REG - Nat Bank of Canada - Annual Report 2024 (MD&A) Part 2
04/12/2024 17:30
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RNS Number : 8435O National Bank of Canada 04 December 2024
Regulatory Announcement
RNS Number: 8435O
National Bank of Canada
December 4, 2024
2024 Management's Discussion and Analysis (Part 2)
National Bank of Canada (the "Bank") announces publication of its 2024 Annual
Report, including the Management's Discussion and Analysis thereon
(the "2024 MD&A"). The 2024 MD&A has been uploaded to the National
Storage Mechanism and will shortly be available at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) and is available on
the Bank's website as part of the 2024 Annual Report at:
https://www.nbc.ca/about-us/investors.html
(https://www.nbc.ca/about-us/investors.html) .
To view the full PDF of the 2024 MD&A, the 2024 Annual Report and the 2024
Annual CEO and CFO Certifications please click on the following link:
http://www.rns-pdf.londonstockexchange.com/rns/8421O_1-2024-12-4.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/8421O_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)
Risk
Management
Risk-taking is intrinsic to a financial institution's business. The Bank views
risk as an integral part of its development and the diversification of its
activities. It advocates a risk management approach that is consistent with
its business strategy. The Bank voluntarily exposes itself to certain risk
categories, particularly credit and market risk, in order to generate revenue.
It also assumes certain risks that are inherent in its activities-to which it
does not choose to expose itself-and that do not generate revenue, i.e.,
mainly operational risks. The purpose of sound and effective risk management
is to provide reasonable assurance that incurred risks do not exceed
acceptable thresholds, to control the volatility in the Bank's results, and to
ensure that risk-taking contributes to the creation of shareholder value.
Risk Management Framework
Risk is rigorously managed. Risks are identified, measured, and controlled to
achieve an appropriate balance between returns obtained and risks assumed.
Decision-making is therefore guided by risk assessments that align with the
Bank's risk appetite and by prudent levels of capital and liquidity. Despite
the exercise of stringent risk management and existing mitigation measures,
risk cannot be eliminated entirely, and residual risks may occasionally cause
losses.
The Bank has developed guidelines that support sound and effective risk
management and that help preserve its reputation, brand, and long-term
viability:
• risk is everyone's business: the business units, the risk
management and oversight functions, and Internal Audit all play an important
role in ensuring a risk management framework is in place; operational
transformations and simplifications are conducted without compromising
rigorous risk management;
• client-centric: having quality information is key to understanding
clients, effectively managing risk, and delivering excellent client service;
• enterprise-wide: a good understanding and an integrated view of
risk are the basis for sound and effective risk management and decision-making
by management;
• human capital: employees are engaged, experienced, and have a high
level of expertise; their curiosity supports continuous development and their
rigour ensures that risk management is built into the corporate culture;
incentive-based compensation programs are designed to adhere to the Bank's
risk tolerance;
• fact-based: good risk management relies heavily on common sense
and good judgment and on advanced systems and models.
Risk Appetite
Risk appetite represents how much risk an organization is willing to assume to
achieve its business strategy. The Bank defines its risk appetite by setting
tolerance thresholds, by aligning those thresholds with its business strategy,
and by integrating risk management into its corporate culture. Risk appetite
is built into decision-making processes as well as into strategic, financial,
and capital planning.
The Bank's risk appetite framework consists of principles, statements, metrics
as well as targets and is reinforced by policies and limits. When setting its
risk appetite targets, the Bank considers regulatory constraints and the
expectations of stakeholders, in particular clients, employees, the community,
shareholders, regulatory agencies, governments, and rating agencies. The risk
appetite framework is defined by the following principles and statements:
The Bank's reputation, brand, and long-term viability are at the centre of our
decisions, which demand:
• a strong credit rating to be maintained;
• a strong capital and liquidity position;
• rigorous management of risks, including information security,
regulatory compliance, and sales practices;
• attainment of environmental, social, and governance objectives.
The Bank understands the risks taken; they are aligned with our business
strategy and translate into:
• the right risk-reward balance;
• a stable risk profile;
• a strategic level of concentration aligned with approved targets.
The Bank's transformation and simplification plan is being carried out without
compromising rigorous risk management, which is reflected in:
• a low tolerance to operational and reputation risk;
• operational and information systems stability, both under normal
circumstances and in times of crisis.
The Bank's management and business units are involved in the risk appetite
setting process and are responsible for adequately monitoring the chosen risk
indicators. These needs are assessed using the enterprise strategic planning
process. The risk indicators are reported on a regular basis to ensure an
effective alignment between the Bank's risk profile and its risk appetite,
failing which corrective actions might be taken. Additional information on the
key credit, market and liquidity risk indicators monitored by the Bank's
management is presented on the following pages.
Enterprise-Wide Stress Testing
An enterprise-wide stress testing program is in place at the Bank. It is part
of a more extensive process aimed at ensuring that the Bank maintains adequate
capital levels commensurate with its business strategy and risk appetite.
Stress testing can be defined as a risk management method that assesses the
potential effects-on the Bank's financial position, capital and liquidity-of a
series of specified changes in risk factors, corresponding to exceptional but
plausible events. The program supports management's decision-making process by
identifying potential vulnerabilities for the Bank as a whole and that are
considered in setting limits as well as in longer term business planning. The
scenarios and stress test results are approved by the Stress Testing Oversight
Committee and are reviewed by the Global Risk Committee (GRC) and the Risk
Management Committee (RMC). For additional information, see the Stress Testing
section of this MD&A relating to credit risk, market risk, and liquidity
risk.
Incorporation of Risk Management Into the Corporate Culture
Risk management is supported by the Bank's cultural evolution through,
notably, the following pillars:
· Tone set by management: The Bank's management promotes risk
management through internal communications and demonstrates it through actions
and decisions that are aligned with the risk appetite as well as the desired
values and culture.
· Shared accountability: A balanced approach is advocated, whereby
business development initiatives are combined with a constant focus on sound
and effective risk management. In particular, risk is taken into consideration
when preparing the business plans of the business segments, when analyzing
strategic initiatives, and when launching new products.
· Transparency: A foundation of the business' values, transparency
lets us communicate our concerns quickly without fear of reprisal. We are a
learning‑focused organization where employees are allowed to make mistakes.
· Behaviour: Talent and performance management practices, including
incentive compensation programs that consider performance and behaviours,
strengthen risk management and promote desired behaviours.
· Continuous development: All employees must complete mandatory
annual regulatory compliance training focused on the Bank's Code of Conduct
and on anti-money laundering and anti-terrorist financing (AML/ATF) efforts as
well as cybersecurity training. Risk management training is also offered
across all of the Bank's business units.
In addition to these five pillars, Internal Audit carries out corporate
cultural assessments as part of its engagements. Furthermore, to ensure the
effectiveness of the existing risk management framework, the Bank has defined
clear roles and responsibilities by reinforcing the concept of the three lines
of defence. The Governance Structure section presented on the following pages
defines this concept as well as the roles and responsibilities of these three
lines of defence.
First Line of Defence Second Line of Defence Third Line of Defence
Risk Owner Independent Oversight Independent Assurance
Business Units Risk Management Internal Audit
and Oversight Functions
• Identify, manage, assess and mitigate risks in day-to-day • Oversee risk management by setting policies and standards. • Provide the Board and management with independent assurance as to
activities.
the effectiveness of the main governance, risk management, and internal
control processes and systems.
• Provide independent oversight of management practices and an
• Ensure activities are aligned with the Bank's risk appetite and independent challenge of the first line of defence.
risk management policies.
• Provide recommendations and advice to promote the Bank's long-term
financial strength.
• Promote sound and effective risk management at the Bank.
• Monitor and report on risk.
Governance Structure((1))*
The following chart shows the Bank's overall governance architecture and the
governance relationships established for risk management.
The Board of Directors (Board)
The Board is responsible for approving and overseeing management of the Bank's
internal and commercial affairs, and it establishes strategic directions
together with management. It also approves and oversees the Bank's overall
risk philosophy and risk appetite, acknowledges and understands the main risks
faced by the Bank, and makes sure appropriate systems are in place to
effectively manage and control those risks. In addition, the Board ensures
that the Bank operates in accordance with environmental, social and governance
(ESG) practices and strategies. It carries out its mandate both directly and
through its committees: the Audit Committee, the Risk Management Committee,
the Human Resources Committee, the Conduct Review and Corporate Governance
Committee, and the Technology Committee.
The Audit Committee
The Audit Committee provides functional oversight over Internal Audit, thereby
ensuring its independence, and defines its responsibilities. It oversees the
work of the Bank's internal auditor and independent auditor; ensures the
Bank's financial strength; oversees the Bank's financial reporting, analysis
processes, and internal controls; and reviews any reports of irregularities in
accounting, internal controls, or audit. It also reviews ESG statements,
including climate-related disclosures included in financial reports.
The Risk Management Committee (RMC)
The Risk Management Committee examines the risk appetite framework and
recommends it to the Board for approval. It approves the main risk management
policies and risk tolerance limits. It ensures that appropriate resources,
processes, and procedures are in place to properly and effectively manage risk
on an ongoing basis. The Committee oversees top and emerging risks, including
financial and non-financial risks. It regularly receives the risk profile and
risk trends of the Bank's activities and ensures they are consistent with the
risk appetite.
The Human Resources Committee
The Human Resources Committee examines compensation risks, and it reviews and
approves the Bank's total compensation policies and programs, taking into
consideration the risk appetite framework and ESG strategies, and recommends
their approval to the Board. It recommends, for Board approval, the
compensation of the President and Chief Executive Officer, of the members of
the Senior Leadership Team, and of the heads of the oversight functions. This
committee oversees all human resources practices, including employee health,
safety and well-being, talent management matters such as succession planning
for management and oversight functions, as well as diversity, equity and
inclusion. Lastly, it oversees pension plans and employee benefits.
The Conduct Review and Corporate Governance Committee
The Conduct Review and Corporate Governance Committee ensures that the Bank
maintains sound practices that comply with legislation and best practices,
particularly in the area of ESG responsibilities, and that they align with the
Bank's One Mission. It reviews and approves business conduct and ethical
behaviour standards, including the Code of Conduct and the Whistleblower
Protection Policy. The committee oversees the application of complaint review
mechanisms and implements mechanisms that ensure compliance with consumer
protection provisions. Lastly, it ensures that the directors are qualified by
evaluating their performance and the effectiveness of the Board and by
planning director succession and the composition of the Board.
The Technology Committee
The Technology Committee oversees the various components of the Bank's
technology program. It reviews, among other things, the Bank's technology
strategy and monitors technology risks, including cyber risks, cybercrime,
privacy, and use of artificial intelligence.
(1) Additional information about the Bank's governance structure can be
found in the Management Proxy Circular for the 2025 Annual Meeting of Holders
of Common Shares, which will be available in March 2025 on the Bank's website
at nbc.ca and on SEDAR+'s website at sedarplus.ca. The mandates of the Board
and of its committees are available in their entirety at nbc.ca.
Senior Leadership Team of the Bank
Composed of the President and Chief Executive Officer and the officers
responsible for the Bank's main functions and business units, the Bank's
Senior Leadership Team ensures that risk management is sound and effective and
aligned with the Bank's pursuit of its business objectives and strategies. The
Senior Leadership Team promotes the integration of risk management into its
corporate culture and manages the primary risks facing the Bank.
The Internal Audit Oversight Function
The Internal Audit Oversight Function is the third line of defence in the risk
management framework. It is responsible for providing the Bank's Board and
management with objective, independent assurance on the effectiveness of the
main governance, risk management, and internal control processes and systems
and for making recommendations and providing advice to promote the Bank's
long-term strength.
The Finance Oversight Function
The Finance Oversight Function is responsible for optimizing management of
financial resources and ensuring sound governance of financial information. It
helps the business segments and support functions with their financial
performance, ensures compliance with regulatory requirements, and handles the
Bank's reporting to shareholders and the external reporting of the various
units, entities, and subsidiaries of the Bank. It is responsible for capital
management and actively participates in the activities of the Asset Liability
Committee.
The Risk Management Oversight Function
The Risk Management Oversight Function is responsible for identifying,
assessing and monitoring-independently and using an integrated approach-the
various risks to which the Bank and its subsidiaries are exposed and for
promoting a risk management culture throughout the Bank. The Risk Management
team helps the Board and management understand and monitor the top risks. This
service also develops, maintains, and communicates the risk appetite framework
while overseeing the integrity and reliability of risk measures.
The Compliance Oversight Function
The Compliance Oversight Function is responsible for implementing a Bank-wide
regulatory compliance risk management framework by relying on an
organizational structure that includes functional links to the main business
segments. It also exercises independent oversight and conducts assessments of
the compliance of the Bank and its subsidiaries with regulatory compliance
risk standards and policies.
The Global Risk Committee (GRC)
The Global Risk Committee is the overriding governing entity of all the Bank's
risk committees, and it oversees every aspect of the overall management of the
Bank's risks. It sets the parameters of the policies that determine risk
tolerance and the overall risk strategy, for the Bank and its subsidiaries as
a whole, and sets limits as well as tolerance and intervention thresholds
enabling the Bank to properly manage the main risks to which it is exposed.
The committee approves and monitors all large credit facilities using the
limits set out in the Credit Risk Management Policy. It reports to the Board,
and recommends for Board approval, the Bank's risk philosophy, risk appetite,
and risk profile management. The Operational Risk Management Committee, the
Financial Markets Risk Committee, and the Enterprise-Wide Risk Management
Committee presented in the governance structure chart are the primary
committees reporting to the Global Risk Committee. The Global Risk Committee
also carries out its mandate through the Senior Complex Valuation Committee
and the Model Oversight Committee, and through risk review committees.
The Compensation Risk Oversight Working Group
The Compensation Risk Oversight Working Group supports the Human Resources
Committee in its compensation risk oversight role. It is made up of at least
three members, namely, the Executive Vice-President and Chief Risk Officer,
the Chief Financial Officer and Executive Vice-President, Finance; and the
Executive Vice-President, Employee Experience. The working group helps to
ensure that compensation policies and programs do not unduly encourage senior
management members, leaders, material risk takers, and all employees to take
risks beyond the Bank's risk tolerance thresholds. As part of that role, it
ensures that the Bank is adhering to the Corporate Governance Guideline issued
by OSFI and to the Principles for Sound Compensation Practices issued by the
Financial Stability Board, for which the Canadian implementation and
monitoring is conducted by OSFI. The RMC also reviews the reports presented by
this working group.
The ESG Committee
Under the leadership of the Chief Financial Officer and Executive
Vice-President, Finance and of the Senior Vice-President, Communications,
Public Affairs and ESG, and made up of several leaders from different areas of
the Bank, the ESG Committee's main role is to develop and support the Bank's
environmental, social and governance initiatives. The ESG Committee is
responsible, among other things, for implementing the recommendations made by
the Task Force on Climate-related Financial Disclosures (TCFD) and the UN
Principles for Responsible Banking as well as the Bank's nine ESG principles
and related commitments (for more details, see the Governance section of the
ESG Report on the Bank's website, at nbc.ca). At least twice a year, the ESG
Committee reports to the Conduct Review and Corporate Governance Committee on
the progress made and on ongoing and upcoming ESG projects. In addition, and
in a timely fashion, the ESG Committee makes presentations on topics of
particular interest, such as extra-financial and climate risk disclosures, to
the Audit Committee and the RMC.
The IT Risk Management Strategic Committee (ITRMSC)
The Bank's senior management and the Senior Vice-President, Integrated Risk
Management, confer to the ITRMSC the responsibility for technology and cyber
risk governance. The ITRMSC, under the leadership of the Vice-President,
Technology, Cyber and Data Risk Management, has been mandated to ensure that
technology strategies (including cybersecurity and technology resilience) are
aligned with the Bank's risk appetite. This committee monitors key technology
risk indicators and significant technology risk developments, ensures that
emerging technology risks are monitored and follows their main trends. Lastly,
it contributes to developing a sound risk culture by promoting ownership of
technology risk management across the Bank.
The Privacy Office
The Privacy Office develops and implements the privacy program and the Bank's
strategy for ensuring privacy and protection of personal information. It
oversees the development, updating, and application of appropriate
documentation in support of the Bank's privacy program, including policies,
standards, and procedures. It also oversees the risk governance framework and
the implementation of appropriate controls designed to mitigate privacy risk.
It supports the business units in their execution of the Bank's strategic
directions and ensures adherence to privacy best practices. Lastly, it
participates in the work to develop and implement the program overseeing
artificial intelligence in the organization.
The Business Units
As the first line of defence, the business units manage risks related to their
operations within established limits and in accordance with risk management
policies by identifying, analyzing, managing, and understanding the risks to
which they are exposed and implementing risk mitigation mechanisms. The
management of these units must ensure that employees are adhering to current
policies and limits.
Asset Liability Committee
The Asset Liability Committee is composed of members of the Bank's Senior
Leadership Team, Risk Management leaders, Finance unit leaders, and business
unit leaders. It monitors and provides strategic actions on structural
interest rate risk, structural foreign exchange risk, and liquidity risk. It
is also charged with strategic coordination of the annual budget plan with
respect to the balance sheet, capital, and funding.
Reputation Risk Committee (RRC)
The Reputation Risk Committee is the central point for sharing information on
the Bank's reputation risk practices. In particular, it ensures that
appropriate frameworks are in place and being applied, that higher reputation
risks are being adequately monitored, and that mitigation plans are in place.
It sets risk appetite levels and proposes guidance and alignments that match
this risk appetite. The RRC reports to the Senior Leadership Team and the RMC.
