantee contracts whereby a guarantor indemnifies the Bank for a loss resulting from an obligor failing to make a payment when due in accordance with the contractual terms of a debt instrument.
Loan Syndication
The Bank has developed specific instructions on the appropriate objectives, responsibilities, and documentation requirements for loan syndication.
Follow-Up of Monitored Accounts and Recovery
Credit granted and obligors are monitored on an ongoing basis and in a manner commensurate with the degree of risk. Loan portfolio managers use an array of intervention methods to conduct a rigorous follow-up on files that show a high risk of default. They assess and comment on (except for small business files assessed using a behavioural model which are monitored by a Work Out unit) each identified borrower on the watchlist for whom they are responsible. A report, in which this information is consolidated, is submitted to the leadership team of the Credit Risk Management groups. When loans continue to deteriorate and there is an increase in risk to the point where monitoring has to be increased, specialized groups step in to maximize collection of the disbursed amounts and tailor strategies to these accounts.
|
Information on the recognition of impaired loans and allowances for credit losses is presented in Notes 1 and 8 to the Consolidated Financial Statements.
Forbearance and Restructuring
Situations where a business or retail obligor begins showing clear signs of potential insolvency are managed on a case-by-case basis and require the use of judgment. The Loan Work Out Policy sets out the principles applicable in such situations to guide loan restructuring decisions and identify situations where distressed restructuring applies. A distressed restructuring situation occurs when the Bank, for economic or legal reasons related to the obligor's financial difficulties, grants the obligor a material special concession that is contrary to the Bank's policies. Such concessions could include reducing the original interest rate so that the new pricing is lower than the cost of funds, waiving a portion of principal or accrued interest in arrears and extending payments for a significant portion of the loan or interest in such a way that the new maturity date or payment terms are more reasonable given the useful life of the collateral.
The Bank has established a management framework for commercial and corporate obligors that represent higher-than-normal risk of default. It outlines the roles and responsibilities of loan portfolio managers with respect to managing high-risk accounts and the responsibilities of the Work Out units and other participants in the process. Lastly, the Credit Risk Management Policy and a management framework are used to determine the authorization limits for distressed restructuring situations. During fiscal 2024 and 2023, the amount of distressed loan restructurings was not significant.
Counterparty Risk Assessment
Counterparty risk is a credit risk that the Bank incurs on various types of transactions involving financial instruments. The most significant risks are those it faces when it trades derivative financial instruments with counterparties on the over-the-counter market or when it purchases securities under reverse repurchase agreements or sells securities under repurchase agreements. Securities lending transactions and securities brokerage activities are also sources of counterparty risk. Note 18 to the Consolidated Financial Statements provides a complete description of the credit risk for derivative financial instruments by type of traded product.
The Risk Management Group has developed models by type of counterparty through which it applies an advanced methodology, where applicable, for calculating the Bank's credit risk exposure and economic capital. The exposures are subject to limits. These limits are established based on the counterparty's internal default risk rating and on the potential volatility of the underlying assets until expiration of the contract.
Counterparty obligations resulting from trading derivative financial instrument contracts, securities lending transactions, and reverse repurchase agreements are frequently subject to credit risk mitigation measures. The mitigation techniques are somewhat different from those used for loans and advances and depend on the nature of the instrument or the type of contract traded. The most widely used measure is entering into master agreements: the International Swaps & Derivatives Association, Inc. (ISDA) master agreement, the Global Master Repurchase Agreement (GMRA), and the Global Master Securities Lending Agreement (GMSLA). These agreements make it possible, in the event of default, insolvency, or bankruptcy of one of the contracting parties, to apply full netting of the gross amounts of the market values for each of the transactions covered by the agreement in force at the time of default. The amount of the final settlement is therefore the net balance of gains and losses on each transaction, which reduces exposure when a counterparty defaults. The Bank's policies require that an ISDA, GMRA, or GMSLA agreement be signed with its trading counterparties to derivatives, foreign exchange forward contracts, securities lending transactions, and reverse repurchase agreements.
Another credit risk reduction mechanism for derivatives and foreign exchange forward contracts complements the ISDA master agreement in many cases and provides the Bank and its counterparty (or either of the parties, if need be) with the right to request collateral from the counterparty when the net balance of gains and losses on each transaction exceeds a threshold defined in the agreement. These agreements on initial margins and variation margins are a regulatory requirement when financial institutions trade with each other or with governments and central banks on international financial markets because they limit the extent of credit risk and reduce the idiosyncratic risk associated with trading derivative financial instruments and foreign exchange forwards, while giving traders additional leeway to continue trading with the counterparty. When required by regulation (notably, by OSFI), the Bank always uses this type of legal documentation in transactions with financial institutions. For transactions with businesses, the Bank prefers to use internal mechanisms, notably involving collateral and mortgages/hypothecs, set out in the credit agreements. Finally, when possible the Bank goes through central clearing counterparties as a counterparty credit risk mitigation method. The Bank's internal policies set the conditions governing the implementation of such mitigation methods.
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The Bank has identified circumstances in which it is likely to be exposed to wrong-way risk. There are two types of wrong-way risk: general wrong-way risk and specific wrong-way risk. General wrong-way risk occurs when the probability of default of the counterparties is positively correlated to general market risk factors. Specific wrong-way risk occurs when the exposure to a specific counterparty is positively correlated to the probability of default of the counterparty due to the nature of the transactions with this counterparty.
Assessment of Settlement Risk
Settlement risk potentially arises from transactions that feature reciprocal delivery of cash or securities between the Bank and a counterparty. Foreign exchange contracts are an example of transactions that can generate significant levels of settlement risk. However, the implementation of multilateral settlement systems that allow settlement netting among participating institutions has contributed greatly to reducing the risks associated with the settlement of foreign exchange transactions among banks. The Bank also uses financial intermediaries to gain access to established clearing houses in order to minimize settlement risk for certain derivative financial instrument transactions. In some cases, the Bank may have direct access to established clearing houses for settling financial transactions such as repurchase agreements or reverse repurchase agreements. In addition, certain over-the-counter derivative financial instruments are settled directly or indirectly by central counterparties. For additional information, see the table that presents notional amounts in Note 18 to the Consolidated Financial Statements.
There are several other types of transactions that may generate settlement risk, in particular the use of certain electronic fund transfer services. This risk refers to the possibility that the Bank may make a payment or settlement on a transaction without receiving the amount owed by the counterparty, and with no opportunity to recover the funds delivered (irrevocable settlement).
For the Bank, the ultimate way to eliminate such a risk is to make no payments or settlements until it receives the funds due from the counterparty. Such an approach cannot, however, be used systematically. For several electronic payment services, the Bank is able to implement mechanisms that allow it to make its transfers revocable or to debit the counterparty in the amount of the settlements before it makes its own transfer. On the other hand, the nature of transactions in financial instruments makes it impossible for such practices to be widely used. For example, on foreign exchange transactions involving a currency other than the U.S. dollar, time zone differentials impose strict payment schedules on the parties. The Bank cannot unduly postpone a settlement without facing penalties, due to the large size of the amounts involved.
The most effective way for the Bank to control settlement risks, both for financial market transactions and irrevocable transfers, is to impose internal risk limits based on the counterparty's ability to pay.
Assessment of Environmental Risk
Environmental risk refers to the impacts on credit risk that may lead to reduced repayment capacity, or a lower value of the asset pledged as collateral due to environmental events, such as soil contamination, waste management, or a spill of materials considered hazardous, to the energy transition, or to extreme weather events. Ultimately, environmental risk can lead to both a higher probability of default and higher provisions for credit losses in cases of default by counterparties. In addition to the measures and guidelines adopted by the various levels of government, the Bank has a set of protective measures to follow in order to identify and reduce the potential, current, or future environmental risks to which it is exposed when it grants credit to clients. In recent years, the risk management framework has been expanded to include new measures for identifying, assessing, controlling, and monitoring climate risk. In addition, the Bank has developed and is gradually deploying a process used to assess and quantify the impacts of climate change on its strategy and results. For clients operating in specific industries, the risk analysis framework involves the collection of information on carbon footprint, a classification of climate risks (physical and transitional) according to business sector and industry, their strategic positioning, and the existence of an energy transition plan (commitments, reduction targets, diversification of activities). These various subjects are addressed, at least once a year, as part of the credit granting, review, and renewal processes.
The Bank also assesses its exposure to environment-related credit risk using a variety of control and monitoring mechanisms. For example, analyses are performed on the loan portfolio's vulnerabilities to physical risks and transition risks; these analyses are applied to all financing activities. Moreover, for several years the Bank has been carrying out climate risk impact analyses using the scenarios recommended by the Network for Greening the Financial System (NGFS). In doing so, the Bank was able to quantify expected losses related to its loan portfolio. The Bank also takes part in standardized climate scenario exercises to strengthen its abilities and refine its expertise. In addition, the Bank periodically assesses the impact of environmental risk on the loan portfolio concentration risk to ensure that there is no significant impact on this risk. Furthermore, a loan portfolio business sector matrix has been developed to provide the Risk Management Group with a clear vision of the sectors that are most affected by climate-related risks. These initiatives allow the Bank to take concrete steps in the process used to review sectoral limits, as each business sector or industry now has an ESG section describing its environmental risk.
Maximum Credit Risk Exposure
The amounts in the following tables represent the Bank's maximum exposure to credit risk as at the financial reporting date without considering any collateral held or any other credit enhancements. These amounts do not include allowances for credit losses nor amounts pledged as collateral. The tables also exclude equity securities.
Maximum Credit Risk Exposure Under the Basel Asset Categories(1)*
| (millions of Canadian dollars) |
| As at October 31, 2024 |
| |||||||||||||||||
| |
|
| Drawn(2) | | Undrawn commitments | | Repo-style transactions(3) | | Derivative financial instruments |
| Other off-balance- sheet items(4) | | Total |
| Standardized Approach(5) |
|
| IRB Approach |
|
|
| Retail |
| | | | | | | | | | |
|
|
|
|
|
|
|
| |
| | Residential mortgage | | 80,861 |
| 8,905 |
| − |
| − |
| − |
| 89,766 |
| 13 | % |
| 87 | % |
|
| | Qualifying revolving retail | | 3,335 |
| 11,867 |
| − |
| − |
| − |
| 15,202 |
| − | % |
| 100 | % |
|
| | Other retail | | 17,237 |
| 2,526 |
| − |
| − |
| 37 |
| 19,800 |
| 13 | % |
| 87 | % |
|
|
|
| 101,433 |
| 23,298 |
| − |
| − |
| 37 |
| 124,768 |
|
|
|
|
|
|
| |
| Non-retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | Corporate | | 96,023 |
| 31,921 |
| 42,395 |
| 234 |
| 8,813 |
| 179,386 |
| 21 | % |
| 79 | % |
|
| | Sovereign | | 65,758 |
| 5,982 |
| 79,859 |
| − |
| 283 |
| 151,882 |
| 3 | % |
| 97 | % |
|
| | Financial institutions | | 8,797 |
| 1,095 |
| 133,787 |
| 2,640 |
| 1,700 |
| 148,019 |
| 22 | % |
| 78 | % |
|
|
| | 170,578 |
| 38,998 |
| 256,041 |
| 2,874 |
| 10,796 |
| 479,287 |
|
|
|
|
|
|
| |
| Trading portfolio | | − |
| − |
| − |
| 17,507 |
| − |
| 17,507 |
| 3 | % |
| 97 | % |
| |
| Securitization | | 4,885 |
| − |
| − |
| − |
| 6,480 |
| 11,365 |
| 93 | % |
| 7 | % |
| |
| Total - Gross credit risk |
| 276,896 |
| 62,296 |
| 256,041 |
| 20,381 |
| 17,313 |
| 632,927 |
| 16 | % |
| 84 | % |
| |
| Standardized Approach(5) | | 39,868 |
| 1,209 |
| 47,241 |
| 2,870 |
| 7,015 |
| 98,203 |
|
|
|
|
|
|
| |
| IRB Approach | | 237,028 |
| 61,087 |
| 208,800 |
| 17,511 |
| 10,298 |
| 534,724 |
|
|
|
|
|
|
| |
| Total - Gross credit risk | | 276,896 |
| 62,296 |
| 256,041 |
| 20,381 |
| 17,313 |
| 632,927 |
| 16 | % |
| 84 | % |
| |
| (millions of Canadian dollars) |
| As at October 31, 2023 |
| |||||||||||||||||
| |
|
| Drawn(2) | | Undrawn commitments | | Repo-style transactions(3) | | Derivative financial instruments | | Other off-balance- sheet items(4) | | Total | | Standardized Approach(5) | | | IRB Approach | | |
| Retail |
| | | | | | | | | | | | | | | | | | | |
| | Residential mortgage | | 77,073 | | 9,094 | | − | | − | | − | | 86,167 | | 12 | % | | 88 | % | |
| | Qualifying revolving retail | | 3,183 | | 12,052 | | − | | − | | − | | 15,235 | | − | % | | 100 | % | |
| | Other retail | | 16,078 | | 2,692 | | − | | − | | 33 | | 18,803 | | 13 | % | | 87 | % | |
|
|
| 96,334 | | 23,838 | | − | | − | | 33 | | 120,205 | | | | | | | | |
| Non-retail |
| | | | | | | | | | | | | | | | | | | |
| | Corporate | | 91,994 | | 27,846 | | 38,549 | | 385 | | 6,915 | | 165,689 | | 18 | % | | 82 | % | |
| | Sovereign | | 61,438 | | 5,921 | | 61,580 | | − | | 267 | | 129,206 | | 3 | % | | 97 | % | |
| | Financial institutions | | 6,719 | | 1,002 | | 98,222 | | 3,013 | | 1,506 | | 110,462 | | 23 | % | | 77 | % | |
|
| | 160,151 | | 34,769 | | 198,351 | | 3,398 | | 8,688 | | 405,357 | | | | | | | | |
| Trading portfolio | | − | | − | | − | | 13,778 | | − | | 13,778 | | 2 | % | | 98 | % | | |
| Securitization | | 4,351 | | − | | − | | − | | 5,318 | | 9,669 | | 92 | % | | 8 | % | | |
| Total - Gross credit risk |
| 260,836 | | 58,607 | | 198,351 | | 17,176 | | 14,039 | | 549,009 | | 15 | % | | 85 | % | | |
| Standardized Approach(5) | | 35,461 | | 1,260 | | 34,717 | | 3,211 | | 5,568 | | 80,217 | | | | | | | | |
| IRB Approach | | 225,375 | | 57,347 | | 163,634 | | 13,965 | | 8,471 | | 468,792 | | | | | | | | |
| Total - Gross credit risk | | 260,836 | | 58,607 | | 198,351 | | 17,176 | | 14,039 | | 549,009 | | 15 | % | | 85 | % | | |
(1) See the Financial Reporting Method section on pages 14 to 20 for additional information on capital management measures.
(2) Excludes equity securities and certain other assets such as investments in deconsolidated subsidiaries and joint ventures, right-of-use properties and assets, goodwill, deferred tax assets, and intangible assets.
(3) Securities purchased under reverse repurchase agreements and sold under repurchase agreements as well as securities loaned and borrowed.
(4) Letters of guarantee, documentary letters of credit, and securitized assets that represent the Bank's commitment to make payments in the event that an obligor cannot meet its financial obligations to third parties.
(5) Includes exposures to qualifying central counterparties (QCCP).
Market Risk
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Market risk is the risk of financial losses arising from movements in market prices. Market risk comes from a number of factors, particularly changes to market variables such as interest rates, credit spreads, exchange rates, equity prices, commodity prices, and implied volatilities. The Bank is exposed to market risk through its participation in trading, investment, and asset/liability management activities. Trading activities involve taking positions on various instruments such as bonds, shares, currencies, commodities, or derivative financial instruments. The Bank is exposed to non-trading market risk through its asset/liability management and investment portfolios.
The trading portfolios include positions in financial instruments and commodities held either for trading or for hedging other items of the trading book. Positions held for trading are those held for short-term resale and/or with the intent of taking advantage of actual or expected short-term price movements or to lock in arbitrage profits, and for hedging risks that arise from financial instruments. The Bank's strategic objectives in undertaking trading activities include market making, facilitating client transactions, and managing risks associated with these activities.
Non-trading portfolios include financial instruments intended to be held to maturity as well as those held for daily cash management or for the purpose of maintaining targeted returns or ensuring asset and liability management.
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The Bank has a framework to oversee market risk, ensure strong governance and comply with industry practices and regulations. A market risk management policy governs global market risk management across the Bank's business units and subsidiaries that are exposed to this type of risk. It is approved by the GRC. The policy sets out the principles for managing market risk and the framework that defines risk measures, control and monitoring activities, how market risk limits are set and the mechanisms for reporting and escalating breaches. The Bank's risk management framework also includes guiding principles for assigning transactions to either the trading portfolio or the banking book as well as the requirements for identifying and monitoring stale positions.
The Financial Markets Risk Committee oversees all Financial Markets segment risks that could adversely affect the Bank's results, liquidity, or capital. This committee also oversees the Financial Markets segment's risk framework to ensure that controls are in place to contain risk in accordance with the Bank's risk appetite framework.
The market risk limit framework ensures the link and coherence between the Bank's market risk appetite targets and the day-to-day market risk management by all parties involved, notably senior management, the business units, and the Market Risk teams in their independent control function. The Bank's monitoring and reporting process consists of comparing market risk exposure to alert levels and to the market risk limits established for all limit authorization and approval levels.
Assessment of Market Risk
The Risk Management Group uses a variety of risk measures to estimate the size of potential financial losses under more or less severe scenarios, using both short-term and long-term time horizons. For short-term horizons, the Bank's risk measures include Value-at-Risk (VaR) and sensitivity metrics. For long-term horizons or sudden significant market moves, including those due to a lack of market liquidity, the risk measures include stress testing across an extensive range of scenarios.
VaR Model
VaR is a statistical measure of risk that is used to quantify market risks by activity and by risk type. VaR is defined as the maximum loss at a specific confidence level over a certain horizon under normal market conditions. The VaR method has the advantage of providing a uniform measurement of financial-instrument-related market risks based on a single statistical confidence level and time horizon.
For VaR, the Bank uses a historical price distribution to compute the probable loss levels at a 99% confidence level, using a two-year history of daily time series of risk factor changes. VaR is the maximum daily loss that the Bank could incur, in 99 out of 100 cases, in a given portfolio. In other words, the loss could exceed that amount in only one out of 100 cases.
The trading VaR is measured by assuming a holding period of one day for ongoing market risk management. VaR is calculated on a daily basis both for major classes of financial instruments (including derivative financial instruments) and for all trading portfolios in the Financial Markets segment and the Bank's Global Funding and Treasury Group.
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· past changes in market risk factors may not always produce accurate predictions of the distribution and correlations of future market movements;
· a VaR with a daily time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day;
· the market risk factor historical database used for VaR calculation may not reflect potential losses that could occur under unusual market conditions (e.g., periods of extreme illiquidity) relative to the historical period used for VaR estimates;
· the use of a 99% VaR confidence level does not reflect the extent of potential losses beyond that percentile.
Given the limitations of VaR, this measure represents only one component of risk management oversight, which also incorporates, among other measures, stress testing, sensitivity analysis, and concentration and liquidity limits and analysis.
The Bank also conducts backtesting of the VaR model. It consists of comparing the profits and losses to the statistical VaR measure. Backtesting is essential to verifying the VaR model's capacity to adequately forecast the maximum risk of market losses and thus validate, retroactively, the quality and accuracy of the results obtained using the model. If the backtesting results present material discrepancies, the VaR model could be revised in accordance with the Bank's model risk management framework. All market risk models and their performance are subject to periodic independent validation by the model validation group.
Controlling Market Risk
A comprehensive set of limits is applied to market risk measures, and these limits are monitored and reported on a regular basis. Instances when limits are exceeded are reported to the appropriate management level. The risk profiles of the Bank's operations remain consistent with its risk appetite and the resulting limits, and are monitored and reported to traders, management of the applicable business unit, senior management, and Board committees. To maintain market risk within risk appetite, the Bank hedges exposures as appropriate by utilizing cash and derivative financial instruments.
Under specific conditions, market risks such as interest rate, credit, or equity risks can be mitigated through derivative financial instruments transactions involving the trading portfolio via an Internal Risk Transfer (IRT). Interest rate IRTs are handled through a dedicated IRT desk approved by OSFI, while credit and equity IRTs occur directly between non-trading and trading portfolios. The Bank has established a framework that details IRT requirements and governance to ensure that these transactions comply with OSFI's Capital Adequacy Requirements guidelines both at the outset and on an ongoing basis.
The Bank also uses economic capital for market risk as an indicator for risk appetite and limit setting. This indicator measures the amount of capital that is required to absorb unexpected losses due to market risk events over a one-year horizon and with a determined confidence level. For additional information on economic capital, see the Capital Management section of this MD&A.
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Reconciliation of Market Risk With Consolidated Balance Sheet Items*
| (millions of Canadian dollars) | As at October 31, 2024 | | ||||||||||
| | | | | 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 | 31,549 | | 257 | | 20,440 | | 10,852 | | Interest rate(3) | | |
| | Securities | | | | | | | | | | | |
| | | At fair value through profit or loss | 115,935 |
| 113,445 |
| 2,490 | | − |
| Interest rate(3) and equity(4) | |
| | | At fair value through other comprehensive income | 14,622 |
| − |
| 14,622 | | − |
| Interest rate(3) and equity(5) | |
| | | At amortized cost | 14,608 |
| − |
| 14,608 | | − |
| Interest rate(3) | |
| | Securities purchased under reverse repurchase |
|
|
|
|
| |
|
| | | |
| | | agreements and securities borrowed | 16,265 |
| − |
| 16,265 | | − |
| Interest rate(3)(6) | |
| | Loans, net of allowances | 243,032 |
| 14,572 |
| 228,460 | | − |
| Interest rate(3) | | |
| | Derivative financial instruments | 12,309 |
| 11,686 |
| 623 | | − |
| Interest rate(7) and exchange rate(7) | | |
| | Defined benefit asset | 487 |
| − |
| 487 | | − |
| Other(8) | | |
| | Other | 13,419 |
| 573 |
| − | | 12,846 |
|
| | |
| | | | 462,226 |
| 140,533 |
| 297,995 | | 23,698 |
| | |
| Liabilities |
|
|
|
|
| |
|
| | | ||
| | Deposits | 333,545 |
| 30,429 |
| 303,116 | | − |
| Interest rate(3) | | |
| | Obligations related to securities sold short | 10,873 |
| 10,873 |
| − | | − |
| | | |
| | | |
|
|
|
|
| |
|
| | |
| | Obligations related to securities sold under repurchase |
|
|
|
|
| |
|
| | | |
| | | agreements and securities loaned | 38,177 |
| − |
| 38,177 | | − |
| Interest rate(3)(6) | |
| | Derivative financial instruments | 15,760 |
| 15,240 |
| 520 | | − |
| Interest rate(7) and exchange rate(7) | | |
| | Liabilities related to transferred receivables | 28,377 |
| 10,564 |
| 17,813 | | − |
| Interest rate(3) | | |
| | Defined benefit liability | 103 |
| − |
| 103 | | − |
| Other(8) | | |
| | Other | 8,583 |
| − |
| 49 | | 8,534 |
| Interest rate(3) | | |
| | Subordinated debt | 1,258 |
| − |
| 1,258 | | − |
| Interest rate(3) | | |
| | | 436,676 |
| 67,106 |
| 361,036 | | 8,534 |
| | | |
(1) Trading positions whose risk measure is total VaR. For additional information, see the table in the pages ahead that shows the VaR distribution of the trading portfolios by risk category and their diversification effect.
(2) Non-trading positions that use other risk measures.
(3) For additional information, see the tables in the pages ahead, namely, the table that shows the VaR distribution of the trading portfolios by risk category, and their diversification effect, as well as the table that shows the interest rate sensitivity.
(4) For additional information, see Note 7 to the Consolidated Financial Statements.
(5) The fair value of equity securities designated at fair value through other comprehensive income is presented in Notes 4 and 7 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.
(7) For additional information, see Notes 18 and 19 to the Consolidated Financial Statements.
