REG - Nat Bank of Canada - Annual Report 2024 (FS) Part 1
04/12/2024 18:00
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RNS Number : 8443O National Bank of Canada 04 December 2024
Regulatory Announcement
RNS Number: ●
National Bank of Canada
December 4, 2024
2024 Annual Financial Statements (Part 1)
National Bank of Canada (the "Bank") announces publication of its 2024 Annual
Report, including the audited consolidated financial statements for the years
ended 31 October 2024 and 2023, together with the notes thereto and
independent auditor's report thereon (the "2024 Financial Statements"). The
2024 Financial Statements have been uploaded to the National Storage Mechanism
and will shortly be available at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) and are available on
the Bank's website as part of the 2024 Annual Report at
https://www.nbc.ca/about-us/investors.html
(https://www.nbc.ca/about-us/investors.html)
To view the full PDF of the 2024 Financial Statements, the 2024 Annual Report
and the 2024 Annual CEO and CFO Certifications, please click on the following
links:
http://www.rns-pdf.londonstockexchange.com/rns/8421O_1-2024-12-4.pdf
(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_2-2024-12-4.pdf)
http://www.rns-pdf.londonstockexchange.com/rns/8421O_3-2024-12-4.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/8421O_3-2024-12-4.pdf)
Audited Consolidated
Financial Statements
Management's Responsibility for Financial Reporting 136
Independent Auditor's Report 137
Consolidated Balance Sheets 140
Consolidated Statements of Income 141
Consolidated Statements of Comprehensive Income 142
Consolidated Statements of Changes in Equity 144
Consolidated Statements of Cash Flows 145
Notes to the Audited Consolidated Financial Statements 146
Management's Responsibility for Financial Reporting
The Consolidated Financial Statements of National Bank of Canada (the Bank)
have been prepared in accordance with section 308(4) of the Bank Act (Canada),
which states that, except as otherwise specified by the Office of the
Superintendent of Financial Institutions (Canada) (OSFI), the financial
statements are to be prepared in accordance with International Financial
Reporting Standards (IFRS(®) Accounting Standards), as issued by the
International Accounting Standards Board (IASB). IFRS Accounting Standards
represent Canadian generally accepted accounting principles (GAAP). None of
the OSFI accounting requirements are exceptions to IFRS Accounting Standards.
Management maintains the accounting and internal control systems needed to
discharge its responsibility, which is to provide reasonable assurance that
the financial accounts are accurate and complete and that the Bank's assets
are adequately safeguarded. Controls that are currently in place include
quality standards on staff hiring and training; the implementation of
organizational structures with clear divisions of responsibility and
accountability for performance; the Code of Professional Conduct; and the
communication of operating policies and procedures.
As Chief Executive Officer and as Chief Financial Officer, we have overseen
the evaluation of the design and operation of the Bank's internal control over
financial reporting in accordance with National Instrument 52-109
Certification of Disclosure in Issuers' Annual and Interim Filings released by
the Canadian Securities Administrators. Based on the evaluation work
performed, we have concluded that the internal control over financial
reporting and the disclosure controls and procedures were effective as at
October 31, 2024 and that they provide reasonable assurance that the Bank's
financial information is reliable and that its Consolidated Financial
Statements have been prepared in accordance with IFRS Accounting Standards.
The Board of Directors (the Board) is responsible for reviewing and approving
the financial information contained in the Annual Report. Acting through the
Audit Committee, the Board also oversees the presentation of the Consolidated
Financial Statements and ensures that accounting and control systems are
maintained. Composed of directors who are neither officers nor employees of
the Bank, the Audit Committee is responsible, through Internal Audit, for
performing an independent and objective review of the Bank's internal control
effectiveness, i.e., governance processes, risk management processes and
control measures. Furthermore, the Audit Committee reviews the Consolidated
Financial Statements and recommends their approval to the Board.
The control systems are further supported by the presence of the Compliance
Service, which exercises independent oversight and evaluation in order to
assist managers in effectively managing regulatory compliance risk and to
obtain reasonable assurance that the Bank is compliant with regulatory
requirements.
Both the Senior Vice-President, Internal Audit and the Senior Vice-President,
Chief Compliance Officer and Chief Anti-Money Laundering Officer have a direct
functional link to the Chair of the Audit Committee and to the Chair of the
Risk Management Committee. They both also have direct access to the President
and Chief Executive Officer.
In accordance with the Bank Act (Canada), OSFI is mandated to protect the
rights and interests of depositors. Accordingly, OSFI examines and enquires
into the business and affairs of the Bank, as deemed necessary, to ensure that
the provisions of the Bank Act (Canada) are being satisfied and that the Bank
is in sound financial condition.
The independent auditor, Deloitte LLP, whose report follows, was appointed by
the shareholders at the recommendation of the Board. The auditor has full and
unrestricted access to the Audit Committee to discuss audit and financial
reporting matters.
Laurent Ferreira Marie Chantal Gingras
President and Chief Executive Officer Chief Financial Officer and Executive Vice-President, Finance
Montreal, Canada, December 3, 2024
Independent Auditor's Report
To the Shareholders of National Bank of Canada
Opinion
We have audited the Consolidated Financial Statements of National Bank of
Canada (the Bank), which comprise the consolidated balance sheets as at
October 31, 2024 and 2023, and the consolidated statements of income, the
consolidated statements of comprehensive income, the consolidated statements
of changes in equity and the consolidated statements of cash flows for the
years then ended, and notes to the Consolidated Financial Statements,
including a summary of material accounting policies (collectively referred to
as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of the Bank as at October 31, 2024
and 2023, and its financial performance and its cash flows for the years then
ended in accordance with IFRS Accounting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards (Canadian GAAS). Our responsibilities under those standards are
further described in the Auditor's Responsibilities for the Audit of the
Financial Statements section of our report. We are independent of the Bank in
accordance with the ethical requirements that are relevant to our audit of the
financial statements in Canada, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were
of most significance in our audit of the Consolidated Financial Statements for
the year ended October 31, 2024. These matters were addressed in the context
of our audit of the Consolidated Financial Statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these
matters.
Allowances for credit losses - Refer to Notes 1 and 8 to the financial
statements
Key Audit Matter Description
The allowances for credit losses represent management's estimate of expected
credit losses (ECL) on financial assets calculated under the IFRS 9, Financial
Instruments ECL framework. The calculation of ECL is based on the probability
of default (PD), loss given default (LGD), and exposure at default (EAD) of
the underlying assets and represents an unbiased and probability weighted
estimate of losses expected to occur in the future based on forecasts of
macroeconomic variables for three scenarios. Lifetime ECL is recorded for
financial assets that have experienced significant increases in credit risk
(SICR) since initial recognition or that are impaired; otherwise 12-month ECL
is recorded. Given uncertainty surrounding the key inputs used to measure
credit losses, the Bank has applied expert credit judgment to adjust the
modelled ECL results.
We have identified the allowances for credit losses as a key audit matter due
to the inherent complexity of the ECL models used and the significant judgment
required by management in relation to the forward-looking nature of some key
assumptions including the impact of a possible economic recession. Significant
auditor judgment was required in evaluating: (i) the models and methodologies
used to measure ECL; (ii) the forecasts of macroeconomic scenarios and
probability weighting; (iii) the determination of SICR; and (iv) the
adjustments to the modelled ECL results representing management's expert
credit judgment. Auditing the ECL models and the key judgments and assumptions
required a high degree of auditor judgment and an increased extent of audit
effort, including the involvement of professionals with specialized skills in
credit risk and economics.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to the models and the key judgments and
assumptions used by management to estimate the ECL included the following,
among others:
· With the assistance of professionals with specialized skills in
credit risk or economics:
o For a selection of ECL models, evaluated the appropriateness of the models
used to estimate ECL;
o Evaluated the forecasts of macroeconomic scenarios and their probability
weighting by comparing them against independently developed forecasts and
publicly available industry data, including the impact of a possible economic
recession;
o Assessed management's determination of SICR and the appropriateness of the
related model's programming;
o Assessed the adjustments to the modelled ECL results by evaluating
management's expert credit judgment.
Independent Auditor's Report (cont.)
Income taxes - Uncertain tax positions - Refer to Notes 1 and 26 to the
financial statements
Key Audit Matter Description
In the normal course of its business, the Bank is involved in a number of
transactions for which the tax impacts are uncertain. The Bank accounts for
provisions for uncertain tax positions that adequately represent the risk
stemming from tax matters under discussion or being audited by tax authorities
or from other matters involving uncertainty. These provisions reflect
management's best possible estimate of the amounts that may have to be paid
based on qualitative assessments of all relevant factors. As disclosed in Note
24, the Bank was reassessed by the tax authorities for additional income taxes
and interest in respect of certain Canadian dividends received by the Bank for
certain taxation years and may be reassessed for subsequent taxation years in
regard to similar activities. The Bank has not recognized any tax liability
related to these uncertain tax positions.
We have identified the assessment of the accounting of the uncertain tax
positions related to certain Canadian dividends as a key audit matter given
the significant judgment made by management when evaluating the probability of
acceptance of the Bank's tax positions and when interpreting relevant tax and
case law and administrative positions. Auditing these judgments required a
high degree of auditor judgment and resulted in an increased extent of audit
effort, including the involvement of tax specialists.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures pertaining to the assessment of the accounting of the
uncertain tax positions related to certain Canadian dividends included the
following, among others:
· With the assistance of tax specialists, evaluated management's
assessment of the probability of acceptance of the Bank's tax positions by
assessing:
o The Bank's interpretations of relevant tax and case law and administrative
positions;
o The correspondence with the relevant tax authorities; and
o The advice and legal opinions obtained by the Bank's external tax
advisors.
Other Information
Management is responsible for the other information. The other information
comprises:
· Management's Discussion and Analysis; and
· The information, other than the financial statements and our
auditor's report thereon, in the Annual Report.
Our opinion on the financial statements does not cover the other information
and we do not express any form of assurance conclusion thereon. In connection
with our audit of the financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or
our knowledge obtained in the audit, or otherwise appears to be materially
misstated.
We obtained Management's Discussion and Analysis and the Annual Report prior
to the date of this auditor's report. If, based on the work we have performed
on this other information, we conclude that there is a material misstatement
of this other information, we are required to report that fact in this
auditor's report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the
financial statements in accordance with IFRS Accounting Standards, and for
such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing
the Bank's ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the Bank or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank's
financial reporting process.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with Canadian GAAS will always detect a
material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
As part of an audit in accordance with Canadian GAAS, we exercise professional
judgment and maintain professional skepticism throughout the audit. We also:
· Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
· Obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Bank's internal control.
· Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
· Conclude on the appropriateness of management's use of the going
concern basis of accounting and, based on the audit evidence obtained, whether
a material uncertainty exists related to events or conditions that may cast
significant doubt on the Bank's ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention
in our auditor's report to the related disclosures in the financial statements
or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditor's
report. However, future events or conditions may cause the Bank to cease to
continue as a going concern.
· Evaluate the overall presentation, structure and content of the
financial statements, including the disclosures, and whether the financial
statements represent the underlying transactions and events in a manner that
achieves fair presentation.
· Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within the Bank
to express an opinion on the financial statements. We are responsible for the
direction, supervision and performance of the group audit. We remain solely
responsible for our audit opinion.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the Consolidated
Financial Statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor's
report is Carl Magnan.
/s/ Deloitte LLP(1)
December 3, 2024
Montreal, Quebec
(1) CPA auditor, public accountancy permit No. A121501
Consolidated Balance Sheets
As at October 31 2024 2023((1))
Assets
Cash and deposits with financial institutions 31,549 35,234
Securities Notes 4, 5 and 7
At fair value through profit or loss 115,935 99,994
At fair value through other comprehensive income 14,622 9,242
At amortized cost 14,608 12,582
145,165 121,818
Securities purchased under reverse repurchase agreements
and securities borrowed 16,265 11,260
Loans Note 8
Residential mortgage 95,009 86,847
Personal 46,883 46,358
Credit card 2,761 2,603
Business and government 99,720 84,192
244,373 220,000
Customers' liability under acceptances − 6,627
Allowances for credit losses (1,341) (1,184)
243,032 225,443
Other
Derivative financial instruments Note 18 12,309 17,516
Investments in associates and joint ventures Note 10 40 49
Premises and equipment Note 11 1,868 1,592
Goodwill Note 12 1,522 1,521
Intangible assets Note 12 1,233 1,256
Other assets Notes 2 and 13 9,243 7,788
26,215 29,722
462,226 423,477
Liabilities and equity
Deposits Notes 5, 14 and 16 333,545 288,173
Other
Acceptances − 6,627
Obligations related to securities sold short 10,873 13,660
Obligations related to securities sold under repurchase agreements
and securities loaned Note 9 38,177 38,347
Derivative financial instruments Note 18 15,760 19,888
Liabilities related to transferred receivables Notes 5 and 9 28,377 25,034
Other liabilities Notes 2 and 15 8,686 7,416
101,873 110,972
Subordinated debt Note 17 1,258 748
Equity
Equity attributable to the Bank's shareholders and holders of other equity Notes 20 and 24
instruments
Preferred shares and other equity instruments 3,150 3,150
Common shares 3,463 3,294
Contributed surplus 85 68
Retained earnings Note 2 18,633 16,650
Accumulated other comprehensive income 219 420
25,550 23,582
Non-controlling interests Note 21 − 2
25,550 23,584
462,226 423,477
The accompanying notes are an integral part of these audited Consolidated
Financial Statements.
(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 these audited Consolidated Financial Statements.
Laurent Ferreira Lynn Loewen
President and Chief Executive Officer Director
Consolidated Statements of Income
Year ended October 2024 2023((1))
31
Interest income
Loans 15,581 12,676
Securities at fair value through profit or loss 1,834 1,681
Securities at fair value through other comprehensive income 541 279
Securities at amortized cost 468 473
Deposits with financial institutions 1,547 1,668
19,971 16,777
Interest expense
Deposits 13,198 10,015
Liabilities related to transferred receivables 752 633
Subordinated debt 62 47
Other 3,020 2,496
17,032 13,191
Net interest income((2)) 2,939 3,586
Non-interest income
Underwriting and advisory fees 419 378
Securities brokerage commissions 194 174
Mutual fund revenues 638 578
Investment management and trust service fees 1,141 1,005
Credit fees 460 574
Card revenues 212 202
Deposit and payment service charges 294 300
Trading revenues (losses) Note 23 4,299 2,677
Gains (losses) on non-trading securities, net 318 70
Insurance revenues, net Note 2 73 59
Foreign exchange revenues, other than trading 225 183
Share in the net income of associates and joint ventures Note 10 8 11
Other 180 261
8,461 6,472
Total revenues 11,400 10,058
Non-interest expenses
Compensation and employee benefits Note 2 3,725 3,425
Occupancy Notes 2 and 11 366 350
Technology Notes 2, 11 and 12 1,046 1,078
Communications 56 58
Professional fees Note 2 316 256
Other Notes 2 and 32 545 586
6,054 5,753
Income before provisions for credit losses and income taxes 5,346 4,305
Provisions for credit losses Note 8 569 397
Income before income taxes 4,777 3,908
Income taxes Notes 2 and 26 961 619
Net income 3,816 3,289
Net income attributable to
Preferred shareholders and holders of other equity instruments 154 141
Common shareholders 3,663 3,150
Bank shareholders and holders of other equity instruments 3,817 3,291
Non-controlling interests (1) (2)
3,816 3,289
Earnings per share (dollars) Note 27
Basic 10.78 9.33
Diluted 10.68 9.24
Dividends per common share (dollars) Note 20 4.32 3.98
The accompanying notes are an integral part of these audited Consolidated
Financial Statements.
(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 these audited Consolidated Financial Statements.
(2) Net interest income includes dividend income. For additional
information, see Note 1 to these audited Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
Year ended October 31 2024 2023((1))
Net income 3,816 3,289
Other comprehensive income, net of income taxes
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in 80 155
foreign operations
Impact of hedging net foreign currency translation gains (losses) (67) (52)
13 103
Net change in debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other 68 (87)
comprehensive income
Net (gains) losses on debt securities at fair value through other
comprehensive income
reclassified to net income (59) 85
Change in allowances for credit losses on debt securities at fair value
through
other comprehensive income reclassified to net income − 1
9 (1)
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow (100) 90
hedges
Net (gains) losses on designated derivative financial instruments reclassified (123) 25
to net income
(223) 115
Share in the other comprehensive income of associates and joint ventures − 1
Items that will not be subsequently reclassified to net income
Remeasurements of pension plans and other post-employment benefit plans 83 (140)
Net gains (losses) on equity securities designated at fair value through other 43 45
comprehensive income
Net fair value change attributable to credit risk on financial liabilities
designated at
fair value through profit or loss (350) (163)
(224) (258)
Total other comprehensive income, net of income taxes (425) (40)
Comprehensive income 3,391 3,249
Comprehensive income attributable to
Bank shareholders and holders of other equity instruments 3,392 3,251
Non-controlling interests (1) (2)
3,391 3,249
The accompanying notes are an integral part of these audited Consolidated
Financial Statements.
(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 these audited Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income (cont.)
Income Taxes - Other Comprehensive Income
The following table presents the income tax expense or recovery for each
component of other comprehensive income.
Year ended October 31 2024 2023
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in − (3)
foreign operations
Impact of hedging net foreign currency translation gains (losses) (23) (14)
(23) (17)
Net change in debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other 27 (33)
comprehensive income
Net (gains) losses on debt securities at fair value through other
comprehensive income
reclassified to net income (24) 33
Change in allowances for credit losses on debt securities at fair value
through
other comprehensive income reclassified to net income − −
3 −
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow (39) 35
hedges
Net (gains) losses on designated derivative financial instruments reclassified (47) 9
to net income
(86) 44
Share in the other comprehensive income of associates and joint ventures − −
Items that will not be subsequently reclassified to net income
Remeasurements of pension plans and other post-employment benefit plans 32 (43)
Net gains (losses) on equity securities designated at fair value through other
comprehensive income 16 8
Net fair value change attributable to credit risk on financial liabilities
designated at
fair value through profit or loss (135) (63)
(87) (98)
(193) (71)
The accompanying notes are an integral part of these audited Consolidated
Financial Statements.