Risk Management Policies
The risk management policies and related standards and procedures set out
responsibilities, define and describe the main business-related risks, specify
the requirements that business units must fulfill when assessing and managing
these risks, stipulate the authorization process for risk-taking, and set the
risk limits to be adhered to. They also establish the reporting that must be
provided to the various risk-related bodies, including the RMC. The policies
cover the Bank's top risks, are reviewed regularly to ensure they are still
relevant given market changes, regulatory changes and changes in the business
plans of the Bank's business units, and they apply to the entire Bank and its
subsidiaries, when applicable. Other policies, standards, and procedures
complement the main policies and cover more specific aspects of risk
management such as business continuity; the launch of new products,
initiatives, or activities; or financial instrument measurement.
Model Risk Management Governance
The Bank uses several models to guide enterprise-wide risk management,
financial markets strategy, economic and regulatory capital allocation, global
credit risk management, operational risk management, and profitability
measures. The model risk management policies as well as a rigorous model
management process ensure that model usage is appropriate and effective.
The key components of the Bank's model risk management governance framework
are the model risk management policies and standards, the model validation
group, and the Model Oversight Committee. The policies and standards set the
rules and principles applicable to the development and independent validation
of models. The range of models covered is broad, from market risk pricing
models and automated credit decision-making models to banking product fraud
detection models, regulatory capital models, and expected credit losses
models.
One of the cornerstones of the Bank's policies is the general principle that
all models deemed important for the Bank or used for regulatory capital
purposes require heightened lifecycle monitoring and independent validation.
All models used by the Bank are therefore classified based on their risk level
(low, medium, or high). Using this classification, the Bank applies strict
guidelines regarding the requirements for model development and documentation,
independent review thereof, performance monitoring thereof, and minimum review
frequency. The Bank believes that the best defence against model risk is the
implementation of a robust development and validation framework.
Independent Oversight by the Compliance Function
Compliance is an independent oversight function within the Bank. Its Senior
Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering
Officer has direct access to the RMC and to the President and Chief Executive
Officer and can communicate directly with leaders and directors of the Bank
and of its subsidiaries and foreign centres. The Senior Vice-President, Chief
Compliance Officer and Chief Anti-Money Laundering Officer regularly meets
with the Chair of the RMC, in the absence of management, to review matters on
the relationship between the Compliance function and the Bank's management and
on access to the information required.
Business unit managers must oversee the implementation of mechanisms for the
daily control of regulatory compliance risks arising from the operations under
their responsibility. Compliance exercises independent oversight to assist
managers in effectively managing these risks and to obtain reasonable
assurance that the Bank complies with the regulatory requirements that apply
to its operations, both in Canada and internationally.
Independent Assessment by Internal Audit
Internal Audit is an independent oversight function created by the Audit
Committee. Its Senior Vice-President has direct access to the Chair of the
Audit Committee and to the President and Chief Executive Officer and can
communicate directly with leaders and directors of the Bank and its
subsidiaries and foreign centres. The Senior Vice-President, Internal Audit,
regularly meets with the Chair of the Audit Committee, in the absence of
management, to review matters on the relationship between Internal Audit and
the Bank's management.
Internal Audit is the third line of defence of the Bank's risk management
framework. It provides reasonable assurance that the main governance, risk
management, and internal control processes and systems are ensuring that, in
all material respects, the Bank's key control procedures are effective and
compliant. Internal Audit also provides recommendations and advice on how to
strengthen these key control procedures. Business unit managers and senior
management must ensure the effectiveness of the main governance, risk
management, and internal control processes and systems, and they must
implement corrective measures if needed.
Top and Emerging Risks
Managing risks requires a solid understanding of every type of risk faced by
the Bank, as they could have a material adverse effect on the Bank's business,
results of operations, financial position, and reputation. As part of its risk
management approach, the Bank identifies, assesses, reviews and monitors the
range of top and emerging risks to which it is exposed in order to proactively
manage them and implement appropriate mitigation strategies. Identified top
and emerging risks are presented to senior management and communicated to the
RMC.
The Bank applies a risk taxonomy that categorizes, in two groups, the top
risks to which the Bank is exposed in the normal course of business:
· Financial risks: Directly tied to the Bank's key business activities and
are generally more quantifiable or predictable;
· Non-financial risks: Inherent in the Bank's activities and to which it
does not choose to be exposed.
The Bank separately qualifies the risks to which it is exposed: a "top risk"
is a risk that has been identified, is clearly defined, and could have a
significant impact on the Bank's business, results of operations, financial
position, and reputation, whereas an "emerging risk" is a risk that, while it
may also have an impact on the Bank, is not yet well understood in terms of
its likelihood, consequences, timing, or the magnitude of its potential
impact.
In the normal course of business, the Bank is exposed to the following top
risks.
Financial risks Non-financial risks
Credit Market Liquidity and funding risk Operational Regulatory compliance risk Reputation Strategic Environmental and social
risk risk risk risk risk risk
The Bank is also exposed to other new, so-called emerging or significant
risks, which are defined as follows.
Risk and Trend Description
Information security
The use of technology in the financial sector drives innovation by increasing
the operational efficiency and competitiveness of businesses to better meet
the evolving needs of clients and market requirements. However, this digital
transformation exposes banks to heightened information security risks.
Cybercriminals, who are increasingly more organized and sophisticated, target
confidential information and critical assets of organizations, causing system
failures, financial losses, service disruptions, litigations, fines, and harm
to the reputation of banking institutions.
In this context, the main risk for the Bank lies primarily in intentional or
accidental breaches of data or a malicious code infection following a case of
social engineering. In addition, the Bank has observed a growing number of
hackers are specializing in corporate credentials theft, thereby pointing to
continued ransomware-type attacks. Furthermore, the risk of the supply chain
being compromised and attacks aimed at deteriorating the performance of
websites or networks remain major sources of concern considering the growth in
the supplier ecosystem and geopolitical conflicts.
With respect to emerging risks, the Bank identified the rise of sophisticated
threats, such as the malicious use of artificial intelligence to replace a
human characteristic like the voice or face with another (deepfake). In
addition, the increased use of connected objects (Internet of Things or IoT)
and the power of quantum computers create new security challenges requiring
heightened vigilance and innovative defence strategies.
Risk and Trend Description
To mitigate these risks, the Bank makes ongoing investments aimed at
strengthening information security, protecting its clients and preserving
Information security their trust. It collaborates with its partners and regulatory authorities,
sets up specialized teams to anticipate and respond to cyber threats, and
(cont.) develops programs for its employees to raise awareness of good cybersecurity
practices and social engineering techniques, for instance through its
cybersecurity program. A governance and accountability structure is also in
place to support decision-making based on sound risk management. In addition,
the Technology Committee is regularly informed of the cybersecurity posture,
trends and developments, such as lessons learned from operational incidents
that have occurred in other large organizations, to gain a better
understanding of cybersecurity and privacy risks.
Data risk and protection of personal information
The Bank operates in an environment where data plays a crucial role, both as a
driver of growth and as a potential source of risk. The Bank understands that
the volume of data created, transformed and handled on a regular basis by all
its segments generates a risk that could give rise to impacts on a financial
level (regulatory penalties, increase in operating costs, etc.) and on a
reputational level, but also on its clients. The importance of effective data
governance and management has grown with the rapid evolution of technology. On
the one hand, the use of artificial intelligence requires data quality and
generates new risks, including ethical risks, such as potential biases. On the
other hand, the regulatory requirements are constantly evolving.
The Bank recognizes data as a strategic asset and has set the objective of
enhancing the quality and integrity of data to unlock its full strategic value
and improve decision-making while complying with regulatory requirements. To
support its efforts, the Bank applies industry best governance and risk
management practices and relies notably on the Basel Committee principles, as
well as internationally recognized principles that are adopted by major
financial institutions. In addition, the Bank continues its efforts and
investments to adopt new technologies and exploit the value of data to support
informed decisions and meet clients' needs with greater agility.
The Bank's Data Office established a data governance framework emphasizing
data quality, security, transparency, protection and risk management. The Data
Council ensures data management is aligned with the corporate strategy. As for
the Data Office, it ensures that the data strategy is deployed and
operationalized in each segment. Committees are in place to monitor the
progress of initiatives, ensure effective governance and sound data
management, and oversee data risk across the Bank.
A significant proportion of the data held by the Bank is personal information
about its clients and employees. Privacy risks exist throughout the data life
cycle and are explained in particular by the volume and sensitivity of the
information that a financial institution must hold about its clients as well
as the constantly evolving legislative requirements. These risks are also
related to the fact that information could be created, collected, used,
communicated, stored or destroyed inappropriately. The exposure to such risks
may become greater when the Bank uses external service providers to process
personal information. Collecting, using, disclosing and managing personal
information, as well as personal information governance, are among the
priorities of the Bank, which is investing in technology solutions and
innovations based on the development of its business activities.
These risks could lead to the loss or theft of personal information, decline
of the client base, financial losses, non-compliance with the legislation in
effect, investigations, legal disputes, penalties, punitive damages or
regulatory orders, compliance costs, corrective actions, and cost hikes to
maintain and upgrade technological infrastructures and systems; all of which
could affect the Bank's operating results or financial position, in addition
to having an impact on its reputation.
In recent years, innovations and the proliferation of technological solutions
that process or store personal information such as cloud computing, artificial
intelligence, machine learning, and open banking, gave rise to significant
legislative changes in many jurisdictions, including Canada and Quebec. For
more information on recent legislative changes, refer to the Regulatory
Compliance Risk section of this MD&A.
The Bank continues to monitor relevant legislative developments and enhance
its governance by updating its policies, standards and practices and by
deploying a privacy program that reflects its determination to maintain the
trust of its clients.
Risk and Trend Description
Technological innovation and competition
Changes in technology and the offering of niche products by non-banking
suppliers continue to shape the financial services industry. These businesses
represent competitors to watch, especially since they are not subject to the
same regulatory requirements as financial institutions. These developments
drive the Bank to remain relevant by offering innovative solutions and
services that meet the evolving tastes and needs of clients. In addition, new
business models are making their way. As a result, the Bank must be agile to
stand out. Whether by focusing on different partnership models for greater
complementarity or by integrating more financial services into its platforms,
the Bank strives to better meet its clients' needs, particularly in terms of
financial independence and well-being.
In the continuous spirit of offering a quality client experience, the Bank
continues to work on integrating artificial intelligence to improve its
business processes and increase their effectiveness. Using this technology
involves both operational and reputation risks, and this is why the principles
governing the development, acquisition and use of artificial intelligence,
defined as part of model risk management, entail the participation of
multidisciplinary teams and set out the roles and responsibilities of each
sector. These principles ensure a quality execution and oversight as well as
common rules and positionings for a responsible use of artificial intelligence
at the Bank. A series of guidelines and good practices, such as overseeing the
use of generative artificial intelligence, enables the Bank to optimize its
operations through the use of these tools while managing the associated risks,
including risks related to confidentiality and execution quality.
The Bank remains alert to the risks that could arise from the transformation
of financial services and continues to invest in the development of its
operational and technological capabilities. The Bank remains strongly
committed to innovation by collaborating closely with the financial industry
and regulatory authorities to set up the open banking regulatory framework and
through its specialized venture capital arm, NAventures(TM), which makes
investments in start-up or growing businesses to establish solid partnerships
that will shape the financial institution of the future.
Reliance on technology and third-party providers
The Bank's clients have higher expectations regarding the accessibility to
products and services on various platforms that house substantial amounts of
data. To diligently meet client expectations and respond to the rapid pace of
technological changes and the growing presence of new actors in the banking
sector, the Bank makes significant and ongoing investments in its technology
while maintaining the operational resilience and robustness of its controls.
Inadequate implementation of technological improvements or new products or
services could significantly affect the Bank's ability to serve and retain
clients.
Third parties provide essential components of the Bank's technological
infrastructure such as Internet connections, access to networks and other
communication services. The Bank also relies on the services of third parties
to support certain business processes and to handle certain IT activities. An
interruption of these services or a breach of security could have an
unfavourable impact on the Bank's ability to provide products and services to
its clients and on its operational resilience, not to mention the impact that
such events would have on the Bank's reputation. The systemic concentration of
third parties and subcontractors of our third parties also increases the risk
of disruption across the banking industry, and the geographic concentration of
third parties could generate disruptions caused by other risks, such as
natural disasters, weather and geopolitical events. To mitigate these risks,
the Bank has a third-party risk management framework that includes various
validations in terms of information security, financial health, beneficiary
and entity screening, regulatory compliance, business continuity, internal and
systemic concentration, execution, privacy, etc. that are carried out both
before entering into an agreement and throughout its life. The extent of the
due diligence review is based on the specific features of the agreement and is
commensurate with the level of risk of the agreement. The framework also
includes business continuity and technological succession plans as well as
exit or contingency plans to ensure effectiveness in the event critical
suppliers are not available. A governance and accountability structure has
also been established to support decision-making based on sound risk
management.
Despite these preventive measures and the efforts deployed by the Bank to
manage third parties, it is possible that some risks may materialize. In such
cases, the Bank would rely on mitigation mechanisms developed in collaboration
with the various concerned agreement owners and third parties. As the industry
is facing a broader ecosystem of third parties, OSFI issued a new version of
its Third-Party Risk Management Guideline (B-10), which has been in effect
since May 1, 2024. Mindful of the significance of third-party risk, the Bank
makes sure that its third-party management practices and policies evolve in
collaboration with its financial sector partners and with regulatory
authorities.
Risk and Trend Description
Geopolitical risks
Government decisions and international relations can have a significant impact
on the environment in which the Bank operates. Geopolitical events can lead to
volatility, have a negative impact on risky assets, and cause financial
conditions to deteriorate. They can also directly or indirectly affect banking
activities by having repercussions on clients. The war in Ukraine, which has
temporarily disrupted energy and agricultural supply chains, is a good
example. The economic sanctions taken against Russia for its invasion of
Ukraine and the steps taken by Russia to significantly reduce natural gas
supply to Europe have led to soaring energy costs. In turn, this situation
triggered the economic headwinds now facing Europe and heightened the risk of
a political reaction in the form of new governments taking power and social
unrest. Even if the war were to end, the shattered trust suggests that Europe
and Russia will continue to take measures to become less dependent on one
another, notably regarding energy matters. In addition, the clashes between
Israel and Hamas add a new risk of regional escalation in the Middle East. At
the time of writing this document, there is an escalation between Israel and
Hezbollah in Lebanon, which is supported by Iran. The greatest risk is that
this conflict spreads and develops into a more direct and lengthy
confrontation between Iran and Israel, which could complicate oil deliveries
in the Persian Gulf. This would have negative consequences on the global
geopolitical and economic landscape, as well as on energy prices.
While new risks could arise at any time, certain concerns are compelling us to
monitor other situations at this time. The geopolitical power struggle that
for years has pitted the United States against China is one such concern.
Businesses, in particular those operating in sectors deemed strategic, run an
increasing risk of finding themselves in a maze of contradictory regulations,
where complying with U.S. regulations means violating Chinese law, and vice
versa. These tensions could also partially undo some of the ties forged
between these two superpowers in the financial markets, which means that
Canada is being increasingly caught in the crossfires between the two
countries. The tariffs on Chinese electric vehicles is just one of many
examples.
Tensions between China and the United States on the subject of Taiwan is
another source of disagreement between the two superpowers. While we do not
believe an invasion is imminent, China will continue to exert pressure on
Taiwan through a combination of unprecedented military exercises and economic
sanctions. Taiwan's importance is highlighted by the fact that it is by far
the leading global producer of advanced microchips (over 90% of the market
share).
Closer to home, Canada is also dealing with some tensions. Until recently,
India represented an alternative to China as a potential trading partner
against a backdrop of persistent tensions with the Middle Kingdom (detention
of two Canadians in China and Chinese interference in Canadian elections).
However, Ottawa's accusations that the Indian government was involved in the
murder of a Canadian citizen have soured relations with India, and the
conflict could affect companies that have forged trade relationships or made
investments there.
However, the potential for confrontation does not end there, as protectionism
is gaining popularity, and a growing number of countries are implementing
measures to both financially support domestic businesses in key sectors (high
tech, health care, and food) and to protect them against global competition
through business restrictions. The combined effects of supply shortages
experienced during the COVID-19 pandemic and geopolitical tensions have
shifted the focus from efficiency to supply security.
In addition, the combined effect of climate change and armed conflicts could
lead to massive involuntary migration, which has already risen sharply in
recent years. This could have economic and political repercussions, with
Europe being particularly vulnerable. Lastly, with rising debt levels and
interest rates, some governments could face a dilemma as they try to satisfy
public demands to maintain social safety nets and respond to pressure from the
financial markets to improve their fiscal balance, causing political tensions
in the developed countries.
We will continue to monitor all of these developments, analyze any new risks
that arise, and assess the impacts that they may have on our organization.
Risk and Trend Description
Economic risk
Global economic growth remains relatively healthy, but still seems to have
slowed down in recent months. Once again, the manufacturing sector is the
source of this downturn, as the worldwide demand for goods continued to wane
after the post-pandemic rush. Geographically, the eurozone and China are the
main areas responsible for the tempered growth. In the single currency zone,
the consequences of the invasion of Ukraine by Russia are still being felt,
especially in Germany, where energy price increases accelerated the erosion of
the industrial base and resulted in GDP stagnation and a rise in the
unemployment rate. The determination of the European Central Bank (ECB) to
reduce key interest rates is certainly good news, but due to the significant
lag in the transmission of monetary policy, it may be a long time before the
ECB's actions succeed in boosting growth once and for all. Meanwhile, China
continues to face a painful deleveraging process in the real estate sector
that undermines household confidence and could lead to an international
reduction in commodities demand. Low, or even negative inflation, is another
factor to monitor, not only because it reflects weak domestic demand, but also
because a potential entrenchment of deflation could make debt service more
challenging in the world's second largest economy.
Even in the United States, where growth remains solid, some risk factors
persist, such as the lagged effects of the monetary policy tightening or the
regional banks' exposure to commercial real estate. The growing popularity of
protectionist policies on both sides of the political aisle is another source
of concern, as it may further strain commercial relations with China.