(8) For additional information, see Note 25 to the Consolidated Financial Statements.
| (millions of Canadian dollars) | As at October 31, 2023(1) | | ||||||||||
| | | | | Market risk measures | | | | | | |||
| | | | Balance sheet | | Trading(2) | | Non-trading(3) | | Not subject to market risk | | Non-traded risk primary risk sensitivity | |
| Assets | | | | | | | | | | | ||
|
| Cash and deposits with financial institutions | 35,234 | | 685 | | 24,950 | | 9,599 | | Interest rate(4) | | |
| | Securities | | | | | | | | | | | |
| | | At fair value through profit or loss | 99,994 | | 98,559 | | 1,435 | | − | | Interest rate(4) and equity(5) | |
| | | At fair value through other comprehensive income | 9,242 | | − | | 9,242 | | − | | Interest rate(4) and equity(6) | |
| | | At amortized cost | 12,582 | | − | | 12,582 | | − | | Interest rate(4) | |
| | Securities purchased under reverse repurchase | | | | | | | | | | | |
| | | agreements and securities borrowed | 11,260 | | − | | 11,260 | | − | | Interest rate(4)(7) | |
| | Loans and acceptances, net of allowances | 225,443 | | 12,739 | | 212,704 | | − | | Interest rate(4) | | |
| | Derivative financial instruments | 17,516 | | 16,349 | | 1,167 | | − | | Interest rate(8) and exchange rate(8) | | |
| | Defined benefit asset | 356 | | − | | 356 | | − | | Other(9) | | |
| | Other | 11,850 | | 544 | | − | | 11,306 | | | | |
| | | | 423,477 | | 128,876 | | 273,696 | | 20,905 | | | |
| Liabilities | | | | | | | | | | | ||
| | Deposits | 288,173 | | 18,126 | | 270,047 | | − | | Interest rate(4) | | |
| | Acceptances | 6,627 | | − | | 6,627 | | − | | Interest rate(4) | | |
| | Obligations related to securities sold short | 13,660 | | 13,660 | | − | | − | | | | |
| | | | | | | | | | | | | |
| | Obligations related to securities sold under repurchase | | | | | | | | | | | |
| | | agreements and securities loaned | 38,347 | | − | | 38,347 | | − | | Interest rate(4)(7) | |
| | Derivative financial instruments | 19,888 | | 19,145 | | 743 | | − | | Interest rate(8) and exchange rate(8) | | |
| | Liabilities related to transferred receivables | 25,034 | | 9,507 | | 15,527 | | − | | Interest rate(4) | | |
| | Defined benefit liability | 94 | | − | | 94 | | − | | Other(9) | | |
| | Other | 7,322 | | − | | 49 | | 7,273 | | Interest rate(4) | | |
| | Subordinated debt | 748 | | − | | 748 | | − | | Interest rate(4) | | |
| | | 399,893 | | 60,438 | | 332,182 | | 7,273 | | | | |
(1) Certain amounts have been adjusted to reflect accounting policy changes arising from the adoption of IFRS 17. For additional information, see Note 2 to the Consolidated Financial Statements.
(2) Trading positions whose risk measure is total VaR. For additional information, see the table on the following page that shows the VaR distribution of the trading portfolios by risk category and their diversification effect.
(3) Non-trading positions that use other risk measures.
(4) For additional information, see the tables in the pages ahead, namely, the table that shows the VaR distribution of the trading portfolios by risk category, their diversification effect, as well as the table that shows the interest rate sensitivity.
(5) For additional information, see Note 7 to the Consolidated Financial Statements.
(6) The fair value of equity securities designated at fair value through other comprehensive income is presented in Notes 4 and 7 to the Consolidated Financial Statements.
(7) 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 measure.
(8) For additional information, see Notes 18 and 19 to the Consolidated Financial Statements.
(9) For additional information, see Note 25 to the Consolidated Financial Statements.
|
The table below shows the VaR distribution of trading portfolios by risk category and their diversification effect.
VaR of Trading Portfolios(1)(2)*
| Year ended October 31 | | | | | | | | | | | | | | | | | |
| (millions of Canadian dollars) | |
|
| 2024 |
|
|
| 2023 |
| ||||||||
| | | Low |
| High |
| Average |
| Period end |
| Low | | High | | Average |
| Period end |
|
| Interest rate | | (5.4) |
| (13.3) |
| (8.6) |
| (8.8) |
| (5.2) | | (11.3) | | (7.4) | | (8.7) | |
| Foreign exchange | | (0.7) |
| (5.3) |
| (1.9) |
| (1.1) |
| (0.9) | | (5.9) | | (2.7) | | (5.0) | |
| Equity | | (1.8) |
| (8.6) |
| (4.5) |
| (5.3) |
| (5.1) | | (10.8) | | (7.6) | | (6.5) | |
| Commodity | | (0.8) |
| (2.4) |
| (1.3) |
| (1.2) |
| (0.6) | | (1.6) | | (1.2) | | (1.6) | |
| Diversification effect(3) | | n.m. |
| n.m. |
| 6.8 |
| 6.3 |
| n.m. | | n.m. | | 9.4 | | 10.4 | |
| Total trading VaR | | (5.0) |
| (14.1) |
| (9.5) |
| (10.1) |
| (6.7) | | (12.4) | | (9.5) | | (11.4) | |
n.m. Computation of a diversification 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) See the Glossary section on pages 130 to 133 for details on the composition of these measures.
(2) Amounts are presented on a pre-tax basis and represent one-day VaR using a 99% confidence level.
(3) The total trading VaR is less than the sum of the individual risk factor VaR results due to the diversification effect.
The average total trading VaR remained stable between fiscal 2023 and fiscal 2024.
The revenues generated by trading activities are compared with VaR as a backtesting assessment of the appropriateness of this risk measure as well as the financial performance of trading activities relative to the risk undertaken.
The chart below shows daily trading and underwriting revenues and VaR. Daily trading and underwriting revenues were positive on 97% of the days for the year ended October 31, 2024. Net daily trading and underwriting losses in excess of $1 million were recorded on five days. None of these losses exceeded the VaR.
Daily Trading and Underwriting Revenues
Year ended October 31, 2024
(millions of Canadian dollars)
|
Stress testing is a risk management technique that involves estimating potential losses under abnormal market conditions and risk factor movements. This technique enhances data transparency by exploring a range of severe but plausible scenarios.
These stress tests simulate the results that the portfolios would generate if the extreme scenarios in question were to materialize. The Bank's stress testing framework, which is applied to all positions with market risk, currently comprises the following categories of stress test scenarios:
· Historical scenarios based on past major disruption situations;
· Hypothetical scenarios designed to be forward-looking in the face of potential market stresses;
· Scenarios specific to asset classes, including:
o sharp parallel increases/decreases in interest rates; non-parallel movements of interest rates (flattening and steepening) and increases/decreases in credit spreads;
o sharp stock market crash coupled with a significant increase in volatility of the term structure; increase in stock prices combined with less volatility;
o significant increases/decreases in commodity prices coupled with increases/decreases in volatility; short-term and long-term increases/decreases in commodity prices;
o depreciation/appreciation of the U.S. dollar and of other currencies relative to the Canadian dollar.
Credit Valuation Adjustment (CVA)
CVA risk is an important consideration in the valuation and the management of over-the-counter (OTC) derivatives and other financial instruments whenever counterparty risk is involved. The Bank maintains a robust and prudent governance framework for CVA risk management, including a clear definition and documentation of the objectives, the scope and the independent controls surrounding these activities. CVA risk is identified and measured using advanced analytical tools and quantitative models, and is monitored and controlled on an ongoing basis by an independent unit of the second line of defence. Additionally, risk limits are established for CVA risk, and those limits are defined by the approving authorities set out in the Bank's policies.
Interest Rate Risk in the Banking Book (IRRBB)
As part of its core banking activities, such as lending and deposit taking, the Bank is exposed to interest rate risk. Interest rate risk in the banking book (IRRBB) is the potential negative impact of interest rate fluctuations on the Bank's annual net interest income and the economic value of its equity. Activities related to hedging, investments, and term funding are also exposed to interest rate risk. The Bank's main exposure to interest rate risk stems from a variety of sources:
· yield curve risk, which refers to changes in the level, slope, and shape of the yield curve;
· repricing risk, which arises from timing differences in the maturity and repricing of on- and off-balance-sheet items;
· options risk, either implicit (e.g., prepayment of mortgage loans) or explicit (e.g., capped mortgages and rate guarantees) in balance sheet products;
· basis risk that is caused by an imperfect correlation between different yield curves.
The Bank's exposure to IRRBB is assessed and controlled mostly through the impact of stress scenarios and market shocks on the economic value of the Bank's equity and on 12-month net interest income projections. These two metrics are calculated daily. They are based on cash flow projections prepared using a number of assumptions. Specifically, the Bank has developed key assumptions on loan prepayment levels, deposit repayment, and the behaviour of clients that were granted rate guarantees as well as the rate and duration profile of non-maturity deposits. These specific assumptions were developed based on historical analyses and are regularly reviewed. Funds transfer pricing is a process by which the Bank's business units are charged or paid according to their use or supply of funding. Through this mechanism, all funding activities as well as the interest rate risk and liquidity risk associated with those activities are centralized in the Global Funding and Treasury Group.
Active IRRBB management can significantly enhance the Bank's profitability and shareholder value. The Bank's goal is to maximize the economic value of its equity and its annual net interest income considering its risk appetite. This goal must be achieved within prescribed risk limits and is accomplished primarily by implementing a policy framework, approved by the GRC and submitted for information purposes to the RMC, that sets a risk tolerance threshold, monitoring structures controlled by various committees, risk indicators, reporting procedures, delegation of responsibilities, and segregation of duties. The Bank also prepares an annual funding plan that includes the expected growth of assets and liabilities.
Governance
Management of the Bank's IRRBB is under the authority of the Global Funding and Treasury Group. In this role, the management team and personnel of this group are responsible for the day-to-day management of the risks inherent to IRRBB hedging decisions and related operations. They act as the primary effective challenge function with respect to the execution of these activities. The GRC approves and endorses the IRRBB exposure and strategies. The Asset Liability Committee (ALCO), comprised of members of senior management, monitors IRRBB on an ongoing basis. This committee reviews exposure to IRRBB, the use of limits, and changes made to assumptions. The Risk Management Group is responsible for assessing IRRBB, monitoring activities, and ensuring compliance with the IRRBB management policy. The Risk Management Group ensures that an appropriate risk management framework is in place and ensures compliance with the risk appetite framework and policy.
|
Stress tests are performed on a regular basis to assess the impact of various scenarios on annual net interest income and on the economic value of equity in order to guide IRRBB management. Stress test scenarios are performed where the yield curve level, slope, and shape are shocked. Yield curve and volatility scenarios are also tested. All risk factors mentioned above are covered by specific scenarios and have Board-approved or GRC‑approved risk limits.
Dynamic simulation is also used to project the Bank's future net interest income, future economic value, and future exposure to IRRBB. These simulations project cash flows of assets, liabilities, and off-balance-sheet products over a given investment horizon. Given their dynamic nature, they encompass assumptions pertaining to changes in volume, client term preference, prepayments of deposits and loans, and the yield curve.
The following table presents the potential before-tax impact of an immediate and sustained 100-basis-point increase or of an immediate and sustained 100‑basis-point decrease in interest rates on the economic value of equity and on the net interest income of the Bank's non-trading portfolios for the next 12 months, assuming no further hedging is undertaken.
Interest Rate Sensitivity - Non-Trading Activities (Before Tax)*
| As at October 31 | | | | | | | | | | | | | | |
| (millions of Canadian dollars) | 2024 |
|
|
| 2023 |
| ||||||||
| | | | Canadian dollar |
| Other currencies |
| Total |
| Canadian dollar | | Other currencies | | Total |
|
| Impact on equity | |
|
|
|
|
|
|
|
|
|
|
|
| |
| 100-basis-point increase in the interest rate | | (378) |
| (57) |
| (435) |
| (297) | | 2 | | (295) |
| |
| 100-basis-point decrease in the interest rate | | 352 |
| 48 |
| 400 |
| 272 | | 7 | | 279 |
| |
| Impact on net interest income | |
|
|
|
|
|
| | | | | |
| |
| 100-basis-point increase in the interest rate | | 121 |
| (22) |
| 99 |
| 73 | | 1 | | 74 |
| |
| 100-basis-point decrease in the interest rate | | (161) |
| 25 |
| (136) |
| (103) | | 1 | | (102) |
| |
| | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank has created securities portfolios comprising liquid and less liquid securities for strategic, long-term investment, and liquidity management purposes. These investments carry market risk, credit risk, liquidity risk, and concentration risk.
The investment governance framework sets out the guiding principles and general management standards that must be followed by all those who manage portfolios of these securities included in the portfolios of the Bank and its subsidiaries. Under this investment governance framework, business units that are active in managing these types of portfolios must adopt internal investment policies that set, among other things, targets and limits for the allocation of assets in the portfolios concerned and internal approval mechanisms. The primary objective is to reduce concentration risk by industry, issuer, country, type of financial instrument, and credit quality.
Overall limits in value and in proportion to the Bank's equity are set on the outstanding amount of liquid preferred shares, liquid equity securities excluding preferred shares, and instruments classified as illiquid securities in the securities portfolios. The overall exposure to common shares with respect to an individual issuer and the total outstanding amount invested in private equity funds, for investment banking services, are also subject to limits. Restrictions are also set on investments defined as special. Lastly, the Bank has a specific policy, approved by the RMC, applicable to investments in debt and equity securities, including strategic investments. Strategic investments are defined as purchases of business assets or acquisitions of significant interests in an entity for purposes of acquiring control or creating a long-term relationship.
Structural Foreign Exchange Risk
The Bank's structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. This risk, predominantly in U.S. dollars, is measured by assessing the impact of currency fluctuations on retained earnings. The Bank uses financial instruments (derivative and non-derivative) to hedge this risk. An adverse change in foreign exchange rates can also impact the Bank's capital ratios due to the amount of RWA denominated in a foreign currency. When the Canadian dollar depreciates relative to other currencies, unrealized translation gains on the Bank's net investments in foreign operations, as well as the impact on hedging transactions, are reported in other comprehensive income in shareholders' equity. In addition, the Canadian-dollar equivalent of U.S.-dollar-denominated RWA and regulatory capital deductions increases. The reverse is true when the Canadian dollar appreciates relative to the U.S. dollar. The structural foreign exchange risk is managed to ensure that the potential impacts on capital ratios and net income are within tolerable limits set by risk policies.
Liquidity and Funding Risk
|
Liquidity and funding 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 and funding risk arises when sources of funds become insufficient to meet scheduled payments under the Bank's commitments. Liquidity risk refers to the possibility that an institution may not be able to meet its financial obligations as they fall due, due to a mismatch between cash inflows and outflows, without incurring unacceptable losses.
The Bank's primary objective as a financial institution is to manage liquidity such that it supports the Bank's business strategy and allows it to honour its commitments when they come due, even in extreme conditions. This is done primarily by implementing a policy framework approved by the RMC, which establishes a risk appetite, monitoring structures controlled by various committees, risk indicators, reporting procedures, delegation of responsibilities, and segregation of duties. The Bank also prepares an annual funding plan that incorporates the expected growth of assets and liabilities.
Regulatory Environment
The Bank works closely with national and international regulators to implement regulatory liquidity standards. The Bank adapts its processes and policies to reflect its liquidity risk appetite towards these new requirements.
The Liquidity Adequacy Requirements (LAR) are reviewed periodically to reflect domestic and international regulatory changes. They constitute OSFI's proposed liquidity framework and include seven chapters:
· overview;
· liquidity coverage ratio (LCR);
· net stable funding ratio (NSFR);
· net cumulative cash flow (NCCF);
· operating cash flow statement;
· liquidity monitoring tools;
· intra-day liquidity monitoring tools.
LCR is used to ensure that banks can overcome severe short-term stress, while the NSFR is a structural ratio over a one-year horizon. The NCCF metric is defined as a monitoring tool that calculates a survival period. It is based on the assumptions of a stress scenario prescribed by OSFI that aims to represent a combined systemic and bank-specific crisis. The Bank publishes the quarterly average of the LCR and the end-of-quarter NSFR on a quarterly basis, whereas NCCF is produced monthly and communicated to OSFI.
On November 7, 2022, OSFI published a new guideline entitled Assurance on Capital, Leverage and Liquidity Returns. OSFI relies largely on the regulatory returns produced by financial institutions when assessing their safety and soundness. The purpose of this guideline is to better inform auditors and institutions on the work to be performed on regulatory returns in order to clarify and align OSFI's assurance expectations across all financial institutions. In particular, the guideline addresses the assurance that must be provided by an external audit, attestation by senior management, the assurance that must be provided by an internal audit, and the effective dates. For D-SIBs, the Internal Audit assurance requirements regarding the capital, leverage and liquidity returns commenced as of fiscal 2023, the senior management attestation and internal review requirements apply as of fiscal 2024, and the external audit assurance requirements apply as of fiscal 2025.
On October 31, 2023, OSFI announced its decision on reviewing the Liquidity Adequacy Requirements (LAR) Guideline with respect to wholesale funding sources with retail-like characteristics, specifically high-interest savings account exchange-traded funds (HISA ETFs). OSFI determined these sources to be unsecure institutional funding provided by other legal entities. Despite some retail-like characteristics and term agreements with depositors, the fact that these products are held directly by fund managers led OSFI to conclude that a 100% run-off factor for these products was appropriate. As a result, deposit-taking institutions exposed to such funding must hold sufficient high-quality liquid assets to support all HISA ETF balances that can be withdrawn within 30 days. Since January 31, 2024, all deposit-taking institutions have modified the measurement and related reporting to comply with the run-off treatment specified in the LAR. Moreover, changes for reporting the LCR were calculated retrospectively to the start of the first quarter to account for daily fluctuations in the ratio (November 1, 2023 for the Bank).
In its Annual Risk Outlook - Fiscal Year 2024-2025, OSFI identified liquidity and funding risk as one of the four key risks to be monitored. OSFI's approach will span key topics, with a focus on intra-day liquidity risk management, and liquidity and interest rate risk in the banking book management effectiveness in material foreign subsidiaries. In addition, OSFI will also deepen its line-of-site into the operational aspects of contingency funding plans to better understand asset monetization decisions during stress events.
In addition, this report notes that OSFI held public consultations on draft revisions to the Liability Adequacy Requirement (LAR) Guideline in the second quarter of 2024. The bankers' acceptance market is intrinsically linked to the CDOR rate and, given that the CDOR rate was abolished on June 28, 2024, OSFI does not believe that the preferential liquidity treatment that was in place is still justified. Consequently, revisions were made to Chapters 3 and 4 of the LAR Guideline to reflect this reality. OSFI is also revising Chapter 7, Intra-day Liquidity Monitoring Tools, of the LAR Guideline, as well as making consequential amendments to Chapter 1 and the Small and Medium-Sized Deposit-Taking Institutions (SMSBs) Capital and Liquidity Requirements Guideline. OSFI will introduce adapted monitoring tools for direct and indirect clearers, taking into account the importance of intra-day liquidity measurement in the context of recent stress episodes. The revised guideline and associated reporting requirements will come into effect on April 1, 2025.
The Bank continues to closely monitor regulatory developments and actively participates in various consultation processes.
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Governance
The Global Funding and Treasury Group is responsible for managing liquidity and funding risk. Although the day-to-day and strategic management of risks associated with liquidity, funding, and pledging activities is assumed by the Global Funding and Treasury Group, the Risk Management Group is responsible for assessing liquidity risk and overseeing compliance with the resulting policy. The Risk Management Group ensures that an appropriate risk management framework is in place and ensures compliance with the risk appetite framework. This structure provides an independent oversight and effective challenge for liquidity, funding, and pledging decisions, strategy, and exposure.
The Bank's Liquidity and Pledging Risk Management Policy requires review and approval by the RMC, based on recommendations from the GRC. The Bank has established four levels of limits. The first two levels involve the Bank's overall cash position and are respectively approved by the Board and the GRC, whereas the third level of limits focuses more on specific aspects of liquidity risk and is approved by the ALCO or by the Financial Markets Risk Committee, whereas the fourth level represents operational limits. The Board not only approves the supervision of day-to-day risk management and governance but also backup plans in anticipation of emergency and liquidity crisis situations. If a limit has to be revised, the Risk Management Group with the support of the Global Funding and Treasury Group, submits the proposed revision to the approving committee.
Oversight of liquidity risk is entrusted mainly to the ALCO, whose members include representatives of the Financial Markets segment, the Global Funding and Treasury Group, the Finance Group and the Risk Management Group. The ALCO ensures that senior management monitors liquidity and funding risk on an ongoing basis.
The Bank also has policies and guidelines governing its own collateral pledged to counterparties, given the potential impact of such asset transfers on its liquidity. In accordance with its Liquidity and Pledging Risk Management Policy, the Bank conducts simulations of potential counterparty collateral claims in the event of a Bank downgrade or other unlikely occurrences, such as large market fluctuations.
Through the ALCO, the Risk Management Group regularly reports changes in liquidity, funding, and pledging indicators and compliance with regulatory‑, Board-, and GRC-approved limits. If control reports indicate non-compliance with the limits and a general deterioration of liquidity indicators, the Global Funding and Treasury Group takes remedial action. According to an escalation process, problematic situations are reported to management and to the GRC and the RMC. An executive report on the Bank's liquidity and funding risk management is submitted quarterly to the RMC; this report describes the Bank's liquidity position and informs the Board of non-compliance with the limits and other rules observed during the reference period as well as remedial action taken.
Liquidity Management
The Bank performs liquidity management, funding, and pledging operations not only from its head office and regional offices in Canada, but also through certain foreign centres. Although the volume of such operations abroad represents a sizable portion of global liquidity management, the Bank's liquidity management is centralized. By organizing liquidity management, funding, and pledging activities within the Global Funding and Treasury Group, the Bank can better coordinate enterprise-wide funding and risk monitoring activities. All internal funding transactions between Bank entities are controlled by the Global Funding and Treasury Group.
This centralized structure streamlines the allocation and control of liquidity management, funding, and pledging limits. Nonetheless, the Liquidity and Pledging Risk Management Policy contains special provisions for financial centres whose size and/or strategic importance makes them more likely to contribute to the Bank's liquidity risk. Consequently, a liquidity and funding risk management structure exists at each financial centre. This structure imposes a set of limits of varying levels, up to the limits approved by the RMC, on diverse liquidity parameters, including liquidity stress tests as well as simple concentration measures.
The Bank's funds transfer pricing system prices liquidity by allocating the cost or income to the various business segments. Liquidity costs are allocated to liquidity-intensive activities, mainly long-term loans, and commitments to extend credit and less liquid securities as well as strategic investments. The liquidity compensation is credited to the suppliers of funds, primarily funding in the form of stable deposits from the Bank's distribution network.
|
Moreover, the Bank's collateral pledging activities are monitored in relation to the different limits set by the Bank and are subject to monthly stress tests. In particular, the Bank uses various scenarios to estimate the potential amounts of additional collateral that would be required in the event of a downgrade to the Bank's credit rating.
Liquidity risk can be assessed in many different ways using different liquidity indicators. One of the key liquidity risk monitoring tools is the result over a three- month stress testing period, which is based on contractual maturity and behavioural assumptions applied to balance sheet items and off-balance-sheet commitments.
Stress Testing
The results over a three-month stress test period measure the Bank's liquidity profile by checking not only its ability to survive a three-month crisis but also the liquidity buffer it can generate with its liquid assets. This result is measured on a weekly basis using three scenarios that are designed to assess sensitivity to a crisis specific to the Bank and/or of a systemic nature. Among the assumptions behind these scenarios, deposit loss simulations are carried out based on their degree of stability, while the value of certain assets is encumbered by an amount reflecting their readiness for liquidation in a crisis. Appropriate scenarios and limits are included in the Bank's Liquidity and Pledging Risk Management Policy.
The Bank maintains an up-to-date, comprehensive financial contingency and crisis recovery plan that describes the measures to be taken in the event of a critical liquidity situation. This plan is reviewed and approved annually by the Board as part of business continuity and recovery planning. For additional information, see the Regulatory Compliance Risk section of this MD&A.
Liquidity Risk Appetite
The Bank monitors and manages its risk appetite through liquidity limits, ratios, and stress tests. The Bank's liquidity risk appetite is based on the following three principles:
· ensure the Bank has a sufficient amount of unencumbered liquid assets to cover its financial requirements, in both normal and stressed conditions;
· ensure the Bank keeps a liquidity buffer above the minimum regulatory requirement;
· ensure the Bank maintains diversified and stable sources of funding.
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. The majority of the 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 the emergency liquidity facilities of central banks. The following tables provide information on the Bank's encumbered and unencumbered assets.