Consolidated Statements of Changes in Equity
Year ended October 31 2024 2023((1))
Preferred shares and other equity instruments at beginning and at end Note 20 3,150 3,150
Common shares at beginning Note 20 3,294 3,196
Issuances of common shares pursuant to the Stock Option Plan 146 95
Impact of shares purchased or sold for trading 23 3
Common shares at end 3,463 3,294
Contributed surplus at beginning 68 56
Stock option expense Note 24 17 18
Stock options exercised (16) (10)
Other 16 4
Contributed surplus at end 85 68
Retained earnings at beginning 16,650 15,140
Impact of IFRS 17 adoption on November 1, 2022 Note 2 − (48)
Net income attributable to the Bank's shareholders and holders of other equity Note 2 3,817 3,291
instruments
Dividends on preferred shares and distributions on other equity instruments Note 20 (175) (163)
Dividends on common shares Note 20 (1,468) (1,344)
Remeasurements of pension plans and other post-employment benefit plans 83 (140)
Net gains (losses) on equity securities designated at fair value through other 43 45
comprehensive income
Net fair value change attributable to the credit risk on financial liabilities
designated at fair value
through profit or loss (350) (163)
Impact of a financial liability resulting from put options written to Note 15 18 10
non-controlling interests
Other 15 22
Retained earnings at end 18,633 16,650
Accumulated other comprehensive income at beginning 420 202
Net foreign currency translation adjustments 13 103
Net change in unrealized gains (losses) on debt securities at fair value 9 (1)
through other comprehensive income
Net change in gains (losses) on instruments designated as cash flow hedges (223) 115
Share in the other comprehensive income of associates and joint ventures − 1
Accumulated other comprehensive income at end 219 420
Equity attributable to the Bank's shareholders and holders of other equity 25,550 23,582
instruments
Non-controlling interests at beginning Note 21 2 2
Net income attributable to non-controlling interests (1) (2)
Other (1) 2
Non-controlling interests at end − 2
Equity 25,550 23,584
Accumulated Other Comprehensive Income
As at October 31 2024 2023
Accumulated other comprehensive income
Net foreign currency translation adjustments 320 307
Net unrealized gains (losses) on debt securities at fair value through other (26) (35)
comprehensive income
Net gains (losses) on instruments designated as cash flow hedges (77) 146
Share in the other comprehensive income of associates and joint ventures 2 2
219 420
The accompanying notes are an integral part of these audited Consolidated
Financial Statements.
(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 these audited Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Year ended October 31 2024 2023((1))
Cash flows from operating activities
Net income 3,816 3,289
Adjustments for
Provisions for credit losses 569 397
Depreciation of premises and equipment, including right-of-use assets 233 211
Amortization of intangible assets 281 313
Impairment losses on premises and equipment and on intangible assets Notes 11 and 12 4 88
Deferred taxes (138) (243)
Losses (gains) on sales of non-trading securities, net (144) (70)
Share in the net income of associates and joint ventures (8) (11)
Stock option expense 17 18
Gain on the fair value remeasurement of equity interests Note 32 (174) (91)
Change in operating assets and liabilities
Securities at fair value through profit or loss (15,941) (12,619)
Securities purchased under reverse repurchase agreements and securities (5,005) 15,226
borrowed
Loans and acceptances, net of securitization (21,442) (20,252)
Deposits 45,372 21,779
Obligations related to securities sold short (2,787) (8,157)
Obligations related to securities sold under repurchase agreements and (170) 4,874
securities loaned
Derivative financial instruments, net 1,079 1,287
Securitization - Credit cards − (29)
Interest and dividends receivable and interest payable 128 407
Current tax assets and liabilities 175 (313)
Other items (1,213) (938)
4,652 5,166
Cash flows from financing activities
Issuances of common shares (including the impact of shares purchased for 153 88
trading)
Issuance of subordinated debt 500 −
Repurchase of subordinated debt − (750)
Repayments of lease liabilities (110) (102)
Dividends paid on shares and distributions on other equity instruments (1,640) (1,503)
(1,097) (2,267)
Cash flows from investing activities
Net change in investments in associates and joint ventures 10 −
Purchases of non-trading securities (17,333) (8,846)
Maturities of non-trading securities 4,470 4,249
Sales of non-trading securities 6,220 5,168
Net change in premises and equipment, excluding right-of-use assets (443) (352)
Net change in intangible assets (260) (299)
(7,336) (80)
(443) −
Impact of currency rate movements on cash and cash equivalents 96 545
Increase (decrease) in cash and cash equivalents (3,685) 3,364
Cash and cash equivalents at beginning 35,234 31,870
Cash and cash equivalents at end((2)) 31,549 35,234
Supplementary information about cash flows from operating activities
Interest paid 16,767 12,236
Interest and dividends received 19,834 16,228
Income taxes paid 1,085 741
The accompanying notes are an integral part of these audited Consolidated
Financial Statements.
(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 these audited Consolidated Financial Statements.
(2) This item represents the balance of Cash and deposits with
financial institutions in the Consolidated Balance Sheet. It includes an
amount of $11.7 billion as at October 31, 2024 ($9.3 billion as at
October 31, 2023) for which there are restrictions and of which $6.5 billion
($6.5 billion as at October 31, 2023) represents the balances that the Bank
must maintain with central banks, other regulatory agencies, and certain
counterparties.
Notes to the Audited Consolidated Financial Statements
Note 1 Basis of Presentation and Summary of Material Accounting Policies 146 Note 18 Derivative Financial Instruments 198
Note 2 Accounting Policy Changes 162 Note 19 Hedging Activities 201
Note 3 Future Accounting Policy Changes 163 Note 20 Share Capital and Other Equity Instruments 207
Note 4 Fair Value of Financial Instruments 164 Note 21 Non-Controlling Interests 210
Note 5 Financial Instruments Designated at Fair Value Through Profit or Loss 175 Note 22 Capital Disclosure 211
Note 6 Offsetting Financial Assets and Financial Liabilities 176 Note 23 Trading Activity Revenues 212
Note 7 Securities 177 Note 24 Share-Based Payments 213
Note 8 Loans and Allowances for Credit Losses 179 Note 25 Employee Benefits - Pension Plans and Other
Note 9 Financial Assets Transferred But Not Derecognized 191 Post-Employment Benefit Plans 216
Note 10 Investments in Associates and Joint Ventures 192 Note 26 Income Taxes 220
Note 11 Premises and Equipment 193 Note 27 Earnings Per Share 223
Note 12 Goodwill and Intangible Assets 194 Note 28 Guarantees, Commitments and Contingent Liabilities 224
Note 13 Other Assets 195 Note 29 Structured Entities 226
Note 14 Deposits 196 Note 30 Related Party Disclosures 229
Note 15 Other Liabilities 196 Note 31 Financial Instruments Risk Management 230
Note 16 Subscription Receipts 197 Note 32 Segment Disclosures 235
Note 17 Subordinated Debt 197 Note 33 Acquisition 237
Note 1 - Basis of Presentation and Summary of Material Accounting Policies
National Bank of Canada (the Bank) is a financial institution incorporated and
domiciled in Canada and whose shares are listed on the Toronto Stock Exchange.
Its head office is located at 800 Saint-Jacques Street in Montreal, Quebec,
Canada. The Bank is a chartered bank under Schedule 1 of the Bank Act (Canada)
and is regulated by the Office of the Superintendent of Financial Institutions
(Canada) (OSFI). The Bank offers financial services to individuals,
businesses, institutional clients, and governments throughout Canada as well
as specialized services at the international level. It operates four business
segments: the Personal and Commercial segment, the Wealth Management segment,
the Financial Markets segment, and the U.S. Specialty Finance and
International (USSF&I) segment. Its full line of services includes banking
and investing solutions for individuals and businesses, corporate banking and
investment banking services, securities brokerage, insurance, and wealth
management.
On December 3, 2024, the Board of Directors (the Board) authorized the
publication of the Bank's audited annual Consolidated Financial Statements
(the Consolidated Financial Statements) for the year ended October 31, 2024.
Basis of Presentation
The Bank's Consolidated Financial Statements are prepared in accordance with
International Financial Reporting Standards (IFRS Accounting Standards), as
issued by the International Accounting Standards Board (IASB). The financial
statements also comply with section 308(4) of the Bank Act (Canada), which
states that, except as otherwise specified by OSFI, the Consolidated Financial
Statements are to be prepared in accordance with IFRS Accounting Standards.
IFRS Accounting Standards represent Canadian generally accepted accounting
principles (GAAP). None of the OSFI accounting requirements are exceptions to
IFRS Accounting Standards. The accounting policies described in the Summary of
Material Accounting Policies section have been applied consistently to all
periods presented.
Unless otherwise indicated, all amounts are expressed in Canadian dollars,
which is the Bank's functional and presentation currency.
Interest Rate Benchmark Reform
The reform of interbank offered rates (IBORs) and other interest rate
benchmarks is a global initiative being coordinated and led by central banks
and governments around the world, including those in Canada. This reform has
been unfolding for several years, with the IASB monitoring developments. To
minimize the financial statement impacts arising from replacing current
interest rate benchmarks with alternative benchmarks, the IASB amended certain
IFRS Accounting Standards and allowed for some temporary exemptions, notably
in the area of hedge accounting.
On December 31, 2021, all LIBOR (London Interbank Offered Rates) rates in
European, British, Swiss, and Japanese currencies as well as the one-week and
two-month USD LIBOR rates were discontinued, whereas the other USD LIBOR rates
were discontinued as of June 30, 2023.
In Canada, CDOR (Canadian Dollar Offered Rate) ceased to be published on
June 28, 2024 and was replaced by risk-free rates CORRA (Canadian Overnight
Repo Rate Average) and term CORRA. As a result, the Bank ceased to grant loans
based on bankers' acceptances and, consistent with its plan, it no longer has
financial instruments referencing CDOR in its Consolidated Financial
Statements as at October 31, 2024.
Summary of Material Accounting Policies
Judgments, Estimates and Assumptions
In preparing Consolidated Financial Statements in accordance with IFRS
Accounting Standards, management must exercise judgment and make estimates and
assumptions that affect the reporting date carrying amounts of assets and
liabilities, net income, and related information. Furthermore, certain
accounting policies require complex judgments and estimates because they apply
to matters that are inherently uncertain, in particular accounting policies
applicable to the following: the fair value determination of financial
instruments, the impairment of financial assets, the impairment of
non-financial assets, pension plans and other post-employment benefits, income
taxes, provisions, the consolidation of structured entities, and the
classification of debt instruments. Descriptions of these judgments and
estimates are provided in each of the notes related thereto in the
Consolidated Financial Statements. Actual results could therefore differ from
these estimates, in which case the impacts are recognized in the Consolidated
Financial Statements of future fiscal periods. The accounting policies
described in this note provide greater detail about the use of estimates and
assumptions and reliance on judgment.
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. The uncertainty
surrounding certain key inputs used in measuring expected credit losses is
described in Note 8 to these Consolidated Financial Statements.
Basis of Consolidation
Subsidiaries
These Consolidated Financial Statements include all the assets, liabilities,
operating results and cash flows of the Bank and its subsidiaries, after
elimination of intercompany transactions and balances. Subsidiaries are
entities, including structured entities, controlled by the Bank. 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 voting rights relate solely
to administrative tasks and the relevant activities are directed by means of
contractual arrangements.
Management must exercise judgment in determining whether the Bank must
consolidate an entity. The Bank controls an entity only if the following three
conditions are met:
· it has decision-making authority regarding the entity's relevant
activities;
· it has exposure or rights to variable returns from its involvement
with the entity;
· it has the ability to use its power to affect the amount of the
returns.
When determining decision-making authority, the Bank considers many factors,
including the existence and effect of actual and potential voting rights held
by the Bank that can be exercised as well as the holding of instruments that
are convertible into voting shares. In addition, the Bank must determine
whether, as an investor with decision-making rights, it acts as a principal or
agent.
Based on these principles, an assessment of control is performed at the
inception of a relationship between any entity and the Bank. When performing
this assessment, the Bank considers all facts and circumstances, and it must
reassess whether it still controls an investee if facts and circumstances
indicate that one or more of the three conditions of control have changed.
The Bank consolidates the entities it controls from the date on which control
is obtained and ceases to consolidate them from the date control ceases. The
Bank uses the acquisition method to account for the acquisition of a
subsidiary from a third party on the date control is obtained.
Non-Controlling Interests
Non-controlling interests in subsidiaries represent the equity interests held
by third parties in the Bank's subsidiaries and are presented in total Equity,
separately from Equity attributable to the Bank's shareholders and holders of
other equity instruments. The non-controlling interests' proportionate shares
of the net income and other comprehensive income of the Bank's subsidiaries
are presented separately in the Consolidated Statement of Income and in the
Consolidated Statement of Comprehensive Income, respectively.
With respect to units issued to third parties by mutual funds and certain
other funds that are consolidated, they are presented at fair value in Other
liabilities in the Consolidated Balance Sheet. Lastly, changes in ownership
interests in subsidiaries that do not result in a loss of control are
recognized as equity transactions. The difference between the adjustment in
the carrying value of the non-controlling interest and the fair value of the
consideration paid or received is recognized directly in Equity attributable
to the Bank's shareholders and holders of other equity instruments.
Note 1 - Basis of Presentation and Summary of Material Accounting Policies
(cont.)
Investments in Associates and Joint Ventures
The Bank exercises significant influence over an entity when it has the power
to participate in the financial and operating policy decisions of the
investee. The Bank has joint control when there is a contractually agreed
sharing of control of an entity, and joint control exists only when decisions
about the relevant activities require the unanimous consent of the parties
sharing control.
Investments in associates, i.e., entities over which the Bank exercises
significant influence, and investments in joint ventures, i.e., entities over
which the Bank has rights to the net assets and exercises joint control, are
accounted for using the equity method. Under the equity method, the investment
is initially recorded at cost and, thereafter, the carrying amount is
increased or decreased by the Bank's proportionate share of net income,
recognized in Non-interest income in the Consolidated Statement of Income, and
by the proportionate share in other comprehensive income, recognized in Other
comprehensive income in the Consolidated Statement of Comprehensive Income.
Distributions received reduce the carrying amount of the interest.
Translation of Foreign Currencies
The Consolidated Financial Statements are presented in Canadian dollars, which
is the Bank's functional and presentation currency. Each foreign operation
within the Bank's scope of consolidation determines its own functional
currency, and the items reported in the financial statements of each foreign
operation are measured using that currency.
Monetary items and non-monetary items measured at fair value and denominated
in foreign currencies are translated into the functional currency at exchange
rates prevailing at the Consolidated Balance Sheet date. Non-monetary items
not measured at fair value are translated into the functional currency at
historical rates. Revenues and expenses denominated in foreign currencies are
translated at the average exchange rates for the period. Translation gains and
losses are recognized in Non-interest income in the Consolidated Statement of
Income, except for equity instruments designated at fair value through other
comprehensive income, for which unrealized gains and losses are recorded in
Other comprehensive income and will not be subsequently reclassified to net
income.
In the Consolidated Financial Statements, the assets and liabilities of all
foreign operations are translated into the Bank's functional currency at the
exchange rates prevailing at the Consolidated Balance Sheet date, whereas the
revenues and expenses of such foreign operations are translated into the
Bank's functional currency at the average exchange rates for the period. Any
goodwill resulting from the acquisition of a foreign operation that does not
have the same functional currency as the parent company, and any fair value
adjustments to the carrying amounts of assets and liabilities resulting from
the acquisition, are treated as assets and liabilities of the foreign
operation and translated at the exchange rates prevailing at the Consolidated
Balance Sheet date. Unrealized translation gains and losses related to foreign
operations, including the impact of hedges and income taxes on the related
results, are presented in Other comprehensive income. Upon disposal of a
foreign operation, any accumulated translation gains and losses, along with
the related hedges, recorded under the Accumulated other comprehensive income
item of this foreign operation, are reclassified to Non-interest income in the
Consolidated Statement of Income.
Classification and Measurement 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.
Financial Instruments Designated at Fair Value Through Profit or Loss
A financial asset may be irrevocably designated at fair value through profit
or loss at initial recognition if certain conditions are met. The Bank may
apply this option if doing so eliminates or significantly reduces a
measurement or recognition inconsistency that would otherwise arise from
measuring financial assets or liabilities or recognizing gains and losses on
them on different bases, and if the fair values are reliable. Financial assets
thus designated are recognized at fair value, and any change in fair value is
recorded in Non-interest income in the Consolidated Statement of Income.
Interest income arising from these financial instruments designated at fair
value through profit or loss is recorded in Net interest income in the
Consolidated Statement of Income.
A financial liability may be irrevocably designated at fair value through
profit or loss when it is initially recognized. Financial liabilities thus
designated are recognized at fair value, and any changes in fair value
attributable to changes in the Bank's own credit risk are recognized in Other
comprehensive income unless these changes create or enlarge an accounting
mismatch in Net income. Fair value changes not attributable to the Bank's own
credit risk are recognized in Non‑interest income in the Consolidated
Statement of Income. The amounts recognized in Other comprehensive income will
not be subsequently reclassified to Net income. Interest expense arising from
these financial liabilities designated at fair value through profit or loss is
recorded in the Net interest income item of the Consolidated Statement of
Income. The Bank may use this option in the following cases:
· if doing so eliminates or significantly reduces a measurement or
recognition inconsistency that would otherwise arise from measuring financial
assets or liabilities or recognizing gains and losses on them on different
bases, and if the fair values are reliable;
· if a group of financial assets and financial liabilities to which
an instrument belongs is managed and its performance is evaluated on a fair
value basis, in accordance with the Bank's documented risk management or
investment strategy, and information is provided on that basis to senior
management. Consequently, the Bank may use this option if it has implemented a
documented risk management strategy to manage a group of financial instruments
together on the fair value basis, if it can demonstrate that significant
financial risks are eliminated or significantly reduced, and if the fair
values are reliable;
· for hybrid financial instruments with one or more embedded
derivatives that would significantly modify the cash flows of the financial
instruments and that would otherwise be bifurcated and accounted for
separately.
Financial Instruments Designated at Fair Value Through Other Comprehensive
Income
At initial recognition, an investment in an equity instrument that is neither
held for trading nor a contingent consideration recognized in a business
combination may be irrevocably designated as being at fair value through other
comprehensive income. In accordance with this designation, any change in fair
value is recognized in Other comprehensive income with no subsequent
reclassification to net income. Dividend income is recorded in Interest income
in the Consolidated Statement of Income.
Securities Measured at Fair Value Through Other Comprehensive Income
Securities measured at fair value through other comprehensive income include:
(i) debt securities for which the contractual terms of the financial asset
give rise, on specified dates, to cash flows that are solely payments of
principal and interest on the principal amount outstanding and that fall
within a "hold to collect and sell" business model and (ii) equity securities
designated at fair value through other comprehensive income with no subsequent
reclassification of gains and losses to net income.
The Bank recognizes securities transactions at fair value through other
comprehensive income on the trade date, and the transaction costs are
capitalized. Interest income and dividend income are recognized in Interest
income in the Consolidated Statement of Income.
Debt Securities Measured at Fair Value Through Other Comprehensive Income
Debt securities measured at fair value through other comprehensive income are
recognized at fair value. Unrealized gains and losses are recognized, net of
expected credit losses and related income taxes, and provided that they are
not hedged by derivative financial instruments in a fair value hedging
relationship, in Other comprehensive income. When the securities are sold,
realized gains or losses, determined on an average cost basis, are
reclassified to Non-interest income - Gains (losses) on non-trading
securities, net in the Consolidated Statement of Income. Premiums, discounts
and related transaction costs are amortized to interest income over the
expected life of the instrument using the effective interest rate method.
Note 1 - Basis of Presentation and Summary of Material Accounting Policies
(cont.)
Equity Securities Designated at Fair Value Through Other Comprehensive Income
Equity securities designated at fair value through other comprehensive income
are recognized at fair value. Unrealized gains and losses are presented, net
of income taxes, in Other comprehensive income with no subsequent
reclassification of realized gains and losses to net income. Transaction costs
incurred upon the purchase of such equity securities are not reclassified to
net income upon the sale of the securities.
Securities Measured at Amortized Cost
Securities measured at amortized cost include debt securities for which the
contractual terms give rise, on specified dates, to cash flows that are solely
payments of principal and interest on the principal amount outstanding and
that fall within a "hold to collect" business model.