While the economic risks mentioned up to this point are more short-term, other
risks carry weight on a longer term, such as the significant deterioration of
the fiscal position of many countries. Many governments became much more
indebted during the pandemic and are now facing an interest payment shock as
bonds come due. Government financing needs will be considerable in the years
to come, with demographic changes, the fight against climate change, and
reindustrialization, which might exacerbate the pressure on public finances.
There is reason to believe that investors could demand compensation for
financing more fragile governments. This could limit the power of governments
to act in the event of economic weakness.
Lastly, climate issues are an added risk in the current context. If too few
measures are adopted on the climate front, severe weather events will
intensify and result in economic woes over the long term. Conversely, a too
swift transition could result in other risks, particularly short- and
medium-term economic costs and rising pressure on production costs.
In short, given the ongoing uncertainties in this economic environment, the
Bank remains vigilant in the face of numerous factors and will continue to
rely on its strong risk management framework to identify, assess, and mitigate
the negative impacts while also remaining within its risk appetite limits.
Real estate and household indebtedness
With interest rates remaining high and central banks continuing to be
concerned about inflation, it is normal to wonder how these circumstances are
affecting Canadian households with high levels of debt. Canadian household
debt, on a global scale, is high in relation to disposable income, as is the
case in other countries with generous social safety nets. In recent years,
policymakers have introduced a number of financial stability measures to limit
Canadian household debt. This has paid off, as shown by the debt ratio, which
had been relatively unchanged since 2016 and has decreased since the start of
monetary policy tightening. Nonetheless, indebted households are feeling the
impact of high interest rates. For now, job layoffs have remained limited,
which cushioned late payments on loans, but we are not immune to a potential
recession that could make matters worse. The Bank offers variable
rate/variable payment mortgage loans. This means that clients in this
situation have been able to gradually adjust their budgets since the start of
the multiple rate hikes and avoid an overly high payment shock when they renew
their mortgage term, as is the case for borrowers that have variable
rate/fixed payment mortgages with other lending institutions.
Risk and Trend Description
Real estate and household indebtedness
(cont.) Soaring house prices have been one of the causes of the country's high
indebtedness since the early 2000s. For the time being, property prices have
been resilient in the face of rising interest rates, since their impact has
been offset by record population growth over the past few quarters. But, as
mentioned above, a less buoyant job market could push the real estate sector
into another slump. A severe recession could cause house prices to plunge,
giving rise to an increase in strategic defaults. Lower debt levels in Quebec
compared to the rest of Canada, due to more affordable housing prices,
combined with the fact that the province has a higher percentage of households
where both spouses are employed, helps limit the Bank's exposure to a
significant increase in credit risk.
The Bank takes all these risks into account when establishing lending criteria
and estimating allowances for credit losses. It should be noted that borrowers
are closely monitored on an ongoing basis, and portfolio stress tests are
conducted periodically to detect any vulnerable borrowers. The Bank
proactively contacts those who are identified and proposes appropriate
solutions to enable them to continue to meet their commitments.
Climate change
Climate-related risk may have an impact on the traditional risks that are
inherent in a financial institution's operations, including credit risk,
market risk, liquidity and funding risk, and operational risk, among others.
Climate risk could result in financial losses for the Bank, affect its
operations and how it conducts them, in addition to harming its reputation and
increasing its regulatory compliance risk, or have repercussions on the
operations and financial position of its clients. It is possible that the
Bank's or its clients' business models fail to align with a low-carbon economy
or that their responses to government strategies and regulatory changes prove
inadequate or fail to achieve the objectives within the predetermined
deadlines. Consequently, to better assess this risk and adequately manage it,
the Bank has integrated a climate dimension to its risk management and risk
appetite frameworks to identify, measure, manage, monitor and report the
impact of this risk and business opportunities. The roles and responsibilities
of the three lines of defence were also defined in a climate-related risk
management standard, and several other internal risk management policies now
include climate-related risk in their assessment and management of these
risks. The Bank also optimized some of its scenario analysis processes to
assess the impact of climate on its portfolios.
In addition, the rapid evolution of the global regulatory environment, the
commitments and frameworks to which we adhere, and stakeholder expectations
concerning our objectives, as well as the actions we take to meet them and
disclosures may constitute a reputation risk and regulatory compliance risk,
including due to potential imbalances among their requirements, in addition to
increasing the risk of lawsuits. The many regulatory standards and projects
that have been issued, such as OSFI's guideline B-15, Climate Risk Management;
the standards of the International Sustainability Standards Board (ISSB(tm)),
the proposed standards of the Canadian Sustainability Standards Board (CSSB),
the European Corporate Sustainability Reporting Directive (CSRD) designed to
govern the disclosure of sustainability-related and climate-related financial
information, and the CSA's proposed National Instrument 51-107 - Disclosure of
Climate-Related Matters, are an illustration.
The actual impacts of these risks will depend on future events, many of which
are beyond the Bank's control, such as the effectiveness of targets set by
government climate strategies or regulatory developments. The Bank must
therefore devote special attention to reducing its exposure to these factors
and, at the same time, to seizing new growth opportunities. Its strategies and
policies have therefore been designed to consider climate-related risks while
also supporting the transition to a low-carbon economy.
Risk and Trend Description
Climate change
(cont.) The Bank strives to support and advise its clients in their own transition.
From this perspective, we continue to deliver climate-related risk management
training across the organization.
To better understand and mitigate climate-related risks, the Bank also takes
part in major national and international initiatives, including the United
Nations Principles for Responsible Banking (UNPRB), the United Nations
Principles for Responsible Investing (UNPRI), the Net-Zero Banking Alliance
(NZBA), the Partnership for Carbon Accounting Financials (PCAF), among others.
The Bank continues to closely monitor regulatory developments and the
development of frameworks, commitments, and stakeholder expectations, so that
it can enhance its climate-related risk management framework and further adapt
its disclosures. For additional information, see the Environmental and Social
Risk section of this MD&A.
Other Factors That Can Affect the Bank's Business, Operating Results,
Financial Position, and Reputation
Ability to Recruit and Retain Key Resources
The Bank's current and future performance depends greatly on its ability to
recruit, develop, and retain key resources. Overall, attracting and retaining
personnel improved in 2024 compared to 2023 and 2022. These results are
explained by contextual factors such as immigration and higher unemployment.
Challenges remain for some administrative and client-facing positions, and
targeted actions are taken for these groups. Despite our improved ability to
attract and retain key talents, we continue to monitor this risk. Reports are
submitted quarterly to the Board's Human Resources Committee. In addition, we
make significant improvements to our talent recruiting, integration and
development processes. A new recruitment experience was deployed in 2024 and
will continue to be enhanced. We will also begin to gradually deploy a new
development experience platform at the end of 2024.
International Risks
Through the operations of some of the Bank's units (mainly its New York and
London offices) and subsidiaries in Canada and abroad (in particular Credigy
Ltd., NBC Global Finance Limited, and Advanced Bank of Asia Limited), the
Bank is exposed to risks arising from its presence in international markets
and foreign jurisdictions. While these risks do not affect a significant
proportion of the Bank's portfolios, their impact must not be overlooked,
especially those that are of a legal or regulatory nature. International risks
can be particularly high in territories where the enforceability of agreements
signed by the Bank is uncertain, in countries and regions facing political or
socioeconomic disturbances, or in countries that may be subject to
international sanctions. Generally speaking, there are many ways in which the
Bank may be exposed to the risks posed by other countries, not the least of
which being foreign laws and regulations. In all such situations, it is
important to consider what is referred to as "country risk." Country risk
affects not only the activities that the Bank carries out abroad, but also the
business that it conducts with non-resident clients as well as the services it
provides to clients doing business abroad, such as electronic funds transfers
or international products, and operations made from Canada in foreign
currencies.
As part of its activities, the Bank must adhere to AML/ATF regulatory
requirements in effect in each jurisdiction where it conducts business. It
must also comply with the requirements pertaining to current international
sanctions in these various jurisdictions. AML/ATF risk is a financial,
regulatory, and reputation risk. For additional information, see the
Regulatory Compliance Risk Management section of this MD&A.
The Bank is exposed to financial risks outside Canada and the United States
primarily through its interbank transactions on international financial
markets or through international trade financing activities. This geographic
loan exposure represents a moderate proportion of the Bank's total risk. The
geographic spread of loans is disclosed in the quarterly Supplementary
Financial Information report available on the Bank's website at nbc.ca. To
control country risk, the Bank sets credit concentration limits by country and
reviews and submits them to the Board for approval upon renewal of the Credit
Risk Management Policy. These limits are based on a percentage of the Bank's
regulatory capital, in line with the level of risk represented by each
country, particularly emerging countries. The risk is rated using a
classification mechanism similar to the one used for credit default risk. In
addition to the country limits, authorization caps and limits are established,
as a percentage of equity, for the world's high-risk regions, i.e.,
essentially all regions except for North America, Western Europe, and the
developed countries of Asia.
Acquisitions
The Bank's ability to successfully complete an acquisition is often
conditional on regulatory approval. The Bank cannot be certain of the timing
or conditions of regulatory decisions. Acquisitions could affect future
results should the Bank experience difficulty integrating the acquired
business. If the Bank does encounter difficulty integrating an acquired
business, maintaining an appropriate governance level over it or retaining key
officers within said business, these factors could prevent the Bank from
realizing expected revenue growth, cost savings, market share gains, and other
projected benefits of the acquisition.
Intellectual Property
The Bank adopts various strategies to protect its intellectual property
rights. However, the protection measures that it may obtain or implement do
not guarantee that it will be able to dissuade or prevent anyone from
infringing its rights or to obtain compensation when infringement occurs.
Moreover, the goods and services developed by the Bank are provided in a
competitive market where third parties could hold intellectual property rights
prior to those held by the Bank. In addition, financial technologies are the
subject of numerous developments in intellectual property and patent
applications, both in Canada and internationally. Therefore, in certain
situations, the Bank could be limited in its ability to acquire intellectual
property rights, develop tools, or market certain products and services. It
could also infringe the rights of third parties, which could lead to legal
action brought against the Bank.
Judicial and Regulatory Proceedings
The Bank takes reasonable measures to comply with the laws and regulations in
effect in the jurisdictions where it operates. Still, the Bank could be
subject to judicial or regulatory decisions resulting in fines, damages or
other costs, or to restrictions likely to adversely affect its operating
results or its reputation. The Bank may also be subject to litigations in the
normal course of business. Although the Bank establishes provisions for the
measures it is subject to under accounting requirements, actual losses
resulting from such litigations could differ significantly from the recognized
amounts, and unfavourable outcomes in such cases could have a significant
adverse effect on the Bank's operating results. The resulting reputational
damage could also affect the Bank's future business prospects. For additional
information, see Note 28 to the Consolidated Financial Statements.
Tax Risk
The tax laws applicable to the Bank are numerous, complex, and subject to
amendment at any time. This complexity can result in differing legal
interpretations between the Bank and the respective tax authorities it deals
with. In addition, legislative changes and changes in tax policy, including
the interpretation thereof by tax authorities and courts, could affect the
Bank's earnings. International and domestic initiatives may also result in
changes to tax laws and policies, including international efforts by the G20
and the Organisation for Economic Co-operation and Development (OECD) to
broaden the tax base. For additional information on income taxes, see the
Income Taxes and Material Accounting Policies and Accounting Estimates
sections of this MD&A, and Note 26 to the Consolidated Financial
Statements.
Accounting Policies, Methods and Estimates Used by the Bank
The accounting policies and methods used by the Bank determine how the Bank
reports its financial position and operating results and require management to
make estimates or assumptions about matters that are inherently uncertain. Any
changes to these estimates and assumptions may have a significant impact on
the Bank's operating results and financial position.
Additional Factors
Lastly, several other factors could have an impact on the Bank's operations,
operating results, financial position, and reputation, including: unexpected
changes in consumer spending and saving habits; the timely development and
launch of new products and services; the ability to successfully align its
organizational structure, resources, and processes; the ability to activate a
business continuity plan within a reasonable time; the repercussions on the
Bank's activities of international conflicts, natural disasters or public
health emergencies such as pandemics; and the Bank's ability to foresee and
effectively manage the risks resulting from these factors through rigorous
risk management.
Credit Risk
Credit risk is the risk of incurring a financial loss if an obligor does not
fully honour its contractual commitments to the Bank. Obligors may be
borrowers, issuers, guarantors or counterparties. Credit risk is the most
significant risk facing the Bank in the normal course of its business. The
Bank is exposed to credit risk not only through its direct lending activities
and transactions but also through commitments to extend credit and through
letters of guarantee, letters of credit, over-the-counter derivatives trading,
debt securities, securities purchased under reverse repurchase agreements,
deposits with financial institutions, brokerage activities, and transactions
carrying a settlement risk for the Bank such as irrevocable fund transfers to
third parties via electronic payment systems.
Governance
A policy framework centrally governs the activities that generate credit risk
for the Bank and its subsidiaries and is supplemented by a series of
subordinate internal policies and standards. These policies and standards
address specific management issues such as concentration limits by borrower
group and business sector, credit limits, collateral requirements, and risk
quantification or issues that provide more thorough guidance for given
business segments.
For example, the institutional activities of the Bank and its subsidiaries on
financial markets and international commercial transactions are governed by
business unit directives that set out standards adapted to the specific
environment of these activities. This also applies to retail brokerage
subsidiaries. In isolated cases, a business unit or subsidiary may have its
own credit policy, and that policy must always fall within the spirit of the
Bank's policy framework. Risk Management's leadership team defines the scope
of the universe of subsidiaries carrying significant credit risks and the
magnitude of the risks incurred.
Credit risk is controlled through a rigorous process that comprises the
following elements:
• credit risk rating and assessment;
• economic capital assessment;
• stress testing;
• credit granting process;
• revision and renewal process;
• risk mitigation;
• follow-up of monitored accounts and recovery;
• counterparty risk assessment;
• settlement risk assessment;
• environmental risk assessment.
Concentration Limits
The risk appetite is allocated based on the setting of concentration limits.
The Bank sets credit concentration and settlement limits by obligor group, by
business sector, by country, and by region. These limits are subject to the
approval of the RMC. Certain types of financing or financing programs are also
subject to specific limits. Breaches of concentration limits by obligor group
or by region are reported to the RMC each quarter. Furthermore, every business
sector, country, and region whose exposure equals a predetermined percentage
of the corresponding authorized limit is reported to the Bank's Risk
Management leadership team. At least once a year, the Bank revises these
exposures by business sector, by country, and by region in order to determine
the appropriateness of the corresponding concentration limits.
Reporting
Every quarter, an integrated risk management report is presented to senior
management and the RMC. It presents changes in the credit portfolio and
highlights on the following matters:
• credit portfolio volume growth by business segment;
• breakdown of the credit portfolio according to various criteria
for which concentration limits have been set;
• changes in provisions and allowances for credit losses;
• changes in impaired loans;
• changes in monitored accounts;
• changes in delinquency;
• monitoring of OSFI's Guideline B-20 - Residential Mortgage
Underwriting Practices and Procedures.
Credit Risk Rating and Assessment
Before a sound and prudent credit decision can be made, an obligor's or
counterparty's credit risk must be accurately assessed. This is the first step
in processing credit applications. Using a credit risk rating system developed
by the Bank, each application is analyzed and assigned one of 19 grades on a
scale of 1 to 10 for all portfolios exposed to credit risk. As each grade
corresponds to an obligor's, counterparty's, or third party's probability of
default, the Bank can estimate the credit risk. The credit risk assessment
method varies according to portfolio type. There are two main methods for
assessing credit risk to determine minimum regulatory capital requirements for
most of its portfolios, the Internal Ratings-Based (IRB) Approach and the
revised Standardized Approach, as defined by the Basel Accord. The IRB
Approach applies to most of its credit portfolios. Since the implementation of
the Basel III reforms in April 2023, the Bank must use the Foundation
Internal Ratings-Based (FIRB) Approach for certain specific exposure types
such as financial institutions, including insurance companies, or large
corporations that belong to a group whose consolidated annual sales exceed
$750 million. For all other exposure types treated under an IRB Approach, the
Bank uses the Advanced Internal Ratings-Based (AIRB) Approach.
The main parameters used to measure credit risk in accordance with the IRB
Approach are as follows:
· probability of default (PD), which is the probability of
through-the-cycle 12-month default by the obligor, calibrated on a long-run
average PD throughout a full economic cycle;
· loss given default (LGD), which represents the magnitude of the
loss from the obligor's default that would be expected in an economic downturn
and subject to certain regulatory floors, expressed as a percentage of
exposure at default;
· exposure at default (EAD), which is an estimate of the amount drawn
and of the expected use of any undrawn portion prior to default, and cannot be
lower than the current balance.
Under the FIRB approach, the Bank provides its own estimates of PD and applies
OSFI's estimates for LGD and EAD. Under both IRB Approaches, risk parameters
are subject to specific input floors.
The methodology as well as the data and the downturn periods used to estimate
LGD under the AIRB Approach are described in the table below.
AIRB APPROACH DATA((1)) DOWNTURN PERIOD((1)) METHODOLOGY FOR CALCULATING LGD
Retail The Bank's internal historical data from 1996 to 2022 1996-1998 and 2008-2009 LGD based on the Bank's historical internal data on recoveries and losses
Corporate 2000-2003, 2008-2009 LGD based on the Bank's historical recoveries and losses internal data and on
Moody's data
The Bank's internal historical data from 2000 to 2023 and 2020
Benchmarking results using:
• Moody's observed default price of bonds,
from 1983 to 2021
• Global Credit Data Consortium historical loss and recovery
database from 1998 to 2021
Sovereign Moody's observed default price of bonds, from 1983 to 2020 1999-2001 and 2008-2012 Based on implied market LGD using observed bond price decreases following the
issuer's default
S&P rating history from 1975 to 2023
Financial institutions Global Credit Data Consortium historical loss and recovery database from 1991 1991-1992, 1994, 1997-1998, 2001‑2002, and 2008-2009 Model for predicting LGD based on different issue- and issuer-related risk
to 2013((2)) drivers
(1) The performance of the models resulting from the AIRB Approach is
measured quarterly, and the methodologies are validated by an independent
third party annually. A report on model performance under the AIRB Approach is
presented annually to the RMC. According to the most recent performance
report, the models continue to perform well and do not require the addition of
new data.