Liquid Asset Portfolio(1)*
| As at October 31 | | | | | | | | | | | | | | ||||
| (millions of Canadian dollars) | |
|
|
| | | | 2024 | | 2023 | | ||||||
| | | | | Bank-owned liquid assets(2) | | Liquid assets received(3) | | Total liquid assets | | Encumbered liquid assets(4) | | Unencumbered liquid assets | | Unencumbered liquid assets | | ||
| Cash and deposits with financial institutions | | 31,549 |
| − |
| 31,549 | | 11,730 |
| 19,819 | | 25,944 | | ||||
| Securities | |
|
|
|
|
| |
|
|
| | | | ||||
|
| Issued or guaranteed by the Canadian government, | |
|
|
|
|
| |
|
|
| | | | |||
|
| | U.S. Treasury, other U.S. agencies and | |
|
|
|
|
| |
|
|
| | | | ||
|
| | other foreign governments | | 36,785 |
| 52,784 |
| 89,569 | | 48,028 |
| 41,541 | | 29,062 | | ||
|
| Issued or guaranteed by Canadian provincial | |
|
|
|
|
| |
|
|
| | | | |||
|
| | and municipal governments | | 13,831 |
| 10,766 |
| 24,597 | | 13,928 |
| 10,669 | | 6,403 | | ||
|
| Other debt securities | | 6,206 |
| 3,961 |
| 10,167 | | 2,862 |
| 7,305 | | 10,095 | | |||
|
| Equity securities | | 88,343 |
| 50,395 |
| 138,738 | | 97,766 |
| 40,972 | | 27,253 | | |||
| Loans | |
|
|
|
|
| |
|
|
| | | | ||||
|
| Securities backed by insured residential mortgages | | 15,455 |
| − |
| 15,455 | | 6,984 |
| 8,471 | | 6,140 | | |||
| As at October 31, 2024 | | 192,169 |
| 117,906 |
| 310,075 | | 181,298 |
| 128,777 | | | | ||||
| As at October 31, 2023 | | 169,888 | | 87,919 | | 257,807 | | 152,910 | | | | 104,897 | | ||||
| | | | | | | | | | | | | | | | | ||
| As at October 31 | | | | | | ||||||||||||
| (millions of Canadian dollars) | | 2024 | | 2023 | | ||||||||||||
| Unencumbered liquid assets by entity | |
| | | | ||||||||||||
| | National Bank (parent) | | 80,768 | | 55,626 | | |||||||||||
| | Domestic subsidiaries | | 12,023 | | 10,013 | | |||||||||||
| | Foreign subsidiaries and branches | | 35,986 | | 39,258 | | |||||||||||
| | |
| | 128,777 | | 104,897 | | ||||||||||
| | | | | | | | | ||||||||||
| As at October 31 | | | | | | ||||||||||||
| (millions of Canadian dollars) | | 2024 | | 2023 | | ||||||||||||
| Unencumbered liquid assets by currency | |
| | | | ||||||||||||
| | Canadian dollar | | 66,970 | | 51,882 | | |||||||||||
| | U.S. dollar | | 53,960 | | 35,243 | | |||||||||||
| | Other currencies | | 7,847 | | 17,772 | | |||||||||||
| | |
| | 128,777 | | 104,897 | | ||||||||||
Liquid Asset Portfolio(1)* - Average(5)
| Year ended October 31 | | | | | | | | | | | | | | ||
| (millions of Canadian dollars) | |
|
|
| | | | 2024 | | 2023 | | ||||
| | | | | Bank-owned liquid assets(2) | | Liquid assets received(3) | | Total liquid assets | | Encumbered liquid assets(4) | | Unencumbered liquid assets | | Unencumbered liquid assets | |
| Cash and deposits with financial institutions | | 32,009 |
| − |
| 32,009 |
| 10,127 |
| 21,882 | | 32,600 | | ||
| Securities | |
|
|
|
|
| |
|
|
| | | | ||
|
| Issued or guaranteed by the Canadian government, | |
|
|
|
|
| |
|
|
| | | | |
|
| | U.S. Treasury, other U.S. agencies and | |
|
|
|
|
|
|
|
|
| | | |
|
| | other foreign governments | | 39,282 |
| 50,400 |
| 89,682 |
| 53,082 |
| 36,600 | | 23,388 | |
|
| Issued or guaranteed by Canadian provincial | |
|
|
|
|
|
|
|
|
| | | | |
|
| | and municipal governments | | 14,085 |
| 8,093 |
| 22,178 |
| 14,826 |
| 7,352 | | 7,236 | |
|
| Other debt securities | | 7,935 |
| 3,989 |
| 11,924 |
| 3,074 |
| 8,850 | | 11,265 | | |
|
| Equity securities | | 86,007 |
| 50,836 |
| 136,843 |
| 96,130 |
| 40,713 | | 28,996 | | |
| Loans | |
|
|
|
|
|
|
|
|
| | | | ||
|
| Securities backed by insured residential mortgages | | 13,591 |
| − |
| 13,591 |
| 6,647 |
| 6,944 | | 5,245 | | |
| As at October 31, 2024 | | 192,909 |
| 113,318 |
| 306,227 |
| 183,886 |
| 122,341 | | | | ||
| As at October 31, 2023 | | 179,054 | | 95,841 | | 274,895 | | 166,165 | | | | 108,730 | | ||
(1) See the Financial Reporting Method section on pages 14 to 20 for additional information on capital management measures.
(2) Bank-owned liquid assets include assets for which there are no legal or geographic restrictions.
(3) Securities received as collateral with respect to securities financing and derivative transactions and securities purchased under reverse repurchase agreements and securities borrowed.
(4) 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.
(5) The average is based on the sum of the end-of-period balances of the 12 months of the year divided by 12.
Summary of Encumbered and Unencumbered Assets(1)*
| (millions of Canadian dollars) | | | | | | | | | | As at October 31, 2024 | | |||
| | | | Encumbered assets(2) |
| Unencumbered assets |
| Total |
| Encumbered assets as % of total assets | | ||||
| | | | Pledged as collateral |
| Other(3) |
| Available as collateral |
| Other(4) |
|
|
|
| |
| Cash and deposits with financial institutions | | 697 |
| 11,033 |
| 19,819 |
| − |
| 31,549 |
| 2.5 | | |
| Securities | | 50,071 |
| − |
| 95,094 |
| − |
| 145,165 |
| 10.8 | | |
| Securities purchased under reverse repurchase | |
|
|
|
|
|
|
|
|
|
|
| | |
| | agreements and securities borrowed | | − |
| 10,872 |
| 5,393 |
| − |
| 16,265 |
| 2.4 | |
| Loans, net of allowances | | 40,296 |
| − |
| 8,471 |
| 194,265 |
| 243,032 |
| 8.7 | | |
| Derivative financial instruments | | − |
| − |
| − |
| 12,309 |
| 12,309 |
| − | | |
| | | |
|
|
|
|
|
|
|
|
|
|
| |
| Investments in associates and joint ventures | | − |
| − |
| − |
| 40 |
| 40 |
| − | | |
| Premises and equipment | | − |
| − |
| − |
| 1,868 |
| 1,868 |
| − | | |
| Goodwill | | − |
| − |
| − |
| 1,522 |
| 1,522 |
| − | | |
| Intangible assets | | − |
| − |
| − |
| 1,233 |
| 1,233 |
| − | | |
| Other assets | | − |
| − |
| − |
| 9,243 |
| 9,243 |
| − | | |
| | | 91,064 |
| 21,905 |
| 128,777 |
| 220,480 |
| 462,226 |
| 24.4 | | |
| | | | | | | | | | | | | | | |
| (millions of Canadian dollars) | | | | | | | | | | As at October 31, 2023(5) | | |||
| | | | Encumbered assets(2) | | Unencumbered assets | | Total | | Encumbered assets as % of total assets | | ||||
| | | | Pledged as collateral | | Other(3) | | Available as collateral | | Other(4) | | | | | |
| Cash and deposits with financial institutions | | 449 | | 8,841 | | 25,944 | | − | | 35,234 | | 2.2 | | |
| Securities | | 49,005 | | − | | 72,813 | | − | | 121,818 | | 11.6 | | |
| Securities purchased under reverse repurchase | | | | | | | | | | | | | | |
| | agreements and securities borrowed | | − | | 11,260 | | − | | − | | 11,260 | | 2.6 | |
| Loans and acceptances, net of allowances | | 36,705 | | − | | 6,140 | | 182,598 | | 225,443 | | 8.7 | | |
| Derivative financial instruments | | − | | − | | − | | 17,516 | | 17,516 | | − | | |
| | | | | | | | | | | | | | | |
| Investments in associates and joint ventures | | − | | − | | − | | 49 | | 49 | | − | | |
| Premises and equipment | | − | | − | | − | | 1,592 | | 1,592 | | − | | |
| Goodwill | | − | | − | | − | | 1,521 | | 1,521 | | − | | |
| Intangible assets | | − | | − | | − | | 1,256 | | 1,256 | | − | | |
| Other assets | | − | | − | | − | | 7,788 | | 7,788 | | − | | |
| | | 86,159 | | 20,101 | | 104,897 | | 212,320 | | 423,477 | | 25.1 | | |
(1) See the Financial Reporting Method section on pages 14 to 20 for additional information on capital management measures.
(2) 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.
(3) 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.
(4) 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 (e.g., mortgages insured by the Canada Mortgage and Housing Corporation that can be securitized into mortgage-backed securities under the National Housing Act (Canada)).
(5) Certain amounts have been adjusted to reflect accounting policy changes arising from the adoption of IFRS 17. For additional information, see Note 2 to the Consolidated Financial Statements.
|
Liquidity Coverage Ratio
The liquidity coverage ratio (LCR) was introduced primarily to ensure that banks could withstand periods of severe short-term stress. LCR is calculated by dividing the total amount of high-quality liquid assets (HQLA) by the total amount of net cash outflows. 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 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's LAR Guideline.
The following table provides average LCR data calculated using the daily figures in the quarter. For the quarter ended October 31, 2024, the Bank's average LCR was 150%, well above the 100% regulatory requirement and demonstrating the Bank's solid liquidity position.
LCR Disclosure Requirements(1)(2)*
| (millions of Canadian dollars) | | | | | For the quarter ended | | | |||||
| | | October 31, 2024 |
|
| July 31, 2024 | | | |||||
| | | | Total unweighted value(3) (average) |
| Total weighted value(4) (average) |
|
| Total weighted value(4) (average) | | | ||
| High-quality liquid assets (HQLA) | |
|
|
|
|
| | | | |||
| | Total HQLA | | n.a. |
| 86,929 |
|
| 80,724 | | | ||
| Cash outflows | |
|
|
|
|
| | | | |||
| | Retail deposits and deposits from small business customers, of which: | | 64,664 |
| 5,858 |
|
| 5,774 | | | ||
| | | Stable deposits | | 27,781 |
| 834 |
|
| 829 | | | |
| | | Less stable deposits | | 36,883 |
| 5,024 |
|
| 4,945 | | | |
| | Unsecured wholesale funding, of which: | | 116,004 |
| 65,742 |
|
| 64,409 | | | ||
| | | Operational deposits (all counterparties) and deposits in networks of cooperative banks | | 35,445 |
| 8,660 |
|
| 8,602 | | | |
| | | Non-operational deposits (all counterparties) | | 75,157 |
| 51,612 |
|
| 47,357 | | | |
| | | Unsecured debt | | 5,402 |
| 5,470 |
|
| 8,450 | | | |
| | Secured wholesale funding | | n.a. |
| 25,691 |
|
| 23,448 | | | ||
| | Additional requirements, of which: | | 76,406 |
| 19,479 |
|
| 19,152 | | | ||
| | | Outflows related to derivative exposures and other collateral requirements | | 25,777 |
| 11,228 |
|
| 10,901 | | | |
| | | Outflows related to loss of funding on secured debt securities | | 1,386 |
| 1,394 |
|
| 1,635 | | | |
| | | Backstop liquidity and credit enhancement facilities and commitments to extend credit | | 49,243 |
| 6,857 |
|
| 6,616 | | | |
| | Other contractual commitments to extend credit | | 2,435 |
| 791 |
|
| 731 | | | ||
| | Other contingent commitments to extend credit | | 156,320 |
| 2,117 |
|
| 2,105 | | | ||
| Total cash outflows | | n.a. |
| 119,678 |
|
| 115,619 | | | |||
| Cash inflows | |
|
|
|
|
| | | | |||
| | Secured lending (e.g., reverse repos) | | 137,758 |
| 29,105 |
|
| 27,808 | | | ||
| | Inflows from fully performing exposures | | 12,816 |
| 8,794 |
|
| 8,481 | | | ||
| | Other cash inflows | | 23,372 |
| 23,262 |
|
| 25,531 | | | ||
| Total cash inflows | | 173,946 |
| 61,161 |
|
| 61,820 | | | |||
| | | | | |
|
|
|
|
| | | |
| | | | | |
|
| Total adjusted value(5) |
|
| Total adjusted value(5) | | |
| Total HQLA | |
|
| 86,929 |
|
| 80,724 | | | |||
| Total net cash outflows | |
|
| 58,517 |
|
| 53,799 | | | |||
| Liquidity coverage ratio (%)(6) | |
|
| 150 | % |
| 152 | % | ||||
n.a. Not applicable
(1) See the Financial Reporting Method section on pages 14 to 20 for additional information on capital management measures.
(2) OSFI prescribed a table format in order to standardize disclosure throughout the banking industry.
(3) Unweighted values are calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows).
(4) Weighted values are calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates.
(5) Total adjusted values are calculated after the application of both haircuts and inflow and outflow rates and any applicable caps.
(6) The data in this table has been calculated using averages of the daily figures in the quarter.
As at October 31, 2024, Level 1 liquid assets represented 85% 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 without such variation being necessarily indicative of a trend. The variation between the quarter ended October 31, 2024 and the preceding quarter is a result of normal business operations. 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 presented in the tables on the previous pages or those used for internal liquidity management rules. While the liquidity disclosure framework is prescribed by the EDTF, the Bank's internal liquidity metrics use assumptions that are calibrated according to its business model and experience.
|
The Bank manages its intra-day liquidity in such a way that the amount of available liquidity exceeds its maximum intra-day liquidity requirements. The Bank monitors its intra-day liquidity on an hourly basis, and the evolution thereof is presented monthly to the ALCO.
Net Stable Funding Ratio
The BCBS has developed the Net Stable Funding Ratio (NSFR) to promote a more resilient banking sector. The NSFR requires institutions to maintain a stable funding profile in relation to the composition of their assets and off-balance-sheet activities. A viable funding structure is intended to reduce the likelihood that disruptions to an institution's regular sources of funding would erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR is calculated by dividing available stable funding by required stable funding. OSFI has been requiring Canadian banks to maintain a minimum NSFR of 100%.
The following table provides the available stable funding and the required stable funding in accordance with OSFI's Liquidity Adequacy Requirements Guideline. As at October 31, 2024, the Bank's NSFR was 122%, well above the 100% regulatory requirement and demonstrating the Bank's solid liquidity in a long-term position.
NSFR Disclosure Requirements(1)(2)*
| (millions of Canadian dollars) | | | | | | | As at October 31, 2024 |
|
| As at July 31, 2024 | |
| ||||
| | | | Unweighted value by residual maturity |
| Weighted value(3) |
|
| | |
| ||||||
| | | | No maturity |
| 6 months or less |
| Over 6 months to 1 year |
| Over 1 year |
|
|
| Weighted value(3) | |
| |
| Available Stable Funding (ASF) Items |
|
|
|
|
|
|
|
|
|
|
| | |
| ||
| Capital: | 25,540 |
| − |
| − |
| 1,258 |
| 26,798 |
|
| 26,610 | |
| ||
| | Regulatory capital | 25,540 |
| − |
| − |
| 1,258 |
| 26,798 |
|
| 26,610 | |
| |
| | Other capital instruments | − |
| − |
| − |
| − |
| − |
|
| − | |
| |
| Retail deposits and deposits from small business customers: | 60,125 |
| 15,068 |
| 8,385 |
| 28,038 |
| 103,782 |
|
| 102,165 | |
| ||
| | Stable deposits | 26,338 |
| 5,346 |
| 4,420 |
| 7,813 |
| 42,111 |
|
| 41,773 | |
| |
| | Less stable deposits | 33,787 |
| 9,722 |
| 3,965 |
| 20,225 |
| 61,671 |
|
| 60,392 | |
| |
| Wholesale funding: | 79,840 |
| 91,291 |
| 23,057 |
| 61,241 |
| 126,339 |
|
| 118,597 | |
| ||
| | Operational deposits | 36,740 |
| − |
| − |
| − |
| 18,370 |
|
| 17,678 | |
| |
| | Other wholesale funding | 43,100 |
| 91,291 |
| 23,057 |
| 61,241 |
| 107,969 |
|
| 100,919 | |
| |
| Liabilities with matching interdependent assets(4) | − |
| 3,313 |
| 1,740 |
| 23,324 |
| − |
|
| − | |
| ||
| Other liabilities(5): | 15,385 |
|
|
| 10,442 |
|
|
| 760 |
|
| 835 | |
| ||
| | NSFR derivative liabilities(5) | n.a. |
|
|
| 317 |
|
|
| n.a. |
|
| n.a. | |
| |
| | All other liabilities and equity not included in the above categories | 15,385 |
| 3,170 |
| 98 |
| 6,857 |
| 760 |
|
| 835 | |
| |
| Total ASF | n.a. |
| n.a. |
| n.a. |
| n.a. |
| 257,679 |
|
| 248,207 | |
| ||
| Required Stable Funding (RSF) Items |
|
|
|
|
|
|
|
|
|
|
| | |
| ||
| Total NSFR high-quality liquid assets (HQLA) | n.a. |
| n.a. |
| n.a. |
| n.a. |
| 9,827 |
|
| 10,254 | |
| ||
| Deposits held at other financial institutions for operational purposes | − |
| − |
| − |
| − |
| − |
|
| − | |
| ||
| Performing loans and securities: | 66,384 |
| 97,602 |
| 30,216 |
| 97,514 |
| 167,755 |
|
| 166,477 | |
| ||
| | Performing loans to financial institutions secured by Level 1 HQLA | 163 |
| 3,514 |
| 85 |
| − |
| 228 |
|
| 258 | |
| |
| | Performing loans to financial institutions secured by non-Level 1 HQLA and unsecured performing loans to financial institutions | 6,837 |
| 57,988 |
| 1,709 |
| 2,563 |
| 11,137 |
|
| 10,534 | |
| |
| | Performing loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and public sector entities, of which: | 34,364 |
| 27,072 |
| 18,837 |
| 33,685 |
| 83,705 |
|
| 82,729 | |
| |
| | | With a risk weight of less than or equal to 35% under the Basel II Standardized Approach for credit risk | 634 |
| 2,417 |
| 517 |
| 123 |
| 1,959 |
|
| 1,510 | |
|
| | Performing residential mortgages, of which: | 9,138 |
| 7,858 |
| 9,250 |
| 59,065 |
| 56,547 |
|
| 55,862 | |
| |
| | | With a risk weight of less than or equal to 35% under the Basel II Standardized Approach for credit risk | 9,138 |
| 7,858 |
| 9,250 |
| 59,065 |
| 56,547 |
|
| 55,862 | |
|
| | Securities that are not in default and do not qualify as HQLA, including exchange-traded equities | 15,882 |
| 1,170 |
| 335 |
| 2,201 |
| 16,138 |
|
| 17,094 | |
| |
| Assets with matching interdependent liabilities(4) | − |
| 3,313 |
| 1,740 |
| 23,324 |
| − |
|
| − | |
| ||
| Other assets(5): | 7,544 |
|
|
| 33,469 |
|
|
| 28,191 |
|
| 24,567 | |
| ||
| | Physical traded commodities, including gold | 696 |
| n.a. |
| n.a. |
| n.a. |
| 696 |
|
| 551 | |
| |
| | Assets posted as initial margin for derivative contracts and contributions to default funds of central counterparties(5) | n.a. |
|
|
| 12,894 |
|
|
| 10,960 |
|
| 10,750 | |
| |
| | NSFR derivative assets(5) | n.a. |
|
|
| 3,453 |
|
|
| 3,136 |
|
| − | |
| |
| | NSFR derivative liabilities before deduction of the variation margin posted(5) | n.a. |
|
|
| 9,758 |
|
|
| 488 |
|
| 611 | |
| |
| | All other assets not included in the above categories | 6,848 |
| 4,053 |
| 1,519 |
| 1,792 |
| 12,911 |
|
| 12,655 | |
| |
| Off-balance-sheet items(5) | n.a. |
|
|
| 126,582 |
|
|
| 4,845 |
|
| 4,686 | |
| ||
| Total RSF | n.a. |
| n.a. |
| n.a. |
| n.a. |
| 210,618 |
|
| 205,984 | |
| ||
| Net Stable Funding Ratio (%) | n.a. |
| n.a. |
| n.a. |
| n.a. |
| 122 | % |
| 120 | % |
| ||
n.a. Not applicable
(1) See the Financial Reporting Method section on pages 14 to 20 for additional information on capital management measures.
(2) OSFI prescribed a table format in order to standardize disclosure throughout the banking industry.
(3) Weighted values are calculated after application of the weightings set out in OSFI's LAR Guideline.
(4) As per OSFI's specifications, liabilities arising from transactions involving the Canada Mortgage Bond program and their corresponding encumbered mortgages are given ASF and RSF weights of 0%, respectively.
(5) As per OSFI's specifications, there is no need to differentiate by maturity.
The NSFR represents the amount of ASF relative to the amount of RSF. ASF is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of RSF of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance-sheet exposures. The amounts of ASF and RSF are calibrated to reflect the degree of stability of liabilities and liquidity of assets. The Bank expects some quarter-over-quarter variation between reported NSFRs without such variation being necessarily indicative of a trend.
The NSFR 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 is prescribed by the EDTF, the Bank's internal liquidity metrics use assumptions that are calibrated according to its business model and experience.
|
|
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.
Liquidity and funding levels remained sound and robust over the year, and the Bank does not foresee any event, commitment, or demand that might have a significant impact on its liquidity and funding risk position. For additional information, see the table entitled Residual Contractual Maturities of Balance Sheet Items and Off-Balance-Sheet Commitments in Note 31 to the Consolidated Financial Statements.
Credit Ratings
The credit ratings assigned by ratings agencies represent their assessment of the Bank's credit quality based on qualitative and quantitative information provided to them. Credit ratings may be revised at any time based on various factors, including macroeconomic factors, the methodologies used by ratings agencies, or the current and projected financial condition of the Bank. Credit ratings are one of the main factors that influence the Bank's ability to access financial markets at a reasonable cost. A downgrade in the Bank's credit ratings could adversely affect the cost, size, and term of future funding and could also result in increased requirement to pledge collateral or decreased capacity to engage in certain collateralized business activities at a reasonable cost, including hedging and derivative financial instrument transactions.
Liquidity and funding levels remain sound and robust, and the Bank continues to enjoy excellent access to the market for its funding needs. The Bank received favourable credit ratings from all the agencies, reflecting the high quality of its debt instruments, and the Bank's objective is to maintain these strong credit ratings. On August 26, 2024, S&P Global Ratings raised its long-term issuer credit rating on the Bank to "A+" and its outlook was maintained at stable. In addition, on September 24, 2024, Moody's placed the Bank's ratings under review for upgrade. As at October 31, 2024, all the other outlooks of the ratings agencies remained unchanged at "Stable". The following table presents the Bank's credit ratings according to four rating agencies as at October 31, 2024.
The Bank's Credit Ratings
| | | | | | | As at October 31, 2024 | | ||
| | | | Moody's | S&P |
| DBRS |
| Fitch | |
| Short-term senior debt | | P-1 | A-1 | | R-1 (high) | | F1+ | | |
| Canadian commercial paper | | | A-1 (mid) | | | | | | |
| Long-term deposits | | Aa3 | | | AA | | AA- | | |
| Long-term non-bail-inable senior debt(1) | | Aa3 | A+ | | AA | | AA- | | |
| Long-term senior debt(2) | | A3 | BBB+ | | AA (low) | | A+ | | |
| NVCC subordinated debt | | Baa2 (hyb) | BBB | | A (low) | | | | |
| NVCC limited recourse capital notes | | Ba1 (hyb) | BB+ | | BBB (high) | | BBB | | |
| NVCC preferred shares | | Ba1 (hyb) | P-3 (high) | | Pfd-2 | | | | |
| Counterparty risk(3) | | Aa3/P-1 | | | | | AA- | | |
| Covered bonds program | | Aaa | | | AAA | | AAA | | |
| Rating outlook | | Under review for an upgrade(4) | Stable | | Stable | | Stable | | |
(1) Includes senior debt issued before September 23, 2018 and senior debt issued on or after September 23, 2018, which is excluded from the Bank Recapitalization (Bail-In) Regime.
(2) Subject to conversion under the Bank Recapitalization (Bail-In) Regime.
(3) Moody's uses the term Counterparty Risk Rating while Fitch uses the term Derivative Counterparty Rating.