The Bank recognizes these securities transactions at fair value on the trade
date, and the transaction costs are capitalized. After initial recognition,
debt securities in this category are recorded at amortized cost. Interest
income is recognized in Interest income in the Consolidated Statement of
Income. Premiums, discounts and related transaction costs are amortized to
interest income over the expected life of the instrument using the effective
interest rate method. Securities measured at amortized cost are presented net
of allowances for credit losses in the Consolidated Balance Sheet.
Securities Measured at Fair Value Through Profit or Loss
Securities not classified or designated as measured at fair value through
other comprehensive income or at amortized cost are classified as measured at
fair value through profit or loss.
Securities measured at fair value through profit or loss include (i)
securities held for trading, (ii) securities designated at fair value through
profit or loss, (iii) all equity securities other than those designated as
measured at fair value through other comprehensive income with no subsequent
reclassifications of gains and losses to net income, and (iv) debt securities
for which the contractual cash flows are not solely payments of principal and
any interest on any principal amount outstanding.
The Bank recognizes securities transactions at fair value through profit or
loss on the settlement date in the Consolidated Balance Sheet. Changes in fair
value between the trade date and the settlement date are recognized in
Non-interest income in the Consolidated Statement of Income.
Securities at fair value through profit or loss are recognized at fair value.
Interest income, any transaction costs, as well as realized and unrealized
gains or losses on securities held for trading are recognized in Non-interest
income - Trading revenues (losses) in the Consolidated Statement of Income.
Dividend income is recorded in Interest income in the Consolidated Statement
of Income. Interest income on securities designated at fair value through
profit or loss is recorded in Interest income in the Consolidated Statement
of Income. Realized and unrealized gains or losses on these securities are
recognized in Non‑interest income - Trading revenues (losses) in the
Consolidated Statement of Income.
Realized and unrealized gains or losses on equity securities at fair value
through profit or loss, other than those held for trading, as well as debt
securities for which the contractual cash flows are not solely payments of
principal and interest on the principal amount outstanding, are recognized
under Non-interest income - Gains (losses) on non-trading securities, net
in the Consolidated Statement of Income. The dividend income and interest
income on these financial assets are recognized under Interest income in the
Consolidated Statement of Income.
Securities Purchased Under Reverse Repurchase Agreements, Obligations Related
to Securities Sold
Under Repurchase Agreements, and Securities Borrowed and Loaned
The Bank recognizes these transactions at amortized cost using the effective
interest rate method, except when they are designated at fair value through
profit or loss and are recorded at fair value. These transactions are held
within a business model whose objective is to collect contractual cash flows,
i.e., cash flows that are solely payments of principal and interest on the
principal amount outstanding. Securities sold under repurchase agreements
remain on the Consolidated Balance Sheet, whereas securities purchased under
reverse repurchase agreements are not recognized. Reverse repurchase
agreements and repurchase agreements are treated as collateralized lending and
borrowing transactions.
The Bank also borrows and lends securities. Securities loaned remain on the
Consolidated Balance Sheet, while securities borrowed are not recognized. As
part of these transactions, the Bank pledges or receives collateral in the
form of cash or securities. Collateral pledged in the form of securities
remains on the Consolidated Balance Sheet. Collateral received in the form of
securities is not recognized in the Consolidated Balance Sheet. Collateral
pledged or received in the form of cash is recognized in financial assets or
liabilities in the Consolidated Balance Sheet.
When the collateral is pledged or received in the form of cash, the interest
income and expense are recorded in Net interest income in the Consolidated
Statement of Income.
Loans
Loans Measured at Amortized Cost
Loans classified as measured at amortized cost include loans originated or
purchased by the Bank that are not classified as measured at fair value
through profit or loss or designated at fair value through profit or loss.
These loans are held within a business model whose objective is to collect
contractual cash flows, i.e., cash flows that are solely payments of principal
and interest on the principal amount outstanding. All loans originated by the
Bank are recognized when cash is advanced to a borrower. Purchased loans are
recognized when the cash consideration is paid by the Bank.
All loans are initially recognized at fair value plus directly attributable
costs and are subsequently measured at amortized cost using the effective
interest rate method, net of allowances for expected credit losses. For
purchased performing loans, the acquisition date fair value adjustment on each
loan is amortized to interest income over the expected remaining life of the
loan using the effective interest rate method. For purchased credit-impaired
loans, the acquisition date fair value adjustment on each loan consists of
management's estimate of the shortfall of principal and interest cash flows
that the Bank expects to collect and of the time value of money. The time
value of money component of the fair value adjustment is amortized to interest
income over the remaining life of the loan using the effective interest rate
method. Loans are presented net of allowances for credit losses in the
Consolidated Balance Sheet.
Loans Measured at Fair Value Through Profit or Loss
Loans classified as measured at fair value through profit or loss, loans
designated at fair value through profit or loss, and loans for which the
contractual cash flows are not solely payments of principal and interest on
the principal amount outstanding are recognized at fair value in the
Consolidated Balance Sheet. The interest income on loans at fair value through
profit or loss is recorded in Interest income in the Consolidated Statement of
Income.
Changes in the fair value of loans classified as at fair value through profit
or loss and loans designated at fair value through profit or loss are
recognized in Non-interest income - Trading revenues (losses) in the
Consolidated Statement of Income. With respect to loans whose contractual cash
flows are not solely payments of principal and interest on the principal
amount outstanding, changes in fair value are recognized in Non-interest
income - Other in the Consolidated Statement of Income.
Reclassification of Financial Assets
A financial asset, other than a derivative financial instrument or a financial
asset that, at initial recognition, was designated as measured at fair value
through profit or loss, is reclassified only in rare situations, i.e., when
there is a change in the business model used to manage the financial asset.
The reclassification is applied prospectively from the reclassification date.
Establishing Fair Value
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 valuation 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.
Note 1 - Basis of Presentation and Summary of Material Accounting Policies
(cont.)
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 techniques due to system
limitations or uncertainty surrounding the measure. These factors include, but
are not limited to, the unobservable nature of the 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 that is 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.
As permitted when certain criteria are met, the Bank has elected to determine
fair value based on net exposure to credit risk or market risk for certain
portfolios of financial instruments, mainly derivative financial instruments.
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. 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 future economic
conditions.
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 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 in 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 in 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.
Derecognition of Financial Assets and Securitization
A financial asset is considered for derecognition when the Bank has
transferred contractual rights to receive the cash flows or assumed an
obligation to transfer these cash flows to a third party. The Bank
derecognizes a financial asset when it considers that substantially all the
risks and rewards of ownership of the asset have been transferred or when the
contractual rights to the cash flows of the financial asset expire. When the
Bank considers that it has retained substantially all the risks and rewards of
ownership of the transferred asset, it continues to recognize the financial
asset and, if applicable, recognizes a financial liability in the Consolidated
Balance Sheet. If, due to a derivative financial instrument, the transfer of a
financial asset does not result in derecognition, the derivative financial
instrument is not recognized in the Consolidated Balance Sheet.
When the Bank has neither transferred nor retained substantially all the risks
and rewards of ownership of the financial asset, it derecognizes the financial
asset it no longer controls. Any rights and obligations retained following the
asset transfer are recognized separately as an asset or liability. If the Bank
retains control of the financial asset, it continues to recognize the asset to
the extent of its continuing involvement in that asset, i.e., the extent to
which it is exposed to changes in the value of the transferred asset.
To diversify its funding sources, the Bank participates in two Canada Mortgage
and Housing Corporation (CMHC) securitization programs: the Mortgage-Backed
Securities Program under the National Housing Act (Canada) (NHA) and Canada
Mortgage Bond (CMB) program. Under the first program, the Bank issues NHA
securities backed by insured residential mortgages and, under the second, the
Bank sells NHA securities to Canada Housing Trust (CHT). As part of these
transactions, the Bank retains substantially all the risks and rewards related
to ownership of the mortgage loans sold. Therefore, the insured mortgage loans
securitized under the CMB program continue to be recognized in Loans in the
Bank's Consolidated Balance Sheet, and the liabilities for the considerations
received from the transfer are recognized in Liabilities related to
transferred receivables in the Consolidated Balance Sheet. Moreover, insured
mortgage loans securitized and retained by the Bank continue to be recognized
in Loans in the Consolidated Balance Sheet.
Derecognition of Financial Liabilities
A financial liability is derecognized when the obligation is discharged,
cancelled, or expires. The difference between the carrying value of the
financial liability transferred and the consideration paid is recognized in
the Consolidated Statement of Income.
Cash and Deposits With Financial Institutions
Cash and deposits with financial institutions consist of cash and cash
equivalents, amounts pledged as collateral as well as amounts placed in
escrow. Cash and cash equivalents consist of cash, bank notes, deposits with
the Bank of Canada and other financial institutions, including net receivables
related to cheques, and other items in the clearing process.
Note 1 - Basis of Presentation and Summary of Material Accounting Policies
(cont.)
Acceptances and Customers' Liability Under Acceptances
The potential liability of the Bank under acceptances is recorded as a
customer commitment liability in the Consolidated Balance Sheet. The Bank's
potential recourse vis-à-vis clients is recorded as an equivalent offsetting
asset. Fees are recorded in Non-interest income in the Consolidated Statement
of Income.
Obligations Related to Securities Sold Short
This financial liability represents the Bank's obligation to deliver the
securities it sold but did not own at the time of sale. Obligations related to
securities sold short are recorded at fair value and presented as liabilities
in the Consolidated Balance Sheet. Realized and unrealized gains and losses
are recognized in Non‑interest income in the Consolidated Statement of
Income.
Derivative Financial Instruments
In the normal course of business, the Bank uses derivative financial
instruments to meet the needs of its clients, to generate trading activity
revenues, and to manage its exposure to interest rate risk, foreign exchange
risk, credit risk, and other market risks.
All derivative financial instruments are measured at fair value in the
Consolidated Balance Sheet. Derivative financial instruments with a positive
fair value are included in assets, whereas derivative financial instruments
with a negative fair value are included in liabilities in the Consolidated
Balance Sheet. Where there are offsetting financial assets and financial
liabilities, the net fair value of certain derivative financial instruments is
reported either as an asset or as a liability, depending on the circumstance.
Embedded Derivative Financial Instruments
An embedded derivative is a component of a hybrid contract that also includes
a non-derivative host, the effect being that some of the cash flows of the
combined instrument vary in a way similar to a stand-alone derivative. An
embedded derivative causes some or all of the cash flows that otherwise would
be required by the contract to be modified according to a specified interest
rate, financial instrument price, commodity price, foreign exchange rate,
index of prices or rates, credit rating or credit index, or other variable,
provided, in the case of a non-financial variable, that the variable is not
specific to one of the parties to the contract.
A derivative embedded in a financial liability is separated from the host
contract and treated as a separate derivative if, and only if, the following
three conditions are met: the economic characteristics and risks of the
embedded derivative are not closely related to those of the host contract, the
embedded derivative is a separate instrument that meets the definition of a
derivative financial instrument, and the hybrid contract is not measured at
fair value through profit or loss. Embedded derivatives that are separately
accounted for are measured at fair value in the Consolidated Balance Sheet,
and subsequent changes in fair value are recognized in Non-interest income in
the Consolidated Statement of Income.
All embedded derivatives are presented on a combined basis with the host
contract.
Held-for-Trading Derivative Financial Instruments
Derivative financial instruments are recognized at fair value, and the
realized and unrealized gains and losses (including interest income and
expense) are recorded in Non-interest income in the Consolidated Statement of
Income.
Derivative Financial Instruments Designated as Hedging Instruments
Policy
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.
Hedge accounting ensures that offsetting gains, losses, revenues and expenses
are recognized in the Consolidated Statement of Income in the same period or
periods.
Documenting and Assessing Effectiveness
The Bank designates and formally documents each hedging relationship, at its
inception, by detailing the risk management objective and the hedging
strategy. The documentation identifies the specific asset, liability, or cash
flows being hedged, the related hedging instrument, the nature of the specific
risk exposure or exposures being hedged, the intended term of the hedging
relationship, and the method for assessing the effectiveness or
ineffectiveness of the hedging relationship. At the inception of the hedging
relationship, and for every financial reporting period for which the hedge has
been designated, the Bank ensures that the hedging relationship is highly
effective and consistent with its originally documented risk management
objective and strategy. When a hedging relationship meets the hedge accounting
requirements, it is designated as either a fair value hedge, a cash flow hedge
or a foreign exchange hedge of a net investment in a foreign operation.
Interest Rate Benchmark Reform
A hedging relationship is directly affected by interest rate benchmark reform
such as interbank offered rates (IBORs) only if the reform gives rise to
uncertainties about (a) the interest rate benchmark (contractually or
non-contractually specified) designated as a hedged risk; and/or (b) the
timing or the amount of the interest-rate-benchmark-based cash flows of the
hedged item or of the hedging instrument.
For such hedging relationships, the following temporary exceptions apply
during the period of uncertainty:
• when determining whether a forecast transaction is highly probable
or expected to occur, it is assumed that the interest rate benchmark on which
the hedged cash flows (contractually or non-contractually specified) are based
is not altered as a result of interest rate benchmark reform;
• when assessing whether a hedge is expected to be highly effective,
it is assumed that the interest rate benchmark on which the hedged cash flows
and/or the hedged risk (contractually or non-contractually specified) are
based, or the interest rate benchmark on which the cash flows of the hedging
instrument are based, is not altered as a result of interest rate benchmark
reform;
• a hedge is not required to be discontinued if the actual results
of the hedge are outside an effectiveness range of 80% to 125% as a result of
interest rate benchmark reform;
• for a hedge of a non-contractually specified benchmark portion of
interest rate risk, the requirement that the designated portion be separately
identifiable need only be met at the inception of the hedging relationship.
Fair Value Hedges
For fair value hedges, the Bank mainly uses interest rate swaps to hedge
changes in the fair value of a hedged item. The carrying amount of the hedged
item is adjusted based on the effective portion of the gains or losses
attributable to the hedged risk, which are recognized in the Consolidated
Statement of Income, as well as the change in the fair value of the hedging
instrument. The resulting ineffective portion is recognized in Non-interest
income in the Consolidated Statement of Income.
The Bank prospectively discontinues hedge accounting if the hedging instrument
is sold or expires or if the hedging relationship no longer qualifies for
hedge accounting or if the Bank revokes the designation. When the designation
is revoked, the hedged item is no longer adjusted to reflect changes in fair
value, and the amounts previously recorded as cumulative adjustments with
respect to the effective portion of gains and losses attributable to the
hedged risk are amortized using the effective interest rate method and
recognized in the Consolidated Statement of Income over the remaining useful
life of the hedged item. If the hedged item is sold or terminated before
maturity, the cumulative adjustments with respect to the effective portion of
gains and losses attributable to the hedged risk are immediately recorded in
the Consolidated Statement of Income.
Cash Flow Hedges
For cash flow hedges, the Bank mainly uses interest rate swaps and total
return swaps to hedge variable cash flows attributable to the hedged risk
related to a financial asset or liability (or to a group of financial assets
or financial liabilities). The effective portion of changes in fair value of
the hedging instrument is recognized in Other comprehensive income, whereas
the ineffective portion is recognized in Non-interest income in the
Consolidated Statement of Income.
The amounts previously recorded in Accumulated other comprehensive income are
reclassified to the Consolidated Statement of Income of the period or periods
during which the cash flows of the hedged item affect the Consolidated
Statement of Income. If the hedging instrument is sold or expires or if the
hedging relationship no longer qualifies for hedge accounting or if the Bank
cancels that designation, then the amounts previously recognized in
Accumulated other comprehensive income are reclassified to the Consolidated
Statement of Income in the period or periods during which the cash flows of
the hedged item affect the Consolidated Statement of Income.
Hedges of Net Investments in Foreign Operations
Derivative and non-derivative financial instruments are used to hedge foreign
exchange risk related to investments made in foreign operations whose
functional currency is not the Canadian dollar. The effective portion of the
gains and losses on the hedging instrument is recognized in Other
comprehensive income, whereas the ineffective portion is recognized in
Non-interest income in the Consolidated Statement of Income. Upon the total or
partial sale of a net investment in a foreign operation, amounts reported
under Accumulated other comprehensive income are reclassified, in whole or in
part, to Non-interest income in the Consolidated Statement of Income.
Offsetting of Financial Assets and Liabilities
Financial assets and liabilities are offset, and the net amount is presented
in the Consolidated Balance Sheet when the Bank has a legally enforceable
right to set off the recognized amounts and intends to settle on a net basis
or to realize the asset and settle the liability simultaneously.
Note 1 - Basis of Presentation and Summary of Material Accounting Policies
(cont.)
Premises and Equipment
Premises and equipment, except for land and the portion under construction of
the head office building, are recognized at cost less accumulated depreciation
and accumulated impairment losses, if any. Land and the portion under
construction of the head office building are recorded at cost less any
accumulated impairment losses. Right-of-use assets are presented in Premises
and equipment in the Consolidated Balance Sheet. For additional information
about the accounting treatment of right-of-use assets, see the Leases section
presented below.
Buildings, computer equipment, and equipment and furniture are systematically
depreciated over their estimated useful lives. The depreciation period for
leasehold improvements is the lesser of the estimated useful life of the
leasehold improvements or the non-cancellable period of the lease.
Depreciation methods and estimated useful lives are reviewed annually. The
depreciation expense is recorded in Non-interest expenses in the Consolidated
Statement of Income.
Method Useful life
Significant components of the head office building
Interior design Straight-line 10-20 years
Exterior design, roofing and electromechanical system Straight-line 30 years
Structure Straight-line 75 years
Other buildings 5% declining balance
Computer equipment Straight-line 3-7 years
Equipment and furniture Straight-line 8 years
Leasehold improvements Straight-line (1)
(1) The depreciation period is the lesser of the estimated useful life
or the lease term.
Leases
At the inception date of a contract, the Bank assesses whether the contract
is, or contains, a lease. A contract is, or contains, a lease if it conveys
the right to control the use of an identified asset for a period of time in
exchange for consideration. When the Bank is a lessee, it recognizes a
right-of-use asset and a corresponding lease liability at the lease
commencement date except for short-term leases (defined as leases with terms
of 12 months or less) other than real estate leases and leases for which the
underlying asset is of low value. For such leases, the Bank recognizes the
lease payments under Non-interest expenses in the Consolidated Statement of
Income on a straight-line basis over the lease term. As a practical expedient,
the Bank elected, for real estate leases, not to separate non-lease components
from lease components and instead account for them as a single lease
component. When the Bank is the lessor, the leased assets remain in the
Consolidated Balance Sheet and are reported under Premises and equipment, and
the rental income is recognized net of related expenses under Non-interest
income in the Consolidated Statement of Income.
Right-of-use assets are initially measured at cost and subsequently measured
at cost less accumulated depreciation and accumulated impairment losses, if
any, and adjusted for certain remeasurements of lease liabilities. The cost of
a right-of-use asset comprises the amount of the initial measurement of the
lease liability, any lease payments made at or before the commencement date,
any initial direct costs incurred when entering into the lease, and an
estimate of costs to dismantle the asset or restore the site, less any lease
incentives received. Right-of-use assets are depreciated on a straight-line
basis over the lesser of the lease term and the estimated useful life of the
asset. Right-of-use assets are presented in Premises and equipment in the
Consolidated Balance Sheet. The depreciation expense and impairment losses, if
any, are recorded in Non-interest expenses in the Consolidated Statement of
Income.