(2) An in-depth revision, including more recent data, is currently being
validated and will be deployed in the coming quarters.
Personal Credit Portfolios
This category comprises portfolios of residential mortgage loans, consumer
loans, and loans to certain small businesses. To assess credit risk, AIRB
models are in place for the main portfolios, particularly mortgage loans, home
equity lines of credit, credit cards, budget loans, lines of credit, and SME
retail. A risk analysis based on loan grouping in pools of homogeneous obligor
and product profiles is used for overall management of personal credit
portfolios. This personal credit assessment approach, which has proven
effective particularly for estimating credit defaults and losses, takes a
number of factors into account, namely:
· attributes from credit rating agencies (scoring) related to
behaviour;
· loan product characteristics;
· collateral provided;
· the length of time on the Bank's balance sheet;
· loan status (active, delinquent, or defaulted).
This mechanism provides adequate risk measurement inasmuch as it effectively
differentiates risk levels by pool. Therefore, the results are periodically
reviewed and, if necessary, adjustments are made to the models. Obligor
migrations between pools are among the factors considered when assessing
credit risk.
Loan pools are also established based on PD, LGD, and EAD, which are measured
based on the characteristics of the obligor and the transaction itself. The
credit risk of these portfolios is estimated using credit scoring models that
determine the obligor's PD. LGD is estimated based on transaction-specific
factors such as loan product characteristics (for example, a line of credit
versus a term loan), loan-to-value ratio, and types of collateral.
Credit scoring models are also used to grant credit. These models use proven
statistical methods that measure an obligor's demand characteristics and
history based on internal and external historical information to estimate the
obligor's future credit behaviour and assign a probability of default. The
underlying data include obligor information such as current and past
employment, historical loan data in the Bank's management systems, and
information from external sources such as credit rating agencies.
The Bank also uses behaviour scoring models to manage and monitor current
commitments. The risk assessment is based on statistical analyses of the past
behaviour of obligors with which the Bank has a long-term relationship in an
effort to predict their future behaviour. The underlying information includes
the obligor's cash flows and borrowing trends. Information on characteristics
that determine behaviour in these models also comes from both internal sources
on current commitments and external sources. The table on the following page
presents the PD categories and credit quality of the associated personal
credit portfolio.
Mortgage Loan Underwriting
To mitigate the impact of an economic slowdown and ensure the long-term
quality of its portfolio, the Bank uses sound risk management when granting
residential mortgages to confirm: (i) the obligor's intention to meet its
financial obligations, (ii) the obligor's ability to repay its debts, and
(iii) the quality of the collateral. In addition, in accordance with the
applicable rules, the Bank takes a prudent approach to client qualification by
using, for example, a higher interest rate to mitigate the risk of short- or
medium-term rate hikes.
Nonetheless, the risk of economic slowdown could adversely affect the
profitability of the mortgage portfolio. In its stress test analyses, the Bank
considers a variety of scenarios to measure the impact of adverse market
conditions. In such circumstances, our analyses show higher credit losses,
which would decrease profitability and reduce the Bank's capital ratios.
However, it should be recalled that our mortgagors showed great resilience to
interest rate increases.
Between March 2, 2022 and July 12, 2023, the Bank of Canada had raised its
policy interest rate ten times, from 0.25% to 5%. This rapid increase in
rates, undertaken primarily to counter inflation in Canada, continues to put
pressure on the ability of borrowers to make payments, notably borrowers with
variable-rate mortgages or for whom the mortgage term is up for renewal. Over
the course of its last four announcements, which occurred on June 5,
July 24, September 4, and October 23, 2024, the Bank of Canada lowered its
policy interest rate from 5% to 3.75%.
New Regulatory Developments
The Bank also closely monitors regulatory developments and is actively
involved in the various consultation processes. Regulatory developments since
November 1, 2023 that should be considered are presented below.
In December 2023, OSFI stated that the stress test rule should not apply to
insured mortgage switch applications between financial institutions. More
specifically, insured mortgage holders should not have to requalify under the
minimum qualifying rate when they switch lending institutions upon renewing
their mortgage loans.
On February 5, 2024, the Prohibition on the Purchase of Residential Property
by Non-Canadians Act, which should have been in effect until January 1, 2025,
was extended to January 1, 2027. The purpose of this law is to help Canadians
access the property market and to reduce speculative purchasing that risks
raising the prices of properties in some already overheated markets.
During fiscal 2024, OSFI implemented a loan-to-income (LTI) limit applicable
to new uninsured mortgage loans. This limit, which is intended to restrict the
banks' exposure to households with high levels of debt, will come into effect
in the first quarter of 2025.
Business and Government Credit Portfolios
This category comprises business (other than some small businesses that are
classified in personal credit portfolios), government, and financial
institution credit portfolios.
These credit portfolios are assigned a risk rating that is based on a detailed
individual analysis of the financial and non-financial aspects of the obligor,
including the obligor's financial strength, sector of economic activity,
competitive ability, access to funds, and number of years in business. The
Bank uses risk-rating tools and models to specifically assess the risk
represented by an obligor in relation to its business sector and peers. The
models used are adapted to the obligor's broad sector of activity. Models are
in place for ten sectors: business/commercial, large business, financial
institutions, sovereigns, investment funds, energy, real estate, agriculture,
insurance, and public-private partnership project financing.
This risk assessment method assigns a default risk rating to an obligor that
reflects its credit quality. To each default credit risk rating corresponds a
PD (see the table below). Using this classification of obligor credit risk,
the Bank can differentiate appropriately between the various assessments of an
obligor's capacity to meet its contractual obligations. Default risk ratings
are assigned according to an assessment of an obligor's commercial and
financial risks based on a solvency review. Various risk quantification
models, described below, are used to perform this assessment.
The business and government default risk rating scale used by the Bank is
similar to the systems used by major external rating agencies. The following
table presents a grouping of the ratings by major risk category and compares
them with the ratings of two major rating agencies.
Internal Default Risk Ratings*
Description((1)) Personal credit Description((1)) Business and government
portfolios credit portfolios
PD (%) - Retail Ratings PD (%) - PD (%) - Standard Moody's
Corporate and Sovereign & Poor's
financial institutions
Excellent 0.000-0.144 Excellent 1-2.5 0.000-0.111 0.000-0.059 AAA to A- Aaa to A3
Good 0.145-0.506 Good 3-4 0.112-0.383 0.060-0.330 BBB+ to BBB- Baa1 to Baa3
Satisfactory 0.507-2.681 Satisfactory 4.5-6.5 0.384-4.234 0.331-5.737 BB+ to B Ba1 to B2
Special mention 2.682-9.348 Special mention 7-7.5 4.235-10.181 5.738-17.963 B- to CCC+ B3 to Caa1
Substandard 9.349-99.999 Substandard 8-8.5 10.182-99.999 17.964-99.999 CCC & CCC- Caa2 & Caa3
Default 100 Default 9-10 100 100 CC, C & D Ca, C & D
(1) Additional information is provided in Note 8 - Loans and Allowances
for Credit Losses to the Consolidated Financial Statements.
The Bank also uses individual assessment models by major business sector to assign a risk rating to the credit facility based on the collateral that the obligor is able to provide and, in some cases, based on other factors. The Bank consequently has a bi-dimensional risk-rating system that, using models and internal and external historical data, establishes a default risk rating for each obligor. In addition, the models assign to each credit facility an LGD risk rating that is independent of the default risk rating assigned to the obligor.
The Bank's default risk ratings and LGD risk ratings as well as the related
risk parameters contribute directly to informed credit-granting, renewal, and
monitoring decisions. They are also used to determine and analyze risk-based
pricing. In addition, from a credit portfolio management perspective, they are
used to establish counterparty credit concentration limits and sector
concentration limits and limits to decision-making power as well as to
determine the credit risk appetite of these portfolios. Moreover, they
represent an important component in estimating expected and unexpected losses,
measuring minimum required economic capital, and measuring the minimum level
of capital required, as prescribed by the regulatory authorities.
The credit risk of obligors and their facilities is assessed with the PD and
LGD parameters at least once a year or more often if significant changes
(triggers) are observed when updating financial information or if another
qualitative indicator of a deterioration in the obligor's solvency or in the
collateral associated with the obligor's facilities is noted. The Bank also
uses a watchlist to more actively monitor the financial position of obligors
whose default-risk rating is greater than or equal to 7.0. This process seeks
to minimize an obligor's default risk and allows for proactive credit risk
management.
Validation
The Risk Management Group monitors the effectiveness of the risk-rating
systems and associated parameters, which is also reviewed regularly in
accordance with the Bank's policies. Backtesting is performed at regular
intervals to validate the effectiveness of the models used to estimate PD,
LGD, and EAD. For PD in particular, this backtesting takes the form of
sequentially applied measures designed to assess the following criteria:
• discriminatory power of the model;
• proportion of overrides;
• model calibration;
• stability of the model's inputs and outputs.
The credit risk quantification models are developed and tested by a team of
specialists with model performance being monitored by the applicable business
units and related credit risk management services. Models are validated by a
unit that is independent of both the specialists who developed the model and
the concerned business units. Approvals of new models or changes to existing
models are subject to an escalation process established by the model risk
management policy. Furthermore, new models or changes to existing models that
markedly impact regulatory capital must be approved by the Board before being
submitted to the regulatory agencies.
The facility and default risk-rating systems, methods, and models are also
subject to periodic validation, which is a responsibility shared between the
development and validation teams, the frequency of which depends on the
model's risk level. Models that have a significant impact on regulatory
capital must be reviewed regularly, thereby further increasing the certainty
that these quantification mechanisms are working as expected.
The key aspects to be validated are risk factors allowing for accurate
classification of default risk by level, adequate quantification of exposure,
use of assessment techniques that consider external factors such as economic
conditions and credit status and, lastly, compliance with internal policies
and regulatory provisions.
The Bank's credit risk assessment and rating systems are overseen by the Model
Oversight Committee, the GRC, and the RMC, and these systems constitute an
integral part of a comprehensive Bank-wide credit risk oversight framework.
Along with the above-mentioned elements, the Bank documents and periodically
reviews the policies, definitions of responsibilities, resource allocation,
and existing processes.
Assessment of Economic Capital
The assessment of the Bank's minimum required economic capital is based on the
credit risk assessments of obligors. These two activities are therefore
interlinked. The different models used to assess the credit risk of a given
portfolio type also enable the Bank to determine the default risk correlation
among obligors. This information is a critical component in the evaluation of
potential losses for all portfolios with credit risk. Estimates of potential
losses, whether expected or not, are based on historical loss experience,
portfolio monitoring, market data, and statistical modelling. Expected and
unexpected losses are used in assessing the minimum required economic capital
for all of the Bank's credit portfolios. The assessment of economic capital
also considers the anticipated potential migrations of the default risk
ratings of obligors during the remaining term of their credit commitments. The
main risk factors that have an impact on economic capital are as follows:
• the obligor's PD;
• the obligor's EAD;
• the obligor's LGD;
• the default correlation among various obligors;
• the residual term of credit commitments;
• the impact of economic and sector-based cycles on asset
quality.
Stress Testing
The Bank carries out stress tests to evaluate its sensitivity to crisis situations in certain business sectors and key portfolios. A global stress test methodology covers most business, government, and personal credit portfolios to provide the Bank with an overview of the situation. By simulating specific scenarios, these tests enable the Bank to measure allowances for credit losses according to IFRS 9 - Financial Instruments (IFRS 9), to assess the level of regulatory capital needed to absorb potential losses, and to determine the impact on its solvency. In addition, these tests contribute to portfolio management as they influence the determination of concentration limits by obligor, product, or business sector. During fiscal 2023 and 2024, several simulations were carried out to assess the impact of rising interest rates and inflation on the financial positions of borrowers. Based on these simulations, the Bank was able to test the resilience of clients, and, in turn, the resilience of the Bank's loan portfolio.
Credit-Granting Process
Credit-granting decisions are based first and foremost on the results of the
risk assessment. Aside from a clients' solvency, credit-granting decisions are
also influenced by factors such as available collateral and guarantees,
transaction compliance with policies, standards and procedures, and the Bank's
overall risk-adjusted return objective. Each credit-granting decision is made
by various authorities within the risk management teams and management, who
are independent of the business units, which are determined based on the size
of the proposed credit transaction and the associated risk. Decision-making
authority is determined in compliance with the delegation of authority set out
in the Credit Risk Management Policy. A person in a senior position in the
organization approves credit facilities that are substantial or carry a higher
risk for the Bank. The GRC approves and monitors all substantial credit
facilities. Credit applications that exceed management's latitudes are
submitted to the Board for approval. The credit-granting process demands a
high level of accountability from managers, who must proactively manage the
credit portfolio.
Review and Renewal Processes
The Bank periodically reviews credit files. The review process enables the
Bank to update information on the quality of the facilities and covers, among
other things, risk ratings, compliance with credit conditions, collateral, and
obligor behaviour. For business credit portfolios, the credit risk of all
obligors is reviewed at least once per year. After this periodic review, for
on-demand or unused credit, the Bank decides whether to pursue its business
relationship with the obligor and, if so, revises the credit conditions. For
personal credit portfolios, the credit risk of all obligors is reviewed on a
continual basis.
Risk Mitigation
The Bank also controls credit risk using various risk mitigation techniques.
In addition to the standard practice of requiring collateral to guarantee
repayment of the credit it grants, the Bank also uses protection mechanisms
such as credit derivative financial instruments, syndication, and loan
assignments as well as an orderly reduction in the amount of credit granted.
The most common method used to mitigate credit risk is obtaining quality
collateral from obligors. Obtaining collateral cannot replace a rigorous
assessment of an obligor's ability to meet its financial obligations, but,
beyond a certain risk threshold, it is an essential complement. Obtaining
collateral depends on the level of risk presented by the obligor and the type
of loan granted. The legal validity and enforceability of any collateral
obtained and the Bank's ability to regularly and correctly measure the
collateral's value are critical for this mechanism to play its proper role in
risk mitigation.
In its internal policies and standards, the Bank has established specific requirements regarding the appropriate legal documentation and assessment for the kinds of collateral that business units may require to guarantee the loans granted. The categories of eligible collateral and the lending value of the collateralized assets have also been defined by the Bank. For the most part, they include the following asset categories as well as guarantees (whether secured or not by the guarantors' assets) and government and bank guarantees:
• accounts receivable;
• inventories;
• machinery and equipment and rolling stock;
• residential and commercial real estate, office buildings and
industrial facilities;
• cash and marketable securities.
Portfolio Diversification and Management
The Bank is exposed to credit risk, not only through outstanding loans and
undrawn amounts of commitments to a particular obligor but also through the
distribution by business sector of the outstanding loans and undrawn amounts
and through the exposure of its various credit portfolios to geographical,
concentration, and settlement risks.
The Bank's approach to controlling these diverse risks begins with a
diversification of exposures. Measures designed to maintain a healthy degree
of credit risk diversification in its portfolios are set out in the Bank's
policies, standards, and procedures. These instructions are mainly reflected
in the application of various exposure limits: credit concentration limits by
counterparty and credit concentration limits by business sector, country,
region, product, and type of financial instrument. These limits are determined
based on the Bank's credit risk appetite framework and are reviewed
periodically. Compliance with these limits, particularly exceptions, is
monitored through periodic reports submitted by the Risk Management Group's
officers to the Board.
Continuous analyses are performed in order to anticipate problems with a
sector or obligor before they materialize, notably as defaulted payments.
Other Risk Mitigation Methods
Credit risk mitigation measures for transactions in derivative financial
instruments, which are regularly used by the Bank, are described in detail in
the Counterparty Risk section.
Credit Derivative Financial Instruments and Financial Guarantee Contracts
The Bank also reduces credit risk by using the protection provided by credit
derivative financial instruments such as credit default swaps. When the Bank
acquires credit protection, it pays a premium on the swap to the counterparty
in exchange for the counterparty's commitment to pay if the underlying entity
defaults or another event involving the counterparty and covered by the legal
agreement occurs. Since, like obligors, providers of credit protection must
receive a default risk rating, the Bank's standards set out all the criteria
under which a counterparty may be judged eligible to mitigate the Bank's
credit risk. The Bank may also reduce its credit risk by entering into
financial guarantee contracts whereby a guarantor indemnifies the Bank for a
loss resulting from an obligor failing to make a payment when due in
accordance with the contractual terms of a debt instrument.
Loan Syndication
The Bank has developed specific instructions on the appropriate objectives,
responsibilities, and documentation requirements for loan syndication.
Follow-Up of Monitored Accounts and Recovery
Credit granted and obligors are monitored on an ongoing basis and in a manner
commensurate with the degree of risk. Loan portfolio managers use an array of
intervention methods to conduct a rigorous follow-up on files that show a high
risk of default. They assess and comment on (except for small business files
assessed using a behavioural model which are monitored by a Work Out unit)
each identified borrower on the watchlist for whom they are responsible. A
report, in which this information is consolidated, is submitted to the
leadership team of the Credit Risk Management groups. When loans continue to
deteriorate and there is an increase in risk to the point where monitoring has
to be increased, specialized groups step in to maximize collection of the
disbursed amounts and tailor strategies to these accounts.
For larger accounts, a monitoring report is submitted quarterly to a monitoring committee comprised of members of the leadership team of the Credit Risk Management groups and Internal Audit. The report is used to track the status of at-risk files and the corrective measures undertaken. At the request of the monitoring committee, some of the files will be the subject of a presentation. The authority to approve allowances for credit losses is attributed using limits delegated on the basis of hierarchical level presented in the Credit Risk Management Policy.