(4) On September 24, 2024, Moody's has placed on review for upgrade all long-term ratings and assessments of the Bank, including its Baa1 baseline credit assessment (BCA), Aa3 long-term deposits ratings and Counterparty Risk Ratings, and its Counterparty Risk Assessment of Aa3(cr).
Guarantees
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-, two-, or three-notch downgrade. These additional collateral requirements are presented in the table below.
| (millions of Canadian dollars) | | As at October 31, 2024 |
| |||||
| | | | One-notch downgrade |
| Two-notch downgrade | | Three-notch downgrade | |
| Derivatives(1) | | 21 |
| 42 | | 88 | | |
(1) Contractual requirements related to agreements known as initial margins and variation margins.
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The main objective of the funding strategy is to support the Bank's organic growth while also enabling it to survive potentially severe and prolonged crises and to meet its regulatory obligations and financial targets.
The Bank's funding framework is summarized as follows:
· pursue a diversified deposit strategy to fund core banking activities through stable deposits coming from the networks of each of the Bank's major business segments;
· maintain sound liquidity risk management through centralized expertise and management of liquidity metrics within a predefined risk appetite;
· maintain active access to various markets to ensure a diversification of institutional funding in terms of source, geographic location, currency, instrument, and maturity, whether or not funding is secured.
The funding strategy is implemented in support of the Bank's overall objectives of strengthening its franchise among market participants and reinforcing its excellent reputation. The Bank continuously monitors and analyzes market trends as well as possibilities for accessing less expensive and more flexible funding, considering both the risks and opportunities observed. The deposit strategy remains a priority for the Bank, which continues to prefer deposits to institutional funding.
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The Bank actively monitors and controls liquidity risk exposures and funding needs within and across entities, business segments, and currencies. The process involves evaluating the liquidity position of individual business segments in addition to that of the Bank as a whole as well as the liquidity risk from raising unsecured and secured funding in foreign currencies. The funding strategy is implemented through the funding plan and deposit strategy, which are monitored, updated to reflect actual results, and regularly evaluated.
Diversified Funding Sources
The primary purpose of diversifying by source, geographic location, currency, instrument, maturity, and depositor is to mitigate liquidity and funding risk by ensuring that the Bank maintains alternative sources of funds that strengthen its capacity to withstand a variety of severe yet plausible institution-specific and market-wide shocks. To meet this objective, the Bank:
· takes funding diversification into account in the business planning process;
· maintains a variety of funding programs to access different markets;
· sets limits on funding concentration;
· maintains strong relationships with fund providers;
· is active in various funding markets of all tenors and for various instruments;
· identifies and monitors the main factors that affect the ability to raise funds.
The Bank is active in the following funding and securitization platforms:
· Canadian dollar Senior Unsecured Debt;
· U.S. dollar Senior Unsecured Debt programs;
· Canadian Medium-Term Note Shelf;
· U.S. dollar Commercial Paper programs;
· Euro Commercial Paper programs;
· U.S. dollar Certificates of Deposit;
· Euro Medium-Term Note program;
· Canada Mortgage and Housing Corporation securitization programs;
· Canadian Credit Card Trust II;
· Legislative Covered Bond program.
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 October 31, 2024 | | |||
| | | | 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) | | 199 |
| − |
| − |
| 532 |
| 731 |
| − |
| − |
| 731 | | |
| Certificates of deposit and commercial paper(3) | | 1,657 |
| 7,255 |
| 10,271 |
| 9,966 |
| 29,149 |
| 139 |
| − |
| 29,288 | | |
| Senior unsecured medium-term notes(4)(5) | | 940 |
| 2,270 |
| 2,074 |
| 4,431 |
| 9,715 |
| 3,984 |
| 13,199 |
| 26,898 | | |
| Senior unsecured structured notes | | − |
| 34 |
| 6 |
| − |
| 40 |
| 1,452 |
| 3,782 |
| 5,274 | | |
| Covered bonds and asset-backed securities | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | Mortgage securitization | | − |
| 1,897 |
| 1,216 |
| 1,740 |
| 4,853 |
| 4,169 |
| 19,355 |
| 28,377 | |
| | Covered bonds | | 355 |
| − |
| 1,513 |
| − |
| 1,868 |
| 2,495 |
| 6,994 |
| 11,357 | |
| | Securitization of credit card receivables | | 49 |
| − |
| − |
| − |
| 49 |
| − |
| − |
| 49 | |
| Subordinated liabilities(6) | | − |
| − |
| − |
| − |
| − |
| − |
| 1,258 |
| 1,258 | | |
| | | 3,200 |
| 11,456 |
| 15,080 |
| 16,669 |
| 46,405 |
| 12,239 |
| 44,588 |
| 103,232 | | |
| Secured funding | | 404 |
| 1,897 |
| 2,729 |
| 1,740 |
| 6,770 |
| 6,664 |
| 26,349 |
| 39,783 | | |
| Unsecured funding | | 2,796 |
| 9,559 |
| 12,351 |
| 14,929 |
| 39,635 |
| 5,575 |
| 18,239 |
| 63,449 | | |
|
| | 3,200 |
| 11,456 |
| 15,080 |
| 16,669 |
| 46,405 |
| 12,239 |
| 44,588 |
| 103,232 | | |
| As at October 31, 2023 | | 3,337 | | 6,616 | | 15,200 | | 6,868 | | 32,021 | | 12,347 | | 34,370 | | 78,738 | | |
(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) Includes debts subject to bank recapitalization (Bail-In) conversion regulations.
(6) Subordinated debt is presented in this table, but the Bank does not consider it as part of its wholesale funding.
Operational Risk
Operational risk is the risk of financial losses attributable to personnel, to an inadequacy or to a failure of processes, systems, or external events. Operational risk exists for every Bank activity. Theft, fraud, cyberattacks, unauthorized transactions, system errors, human error, misinterpretation of laws and regulations, litigation or disputes with clients, inappropriate sales practice behaviour, or property damage are just a few examples of events likely to cause financial loss, harm the Bank's reputation, or lead to regulatory penalties or sanctions.
Although operational risk cannot be eliminated entirely, it can be managed in a thorough and transparent manner to keep it at an acceptable level. The Bank's operational risk management framework is built on the concept of three lines of defence and provides a clear allocation of responsibilities to all levels of the organization, as mentioned below.
Operational Risk Management Framework
The operational risk management framework is described in the Operational Risk Management Policy, which is derived from the Risk Management Policy. The operational risk management framework is aligned with the Bank's risk appetite and is made up of policies, standards, and procedures specific to each operational risk, which fall under the responsibility of specialized groups. Effective management of operational risk contributes to the operational resilience of the Bank, which ensures the implementation of an efficient approach in this respect.
The Operational Risk Management Committee (ORMC), a subcommittee of the GRC, is the main governance committee overseeing operational risk matters. Its mission is to provide oversight of the operational risk level across the organization to ensure it aligns with the Bank's established risk appetite targets. It implements effective frameworks for managing operational risk, including policies and standards, and monitors the application thereof.
The segments use several operational risk management tools and methods to identify, assess, manage and monitor their operational risks and control measures. With these tools and methods, the segments can:
· recognize and understand the inherent and residual risks to which their activities and operations are exposed;
· identify how to manage and monitor the identified risks to keep them at an acceptable level;
· proactively and continuously manage risks;
· obtain an integrated view of risk posture and the action plans that need to be put in place to achieve risk appetite targets, by combining the results of these various tools in the risk profile.
Operational Risk Management Tools and Methods
Operational Risk Taxonomy
With the aim of developing a common language for the Bank's operational risk universe, an operational risk taxonomy has been established. It is comparable to the Basel taxonomy and based on eight risk categories and two risk themes.
Collection and Analysis of Data on Internal Operational Events
The Operational Risk Unit applies a process, across the Bank and its subsidiaries, for identifying, collecting, and analyzing data on internal operational events. This process helps determine the Bank's exposure to the operational risks and operational losses incurred and assess the effectiveness of internal controls. It also helps limit operational events, keep losses at an acceptable level and, as a result, reduce potential capital charges and lower the likelihood of damage to the Bank's reputation. These data are processed and saved in a centralized database and are periodically the subject of a quality assurance exercise.
Analysis and Lessons Learned from Operational Events Observed in Other Large Businesses
By collecting and analyzing media-reported information about significant operational incidents, in particular incidents related to fraud, information security, and theft of personal information experienced by other organizations, the Bank can assess the effectiveness of its own operational risk management practices and reinforce them, if necessary.
Self-Assessment of Operational Risk
Self-assessment of operational risk gives each business unit and corporate unit the means to proactively identify and assess the new or major operational risks to which they are exposed, evaluate the effectiveness of monitoring and mitigating controls, and develop action plans to keep such risks at acceptable levels. The self-assessment is done on an ongoing basis through quarterly monitoring and in-depth analysis, or when significant changes are made to products, services, operations, markets, technological systems or business processes, which helps anticipate factors that could hinder performance or the achievement of objectives.
Key Risk Indicators
Key risk indicators are used to monitor the main operational risk exposure factors and track how risks are evolving in order to proactively manage them. The business units and corporate units define the key indicators associated with their main operational risks and assign tolerance thresholds to them. These indicators are monitored periodically and, when they show a significant increase in risk or when a tolerance threshold is exceeded, they are sent to an appropriate level in the hierarchy and action plans are implemented as required.
Scenario Analysis
Scenario analysis, which is part of a Bank-wide stress testing program, is an important and useful tool for assessing the impacts related to potentially serious events. It is used to define the risk appetite, set risk exposure limits, and engage in business planning. More specifically, scenario analysis provides management with a better understanding of the risks faced by the Bank and helps it make appropriate management decisions to mitigate potential operational risks that are inconsistent with the Bank's risk appetite.
Insurance Program
To protect itself against any material financial losses arising from unforeseeable operational risk exposure, the Bank also has adequate insurance, the nature and amount of which meet its coverage requirements.
Operational Risk Reports and Disclosures
Operational events for which the financial impact exceeds tolerance thresholds or that have a significant non-financial impact are submitted to appropriate decision-making levels. Management is obligated to report on its management process and to remain alert to current and future issues. Reports on the Bank's risk profile, highlights, and emerging risks are periodically submitted, on a timely basis, to the ORMC, the GRC, and the RMC. This reporting enhances the transparency and proactive management of the main operational risk factors.
Regulatory Compliance Risk
Regulatory compliance risk is the risk of the Bank or of one of its employees or business partners failing to comply with the regulatory requirements in effect where it does business, both in Canada and internationally. Regulatory compliance risk is present in all of the daily operations of each Bank segment.
The Bank faces an increasingly complex environment of regulatory requirements, as governments and regulatory authorities continue to implement major reforms aimed at strengthening the stability of the financial system and protecting key markets and participants. Numerous factors are creating significant pressure on human resources and the need for technological innovation, including the expansion of the Bank's international activities, increasingly complex international sanctions in a constantly evolving geopolitical environment, the growing interconnectivity of regulatory risks, and the changing expectations of the many regulatory bodies.
A situation of regulatory non-compliance can adversely affect the Bank's reputation and result in penalties and sanctions and/or restrictions on business activities, as well as increased oversight by regulators.
Organizational Structure of Compliance
Compliance is an independent oversight function within the Bank. The Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer serves as both chief compliance officer (CCO) and chief anti-money laundering officer (CAMLO) for the Bank and its subsidiaries and foreign centres. She is responsible for implementing and updating the Bank's programs for regulatory compliance management, regulatory requirements related to AML/ATF, international sanctions, and the fight against corruption. The CCO and CAMLO has a direct relationship with the Chair of the RMC and meets with her at least once every quarter. She can also communicate directly with senior management, leaders, and directors of the Bank and of its subsidiaries and foreign centres.
Regulatory Compliance Framework
The Bank operates in a highly regulated industry. To ensure sound management of regulatory compliance, the Bank favours proactive approaches and incorporates regulatory requirements into its day-to-day operations.
Such proactive management also provides reasonable assurance that the Bank is in compliance, in all material respects, with the regulatory requirements in effect where it does business, both in Canada and internationally.
The implementation of a regulatory compliance risk management framework across the Bank is entrusted to the Compliance Service, which has the following mandate:
· implement policies and standards that ensure compliance with current regulatory requirements, including those related to AML/ATF, to international sanctions, and to the fight against corruption;
· develop compliance and AML/ATF training programs for Bank employees, leaders, and directors;
· exercise independent oversight and monitoring of the programs, policies, and procedures implemented by the management of the Bank, its subsidiaries, and its foreign centres to ensure that the control mechanisms are sufficient, respected, and effective;
· report relevant compliance and AML/ATF matters to the Bank's Board and inform it of any significant changes in the effectiveness of the risk management framework.
The Bank holds itself to high regulatory compliance risk management standards in order to earn the trust of its clients, its shareholders, the market, and the general public.
In addition, the Bank has an organization-wide AML/ATF Program designed to prevent the use of its products and services for money laundering and terrorist financing purposes. The Bank also applies the International Sanctions Program, which is designed to ensure that all financial products and activities comply with the applicable economic sanctions, as well as an Anticorruption Program aimed at preventing acts of corruption in the organization. Controls are in place to monitor and detect financial transactions that are suspected of being linked to money laundering or the financing of terrorist activities, or that are in contravention of international sanctions, and to report them to the applicable regulatory authorities.
The main regulatory developments that have been monitored over the past year are described below.
Reform of the Official Languages Act (federal law)
The purpose of Bill C-13, An Act to amend the Official Languages Act, to enact the Use of French in Federally Regulated Private Businesses Act and to make related amendments to other Acts is to provide a new legal framework and support the official languages of Canada. It modernizes the Official Languages Act by giving new powers to the Commissioner (compliance agreements, orders, penalties, etc.) to protect the language rights of Canadians. It also introduces a new law that confers rights and obligations on federal businesses regarding language of service (consumers) and language of work in Quebec and in other regions of Canada with a strong francophone presence. The bill was assented to on June 20, 2023. The amendments to the Official Languages Act then came into effect, with the new Act coming into effect by order-in-council at a later date. A consultation was initiated by Canadian Heritage to obtain industry feedback on application of the new law. The comments received will be used to set the rules of a new regulation, in particular to align the new obligations in regions with a strong French-speaking presence.
Amendments to the Charter of the French Language (Quebec)
An Act respecting French, the official and common language of Québec (formerly Bill 96) made amendments to the Charter of the French Language and other legislation. The objectives consist mainly of strengthening the presence and use of the French language in Quebec and affirming that French is the only official language of Quebec. In June 2024, the government published a new Regulation respecting the language of commerce and business that gives detailed information on the new requirements for contracts of adhesion and commercial advertising (assented to in July 2024). The last provisions relating to commercial advertising will come into effect on June 1, 2025.
Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances
On July 5, 2023, the Financial Consumer Agency of Canada (FCAC) published, with immediate effect, its Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances. This guideline sets out the FCAC's expectations for federally regulated financial institutions (FRFIs) to contribute to the protection of consumers of financial products and services by providing tailored support to natural persons with an existing residential mortgage loan on their principal residence who are experiencing severe financial stress, as a result of exceptional circumstances, and are at risk of mortgage default. These exceptional circumstances include the current combined effects of high household indebtedness, the rapid rise in interest rates in recent years, and the increased cost of living. The FCAC expects FRFIs to consider all available mortgage relief measures and to adopt an approach that reflects the personal circumstances of consumers and their financial needs. On September 1, 2023, the FCAC also published instructions for banks to file their reports with the FCAC relating to the implementation of the Guideline on Existing Consumer Mortgages in Exceptional Circumstances.
An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023 concerning external complaints bodies (ECBs)
Bill C-47, enacted in June 2023, amends the Bank Act and gives the Minister of Finance the power to designate only one ECB to address consumer complaints involving banks. These amendments require a bank that is a subject of a complaint received by the ECB to provide the designated ECB, without delay, with all information in its possession or control that relates to the complaint. The Minister of Finance may also increase the FCAC's oversight and enforcement powers with respect to the ECB, and allow the FCAC to conduct a special audit of the ECB. The Ombudsman for Banking Services and Investments (OBSI) was selected as the exclusive ECB, and all banks not already conducting business with the OSBI were required to complete a transfer by November 1, 2024.
Budget Implementation Act, 2023, No. 1 and Criminal Interest Rate Regulations
On December 23, 2023, the federal government released its Criminal Interest Rate Regulations for public consultation. The purpose of these draft regulations is to implement the amendments to the Criminal Code proposed in the Budget Implementation Act, No. 1, 2023, which will change the calculation method from one based on an effective annual rate to a method based on an annual percentage rate and lower the criminal interest rate from an APR of 45% to 35%. Implementation is scheduled for January 1, 2025.
Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Activities
Changes to reporting forms resulting from amendments made to the regulations set out in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (AML/ATF) have been implemented in accordance with the requirements of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
Protection of Personal Information
Given changing technologies and societal behaviours, privacy and the protection of personal information is a topical issue in Canada. Recent regulatory measures around the world reflect a desire to implement a stronger legislative framework in the areas of confidentiality and use of personal information. In Quebec, most of the obligations of the new Act 25, An Act to modernize legislative provisions as regards the protection of personal information, came into effect in September 2023. Act 25 has introduced substantial changes regarding the protection of personal information, mainly by promoting transparency, enhancing data confidentiality levels, and providing a framework for the collection, use, and sharing of personal information. In addition, the Regulation respecting the anonymization of personal information came into force in May 2024, and the final component of Law 25 concerning the data portability right came into force in September 2024. The Regulation sets out the criteria to be met when a company anonymizes personal information in order to use it for serious and legitimate purposes, rather than destroying it. As for the data portability right, it enables individuals to have information communicated to them in a structured, commonly used technological format. At the federal level, Bill C-27, tabled in June 2022, enacts three new laws: the Consumer Privacy Protection Act, the Personal Information and Data Protection Tribunal Act, the Artificial Intelligence and Data Act. The latter act is the first bill designed to regulate artificial intelligence in Canada. Still at the federal level, the Consumer-Driven Banking Act was enacted on June 20, 2024. This law establishes Canada's first legislative framework for an open banking system, which aims to enable consumers and small businesses to transfer their financial data between financial institutions and accredited financial applications in a secure and user-friendly manner.
Employment Equity Act
Amendments to the Employment Equity Regulationsintroduced new pay transparency reporting obligations, among other things, under the Employment Equity Act. The amendments came into effect on January 1, 2021 and created new pay gap reporting obligations for affected employers, which were required to be included in employer annual reports (which were due by June 1, 2022). The aggregate wage gap data for each employer was publicly posted in the winter of 2023 (and updated annually thereafter). The purpose of the Employment Equity Act is to achieve equality in the workplace so that no person shall be denied employment opportunities or benefits for reasons unrelated to ability and, in the fulfilment of that goal, to correct the conditions of disadvantage in employment experienced by women, Indigenous Peoples, persons with disabilities, and members of visible minorities by giving effect to the principle that employment equity means more than treating persons in the same way but also requires special measures and the accommodation of differences. The Act is currently the subject of consultations on its modernization.
Pay Equity Act
Under the federal Pay Equity Act, which came into effect on August 31, 2021, employers with more than ten employees are required to develop a pay equity plan that identifies and corrects gender-based wage gaps within three years (i.e., no later than September 3, 2024). The purpose of the Act is to achieve pay equity through proactive means by redressing the systemic gender-based discrimination in the compensation practices and systems of employers that is experienced by employees who occupy positions in predominantly female job classes. This Act seeks to ensure that employees receive equal compensation for work of equal value, while taking into account the diverse needs of employers and then to maintain pay equity through proactive means. Employers with over 100 employees must prepare (and maintain) their pay equity plan in a joint employer-employee pay equity committee.
Recovery and Resolution Planning
As part of the regulatory measures used to manage systemic risks, D-SIBs are required to prepare recovery and resolution plans. A recovery plan is essentially a roadmap that guides the recovery of a bank in the event of severe financial stress; conversely, a resolution plan guides its orderly wind-down in the event of failure when recovery is no longer an option. The Bank improves and periodically updates its recovery and resolution plans to prepare for these high-risk, but low-probability, events in accordance with the guidelines of the CDIC, which are frequently updated. In addition, the Bank and other D-SIBs continue to work with the CDIC to maintain a comprehensive resolution plan that would ensure an orderly winding down of the Bank's operations. These plans are approved by the Board and submitted to the national regulatory agencies.
Internal Revenue Code (Section 871(m) - Dividend Equity Payments)
Section 871(m) of the U.S. Internal Revenue Code (IRC) aims to ensure that non-U.S. persons pay tax on payments that can be considered dividends on U.S. shares when these payments are made on certain derivative instruments. The derivative instruments for which the underlyings are U.S. shares (including U.S. exchange-traded funds) or "non-qualified indices" are therefore subject to the withholding and reporting requirements. Given that discussions are ongoing in the industry, the effective date of certain aspects of this regulation, as well as some of the obligations of Qualified Derivatives Dealers under section 871(m) of the IRC and the Qualified Intermediary Agreement, have been postponed until January 1, 2027.
U.S. Foreign Account Tax Compliance Act and Common Reporting Standard
The U.S. law addressing foreign account tax compliance (Foreign Account Tax Compliance Act or FATCA) and the Common Reporting Standard (CRS), both incorporated into the Income Tax Act(Canada), are intended to counter tax evasion internationally through the automatic exchange of tax information reported annually by Canadian financial institutions to the Canada Revenue Agency (CRA), which then relays the information to the relevant tax authorities. CRA also publishes guidance documents on the due diligence and reporting obligations imposed under FATCA and CRS. These documents are amended periodically to reflect any regulatory changes, such as the recent amendments to CRS made by OECD, the adoption of which was proposed in the 2024 Federal Budget, for 2026 and subsequent years.
Proposed Rules on Sales and Exchanges of Digital Assets by Brokers
In June 2024, the U.S. Department of the Treasury published final regulations on broker sales and exchanges of digital assets. Brokers will be required to report the gross proceeds from sales of digital assets effected on or after January 1, 2025. Reporting the adjusted basis will be required for sales effected on or after January 1, 2026.
Reform of Interest Rate Benchmarks
As part of the transition related to the reform of interest rate benchmarks in Canada, the CDOR (Canadian Dollar Offered Rate) was discontinued on June 28, 2024 and replaced with the CORRA (Canadian Overnight Repo Rate Average). A forward-looking rate, the 1-month and 3-month Term CORRA has also been available for certain financial products since September 5, 2023. For additional information, see the Basis of Presentation section in Note 1 to the Consolidated Financial Statements.
One-Day Settlement Cycle
In May 2024, the normal settlement cycle for certain securities transactions in Canada and the U.S. was shortened from two business days after the trade date (T+2) to one business day after the trade date (T+1). The shorter settlement cycle is expected to reduce credit and counterparty risk, lower the cost of collateral, increase market liquidity and provide faster access to financing. Canada and the U.S. moved to T+1 over the weekend of May 25 and 26, 2024, with May 24 being the last date on which securities were traded under the T+2 cycle. However, the first trading day at T+1 was different in the United States due to Memorial Day. Canada and the U.S. had identical trade settlement cycles on May 30, 2024.
The CSA adopted amendments to National Instrument 24-101 - Institutional Trade Matching and Settlement and its companion policy (the "amendments") that came into force on May 27, 2024. These amendments were adopted to: (i) address the transition to T+1, and (ii) permanently repeal the exception reporting requirements in Part 4 of NI 24-101. The CSA also proposed amendments to National Instrument 81-102 - Investment Funds to facilitate a mutual fund's decision to voluntarily shorten its trade settlement cycle for purchases and redemptions to T+1. The Canadian Investment Regulatory Organization (CIRO) has published amendments to the Universal Market Integrity Rules and the Investment Dealer and Partially Consolidated Rules to support the securities industry's transition to the T+1 settlement cycle.
Consolidation of the Rules of the Canadian Investment Regulatory Organization (CIRO)
A consolidation of CIRO rules has been underway since October 2023 and is being carried out in five consultation phases. Phases 1 to 3 have been published. It is expected that Phase 4 will be published in the fall of 2024, with the fifth and final consultation phase published in early 2025. The entry into force of this new set of rules has yet to be confirmed by CIRO. These rules will apply to investment dealers and mutual fund dealers.
Accessible Canada Act
The Act was adopted in June 2019. The purpose of the Act is to make Canada a barrier-free country by January 1, 2040. The Bank published its accessibility plan on May 31, 2023 and its first progress report on May 30, 2024 on its website at nbc.ca.