The lease liability is initially measured at the present value of future lease
payments net of lease incentives not yet received. The present value of lease
payments is determined using the Bank's incremental borrowing rate. The lease
liability is subsequently measured at amortized cost using the effective
interest method. In determining the lease term, the Bank considers all the
facts and circumstances that create an economic incentive to exercise an
extension option or not to exercise a termination option. The lease term
determined by the Bank comprises the non-cancellable period of lease
contracts, the periods covered by an option to extend the lease if the Bank is
reasonably certain to exercise that option, and the periods covered by an
option to terminate the lease if the Bank is reasonably certain not to
exercise that option. The Bank reassesses the lease term if a significant
event or change in circumstances occurs and that is within its control. The
Bank applies judgment to determine the lease term when the lease contains
extension and termination options. Lease liabilities are presented under Other
liabilities in the Consolidated Balance Sheet, and the interest expense is
presented in Interest expense - Other in the Consolidated Statement of
Income.
Goodwill
The Bank uses the acquisition method to account for business combinations. The
consideration transferred in a business combination is measured at the
acquisition-date fair value, and the transaction costs related to the
acquisition are expensed as incurred. When the Bank acquires control of a
business, all of the identifiable assets and liabilities of the acquiree,
including intangible assets, are recorded at fair value. The interests
previously held in the acquiree are also measured at fair value. Goodwill
represents the excess of the purchase consideration and all previously held
interests over the fair value of the identifiable net assets of the acquiree.
If the fair value of the identifiable net assets exceeds the purchase
consideration and all previously held interests, the difference is immediately
recognized in income as a gain on a bargain purchase.
Non-controlling interests in the net assets of consolidated subsidiaries are
identified separately from the Bank's ownership interest and can be initially
measured at either fair value or at the non-controlling interest's
proportionate share of the acquiree's identifiable net assets. The measurement
basis is selected on a case-by-case basis. Following an acquisition,
non-controlling interests consist of the value assigned to those interests at
initial recognition plus the non-controlling interests' share of changes in
equity since the date of the acquisition.
Intangible Assets
Intangible Assets With Finite Useful Lives
Software that is not part of a cloud computing arrangement and certain other
intangible assets are recognized at cost less accumulated amortization and
accumulated impairment losses. These intangible assets are systematically
amortized on a straight-line basis over their useful lives, which vary between
four and ten years. The amortization expense is recorded in Non-interest
expenses in the Consolidated Statement of Income.
Intangible Assets With Indefinite Useful Lives
The Bank's intangible assets with indefinite useful lives come from the
acquisition of subsidiaries or groups of assets and consist of management
contracts and a trademark. They are recognized at the acquisition-date fair
value. The management contracts are for the management of open-ended funds. At
the end of each reporting period, the Bank reviews the useful lives to
determine whether facts and circumstances continue to support an indefinite
useful life assessment. Intangible assets are deemed to have an indefinite
useful life following an examination of all relevant factors, in particular:
(a) the contracts do not have contractual maturities; (b) the stability of the
business segment to which the intangible assets belong; (c) the Bank's
capacity to control the future economic benefits of the intangible assets; and
(d) the continued economic benefits generated by the intangible assets.
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. 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.
Corporate assets, such as the head office building and computer equipment, do
not generate cash inflows that are largely independent of the cash inflows
generated by other assets or groups of assets. Therefore, the recoverable
amount of an individual corporate asset cannot be determined unless management
has decided to dispose of the asset. However, if there is an indication that a
corporate asset may be impaired, the recoverable amount is determined for the
CGU or group of CGUs to which the corporate asset belongs, and that
recoverable amount is compared with the carrying amount of this CGU or group
of CGUs.
Note 1 - Basis of Presentation and Summary of Material Accounting Policies
(cont.)
Goodwill is always tested for impairment at the level of a CGU or group of
CGUs. For impairment testing purposes, from the acquisition date, goodwill
resulting from a business combination must be allocated to the CGU or group of
CGUs expected to benefit from the synergies of the business combination. Each
CGU or group of CGUs to which goodwill is allocated must represent the lowest
level for which the goodwill is monitored internally at the Bank and must not
be larger than an operating segment. The allocation of goodwill to a CGU or
group of CGUs involves management's judgment. If an impairment loss is to be
recognized, the Bank does so by first reducing the carrying amount of goodwill
allocated to the CGU or group of CGUs and then reducing the carrying amounts
of the other assets of the CGU or group of CGUs in proportion to the carrying
amount of each asset in the CGU or group of CGUs.
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 in Non-interest expenses in the Consolidated
Statement of Income. An impairment loss recognized in prior periods for an
asset other than goodwill must be reversed if, and only if, there has been a
change in the estimates used to determine the asset's recoverable amount since
the last impairment was recognized. If this is the case, the carrying amount
of the asset is increased, given that the impairment loss was reversed, but
shall not exceed the carrying amount that would have been determined, net of
amortization, had no impairment loss been recognized for this asset in
previous years.
Provisions
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 economic
resources will be required to settle the obligation and when the amount of the
obligation can be reliably estimated. Provisions are based on the Bank's best
estimates of the economic resources required to settle the present obligation,
given all relevant risks and uncertainties, and, when it is significant, the
effect of the time value of money. Provisions are reviewed at the end of each
reporting period. Provisions are presented in Other liabilities in the
Consolidated Balance Sheet.
Interest Income and Expense
Interest income and expense, except for the interest income on securities
classified as at fair value through profit or loss, are recognized in Net
interest income and calculated using the effective interest rate method.
The effective interest rate is the rate that exactly discounts estimated
future cash inflows and outflows through the expected life of a financial
asset or financial liability to the gross carrying amount of a financial asset
or to the amortized cost of a financial liability. When calculating the
effective interest rate, the Bank estimates expected cash flows by considering
all the contractual terms of the financial instrument but does not consider
expected credit losses. The calculation includes all fees and points paid or
received between the parties to the contract that are an integral part of the
effective interest rate, transaction costs, and all other premiums or
discounts. Interest income is calculated by applying the effective interest
rate to the gross carrying amount of a financial asset except for purchased or
originated credit-impaired financial assets and financial assets that were not
impaired upon their purchase or origination but became impaired thereafter.
For purchased or originated credit-impaired financial assets, the Bank applies
the credit-adjusted effective interest rate to the amortized cost of the
financial asset from initial recognition. The credit-adjusted effective
interest rate reflects expected credit losses. As for loans that have
subsequently become credit-impaired, interest income is calculated by applying
the effective interest rate to the net carrying amount (net of allowances for
credit losses) rather than to the gross carrying amount.
Loan origination fees, including commitment, restructuring, and renegotiation
fees, are considered an integral part of the yield earned on the loan. They
are deferred and amortized using the effective interest rate method, and the
amortization is recognized in Interest income over the term of the loan.
Direct costs for originating a loan are netted against the loan origination
fees. If it is likely that a commitment will result in a loan, commitment fees
receive the same accounting treatment, i.e., they are deferred and amortized
using the effective interest rate method and the amortization is recognized in
Interest income over the term of the loan. Otherwise, they are recorded in
Non-interest income over the term of the commitment.
Loan syndication fees are recorded in Non-interest income unless the yield on
the loan retained by the Bank is less than that of other comparable lenders
involved in the financing. In such cases, an appropriate portion of the fees
is deferred and amortized using the effective interest rate method, and the
amortization is recognized in Interest income over the term of the loan.
Certain mortgage loan prepayment fees are recognized in Interest income in the
Consolidated Statement of Income when earned.
Dividend Income
Dividends from an equity instrument are recognized under Net interest income
in the Consolidated Statement of Income when the Bank's right to receive
payment is established.
Fee and Commission Income
Fee and commission income is recognized when, or as, a performance obligation
is satisfied, i.e., when control of a promised service is transferred to a
customer and in an amount that reflects the consideration that the entity
expects to be entitled to receive in exchange for the service. The revenue may
therefore be recognized at a point in time, upon completion of the service, or
over time as services are provided.
The Bank must also determine whether its performance obligation is to provide
the service itself or to arrange for another party to provide the service (in
other words, whether the Bank is acting as a principal or agent). A principal
may itself satisfy its performance obligation to provide the specified good or
service or it may engage another party to satisfy some or all of the
performance obligation on its behalf. A principal also has the primary
responsibility for fulfilling the promise to provide the good or service to
the customer and has discretion in establishing the price for the service. If
the Bank is acting as a principal, revenue is recognized on a gross basis in
an amount corresponding to the consideration to which the Bank expects to be
entitled. If the Bank is acting as an agent, then revenue is recognized net of
the service fees and other costs incurred in relation to the commission and
fees earned.
Underwriting and Advisory Fees
Underwriting and advisory fees include underwriting fees, financial advisory
fees, and loan syndication fees. These fees are mainly earned in the Financial
Markets segment and are recognized at a point in time as revenue upon
successful completion of the engagement. Financial advisory fees are fees
earned for assisting customers with transactions related to mergers and
acquisitions and financial restructurings. Loan syndication fees represent
fees earned as the agent or lead lender responsible for structuring,
arranging, and administering a loan syndication and are recorded in
Non-interest income unless the yield on the loan retained by the Bank is less
than that of other comparable lenders involved in the financing. In such
cases, an appropriate portion of the fees is deferred and amortized using the
effective interest rate method, and the amortization is recognized in Interest
income over the term of the loan.
Securities Brokerage Commissions
Securities brokerage commissions are earned in the Wealth Management segment
and are recognized when the transaction is executed.
Mutual Fund Revenues
Mutual fund revenues include management fees earned in the Wealth Management
segment. Management fees are primarily calculated based on a fund's net asset
value and are recorded in the period the services are performed.
Investment Management and Trust Service Fees
Investment management and trust service fees include management fees, trust
service fees, and fees for other investment services provided to clients and
earned in the Wealth Management segment. Generally, these fees are calculated
using the balances of assets under administration and assets under management.
Such fees are recognized in the period the service is performed.
Card Revenues
Card revenues are earned in the Personal and Commercial segment and include
card fees such as annual and transactional fees as well as interchange fees.
Interchange fees are recognized when a card transaction is settled. Card fees
are recognized on the transaction date except for annual fees, which are
recorded evenly throughout the year. Reward costs are recorded as a reduction
to interchange fees.
Credit Fees and Deposit and Payment Service Charges
Credit fees and deposit and payment service charges are earned in the Personal
and Commercial, Financial Markets, and U.S. Specialty Finance and
International segments. Credit fees include commissions earned by providing
services for loan commitments, financial guarantee contracts, bankers'
acceptances, and letters of credit and guarantee, and they are generally
recognized in income over the period the services are provided. Deposit and
payment service charges include fees related to account maintenance activities
and transaction-based service charges. Fees related to account maintenance
activities are recognized in the period the services are provided, whereas
transaction-based service charges are recognized when the transaction is
executed.
Insurance Revenues
Insurance contracts, including reinsurance contracts, are arrangements under
which one party accepts significant insurance risk by agreeing to compensate
the policyholder if a specified uncertain future event that adversely affect
the policyholder was to occur.
The Bank uses the General Measurement Model (GMM) to measure most of its
insurance and reinsurance contracts based on the present value of estimates of
the expected future cash flows necessary to fulfill the contracts, including
an adjustment for non-financial risk as well as the contractual service margin
(CSM), which represents the unearned profits that will be recognized as
services are provided in the future. The Bank chose to apply the simplified
approach (the Premium Allocation Approach or PAA) to measure insurance
contracts with coverage periods of one year or less. The insurance revenues
from these contracts are recognized systematically over the coverage period.
For all measurement approaches, if contracts are expected to be onerous,
losses are recognized immediately in the Consolidated Statement of Income.
Note 1 - Basis of Presentation and Summary of Material Accounting Policies
(cont.)
Upon the issuance of a contract, an insurance contract asset or liability and
a reinsurance contract asset, if applicable, are recognized under Other assets
and under Other liabilities in the Consolidated Balance Sheet. Subsequent
changes in the carrying values of the insurance contract asset and liability
and reinsurance contract asset are recognized on a net basis under
Non-interest income in the Consolidated Statement of Income.
Insurance service expenses consist mainly of incurred claims and other
insurance service expenses, amortization of insurance acquisition cash flows,
and losses on onerous contracts as well as reversals of such losses. Royalties
received from reinsurers are recognized in the Consolidated Statement of
Income as the Bank receives services under groups of reinsurance contracts.
Amounts recovered from reinsurers comprise cash flows related to the claims or
benefit experience of the underlying contracts. All of these amounts are
recognized as a deduction from insurance revenues under Non-interest income in
the Consolidated Statement of Income.
Income Taxes
Income taxes include current taxes and deferred taxes and are recorded in net
income except for income taxes generated by items recognized in Other
comprehensive income or directly in equity.
Current tax is the amount of income tax payable on the taxable income for a
period. It is calculated using the enacted or substantively enacted tax rates
prevailing on the reporting date, and any adjustments recognized in the period
for the current tax of prior periods. Current tax assets and liabilities are
offset, and the net balance is presented under either Other assets or Other
liabilities in the Consolidated Balance Sheet when the Bank has a legally
enforceable right to set off the recognized amounts and intends to settle on a
net basis or to simultaneously realize the asset and settle the liability.
Deferred tax is established based on temporary differences between the
carrying values and the tax bases of assets and liabilities, in accordance
with enacted or substantively enacted income tax laws and rates that will
apply on the date the differences reverse. Deferred tax is not recognized for
temporary differences related to the following:
· the initial accounting of goodwill;
· the initial accounting of an asset or liability in a transaction
that is not a business combination and that, at the time of the transaction,
affects neither accounting income nor taxable income;
· investments in subsidiaries, associates and joint ventures when it
is probable that the temporary difference will not reverse in the foreseeable
future and that the Bank controls the timing of the reversal of the temporary
difference;
· investments in subsidiaries, associates and joint ventures when it
is probable that the temporary difference will not reverse in the foreseeable
future and that there will not be taxable income to which the temporary
difference can be recognized.
Deferred tax assets are tax benefits in the form of deductions that the Bank
may claim to reduce its taxable income in future years. At the end of each
reporting period, the carrying amount of deferred tax assets is revised, and
it is reduced to the extent that it is no longer probable that sufficient
taxable income will be available to allow the benefit of the deferred tax
asset to be utilized.
Deferred tax assets and liabilities are offset, and the net balance is
presented under either Other assets or Other liabilities in the Consolidated
Balance Sheet when the Bank has a legally enforceable right to set off the
current tax assets and liabilities and if the deferred tax assets and
liabilities relate to taxes levied by the same taxation authority on the same
taxable entity or on different taxable entities that intend to settle current
tax assets and liabilities based on their net amount.
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 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 is subject to the jurisdictions of various tax authorities. In the
normal course of its business, the Bank is involved in a number of
transactions for which the tax impacts are uncertain. As a result, the Bank
accounts for provisions for uncertain tax positions that adequately represent
the tax risk stemming from tax matters under discussion or being audited by
tax authorities or from other matters involving uncertainty. The amounts of
these provisions reflect the best possible estimates of the amounts that may
have to be paid based on qualitative assessments of all relevant factors. The
provisions are estimated at the end of each reporting period. However, it is
possible that, at a future date, a provision might need to be adjusted
following an audit by the tax authorities. When the final assessment differs
from the initially provisioned amounts, the difference will impact the income
taxes of the period in which the assessment was made.
Financial Guarantee Contracts
A financial guarantee contract is a contract or indemnification agreement that
could require the Bank to make specified payments (in cash, financial
instruments, other assets, Bank shares, or provisions of services) to
reimburse a beneficiary in the event of a loss resulting from a debtor
defaulting on the original or amended terms of a debt instrument.
To reflect the fair value of an obligation assumed at the inception of a
financial guarantee, a liability is recorded in Other liabilities in the
Consolidated Balance Sheet. After initial recognition, the Bank must measure
financial guarantee contracts at the higher of the allowance for credit
losses, determined using the ECL model, and of the initially recognized amount
less, where applicable, the cumulative amount of revenue recognized. This
revenue is recognized in Credit fees in the Consolidated Statement of Income.
Employee Benefits - Pension Plans and Other Post-Employment Benefit Plans
The Bank offers pension plans that have a defined benefit component and a
defined contribution component. The Bank also offers other post-employment
benefit plans to eligible retirees. The other post-employment benefit plans
include post-employment medical, dental, and life insurance coverage. The
defined benefit component of the pension plans is funded, whereas the defined
contribution component of the pension plans and of the other post-employment
benefit plans are not funded.
Defined Benefit Component of the Pension Plans and Other Post-Employment
Benefit Plans
Plan expenses and obligations are actuarially determined based on 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.
The net asset or net liability related to these plans is calculated separately
for each plan as the difference between the present value of the future
benefits earned by employees for current and prior-period service and the fair
value of plan assets. The net asset or net liability is included under either
Other assets or Other liabilities in the Consolidated Balance Sheet.
The expense related to these plans consists of the following items: current
service cost, net interest on the net plan asset or liability, administration
costs, and past service cost, if any, recognized when a plan is amended. This
expense is recognized in Compensation and employee benefits in the
Consolidated Statement of Income. The net amount of interest income and
expense is determined by applying a discount rate to the net plan asset or
liability amount.
Remeasurements of defined benefit pension plans and other post-employment
benefit plans represent actuarial gains and losses related to the defined
benefit obligation and the actual return on plan assets, excluding net
interest determined by applying a discount rate to the net plan asset or
liability amount. 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.
Defined Contribution Component of the Pension Plans
The expense for these plans is equivalent to the Bank's contributions during
the period and is recognized in Compensation and employee benefits in the
Consolidated Statement of Income.
Share-Based Payments
The Bank has several share-based compensation plans: the Stock Option Plan,
the Stock Appreciation Rights (SAR) Plan, the Deferred Stock Unit (DSU) Plan,
the Restricted Stock Unit (RSU) Plan, the Performance Stock Unit (PSU) Plan,
the Deferred Compensation Plan (DCP) of National Bank Financial, and the
Employee Share Ownership Plan.
Compensation expense is recognized over the service period required for
employees to become fully entitled to the award. This period is generally the
same as the vesting period, except where the required service period begins
before the award date. Compensation expense related to awards granted to
employees eligible to retire on the award date is immediately recognized on
the award date. Compensation expense related to awards granted to employees
who will become eligible to retire during the vesting period is recognized
over the period from the award date to the date the employee becomes eligible
to retire. For all of these plans, as of the first year of recognition, the
expense includes cancellation and forfeiture estimates. These estimates are
subsequently revised, as necessary. The Bank uses derivative financial
instruments to hedge the risks associated with some of these plans. The
compensation expense for these plans, net of related hedges, is recognized in
the Consolidated Statement of Income.
Under the Stock Option Plan, the Bank uses the fair value method to account
for stock options awarded. The options vest at 25% per year, and each tranche
is treated as though it was a separate award. The fair value of each of the
tranches is measured on the award date using the Black-Scholes model, and this
fair value is recognized in Compensation and employee benefits and Contributed
surplus. When the options are exercised, the Contributed surplus amount is
credited to Equity - Common shares in the Consolidated Balance Sheet. The
proceeds received from the employees when these options are exercised are also
credited to Equity - Common shares in the Consolidated Balance Sheet.