Information on the recognition of impaired loans and allowances for credit
losses is presented in Notes 1 and 8 to the Consolidated Financial Statements.
Forbearance and Restructuring
Situations where a business or retail obligor begins showing clear signs of
potential insolvency are managed on a case-by-case basis and require the use
of judgment. The Loan Work Out Policy sets out the principles applicable in
such situations to guide loan restructuring decisions and identify situations
where distressed restructuring applies. A distressed restructuring situation
occurs when the Bank, for economic or legal reasons related to the obligor's
financial difficulties, grants the obligor a material special concession that
is contrary to the Bank's policies. Such concessions could include reducing
the original interest rate so that the new pricing is lower than the cost of
funds, waiving a portion of principal or accrued interest in arrears and
extending payments for a significant portion of the loan or interest in such a
way that the new maturity date or payment terms are more reasonable given the
useful life of the collateral.
The Bank has established a management framework for commercial and corporate
obligors that represent higher-than-normal risk of default. It outlines the
roles and responsibilities of loan portfolio managers with respect to managing
high-risk accounts and the responsibilities of the Work Out units and other
participants in the process. Lastly, the Credit Risk Management Policy and a
management framework are used to determine the authorization limits for
distressed restructuring situations. During fiscal 2024 and 2023, the amount
of distressed loan restructurings was not significant.
Counterparty Risk Assessment
Counterparty risk is a credit risk that the Bank incurs on various types of
transactions involving financial instruments. The most significant risks are
those it faces when it trades derivative financial instruments with
counterparties on the over-the-counter market or when it purchases securities
under reverse repurchase agreements or sells securities under repurchase
agreements. Securities lending transactions and securities brokerage
activities are also sources of counterparty risk. Note 18 to the Consolidated
Financial Statements provides a complete description of the credit risk for
derivative financial instruments by type of traded product.
The Risk Management Group has developed models by type of counterparty through
which it applies an advanced methodology, where applicable, for calculating
the Bank's credit risk exposure and economic capital. The exposures are
subject to limits. These limits are established based on the counterparty's
internal default risk rating and on the potential volatility of the underlying
assets until expiration of the contract.
Counterparty obligations resulting from trading derivative financial
instrument contracts, securities lending transactions, and reverse repurchase
agreements are frequently subject to credit risk mitigation measures. The
mitigation techniques are somewhat different from those used for loans and
advances and depend on the nature of the instrument or the type of contract
traded. The most widely used measure is entering into master agreements: the
International Swaps & Derivatives Association, Inc. (ISDA) master
agreement, the Global Master Repurchase Agreement (GMRA), and the Global
Master Securities Lending Agreement (GMSLA). These agreements make it
possible, in the event of default, insolvency, or bankruptcy of one of the
contracting parties, to apply full netting of the gross amounts of the market
values for each of the transactions covered by the agreement in force at the
time of default. The amount of the final settlement is therefore the net
balance of gains and losses on each transaction, which reduces exposure when a
counterparty defaults. The Bank's policies require that an ISDA, GMRA, or
GMSLA agreement be signed with its trading counterparties to derivatives,
foreign exchange forward contracts, securities lending transactions, and
reverse repurchase agreements.
Another credit risk reduction mechanism for derivatives and foreign exchange
forward contracts complements the ISDA master agreement in many cases and
provides the Bank and its counterparty (or either of the parties, if need be)
with the right to request collateral from the counterparty when the net
balance of gains and losses on each transaction exceeds a threshold defined in
the agreement. These agreements on initial margins and variation margins are a
regulatory requirement when financial institutions trade with each other or
with governments and central banks on international financial markets because
they limit the extent of credit risk and reduce the idiosyncratic risk
associated with trading derivative financial instruments and foreign exchange
forwards, while giving traders additional leeway to continue trading with the
counterparty. When required by regulation (notably, by OSFI), the Bank always
uses this type of legal documentation in transactions with financial
institutions. For transactions with businesses, the Bank prefers to use
internal mechanisms, notably involving collateral and mortgages/hypothecs, set
out in the credit agreements. Finally, when possible the Bank goes through
central clearing counterparties as a counterparty credit risk mitigation
method. The Bank's internal policies set the conditions governing the
implementation of such mitigation methods.
Requiring collateral as part of a securities lending transaction or reverse repurchase agreements is not solely the result of an internal credit decision. In fact, it is mandatory for the purpose of meeting the accounting, balance sheet and regulatory capital treatment requirements pursuant to applicable accounting rules and rules imposed by self-regulating organizations in the financial services sector such as the Canadian Investment Regulatory Organization (CIRO).
The Bank has identified circumstances in which it is likely to be exposed to
wrong-way risk. There are two types of wrong-way risk: general wrong-way risk
and specific wrong-way risk. General wrong-way risk occurs when the
probability of default of the counterparties is positively correlated to
general market risk factors. Specific wrong-way risk occurs when the exposure
to a specific counterparty is positively correlated to the probability of
default of the counterparty due to the nature of the transactions with this
counterparty.
Assessment of Settlement Risk
Settlement risk potentially arises from transactions that feature reciprocal
delivery of cash or securities between the Bank and a counterparty. Foreign
exchange contracts are an example of transactions that can generate
significant levels of settlement risk. However, the implementation of
multilateral settlement systems that allow settlement netting among
participating institutions has contributed greatly to reducing the risks
associated with the settlement of foreign exchange transactions among banks.
The Bank also uses financial intermediaries to gain access to established
clearing houses in order to minimize settlement risk for certain derivative
financial instrument transactions. In some cases, the Bank may have direct
access to established clearing houses for settling financial transactions such
as repurchase agreements or reverse repurchase agreements. In addition,
certain over-the-counter derivative financial instruments are settled directly
or indirectly by central counterparties. For additional information, see the
table that presents notional amounts in Note 18 to the Consolidated Financial
Statements.
There are several other types of transactions that may generate settlement
risk, in particular the use of certain electronic fund transfer services. This
risk refers to the possibility that the Bank may make a payment or settlement
on a transaction without receiving the amount owed by the counterparty, and
with no opportunity to recover the funds delivered (irrevocable settlement).
For the Bank, the ultimate way to eliminate such a risk is to make no payments
or settlements until it receives the funds due from the counterparty. Such an
approach cannot, however, be used systematically. For several electronic
payment services, the Bank is able to implement mechanisms that allow it to
make its transfers revocable or to debit the counterparty in the amount of the
settlements before it makes its own transfer. On the other hand, the nature of
transactions in financial instruments makes it impossible for such practices
to be widely used. For example, on foreign exchange transactions involving a
currency other than the U.S. dollar, time zone differentials impose strict
payment schedules on the parties. The Bank cannot unduly postpone a settlement
without facing penalties, due to the large size of the amounts involved.
The most effective way for the Bank to control settlement risks, both for
financial market transactions and irrevocable transfers, is to impose internal
risk limits based on the counterparty's ability to pay.
Assessment of Environmental Risk
Environmental risk refers to the impacts on credit risk that may lead to
reduced repayment capacity, or a lower value of the asset pledged as
collateral due to environmental events, such as soil contamination, waste
management, or a spill of materials considered hazardous, to the energy
transition, or to extreme weather events. Ultimately, environmental risk can
lead to both a higher probability of default and higher provisions for credit
losses in cases of default by counterparties. In addition to the measures and
guidelines adopted by the various levels of government, the Bank has a set of
protective measures to follow in order to identify and reduce the potential,
current, or future environmental risks to which it is exposed when it grants
credit to clients. In recent years, the risk management framework has been
expanded to include new measures for identifying, assessing, controlling, and
monitoring climate risk. In addition, the Bank has developed and is gradually
deploying a process used to assess and quantify the impacts of climate change
on its strategy and results. For clients operating in specific industries, the
risk analysis framework involves the collection of information on carbon
footprint, a classification of climate risks (physical and transitional)
according to business sector and industry, their strategic positioning, and
the existence of an energy transition plan (commitments, reduction targets,
diversification of activities). These various subjects are addressed, at least
once a year, as part of the credit granting, review, and renewal processes.
The Bank also assesses its exposure to environment-related credit risk using a
variety of control and monitoring mechanisms. For example, analyses are
performed on the loan portfolio's vulnerabilities to physical risks and
transition risks; these analyses are applied to all financing activities.
Moreover, for several years the Bank has been carrying out climate risk impact
analyses using the scenarios recommended by the Network for Greening the
Financial System (NGFS). In doing so, the Bank was able to quantify expected
losses related to its loan portfolio. The Bank also takes part in standardized
climate scenario exercises to strengthen its abilities and refine its
expertise. In addition, the Bank periodically assesses the impact of
environmental risk on the loan portfolio concentration risk to ensure that
there is no significant impact on this risk. Furthermore, a loan portfolio
business sector matrix has been developed to provide the Risk Management Group
with a clear vision of the sectors that are most affected by climate-related
risks. These initiatives allow the Bank to take concrete steps in the process
used to review sectoral limits, as each business sector or industry now has an
ESG section describing its environmental risk.
Maximum Credit Risk Exposure
The amounts in the following tables represent the Bank's maximum exposure to
credit risk as at the financial reporting date without considering any
collateral held or any other credit enhancements. These amounts do not include
allowances for credit losses nor amounts pledged as collateral. The tables
also exclude equity securities.
Maximum Credit Risk Exposure Under the Basel Asset Categories((1))*
(millions of Canadian dollars) As at October 31, 2024
Drawn((2)) Undrawn Repo-style Derivative Other Total Standardized IRB
commitments transactions((3)) financial off-balance- Approach((5)) Approach
instruments sheet items((4))
Retail
Residential mortgage 80,861 8,905 − − − 89,766 13 % 87 %
Qualifying revolving retail 3,335 11,867 − − − 15,202 − % 100 %
Other retail 17,237 2,526 − − 37 19,800 13 % 87 %
101,433 23,298 − − 37 124,768
Non-retail
Corporate 96,023 31,921 42,395 234 8,813 179,386 21 % 79 %
Sovereign 65,758 5,982 79,859 − 283 151,882 3 % 97 %
Financial institutions 8,797 1,095 133,787 2,640 1,700 148,019 22 % 78 %
170,578 38,998 256,041 2,874 10,796 479,287
Trading portfolio − − − 17,507 − 17,507 3 % 97 %
Securitization 4,885 − − − 6,480 11,365 93 % 7 %
Total - Gross credit risk 276,896 62,296 256,041 20,381 17,313 632,927 16 % 84 %
Standardized Approach((5)) 39,868 1,209 47,241 2,870 7,015 98,203
IRB Approach 237,028 61,087 208,800 17,511 10,298 534,724
Total - Gross credit risk 276,896 62,296 256,041 20,381 17,313 632,927 16 % 84 %
(millions of Canadian dollars) As at October 31, 2023 ( )
Drawn((2)) Undrawn Repo-style Derivative Other Total Standardized IRB
commitments transactions((3)) financial off-balance- Approach((5)) Approach
instruments sheet items((4))
Retail
Residential mortgage 77,073 9,094 − − − 86,167 12 % 88 %
Qualifying revolving retail 3,183 12,052 − − − 15,235 − % 100 %
Other retail 16,078 2,692 − − 33 18,803 13 % 87 %
96,334 23,838 − − 33 120,205
Non-retail
Corporate 91,994 27,846 38,549 385 6,915 165,689 18 % 82 %
Sovereign 61,438 5,921 61,580 − 267 129,206 3 % 97 %
Financial institutions 6,719 1,002 98,222 3,013 1,506 110,462 23 % 77 %
160,151 34,769 198,351 3,398 8,688 405,357
Trading portfolio − − − 13,778 − 13,778 2 % 98 %
Securitization 4,351 − − − 5,318 9,669 92 % 8 %
Total - Gross credit risk 260,836 58,607 198,351 17,176 14,039 549,009 15 % 85 %
Standardized Approach((5)) 35,461 1,260 34,717 3,211 5,568 80,217
IRB Approach 225,375 57,347 163,634 13,965 8,471 468,792
Total - Gross credit risk 260,836 58,607 198,351 17,176 14,039 549,009 15 % 85 %
(1) See the Financial Reporting Method section on pages 14 to 20 for
additional information on capital management measures.
(2) Excludes equity securities and certain other assets such as
investments in deconsolidated subsidiaries and joint ventures, right-of-use
properties and assets, goodwill, deferred tax assets, and intangible assets.
(3) Securities purchased under reverse repurchase agreements and sold
under repurchase agreements as well as securities loaned and borrowed.
(4) Letters of guarantee, documentary letters of credit, and securitized
assets that represent the Bank's commitment to make payments in the event that
an obligor cannot meet its financial obligations to third parties.
(5) Includes exposures to qualifying central counterparties (QCCP).
Market Risk
Market risk is the risk of financial losses arising from movements in market
prices. Market risk comes from a number of factors, particularly changes to
market variables such as interest rates, credit spreads, exchange rates,
equity prices, commodity prices, and implied volatilities. The Bank is exposed
to market risk through its participation in trading, investment, and
asset/liability management activities. Trading activities involve taking
positions on various instruments such as bonds, shares, currencies,
commodities, or derivative financial instruments. The Bank is exposed to
non-trading market risk through its asset/liability management and investment
portfolios.
The trading portfolios include positions in financial instruments and
commodities held either for trading or for hedging other items of the trading
book. Positions held for trading are those held for short-term resale and/or
with the intent of taking advantage of actual or expected short-term price
movements or to lock in arbitrage profits, and for hedging risks that arise
from financial instruments. The Bank's strategic objectives in undertaking
trading activities include market making, facilitating client transactions,
and managing risks associated with these activities.
Non-trading portfolios include financial instruments intended to be held to
maturity as well as those held for daily cash management or for the purpose of
maintaining targeted returns or ensuring asset and liability management.
Governance
The Bank has a framework to oversee market risk, ensure strong governance and
comply with industry practices and regulations. A market risk management
policy governs global market risk management across the Bank's business units
and subsidiaries that are exposed to this type of risk. It is approved by the
GRC. The policy sets out the principles for managing market risk and the
framework that defines risk measures, control and monitoring activities, how
market risk limits are set and the mechanisms for reporting and escalating
breaches. The Bank's risk management framework also includes guiding
principles for assigning transactions to either the trading portfolio or the
banking book as well as the requirements for identifying and monitoring stale
positions.
The Financial Markets Risk Committee oversees all Financial Markets segment
risks that could adversely affect the Bank's results, liquidity, or capital.
This committee also oversees the Financial Markets segment's risk framework to
ensure that controls are in place to contain risk in accordance with the
Bank's risk appetite framework.
The market risk limit framework ensures the link and coherence between the
Bank's market risk appetite targets and the day-to-day market risk management
by all parties involved, notably senior management, the business units, and
the Market Risk teams in their independent control function. The Bank's
monitoring and reporting process consists of comparing market risk exposure to
alert levels and to the market risk limits established for all limit
authorization and approval levels.
Assessment of Market Risk
The Risk Management Group uses a variety of risk measures to estimate the size
of potential financial losses under more or less severe scenarios, using both
short-term and long-term time horizons. For short-term horizons, the Bank's
risk measures include Value-at-Risk (VaR) and sensitivity metrics. For
long-term horizons or sudden significant market moves, including those due to
a lack of market liquidity, the risk measures include stress testing across an
extensive range of scenarios.
VaR Model
VaR is a statistical measure of risk that is used to quantify market risks by
activity and by risk type. VaR is defined as the maximum loss at a specific
confidence level over a certain horizon under normal market conditions. The
VaR method has the advantage of providing a uniform measurement of
financial-instrument-related market risks based on a single statistical
confidence level and time horizon.
For VaR, the Bank uses a historical price distribution to compute the probable
loss levels at a 99% confidence level, using a two-year history of daily time
series of risk factor changes. VaR is the maximum daily loss that the Bank
could incur, in 99 out of 100 cases, in a given portfolio. In other words, the
loss could exceed that amount in only one out of 100 cases.
The trading VaR is measured by assuming a holding period of one day for
ongoing market risk management. VaR is calculated on a daily basis both for
major classes of financial instruments (including derivative financial
instruments) and for all trading portfolios in the Financial Markets segment
and the Bank's Global Funding and Treasury Group.
The VaR methodology is well suited to measuring risk under normal market conditions, in particular for trading positions in liquid financial markets. However, there are limitations in measuring risks with this method when extreme and sudden market risk events occur and, consequently, the Bank's market risk could likely be underestimated. VaR methodology limitations include the following:
· past changes in market risk factors may not always produce accurate
predictions of the distribution and correlations of future market movements;
· a VaR with a daily time horizon does not fully capture the market
risk of positions that cannot be liquidated or hedged within one day;
· the market risk factor historical database used for VaR calculation
may not reflect potential losses that could occur under unusual market
conditions (e.g., periods of extreme illiquidity) relative to the historical
period used for VaR estimates;
· the use of a 99% VaR confidence level does not reflect the extent
of potential losses beyond that percentile.
Given the limitations of VaR, this measure represents only one component of
risk management oversight, which also incorporates, among other measures,
stress testing, sensitivity analysis, and concentration and liquidity limits
and analysis.
The Bank also conducts backtesting of the VaR model. It consists of comparing
the profits and losses to the statistical VaR measure. Backtesting is
essential to verifying the VaR model's capacity to adequately forecast the
maximum risk of market losses and thus validate, retroactively, the quality
and accuracy of the results obtained using the model. If the backtesting
results present material discrepancies, the VaR model could be revised in
accordance with the Bank's model risk management framework. All market risk
models and their performance are subject to periodic independent validation by
the model validation group.
Controlling Market Risk
A comprehensive set of limits is applied to market risk measures, and these
limits are monitored and reported on a regular basis. Instances when limits
are exceeded are reported to the appropriate management level. The risk
profiles of the Bank's operations remain consistent with its risk appetite and
the resulting limits, and are monitored and reported to traders, management of
the applicable business unit, senior management, and Board committees. To
maintain market risk within risk appetite, the Bank hedges exposures as
appropriate by utilizing cash and derivative financial instruments.