Amendments to National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations - Client Relationship Model (Phase 3)
In April 2023, the CSA published the final version of changes designed to enhance disclosure requirements on the cost of investment funds and to impose new disclosure requirements on the cost and performance of individual variable insurance contracts (segregated fund contracts). All dealers, advisers, registered investment fund managers, and insurers offering segregated fund contracts are affected by these new requirements, which will come into effect on January 1, 2026.
National Instrument 91-507 - Trade Repositories and Derivatives Data Reporting
The CSA has published the final version of amendments intended to simplify the reporting of OTC derivatives data and harmonize it with global standards. The amendments will come into force on July 25, 2025.
National Instrument 93-101 - Derivatives: Business Conduct
This instrument, which came into force on September 28, 2024, sets out the fundamental obligations for OTC derivatives dealers and advisors. NI 93-101 meets international standards, including fair dealing, conflicts of interest, suitability, reporting non-compliance and recordkeeping. The business conduct rule is intended to help protect market participants by improving transparency, increasing accountability, and promoting responsible business conduct in OTC derivatives markets.
Regulation respecting complaint processing and dispute resolution in the financial sector
On February 15, 2024, the Autorité des marchés financiers (AMF) published the final version of the regulation. Investment dealers who are members of CIRO are exempt from application of the regulation for their activities in Quebec when they are subject to equivalent CIRO rules and these rules are approved by the AMF. The AMF must confirm that CIRO's rules are equivalent and that the exemption applies. The regulation will come into force on July 1, 2025.
Client and Order Identifiers
On December 7, 2023, the Montréal Exchange published the final version of changes to client and order identifiers. These rules introduce client identifiers and markers to identify orders when entered on the Electronic Trading System. The Exchange has extended the timeline for Participants to ensure compliance with the client and order identifiers requirements, and has established a compliance deadline of March 31, 2025.
Reputation Risk
Reputation risk is the risk that the Bank's operations or practices will be judged negatively by the public, whether that judgment is with or without basis, thereby adversely affecting the perception, image, or trademarks of the Bank and potentially resulting in costly litigation or loss of income. Reputation risk generally arises from a deficiency in managing another risk. The Bank's reputation may, for example, be adversely affected by non-compliance with laws and regulations or by process failures. All risks must therefore be managed effectively in order to protect the Bank's reputation.
The Bank's corporate culture continually promotes the behaviours and values to be adopted by employees. Ethics are at the heart of everything we do. To fulfill our mission, put people first, and continue to build a strong bank, we must maintain the highest degree of work ethic. Our Code of Conduct outlines what is expected from each employee in terms of ethical behaviour and rules to be followed as they carry out their duties.
Reputation Risk Management Policy
Approved by the GRC, the reputation risk policy covers all of the Bank's practices and activities. It sets out the principles and rules for managing reputation risk within our risk appetite limits along the following five focal points: clients, employees, community, shareholders and governance, all of which represent Bank stakeholders. The policy is supplemented by specific provisions of several policies and standards, such as the policy on managing risks related to major changes, the business continuity and crisis management policy, and the investment governance policy.
Strategic Risk
Strategic risk is the risk of a financial loss or of reputational harm arising from inappropriate strategic orientations, improper execution, or ineffective response to economic, financial, or regulatory changes. The corporate strategic plan is developed by the Senior Leadership Team, in alignment with the Bank's overall risk appetite, and approved by the Board. Once approved, the initiatives of the strategic plan are monitored regularly to ensure that they are progressing. If not, strategies could be reviewed or adjusted if deemed appropriate.
In addition, the Bank has a specific Board-approved policy for strategic investments, which are defined as purchases of business assets or acquisitions of significant interests in an entity for the purposes of acquiring control or creating a long-term relationship. As such, acquisition projects and other strategic investments are analyzed through a due diligence process to ensure that these investments are aligned with the corporate strategic plan and the Bank's risk appetite.
Environmental and Social Risk
Environmental and social risk is the possibility that environmental and social matters would result in a financial loss for the Bank or affect its business activities. Environmental risk consists of many aspects, including the use of energy, water, and other resources; climate change; and biodiversity. Social risk includes, for example, considerations relating to human rights, accessibility, diversity, equity and inclusion, our human capital management practices, including work conditions and the health, safety and well-being of our employees.
A rapidly changing global regulatory environment, increased expectations and scrutiny from regulatory agencies and other associations, and potential imbalances among their requirements represent challenges, as do stakeholders' expectations and their differing views about the Bank's environmental and social priorities and actions. The Bank's reputation could also be affected by its action or inaction or by a perception of inaction or inadequate action on environmental and social matters, particularly regarding the progress made. All these factors can lead to greater exposure to reputation risk, regulatory compliance risk, and strategic risk. We monitor the evolution of these factors, analyze them, and update our procedures on an ongoing basis.
Governance
Our ESG governance structure is based on all levels of the organization being involved in achieving our objectives and meeting our commitments, including the Board, which exercises an ESG oversight role. Together with management, the Board, through its committees, oversees the execution of the Bank's ESG strategy, which is structured around nine ESG principles that are approved by the Board. These ESG principles have been incorporated into the Bank's strategic priorities. The Board ensures that ESG criteria are incorporated into the Bank's long-term strategic objectives, and it monitors the development and integration of ESG initiatives and principles into our day-to-day activities. Furthermore, the Board's various committees monitor environmental and social risks in accordance with their respective mandates. They are supported by management in the performance of their duties. Environmental and social issues are now central to the Bank's decision-making process. ESG factors continue to be incorporated into the Bank's processes, in line with its strategy and the principles approved by the Board. ESG indicators have been added to the various monitoring dashboards and are gradually being integrated into the Bank's risk appetite framework. Reports on the ESG indicators and on the Bank's ESG commitments are being periodically presented to the internal committees and to the Board committees tasked with overseeing them. The Bank has an environmental policy that expresses its determination to preserve the environment in the face of human activity, both in terms of our own activities and the benefits to the community. It has also adopted an internal ESG policy to better reflect ESG issues in its corporate strategy and to define the key guidelines and responsibilities for ESG management and governance at the Bank.
The Bank's Code of Conduct outlines what is expected from each employee in their professional, business, and community interactions. It also provides guidance on adhering to the Bank's values, on the day-to-day conduct of the Bank's affairs, and on relationships with third parties, employees, and clients to create an environment conducive to achieving the Bank's One Mission, namely, to have a positive impact on people's lives. In addition, our Human Rights Statement outlines how the Bank applies its principles in its activities and relationships with its stakeholders, in every role it plays in society. The Bank's commitment on modern slavery outlines the governance structure, risk management and control measures deployed by the Bank in this regard.
Risk Management
Identifying, assessing, mitigating and monitoring environmental and social risks are part of the Bank's risk management framework and risk appetite framework. For some years now, the Bank has been integrating ESG risk into its risk management policy framework. The Bank has also added a statement to its risk appetite about its commitment to achieving its ESG objectives through target indicators. Other risk management policies and standards also support more comprehensive environmental and social risk management. Given its importance, climate risk has been more fully integrated, and a climate risk management standard has been developed. In addition, the concept of climate risk has been incorporated into the Internal Capital Adequacy Assessment Process risk inventory register.
As a key player in the financial industry, the Bank has demonstrated its commitment to environmental and social groups and associations such as the United Nations Principles for Responsible Banking, PCAF, and NZBA. The frameworks and methodologies developed by these groups may evolve, which could lead the Bank to reconsider its membership therein. In addition, their efforts to develop such frameworks and objectives could raise competition-related concerns.
As part of its PCAF and NZBA commitments, the Bank has continued to quantify its financed GHG emissions in addition to working on defining interim reduction targets for carbon-intensive sectors. However, it should be remembered that the need to make an orderly and fair transition to a low-carbon economy means that the Bank's decarbonization efforts must be gradual. The Bank takes concrete steps to meet its commitments and to move its plan forward, notably by quantifying the financial impacts of environmental and social risk. Furthermore, the Bank is committed to transparently communicating information about its progress and its signatory commitments by periodically publishing performance reports.
With respect to its own activities, the Bank is pursuing its commitment to reduce its carbon footprint and offsets a portion of its GHG emissions (including for business travel by employees). The Bank has implemented a global responsible procurement strategy and has adopted a Supplier Code of Conduct that describes its expectations of suppliers to uphold responsible business practices. By adopting this code, the Bank is manifesting its intention to do business with suppliers that incorporate environmental, social and governance issues into their operations and throughout their supply chains. Before entering into a relationship with a third party, the business segment conducts due diligence to assess the risk. Responsible sourcing criteria have also been integrated into the purchasing and supplier selection practices for the new head office construction project. The Bank is aiming for LEED v4(1) Gold and WELL(2) Wellness certifications.
The Bank is mindful about the accuracy of the information it provides in the context of increased disclosure and the risks associated with greenwashing and socialwashing. However, our ability to set and achieve our environmental and social objectives, priorities, and targets depends on several assumptions and factors, many of which are beyond the Bank's control and whose effects are difficult to predict. Many of these assumptions, data, indicators, measures, methodologies, scenarios and other standards continue to evolve, and may differ significantly from those used by others, from those we may use in the future, or from those that may be imposed in the future by governmental or other authorities in this area. We may therefore be obliged to redefine certain objectives, priorities, or targets or revise data to reflect changes in methodologies or the quality of the available data. It is also possible that the Bank's predictions, targets, or projections prove to be inaccurate, that its assumptions may not be confirmed, and that its strategic objectives and performance targets will not be achieved within the deadlines.
These past few years also saw the emergence of a new environmental risk issue, i.e., the potential financial repercussions of climate change on biodiversity, ecosystems, and ecosystemic services. Financial system participants were called upon by the PRB Biodiversity Community initiative of the United Nations Environment Programme Finance Initiative (UNEP-FI), of which the Bank is a member. As this environmental risk issue begins to emerge, the Bank will continue to closely monitor the various initiatives and contribute to deliberations about potentially incorporating this issue into both investment and credit-granting decisions. The Risk Management Group closely monitors changes in trends and calculation methods and actively participates in various industry discussion groups. In addition, an internal "Nature" working group has been set up. This group is responsible for developing expertise and sharing best practices.
To proactively ensure the strategic positioning of its entire portfolio, the Bank continues to support the transition to a low-carbon economy while closely monitoring the related developments and implications. Doing so involves ongoing and stronger adaptation efforts as well as additional mitigation measures for instances of business interruptions or disruptions caused by major incidents such as natural disasters or health crises. Such measures include the business continuity plan, the operational risk management program, and the disaster risk management program. To ensure regulatory compliance and sound risk management, the Bank has introduced new processes and continues to improve existing ones, in addition to working on optimizing its data and control architecture to include ESG data.
(1) Criteria of the LEED (Leadership in Energy and Environmental Design) certification system. LEED certification involves satisfying climate criteria and adaptation characteristics that will help limit potential physical climate risks.
(2) The WELL Standard, administered by the International WELL Building Institute, recognizes environments that support the health and well-being of the occupants.
New Regulatory Developments
On March 13, 2024, the Canadian Sustainability Standards Board (CSSB) published its first set of proposed Canadian Sustainability Disclosure Standards (CSDS) in the form of exposure drafts. CSDS 1 - General Requirements for Disclosure of Sustainability-related Financial Information, and CSDS 2 - Climate-related Disclosures, are aligned with IFRS S1 - General Requirements for Disclosure of Sustainability related financial Information and IFRS S2 - Climate Related Disclosures (IFRS S2), but propose a later effective date and extend transition relief for certain disclosure requirements. CSDS will be applicable to D‑SIBs at the end of fiscal 2026, and transitional relief measures will postpone certain disclosure requirements to the end of fiscal 2028. Disclosure under CSDS will be on a voluntary basis until mandated by the CSA.
On March 20, 2024, OSFI published a new version of guideline B-15 entitled Climate Risk Management, the required disclosures of which more closely align with those of the International Sustainability Standards Board's final version of IFRS S2. Most of the B-15 disclosure requirements will take effect for D-SIBs at the end of fiscal 2024, while other disclosure requirements will take effect in fiscal 2025 or later. At the same time, OSFI also released new Climate Risk Returns that will collect standardized data on emissions and exposures. The data collected by OSFI will support its climate risk supervisory activities. It also continues to monitor updates and future developments.
On December 16, 2022, the European Union published the Corporate Sustainability Reporting Directive (CSRD), which has come into force gradually since January 1, 2024. The CSRD requires companies falling within its scope to use the European Sustainability Reporting Standards (ESRS), which specify the information to be reported and, when relevant, the structure in which that information should be reported. It sets specific deadlines for companies to comply with disclosure requirements, depending on their size and classification. During 2024, the Bank carried out work to assess its disclosure obligations under these new regulations. In order not only to comply with the new requirements, but also to reap the benefits in terms of strategic development and performance, the Bank has begun to reflect on the appropriate governance and structure required to carry out this project.
Tightening the Rules on Greenwashing (C-59)
Bill C-59 amended the Competition Act to include provisions prohibiting misleading environmental benefit claims. These provisions are designed to prohibit claims about the environmental benefits of a product or company that are not based on adequate and proper testing. These changes also provide for private rights of action from mid-2025. The Competition Bureau has launched a public consultation to develop guidance on the application of the new provisions of the Act, and the Bank is following these developments closely.
Material Accounting Policies and Accounting Estimates
A summary of the material accounting policies used by the Bank is presented in Note 1 to the Consolidated Financial Statements of this Annual Report. The accounting policies discussed below are considered critical given their importance to the presentation of the Bank's financial position and operating results and require subjective and complex judgments and estimates on matters that are inherently uncertain. Any change in these judgments and estimates could have a significant impact on the Bank's Consolidated Financial Statements.
The geopolitical landscape (notably the Russia-Ukraine war and the clashes between Israel and Hamas), inflation, climate change, and high interest rates continue to create uncertainty. As a result, establishing reliable estimates and applying judgment continue to be substantially complex. Some of the Bank's accounting policies, such as measurement of expected credit losses (ECLs), require particularly complex judgments and estimates. See Note 1 to the Consolidated Financial Statements for a summary of the most significant estimation processes used to prepare the Consolidated Financial Statements in accordance with IFRS Accounting Standards and the valuation techniques used to determine carrying values and fair values of assets and liabilities. The uncertainty regarding certain key inputs used in measuring ECLs is described in Note 8 to the Consolidated Financial Statements.
Classification of Financial Instruments
At initial recognition, all financial instruments are recorded at fair value in the Consolidated Balance Sheet. At initial recognition, financial assets must be classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss. The Bank determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to manage these financial assets. At initial recognition, financial liabilities are classified as subsequently measured at amortized cost or as at fair value through profit or loss.
For the purpose of classifying a financial asset, the Bank must determine whether the contractual cash flows associated with the financial asset are solely payments of principal and interest on the principal amount outstanding. The principal is generally the fair value of the financial asset at initial recognition. The interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period, and for other basic lending risks and costs as well as of a profit margin. If the Bank determines that the contractual cash flows associated with a financial asset are not solely payments of principal and interest, the financial assets must be classified as measured at fair value through profit or loss.
When classifying financial assets, the Bank determines the business model used for each portfolio of financial assets that are managed together to achieve a same business objective. The business model reflects how the Bank manages its financial assets and the extent to which the financial asset cash flows are generated by the collection of the contractual cash flows, the sale of the financial assets, or both. The Bank determines the business model using scenarios that it reasonably expects to occur. Consequently, the business model determination is a matter of fact and requires the use of judgment and consideration of all the relevant evidence available to the Bank at the date of determination.
A financial asset portfolio falls within a "hold to collect" business model when the Bank's primary objective is to hold these financial assets in order to collect contractual cash flows from them and not to sell them. When the Bank's objective is achieved both by collecting contractual cash flows and by selling the financial assets, the financial asset portfolio falls within a "hold to collect and sell" business model. In this type of business model, collecting contractual cash flows and selling financial assets are both integral components to achieving the Bank's objective for this financial asset portfolio. Financial assets are mandatorily measured at fair value through profit or loss if they do not fall within either a "hold to collect" business model or a "hold to collect and sell" business model.
Fair Value of Financial Instruments
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial assets and offered prices for financial liabilities, provide the best evidence of fair value. A financial instrument is considered quoted in an active market when prices in exchange, dealer, broker or principal‑to‑principal markets are accessible at the measurement date. An active market is one where transactions occur with sufficient frequency and volume to provide quoted prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another valuation technique that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would consider when pricing a transaction. Judgment is required when applying a large number of acceptable valuation techniques and estimates to determine fair value. The estimated fair value reflects market conditions on the measurement date and, consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration received or paid. If there is a difference between the fair value at initial recognition and the transaction price, and the fair value is determined using a valuation technique based on observable market inputs or, in the case of a derivative, if the risks are fully offset by other contracts entered into with third parties, this difference is recognized in the Consolidated Statement of Income. In other cases, the difference between the fair value at initial recognition and the transaction price is deferred in the Consolidated Balance Sheet. The amount of the deferred gain or loss is recognized over the term of the financial instrument. The unamortized balance is immediately recognized in net income when (i) observable market inputs can be obtained and support the fair value of the transaction, (ii) the risks associated with the initial contract are substantially offset by other contracts entered into with third parties, (iii) the gain or loss is realized through a cash receipt or payment, or (iv) the transaction matures or is terminated before maturity.
In certain cases, measurement adjustments are recognized to address factors that market participants would use at the measurement date to determine fair value but that are not included in the measurement technique due to system limitations or uncertainty surrounding the measure. These factors include, but are not limited to, the unobservable nature of inputs used in the valuation model, assumptions about risk such as market risk, credit risk, or valuation model risk and future administration costs. The Bank may also consider market liquidity risk when determining the fair value of financial instruments when it believes these instruments could be disposed of for a consideration below the fair value otherwise determined due to a lack of market liquidity or an insufficient volume of transactions in a given market. The measurement adjustments also include the funding valuation adjustment applied to derivative financial instruments to reflect the market implied cost or benefits of funding collateral for uncollateralized or partly collateralized transactions.
IFRS Accounting Standards establish a fair value measurement hierarchy that classifies the inputs used in financial instrument fair value measurement techniques according to three levels. The fair value measurement hierarchy has the following levels:
Level 1
Inputs corresponding to unadjusted quoted prices in active markets for identical assets and liabilities and accessible to the Bank at the measurement date. These instruments consist primarily of equity securities, derivative financial instruments traded in active markets, and certain highly liquid debt securities actively traded in over-the-counter markets.
Level 2
Valuation techniques based on inputs, other than the quoted prices included in Level 1 inputs, that are directly or indirectly observable in the market for the asset or liability. These inputs are quoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived principally from or corroborated by observable market inputs by correlation or other means. These instruments consist primarily of certain loans, certain deposits, derivative financial instruments traded in over-the-counter markets, certain debt securities, certain equity securities whose value is not directly observable in an active market, liabilities related to transferred receivables, and certain other liabilities.
Level 3
Valuation techniques based on one or more significant inputs that are not observable in the market for the asset or liability. The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the markets. The valuation technique may also be partly based on observable market inputs. Financial instruments whose fair values are classified in Level 3 consist of investments in hedge funds, certain derivative financial instruments, equity and debt securities of private companies, certain loans, certain deposits (structured deposit notes), and certain other assets (receivables).
Establishing fair value is an accounting estimate and has an impact on the following items: Securities at fair value through profit or loss, certain Loans, Securities at fair value through other comprehensive income, Obligations related to securities sold short, Derivative financial instruments, financial instruments designated at fair value through profit or loss, and financial instruments designated at fair value through other comprehensive income in the Consolidated Balance Sheet. This estimate also has an impact on Non-interest income in the Consolidated Statement of Income of the Financial Markets segment and of the Other heading. Lastly, this estimate has an impact on Other comprehensive income in the Consolidated Statement of Comprehensive Income. For additional information on the determination of the fair value of financial instruments, see Notes 4 and 7 to the Consolidated Financial Statements.
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt instruments measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that are not measured at fair value. ECLs are a probability-weighted estimate of credit losses over the remaining expected life of the financial instrument. The ECL model is forward looking. Measurement of ECLs at each reporting period reflects reasonable and supportable information about past events, current conditions, and forecasts of future events and economic conditions. Judgment is required in making assumptions and estimates, determining movements between the three stages, and applying forward-looking information. Any changes in these assumptions and estimates, as well as the use of different, but equally reasonable, estimates and assumptions, could have an impact on the allowances for credit losses and the provisions for credit losses for the year. All business segments are affected by this accounting estimate. For additional information, see Note 8 to the Consolidated Financial Statements.
Determining the Stage
The ECL three-stage impairment approach is based on the change in the credit quality of financial assets since initial recognition. If, at the reporting date, the credit risk of non-impaired financial instruments has not increased significantly since initial recognition, these financial instruments are classified in Stage 1, and an allowance for credit losses that is measured, at each reporting date, in an amount equal to 12-month expected credit losses, is recorded. When there is a significant increase in credit risk since initial recognition, these non-impaired financial instruments are migrated to Stage 2, and an allowance for credit losses that is measured, at each reporting date, in an amount equal to lifetime expected credit losses, is recorded. In subsequent reporting periods, if the credit risk of a financial instrument improves such that there is no longer a significant increase in credit risk since initial recognition, the ECL model requires reverting to Stage 1, i.e., recognition of 12-month expected credit losses. When one or more events that have a detrimental impact on the estimated future cash flows of a financial asset occurs, the financial asset is considered credit-impaired and is migrated to Stage 3, and an allowance for credit losses equal to lifetime expected credit losses continues to be recorded or the financial asset is written off. Interest income is calculated on the gross carrying amount for financial assets in Stages 1 and 2 and on the net carrying amount for financial assets in Stage 3.
Assessment of Significant Increase in Credit Risk
In determining whether credit risk has increased significantly, the Bank uses an internal credit risk grading system, external risk ratings, and forward-looking information to assess deterioration in the credit quality of a financial instrument. To assess whether or not the credit risk of a financial instrument has increased significantly, the Bank compares the probability of default (PD) occurring over its expected life as at the reporting date with the PD occurring over its expected life on the date of initial recognition and considers reasonable and supportable information indicative of a significant increase in credit risk since initial recognition. The Bank includes relative and absolute thresholds in the definition of significant increase in credit risk and a backstop of 30 days past due. All financial instruments that are more than 30 days past due since initial recognition are migrated to Stage 2 even if other metrics do not indicate that a significant increase in credit risk has occurred. The assessment of a significant increase in credit risk requires significant judgment.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of all expected cash shortfalls over the remaining expected life of the financial instrument, and reasonable and supportable information about past events, current conditions, and forecasts of future events and economic conditions is considered. The estimation and application of forward-looking information requires significant judgment. Cash shortfalls represent the difference between all contractual cash flows owed to the Bank and all cash flows that the Bank expects to receive.
The measurement of ECLs is primarily based on the product of the financial instrument's PD, loss given default (LGD) and exposure at default (EAD). Forward-looking macroeconomic factors such as unemployment rates, housing price indices, interest rates, and gross domestic product (GDP) are incorporated into the risk parameters. The estimate of expected credit losses reflects an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes. The Bank incorporates three forward-looking macroeconomic scenarios in its ECL calculation process: a base scenario, an upside scenario, and a downside scenario. Probability weights are assigned to each scenario. The scenarios and probability weights are reassessed quarterly and are subject to management review. The Bank applies experienced credit judgment to adjust the modelled ECL results when it becomes evident that known or expected risk factors and information were not considered in the credit risk rating and modelling process.
ECLs for all financial instruments are recognized under Provisions for credit losses in the Consolidated Statement of Income. In the case of debt instruments measured at fair value through other comprehensive income, ECLs are recognized under Provisions for credit losses in the Consolidated Statement of Income, and a corresponding amount is recognized in Other comprehensive income with no reduction in the carrying amount of the asset in the Consolidated Balance Sheet. As for debt instruments measured at amortized cost, they are presented net of the related allowances for credit losses in the Consolidated Balance Sheet. Allowances for credit losses for off-balance-sheet credit exposures that are not measured at fair value are included in Other liabilities in the Consolidated Balance Sheet.
Purchased or Originated Credit-Impaired Financial Assets
On initial recognition of a financial asset, the Bank determines whether the asset is credit-impaired. For financial assets that are credit-impaired upon purchase or origination, the lifetime expected credit losses are reflected in the initial fair value. In subsequent reporting periods, the Bank recognizes only the cumulative changes in these lifetime ECLs since initial recognition as an allowance for credit losses. The Bank recognizes changes in ECLs under Provisions for credit losses in the Consolidated Statement of Income, even if the lifetime ECLs are less than the ECLs that were included in the estimated cash flows on initial recognition.