Note 1 - Basis of Presentation and Summary of Material Accounting Policies
(cont.)
SARs are recorded at fair value when awarded, and their fair value is
remeasured at the end of each reporting period until they are exercised. The
cost is recognized in Compensation and employee benefits in the Consolidated
Statement of Income and under Other liabilities in the Consolidated Balance
Sheet. The obligation that results from the change in fair value at each
period is recognized in net income gradually over the vesting period, and
periodically thereafter, until the SARs are exercised. When a SAR is
exercised, the Bank makes a cash payment equal to the increase in the stock
price since the date of the award.
The obligation that results from the award of a DSU, RSU, PSU and DCP unit is
recognized in net income, and the corresponding amount is included in Other
liabilities in the Consolidated Balance Sheet. For the DSU, RSU and DCP plans,
the change in the obligation attributable to changes in the share price and
dividends paid on the common shares of these plans is recognized in
Compensation and employee benefits in the Consolidated Statement of Income for
the period in which the changes occur. On the redemption date, the Bank makes
a cash payment equal to the value of the common shares on that date. For the
PSU Plan, the change in the obligation attributable to changes in the share
price, adjusted upward or downward depending on the relative result of the
performance criteria, and the change in the obligation attributable to
dividends paid on the shares awarded under the plan, are recognized in
Compensation and employee benefits in the Consolidated Statement of Income for
the period in which the changes occur. On the redemption date, the Bank makes
a cash payment equal to the value of the common shares on that date, adjusted
upward or downward according to the performance criteria.
The Bank's contributions to the employee share ownership plan are expensed as
incurred.
Note 2 - Accounting Policy Changes
On November 1, 2023, the Bank adopted IFRS 17 - Insurance Contracts (IFRS
17).
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 As at As at As at
October 31, 2023 October 31, 2023 October 31, 2022 November 1, 2022
As reported IFRS 17 Adjusted As reported IFRS 17 Adjusted
adjustments adjustments
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 assets and liabilities
had 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)
Note 3 - 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.
Note 4 - Fair Value of Financial Instruments
Fair Value and Carrying Value of Financial Instruments by Category
Financial assets and financial liabilities are recognized in the Consolidated
Balance Sheet at fair value or at amortized cost in accordance with the
categories set out in the accounting framework for financial instruments.
As at October 31, 2024
Carrying value Carrying value Fair Total carrying value Total
and fair value value fair
value
Financial Financial Debt securities classified as at fair value through other comprehensive income Equity securities Financial instruments at amortized cost, net Financial instruments at amortized cost, net
instruments instruments designated at
classified as designated fair value
at fair value at fair value through other
through profit through profit comprehensive income
or loss or loss
Financial assets
Cash and deposits with financial
institutions − − − − 31,549 31,549 31,549 31,549
− −
Securities 115,578 357 13,956 666 14,608 14,551 145,165 145,108
Securities purchased under reverse
repurchase agreements
and securities borrowed − − − − 16,265 16,265 16,265 16,265
Loans, net of allowances 14,972 − − − 228,060 229,614 243,032 244,586
Other
Derivative financial instruments 12,309 − − − − − 12,309 12,309
Other assets 2,059 − − − 3,674 3,674 5,733 5,733
Financial liabilities
Deposits((1)) − 26,190 307,355 307,553 333,545 333,743
Other
Obligations related to securities sold short 10,873 − − − 10,873 10,873
Obligations related to securities sold under
repurchase agreements and
securities loaned − − 38,177 38,177 38,177 38,177
Derivative financial instruments 15,760 − − − 15,760 15,760
Liabilities related to transferred receivables − 11,034 17,343 17,011 28,377 28,045
Other liabilities − − 4,114 4,114 4,114 4,114
Subordinated debt − − 1,258 1,296 1,258 1,296
(1) Includes embedded derivative financial instruments.
As at October 31, 2023((1))
Carrying value Carrying Fair Total Total
and fair value value value carrying fair
value value
Financial Financial instruments Debt securities classified as at fair value through other comprehensive income Equity securities Financial Financial
instruments designated designated at instruments instruments
classified as at fair value fair value at amortized at amortized
at fair value through profit through other cost, net cost, net
through profit or loss comprehensive income
or loss
Financial assets
Cash and deposits with financial
institutions − − − − 35,234 35,234 35,234 35,234
Securities 99,236 758 8,583 659 12,582 12,097 121,818 121,333
Securities purchased under reverse
repurchase agreements and
securities borrowed − − − − 11,260 11,260 11,260 11,260
Loans and acceptances, net of allowances 13,124 − − − 212,319 210,088 225,443 223,212
Other
Derivative financial instruments 17,516 − − − − − 17,516 17,516
Other assets 73 − − − 4,285 4,285 4,358 4,358
Financial liabilities
Deposits((2)) − 18,275 269,898 269,490 288,173 287,765
Other
Acceptances − − 6,627 6,627 6,627 6,627
Obligations related to securities sold short 13,660 − − − 13,660 13,660
Obligations related to securities sold under
repurchase agreements and
securities loaned − − 38,347 38,347 38,347 38,347
Derivative financial instruments 19,888 − − − 19,888 19,888
Liabilities related to transferred receivables − 9,952 15,082 14,255 25,034 24,207
Other liabilities − − 3,497 3,494 3,497 3,494
Subordinated debt − − 748 727 748 727
(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 these Consolidated Financial Statements.
(2) Includes embedded derivative financial instruments.
Establishing Fair Value
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 provide the best evidence of fair
value. When there is no quoted price in an active market, the Bank applies
other valuation techniques that maximize the use of relevant observable inputs
and that minimize the use of unobservable inputs. Such valuation techniques
include the following: using information available from recent market
transactions, referring to the current fair value of a comparable financial
instrument, applying discounted cash flow analysis, applying option pricing
models, or relying on any other valuation technique that is commonly used by
market participants and has proven to yield reliable estimates. Judgment is
required when applying many of the valuation techniques. The Bank's valuation
was based on its assessment of the conditions prevailing as at October 31,
2024 and may change in the future. Furthermore, there may be measurement
uncertainty resulting from the choice of valuation model used.
Note 4 - Fair Value of Financial Instruments (cont.)
Valuation Governance
Fair value is established in accordance with a rigorous control framework. The
Bank has policies and procedures that govern the process for determining fair
value. These policies are documented and periodically reviewed by the Risk
Management Group. All valuation models are validated, and controls have been
implemented to ensure that they are applied.
The fair value of existing or new products is determined and validated by
functions independent of the risk-taking team. Complex fair value matters are
reviewed by valuation committees made up of experts from various specialized
functions.
For financial instruments classified in Level 3 of the fair value hierarchy,
the Bank has documented the hierarchy classification policies, and controls
are in place to ensure that fair value is measured appropriately, reliably,
and consistently. Valuation methods and the underlying assumptions are
regularly reviewed.
Valuation Methods and Assumptions
Financial Instruments Whose Fair Value Equals Carrying Value
The carrying value of the following financial instruments is a reasonable
approximation of fair value:
· cash and deposits with financial institutions;
· securities purchased under reverse repurchase agreements and
securities borrowed;
· obligations related to securities sold under repurchase agreements
and securities loaned;
· customers' liability under acceptances;
· acceptances;
· certain items of other assets and other liabilities.
Securities and Obligations Related to Securities Sold Short
These financial instruments, except for securities at amortized cost, are
recognized at fair value in the Consolidated Balance Sheet. Their fair value
is based on quoted prices in active markets, i.e., bid prices for financial
assets and offered prices for financial liabilities. If there are no quoted
prices in an active market, fair value is estimated using prices for
securities that are substantially the same. If such prices are not available,
fair value is determined using valuation techniques that incorporate
assumptions based primarily on observable market inputs such as current market
prices, the contractual prices of the underlying instruments, the time value
of money, credit risk, interest rate yield curves, and currency rates.
When one or more significant inputs are not observable in the markets, fair
value is established primarily using internal estimates and data that consider
the valuation policies in effect at the Bank, economic conditions, the
characteristics specific to the financial asset or liability, and other
relevant factors.
Securities Issued or Guaranteed by Governments
Securities issued or guaranteed by governments include debt securities of the
governments of Canada (federal, provincial and municipal) as well as debt
securities of the U.S. government (U.S. Treasury), of other U.S. agencies, and
of other foreign governments. Securities whose fair value is based on
unadjusted quoted prices in active markets are classified in Level 1. For
those classified in Level 2, quoted prices for identical or similar
instruments in active markets are used to determine fair value. In the absence
of an observable market, a valuation technique such as the discounted cash
flow method could be used, incorporating assumptions on benchmark yields and
the risk spreads of similar securities.
Equity Securities and Other Debt Securities
The fair value of equity securities is determined primarily by using quoted
prices in active markets. For equity securities and other debt securities
classified in Level 2, a valuation technique based on quoted prices of
identical and similar instruments in an active market is used to determine
fair value. In the absence of observable inputs, a valuation technique such as
the discounted cash flow method could be used, incorporating assumptions on
benchmark yields and the risk spreads of similar securities. For those
classified in Level 3, fair value can be determined based on net asset value,
which represents the estimated value of a security based on valuations
received from investment or fund managers or the general partners of limited
partnerships. Fair value can also be determined using internal valuation
techniques adjusted to reflect financial instrument risk factors and economic
conditions.
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value in the
Consolidated Balance Sheet. For exchange-traded derivative financial
instruments, fair value is based on quoted prices in an active market.
For over-the-counter (OTC) derivative financial instruments, fair value is
determined using well established valuation techniques that incorporate
assumptions based primarily on observable market inputs such as current market
prices and the contractual prices of the underlying instruments, the time
value of money, interest rate yield curves, credit curves, currency rates as
well as price and rate volatility factors. In establishing the fair value of
OTC derivative financial instruments, the Bank also incorporates the following
factors:
Credit Valuation Adjustment (CVA)
The CVA is a valuation adjustment applied to derivative financial instruments
to reflect the credit risk of the counterparty. For each counterparty, the CVA
is based on the expected positive exposure and probabilities of default
through time. The exposures are determined by using relevant factors such as
current and potential future market values, master netting agreements,
collateral agreements, and expected recovery rates. The default probabilities
are inferred using credit default swap (CDS) spreads. When such information is
unavailable, relevant proxies are used. While the general methodology
currently assumes independence between expected positive exposures and
probabilities of default, adjustments are applied to certain types of
transactions where there is a direct link between the exposure at default and
the default probabilities.
Funding Valuation Adjustment (FVA)
The FVA is a valuation adjustment applied to derivative financial instruments
to reflect the market-implied cost or benefits of funding collateral for
uncollateralized or partly collateralized transactions. The expected exposures
are determined using methodologies consistent with the CVA framework. The
funding level used to determine the FVA is based on the average funding level
of relevant market participants.
When the valuation techniques incorporate one or more significant inputs that
are not observable in the markets, the fair value of OTC derivative financial
instruments is established primarily on the basis of internal estimates and
data that consider the valuation policies in effect at the Bank, economic
conditions, the characteristics specific to the financial asset or financial
liability, and other relevant factors.
Loans
The fair value of fixed-rate mortgage loans is determined by discounting
expected future contractual cash flows, adjusted for several factors,
including prepayment options, current market interest rates for similar loans,
and other relevant variables where applicable. The fair value of variable-rate
mortgage loans is deemed to equal carrying value.
The fair value of other fixed-rate loans is determined by discounting expected
future contractual cash flows using current market interest rates charged for
similar new loans. The fair value of other variable-rate loans is deemed to
equal carrying value.
Deposits
The fair value of fixed-term deposits is determined primarily by discounting
expected future contractual cash flows and considering several factors such as
redemption options and market interest rates currently offered for financial
instruments with similar conditions. For certain term funding instruments,
fair value is determined using market prices for similar instruments. The fair
value of demand deposits and notice deposits is deemed to equal carrying
value.
The fair value of structured deposit notes is established using valuation
models that maximize the use of observable inputs when available, such as
benchmark indices, and also incorporates the Bank's own credit risk. In
calculating the Bank's own credit risk, the market implied spreads of the Bank
are used to infer its probabilities of default. Lastly, when fair value is
determined using option pricing models, the valuation techniques are similar
to those described for derivative financial instruments.
Liabilities Related to Transferred Receivables
These liabilities arise from sale transactions to Canada Housing Trust (CHT)
of securities backed by insured residential mortgages and other securities
under the Canada Mortgage Bond (CMB) program. These transactions do not
qualify for derecognition. They are recorded as guaranteed borrowings, which
results in the recording of liabilities in the Consolidated Balance Sheet. The
fair value of these liabilities is established using valuation techniques
based on observable market inputs such as Canada Mortgage Bond prices.
Note 4 - Fair Value of Financial Instruments (cont.)
Other Liabilities and Subordinated Debt
The fair value of these financial liabilities is based on quoted market prices
in an active market. If there is no active market, fair value is determined by
discounting contractual cash flows using the current market interest rates
offered for similar financial instruments that have the same term to maturity.
Hierarchy of Fair Value Measurements
Determining the Levels of the Fair Value Measurement Hierarchy
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. This fair value hierarchy requires
observable market inputs to be used whenever such inputs exist. According to
the hierarchy, the highest level of inputs are unadjusted quoted prices in
active markets for identical instruments and the lowest level of inputs are
unobservable inputs. In some cases, the inputs used to measure the fair value
of a financial instrument might be categorized within different levels of the
fair value hierarchy. In those cases, the fair value measurement is
categorized in its entirety in the same level of the fair value hierarchy as
the lowest level input that is significant to the entire measurement. 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, certain other
assets, 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
the following:
· financial instruments measured at fair value through profit or
loss: investments in hedge funds for which there are certain restrictions on
unit or security redemptions, equity securities and debt securities of private
companies, as well as certain derivative financial instruments whose fair
value is established using internal valuation models that are based on
significant unobservable market inputs;
· securities at fair value through other comprehensive income: equity
and debt securities of private companies;
· certain loans and certain deposits (structured deposit notes) whose
fair value is established using internal valuation models that are based on
significant unobservable market inputs;
· certain other assets (receivables) for which fair value is
established using internal valuation models that are based on significant
unobservable market inputs.
Transfers Between the Fair Value Hierarchy Levels
Transfers of financial instruments between Levels 1 and 2 and transfers to (or
from) Level 3 are deemed to have taken place at the beginning of the quarter
in which the transfer occurred. Significant transfers can occur between the
fair value hierarchy levels due to new information on inputs used to determine
fair value and the observable nature of those inputs.
During fiscal 2024, securities classified as at fair value through profit or
loss of $20 million and obligations related to securities sold short of $1
million were transferred from Level 2 to Level 1 as a result of changing
market conditions (securities classified as at fair value through profit or
loss of $17 million and obligations related to securities sold short of $3
million in fiscal 2023). In addition, during fiscal 2024, securities
classified as at fair value through profit or loss of $17 million and
obligations related to securities sold short of $1 million were transferred
from Level 1 to Level 2 as a result of changing market conditions (securities
classified as at fair value through profit or loss of $15 million and
obligations related to securities sold short of $3 million in fiscal 2023).
During fiscal 2024 and 2023, financial instruments were transferred to (or
from) Level 3 due to changes in the availability of observable market inputs
as a result of changing market conditions.
Financial Instruments Recorded at Fair Value in the Consolidated Balance Sheet
The following tables show financial instruments recorded at fair value in the
Consolidated Balance Sheet according to the fair value hierarchy.
As at October 31, 2024
Level 1 Level 2 Level 3 Total financial assets/liabilities at fair value
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government 4,150 10,330 − 14,480
Canadian provincial and municipal governments − 8,473 − 8,473
U.S. Treasury, other U.S. agencies and other foreign governments 1,169 1,046 − 2,215
Other debt securities − 3,030 60 3,090
Equity securities 85,414 1,655 608 87,677
90,733 24,534 668 115,935
At fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government 170 5,048 − 5,218
Canadian provincial and municipal governments − 2,900 − 2,900
U.S. Treasury, other U.S. agencies and other foreign governments 4,805 186 − 4,991
Other debt securities − 847 − 847
Equity securities − 359 307 666
4,975 9,340 307 14,622
Loans − 14,767 205 14,972
Other
Derivative financial instruments 1,139 11,073 97 12,309
Other assets - Other items − 1,976 83 2,059
96,847 61,690 1,360 159,897
Financial liabilities
Deposits((1)) − 30,434 − 30,434
Other
Obligations related to securities sold short 6,052 4,821 − 10,873
Derivative financial instruments 1,976 13,758 26 15,760
Liabilities related to transferred receivables − 11,034 − 11,034
8,028 60,047 26 68,101
(1) The amounts include the fair value of embedded derivative
financial instruments in deposits.
Note 4 - Fair Value of Financial Instruments (cont.)
As at October 31, 2023
Level 1 Level 2 Level 3 Total financial
assets/liabilities
at fair value
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government 6,403 10,872 − 17,275
Canadian provincial and municipal governments − 8,260 − 8,260
U.S. Treasury, other U.S. agencies and other foreign governments 2,781 2,105 − 4,886
Other debt securities − 3,450 65 3,515
Equity securities 65,018 554 486 66,058
74,202 25,241 551 99,994
At fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government 73 4,124 − 4,197
Canadian provincial and municipal governments − 1,938 − 1,938
U.S. Treasury, other U.S. agencies and other foreign governments 904 254 − 1,158
Other debt securities − 1,290 − 1,290
Equity securities − 281 378 659
977 7,887 378 9,242
Loans − 12,907 217 13,124
Other
Derivative financial instruments 285 17,224 7 17,516
Other assets - Other items − − 73 73
75,464 63,259 1,226 139,949
Financial liabilities
Deposits((1)) − 18,134 − 18,134
Other
Obligations related to securities sold short 8,335 5,325 − 13,660
Derivative financial instruments 467 19,399 22 19,888
Liabilities related to transferred receivables − 9,952 − 9,952
8,802 52,810 22 61,634
(1) The amounts include the fair value of embedded derivative
financial instruments in deposits.
Financial Instruments Classified in Level 3
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 based, in part, on observable
market inputs. The table on the following page shows the significant
unobservable inputs used for the fair value measurements of financial
instruments classified in Level 3 of the hierarchy.