Under specific conditions, market risks such as interest rate, credit, or
equity risks can be mitigated through derivative financial instruments
transactions involving the trading portfolio via an Internal Risk Transfer
(IRT). Interest rate IRTs are handled through a dedicated IRT desk approved by
OSFI, while credit and equity IRTs occur directly between non-trading and
trading portfolios. The Bank has established a framework that details IRT
requirements and governance to ensure that these transactions comply with
OSFI's Capital Adequacy Requirements guidelines both at the outset and on an
ongoing basis.
The Bank also uses economic capital for market risk as an indicator for risk
appetite and limit setting. This indicator measures the amount of capital that
is required to absorb unexpected losses due to market risk events over a
one-year horizon and with a determined confidence level. For additional
information on economic capital, see the Capital Management section of this
MD&A.
The following tables provide a breakdown of the Bank's Consolidated Balance Sheet into assets and liabilities by those that carry market risk and those that do not carry market risk, distinguishing between trading positions whose main risk measure is VaR and non-trading positions that use other risk measures.
Reconciliation of Market Risk With Consolidated Balance Sheet Items*
(millions of Canadian dollars) As at October 31, 2024
Market risk measures
Balance Trading((1)) Non-Trading((2)) Not subject to market risk Non-traded risk
sheet primary risk sensitivity
Assets
Cash and deposits with financial institutions 31,549 257 20,440 10,852 Interest rate((3))
Securities
At fair value through profit or loss 115,935 113,445 2,490 − Interest rate((3)) and equity((4))
At fair value through other comprehensive income 14,622 − 14,622 − Interest rate((3)) and equity((5))
At amortized cost 14,608 − 14,608 − Interest rate((3))
Securities purchased under reverse repurchase
agreements and securities borrowed 16,265 − 16,265 − Interest rate((3)(6))
Loans, net of allowances 243,032 14,572 228,460 − Interest rate((3))
Derivative financial instruments 12,309 11,686 623 − Interest rate((7)) and exchange rate((7))
Defined benefit asset 487 − 487 − Other((8))
Other 13,419 573 − 12,846
462,226 140,533 297,995 23,698
Liabilities
Deposits 333,545 30,429 303,116 − Interest rate((3))
Obligations related to securities sold short 10,873 10,873 − −
Obligations related to securities sold under repurchase
agreements and securities loaned 38,177 − 38,177 − Interest rate((3)(6))
Derivative financial instruments 15,760 15,240 520 − Interest rate((7)) and exchange rate((7))
Liabilities related to transferred receivables 28,377 10,564 17,813 − Interest rate((3))
Defined benefit liability 103 − 103 − Other((8))
Other 8,583 − 49 8,534 Interest rate((3))
Subordinated debt 1,258 − 1,258 − Interest rate((3))
436,676 67,106 361,036 8,534
(1) Trading positions whose risk measure is total VaR. For additional
information, see the table in the pages ahead that shows the VaR distribution
of the trading portfolios by risk category and their diversification effect.
(2) Non-trading positions that use other risk measures.
(3) For additional information, see the tables in the pages ahead,
namely, the table that shows the VaR distribution of the trading portfolios by
risk category, and their diversification effect, as well as the table that
shows the interest rate sensitivity.
(4) For additional information, see Note 7 to the Consolidated Financial
Statements.
(5) The fair value of equity securities designated at fair value through
other comprehensive income is presented in Notes 4 and 7 to the Consolidated
Financial Statements.
(6) These instruments are recorded at amortized cost and are subject to
credit risk for capital management purposes. For trading-related transactions
with maturities of more than one day, interest rate risk is included in the
VaR.
(7) For additional information, see Notes 18 and 19 to the Consolidated
Financial Statements.
(8) For additional information, see Note 25 to the Consolidated
Financial Statements.
(millions of Canadian dollars) As at October 31, 2023((1))
Market risk measures
Balance Trading((2)) Non-trading((3)) Not subject to market risk Non-traded risk primary
sheet risk sensitivity
Assets
Cash and deposits with financial institutions 35,234 685 24,950 9,599 Interest rate((4))
Securities
At fair value through profit or loss 99,994 98,559 1,435 − Interest rate((4)) and equity((5))
At fair value through other comprehensive income 9,242 − 9,242 − Interest rate((4)) and equity((6))
At amortized cost 12,582 − 12,582 − Interest rate((4))
Securities purchased under reverse repurchase
agreements and securities borrowed 11,260 − 11,260 − Interest rate((4)(7))
Loans and acceptances, net of allowances 225,443 12,739 212,704 − Interest rate((4))
Derivative financial instruments 17,516 16,349 1,167 − Interest rate((8)) and exchange rate((8))
Defined benefit asset 356 − 356 − Other((9))
Other 11,850 544 − 11,306
423,477 128,876 273,696 20,905
Liabilities
Deposits 288,173 18,126 270,047 − Interest rate((4))
Acceptances 6,627 − 6,627 − Interest rate((4))
Obligations related to securities sold short 13,660 13,660 − −
Obligations related to securities sold under repurchase
agreements and securities loaned 38,347 − 38,347 − Interest rate((4)(7))
Derivative financial instruments 19,888 19,145 743 − Interest rate((8)) and exchange rate((8))
Liabilities related to transferred receivables 25,034 9,507 15,527 − Interest rate((4))
Defined benefit liability 94 − 94 − Other((9))
Other 7,322 − 49 7,273 Interest rate((4))
Subordinated debt 748 − 748 − Interest rate((4))
399,893 60,438 332,182 7,273
(1) Certain amounts have been adjusted to reflect accounting policy
changes arising from the adoption of IFRS 17. For additional information, see
Note 2 to the Consolidated Financial Statements.
(2) Trading positions whose risk measure is total VaR. For additional
information, see the table on the following page that shows the VaR
distribution of the trading portfolios by risk category and their
diversification effect.
(3) Non-trading positions that use other risk measures.
(4) For additional information, see the tables in the pages ahead,
namely, the table that shows the VaR distribution of the trading portfolios by
risk category, their diversification effect, as well as the table that shows
the interest rate sensitivity.
(5) For additional information, see Note 7 to the Consolidated Financial
Statements.
(6) The fair value of equity securities designated at fair value through
other comprehensive income is presented in Notes 4 and 7 to the Consolidated
Financial Statements.
(7) These instruments are recorded at amortized cost and are subject to
credit risk for capital management purposes. For trading-related transactions
with maturities of more than one day, interest rate risk is included in the
VaR measure.
(8) For additional information, see Notes 18 and 19 to the Consolidated
Financial Statements.
(9) For additional information, see Note 25 to the Consolidated
Financial Statements.
Trading Activities
The table below shows the VaR distribution of trading portfolios by risk
category and their diversification effect.
VaR of Trading Portfolios((1)(2))*
Year ended October 31
(millions of Canadian dollars) 2024 2023
Low High Average Period end Low High Average Period end
Interest rate (5.4) (13.3) (8.6) (8.8) (5.2) (11.3) (7.4) (8.7)
Foreign exchange (0.7) (5.3) (1.9) (1.1) (0.9) (5.9) (2.7) (5.0)
Equity (1.8) (8.6) (4.5) (5.3) (5.1) (10.8) (7.6) (6.5)
Commodity (0.8) (2.4) (1.3) (1.2) (0.6) (1.6) (1.2) (1.6)
Diversification effect((3)) n.m. n.m. 6.8 6.3 n.m. n.m. 9.4 10.4
Total trading VaR (5.0) (14.1) (9.5) (10.1) (6.7) (12.4) (9.5) (11.4)
n.m. Computation of a diversification effect for the high and low is not
meaningful, as highs and lows may occur on different days and be attributable
to different types of risk.
(1) See the Glossary section on pages 130 to 133 for details on the
composition of these measures.
(2) Amounts are presented on a pre-tax basis and represent one-day VaR
using a 99% confidence level.
(3) The total trading VaR is less than the sum of the individual risk
factor VaR results due to the diversification effect.
The average total trading VaR remained stable between fiscal 2023 and fiscal
2024.
The revenues generated by trading activities are compared with VaR as a
backtesting assessment of the appropriateness of this risk measure as well as
the financial performance of trading activities relative to the risk
undertaken.
The chart below shows daily trading and underwriting revenues and VaR. Daily
trading and underwriting revenues were positive on 97% of the days for the
year ended October 31, 2024. Net daily trading and underwriting losses in
excess of $1 million were recorded on five days. None of these losses
exceeded the VaR.
Daily Trading and Underwriting Revenues
Year ended October 31, 2024
(millions of Canadian dollars)
Stress Testing
Stress testing is a risk management technique that involves estimating
potential losses under abnormal market conditions and risk factor movements.
This technique enhances data transparency by exploring a range of severe but
plausible scenarios.
These stress tests simulate the results that the portfolios would generate if
the extreme scenarios in question were to materialize. The Bank's stress
testing framework, which is applied to all positions with market risk,
currently comprises the following categories of stress test scenarios:
· Historical scenarios based on past major disruption situations;
· Hypothetical scenarios designed to be forward-looking in the face of
potential market stresses;
· Scenarios specific to asset classes, including:
o sharp parallel increases/decreases in interest rates; non-parallel
movements of interest rates (flattening and steepening) and
increases/decreases in credit spreads;
o sharp stock market crash coupled with a significant increase in volatility
of the term structure; increase in stock prices combined with less volatility;
o significant increases/decreases in commodity prices coupled with
increases/decreases in volatility; short-term and long-term
increases/decreases in commodity prices;
o depreciation/appreciation of the U.S. dollar and of other currencies
relative to the Canadian dollar.
Credit Valuation Adjustment (CVA)
CVA risk is an important consideration in the valuation and the management of
over-the-counter (OTC) derivatives and other financial instruments whenever
counterparty risk is involved. The Bank maintains a robust and prudent
governance framework for CVA risk management, including a clear definition and
documentation of the objectives, the scope and the independent controls
surrounding these activities. CVA risk is identified and measured using
advanced analytical tools and quantitative models, and is monitored and
controlled on an ongoing basis by an independent unit of the second line of
defence. Additionally, risk limits are established for CVA risk, and those
limits are defined by the approving authorities set out in the Bank's
policies.
Interest Rate Risk in the Banking Book (IRRBB)
As part of its core banking activities, such as lending and deposit taking,
the Bank is exposed to interest rate risk. Interest rate risk in the banking
book (IRRBB) is the potential negative impact of interest rate fluctuations on
the Bank's annual net interest income and the economic value of its equity.
Activities related to hedging, investments, and term funding are also exposed
to interest rate risk. The Bank's main exposure to interest rate risk stems
from a variety of sources:
· yield curve risk, which refers to changes in the level, slope, and
shape of the yield curve;
· repricing risk, which arises from timing differences in the
maturity and repricing of on- and off-balance-sheet items;
· options risk, either implicit (e.g., prepayment of mortgage loans)
or explicit (e.g., capped mortgages and rate guarantees) in balance sheet
products;
· basis risk that is caused by an imperfect correlation between
different yield curves.
The Bank's exposure to IRRBB is assessed and controlled mostly through the
impact of stress scenarios and market shocks on the economic value of the
Bank's equity and on 12-month net interest income projections. These two
metrics are calculated daily. They are based on cash flow projections prepared
using a number of assumptions. Specifically, the Bank has developed key
assumptions on loan prepayment levels, deposit repayment, and the behaviour of
clients that were granted rate guarantees as well as the rate and duration
profile of non-maturity deposits. These specific assumptions were developed
based on historical analyses and are regularly reviewed. Funds transfer
pricing is a process by which the Bank's business units are charged or paid
according to their use or supply of funding. Through this mechanism, all
funding activities as well as the interest rate risk and liquidity risk
associated with those activities are centralized in the Global Funding and
Treasury Group.
Active IRRBB management can significantly enhance the Bank's profitability and
shareholder value. The Bank's goal is to maximize the economic value of its
equity and its annual net interest income considering its risk appetite. This
goal must be achieved within prescribed risk limits and is accomplished
primarily by implementing a policy framework, approved by the GRC and
submitted for information purposes to the RMC, that sets a risk tolerance
threshold, monitoring structures controlled by various committees, risk
indicators, reporting procedures, delegation of responsibilities, and
segregation of duties. The Bank also prepares an annual funding plan that
includes the expected growth of assets and liabilities.
Governance
Management of the Bank's IRRBB is under the authority of the Global Funding
and Treasury Group. In this role, the management team and personnel of this
group are responsible for the day-to-day management of the risks inherent to
IRRBB hedging decisions and related operations. They act as the primary
effective challenge function with respect to the execution of these
activities. The GRC approves and endorses the IRRBB exposure and strategies.
The Asset Liability Committee (ALCO), comprised of members of senior
management, monitors IRRBB on an ongoing basis. This committee reviews
exposure to IRRBB, the use of limits, and changes made to assumptions. The
Risk Management Group is responsible for assessing IRRBB, monitoring
activities, and ensuring compliance with the IRRBB management policy. The Risk
Management Group ensures that an appropriate risk management framework is in
place and ensures compliance with the risk appetite framework and policy.
Stress Testing
Stress tests are performed on a regular basis to assess the impact of various
scenarios on annual net interest income and on the economic value of equity in
order to guide IRRBB management. Stress test scenarios are performed where the
yield curve level, slope, and shape are shocked. Yield curve and volatility
scenarios are also tested. All risk factors mentioned above are covered by
specific scenarios and have Board-approved or GRC‑approved risk limits.
Dynamic simulation is also used to project the Bank's future net interest
income, future economic value, and future exposure to IRRBB. These simulations
project cash flows of assets, liabilities, and off-balance-sheet products over
a given investment horizon. Given their dynamic nature, they encompass
assumptions pertaining to changes in volume, client term preference,
prepayments of deposits and loans, and the yield curve.
The following table presents the potential before-tax impact of an immediate
and sustained 100-basis-point increase or of an immediate and sustained
100‑basis-point decrease in interest rates on the economic value of equity
and on the net interest income of the Bank's non-trading portfolios for the
next 12 months, assuming no further hedging is undertaken.
Interest Rate Sensitivity - Non-Trading Activities (Before Tax)*
As at October 31
(millions of Canadian dollars) 2024 2023
Canadian Other Total Canadian Other Total
dollar currencies dollar currencies
Impact on equity
100-basis-point increase in the interest rate (378) (57) (435) (297) 2 (295)
100-basis-point decrease in the interest rate 352 48 400 272 7 279
Impact on net interest income
100-basis-point increase in the interest rate 121 (22) 99 73 1 74
100-basis-point decrease in the interest rate (161) 25 (136) (103) 1 (102)
Investment Governance
The Bank has created securities portfolios comprising liquid and less liquid
securities for strategic, long-term investment, and liquidity management
purposes. These investments carry market risk, credit risk, liquidity risk,
and concentration risk.
The investment governance framework sets out the guiding principles and
general management standards that must be followed by all those who manage
portfolios of these securities included in the portfolios of the Bank and its
subsidiaries. Under this investment governance framework, business units that
are active in managing these types of portfolios must adopt internal
investment policies that set, among other things, targets and limits for the
allocation of assets in the portfolios concerned and internal approval
mechanisms. The primary objective is to reduce concentration risk by industry,
issuer, country, type of financial instrument, and credit quality.
Overall limits in value and in proportion to the Bank's equity are set on the
outstanding amount of liquid preferred shares, liquid equity securities
excluding preferred shares, and instruments classified as illiquid securities
in the securities portfolios. The overall exposure to common shares with
respect to an individual issuer and the total outstanding amount invested in
private equity funds, for investment banking services, are also subject to
limits. Restrictions are also set on investments defined as special. Lastly,
the Bank has a specific policy, approved by the RMC, applicable to investments
in debt and equity securities, including strategic investments. Strategic
investments are defined as purchases of business assets or acquisitions of
significant interests in an entity for purposes of acquiring control or
creating a long-term relationship.
Structural Foreign Exchange Risk
The Bank's structural foreign exchange risk arises from investments in foreign
operations denominated in currencies other than the Canadian dollar. This
risk, predominantly in U.S. dollars, is measured by assessing the impact of
currency fluctuations on retained earnings. The Bank uses financial
instruments (derivative and non-derivative) to hedge this risk. An adverse
change in foreign exchange rates can also impact the Bank's capital ratios due
to the amount of RWA denominated in a foreign currency. When the Canadian
dollar depreciates relative to other currencies, unrealized translation gains
on the Bank's net investments in foreign operations, as well as the impact on
hedging transactions, are reported in other comprehensive income in
shareholders' equity. In addition, the Canadian-dollar equivalent of
U.S.-dollar-denominated RWA and regulatory capital deductions increases. The
reverse is true when the Canadian dollar appreciates relative to the U.S.
dollar. The structural foreign exchange risk is managed to ensure that the
potential impacts on capital ratios and net income are within tolerable limits
set by risk policies.
Liquidity and Funding Risk
Liquidity and funding risk is the risk that the Bank will be unable to honour
daily cash and financial obligations without resorting to costly and untimely
measures. Liquidity and funding risk arises when sources of funds become
insufficient to meet scheduled payments under the Bank's commitments.
Liquidity risk refers to the possibility that an institution may not be able
to meet its financial obligations as they fall due, due to a mismatch between
cash inflows and outflows, without incurring unacceptable losses.
The Bank's primary objective as a financial institution is to manage liquidity
such that it supports the Bank's business strategy and allows it to honour its
commitments when they come due, even in extreme conditions. This is done
primarily by implementing a policy framework approved by the RMC, which
establishes a risk appetite, monitoring structures controlled by various
committees, risk indicators, reporting procedures, delegation of
responsibilities, and segregation of duties. The Bank also prepares an annual
funding plan that incorporates the expected growth of assets and liabilities.