Definition of Default
The definition of default used by the Bank to measure ECLs and transfer financial instruments between stages is consistent with the definition of default used for internal credit risk management purposes. The Bank considers a financial asset, other than a credit card receivable, to be credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred or when contractual payments are 90 days past due. Credit card receivables are considered credit-impaired and are fully written off at the earlier of the following dates: when a notice of bankruptcy is received, a settlement proposal is made, or contractual payments are 180 days past due.
Write-Offs
A financial asset and its related allowance for credit losses are normally written off in whole or in part when the Bank considers the probability of recovery to be non-existent and when all guarantees and other remedies available to the Bank have been exhausted or if the borrower is bankrupt or winding up and balances owing are not likely to be recovered.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not available for use or that have indefinite useful lives are tested for impairment annually or more frequently if there is an indication that the asset might be impaired.
An asset is tested for impairment by comparing its carrying amount with its recoverable amount. The recoverable amount must be estimated for the individual asset. Where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the cash-generating unit (CGU) to which the asset belongs will be determined. Goodwill is always tested for impairment at the level of a CGU or a group of CGUs. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Bank uses judgment to identify CGUs.
An asset's recoverable amount is the higher of fair value less costs to sell and the value in use of the asset or CGU. Value in use is the present value of expected future cash flows from the asset or CGU. The recoverable amount of the asset or CGU is determined using valuation models that consider various factors such as projected future cash flows, discount rates, and growth rates. The use of different estimates and assumptions in applying the impairment tests could have a significant impact on income. If the recoverable amount of an asset or a CGU is less than its carrying amount, the carrying amount is reduced to its recoverable amount and an impairment loss is recognized under Non-interest expenses in the Consolidated Statement of Income.
Management exercises judgment when determining whether there is objective evidence that premises and equipment or intangible assets with finite useful lives may be impaired. It also uses judgment in determining to which CGU or group of CGUs an asset or goodwill is to be allocated. Moreover, for impairment assessment purposes, management must make estimates and assumptions to determine the recoverable amount of non-financial assets, CGUs, or a group of CGUs. For additional information on the estimates and assumptions used to calculate the recoverable amount of an asset or CGU, see Note 12 to the Consolidated Financial Statements.
Any changes to these estimates and assumptions may have an impact on the recoverable amount of a non-financial asset and, consequently, on impairment testing results. These accounting estimates have an impact on Premises and equipment, Intangible assets and Goodwill reported in the Consolidated Balance Sheet. The aggregate impairment losses, if any, are recognized under Non-interest expenses - Other in the given business segment.
Employee Benefits - Pension Plans and Other Post-Employment Benefit Plans
The expense and obligation of the defined benefit component of the pension plans and other post-employment benefit plans are actuarially determined using the projected benefit method prorated on service. The calculations incorporate management's best estimates of various actuarial assumptions such as discount rates, rates of compensation increase, health care cost trend rates, mortality rates, and retirement age.
Remeasurements of these plans represent the actuarial gains and losses related to the defined benefit obligation and the actual return on plan assets, excluding the net interest determined by applying a discount rate to the net asset or net liability of the plans. Remeasurements are immediately recognized in Other comprehensive income and are not subsequently reclassified to net income; these cumulative gains and losses are reclassified to Retained earnings.
The use of different assumptions could have a significant impact on the defined benefit asset (liability) presented under Other assets (Other liabilities) in the Consolidated Balance Sheet, on the pension plan and other post-employment benefit plan expenses presented under Compensation and employee benefits in the Consolidated Statement of Income, as well as on Remeasurements of pension plans and other post-employment benefit plans presented in Other comprehensive income. All business segments are affected by this accounting estimate. For additional information, including the significant assumptions used to determine the Bank's pension plan and other post-employment benefit plan expenses and the sensitivity analysis for significant plan assumptions, see Note 25 to the Consolidated Financial Statements.
Income Taxes
The Bank makes assumptions to estimate income taxes as well as deferred tax assets and liabilities. This process involves estimating the actual amount of current taxes and evaluating tax loss carryforwards and temporary differences arising from differences between the values of items reported for accounting and for income tax purposes. Deferred tax assets and liabilities, presented under Other assets and Other liabilities in the Consolidated Balance Sheet, are calculated according to the tax rates to be applied in future periods. Previously recorded deferred tax assets and liabilities must be adjusted when the date of the future event is revised based on current information. The Bank periodically evaluates deferred tax assets to assess recoverability. In the Bank's opinion, based on the information at its disposal, it is probable that all deferred tax assets will be realized before they expire.
This accounting estimate affects Income taxes in the Consolidated Statement of Income for all business segments. For additional information on income taxes, see Notes 1 and 26 to the Consolidated Financial Statements.
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 proceeding involving the Bank are as follows:
Defrance
On January 21, 2019, the Quebec Superior Court authorized a class action against the National Bank and several other Canadian financial institutions. The originating application was served to the Bank on April 23, 2019. The class action was initiated on behalf of consumers residing in Quebec. The plaintiffs allege that non-sufficient funds charges, billed by all of the defendants when a payment order is refused due to non-sufficient funds, are illegal and prohibited by the Consumer Protection Act. The plaintiffs are claiming, in the form of damages, the repayment of these charges as well as punitive damages.
It is impossible to determine the outcome of the claims instituted or which may be instituted against the Bank and its subsidiaries. The Bank estimates, based on the information at its disposal, that while the amount of contingent liabilities pertaining to these claims, taken individually or in the aggregate, could have a material impact on the Bank's consolidated results of operations for a particular period, it would not have a material adverse impact on the Bank's consolidated financial position.
Provisions are liabilities of uncertain timing and amount. A provision is recognized when the Bank has a present obligation (legal or constructive) arising from a past event, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when the amount of the obligation can be reliably estimated. The recognition of a litigation provision requires the judgment of the Bank's management in assessing the existence of an obligation, the timing and probability of loss, and estimates of potential monetary impact. Provisions are based on the Bank's best estimates of the economic resources required to settle the present obligation, given all available information and relevant risks and uncertainties, and, when it is significant, the effect of the time value of money. However, the actual amount required to settle litigation could be significantly higher or lower than the amounts recognized, as the actual amounts depend on a variety of factors and risks, notably the degree to which proceedings have advanced when the amount is determined, the presence of multiple defendants whose share of responsibility is undetermined, including that of the Bank, the types of matters or allegations in question, including some that may involve new legal frameworks or regulations or that set forth new legal interpretations and theories.
The Bank regularly assesses all litigation provisions by considering the development of each case, the Bank's past experience in similar transactions, and the opinion of its legal counsel. Each new piece of information can alter the Bank's assessment as to the probability and estimated amount of loss and therefore the extent to which it adjusts the recorded provision.
Structured Entities
In the normal course of business, the Bank enters into arrangements and transactions with structured entities. Structured entities are entities designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate solely to administrative tasks and the relevant activities are directed by means of contractual arrangements. A structured entity is consolidated when the Bank concludes, after evaluating the substance of the relationship and its right or exposure to variable returns, that it controls that entity. Management must exercise judgment in determining whether the Bank controls an entity. Additional information is provided in the Securitization and Off-Balance-Sheet Arrangements section of this MD&A and in Note 29 to the Consolidated Financial Statements.
Accounting Policy Changes
IFRS 17 - Insurance Contracts
On November 1, 2023, the Bank adopted the accounting standard IFRS 17 - Insurance Contracts (IFRS 17). IFRS 17 affects how an entity accounts for its insurance contracts and how it reports financial performance in the Consolidated Income Statement, in particular the timing of revenue recognition for insurance contracts. The current Consolidated Balance Sheet presentation, under which items are included and reported in Other assets and Other liabilities, respectively, was changed.
IFRS 17 introduces three approaches to measure insurance contracts: the general model approach, the premium allocation approach, and the variable fee approach. The general model approach, which is primarily used by the Bank, measures insurance contracts based on the present value of estimates of the expected future cash flows necessary to fulfill the contracts, including a risk adjustment for non-financial risk as well as the contractual service margin (CSM), which represents the unearned profits that are recognized as services are provided in the future. The premium allocation approach is applied to short-term contracts, and insurance revenues are recognized systematically over the coverage period. For all measurement approaches, if contracts are expected to be onerous, losses are recognized immediately.
At the transition date, November 1, 2022, the Bank applied two of the three transition approaches available under IFRS 17: the full retrospective approach and the fair value approach. For most groups of contracts, the fair value approach was applied considering that the full retrospective approach was impracticable, since reasonable and supportable information for applying this approach was not available without undue cost or effort.
Impacts of IFRS 17 Adoption
The IFRS 17 requirements have been applied retrospectively by adjusting the Consolidated Balance Sheet balances on the date of initial application, i.e., November 1, 2022. The impacts of IFRS 17 adoption have been recognized through an adjustment to Retained earnings as at November 1, 2022. The following information presents the impacts on the Consolidated Balance Sheets as at November 1, 2022 and as at October 31, 2023:
Consolidated Balance Sheets
| | | | As at October 31, 2023 | | | | As at October 31, 2023 | | As at October 31, 2022 | | | | As at November 1, 2022 | |
| | | As reported | | IFRS 17 adjustments | | Adjusted | | As reported | | IFRS 17 adjustments | | Adjusted | | |
| Assets | | | | | | | | | | | | | | |
| Other assets | | 7,889 | | (101) | | 7,788 | | 5,958 | | (50) | | 5,908 | | |
| Liabilities | | | | | | | | | | | | | | |
| Other liabilities | | 7,423 | | (7) | | 7,416 | | 6,361 | | (2) | | 6,359 | | |
| Equity | | | | | | | | | | | | | | |
| Retained earnings | | 16,744 | | (94) | | 16,650 | | 15,140 | | (48) | | 15,092 | | |
As at October 31, 2023, the net CSM amount related to the new recognition and measurement principles for insurance and reinsurance contract assets and liabilities stood at $109 million ($89 million as at November 1, 2022).
The following information presents the impacts on the Consolidated Statement of Income for the comparative fiscal year:
Consolidated Statement of Income - Increase (Decrease)
| Year ended October 31, 2023 | | ||
| Non-interest income - Insurance revenues, net | | (112) | |
| Total revenues | | (112) | |
| Compensation and employee benefits | | (27) | |
| Occupancy | | (3) | |
| Technology | | (7) | |
| Professional fees | | (1) | |
| Other | | (10) | |
| Non-interest expenses |
| (48) |
|
| Income before provisions for credit losses and income taxes |
| (64) |
|
| Income before income taxes | | (64) | |
| Income taxes | | (18) | |
| Net income | | (46) | |
Future Accounting Policy Changes
The Bank closely monitors both new accounting standards and amendments to existing accounting standards issued by the IASB. The following standards have been issued but are not yet effective. The Bank is currently assessing the impact of applying these standards on the Consolidated Financial Statements.
Effective Date - November 1, 2026
Amendments to the Classification and Measurement of Financial Instruments
In May 2024, the IASB issued Amendments to the Classification and Measurement of Financial Instruments, which affects certain provisions of IFRS 9 - Financial Instruments and IFRS 7 - Financial Instruments: Disclosures. Specifically, the amendments apply to the derecognition of financial liabilities settled through electronic transfer, to the classification of certain financial assets, to disclosures regarding equity instruments designated at fair value through other comprehensive income, and to contractual terms that could change the timing or amount of contractual cash flows. These amendments must be applied retrospectively for annual periods beginning on or after January 1, 2026. Earlier application is permitted.
Effective Date - November 1, 2027
IFRS 18 - Presentation and Disclosure in Financial Statements
In April 2024, the IASB issued a new accounting standard, IFRS 18 - Presentation and Disclosure in Financial Statements (IFRS 18). This new standard replaces the current IAS 1 accounting standard on presentation of financial statements. IFRS 18 presents a new accounting framework that will improve how information is communicated in financial statements, in particular performance-related information in the Consolidated Statement of Income, and that will introduce limited changes to the Consolidated Statement of Cash Flows and the Consolidated Balance Sheet. IFRS 18 must be applied retrospectively for annual periods beginning on or after January 1, 2027. Earlier application is permitted.
Additional Financial Information
Table 1 - Quarterly Results
| (millions of Canadian dollars, except per share amounts) | | 2024 | | | |||||||||||||||
| | | | |
| Total |
|
| Q4 |
|
| Q3 |
|
| Q2 |
| | Q1 |
| |
| Statement of income data | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | ||
| Net interest income(1) | |
| 2,939 |
|
| 784 |
|
| 769 |
|
| 635 |
|
| 751 |
| | ||
| Non-interest income(2) | |
| 8,461 |
|
| 2,160 |
|
| 2,227 |
|
| 2,115 |
|
| 1,959 |
| | ||
| Total revenues | |
| 11,400 |
|
| 2,944 |
|
| 2,996 |
|
| 2,750 |
|
| 2,710 |
| | ||
| Non-interest expenses(3) | |
| 6,054 |
|
| 1,592 |
|
| 1,541 |
|
| 1,472 |
|
| 1,449 |
| | ||
| Income before provisions for credit losses and income taxes | |
| 5,346 |
|
| 1,352 |
|
| 1,455 |
|
| 1,278 |
|
| 1,261 |
| | ||
| Provisions for credit losses | |
| 569 |
|
| 162 |
|
| 149 |
|
| 138 |
|
| 120 |
| | ||
| Income taxes(4) | |
| 961 |
|
| 235 |
|
| 273 |
|
| 234 |
|
| 219 |
| | ||
| Net income | |
| 3,816 |
|
| 955 |
|
| 1,033 |
|
| 906 |
|
| 922 |
| | ||
| Non-controlling interests | |
| (1) |
|
| − |
|
| − |
|
| (1) |
|
| − |
| | ||
| Net income attributable to the Bank's shareholders and holders of other equity instruments | |
| 3,817 |
|
| 955 |
|
| 1,033 |
|
| 907 |
|
| 922 |
| | ||
| Earnings per common share | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | ||
| | Basic | | $ | 10.78 |
| $ | 2.69 |
| $ | 2.92 |
| $ | 2.56 |
| $ | 2.61 |
| | |
| | Diluted | |
| 10.68 |
|
| 2.66 |
|
| 2.89 |
|
| 2.54 |
|
| 2.59 |
| | |
| Dividends (per share) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | ||
| | Common | | $ | 4.32 |
| $ | 1.10 |
| $ | 1.10 |
| $ | 1.06 |
| $ | 1.06 |
| | |
| | Preferred | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| | | Series 30 | |
| 1.2770 |
|
| 0.3869 |
|
| 0.3870 |
|
| 0.2515 |
|
| 0.2516 |
| |
| | | Series 32 | |
| 0.9598 |
|
| 0.2400 |
|
| 0.2399 |
|
| 0.2400 |
|
| 0.2399 |
| |
| | | Series 38 | |
| 1.7568 |
|
| 0.4392 |
|
| 0.4392 |
|
| 0.4392 |
|
| 0.4392 |
| |
| | | Series 40 | |
| 1.4545 |
|
| 0.3636 |
|
| 0.3636 |
|
| 0.3637 |
|
| 0.3636 |
| |
| | | Series 42 | |
| 1.7640 |
|
| 0.4410 |
|
| 0.4410 |
|
| 0.4410 |
|
| 0.4410 |
| |
| Return on common shareholders' equity(5) | |
| 17.2 |
| % | 16.4 |
| % | 18.4 |
| % | 16.9 |
| % | 17.1 | % | | ||
| Total assets | |
|
|
|
| 462,226 |
|
| 453,933 |
|
| 441,690 |
|
| 433,927 |
| | ||
| Subordinated debt(6) | |
|
|
|
| 1,258 |
|
| 1,254 |
|
| 1,237 |
|
| 749 |
| | ||
| Net impaired loans excluding POCI loans(5) | |
|
|
|
| 1,144 |
|
| 959 |
|
| 864 |
|
| 677 |
| | ||
| Number of common shares outstanding (thousands) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | ||
| | Average - Basic | |
| 339,733 |
|
| 340,479 |
|
| 340,215 |
|
| 339,558 |
|
| 338,675 |
| | |
| | Average - Diluted | |
| 342,839 |
|
| 344,453 |
|
| 343,531 |
|
| 342,781 |
|
| 341,339 |
| | |
| | End of period | |
|
|
|
| 340,744 |
|
| 340,523 |
|
| 340,056 |
|
| 339,166 |
| | |
| Per common share | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | ||
| | Book value(5) | |
|
|
| $ | 65.74 |
| $ | 64.64 |
| $ | 62.28 |
| $ | 61.18 |
| | |
| | Share price | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| | | High | | $ | 134.23 |
|
| 134.23 |
|
| 118.17 |
|
| 114.68 |
|
| 103.38 |
| |
| | | Low | |
| 86.50 |
|
| 111.98 |
|
| 106.21 |
|
| 101.24 |
|
| 86.50 |
| |
| Number of employees - Worldwide (full-time equivalent) | |
|
|
|
| 29,196 |
|
| 29,250 |
|
| 28,665 |
|
| 28,730 |
| | ||
| Number of branches in Canada | |
|
|
|
| 368 |
|
| 369 |
|
| 369 |
|
| 368 |
| | ||
(1) For fiscal 2024, Net interest income included an amount of $14 million to reflect the amortization of the issuance costs of the subscription receipts issued as part of the agreement to acquire CWB.
(2) For fiscal 2024, Non-interest income included a gain of $174 million upon the remeasurement at fair value of the interest already held in CWB as well as a $3 million loss to reflect the management of the fair value changes related to the CWB acquisition (2023: $91 million gain upon the fair value remeasurement of the interest in TMX).
(3) For fiscal 2024, Non-interest expenses included $18 million in CWB acquisition and integration charges (2023: $86 million in premises and equipment and intangible asset impairment losses, $35 million in litigation expenses, a $25 million expense related to changes to the Excise Tax Act, and $15 million in provisions for contracts).
(4) Income taxes expense for fiscal 2023 had included $24 million related to the Canadian Government's 2022 tax measures.
(5) See the "Glossary" on pages 130 to 133 for details on the composition of these measures.
(6) Represents long-term financial liability.
(7) Certain comparative figures for 2023, have been adjusted to reflect accounting policy changes arising from the adoption of IFRS 17. For additional information, see Note 2 to the Consolidated Financial Statements.
|
| | | 2023(7) | | | 2022 | | | ||||||||||||||||||||||||
|
| | | Total | | | Q4 | | | Q3 | | | Q2 | | | Q1 | | | Total | | | Q4 | | | Q3 | | | Q2 | | | Q1 | | |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | 3,586 | | | 735 | | | 870 | | | 882 | | | 1,099 | | | 5,271 | | | 1,207 | | | 1,419 | | | 1,313 | | | 1,332 | | |
|
| | | 6,472 | | | 1,825 | | | 1,620 | | | 1,564 | | | 1,463 | | | 4,381 | | | 1,127 | | | 994 | | | 1,126 | | | 1,134 | | |
|
|
| | 10,058 | | | 2,560 | | | 2,490 | | | 2,446 | | | 2,562 | | | 9,652 | | | 2,334 | | | 2,413 | | | 2,439 | | | 2,466 | | |
|
| | | 5,753 | | | 1,597 | | | 1,404 | | | 1,362 | | | 1,390 | | | 5,230 | | | 1,346 | | | 1,305 | | | 1,299 | | | 1,280 | | |
|
| | | 4,305 | | | 963 | | | 1,086 | | | 1,084 | | | 1,172 | | | 4,422 | | | 988 | | | 1,108 | | | 1,140 | | | 1,186 | | |
|
| | | 397 | | | 115 | | | 111 | | | 85 | | | 86 | | | 145 | | | 87 | | | 57 | | | 3 | | | (2) | | |
|
|
| | 619 | | | 97 | | | 145 | | | 167 | | | 210 | | | 894 | | | 163 | | | 225 | | | 248 | | | 258 | | |
|
|
| | 3,289 | | | 751 | | | 830 | | | 832 | | | 876 | | | 3,383 | | | 738 | | | 826 | | | 889 | | | 930 | | |
|
|
| | (2) | | | - | | | (1) | | | (1) | | | - | | | (1) | | | - | | | - | | | (1) | | | - | | |
|
|
| | 3,291 | |
| 751 | | | 831 | | | 833 | | | 876 | | | 3,384 | | | 738 | | | 826 | | | 890 | | | 930 | | |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | $ | 9.33 | | $ | 2.11 | | $ | 2.35 | | $ | 2.37 | | $ | 2.49 | | $ | 9.72 | | $ | 2.10 | | $ | 2.38 | | $ | 2.56 | | $ | 2.67 | | |
|
| | | 9.24 | | | 2.09 | | | 2.33 | | | 2.34 | | | 2.47 | | | 9.61 | | | 2.08 | | | 2.35 | | | 2.53 | | | 2.64 | | |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | $ | 3.98 | | $ | 1.02 | | $ | 1.02 | | $ | 0.97 | | $ | 0.97 | | $ | 3.58 | | $ | 0.92 | | $ | 0.92 | | $ | 0.87 | | $ | 0.87 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | 1.0063 | | | 0.2516 | | | 0.2516 | | | 0.2515 | | | 0.2516 | | | 1.0063 | | | 0.2516 | | | 0.2516 | | | 0.2515 | | | 0.2516 | | |
|
| | | 0.9598 | | | 0.2400 | | | 0.2399 | | | 0.2400 | | | 0.2399 | | | 0.9598 | | | 0.2400 | | | 0.2399 | | | 0.2400 | | | 0.2399 | | |
|
| | | 1.7568 | | | 0.4392 | | | 0.4392 | | | 0.4392 | | | 0.4392 | | | 1.1125 | | | 0.2781 | | | 0.2781 | | | 0.2782 | | | 0.2781 | | |
|
| | | 1.3023 | | | 0.3637 | | | 0.3636 | | | 0.2875 | | | 0.2875 | | | 1.1500 | | | 0.2875 | | | 0.2875 | | | 0.2875 | | | 0.2875 | | |
|
| | | 1.2375 | | | 0.3094 | | | 0.3093 | | | 0.3094 | | | 0.3094 | | | 1.2375 | | | 0.3094 | | | 0.3093 | | | 0.3094 | | | 0.3094 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| | 16.3 | | % | 14.1 | | % | 16.1 | | % | 17.2 | | % | 17.9 | % | | 18.8 | | % | 15.3 | | % | 17.9 | | % | 20.7 | | % | 21.9 | % | |
|
|
| | | | | 423,477 | | | 425,936 | | | 417,614 | | | 418,287 | | | | | | 403,740 | | | 386,833 | | | 369,570 | | | 366,680 | | |
|
|
| | | | | 748 | | | 748 | | | 748 | | | 1,497 | | | | | | 1,499 | | | 1,510 | | | 764 | | | 766 | | |
|
| | | | | | 606 | | | 537 | | | 477 | | | 476 | | | | | | 479 | | | 301 | | | 293 | | | 287 | | |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | 337,660 | | | 338,229 | | | 337,916 | | | 337,497 | | | 336,993 | | | 337,099 | | | 336,530 | | | 336,437 | | | 337,381 | | | 338,056 | | |
|
| | | 340,768 | | | 341,143 | | | 341,210 | | | 340,971 | | | 340,443 | | | 340,837 | | | 339,910 | | | 339,875 | | | 341,418 | | | 342,318 | | |
|
| | | | | | 338,285 | | | 338,228 | | | 337,720 | | | 337,318 | | | | | | 336,582 | | | 336,456 | | | 336,513 | | | 338,367 | | |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | $ | 60.40 | | $ | 58.53 | | $ | 57.45 | | $ | 55.76 | | | | | $ | 55.24 | | $ | 54.29 | | $ | 52.28 | | $ | 49.71 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | $ | 103.58 | | | 103.58 | | | 103.28 | | | 103.45 | | | 99.95 | | $ | 105.44 | | | 94.37 | | | 97.87 | | | 104.59 | | | 105.44 | | |
|
| | | 84.97 | | | 84.97 | | | 94.62 | | | 92.67 | | | 91.02 | | | 83.12 | | | 83.12 | | | 83.33 | | | 89.33 | | | 94.37 | | |
|
|
| | | | | 28,916 | | | 28,901 | | | 28,170 | | | 27,674 | | | | | | 27,103 | | | 26,539 | | | 25,823 | | | 25,417 | | |
|
|
| | | | | 368 | | | 372 | | | 374 | | | 378 | | | | | | 378 | | | 384 | | | 385 | | | 385 | | |
Table 2 - Overview of Results
| Year ended October 31 | | | | | | | | | | | | | | | | |
| (millions of Canadian dollars) |
| 2024 |
|
| 2023(1) | | | 2022 | | | 2021 | | | 2020 | | |
| Net interest income(2) | | 2,939 |
| | 3,586 | | | 5,271 | | | 4,783 | | | 4,255 | | |
| Non-interest income(3) | | 8,461 |
| | 6,472 | | | 4,381 | | | 4,144 | | | 3,672 | | |
| Total revenues | | 11,400 |
| | 10,058 | | | 9,652 | | | 8,927 | | | 7,927 | | |
| Non-interest expenses(4) | | 6,054 |
| | 5,753 | | | 5,230 | | | 4,903 | | | 4,616 | | |
| Income before provisions for credit losses and income taxes | | 5,346 |
| | 4,305 | | | 4,422 | | | 4,024 | | | 3,311 | | |
| Provisions for credit losses | | 569 |
| | 397 | | | 145 | | | 2 | | | 846 | | |
| Income before income taxes | | 4,777 |
| | 3,908 | | | 4,277 | | | 4,022 | | | 2,465 | | |
| Income taxes(5) | | 961 |
| | 619 | | | 894 | | | 882 | | | 434 | | |
| Net income | | 3,816 |
| | 3,289 | | | 3,383 | | | 3,140 | | | 2,031 | | |
| Non-controlling interests | | (1) |
| | (2) | | | (1) | | | − | | | 42 | | |
| Net income attributable to the Bank's | |
|
| | | | | | | | | | | | | |
| | shareholders and holders of other equity instruments | | 3,817 |
| | 3,291 | | | 3,384 | | | 3,140 | | | 1,989 | |
(1) Certain comparative figures for 2023 have been adjusted to reflect accounting policy changes arising from the adoption of IFRS 17. For additional information, see Note 2 to the Consolidated Financial Statements.