As at October 31, 2024
Fair Primary Significant Range of input values
value valuation techniques unobservable inputs
Low High
Financial assets
Securities
Equity securities and other debt securities 975 Net asset value Net asset value 100 % 100 %
Market comparable EV/EBITDA((1)) multiple 13 x 17 x
Discounted cash flows Discount rate 5.50 % 13.20 %
Loans
Loans at fair value through profit or loss 205 Discounted cash flows Discount rate 7.31 % 14.50 %
Discounted cash flows Liquidity premium 3.53 % 10.62 %
Other
Derivative financial instruments
Equity contracts 96 Option pricing model Long-term volatility 14 % 58 %
Market correlation (48) % 100 %
Liquidity premium 8 % 12 %
Credit derivative contracts 1 Discounted cash flows Credit spread 21 Bps((2)) 60 Bps((2))
Other assets - Other items 83 Discounted cash flows Discount rate 13 % 13 %
1,360
Financial liabilities
Other
Derivative financial instruments
Interest rate contracts 1 Discounted cash flows Discount rate 2.20 % 2.20 %
Equity contracts 22 Option pricing model Long-term volatility 13 % 49 %
Market correlation (88) % 98 %
Credit derivative contracts 3 Discounted cash flows Credit spread 21 Bps((2)) 60 Bps((2))
26
As at October 31, 2023
Fair Primary Significant Range of input values
value valuation techniques unobservable inputs
Low High
Financial assets
Securities
Equity securities and other debt securities 929 Net asset value Net asset value 100 % 100 %
Market comparable EV/EBITDA((1)) multiple 11 x 14 x
Discounted cash flows Discount rate 6.50 % 15.10 %
Loans
Loans at fair value through profit or loss 217 Discounted cash flows Discount rate 8.08 % 15.99 %
Discounted cash flows Liquidity premium 3.57 % 11.32 %
Other
Derivative financial instruments
Equity contracts 5 Option pricing model Long-term volatility 7 % 58 %
Market correlation 15 % 94 %
Credit derivative contracts 2 Discounted cash flows Credit spread 22 Bps((2)) 91 Bps((2))
Other assets - Other items 73 Discounted cash flows Discount rate 13 % 13 %
1,226
Financial liabilities
Other
Derivative financial instruments
Interest rate contracts 5 Discounted cash flows Discount rate 2.20 % 2.20 %
Equity contracts 16 Option pricing model Long-term volatility 7 % 58 %
Market correlation (9) % 94 %
Credit derivative contracts 1 Discounted cash flows Credit spread 22 Bps((2)) 91 Bps((2))
22
(1) EV/EBITDA means Enterprise Value/Earnings Before Interest,
Taxes, Depreciation and Amortization.
(2) Bps or basis point is a unit of measure equal to 0.01%.
Note 4 - Fair Value of Financial Instruments (cont.)
Significant Unobservable Inputs Used for Fair Value Measurements of Financial
Instruments Classified in Level 3
Net Asset Value
Net asset value is the estimated value of a security based on valuations
received from the investment or fund managers, the administrators of the
conduits, or the general partners of limited partnerships. The net asset value
of a fund is the total fair value of assets less liabilities.
EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation and
Amortization) Multiple and Price Equivalent
Private equity valuation inputs include earnings multiples, which are
determined based on comparable companies, and a higher multiple will translate
into a higher fair value. Price equivalent is a percentage of the market price
based on the liquidity of the security.
Discount Rate
The discount rate is the input used to bring future cash flows to their
present value. A higher discount rate will translate into a lower fair value.
Liquidity Premium
A liquidity premium may be applied when few or no transactions exist to
support the valuations. A higher liquidity premium will result in a lower
value.
Long-Term Volatility
Volatility is a measure of the expected future variability of market prices.
Volatility is generally observable in the market through options prices.
However, the long-term volatility of options with a longer maturity might not
be observable. An increase (decrease) in long-term volatility is generally
associated with an increase (decrease) in long-term correlation. Higher
long-term volatility may increase or decrease an instrument's fair value
depending on its terms.
Market Correlation
Correlation is a measure of the inter-relationship between two different
variables. A positive correlation means that the variables tend to move in the
same direction; a negative correlation means that the variables tend to move
in opposite directions. Correlation is used to measure financial instruments
whose future returns depend on several variables. Changes in correlation will
either increase or decrease a financial instrument's fair value depending on
the terms of its contractual payout.
Credit Spread
A credit spread (yield) is the difference between the instrument's yield and a
benchmark yield. Benchmark instruments have high credit quality ratings with
similar maturities. The credit spread therefore represents the discount rate
used to determine the present value of future cash flows of an asset to
reflect the market return required for credit quality in the estimated cash
flows. A higher credit spread will result in a lower value.
Sensitivity Analysis of Financial Instruments Classified in Level 3
The Bank performs sensitivity analyses for the fair value measurements of
Level 3 financial instruments, substituting unobservable inputs with one or
more reasonably possible alternative assumptions.
For equity securities and other debt securities, the Bank varies significant
unobservable inputs such as net asset values, EV/EBITDA multiples, or price
equivalents and establishes a reasonable fair value range that could result in
a $169 million increase or decrease in the fair value recorded as at
October 31, 2024 (a $155 million increase or decrease as at October 31,
2023).
For loans, the Bank varies unobservable inputs such as a liquidity premium and
establishes a reasonable fair value range that could result in a $26 million
increase or decrease in the fair value recorded as at October 31, 2024 (a
$25 million increase or decrease as at October 31, 2023).
For derivative financial instruments, the Bank varies long-term volatility,
market correlation inputs, and credit spread and establishes a reasonable fair
value range. As at October 31, 2024, for derivative financial instruments,
the net fair value recorded could result in a $54 million increase or
decrease (a $16 million increase or decrease as at October 31, 2023).
For other assets, the Bank varies unobservable inputs such as discount rates
and establishes a reasonable fair value range that could result in a
$3 million increase or decrease in the fair value recorded as at October 31,
2024 (a $9 million increase or decrease as at October 31, 2023).
For all Level 3 financial instruments, the reasonable fair value ranges could
result in a 7% increase or decrease in net income as at October 31, 2024 (a
6% increase or decrease in net income as at October 31, 2023).
Change in the Fair Value of Financial Instruments Classified in Level 3
The Bank may hedge the fair value of financial instruments classified in the
various levels through offsetting hedge positions. Gains and losses for
financial instruments classified in Level 3 presented in the following tables
do not reflect the inverse gains and losses on financial instruments used for
economic hedging purposes that may have been classified in Level 1 or 2 by the
Bank. In addition, the Bank may hedge the fair value of financial instruments
classified in Level 3 using other financial instruments classified in Level 3.
The effect of these hedges is not included in the net amount presented in the
following tables. The gains and losses presented hereafter may comprise
changes in fair value based on observable and unobservable inputs.
Year ended October 31, 2024
Securities Securities Loans and Derivative Deposits((2))
at fair value at fair value other assets financial
through profit through other instruments((1))
or loss comprehensive
income
Fair value as at October 31, 2023 551 378 290 (15) −
Total realized and unrealized gains (losses) included in Net income ((3)) 103 − 9 (107) −
Total realized and unrealized gains (losses) included in
Other comprehensive income − 1 − − −
Purchases 135 − − − −
Sales (121) (72) (5) − −
Issuances − − 23 − −
Settlements and other − − (29) 191 −
Financial instruments transferred into Level 3 − − − (3) −
Financial instruments transferred out of Level 3 − − − 5 −
Fair value as at October 31, 2024 668 307 288 71 −
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 90 − 9 (107) −
2024((4))
Year ended October 31, 2023
Securities Securities Loans and Derivative Deposits((2))
at fair value at fair value other assets financial
through profit through other instruments((1))
or loss comprehensive
income
Fair value as at October 31, 2022 476 320 331 (17) (8)
Total realized and unrealized gains (losses) included in Net income ((5)) 33 − (4) (15) −
Total realized and unrealized gains (losses) included in
Other comprehensive income − 58 − − −
Purchases 62 − − − −
Sales (21) − (9) − −
Issuances − − 29 − −
Settlements and other − − (57) 7 −
Financial instruments transferred into Level 3 1 − − 8 −
Financial instruments transferred out of Level 3 − − − 2 8
Fair value as at October 31, 2023 551 378 290 (15) −
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 62 − (4) (15) −
2023((6))
(1) The derivative financial instruments include assets and
liabilities presented on a net basis.
(2) The amounts include the fair value of embedded derivative
financial instruments in deposits.
(3) Total gains (losses) included in Non-interest income was a
gain of $5 million.
(4) Total unrealized gains (losses) included in Non-interest
income was an unrealized loss of $8 million.
(5) Total gains (losses) included in Non-interest income was a
gain of $14 million.
(6) Total unrealized gains (losses) included in Non-interest
income was an unrealized gain of $43 million.
Note 4 - Fair Value of Financial Instruments (cont.)
Financial Instruments Not Recorded at Fair Value in the Consolidated Balance
Sheet
The following tables show the financial instruments that have not been
recorded at fair value in the Consolidated Balance Sheet according to the fair
value hierarchy, except for those whose carrying value is a reasonable
approximation of fair value.
As at October 31, 2024
Level 1 Level 2 Level 3 Total
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government − 9,217 − 9,217
Canadian provincial and municipal governments − 2,400 − 2,400
U.S. Treasury, other U.S. agencies and other foreign governments 506 178 − 684
Other debt securities − 2,250 − 2,250
506 14,045 − 14,551
Loans, net of allowances − 100,618 128,996 229,614
Financial liabilities
Deposits − 307,553 − 307,553
Other
Liabilities related to transferred receivables − 17,011 − 17,011
Other liabilities − 49 − 49
Subordinated debt − 1,296 − 1,296
− 325,909 − 325,909
As at October 31, 2023
Level 1 Level 2 Level 3 Total
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government − 5,935 − 5,935
Canadian provincial and municipal governments − 1,772 − 1,772
U.S. Treasury, other U.S. agencies and other foreign governments − 593 − 593
Other debt securities − 3,797 − 3,797
− 12,097 − 12,097
Loans, net of allowances − 86,887 116,627 203,514
Financial liabilities
Deposits − 269,490 − 269,490
Other
Liabilities related to transferred receivables − 14,255 − 14,255
Other liabilities − 46 − 46
Subordinated debt − 727 − 727
− 284,518 − 284,518
Note 5 - Financial Instruments Designated at Fair Value Through Profit or Loss
The Bank chose to designate certain financial instruments at fair value
through profit or loss according to the criteria presented in Note 1 to these
Consolidated Financial Statements. Consistent with its risk management
strategy and in accordance with the fair value option, which permits the
designation if it eliminates or significantly reduces a measurement or
recognition inconsistency that would otherwise arise from measuring financial
assets and liabilities or recognizing the gains and losses thereon on
different bases, the Bank designated certain securities and certain
liabilities related to transferred receivables at fair value through profit or
loss. The fair value of liabilities related to transferred receivables does
not include credit risk, as the holders of these liabilities are not exposed
to the Bank's credit risk. The Bank also designated certain deposits that
include embedded derivative financial instruments at fair value through profit
or loss.
To determine a change in fair value arising from a change in the credit risk
of deposits designated at fair value through profit or loss, the Bank
calculates, at the beginning of the period, the present value of the
instrument's contractual cash flows using the following rates: first, an
observed discount rate for similar securities that reflects the Bank's credit
spread and, then, a rate that excludes the Bank's credit spread. The
difference obtained between the two values is then compared to the difference
obtained using the same rates at the end of the period.
Information about the financial assets and financial liabilities designated at
fair value through profit or loss is provided in the following tables.
Carrying Unrealized Unrealized
value as at gains (losses) gains (losses)
October 31, 2024 for the year ended since the initial
October 31, 2024 recognition of
the instrument
Financial assets designated at fair value through profit or loss
Securities 357 13 8
Financial liabilities designated at fair value through profit or loss
Deposits((1)(2)) 26,190 (2,526) 1,212
Liabilities related to transferred receivables 11,034 (213) 136
37,224 (2,739) 1,348
Carrying Unrealized Unrealized
value as at gains (losses) gains (losses)
October 31, 2023 for the year ended since the initial
October 31, 2023 recognition of
the instrument
Financial assets designated at fair value through profit or loss
Securities 758 (5) (12)
Financial liabilities designated at fair value through profit or loss
Deposits((1)(2)) 18,275 493 3,546
Liabilities related to transferred receivables 9,952 80 562
28,227 573 4,108
(1) For the year ended October 31, 2024, the change in the fair
value of deposits designated at fair value through profit or loss attributable
to credit risk, and recorded in Other comprehensive income, resulted in a loss
of $485 million (loss of $226 million for the year ended October 31, 2023).
(2) The amount at maturity that the Bank will be contractually
required to pay to the holders of these deposits varies and will differ from
the reporting date fair value.
Note 6 - Offsetting Financial Assets and Financial Liabilities
Financial assets and liabilities are offset, and the net amount is presented
in the Consolidated Balance Sheet when the Bank has a legally enforceable
right to set off the recognized amounts and intends to settle on a net basis
or to realize the asset and settle the liability simultaneously.
Generally, over-the-counter derivative financial instruments subject to master
netting agreements of the International Swaps & Derivatives Association,
Inc. or other similar agreements do not meet the offsetting criteria in the
Consolidated Balance Sheet, because the right of set-off is legally
enforceable only in the event of default, insolvency, or bankruptcy.
Generally, securities purchased under reverse repurchase agreements and
securities borrowed as well as obligations related to securities sold under
repurchase agreements and securities loaned, subject to master agreements, do
not meet the offsetting criteria if they confer only a right of set-off that
is enforceable only in the event of default, insolvency, or bankruptcy.
However, the above-mentioned transactions may be subject to contractual
netting agreements concluded with clearing houses. If the offsetting criteria
are met, these transactions are netted in the Consolidated Balance Sheet. In
addition, as part of these transactions, the Bank may pledge or receive cash
or other financial instruments used as collateral.
The following tables present information on financial assets and financial
liabilities that are netted in the Consolidated Balance Sheet, because they
meet the offsetting criteria as well as information on those that are not
netted and are subject to an enforceable master netting agreement or similar
agreement.
As at October 31, 2024
Gross amounts recognized Amounts Net amounts Associated amounts
set off in the reported not set off in the
Consolidated in the Consolidated Balance Sheet
Balance Sheet((1)) Consolidated
Balance Sheet
Financial instruments((2)) Financial assets Net
received/pledged amounts
as collateral((3))
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed 34,247 17,982 16,265 3,815 12,378 72
Derivative financial instruments 12,309 − 12,309 6,410 2,701 3,198
46,556 17,982 28,574 10,225 15,079 3,270
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned 56,159 17,982 38,177 3,815 34,309 53
Derivative financial instruments 15,760 − 15,760 6,410 5,256 4,094
71,919 17,982 53,937 10,225 39,565 4,147
As at October 31, 2023
Gross amounts recognized Amounts Net amounts Associated amounts
set off in the reported not set off in the
Consolidated in the Consolidated Balance Sheet
Balance Sheet((1)) Consolidated
Balance Sheet
Financial instruments((2)) Financial assets Net
received/pledged amounts
as collateral((3))
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed 20,344 9,084 11,260 2,538 8,649 73
Derivative financial instruments 35,404 17,888 17,516 8,032 7,065 2,419
55,748 26,972 28,776 10,570 15,714 2,492
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned 47,431 9,084 38,347 2,538 35,679 130
Derivative financial instruments 37,776 17,888 19,888 8,032 5,703 6,153
85,207 26,972 58,235 10,570 41,382 6,283
(1) Comprises amounts that qualify for offsetting. Effective in
fiscal 2024, certain derivative financial instruments cleared through a
central counterparty were considered settled-to-market and not
collaterized-to-market. Derivative financial instruments that are
settled-to-market are settled on a daily basis, resulting in derecognition,
rather than offsetting, of the related amounts.
(2) Carrying amount of financial instruments that are subject to
an enforceable master netting agreement or similar agreement but that do not
satisfy offsetting criteria.
(3) Excludes collateral in the form of non-financial instruments.
Note 7 - Securities
Residual Contractual Maturities of Securities
As at October 31 2024 2023
1 year Over 1 Over No Total Total
or less year to 5 years specified
5 years maturity
Securities at fair value through profit or loss
Securities issued or guaranteed by
Canadian government 2,541 9,442 2,497 − 14,480 17,275
Canadian provincial and municipal governments 762 2,476 5,235 − 8,473 8,260
U.S. Treasury, other U.S. agencies
and other foreign governments 203 845 1,167 − 2,215 4,886
Other debt securities 384 1,675 1,031 − 3,090 3,515
Equity securities − − − 87,677 87,677 66,058
3,890 14,438 9,930 87,677 115,935 99,994
Securities at fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government 308 2,723 2,187 − 5,218 4,197
Canadian provincial and municipal governments − 519 2,381 − 2,900 1,938
U.S. Treasury, other U.S. agencies
and other foreign governments − 4,951 40 − 4,991 1,158
Other debt securities 133 358 356 − 847 1,290
Equity securities − − − 666 666 659
441 8,551 4,964 666 14,622 9,242
Securities at amortized cost((1))
Securities issued or guaranteed by
Canadian government 1,139 8,055 − − 9,194 6,172
Canadian provincial and municipal governments 371 595 1,492 − 2,458 1,932
U.S. Treasury, other U.S. agencies
and other foreign governments 540 147 − − 687 604
Other debt securities 1,043 1,121 105 − 2,269 3,874
3,093 9,918 1,597 − 14,608 12,582
(1) As at October 31, 2024, securities at amortized cost are
presented net of allowances for credit losses of $6 million ($4 million as
at October 31, 2023).
Credit Quality
As at October 31, 2024 and 2023, securities at fair value through other
comprehensive income and securities at amortized cost were mainly classified
in Stage 1, with their credit quality falling mostly in the "Excellent"
category according to the Bank's internal risk-rating categories. For
additional information on the reconciliation of allowances for credit losses,
see Note 8 to these Consolidated Financial Statements.
Note 7 - Securities (cont.)
Unrealized Gross Gains (Losses) on Securities at Fair Value Through
Other Comprehensive Income((1))
As at October 31, 2024
Amortized Gross unrealized gains Gross unrealized losses Carrying
cost value((2))
Securities issued or guaranteed by
Canadian government 5,166 96 (44) 5,218
Canadian provincial and municipal governments 2,894 45 (39) 2,900
U.S. Treasury, other U.S. agencies and other foreign governments 4,986 37 (32) 4,991
Other debt securities 888 3 (44) 847
Equity securities 591 77 (2) 666
14,525 258 (161) 14,622
As at October 31, 2023
Amortized Gross unrealized gains Gross unrealized losses Carrying
cost value((2))
Securities issued or guaranteed by
Canadian government 4,406 1 (210) 4,197
Canadian provincial and municipal governments 2,110 − (172) 1,938
U.S. Treasury, other U.S. agencies and other foreign governments 1,227 − (69) 1,158
Other debt securities 1,423 − (133) 1,290
Equity securities 616 66 (23) 659
9,782 67 (607) 9,242
(1) Excludes the impact of hedging.
(2) The allowances for credit losses on securities at fair value
through other comprehensive income (excluding equity securities), representing
$3 million as at October 31, 2024 ($3 million as at October 31, 2023),
are reported under Other comprehensive income. For additional information, see
Note 8 to these Consolidated Financial Statements.
Equity Securities Designated at Fair Value Through Other Comprehensive Income
The Bank designated certain equity securities, the main business objective of
which is to generate dividend income, at fair value through other
comprehensive income without subsequent reclassification of gains and losses
to net income. During the year ended October 31, 2024, a dividend income
amount of $41 million was recognized for these investments ($33 million for
the year ended October 31, 2023), including amounts of $7 million for
investments that were sold during the year ended October 31, 2024
($2 million for investments that were sold during the year ended
October 31, 2023).