Regulatory Environment
The Bank works closely with national and international regulators to implement
regulatory liquidity standards. The Bank adapts its processes and policies to
reflect its liquidity risk appetite towards these new requirements.
The Liquidity Adequacy Requirements (LAR) are reviewed periodically to reflect
domestic and international regulatory changes. They constitute OSFI's proposed
liquidity framework and include seven chapters:
· overview;
· liquidity coverage ratio (LCR);
· net stable funding ratio (NSFR);
· net cumulative cash flow (NCCF);
· operating cash flow statement;
· liquidity monitoring tools;
· intra-day liquidity monitoring tools.
LCR is used to ensure that banks can overcome severe short-term stress, while
the NSFR is a structural ratio over a one-year horizon. The NCCF metric is
defined as a monitoring tool that calculates a survival period. It is based on
the assumptions of a stress scenario prescribed by OSFI that aims to represent
a combined systemic and bank-specific crisis. The Bank publishes the quarterly
average of the LCR and the end-of-quarter NSFR on a quarterly basis, whereas
NCCF is produced monthly and communicated to OSFI.
On November 7, 2022, OSFI published a new guideline entitled Assurance on
Capital, Leverage and Liquidity Returns. OSFI relies largely on the regulatory
returns produced by financial institutions when assessing their safety and
soundness. The purpose of this guideline is to better inform auditors and
institutions on the work to be performed on regulatory returns in order to
clarify and align OSFI's assurance expectations across all financial
institutions. In particular, the guideline addresses the assurance that must
be provided by an external audit, attestation by senior management, the
assurance that must be provided by an internal audit, and the effective dates.
For D-SIBs, the Internal Audit assurance requirements regarding the capital,
leverage and liquidity returns commenced as of fiscal 2023, the senior
management attestation and internal review requirements apply as of fiscal
2024, and the external audit assurance requirements apply as of fiscal 2025.
On October 31, 2023, OSFI announced its decision on reviewing the Liquidity
Adequacy Requirements (LAR) Guideline with respect to wholesale funding
sources with retail-like characteristics, specifically high-interest savings
account exchange-traded funds (HISA ETFs). OSFI determined these sources to be
unsecure institutional funding provided by other legal entities. Despite some
retail-like characteristics and term agreements with depositors, the fact that
these products are held directly by fund managers led OSFI to conclude that a
100% run-off factor for these products was appropriate. As a result,
deposit-taking institutions exposed to such funding must hold sufficient
high-quality liquid assets to support all HISA ETF balances that can be
withdrawn within 30 days. Since January 31, 2024, all deposit-taking
institutions have modified the measurement and related reporting to comply
with the run-off treatment specified in the LAR. Moreover, changes for
reporting the LCR were calculated retrospectively to the start of the first
quarter to account for daily fluctuations in the ratio (November 1, 2023 for
the Bank).
In its Annual Risk Outlook - Fiscal Year 2024-2025, OSFI identified liquidity
and funding risk as one of the four key risks to be monitored. OSFI's approach
will span key topics, with a focus on intra-day liquidity risk management, and
liquidity and interest rate risk in the banking book management effectiveness
in material foreign subsidiaries. In addition, OSFI will also deepen its
line-of-site into the operational aspects of contingency funding plans to
better understand asset monetization decisions during stress events.
In addition, this report notes that OSFI held public consultations on draft
revisions to the Liability Adequacy Requirement (LAR) Guideline in the second
quarter of 2024. The bankers' acceptance market is intrinsically linked to the
CDOR rate and, given that the CDOR rate was abolished on June 28, 2024, OSFI
does not believe that the preferential liquidity treatment that was in place
is still justified. Consequently, revisions were made to Chapters 3 and 4 of
the LAR Guideline to reflect this reality. OSFI is also revising Chapter 7,
Intra-day Liquidity Monitoring Tools, of the LAR Guideline, as well as making
consequential amendments to Chapter 1 and the Small and Medium-Sized
Deposit-Taking Institutions (SMSBs) Capital and Liquidity Requirements
Guideline. OSFI will introduce adapted monitoring tools for direct and
indirect clearers, taking into account the importance of intra-day liquidity
measurement in the context of recent stress episodes. The revised guideline
and associated reporting requirements will come into effect on April 1, 2025.
The Bank continues to closely monitor regulatory developments and actively
participates in various consultation processes.
Governance
The Global Funding and Treasury Group is responsible for managing liquidity
and funding risk. Although the day-to-day and strategic management of risks
associated with liquidity, funding, and pledging activities is assumed by the
Global Funding and Treasury Group, the Risk Management Group is responsible
for assessing liquidity risk and overseeing compliance with the resulting
policy. The Risk Management Group ensures that an appropriate risk management
framework is in place and ensures compliance with the risk appetite framework.
This structure provides an independent oversight and effective challenge for
liquidity, funding, and pledging decisions, strategy, and exposure.
The Bank's Liquidity and Pledging Risk Management Policy requires review and
approval by the RMC, based on recommendations from the GRC. The Bank has
established four levels of limits. The first two levels involve the Bank's
overall cash position and are respectively approved by the Board and the GRC,
whereas the third level of limits focuses more on specific aspects of
liquidity risk and is approved by the ALCO or by the Financial Markets Risk
Committee, whereas the fourth level represents operational limits. The Board
not only approves the supervision of day-to-day risk management and governance
but also backup plans in anticipation of emergency and liquidity crisis
situations. If a limit has to be revised, the Risk Management Group with the
support of the Global Funding and Treasury Group, submits the proposed
revision to the approving committee.
Oversight of liquidity risk is entrusted mainly to the ALCO, whose members
include representatives of the Financial Markets segment, the Global Funding
and Treasury Group, the Finance Group and the Risk Management Group. The ALCO
ensures that senior management monitors liquidity and funding risk on an
ongoing basis.
The Bank also has policies and guidelines governing its own collateral pledged
to counterparties, given the potential impact of such asset transfers on its
liquidity. In accordance with its Liquidity and Pledging Risk Management
Policy, the Bank conducts simulations of potential counterparty collateral
claims in the event of a Bank downgrade or other unlikely occurrences, such as
large market fluctuations.
Through the ALCO, the Risk Management Group regularly reports changes in
liquidity, funding, and pledging indicators and compliance with regulatory‑,
Board-, and GRC-approved limits. If control reports indicate non-compliance
with the limits and a general deterioration of liquidity indicators, the
Global Funding and Treasury Group takes remedial action. According to an
escalation process, problematic situations are reported to management and to
the GRC and the RMC. An executive report on the Bank's liquidity and funding
risk management is submitted quarterly to the RMC; this report describes the
Bank's liquidity position and informs the Board of non-compliance with the
limits and other rules observed during the reference period as well as
remedial action taken.
Liquidity Management
The Bank performs liquidity management, funding, and pledging operations not
only from its head office and regional offices in Canada, but also through
certain foreign centres. Although the volume of such operations abroad
represents a sizable portion of global liquidity management, the Bank's
liquidity management is centralized. By organizing liquidity management,
funding, and pledging activities within the Global Funding and Treasury Group,
the Bank can better coordinate enterprise-wide funding and risk monitoring
activities. All internal funding transactions between Bank entities are
controlled by the Global Funding and Treasury Group.
This centralized structure streamlines the allocation and control of liquidity
management, funding, and pledging limits. Nonetheless, the Liquidity and
Pledging Risk Management Policy contains special provisions for financial
centres whose size and/or strategic importance makes them more likely to
contribute to the Bank's liquidity risk. Consequently, a liquidity and funding
risk management structure exists at each financial centre. This structure
imposes a set of limits of varying levels, up to the limits approved by the
RMC, on diverse liquidity parameters, including liquidity stress tests as well
as simple concentration measures.
The Bank's funds transfer pricing system prices liquidity by allocating the
cost or income to the various business segments. Liquidity costs are allocated
to liquidity-intensive activities, mainly long-term loans, and commitments to
extend credit and less liquid securities as well as strategic investments. The
liquidity compensation is credited to the suppliers of funds, primarily
funding in the form of stable deposits from the Bank's distribution network.
Short-term day-to-day funding decisions are based on a daily cumulative net cash position, which is controlled using liquidity ratio limits. Among these ratios and parameters, the Bank pays particular attention to the funds obtained on the wholesale market and to cumulative cash flows over various time horizons.
Moreover, the Bank's collateral pledging activities are monitored in relation
to the different limits set by the Bank and are subject to monthly stress
tests. In particular, the Bank uses various scenarios to estimate the
potential amounts of additional collateral that would be required in the event
of a downgrade to the Bank's credit rating.
Liquidity risk can be assessed in many different ways using different
liquidity indicators. One of the key liquidity risk monitoring tools is the
result over a three- month stress testing period, which is based on
contractual maturity and behavioural assumptions applied to balance sheet
items and off-balance-sheet commitments.
Stress Testing
The results over a three-month stress test period measure the Bank's liquidity
profile by checking not only its ability to survive a three-month crisis but
also the liquidity buffer it can generate with its liquid assets. This result
is measured on a weekly basis using three scenarios that are designed to
assess sensitivity to a crisis specific to the Bank and/or of a systemic
nature. Among the assumptions behind these scenarios, deposit loss simulations
are carried out based on their degree of stability, while the value of certain
assets is encumbered by an amount reflecting their readiness for liquidation
in a crisis. Appropriate scenarios and limits are included in the Bank's
Liquidity and Pledging Risk Management Policy.
The Bank maintains an up-to-date, comprehensive financial contingency and
crisis recovery plan that describes the measures to be taken in the event of a
critical liquidity situation. This plan is reviewed and approved annually by
the Board as part of business continuity and recovery planning. For additional
information, see the Regulatory Compliance Risk section of this MD&A.
Liquidity Risk Appetite
The Bank monitors and manages its risk appetite through liquidity limits,
ratios, and stress tests. The Bank's liquidity risk appetite is based on the
following three principles:
· ensure the Bank has a sufficient amount of unencumbered liquid
assets to cover its financial requirements, in both normal and stressed
conditions;
· ensure the Bank keeps a liquidity buffer above the minimum
regulatory requirement;
· ensure the Bank maintains diversified and stable sources of
funding.
Liquid Assets
To protect depositors and creditors from unexpected crisis situations, the
Bank holds a portfolio of unencumbered liquid assets that can be readily
liquidated to meet financial obligations. The majority of the unencumbered
liquid assets are held in Canadian or U.S. dollars. Moreover, all assets that
can be quickly monetized are considered liquid assets. The Bank's liquidity
reserves do not factor in the availability of the emergency liquidity
facilities of central banks. The following tables provide information on the
Bank's encumbered and unencumbered assets.
Liquid Asset Portfolio((1))*
As at October 31
(millions of Canadian dollars) 2024 2023
Bank-owned Liquid assets Total Encumbered Unencumbered Unencumbered
liquid assets((2)) received((3)) liquid assets liquid assets((4)) liquid assets liquid assets
Cash and deposits with financial institutions 31,549 − 31,549 11,730 19,819 25,944
Securities
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments 36,785 52,784 89,569 48,028 41,541 29,062
Issued or guaranteed by Canadian provincial
and municipal governments 13,831 10,766 24,597 13,928 10,669 6,403
Other debt securities 6,206 3,961 10,167 2,862 7,305 10,095
Equity securities 88,343 50,395 138,738 97,766 40,972 27,253
Loans
Securities backed by insured residential mortgages 15,455 − 15,455 6,984 8,471 6,140
As at October 31, 2024 192,169 117,906 310,075 181,298 128,777
As at October 31, 2023 169,888 87,919 257,807 152,910 104,897
As at October 31
(millions of Canadian dollars) 2024 2023
Unencumbered liquid assets by entity
National Bank (parent) 80,768 55,626
Domestic subsidiaries 12,023 10,013
Foreign subsidiaries and branches 35,986 39,258
128,777 104,897
As at October 31
(millions of Canadian dollars) 2024 2023
Unencumbered liquid assets by currency
Canadian dollar 66,970 51,882
U.S. dollar 53,960 35,243
Other currencies 7,847 17,772
128,777 104,897
Liquid Asset Portfolio((1))* - Average((5))
Year ended October 31
(millions of Canadian dollars) 2024 2023
Bank-owned Liquid assets Total Encumbered Unencumbered Unencumbered
liquid assets((2)) received((3)) liquid assets liquid assets((4)) liquid assets liquid assets
Cash and deposits with financial institutions 32,009 − 32,009 10,127 21,882 32,600
Securities
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments 39,282 50,400 89,682 53,082 36,600 23,388
Issued or guaranteed by Canadian provincial
and municipal governments 14,085 8,093 22,178 14,826 7,352 7,236
Other debt securities 7,935 3,989 11,924 3,074 8,850 11,265
Equity securities 86,007 50,836 136,843 96,130 40,713 28,996
Loans
Securities backed by insured residential mortgages 13,591 − 13,591 6,647 6,944 5,245
As at October 31, 2024 192,909 113,318 306,227 183,886 122,341
As at October 31, 2023 179,054 95,841 274,895 166,165 108,730
(1) See the Financial Reporting Method section on pages 14 to 20 for
additional information on capital management measures.
(2) Bank-owned liquid assets include assets for which there are no legal
or geographic restrictions.
(3) Securities received as collateral with respect to securities
financing and derivative transactions and securities purchased under reverse
repurchase agreements and securities borrowed.
(4) In the normal course of its funding activities, the Bank pledges
assets as collateral in accordance with standard terms. Encumbered liquid
assets include assets used to cover short sales, obligations related to
securities sold under repurchase agreements and securities loaned, guarantees
related to security-backed loans and borrowings, collateral related to
derivative financial instrument transactions, asset-backed securities, and
liquid assets legally restricted from transfers.
(5) The average is based on the sum of the end-of-period balances of the
12 months of the year divided by 12.
Summary of Encumbered and Unencumbered Assets((1))*
(millions of Canadian dollars) As at October 31, 2024
Encumbered Unencumbered Total Encumbered
assets((2)) assets assets as %
of total assets
Pledged as Other((3)) Available as Other((4))
collateral collateral
Cash and deposits with financial institutions 697 11,033 19,819 − 31,549 2.5
Securities 50,071 − 95,094 − 145,165 10.8
Securities purchased under reverse repurchase
agreements and securities borrowed − 10,872 5,393 − 16,265 2.4
Loans, net of allowances 40,296 − 8,471 194,265 243,032 8.7
Derivative financial instruments − − − 12,309 12,309 −
Investments in associates and joint ventures − − − 40 40 −
Premises and equipment − − − 1,868 1,868 −
Goodwill − − − 1,522 1,522 −
Intangible assets − − − 1,233 1,233 −
Other assets − − − 9,243 9,243 −
91,064 21,905 128,777 220,480 462,226 24.4
(millions of Canadian dollars) As at October 31, 2023((5))
Encumbered Unencumbered Total Encumbered
assets((2)) assets assets as %
of total assets
Pledged as Other((3)) Available as Other((4))
collateral collateral
Cash and deposits with financial institutions 449 8,841 25,944 − 35,234 2.2
Securities 49,005 − 72,813 − 121,818 11.6
Securities purchased under reverse repurchase
agreements and securities borrowed − 11,260 − − 11,260 2.6
Loans and acceptances, net of allowances 36,705 − 6,140 182,598 225,443 8.7
Derivative financial instruments − − − 17,516 17,516 −
Investments in associates and joint ventures − − − 49 49 −
Premises and equipment − − − 1,592 1,592 −
Goodwill − − − 1,521 1,521 −
Intangible assets − − − 1,256 1,256 −
Other assets − − − 7,788 7,788 −
86,159 20,101 104,897 212,320 423,477 25.1
(1) See the Financial Reporting Method section on pages 14 to 20 for
additional information on capital management measures.
(2) In the normal course of its funding activities, the Bank pledges
assets as collateral in accordance with standard terms. Encumbered assets
include assets used to cover short sales, obligations related to securities
sold under repurchase agreements and securities loaned, guarantees related to
security-backed loans and borrowings, collateral related to derivative
financial instrument transactions, asset-backed securities, residential
mortgage loans securitized and transferred under the Canada Mortgage Bond
program, assets held in consolidated trusts supporting the Bank's funding
activities, and mortgage loans transferred under the covered bond program.
(3) Other encumbered assets include assets for which there are
restrictions and that cannot therefore be used for collateral or funding
purposes as well as assets used to cover short sales.
(4) Other unencumbered assets are assets that cannot be used for
collateral or funding purposes in their current form. This category includes
assets that are potentially eligible as funding program collateral (e.g.,
mortgages insured by the Canada Mortgage and Housing Corporation that can be
securitized into mortgage-backed securities under the National Housing Act
(Canada)).
(5) Certain amounts have been adjusted to reflect accounting policy
changes arising from the adoption of IFRS 17. For additional information, see
Note 2 to the Consolidated Financial Statements.
Liquidity Coverage Ratio
The liquidity coverage ratio (LCR) was introduced primarily to ensure that
banks could withstand periods of severe short-term stress. LCR is calculated
by dividing the total amount of high-quality liquid assets (HQLA) by the total
amount of net cash outflows. OSFI has been requiring Canadian banks to
maintain a minimum LCR of 100%. An LCR above 100% ensures that banks are
holding sufficient high-quality liquid assets to cover net cash outflows given
a severe, 30-day liquidity crisis. The assumptions underlying the LCR scenario
were established by the BCBS and OSFI's LAR Guideline.
The following table provides average LCR data calculated using the daily
figures in the quarter. For the quarter ended October 31, 2024, the Bank's
average LCR was 150%, well above the 100% regulatory requirement and
demonstrating the Bank's solid liquidity position.