(2) For fiscal 2024, Net interest income included an amount of $14 million to reflect the amortization of the issuance costs of the subscription receipts issued as part of the agreement to acquire CWB.
(3) For fiscal 2024 Non-interest income included a gain of $174 million upon the remeasurement at fair value of the interest already held in CWB as well as a $3 million loss to reflect the management of the fair value changes of the CWB acquisition (2023: gain of $91 million to reflect the fair value remeasurement of the equity interest in TMX; 2021: $33 million gain following a remeasurement of the previously held equity interest in Flinks and a $30 million loss related to the fair value remeasurement of the Bank's equity interest in AfrAsia; 2020: $24 million foreign currency translation loss on a disposal of subsidiaries.)
(4) For fiscal 2024 Non-interest expenses included acquisition and integration charges of $18 million related to the CWB transaction. For fiscal 2023, Non-interest expenses had included impairment losses on premises and equipment and intangible assets of $86 million (2021: $9 million; 2020: $71 million), $35 million in litigation expenses, a $25 million expense related to changes to the Excise Tax Act, and $15 million in provisions for contracts. In fiscal 2020, Non-interest expenses had included $48 million in severance pay and a $13 million charge related to Maple Financial Group Inc. (Maple).
(5) Income taxes for 2023 had included an amount of $24 million related to the Canadian government's 2022 tax measures.
Table 3 - Changes in Net Interest Income
| Year ended October 31 | | | | | | | | | | | | | | | | |
| (millions of Canadian dollars) |
| 2024 |
|
| 2023 | | | 2022 | | | 2021 | | | 2020 | | |
| Personal and Commercial | |
|
| | | | | | | | | | | | | |
| Net interest income | | 3,587 |
| | 3,321 | | | 2,865 | | | 2,547 | | | 2,420 | | |
| Average assets(1) | | 158,917 |
| | 148,511 | | | 140,300 | | | 126,637 | | | 115,716 | | |
| Average interest-bearing assets(2) | | 153,980 |
| | 141,458 | | | 133,543 | | | 120,956 | | | 110,544 | | |
| Net interest margin(2) | | 2.33 | % | | 2.35 | % | | 2.15 | % | | 2.11 | % | | 2.19 | % | |
| Wealth Management | |
|
| | | | | | | | | | | | | |
| Net interest income on a taxable equivalent basis | | 833 |
| | 778 | | | 594 | | | 446 | | | 442 | | |
| Average assets(1) | | 9,249 |
| | 8,560 | | | 8,440 | | | 7,146 | | | 5,917 | | |
| Financial Markets | |
|
| | | | | | | | | | | | | |
| Net interest income on a taxable equivalent basis(3) | | (2,449) |
| | (1,054) | | | 1,258 | | | 1,262 | | | 971 | | |
| Average assets(1) | | 195,881 |
| | 180,837 | | | 154,349 | | | 151,240 | | | 125,565 | | |
| USSF&I | |
|
| | | | | | | | | | | | | |
| Net interest income | | 1,303 |
| | 1,132 | | | 1,090 | | | 907 | | | 807 | | |
| Average assets(1) | | 27,669 |
| | 23,007 | | | 18,890 | | | 16,150 | | | 14,336 | | |
| Other | |
|
| | | | | | | | | | | | | |
| Net interest income(3)(4) | | (335) |
| | (591) | | | (536) | | | (379) | | | (385) | | |
| Average assets(1) | | 65,546 |
| | 69,731 | | | 71,868 | | | 62,333 | | | 56,553 | | |
| Total | |
|
| | | | | | | | | | | | | |
| Net interest income | | 2,939 |
| | 3,586 | | | 5,271 | | | 4,783 | | | 4,255 | | |
| Average assets(1) | | 457,262 |
| | 430,646 | | | 393,847 | | | 363,506 | | | 318,087 | | |
(1) Represents an average of the daily balances for the period.
(2) See the Glossary section on pages 130 to 133 for details on the composition of these measures.
(3) For fiscal 2024, the Net interest income of the Financial Markets segment was grossed up by $70 million (2023: $324 million; 2022: $229 million; 2021: $175 million; 2020: $202 million), and the Net interest income of the Other heading was grossed up by $9 million (2023: $8 million; 2022: $5 million; 2021: $6 million; 2020: $6 million). The effect of these adjustments is reversed under the Other heading of segment disclosures. In light of the enacted legislation with respect to Canadian dividends, the Bank did not recognize an income tax deduction or use the taxable equivalent basis method to adjust revenues related to affected dividends received after January 1, 2024 (for additional information, see the Income Taxes section).
(4) For fiscal 2024, Net interest income included an amount of $14 million to reflect the amortization of the issuance costs of the subscription receipts issued as part of the agreement to acquire CWB.
Table 4 - Non-Interest Income
| Year ended October 31 | | | | | | | | | | | | | | | | | |
| (millions of Canadian dollars) |
| 2024 |
|
| 2023(1) | | | 2022 | | | 2021 | | | 2020 | | | |
| Underwriting and advisory fees | | 419 |
| | 378 | | | 324 | | | 415 | | | 314 | | | |
| Securities brokerage commissions | | 194 |
| | 174 | | | 204 | | | 238 | | | 204 | | | |
| Mutual fund revenues | | 638 |
| | 578 | | | 587 | | | 563 | | | 477 | | | |
| Investment management and trust service fees | | 1,141 |
| | 1,005 | | | 997 | | | 900 | | | 735 | | | |
| Credit fees | | 195 |
| | 183 | | | 155 | | | 164 | | | 147 | | | |
| Revenues from acceptances, letters of | |
|
| | | | | | | | | | | | | | |
| | credit and guarantee | | 265 |
| | 391 | | | 335 | | | 342 | | | 320 | | |
| Card revenues | | 212 |
| | 202 | | | 186 | | | 148 | | | 138 | | | |
| Deposit and payment service charges | | 294 |
| | 300 | | | 298 | | | 274 | | | 262 | | | |
| Trading revenues (losses)(2) | | 4,299 |
| | 2,677 | | | 543 | | | 268 | | | 544 | | | |
| Gains (losses) on non-trading | |
|
| | | | | | | | | | | | | | |
| | securities, net(3) | | 318 |
| | 70 | | | 113 | | | 151 | | | 93 | | |
| Insurance revenues, net(1) | | 73 |
| | 59 | | | 158 | | | 131 | | | 128 | | | |
| Foreign exchange revenues, other than trading | | 225 |
| | 183 | | | 211 | | | 202 | | | 164 | | | |
| Share in the net income of associates and | |
|
| | | | | | | | | | | | | | |
| | joint ventures | | 8 |
| | 11 | | | 28 | | | 23 | | | 28 | | |
| Other(4) | | 180 |
| | 261 | | | 242 | | | 325 | | | 118 | | | |
| | | 8,461 |
| | 6,472 | | | 4,381 | | | 4,144 | | | 3,672 | | | |
| Canada | | 7,055 |
| | 5,700 | | | 4,299 | | | 3,992 | | | 3,574 | | | |
| United States | | 191 |
| | 98 | | | 18 | | | 106 | | | 5 | | | |
| Other countries | | 1,215 |
| | 674 | | | 64 | | | 46 | | | 93 | | | |
| Non-interest income as a % of total revenues | | 74.2 | % | | 64.3 | % | | 45.4 | % | | 46.4 | % | | 46.3 | % | | |
(1) Certain comparative figures for 2023 have been adjusted to reflect accounting policy changes arising from the adoption of IFRS 17. For additional information, see Note 2 to the Consolidated Financial Statements.
(2) For fiscal 2024, Trading revenues (losses) included a $3 million loss related to the management of the fair value changes related to the CWB acquisition.
(3) For fiscal 2024, Gains (losses) on non-trading securities, net included a gain of $174 million upon the remeasurement at fair value of the equity interest already held in CWB.
(4) For fiscal 2023, Other had included a gain of $91 million to reflect the remeasurement at fair value of the equity interest in TMX (2021: $33 million gain following a remeasurement of the previously held equity interest in Flinks and a $30 million loss related to the fair value remeasurement of the Bank's equity interest in AfrAsia; 2020: $24 million foreign currency translation loss on a disposal of subsidiaries).
Table 5 - Trading Activity Revenues
| Year ended October 31 | | | | | | | | | | | | | |
| (millions of Canadian dollars) |
| 2024 |
|
| 2023 | | 2022 | | 2021 | | 2020 | | |
| Net interest income (loss) related to trading activity(1) | | (3,076) |
| | (1,816) | | 682 | | 777 | | 522 | | |
| Taxable equivalent basis(2) | | 70 |
| | 321 | | 229 | | 171 | | 202 | | |
| Net interest income (loss) related to trading activity on a taxable equivalent basis(2) | | (3,006) |
| | (1,495) | | 911 | | 948 | | 724 | | |
| Non-interest income related to trading activity(1) | | 4,327 |
| | 2,696 | | 548 | | 282 | | 625 | | |
| Taxable equivalent basis(2) | | 306 |
| | 247 | | 48 | | 8 | | 57 | | |
| Non-interest income related to trading activity on a taxable equivalent basis(2) | | 4,633 |
| | 2,943 | | 596 | | 290 | | 682 | | |
| Trading activity revenues(1) | | 1,251 |
| | 880 | | 1,230 | | 1,059 | | 1,147 | | |
| Taxable equivalent basis(2) | | 376 |
| | 568 | | 277 | | 179 | | 259 | | |
| Trading activity revenues on a taxable equivalent basis(2) | | 1,627 |
| | 1,448 | | 1,507 | | 1,238 | | 1,406 | | |
| Trading activity revenues by segment on a taxable equivalent basis(2) | |
|
| | | | | | | | | | |
| Financial Markets | |
|
| | | | | | | | | | |
| | Equities | | 1,018 |
| | 904 | | 979 | | 685 | | 706 | |
| | Interest rate and credit | | 573 |
| | 417 | | 367 | | 357 | | 430 | |
| | Commodities and foreign exchange | | 198 |
| | 173 | | 156 | | 128 | | 132 | |
| | | | 1,789 |
| | 1,494 | | 1,502 | | 1,170 | | 1,268 | |
| Other segments | | (162) |
| | (46) | | 5 | | 68 | | 138 | | |
|
| | 1,627 |
| | 1,448 | | 1,507 | | 1,238 | | 1,406 | | |
(1) See the Glossary section on pages 130 to 133 for details on the composition of these measures.
(2) See the Financial Reporting Method section on pages 14 to 20 for additional information on non-GAAP financial measures. The taxable equivalent basis presented in this table is related to trading portfolios. The Bank also uses the taxable equivalent basis for certain investment portfolios, and the amounts stood at $9 million for fiscal 2024 (2023: $11 million; 2022: $5 million; 2021: $10 million; 2020: $6 million). In light of the enacted legislation with respect to Canadian dividends, the Bank did not recognize an income tax deduction or use the taxable equivalent basis method to adjust revenues related to affected dividends received after January 1, 2024 (for additional information, see the Income Taxes section).
Table 6 - Non-Interest Expenses
| Year ended October 31 | | | | | | | | | | | | | | | | |
| (millions of Canadian dollars) |
| 2024 |
|
| 2023(1) | | | 2022 | | | 2021 | | | 2020 | |
|
| Compensation and employee benefits(1)(2) | | 3,725 |
| | 3,425 | | | 3,284 | | | 3,027 | | | 2,713 | | |
| Occupancy(1) | | 189 |
| | 178 | | | 157 | | | 147 | | | 151 | | |
| Amortization - Premises and equipment(3) | | 177 |
| | 172 | | | 155 | | | 152 | | | 140 | | |
| Technology(1) | | 708 |
| | 646 | | | 589 | | | 557 | | | 510 | | |
| Amortization - Technology(4) | | 338 |
| | 432 | | | 326 | | | 314 | | | 366 | | |
| Communications | | 56 |
| | 58 | | | 57 | | | 53 | | | 58 | | |
| Professional fees(1)(5) | | 316 |
| | 256 | | | 249 | | | 246 | | | 244 | | |
| Advertising and business development | | 175 |
| | 168 | | | 144 | | | 109 | | | 103 | | |
| Capital and payroll taxes | | 36 |
| | 37 | | | 32 | | | 52 | | | 73 | | |
| Other(1)(6) | | 334 |
| | 381 | | | 237 | | | 246 | | | 258 | | |
| Total | | 6,054 |
| | 5,753 | | | 5,230 | | | 4,903 | | | 4,616 | | |
| Canada | | 5,464 |
| | 5,213 | | | 4,760 | | | 4,478 | | | 4,195 | | |
| United States | | 238 |
| | 226 | | | 209 | | | 203 | | | 209 | | |
| Other countries | | 352 |
| | 314 | | | 261 | | | 222 | | | 212 | | |
| Efficiency ratio(7) | | 53.1 | % | | 57.2 | % | | 54.2 | % | | 54.9 | % | | 58.2 | % | |
(1) Certain comparative figures for 2023 have been adjusted to reflect accounting policy changes arising from the adoption of IFRS 17. For additional information, see Note 2 to the Consolidated Financial Statements.
(2) For fiscal 2020, Compensation and employee benefits had included $48 million in severance pay.
(3) For fiscal 2023, Amortization - Premises and Equipment expense had included $11 million in impairment losses.
(4) For fiscal 2023, Amortization - Technology expense had included $75 million in intangible asset impairment losses (2021: $9 million; 2020: $71 million).
(5) For fiscal 2024, Professional fees included acquisition and integration charges of $18 million related to the CWB transaction.
(6) For fiscal 2023, Other expenses had included $35 million in litigation expenses, a $25 million expense related to changes to the Excise Tax Act, and $15 million in provisions for contracts. For fiscal 2020, Other expenses had included a $13 million charge related to Maple.
(7) See the Glossary section on pages 130 to 133 for details on the composition of these measures.
Table 7 - Provisions for Credit Losses(1)
| Year ended October 31 | | | | | | | | | | | | | | | | | ||
| (millions of Canadian dollars) |
| 2024 |
|
| 2023 | | | 2022 | | | 2021 | | | 2020 | |
| ||
| | Personal Banking(2) | |
|
| | | | | | | | | | | | | | |
| | | Stage 3 | | 196 |
| | 119 | | | 75 | | | 65 | | | 147 | | |
| | | Stages 1 and 2 | | 28 |
| | 38 | | | 9 | | | (77) | | | 121 | | |
| | | | | 224 |
| | 157 | | | 84 | | | (12) | | | 268 | | |
| | Commercial Banking | |
|
| | | | | | | | | | | | | | |
| | | Stage 3 | | 106 |
| | 48 | | | 13 | | | 26 | | | 76 | | |
| | | Stages 1 and 2 | | 19 |
| | 40 | | | − | | | 26 | | | 103 | | |
| | | POCI | | (14) |
| | (7) | | | − | | | − | | | − | | |
| | | | | 111 |
| | 81 | | | 13 | | | 52 | | | 179 | | |
| | Wealth Management | |
|
| | | | | | | | | | | | | | |
| | | Stage 3 | | − |
| | (1) | | | 1 | | | 1 | | | 4 | | |
| | | Stages 1 and 2 | | (1) |
| | 3 | | | 2 | | | − | | | 3 | | |
| | | | | (1) |
| | 2 | | | 3 | | | 1 | | | 7 | | |
| | Financial Markets | |
|
| | | | | | | | | | | | | | |
| | | Stage 3 | | 34 |
| | 3 | | | 1 | | | 78 | | | 99 | | |
| | | Stages 1 and 2 | | 20 |
| | 36 | | | (24) | | | (102) | | | 210 | | |
| | | | | 54 |
| | 39 | | | (23) | | | (24) | | | 309 | | |
| | USSF&I | |
|
| | | | | | | | | | | | | | |
| | | Stage 3 | | 144 |
| | 76 | | | 48 | | | 13 | | | 46 | | |
| | | Stages 1 and 2 | | 26 |
| | 53 | | | 12 | | | (2) | | | 41 | | |
| | | POCI | | 12 |
| | (16) | | | 6 | | | (26) | | | (7) | | |
| | | | | 182 |
| | 113 | | | 66 | | | (15) | | | 80 | | |
| | Other | |
|
| | | | | | | | | | | | | | |
| | | Stage 3 | | − |
| | − | | | − | | | − | | | − | | |
| | | Stages 1 and 2 | | (1) |
| | 5 | | | 2 | | | − | | | 3 | | |
| | | | | (1) |
| | 5 | | | 2 | | | − | | | 3 | | |
| Total provisions for credit losses | |
|
| | | | | | | | | | | | | | ||
| Stage 3 | | 480 |
| | 245 | | | 138 | | | 183 | | | 372 | | | ||
| Stages 1 and 2 | | 91 |
| | 175 | | | 1 | | | (155) | | | 481 | | | ||
| POCI | | (2) |
| | (23) | | | 6 | | | (26) | | | (7) | | | ||
|
| | 569 |
| | 397 | | | 145 | | | 2 | | | 846 | | | ||
| Average loans and acceptances | | 234,180 |
| | 215,976 | | | 194,340 | | | 172,323 | | | 159,275 | | | ||
| Provisions for credit losses on impaired loans | |
|
| | | | | | | | | | | | | | ||
| | excluding POCI loans(3) as a % of average loans and acceptances(3) | | 0.20 | % | | 0.11 | % | | 0.07 | % | | 0.11 | % | | 0.23 | % | | |
| Provisions for credit losses | |
|
| | | | | | | | | | | | | | ||
| | as a % of average loans and acceptances(3) | | 0.24 | % | | 0.18 | % | | 0.07 | % | | − | % | | 0.53 | % | | |
(1) The Stage 3 category presented in this table represents provisions for credit losses on loans classified in Stage 3 of the expected credit loss model and excludes POCI loans (impaired loans excluding POCI loans). The Stages 1 and 2 category represents provisions for credit losses on non-impaired loans. The POCI category represents provisions for credit losses on POCI loans.
(2) Includes credit card receivables.
(3) See the Glossary section on pages 130 to 133 for details on the composition of these measures.
Table 8 - Change in Average Volumes(1)
| Year ended October 31 | | | | | | | | | | | | | | | | | | | | | |
| (millions of Canadian dollars) |
| 2024 |
| 2023 | | 2022 | | 2021 | | 2020 | |||||||||||
| | | | Average volume $ |
| Rate % | | Average volume $ | | Rate % | | Average volume $ | | Rate % | | Average volume $ | | Rate % | | Average volume $ | | Rate % |
| Assets | |
| |
| | | | | | | | | | | | | | | | | |
| Deposits with financial institutions | | 31,429 |
| 4.92 |
| 40,824 | | 4.09 | | 42,042 | | 1.03 | | 40,294 | | 0.31 | | 24,966 | | 0.44 | |
| Securities | | 146,911 |
| 1.94 |
| 126,182 | | 1.93 | | 111,863 | | 1.77 | | 116,023 | | 1.25 | | 97,025 | | 1.63 | |
| Securities purchased under reverse | |
| |
| | | | | | | | | | | | | | | | | |
| | repurchase agreements and | |
| |
| | | | | | | | | | | | | | | | |
| | securities borrowed | | 17,607 |
| 9.61 |
| 19,533 | | 6.61 | | 16,255 | | 2.08 | | 11,559 | | 0.90 | | 16,408 | | 1.39 |
| Residential mortgage loans | | 89,621 |
| 4.47 |
| 82,884 | | 3.95 | | 75,712 | | 2.90 | | 68,297 | | 2.93 | | 59,801 | | 3.13 | |
| Personal loans | | 46,039 |
| 5.92 |
| 44,829 | | 5.44 | | 42,723 | | 3.82 | | 38,434 | | 3.16 | | 36,273 | | 3.68 | |
| Credit card receivables | | 2,532 |
| 13.58 |
| 2,325 | | 13.17 | | 2,133 | | 12.81 | | 1,864 | | 13.47 | | 1,995 | | 14.62 | |
| Business and government loans | | 86,899 |
| 7.08 |
| 69,599 | | 6.49 | | 58,947 | | 3.63 | | 50,216 | | 3.06 | | 47,272 | | 4.13 | |
| POCI loans | | 528 |
| 20.26 |
| 545 | | 21.98 | | 493 | | 32.68 | | 686 | | 22.64 | | 1,073 | | 16.45 | |
| Average interest-bearing assets(1) | | 421,566 |
| 4.70 |
| 386,721 | | 4.30 | | 350,168 | | 2.69 | | 327,373 | | 2.13 | | 284,813 | | 2.66 | |
| Other assets | | 35,696 |
|
|
| 43,925 | | | | 43,679 | | | | 36,133 | | | | 33,274 | | | |
| | | 457,262 |
| 4.37 |
| 430,646 | | 3.90 | | 393,847 | | 2.43 | | 363,506 | | 1.93 | | 318,087 | | 2.38 | |
| Liabilities and equity | |
| |
| | | | | | | | | | | | | | | | | |
| Personal deposits | | 91,976 |
| 2.48 |
| 84,262 | | 2.03 | | 72,927 | | 0.67 | | 68,334 | | 0.42 | | 63,634 | | 0.87 | |
| Deposit-taking institutions | | 4,936 |
| 4.17 |
| 4,997 | | 3.81 | | 5,695 | | 0.88 | | 6,522 | | 0.09 | | 6,494 | | 0.63 | |
| Other deposits | | 218,693 |
| 4.88 |
| 195,311 | | 4.15 | | 180,307 | | 1.28 | | 161,373 | | 0.68 | | 137,253 | | 1.26 | |
| | | 315,605 |
| 4.17 |
| 284,570 | | 3.51 | | 258,929 | | 1.10 | | 236,229 | | 0.58 | | 207,381 | | 1.12 | |
| Subordinated debt | | 1,083 |
| 5.72 |
| 937 | | 5.16 | | 960 | | 3.70 | | 758 | | 3.22 | | 759 | | 3.25 | |
| Obligations other than deposits(2) | | 85,837 |
| 4.31 |
| 90,194 | | 3.43 | | 81,659 | | 1.13 | | 80,808 | | 0.67 | | 70,973 | | 1.12 | |
| Average interest-bearing liabilities(1) | | 402,525 |
| 4.23 |
| 375,701 | | 3.51 | | 341,548 | | 1.25 | | 317,795 | | 0.69 | | 279,113 | | 1.19 | |
| Other liabilities | | 28,695 |
|
|
| 30,698 | | | | 30,209 | | | | 28,195 | | | | 23,400 | | | |
| Equity | | 26,042 |
|
|
| 24,247 | | | | 22,090 | | | | 17,516 | | | | 15,574 | | | |
| | | 457,262 | | 3.73 | | 430,646 | | 3.07 | | 393,847 | | 1.09 | | 363,506 | | 0.61 | | 318,087 | | 1.04 | |
| Net interest margin(3) | |
| | 0.64 | | | | 0.83 | | | | 1.34 | | | | 1.32 | | | | 1.34 | |
(1) See the Glossary section on pages 130 to 133 for details on the composition of these measures.
(2) Average obligations other than deposits represent the average of the daily balances for the fiscal year of obligations related to securities sold short, obligations related to securities sold under repurchase agreements and securities loaned, and liabilities related to transferred receivables.
(3) Calculated by dividing net interest income by average assets.