Year ended October 31, 2024 Year ended October 31, 2023
Equity securities Equity securities Total Equity securities Equity securities Total
of private companies of public companies of private companies of public companies
Fair value at beginning 378 281 659 320 236 556
Change in fair value 1 58 59 58 (5) 53
Designated at fair value through other
comprehensive income((1)) − 253 253 − 314 314
Sales((2)) (72) (233) (305) − (264) (264)
Fair value at end 307 359 666 378 281 659
(1) On May 2, 2023, the Bank had concluded that it had lost
significant influence over TMX Group Limited (TMX) and therefore, as of this
date, ceased using the equity method to account for this investment. The Bank
had designated its investment in TMX as a financial asset measured at fair
value through other comprehensive income in an amount of $191 million.
(2) The Bank disposed of private and public company equity securities
for economic reasons.
Gains (Losses) on Disposals of Securities at Amortized Cost
During the years ended October 31, 2024 and 2023, the Bank disposed of
certain debt securities measured at amortized cost. The carrying value of
these securities upon disposal was $1,419 million for the year ended
October 31, 2024 ($821 million for the year ended October 31, 2023), and
the Bank recognized gains of $6 million for the year ended October 31, 2024
(negligible amount for the year ended October 31, 2023) under Non-interest
income - Gains (losses) on non‑trading securities, net in the Consolidated
Statement of Income.
Note 8 - Loans and Allowances for Credit Losses
Loans are recognized either at fair value through profit or loss or at
amortized cost using the financial asset classification criteria defined in
IFRS 9.
Determining and Measuring Expected Credit Losses (ECL)
Determining Expected Credit Losses
Expected credit losses are determined using a three-stage impairment approach
that is based on the change in the credit quality of financial assets since
initial recognition.
Non-impaired loans
Stage 1
Financial assets that have experienced no significant increase in credit risk
between initial recognition and the reporting date, and for which 12‑month
expected credit losses are recorded at the reporting date, are classified in
Stage 1.
Stage 2
Financial assets that have experienced a significant increase in credit risk
between initial recognition and the reporting date, and for which lifetime
expected credit losses are recorded at the reporting date, are classified in
Stage 2.
Impaired loans
Stage 3
Financial assets for which there is objective evidence of impairment, for
which one or more events have had a detrimental impact on the estimated future
cash flows of these financial assets at the reporting date, and for which
lifetime expected credit losses are recorded, are classified in Stage 3.
POCI
Financial assets that are credit-impaired when purchased or originated (POCI)
are classified in the POCI category.
Impairment Governance
A rigorous control framework is applied to the determination of expected
credit losses. The Bank has policies and procedures that govern impairments
arising from credit risk. These policies are documented and periodically
reviewed by the Risk Management Group. All models used to calculate expected
credit losses are validated, and controls are in place to ensure they are
applied.
These models are validated by groups that are independent of the team that
prepares the calculations. Complex questions on measurement methodologies and
assumptions are reviewed by a group of experts from various functions.
Furthermore, the inputs and assumptions used to determine expected credit
losses are regularly reviewed.
Measurement of Expected Credit Losses (ECL)
Expected credit losses are estimated using three main variables: (1)
probability of default (PD), (2) loss given default (LGD) and (3) exposure at
default (EAD). For accounting purposes, 12-month PD and lifetime PD are the
probabilities of a default occurring over the next 12 months or over the life
of a financial instrument, respectively, based on conditions existing at the
balance sheet date and on future economic conditions that have, or will have,
an impact on credit risk. LGD reflects the losses expected should default
occur and considers such factors as the mitigating effects of collateral, the
realizable value thereof, and the time value of money. EAD is the expected
balance owing at default and considers such factors as repayments of principal
and interest between the balance sheet date and the time of default as well as
any amounts expected to be drawn on a committed facility. Twelve-month
expected credit losses are estimated by multiplying 12-month PD by LGD and by
EAD. Lifetime expected credit losses are estimated using the lifetime PD.
For most financial instruments, expected credit losses are measured on an
individual basis. Financial instruments that have credit losses measured on a
collective basis are grouped according to similar credit risk characteristics
such as type of instrument, geographic location, comparable risk level, and
business sector or industry.
Inputs, Assumptions and Estimation Techniques
The Bank's approach to calculating expected credit losses consists essentially
of leveraging existing regulatory models and then adjusting their parameters
for IFRS 9 purposes. These models have the advantage of having been
thoroughly tested and validated. In addition, using the same base models,
regardless of the purpose, provides consistency across risk assessments. These
models use inputs, assumptions and estimation techniques that require a high
degree of management judgment. The main factors that contribute to changes in
ECL that are subject to significant judgment include the following:
· calibration of regulatory parameters in order to obtain
point-in-time and forward-looking parameters;
· forecasts of macroeconomic variables for multiple scenarios and the
probability weighting of the scenarios;
· determination of the significant increases in credit risk (SICR) of
a loan.
Note 8 - Loans and Allowances for Credit Losses (cont.)
Main Parameters
PD Estimates
Since the objective of the regulatory calibration of PD is to align historical
data to the long-run default rate, adjustments are required to obtain a
point-in-time, forward-looking PD, as required by IFRS 9. The Bank performs
the following: (1) A point-in-time calibration, where the PD of the portfolio
is aligned with the appropriate default rate. The resulting PD estimate
generally equals the prior-year default rate. The prior-year default rate is
selected for the calibration performed at this stage, as it often reflects one
of the most accurate and appropriate estimates of the current-year default
rate; (2) Forward-looking adjustments are incorporated through, among other
measures, a calibration factor based on forecasts produced by the stress
testing team's analyses. The team considers three macroeconomic scenarios,
and, for each scenario, produces a forward-looking assessment covering the
three upcoming years.
LGD Estimates
The LGD estimation method consists of using, for each of the three
macroeconomic scenarios, expected LGD based on the LGD values observed using
backtesting, the economic LGD estimated and used to calculate economic
capital, and lastly, the estimated downturn LGD used to calculate regulatory
capital.
EAD Estimates
For term loans, the Bank uses expected EAD, which is the outstanding balance
anticipated at each point in time. Expected EAD decreases over time according
to contractual repayments and to prepayments. For revolving loans, the EAD
percentage is based on the percentage estimated by the corresponding
regulatory model and, thereafter, is converted to dollars according to the
authorized balance.
Expected Life
For most financial instruments, the expected life used when measuring expected
credit losses is the remaining contractual life. For revolving financial
instruments where there is no contractual maturity, such as credit cards or
lines of credit, the expected life is based on the behavioural life of clients
who have defaulted or closed their account.
Incorporation of Forward-Looking Information
The Bank's Economy and Strategy Group is responsible for developing three
macroeconomic scenarios and for recommending probability weights for each
scenario. Macroeconomic scenarios are not developed for specific portfolios,
as the Economy and Strategy Group provides a set of variables for each of the
defined scenarios for the next three years. The PDs are also adjusted to
incorporate economic assumptions (interest rates, unemployment rates, GDP
forecasts, oil prices, housing price indices, etc.) that can be statistically
tied to PD changes that will have an impact beyond the next 12 months. These
statistical relationships are determined using the processes developed for
stress testing. In addition, the group considers other relevant factors that
may not be adequately reflected in the information used to calculate the PDs
(including late payments and whether the financial asset is subject to
additional monitoring within the watchlist process for business and government
loan portfolios).
Determination of a Significant Increase in the Credit Risk of a Financial
Instrument
At each reporting period, the Bank determines whether credit risk has
increased significantly since initial recognition by examining the change in
the risk of default occurring over the remaining life of the financial
instrument. First, the Bank compares the point-in-time forward-looking
remaining lifetime PD at the reporting date with the expected point-in-time
forward-looking remaining lifetime PD established at initial recognition.
Based on this comparison, the Bank determines whether the loan has
deteriorated when compared to the initial conditions. Because the comparison
includes an adjustment based on origination‑date forward-looking information
and reporting-date forward-looking information, the deterioration may be
caused by the following factors: (i) deterioration of the economic outlook
used in the forward-looking assessment; (ii) deterioration of the borrower's
conditions (payment defaults, worsening financial ratios, etc.); or (iii) a
combination of both factors. The quantitative criteria used to determine a
significant increase in credit risk are a series of relative and absolute
thresholds, and a backstop is also applied. All financial instruments that are
over 30 days past due but below 90 days past due are migrated to Stage 2, even
if the other criteria do not indicate a significant increase in credit risk.
Credit Quality of Loans
The following tables present the gross carrying amounts of loans as at October
31, 2024 and 2023, according to credit quality and ECL impairment stage of
each loan category at amortized cost, and according to credit quality for
loans at fair value through profit or loss. For additional information on
credit quality according to the Internal Ratings-Based (IRB) categories, see
the Internal Default Risk Ratings table on page 81 in the Credit Risk section
of the MD&A for the year ended October 31, 2024.
As at October 31, 2024
Non-impaired loans Impaired loans Loans at fair value Total
through profit or loss((1))
Stage 1 Stage 2 Stage 3 POCI
Residential mortgage
Excellent 33,651 16 − − − 33,667
Good 17,063 241 − − − 17,304
Satisfactory 12,634 4,209 − − − 16,843
Special mention 358 800 − − − 1,158
Substandard 70 300 − − − 370
Default − − 118 − − 118
IRB Approach 63,776 5,566 118 − − 69,460
Standardized Approach 11,350 266 494 247 13,192 25,549
Gross carrying amount 75,126 5,832 612 247 13,192 95,009
Allowances for credit losses((2)) 62 85 137 (87) − 197
Carrying amount 75,064 5,747 475 334 13,192 94,812
Personal
Excellent 21,702 274 − − − 21,976
Good 6,686 1,618 − − − 8,304
Satisfactory 6,959 2,247 − − − 9,206
Special mention 2,111 845 − − − 2,956
Substandard 53 279 − − − 332
Default − − 226 − − 226
IRB Approach 37,511 5,263 226 − − 43,000
Standardized Approach 3,580 84 101 118 − 3,883
Gross carrying amount 41,091 5,347 327 118 − 46,883
Allowances for credit losses((2)) 102 123 146 (11) − 360
Carrying amount 40,989 5,224 181 129 − 46,523
Credit card
Excellent 551 − − − − 551
Good 399 − − − − 399
Satisfactory 729 28 − − − 757
Special mention 484 211 − − − 695
Substandard 69 149 − − − 218
Default − − − − − −
IRB Approach 2,232 388 − − − 2,620
Standardized Approach 141 − − − − 141
Gross carrying amount 2,373 388 − − − 2,761
Allowances for credit losses((2)) 42 114 − − − 156
Carrying amount 2,331 274 − − − 2,605
Business and government
Excellent 7,743 − − − 1,486 9,229
Good 27,950 7 − − 53 28,010
Satisfactory 34,626 11,381 − − 147 46,154
Special mention 255 1,770 − − − 2,025
Substandard 2 481 − 2 − 485
Default − − 555 10 − 565
IRB Approach 70,576 13,639 555 12 1,686 86,468
Standardized Approach 12,879 107 158 14 94 13,252
Gross carrying amount 83,455 13,746 713 26 1,780 99,720
Allowances for credit losses((2)) 218 181 225 4 − 628
Carrying amount 83,237 13,565 488 22 1,780 99,092
Total loans
Gross carrying amount 202,045 25,313 1,652 391 14,972 244,373
Allowances for credit losses((2)) 424 503 508 (94) − 1,341
Carrying amount 201,621 24,810 1,144 485 14,972 243,032
(1) Not subject to expected credit losses.
(2) The allowances for credit losses do not include the amounts
related to undrawn commitments reported under Other liabilities in the
Consolidated Balance Sheet.
Note 8 - Loans and Allowances for Credit Losses (cont.)
As at October 31, 2023
Non-impaired loans Impaired loans Loans at fair value Total
through profit or loss((1))
Stage 1 Stage 2 Stage 3 POCI
Residential mortgage
Excellent 30,075 13 − − − 30,088
Good 17,008 247 − − − 17,255
Satisfactory 11,795 4,118 − − − 15,913
Special mention 318 773 − − − 1,091
Substandard 61 252 − − − 313
Default − − 66 − − 66
IRB Approach 59,257 5,403 66 − − 64,726
Standardized Approach 9,540 218 287 304 11,772 22,121
Gross carrying amount 68,797 5,621 353 304 11,772 86,847
Allowances for credit losses((2)) 69 93 87 (95) − 154
Carrying amount 68,728 5,528 266 399 11,772 86,693
Personal
Excellent 21,338 120 − − − 21,458
Good 7,360 1,665 − − − 9,025
Satisfactory 6,497 2,240 − − − 8,737
Special mention 1,849 810 − − − 2,659
Substandard 29 224 − − − 253
Default − − 156 − − 156
IRB Approach 37,073 5,059 156 − − 42,288
Standardized Approach 3,713 79 71 207 − 4,070
Gross carrying amount 40,786 5,138 227 207 − 46,358
Allowances for credit losses((2)) 91 108 87 (15) − 271
Carrying amount 40,695 5,030 140 222 − 46,087
Credit card
Excellent 641 − − − − 641
Good 380 1 − − − 381
Satisfactory 752 68 − − − 820
Special mention 304 210 − − − 514
Substandard 37 86 − − − 123
Default − − − − − −
IRB Approach 2,114 365 − − − 2,479
Standardized Approach 124 − − − − 124
Gross carrying amount 2,238 365 − − − 2,603
Allowances for credit losses((2)) 33 106 − − − 139
Carrying amount 2,205 259 − − − 2,464
Business and government((3))
Excellent 7,785 − − − 1,113 8,898
Good 28,525 16 − − 53 28,594
Satisfactory 32,095 8,400 − 2 140 40,637
Special mention 215 1,790 − − − 2,005
Substandard 27 290 − − − 317
Default − − 397 − − 397
IRB Approach 68,647 10,496 397 2 1,306 80,848
Standardized Approach 9,774 57 47 47 46 9,971
Gross carrying amount 78,421 10,553 444 49 1,352 90,819
Allowances for credit losses((2)) 182 194 244 − − 620
Carrying amount 78,239 10,359 200 49 1,352 90,199
Total loans and acceptances
Gross carrying amount 190,242 21,677 1,024 560 13,124 226,627
Allowances for credit losses((2)) 375 501 418 (110) − 1,184
Carrying amount 189,867 21,176 606 670 13,124 225,443
(1) Not subject to expected credit losses.
(2) The allowances for credit losses do not include the amounts
related to undrawn commitments reported under Other liabilities in the
Consolidated Balance Sheet.
(3) Includes customers' liability under acceptances.
The following table presents the credit risk exposures of off-balance-sheet
commitments as at October 31, 2024 and 2023 according to credit quality and
ECL impairment stage.
As at October 31 2024 2023
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
Off-balance-sheet commitments((1))
Retail
Excellent 16,159 113 − 16,272 16,648 67 − 16,715
Good 3,492 415 − 3,907 3,485 467 − 3,952
Satisfactory 1,095 249 − 1,344 1,268 285 − 1,553
Special mention 381 112 − 493 239 93 − 332
Substandard 30 35 − 65 17 15 − 32
Default − − 1 1 − − 2 2
Non-retail
Excellent 13,071 − − 13,071 14,117 − − 14,117
Good 22,547 − − 22,547 21,082 − − 21,082
Satisfactory 15,513 6,351 − 21,864 12,258 4,354 − 16,612
Special mention 24 278 − 302 17 248 − 265
Substandard 2 52 − 54 19 33 − 52
Default − − 27 27 − − 10 10
IRB Approach 72,314 7,605 28 79,947 69,150 5,562 12 74,724
Standardized Approach 18,968 − − 18,968 18,172 − − 18,172
Total exposure 91,282 7,605 28 98,915 87,322 5,562 12 92,896
Allowances for credit losses 142 72 − 214 116 60 − 176
Total exposure, net of allowances 91,140 7,533 28 98,701 87,206 5,502 12 92,720
(1) Represent letters of guarantee and documentary letters of
credit, undrawn commitments, and backstop liquidity and credit enhancement
facilities.
Loans Past Due But Not Impaired((1))
As at October 31 2024 2023
Residential Personal Credit card Business and Residential Personal Credit card Business and
mortgage government mortgage government((2))
Past due but not impaired
31 to 60 days 179 121 30 76 139 102 27 38
61 to 90 days 82 48 14 33 58 65 14 21
Over 90 days((3)) − − 35 − − − 30 −
261 169 79 109 197 167 71 59
(1) Loans less than 31 days past due are not presented as they are
not considered past due from an administrative standpoint.
(2) Includes customers' liability under acceptances.
(3) All loans more than 90 days past due, except for credit card
receivables, are considered impaired (Stage 3).
Note 8 - Loans and Allowances for Credit Losses (cont.)
Impaired Loans
As at October 31 2024 2023
Gross Allowances for credit losses Net Gross Allowances for credit losses Net
Loans - Stage 3
Residential mortgage 612 137 475 353 87 266
Personal 327 146 181 227 87 140
Credit card((1)) − − − − − −
Business and government((2)) 713 225 488 444 244 200
1,652 508 1,144 1,024 418 606
Loans - POCI 391 (94) 485 560 (110) 670
2,043 414 1,629 1,584 308 1,276
(1) Credit card receivables are considered impaired, at the
latest, when payment is 180 days past due, and they are written off at that
time.
(2) Includes customers' liability under acceptances.
Maximum Exposure to Credit Risk of Impaired Loans
The following table presents the maximum exposure to credit risk of impaired
loans, the percentage of exposure covered by guarantees, and the main types of
collateral and guarantees held for each loan category.
As at October 31 2024 2023
Gross Percentage covered by guarantees((1)) Gross Percentage covered by guarantees((1)) Types of collateral
impaired loans impaired loans and guarantees
Loans - Stage 3
Residential mortgage 612 95 % 353 97 % Residential buildings
Personal 327 52 % 227 59 % Buildings, land and automobiles
Business and government((2)) 713 75 % 444 51 % Buildings, land, equipment,
government and bank guarantees
Loans - POCI 391 41 % 560 36 % Buildings and automobiles
(1) For gross impaired loans, the ratio is calculated on a
weighted average basis using the estimated value of the collateral and
guarantees held for each loan category presented. The value of the collateral
and guarantees held for a specific loan may exceed the balance of the loan;
when this is the case, the ratio presented is capped at 100%.
(2) Includes customers' liability under acceptances.
Allowances for Credit Losses
The following tables present a reconciliation of the allowances for credit
losses by Consolidated Balance Sheet item and by type of off-balance-sheet
commitment.