Table 9 - Distribution of Gross Loans and Acceptances by Borrower Category Under
Basel Asset Classes
| As at October 31 | | | | | | | | | | | | | | | | | | | | | | |
| (millions of Canadian dollars) |
| 2024 |
| 2023 | | 2022 | | 2021 | | 2020 | | |||||||||||
| | | | $ |
| % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | |
| Residential mortgage(1) | | 104,665 | | 42.8 | | 99,910 | | 44.1 | | 95,575 | | 46.0 | | 89,035 | | 48.5 | | 81,543 | | 49.2 | | |
| Qualifying revolving retail(2) | | 4,148 | | 1.7 | | 4,000 | | 1.8 | | 3,801 | | 1.8 | | 3,589 | | 2.0 | | 3,599 | | 2.2 | | |
| Other retail(3) | | 17,919 | | 7.3 | | 16,696 | | 7.4 | | 14,899 | | 7.2 | | 12,949 | | 7.0 | | 11,569 | | 7.0 | | |
| Agriculture | | 9,192 | | 3.8 | | 8,545 | | 3.8 | | 8,109 | | 3.9 | | 7,357 | | 4.0 | | 6,696 | | 4.0 | | |
| Oil and gas | | 1,913 | | 0.8 | | 1,826 | | 0.8 | | 1,435 | | 0.7 | | 1,807 | | 1.0 | | 2,506 | | 1.5 | | |
| Mining | | 2,062 | | 0.9 | | 1,245 | | 0.5 | | 1,049 | | 0.5 | | 529 | | 0.3 | | 756 | | 0.5 | | |
| Utilities | | 12,528 | | 5.1 | | 12,427 | | 5.5 | | 9,682 | | 4.6 | | 7,687 | | 4.2 | | 6,640 | | 4.0 | | |
| Non-real-estate construction(4) | | 1,864 | | 0.8 | | 1,739 | | 0.8 | | 1,935 | | 0.9 | | 1,541 | | 0.8 | | 1,079 | | 0.7 | | |
| Manufacturing | | 8,064 | | 3.3 | | 7,047 | | 3.1 | | 7,374 | | 3.6 | | 5,720 | | 3.1 | | 5,803 | | 3.5 | | |
| Wholesale | | 3,145 | | 1.3 | | 3,208 | | 1.4 | | 3,241 | | 1.6 | | 2,598 | | 1.4 | | 2,206 | | 1.3 | | |
| Retail | | 4,229 | | 1.7 | | 3,801 | | 1.7 | | 3,494 | | 1.7 | | 2,978 | | 1.6 | | 2,955 | | 1.8 | | |
| Transportation | | 3,253 | | 1.3 | | 2,631 | | 1.2 | | 2,209 | | 1.1 | | 1,811 | | 1.0 | | 1,528 | | 0.9 | | |
| Communications | | 2,542 | | 1.0 | | 2,556 | | 1.1 | | 1,830 | | 0.9 | | 1,441 | | 0.8 | | 1,184 | | 0.7 | | |
| Financial services | | 12,775 | | 5.2 | | 11,693 | | 5.1 | | 10,777 | | 5.2 | | 8,870 | | 4.8 | | 7,476 | | 4.4 | | |
| Real estate and real-estate-construction(5) | | 30,848 | | 12.6 | | 25,967 | | 11.5 | | 22,382 | | 10.8 | | 18,195 | | 9.9 | | 14,171 | | 8.6 | | |
| Professional services | | 3,871 | | 1.6 | | 3,973 | | 1.7 | | 2,338 | | 1.1 | | 1,872 | | 1.0 | | 1,490 | | 0.9 | | |
| Education and health care | | 3,487 | | 1.4 | | 3,700 | | 1.6 | | 3,412 | | 1.6 | | 4,073 | | 2.2 | | 3,800 | | 2.3 | | |
| Other services | | 7,356 | | 3.0 | | 6,898 | | 3.0 | | 6,247 | | 3.0 | | 5,875 | | 3.2 | | 5,296 | | 3.2 | | |
| Government | | 1,853 | | 0.8 | | 1,727 | | 0.8 | | 1,661 | | 0.8 | | 1,159 | | 0.6 | | 1,160 | | 0.7 | | |
| Other | | 8,268 | | 3.4 | | 6,478 | | 2.9 | | 5,790 | | 2.8 | | 4,137 | | 2.3 | | 3,586 | | 2.1 | | |
| POCI loans | | 391 | | 0.2 | | 560 | | 0.2 | | 459 | | 0.2 | | 464 | | 0.3 | | 855 | | 0.5 | | |
| | | 244,373 | | 100.0 | | 226,627 | | 100.0 | | 207,699 | | 100.0 | | 183,687 | | 100.0 | | 165,898 | | 100.0 | | |
(1) Includes residential mortgage loans on one- to four-unit dwellings (Basel definition) and home equity lines of credit.
(2) Includes lines of credit and credit card receivables.
(3) Includes consumer loans and other retail loans but excludes SME loans.
(4) Includes civil engineering loans, public-private partnership loans, and project finance loans.
(5) Includes residential mortgages on dwellings of five or more units and SME loans.
Table 10 - Impaired Loans
| As at October 31 | | | | | | | | | | | | | | | | | |
| (millions of Canadian dollars) |
| 2024 |
|
| 2023 | | | 2022 | | | 2021 | | | 2020 | |
| |
| Gross impaired loans | |
|
| | | | | | | | | | | | | | |
| | Personal Banking | | 327 |
| | 220 | | | 176 | | | 169 | | | 287 | | |
| | Commercial Banking | | 451 |
| | 296 | | | 206 | | | 244 | | | 333 | | |
| | Wealth Management | | 16 |
| | 13 | | | 21 | | | 23 | | | 8 | | |
| | Financial Markets | | 122 |
| | 110 | | | 167 | | | 162 | | | 134 | | |
| | USSF&I | | 736 |
| | 385 | | | 242 | | | 64 | | | 55 | | |
| Gross impaired loans excluding POCI loans(1) | | 1,652 |
| | 1,024 | | | 812 | | | 662 | | | 817 | | | |
| Gross POCI loans | | 391 |
| | 560 | | | 459 | | | 464 | | | 855 | | | |
| | | | 2,043 |
| | 1,584 | | | 1,271 | | | 1,126 | | | 1,672 | | |
| Net impaired loans(2) | |
|
| | | | | | | | | | | | | | |
| | Personal Banking | | 203 |
| | 145 | | | 104 | | | 106 | | | 206 | | |
| | Commercial Banking | | 302 |
| | 140 | | | 89 | | | 107 | | | 184 | | |
| | Wealth Management | | 11 |
| | 8 | | | 15 | | | 16 | | | 2 | | |
| | Financial Markets | | 78 |
| | 30 | | | 91 | | | 14 | | | 43 | | |
| | USSF&I | | 550 |
| | 283 | | | 180 | | | 40 | | | 30 | | |
| Net impaired loans excluding POCI loans(1) | | 1,144 |
| | 606 | | | 479 | | | 283 | | | 465 | | | |
| Net POCI loans | | 485 |
| | 670 | | | 551 | | | 553 | | | 921 | | | |
| | | | 1,629 |
| | 1,276 | | | 1,030 | | | 836 | | | 1,386 | | |
| Allowances for credit losses on impaired loans excluding POCI loans(1) | | 508 |
| | 418 | | | 333 | | | 379 | | | 352 | | | |
| Allowances for credit losses on POCI loans | | (94) |
| | (110) | | | (92) | | | (89) | | | (66) | | | |
| Allowances for credit losses on impaired loans | | 414 |
| | 308 | | | 241 | | | 290 | | | 286 | | | |
| Impaired loan provisioning rate excluding POCI loans(1) | | 30.8 | % | | 40.8 | % | | 41.0 | % | | 57.3 | % | | 43.1 | % | | |
| Gross impaired loans excluding POCI loans as a % of loans and acceptances(1) | | 0.68 | % | | 0.45 | % | | 0.39 | % | | 0.36 | % | | 0.49 | % | | |
| Net impaired loans excluding POCI loans as a % of loans and acceptances(1) | | 0.47 | % | | 0.27 | % | | 0.23 | % | | 0.15 | % | | 0.28 | % | | |
(1) See the Glossary section on pages 130 to 133 for details on the composition of these measures.
(2) Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and on POCI loans.
Table 11 - Allowances for Credit Losses
| Year ended October 31 | | | | | | | | | | | | | | | | | ||
| (millions of Canadian dollars) |
| 2024 |
|
| 2023 | | | 2022 | | | 2021 | | | 2020 | |
| ||
| | Balance at beginning | | 1,377 |
| | 1,131 | | | 1,169 | | | 1,343 | | | 755 | | | |
| | Provisions for credit losses | | 569 |
| | 397 | | | 145 | | | 2 | | | 846 | | | |
| | Write-offs | | (421) |
| | (199) | | | (233) | | | (192) | | | (294) | | | |
| | Disposals | | (2) |
| | − | | | − | | | (14) | | | − | | | |
| | Recoveries | | 56 |
| | 47 | | | 40 | | | 44 | | | 44 | | | |
| | Exchange rate and other movements | | (6) |
| | 1 | | | 10 | | | (14) | | | (8) | | | |
| | Balance at end | | 1,573 |
| | 1,377 | | | 1,131 | | | 1,169 | | | 1,343 | | | |
| Composition of allowances: | |
|
| | | | | | | | | | | | | | ||
| | Allowances for credit losses on impaired loans excluding POCI loans(1) | | 508 |
| | 418 | | | 333 | | | 379 | | | 352 | | | |
| | Allowances for credit losses on POCI loans | | (94) | | | (110) | | | (92) | | | (89) | | | (66) | | | |
| | Allowances for credit losses on non-impaired loans | | 927 |
| | 876 | | | 714 | | | 708 | | | 872 | | | |
| | Allowances for credit losses on off-balance-sheet | |
|
| | | | | | | | | | | | | | |
| | | commitments and other assets | | 232 |
| | 193 | | | 176 | | | 171 | | | 185 | | |
(1) See the Glossary section on pages 130 to 133 for details on the composition of these measures.
Table 12 - Deposits
| As at October 31 | | | | | | | | | | | | | | | | | | | | | | |
| (millions of Canadian dollars) |
| 2024 |
| 2023 | | 2022 | | 2021 | | 2020 | | |||||||||||
| | | | $ |
| % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | |
| Personal | | 95,181 | | 28.5 | | 87,883 | | 30.5 | | 78,811 | | 29.6 | | 70,076 | | 29.1 | | 67,499 | | 31.3 | | |
| Business and government | | 232,730 | | 69.8 | | 197,328 | | 68.5 | | 184,230 | | 69.1 | | 167,870 | | 69.7 | | 143,787 | | 66.6 | | |
| Deposit-taking institutions | | 5,634 | | 1.7 | | 2,962 | | 1.0 | | 3,353 | | 1.3 | | 2,992 | | 1.2 | | 4,592 | | 2.1 | | |
| Total | | 333,545 | | 100.0 | | 288,173 | | 100.0 | | 266,394 | | 100.0 | | 240,938 | | 100.0 | | 215,878 | | 100.0 | | |
| Canada | | 300,642 | | 90.1 | | 257,732 | | 89.4 | | 238,239 | | 89.5 | | 216,906 | | 90.0 | | 195,730 | | 90.7 | | |
| United States | | 8,908 | | 2.7 | | 9,520 | | 3.3 | | 9,147 | | 3.4 | | 9,234 | | 3.8 | | 8,126 | | 3.7 | | |
| Other countries | | 23,995 | | 7.2 | | 20,921 | | 7.3 | | 19,008 | | 7.1 | | 14,798 | | 6.2 | | 12,022 | | 5.6 | | |
| Total | | 333,545 | | 100.0 | | 288,173 | | 100.0 | | 266,394 | | 100.0 | | 240,938 | | 100.0 | | 215,878 | | 100.0 | | |
| Personal deposits as a % | |
| |
| | | | | | | | | | | | | | | | | | |
| | of total assets | |
| | 20.6 | | | | 20.8 | | | | 19.5 | | | | 19.7 | | | | 20.4 | |
Glossary
Acceptances
Acceptances and the customers' liability under acceptances constitute a guarantee of payment by a bank and can be traded in the money market. The Bank earns a "stamping fee" for providing this guarantee.
Allowances for credit losses
Allowances for credit losses represent management's unbiased estimate of expected credit losses as at the balance sheet date. These allowances are primarily related to loans and off-balance sheet items such as loan commitments and financial guarantees.
Assets under administration
Assets in respect of which a financial institution provides administrative services on behalf of the clients who own the assets. Such services include custodial services, collection of investment income, settlement of purchase and sale transactions, and record-keeping. Assets under administration are not reported on the balance sheet of the institution offering such services.
Assets under management
Assets managed by a financial institution and that are beneficially owned by clients. Management services are more comprehensive than administrative services and include selecting investments or offering investment advice. Assets under management, which may also be administered by the financial institution, are not reported on the balance sheet of the institution offering such services.
Available TLAC
Available TLAC includes total capital as well as certain senior unsecured debt subject to the federal government's bail-in regulations that satisfy all the eligibility criteria in OSFI's Total Loss Absorbing Capacity (TLAC) Guideline.
Average interest-bearing assets
Average interest-bearing assets include interest-bearing deposits with financial institutions and certain cash items, securities, securities purchased under reverse repurchase agreements and securities borrowed, and loans, while excluding customers' liability under acceptances and other assets. The average is calculated based on the daily balances for the period.
Average interest-bearing assets, non-trading
Average interest-bearing assets, non-trading, include interest-bearing deposits with financial institutions and certain cash items, securities purchased under reverse repurchase agreements and borrowed securities, and loans, while excluding other assets and assets related to trading activities. The average is calculated based on the daily balances for the period.
Average volumes
Average volumes represent the average of the daily balances for the period of the consolidated balance sheet items.
Basic earnings per share
Basic earnings per share are calculated by dividing net income attributable to common shareholders by the weighted average basic number of common shares outstanding.
Basis point (bps)
Unit of measure equal to one one-hundredth of a percentage point (0.01%).
Book value of a common share
The book value of a common share is calculated by dividing common shareholders' equity by the number of common shares on a given date.
Common Equity Tier 1 (CET1) capital ratio
CET1 capital consists of common shareholders' equity, less goodwill, intangible assets, and other capital deductions. The CET1 capital ratio is calculated by dividing total CET1 capital by the corresponding risk-weighted assets.
Compound annual growth rate (CAGR)
CAGR is a rate of growth that shows, for a period exceeding one year, the annual change as though the growth had been constant throughout the period.
Derivative financial instruments
Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, equity price, commodity price, credit instrument or index. Examples of derivatives include swaps, options, forward rate agreements, and futures. The notional amount of the derivative is the contract amount used as a reference point to calculate the payments to be exchanged between the two parties, and the notional amount itself is generally not exchanged by the parties.
Diluted earnings per share
Diluted earnings per share are calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding after taking into account the dilution effect of stock options using the treasury stock method and any gain (loss) on the redemption of preferred shares.
Dividend payout ratio
The dividend payout ratio represents the dividends of common shares (per share amount) expressed as a percentage of basic earnings per share.
Economic capital
Economic capital is the internal measure used by the Bank to determine the capital required for its solvency and to pursue its business operations. Economic capital takes into consideration the credit, market, operational, business and other risks to which the Bank is exposed as well as the risk diversification effect among them and among the business segments. Economic capital thus helps the Bank to determine the capital required to protect itself against such risks and ensure its long-term viability.
Efficiency ratio
The efficiency ratio represents non-interest expenses expressed as a percentage of total revenues. It measures the efficiency of the Bank's operations.
Fair value
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., an exit price).
Gross impaired loans as a percentage of total loans and acceptances
This measure represents gross impaired loans expressed as a percentage of the balance of loans and acceptances.
Gross impaired loans excluding POCI loans
Gross impaired loans excluding POCI loans are all loans classified in Stage 3 of the expected credit loss model excluding POCI loans.
Gross impaired loans excluding POCI loans as a percentage of total loans and acceptances
This measure represents gross impaired loans excluding POCI loans expressed as a percentage of the balance of loans and acceptances.
Hedging
The purpose of a hedging transaction is to modify the Bank's exposure to one or more risks by creating an offset between changes in the fair value of, or the cash flows attributable to, the hedged item and the hedging instrument.
Impaired loans
The Bank considers a financial asset, other than a credit card receivable, to be credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred or when contractual payments are 90 days past due. Credit card receivables are considered credit-impaired and are fully written off at the earlier of the following dates: when a notice of bankruptcy is received, a settlement proposal is made, or contractual payments are 180 days past due.
Leverage ratio
The leverage ratio is calculated by dividing Tier 1 capital by total exposure. Total exposure is defined as the sum of on-balance-sheet assets (including derivative financial instrument exposures and securities financing transaction exposures) and off-balance-sheet items.
Liquidity coverage ratio (LCR)
The LCR is a measure designed to ensure that the Bank has sufficient high-quality liquid assets to cover net cash outflows given a severe, 30-day liquidity crisis.
Loans and acceptances
Loans and acceptances represent the sum of loans and of the customers' liability under acceptances.
Loan-to-value ratio
The loan-to-value ratio is calculated according to the total facility amount for residential mortgages and home equity lines of credit divided by the value of the related residential property.
Master netting agreement
Legal agreement between two parties that have multiple derivative contracts with each other that provides for the net settlement of all contracts through a single payment, in the event of default, insolvency or bankruptcy.
Net impaired loans
Net impaired loans are gross impaired loans presented net of allowances for credit losses on Stage 3 loan amounts drawn.
Net impaired loans as a percentage of total loans and acceptances
This measure represents net impaired loans as a percentage of the balance of loans and acceptances.
Net impaired loans excluding POCI loans
Net impaired loans excluding POCI loans are gross impaired loans excluding POCI loans presented net of allowances for credit losses on amounts drawn on Stage 3 loans granted by the Bank.
Net interest income from trading activities
Net interest income from trading activities comprises dividends related to financial assets and liabilities associated with trading activities and interest income related to the financing of these financial assets and liabilities, net of interest expenses.
Net interest income, non-trading
Net interest income, non-trading, comprises revenues related to financial assets and liabilities associated with non-trading activities, net of interest expenses and interest income related to the financing of these financial assets and liabilities.
Net interest margin
Net interest margin is calculated by dividing net interest income by average interest-bearing assets.
Net stable funding ratio (NSFR)
The NSFR ratio is a measure that helps guarantee that the Bank is maintaining a stable funding profile to reduce the risk of funding stress.
Net write-offs as a percentage of average loans and acceptances
This measure represents the net write-offs (net of recoveries) expressed as a percentage of average loans and acceptances.
Non-interest income related to trading activities
Non-interest income related to trading activities consists of realized and unrealized gains and losses as well as interest income on securities measured at fair value through profit or loss, income from held-for-trading derivative financial instruments, changes in the fair value of loans at fair value through profit or loss, changes in the fair value of financial instruments designated at fair value through profit or loss, certain commission income, other trading activity revenues, and any applicable transaction costs.
Office of the Superintendent of Financial Institutions (Canada) (OSFI)
The mandate of OSFI is to regulate and supervise financial institutions and private pension plans subject to federal oversight, to help minimize undue losses to depositors and policyholders and, thereby, to contribute to public confidence in the Canadian financial system.
Operating leverage
Operating leverage is the difference between the growth rate for total revenues and the growth rate for non-interest expenses.
Provisioning rate
This measure represents the allowances for credit losses on impaired loans expressed as a percentage of gross impaired loans.
Provisioning rate excluding POCI loans
This measure represents the allowances for credit losses on impaired loans excluding POCI loans expressed as a percentage of gross impaired loans excluding POCI loans.
Provisions for credit losses
Amount charged to income necessary to bring the allowances for credit losses to a level deemed appropriate by management and is comprised of provisions for credit losses on impaired and non-impaired financial assets.
Provisions for credit losses as a percentage of average loans and acceptances
This measure represents the provisions for credit losses expressed as a percentage of average loans and acceptances.
Provisions for credit losses on impaired loans as a percentage of average loans and acceptances
This measure represents the provisions for credit losses on impaired loans expressed as a percentage of average loans and acceptances.
Provisions for credit losses on impaired loans excluding POCI loans
Amount charged to income necessary to bring the allowances for credit losses to a level deemed appropriate by management and is comprised of provisions for credit losses on impaired financial assets excluding POCI loans.
Provisions for credit losses on impaired loans excluding POCI loans as a percentage of average loans and acceptances or provisions for credit losses on impaired loans excluding POCI loans ratio
This measure represents the provisions for credit losses on impaired loans excluding POCI loans expressed as a percentage of average loans and acceptances.
Return on average assets
Return on average assets represents net income expressed as a percentage of average assets.
Return on common shareholders' equity (ROE)
ROE represents net income attributable to common shareholders expressed as a percentage of average equity attributable to common shareholders. It is a general measure of the Bank's efficiency in using equity.
Risk-weighted assets
Assets are risk weighted according to the guidelines established by OSFI. In the Standardized calculation approach, risk factors are applied directly to the face value of certain assets in order to reflect comparable risk levels. In the Advanced Internal Ratings-Based (AIRB) Approach, risk-weighted assets are derived from the Bank's internal models, which represent the Bank's own assessment of the risks it incurs. In the Foundation Internal Ratings-Based (FIRB) Approach, the Bank can use its own estimate of probability of default but must rely on OSFI estimates for the loss given default and exposure at default risk parameters. Off-balance-sheet instruments are converted to balance sheet (or credit) equivalents by adjusting the notional values before applying the appropriate risk-weighting factors.
Securities purchased under reverse repurchase agreements
Securities purchased by the Bank from a client pursuant to an agreement under which the securities will be resold to the same client on a specified date and at a specified price. Such an agreement is a form of short-term collateralized lending.
Securities sold under repurchase agreements
Financial obligations related to securities sold pursuant to an agreement under which the securities will be repurchased on a specified date and at a specified price. Such an agreement is a form of short-term funding.
Structured entity
A structured entity is an entity created to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate solely to administrative tasks and the relevant activities are directed by means of contractual arrangements.
Taxable equivalent basis
Taxable equivalent basis is a calculation method that consists of grossing up certain revenues taxed at lower rates (notably dividends) by the income tax to a level that would make it comparable to revenues from taxable sources in Canada. The Bank uses the taxable equivalent basis to calculate net interest income, non-interest income and income taxes.
Tier 1 capital ratio
Tier 1 capital ratio consists of Common Equity Tier 1 capital and Additional Tier 1 instruments, namely, qualifying non-cumulative preferred shares and the eligible amount of innovative instruments. The Tier 1 capital ratio is calculated by dividing Tier 1 capital, less regulatory adjustments, by the corresponding risk-weighted assets.
TLAC leverage ratio
The TLAC leverage ratio is an independent risk measure that is calculated by dividing available TLAC by total exposure, as set out in OSFI's Total Loss Absorbing Capacity (TLAC) Guideline.
TLAC ratio
The TLAC ratio is a measure used to assess whether a non-viable Domestic Systemically Important Bank (D-SIB) has sufficient loss-absorbing capacity to support its recapitalization. It is calculated by dividing available TLAC by risk weighted assets, as set out in OSFI's Total Loss Absorbing Capacity (TLAC) Guideline.
Total capital ratio
Total capital is the sum of Tier 1 and Tier 2 capital. Tier 2 capital consists of the eligible portion of subordinated debt and certain allowances for credit losses. The Total capital ratio is calculated by dividing Total capital, less regulatory adjustments, by the corresponding risk-weighted assets.
Total shareholder return (TSR)
TSR represents the average total return on an investment in the Bank's common shares. The return includes changes in share price and assumes that the dividends received were reinvested in additional common shares of the Bank.
Trading activity revenues
Trading activity revenues consist of the net interest income and the non-interest income related to trading activities. Net interest income comprises dividends related to financial assets and liabilities associated with trading activities, and some interest income related to the financing of these financial assets and liabilities net of interest expenses and interest income related to the financing of these financial assets and liabilities. Non-interest income consists of realized and unrealized gains and losses as well as interest income on securities measured at fair value through profit or loss, income from held-for-trading derivative financial instruments, changes in the fair value of loans at fair value through profit or loss, changes in the fair value of financial instruments designated at fair value through profit or loss, realized and unrealized gains and losses as well as interest expense on obligations related to securities sold short, certain commission income, other trading activity revenues, and any applicable transaction costs.
Value-at-Risk (VaR)
VaR is a statistical measure of risk that is used to quantify market risks across products, per types of risks, and aggregate risk on a portfolio basis. VaR is defined as the maximum loss at a specific confidence level over a certain horizon under normal market conditions. The VaR method has the advantage of providing a uniform measurement of financial instrument-related market risks based on a single statistical confidence level and time horizon.
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