Year ended October 31, 2024
Allowances for Provisions for Write-offs((1)) Disposals Recoveries Allowances for
credit losses as at credit losses and other credit losses as
October 31, 2023 at October 31, 2024
Balance sheet
Cash and deposits with financial institutions((2)(3)) 10 (1) − − − 9
Securities((3))
At fair value through other comprehensive income((4)) 3 − − − − 3
At amortized cost((2)) 4 2 − − − 6
Securities purchased under reverse repurchase
agreements and securities borrowed((2)(3)) − − − − − −
Loans((5))
Residential mortgage 154 46 (4) (2) 3 197
Personal 271 198 (121) − 12 360
Credit card 139 113 (111) − 15 156
Business and government 567 226 (185) − 20 628
Customers' liability under acceptances 53 (53) − − − −
1,184 530 (421) (2) 50 1,341
Other assets((2)(3)) − − − − − −
Off-balance-sheet commitments((6))
Letters of guarantee and documentary letters of credit 16 5 − − − 21
Undrawn commitments 152 36 − − − 188
Backstop liquidity and credit enhancement facilities 8 (3) − − − 5
176 38 − − − 214
1,377 569 (421) (2) 50 1,573
Year ended October 31, 2023
Allowances for Provisions for Write-offs((1)) Disposals Recoveries Allowances for
credit losses as at credit losses and other credit losses as
October 31, 2022 at October 31, 2023
Balance sheet
Cash and deposits with financial institutions((2)(3)) 5 5 − − − 10
Securities((3))
At fair value through other comprehensive income((4)) 2 1 − − − 3
At amortized cost((2)) 7 (3) − − − 4
Securities purchased under reverse repurchase
agreements and securities borrowed((2)(3)) − − − − − −
Loans((5))
Residential mortgage 118 36 (3) − 3 154
Personal 239 114 (101) − 19 271
Credit card 126 81 (83) − 15 139
Business and government 418 150 (12) − 11 567
Customers' liability under acceptances 54 (1) − − − 53
955 380 (199) − 48 1,184
Other assets((2)(3)) − − − − − −
Off-balance-sheet commitments((6))
Letters of guarantee and documentary letters of credit 13 3 − − − 16
Undrawn commitments 143 9 − − − 152
Backstop liquidity and credit enhancement facilities 6 2 − − − 8
162 14 − − − 176
1,131 397 (199) − 48 1,377
(1) The contractual amount outstanding on financial assets that
were written off during the year ended October 31, 2024 and that are still
subject to enforcement activity was $172 million ($118 million for the year
ended October 31, 2023).
(2) These financial assets are presented net of the allowances for
credit losses in the Consolidated Balance Sheet.
(3) As at October 31, 2024 and 2023, these financial assets were
mainly classified in Stage 1 and their credit quality fell mostly within the
Excellent category.
(4) The allowances for credit losses are reported under
Accumulated other comprehensive income in the Consolidated Balance Sheet.
(5) The allowances for credit losses are reported under Allowances
for credit losses in the Consolidated Balance Sheet.
(6) The allowances for credit losses are reported under Other
liabilities in the Consolidated Balance Sheet.
Note 8 - Loans and Allowances for Credit Losses (cont.)
The following tables present the reconciliation of allowances for credit
losses for each loan category at amortized cost according to ECL impairment
stage.
Year ended October 31 2024 2023
Allowances for Allowances for Total Allowances for Allowances for Total
credit losses on credit losses on credit losses on credit losses on
non-impaired loans impaired loans non-impaired loans impaired loans
Stage 1 Stage 2 Stage 3 POCI((1)) Stage 1 Stage 2 Stage 3 POCI((1))
Residential mortgage
Balance at beginning 69 93 87 (95) 154 53 80 61 (76) 118
Originations or purchases 13 − − − 13 18 − − − 18
Transfers((2)):
to Stage 1 58 (50) (8) − − 52 (48) (4) − −
to Stage 2 (9) 28 (19) − − (12) 30 (18) − −
to Stage 3 (1) (26) 27 − − (2) (33) 35 − −
Net remeasurement of loss allowances((3)) (57) 59 54 8 64 (29) 65 21 (17) 40
Derecognitions((4)) (7) (7) (11) − (25) (7) (9) (8) − (24)
Changes to models (2) (12) 8 − (6) (5) 7 − − 2
Provisions for credit losses (5) (8) 51 8 46 15 12 26 (17) 36
Write-offs − − (4) − (4) − − (3) − (3)
Disposals (2) − − − (2) − − − − −
Recoveries − − 3 − 3 − − 2 − 2
Foreign exchange movements and other − − − − − 1 1 1 (2) 1
Balance at end 62 85 137 (87) 197 69 93 87 (95) 154
Includes:
Amounts drawn 62 85 137 (87) 197 69 93 87 (95) 154
Undrawn commitments((5)) − − − − − − − − − −
Personal
Balance at beginning 95 114 87 (15) 281 70 117 75 (16) 246
Originations or purchases 36 − − − 36 47 − − − 47
Transfers((2)):
to Stage 1 106 (96) (10) − − 91 (82) (9) − −
to Stage 2 (26) 33 (7) − − (25) 30 (5) − −
to Stage 3 (1) (74) 75 − − (2) (88) 90 − −
Net remeasurement of loss allowances((3)) (94) 165 113 4 188 (77) 152 23 1 99
Derecognitions((4)) (10) (14) (5) − (29) (11) (18) (4) − (33)
Changes to models − (1) 3 − 2 1 3 − − 4
Provisions for credit losses 11 13 169 4 197 24 (3) 95 1 117
Write-offs − − (121) − (121) − − (101) − (101)
Disposals − − − − − − − − − −
Recoveries − − 15 − 15 − − 20 − 20
Foreign exchange movements and other 1 − (4) − (3) 1 − (2) − (1)
Balance at end 107 127 146 (11) 369 95 114 87 (15) 281
Includes:
Amounts drawn 102 123 146 (11) 360 91 108 87 (15) 271
Undrawn commitments((5)) 5 4 − − 9 4 6 − − 10
(1) No POCI loans were acquired during the year ended October 31,
2024 (the total amount of undiscounted initially expected credit losses on the
POCI loans acquired during the year ended on October 31, 2023 was
$93 million). The expected credit losses reflected in the purchase price have
been discounted.
(2) Represent stage transfers deemed to have taken place at the
beginning of the quarter in which the transfer occurred.
(3) Includes the net remeasurement of loss allowances (after
transfers) attributable mainly to changes in volumes and in the credit quality
of existing loans as well as to changes in risk parameters.
(4) Represent reversals to loss allowances arising from full loan
repayments (excluding write-offs and disposals).
(5) The allowances for credit losses on undrawn commitments are
reported under Other liabilities in the Consolidated Balance Sheet.
Year ended October 31 2024 2023
Allowances for Allowances for Total Allowances for Allowances for Total
credit losses on credit losses on credit losses on credit losses on
non-impaired loans impaired loans non-impaired loans impaired loans
Stage 1 Stage 2 Stage 3 POCI((1)) Stage 1 Stage 2 Stage 3 POCI((1))
Credit card
Balance at beginning 59 127 − − 186 53 112 − − 165
Originations or purchases 12 − − − 12 11 − − − 11
Transfers((2)):
to Stage 1 110 (110) − − − 100 (100) − − −
to Stage 2 (20) 20 − − − (19) 19 − − −
to Stage 3 (1) (46) 47 − − − (35) 35 − −
Net remeasurement of loss allowances((3)) (90) 147 49 − 106 (83) 133 33 − 83
Derecognitions((4)) (2) (1) − − (3) (3) (2) − − (5)
Changes to models 2 4 − − 6 − − − − −
Provisions for credit losses 11 14 96 − 121 6 15 68 − 89
Write-offs − − (111) − (111) − − (83) − (83)
Disposals − − − − − − − − − −
Recoveries − − 15 − 15 − − 15 − 15
Foreign exchange movements and other − − − − − − − − − −
Balance at end 70 141 − − 211 59 127 − − 186
Includes:
Amounts drawn 42 114 − − 156 33 106 − − 139
Undrawn commitments((5)) 28 27 − − 55 26 21 − − 47
Business and government((6))
Balance at beginning 251 220 244 − 715 177 195 197 − 569
Originations or purchases 135 − − − 135 93 − − − 93
Transfers((2)):
to Stage 1 54 (52) (2) − − 54 (54) − − −
to Stage 2 (52) 60 (8) − − (28) 36 (8) − −
to Stage 3 (1) (10) 11 − − (1) (6) 7 − −
Net remeasurement of loss allowances((3)) (39) 28 168 (14) 143 (24) 79 61 (7) 109
Derecognitions((4)) (40) (26) (6) − (72) (19) (29) (4) − (52)
Changes to models − (5) 1 − (4) (2) (1) − − (3)
Provisions for credit losses 57 (5) 164 (14) 202 73 25 56 (7) 147
Write-offs − − (185) − (185) − − (12) − (12)
Disposals − − − − − − − − − −
Recoveries − − 5 18 23 − − 3 7 10
Foreign exchange movements and other − − (3) − (3) 1 − − − 1
Balance at end 308 215 225 4 752 251 220 244 − 715
Includes:
Amounts drawn 218 181 225 4 628 182 194 244 − 620
Undrawn commitments((5)) 90 34 − − 124 69 26 − − 95
Total allowances for credit losses at end((7)) 547 568 508 (94) 1,529 474 554 418 (110) 1,336
Includes:
Amounts drawn 424 503 508 (94) 1,341 375 501 418 (110) 1,184
Undrawn commitments((5)) 123 65 − − 188 99 53 − − 152
(1) No POCI loans were acquired during the year ended October 31,
2024 (the total amount of undiscounted initially expected credit losses on the
POCI loans acquired during the year ended on October 31, 2023 was
$93 million). The expected credit losses reflected in the purchase price have
been discounted.
(2) Represent stage transfers deemed to have taken place at the
beginning of the quarter in which the transfer occurred.
(3) Includes the net remeasurement of loss allowances (after
transfers) attributable mainly to changes in volumes and in the credit quality
of existing loans as well as to changes in risk parameters.
(4) Represent reversals to loss allowances arising from full loan
repayments (excluding write-offs and disposals).
(5) The allowances for credit losses on undrawn commitments are
reported under Other liabilities in the Consolidated Balance Sheet.
(6) Includes customers' liability under acceptances.
(7) Excludes allowances for credit losses on other financial
assets at amortized cost and on off-balance-sheet commitments other than
undrawn commitments.
Note 8 - Loans and Allowances for Credit Losses (cont.)
Distribution of Gross and Impaired Loans by Borrower Category
Under the Basel Asset Classes
2024 2023
As at October 31 Year ended October 31 As at October 31 Year ended October 31
Gross Impaired Allowances Provisions Write-offs Gross Impaired Allowances Provisions Write-offs
loans loans for credit losses for credit loans((2)) loans((2)) for credit losses for credit
on impaired losses on impaired losses
loans((1)) loans((1)(2))
Retail
Residential mortgage((3)) 104,665 647 138 47 3 99,910 405 91 28 2
Qualifying revolving retail((4)) 4,148 27 21 115 130 4,000 24 18 82 96
Other retail((5)) 17,919 336 140 167 103 16,696 157 67 81 88
126,732 1,010 299 329 236 120,606 586 176 191 186
Non-retail
Agriculture 9,192 84 16 12 − 8,545 67 4 2 −
Oil and gas 1,913 − − − − 1,826 − − (7) −
Mining 2,062 38 17 17 − 1,245 − − (4) −
Utilities 12,528 − − − − 12,427 − − (35) −
Non-real-estate 1,864 38 31 − − 1,739 38 31 − −
construction((6))
Manufacturing 8,064 93 45 32 37 7,047 76 51 41 −
Wholesale 3,145 48 17 42 64 3,208 51 40 15 −
Retail 4,229 13 6 − 13 3,801 29 18 (1) −
Transportation 3,253 71 6 4 7 2,631 14 9 3 1
Communications 2,542 7 6 1 9 2,556 17 14 5 2
Financial services 12,775 66 16 11 − 11,693 22 5 6 2
Real estate services and 30,848 113 26 23 2 25,967 19 5 − 3
real estate construction((7))
Professional services 3,871 10 3 2 2 3,973 8 3 (1) 2
Education and health care 3,487 49 13 6 50 3,700 83 55 31 1
Other services 7,356 11 7 1 1 6,898 13 7 − 2
Government 1,853 − − − − 1,727 − − − −
Other 8,268 1 − − − 6,478 1 − (1) −
117,250 642 209 151 185 105,461 438 242 54 13
Excluding POCI loans 243,982 1,652 508 480 ( ) 421 226,067 1,024 418 245 ( ) 199
POCI 391 391 (94) (2) ( ) − 560 560 (110) (23) ( ) −
244,373 2,043 414 478 ( ) 421 226,627 1,584 308 222 ( ) 199
Stages 1 and 2((8)) 91 ( ) 175 ( )
569 421 397 199
(1) Allowances for credit losses on drawn amounts.
(2) Includes customers' liability under acceptances.
(3) Includes residential mortgages on one-to-four-unit dwellings
(Basel definition) and home equity lines of credit.
(4) Includes lines of credit and credit card receivables.
(5) Includes consumer loans and other retail loans but excludes
SME loans.
(6) Includes civil engineering loans, public-private partnership
loans, and project finance loans.
(7) Includes residential mortgages on dwellings of five or more
units and SME loans.
(8) Includes provisions for credit losses on other financial
assets at amortized cost and on off-balance-sheet commitments.
Main Macroeconomic Factors
The following tables show the main macroeconomic factors used to estimate the
allowances for credit losses on loans. For each scenario, namely, the base
scenario, upside scenario, and downside scenario, the average values of the
macroeconomic factors over the next 12 months (used for Stage 1 credit loss
calculations) and over the remaining forecast period (used for Stage 2 credit
loss calculations) are presented.
As at October 31, 2024
Base scenario Upside scenario Downside scenario
Next Remaining Next Remaining Next Remaining
12 months forecast period 12 months forecast period 12 months forecast period
Macroeconomic factors((1))
GDP growth((2)) 1.2 % 2.0 % 1.9 % 2.1 % (5.2) % 2.7 %
Unemployment rate 7.3 % 6.7 % 6.5 % 5.8 % 8.7 % 7.9 %
Housing price index growth((2)) 4.1 % 2.6 % 7.7 % 2.4 % (13.9) % 0.3 %
BBB spread((3)) 2.2 % 1.9 % 1.7 % 1.6 % 3.4 % 2.6 %
S&P/TSX growth((2)(4)) (3.8) % 2.7 % 4.0 % 3.0 % (25.6) % 5.5 %
WTI oil price((5)) (US$ per barrel) 71 75 89 84 45 55
As at July 31, 2024
Base scenario Upside scenario Downside scenario
Next Remaining Next Remaining Next Remaining
12 months forecast period 12 months forecast period 12 months forecast period
Macroeconomic factors((1))
GDP growth((2)) 0.9 % 1.8 % 1.4 % 2.0 % (5.1) % 2.6 %
Unemployment rate 6.8 % 6.5 % 6.5 % 5.8 % 8.4 % 7.7 %
Housing price index growth((2)) 2.1 % 2.6 % 7.7 % 2.4 % (13.9) % 0.3 %
BBB spread((3)) 2.0 % 1.6 % 1.4 % 1.4 % 3.1 % 2.3 %
S&P/TSX growth((2)(4)) (8.3) % 2.9 % 4.0 % 3.0 % (25.6) % 5.5 %
WTI oil price((5)) (US$ per barrel) 76 80 94 89 47 58
As at October 31, 2023
Base scenario Upside scenario Downside scenario
Next Remaining Next Remaining Next Remaining
12 months forecast period 12 months forecast period 12 months forecast period
Macroeconomic factors((1))
GDP growth((2)) − % 1.7 % 0.4 % 1.9 % (4.9) % 2.6 %
Unemployment rate 6.3 % 6.5 % 5.9 % 5.9 % 7.7 % 7.2 %
Housing price index growth((2)) (1.1) % 1.9 % 2.5 % 2.4 % (13.9) % 0.3 %
BBB spread((3)) 2.4 % 2.1 % 1.9 % 1.8 % 3.1 % 2.3 %
S&P/TSX growth((2)(4)) (10.0) % 3.7 % 4.0 % 3.0 % (25.6) % 5.5 %
WTI oil price((5)) (US$ per barrel) 77 80 91 86 46 56
(1) All macroeconomic factors are based on the Canadian economy
unless otherwise indicated.
(2) Growth rate is annualized.
(3) Yield on corporate BBB bonds less yield on Canadian federal
government bonds with a 10-year maturity.
(4) Main stock index in Canada.
(5) The West Texas Intermediate (WTI) index is commonly used as a
benchmark for the price of oil.
The main macroeconomic factors used for the personal credit portfolio are
unemployment rate and growth in the housing price index, based on the economy
of Canada or Quebec. The main macroeconomic factors used for the business and
government credit portfolio are unemployment rate, spread on corporate BBB
bonds, S&P/TSX growth, and WTI oil price.
An increase in unemployment rate or BBB spread will generally lead to higher
allowances for credit losses, whereas an increase in the other macroeconomic
factors (GDP, S&P/TSX, housing price index, and WTI oil price) will
generally lead to lower allowances for credit losses.
Note 8 - Loans and Allowances for Credit Losses (cont.)
During the year ended October 31, 2024, the macroeconomic outlook remained
essentially unchanged and uncertainty remains high.
Data further confirm that inflation is contained in Canada, in an environment
where economic growth has been below the pace of potential GDP since 2022. The
labour market remains fragile, with a continuous decline in the employment
rate, in particular for people aged 25 to 54. Hiring intentions and job
vacancy rates do not suggest any stabilization in the coming months, as the
business climate is weakened by a monetary policy that remains restrictive.
Considering that inflation is back to the Bank of Canada's target, it seems
risky to maintain such a policy because this could have side effects. We
anticipate an additional 225-basis point reduction in the policy interest rate
over the next four quarters, with economic growth of only 1.0% in 2024 and
1.3% in 2025, which would lead to an unemployment rate ranging from 7.0% to
7.5% by mid-2025. The U.S. economy continues to be robust as a result of
sustained government and consumer spending. However, the labour market has
started to show signs of vulnerability. Consequently, the U.S. Federal Reserve
began a monetary policy easing cycle, but it is hard to believe that inflation
will be permanently curbed without any economic slowdown. In the base
scenario, the unemployment rate stands at 7.3% after 12 months in Canada, up
0.8 percentage point. Despite the slight deterioration in the labour market,
real estate prices continue to increase slightly due to the housing shortage
exacerbated by the demographic boom and the increase in maximum amortization
for insured loans from 25 to 30 years for first-time homebuyers. As a result,
house prices are up 4.1% year over year. The S&P/TSX sits at 22,067 points
after one year, and the price of oil hovers around US$73.
In the upside scenario, an easing of geopolitical tensions boosts confidence.
Inflation continues to subside, as central banks managed to curb it without
causing significant damages to the economy. The Canadian and U.S. governments
continue to expand spending, offsetting the effects of the restrictive
monetary policies. With the labour market holding up, consumer spending
remains relatively resilient. House prices rise at a moderate pace against a
backdrop of strong demographic growth. After one year, the unemployment rate
in this scenario is more favourable than in the base scenario (nine-tenths
lower). House prices rise 7.7%, the S&P/TSX is at 23,849 points after one
year, and the price of oil hovers around US$89.
In the downside scenario, central banks did not ease their monetary policies
quickly enough, and the global economy sinks into a recession as falling
demand translates into reduced investment by businesses, which also lay off a
large number of workers. Given budgetary constraints, governments are unable
to support households and businesses as they did during the pandemic. The
geopolitical situation continues to cause concern, with the risk of conflicts
escalating. After 12 months, economic contraction pushes unemployment to 9.5%.
House prices fall sharply (-13.9%). The S&P/TSX sits at 17,063 points
after one year, and the price of oil hovers around US$39.
Given uncertainty surrounding the key inputs used to measure credit losses,
the Bank has applied expert credit judgment to adjust the modelled ECL
results.
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