LCR Disclosure Requirements((1)(2))*
(millions of Canadian dollars) For the quarter ended
October 31, 2024 July 31, 2024
Total unweighted Total weighted Total weighted
value((3)) (average) value((4)) (average) value((4)) (average)
High-quality liquid assets (HQLA)
Total HQLA n.a. 86,929 80,724
Cash outflows
Retail deposits and deposits from small business customers, of which: 64,664 5,858 5,774
Stable deposits 27,781 834 829
Less stable deposits 36,883 5,024 4,945
Unsecured wholesale funding, of which: 116,004 65,742 64,409
Operational deposits (all counterparties) and deposits in networks of 35,445 8,660 8,602
cooperative banks
Non-operational deposits (all counterparties) 75,157 51,612 47,357
Unsecured debt 5,402 5,470 8,450
Secured wholesale funding n.a. 25,691 23,448
Additional requirements, of which: 76,406 19,479 19,152
Outflows related to derivative exposures and other collateral requirements 25,777 11,228 10,901
Outflows related to loss of funding on secured debt securities 1,386 1,394 1,635
Backstop liquidity and credit enhancement facilities and commitments to extend 49,243 6,857 6,616
credit
Other contractual commitments to extend credit 2,435 791 731
Other contingent commitments to extend credit 156,320 2,117 2,105
Total cash outflows n.a. 119,678 115,619
Cash inflows
Secured lending (e.g., reverse repos) 137,758 29,105 27,808
Inflows from fully performing exposures 12,816 8,794 8,481
Other cash inflows 23,372 23,262 25,531
Total cash inflows 173,946 61,161 61,820
Total adjusted value((5)) Total adjusted value((5))
Total HQLA 86,929 80,724
Total net cash outflows 58,517 53,799
Liquidity coverage ratio (%)((6)) 150 % 152 %
n.a. Not applicable
(1) See the Financial Reporting Method section on pages 14 to 20 for
additional information on capital management measures.
(2) OSFI prescribed a table format in order to standardize
disclosure throughout the banking industry.
(3) Unweighted values are calculated as outstanding balances
maturing or callable within 30 days (for inflows and outflows).
(4) Weighted values are calculated after the application of
respective haircuts (for HQLA) or inflow and outflow rates.
(5) Total adjusted values are calculated after the application of
both haircuts and inflow and outflow rates and any applicable caps.
(6) The data in this table has been calculated using averages of
the daily figures in the quarter.
As at October 31, 2024, Level 1 liquid assets represented 85% of the Bank's
HQLA, which includes cash, central bank deposits, and bonds issued or
guaranteed by the Canadian government and Canadian provincial governments.
Cash outflows arise from the application of OSFI-prescribed assumptions on
deposits, debt, secured funding, commitments, and additional collateral
requirements. The cash outflows are partly offset by cash inflows, which come
mainly from secured loans and performing loans. The Bank expects some
quarter-over-quarter variation between reported LCRs without such variation
being necessarily indicative of a trend. The variation between the quarter
ended October 31, 2024 and the preceding quarter is a result of normal
business operations. The Bank's liquid asset buffer is well in excess of its
total net cash outflows. The LCR assumptions differ from the assumptions used
for the liquidity disclosures presented in the tables on the previous pages or
those used for internal liquidity management rules. While the liquidity
disclosure framework is prescribed by the EDTF, the Bank's internal liquidity
metrics use assumptions that are calibrated according to its business model
and experience.
Intraday Liquidity
The Bank manages its intra-day liquidity in such a way that the amount of
available liquidity exceeds its maximum intra-day liquidity requirements. The
Bank monitors its intra-day liquidity on an hourly basis, and the evolution
thereof is presented monthly to the ALCO.
Net Stable Funding Ratio
The BCBS has developed the Net Stable Funding Ratio (NSFR) to promote a more
resilient banking sector. The NSFR requires institutions to maintain a stable
funding profile in relation to the composition of their assets and
off-balance-sheet activities. A viable funding structure is intended to reduce
the likelihood that disruptions to an institution's regular sources of funding
would erode its liquidity position in a way that would increase the risk of
its failure and potentially lead to broader systemic stress. The NSFR is
calculated by dividing available stable funding by required stable funding.
OSFI has been requiring Canadian banks to maintain a minimum NSFR of 100%.
The following table provides the available stable funding and the required
stable funding in accordance with OSFI's Liquidity Adequacy Requirements
Guideline. As at October 31, 2024, the Bank's NSFR was 122%, well above the
100% regulatory requirement and demonstrating the Bank's solid liquidity in a
long-term position.
NSFR Disclosure Requirements((1)(2))*
(millions of Canadian dollars) As at October 31, As at July 31,
2024 2024
Unweighted value by residual maturity Weighted
value((3))
No 6 months Over Over Weighted
maturity or less 6 months 1 year value((3))
to 1 year
Available Stable Funding (ASF) Items
Capital: 25,540 − − 1,258 26,798 26,610
Regulatory capital 25,540 − − 1,258 26,798 26,610
Other capital instruments − − − − − −
Retail deposits and deposits from small business customers: 60,125 15,068 8,385 28,038 103,782 102,165
Stable deposits 26,338 5,346 4,420 7,813 42,111 41,773
Less stable deposits 33,787 9,722 3,965 20,225 61,671 60,392
Wholesale funding: 79,840 91,291 23,057 61,241 126,339 118,597
Operational deposits 36,740 − − − 18,370 17,678
Other wholesale funding 43,100 91,291 23,057 61,241 107,969 100,919
Liabilities with matching interdependent assets((4)) − 3,313 1,740 23,324 − −
Other liabilities((5)): 15,385 10,442 760 835
NSFR derivative liabilities((5)) n.a. 317 n.a. n.a.
All other liabilities and equity not included in the above categories 15,385 3,170 98 6,857 760 835
Total ASF n.a. n.a. n.a. n.a. 257,679 248,207
Required Stable Funding (RSF) Items
Total NSFR high-quality liquid assets (HQLA) n.a. n.a. n.a. n.a. 9,827 10,254
Deposits held at other financial institutions for operational purposes − − − − − −
Performing loans and securities: 66,384 97,602 30,216 97,514 167,755 166,477
Performing loans to financial institutions secured by Level 1 HQLA 163 3,514 85 − 228 258
Performing loans to financial institutions secured by non-Level 1 6,837 57,988 1,709 2,563 11,137 10,534
HQLA and unsecured performing loans to financial institutions
Performing loans to non-financial corporate clients, loans to retail 34,364 27,072 18,837 33,685 83,705 82,729
and small business customers, and loans to sovereigns, central
banks and public sector entities, of which:
With a risk weight of less than or equal to 35% under the Basel II 634 2,417 517 123 1,959 1,510
Standardized Approach for credit risk
Performing residential mortgages, of which: 9,138 7,858 9,250 59,065 56,547 55,862
With a risk weight of less than or equal to 35% under the Basel II 9,138 7,858 9,250 59,065 56,547 55,862
Standardized Approach for credit risk
Securities that are not in default and do not qualify as HQLA, including 15,882 1,170 335 2,201 16,138 17,094
exchange-traded equities
Assets with matching interdependent liabilities((4)) − 3,313 1,740 23,324 − −
Other assets((5)): 7,544 33,469 28,191 24,567
Physical traded commodities, including gold 696 n.a. n.a. n.a. 696 551
Assets posted as initial margin for derivative contracts and n.a. 12,894 10,960 10,750
contributions to default funds of central counterparties((5))
NSFR derivative assets((5)) n.a. 3,453 3,136 −
NSFR derivative liabilities before deduction of the variation n.a. 9,758 488 611
margin posted((5))
All other assets not included in the above categories 6,848 4,053 1,519 1,792 12,911 12,655
Off-balance-sheet items((5)) n.a. 126,582 4,845 4,686
Total RSF n.a. n.a. n.a. n.a. 210,618 205,984
Net Stable Funding Ratio (%) n.a. n.a. n.a. n.a. 122 % 120 %
n.a. Not applicable
(1) See the Financial Reporting Method section on pages 14 to 20 for
additional information on capital management measures.
(2) OSFI prescribed a table format in order to standardize disclosure
throughout the banking industry.
(3) Weighted values are calculated after application of the weightings
set out in OSFI's LAR Guideline.
(4) As per OSFI's specifications, liabilities arising from transactions
involving the Canada Mortgage Bond program and their corresponding encumbered
mortgages are given ASF and RSF weights of 0%, respectively.
(5) As per OSFI's specifications, there is no need to differentiate by
maturity.
The NSFR represents the amount of ASF relative to the amount of RSF. ASF is
defined as the portion of capital and liabilities expected to be reliable over
the time horizon considered by the NSFR, which extends to one year. The amount
of RSF of a specific institution is a function of the liquidity
characteristics and residual maturities of the various assets held by that
institution as well as those of its off-balance-sheet exposures. The amounts
of ASF and RSF are calibrated to reflect the degree of stability of
liabilities and liquidity of assets. The Bank expects some
quarter-over-quarter variation between reported NSFRs without such variation
being necessarily indicative of a trend.
The NSFR assumptions differ from the assumptions used for the liquidity
disclosures provided in the tables on the preceding pages or those used for
internal liquidity management rules. While the liquidity disclosure framework
is prescribed by the EDTF, the Bank's internal liquidity metrics use
assumptions that are calibrated according to its business model and
experience.
Funding Risk
Funding risk is defined as the risk to the Bank's ongoing ability to raise
sufficient funds to finance actual or proposed business activities on an
unsecured or secured basis at an acceptable price. The Bank maintains a good
balance of its funding through appropriate diversification of its unsecured
funding vehicles, securitization programs, and secured funding. The Bank also
diversifies its funding by currency, geography, and maturity. The funding
management priority is to achieve an optimal balance between deposits,
securitization, secured funding, and unsecured funding. This brings optimal
stability to the funding and reduces vulnerability to unpredictable events.
Liquidity and funding levels remained sound and robust over the year, and the
Bank does not foresee any event, commitment, or demand that might have a
significant impact on its liquidity and funding risk position. For additional
information, see the table entitled Residual Contractual Maturities of Balance
Sheet Items and Off-Balance-Sheet Commitments in Note 31 to the Consolidated
Financial Statements.
Credit Ratings
The credit ratings assigned by ratings agencies represent their assessment of
the Bank's credit quality based on qualitative and quantitative information
provided to them. Credit ratings may be revised at any time based on various
factors, including macroeconomic factors, the methodologies used by ratings
agencies, or the current and projected financial condition of the Bank. Credit
ratings are one of the main factors that influence the Bank's ability to
access financial markets at a reasonable cost. A downgrade in the Bank's
credit ratings could adversely affect the cost, size, and term of future
funding and could also result in increased requirement to pledge collateral or
decreased capacity to engage in certain collateralized business activities at
a reasonable cost, including hedging and derivative financial instrument
transactions.
Liquidity and funding levels remain sound and robust, and the Bank continues
to enjoy excellent access to the market for its funding needs. The Bank
received favourable credit ratings from all the agencies, reflecting the high
quality of its debt instruments, and the Bank's objective is to maintain these
strong credit ratings. On August 26, 2024, S&P Global Ratings raised its
long-term issuer credit rating on the Bank to "A+" and its outlook was
maintained at stable. In addition, on September 24, 2024, Moody's placed the
Bank's ratings under review for upgrade. As at October 31, 2024, all the other
outlooks of the ratings agencies remained unchanged at "Stable". The following
table presents the Bank's credit ratings according to four rating agencies as
at October 31, 2024.
The Bank's Credit Ratings
As at October 31, 2024
Moody's S&P DBRS Fitch
Short-term senior debt P-1 A-1 R-1 (high) F1+
Canadian commercial paper A-1 (mid)
Long-term deposits Aa3 AA AA-
Long-term non-bail-inable senior debt((1)) Aa3 A+ AA AA-
Long-term senior debt((2)) A3 BBB+ AA (low) A+
NVCC subordinated debt Baa2 (hyb) BBB A (low)
NVCC limited recourse capital notes Ba1 (hyb) BB+ BBB (high) BBB
NVCC preferred shares Ba1 (hyb) P-3 (high) Pfd-2
Counterparty risk((3)) Aa3/P-1 AA-
Covered bonds program Aaa AAA AAA
Rating outlook Under review for an upgrade((4)) Stable Stable Stable
(1) Includes senior debt issued before September 23, 2018 and senior
debt issued on or after September 23, 2018, which is excluded from the Bank
Recapitalization (Bail-In) Regime.
(2) Subject to conversion under the Bank Recapitalization (Bail-In)
Regime.
(3) Moody's uses the term Counterparty Risk Rating while Fitch uses the
term Derivative Counterparty Rating.
(4) On September 24, 2024, Moody's has placed on review for upgrade all
long-term ratings and assessments of the Bank, including its Baa1 baseline
credit assessment (BCA), Aa3 long-term deposits ratings and Counterparty Risk
Ratings, and its Counterparty Risk Assessment of Aa3(cr).
Guarantees
As part of a comprehensive liquidity management framework, the Bank regularly
reviews its contracts that stipulate that additional collateral could be
required in the event of a downgrade of the Bank's credit rating. The Bank's
liquidity position management approach already incorporates additional
collateral requirements in the event of a one-, two-, or three-notch
downgrade. These additional collateral requirements are presented in the table
below.
(millions of Canadian dollars) As at October 31, 2024
One-notch Two-notch Three-notch
downgrade downgrade downgrade
Derivatives((1)) 21 42 88
(1) Contractual requirements related to agreements known as initial
margins and variation margins.
Funding Strategy
The main objective of the funding strategy is to support the Bank's organic
growth while also enabling it to survive potentially severe and prolonged
crises and to meet its regulatory obligations and financial targets.
The Bank's funding framework is summarized as follows:
· pursue a diversified deposit strategy to fund core banking
activities through stable deposits coming from the networks of each of the
Bank's major business segments;
· maintain sound liquidity risk management through centralized
expertise and management of liquidity metrics within a predefined risk
appetite;
· maintain active access to various markets to ensure a
diversification of institutional funding in terms of source, geographic
location, currency, instrument, and maturity, whether or not funding is
secured.
The funding strategy is implemented in support of the Bank's overall
objectives of strengthening its franchise among market participants and
reinforcing its excellent reputation. The Bank continuously monitors and
analyzes market trends as well as possibilities for accessing less expensive
and more flexible funding, considering both the risks and opportunities
observed. The deposit strategy remains a priority for the Bank, which
continues to prefer deposits to institutional funding.
The Bank actively monitors and controls liquidity risk exposures and funding
needs within and across entities, business segments, and currencies. The
process involves evaluating the liquidity position of individual business
segments in addition to that of the Bank as a whole as well as the liquidity
risk from raising unsecured and secured funding in foreign currencies. The
funding strategy is implemented through the funding plan and deposit strategy,
which are monitored, updated to reflect actual results, and regularly
evaluated.
Diversified Funding Sources
The primary purpose of diversifying by source, geographic location, currency,
instrument, maturity, and depositor is to mitigate liquidity and funding risk
by ensuring that the Bank maintains alternative sources of funds that
strengthen its capacity to withstand a variety of severe yet plausible
institution-specific and market-wide shocks. To meet this objective, the Bank:
· takes funding diversification into account in the business planning
process;
· maintains a variety of funding programs to access different
markets;
· sets limits on funding concentration;
· maintains strong relationships with fund providers;
· is active in various funding markets of all tenors and for various
instruments;
· identifies and monitors the main factors that affect the ability to
raise funds.
The Bank is active in the following funding and securitization platforms:
· Canadian dollar Senior Unsecured Debt;
· U.S. dollar Senior Unsecured Debt programs;
· Canadian Medium-Term Note Shelf;
· U.S. dollar Commercial Paper programs;
· Euro Commercial Paper programs;
· U.S. dollar Certificates of Deposit;
· Euro Medium-Term Note program;
· Canada Mortgage and Housing Corporation securitization programs;
· Canadian Credit Card Trust II;
· Legislative Covered Bond program.
The table below presents the residual contractual maturities of the Bank's
wholesale funding. The information has been presented in accordance with the
categories recommended by the EDTF for comparison purposes with other banks.
Residual Contractual Maturities of Wholesale Funding((1))*
(millions of Canadian dollars) As at October 31, 2024
1 month or less Over 1 Over 3 Over 6 Subtotal Over 1 Over 2 Total
month to months to months to 1 year year to years
3 months 6 months 12 months or less 2 years
Deposits from banks((2)) 199 − − 532 731 − − 731
Certificates of deposit and commercial paper((3)) 1,657 7,255 10,271 9,966 29,149 139 − 29,288
Senior unsecured medium-term notes((4)(5)) 940 2,270 2,074 4,431 9,715 3,984 13,199 26,898
Senior unsecured structured notes − 34 6 − 40 1,452 3,782 5,274
Covered bonds and asset-backed securities
Mortgage securitization − 1,897 1,216 1,740 4,853 4,169 19,355 28,377
Covered bonds 355 − 1,513 − 1,868 2,495 6,994 11,357
Securitization of credit card receivables 49 − − − 49 − − 49
Subordinated liabilities((6)) − − − − − − 1,258 1,258
3,200 11,456 15,080 16,669 46,405 12,239 44,588 103,232
Secured funding 404 1,897 2,729 1,740 6,770 6,664 26,349 39,783
Unsecured funding 2,796 9,559 12,351 14,929 39,635 5,575 18,239 63,449
3,200 11,456 15,080 16,669 46,405 12,239 44,588 103,232
As at October 31, 2023 3,337 6,616 15,200 6,868 32,021 12,347 34,370 78,738
(1) Bankers' acceptances are not included in this table.
(2) Deposits from banks include all non-negotiable term deposits from
banks.
(3) Includes bearer deposit notes.
(4) Certificates of deposit denominated in euros are included in senior
unsecured medium-term notes.
(5) Includes debts subject to bank recapitalization (Bail-In) conversion
regulations.
(6) Subordinated debt is presented in this table, but the Bank does not
consider it as part of its wholesale funding.
Operational Risk
Operational risk is the risk of financial losses attributable to personnel, to
an inadequacy or to a failure of processes, systems, or external events.
Operational risk exists for every Bank activity. Theft, fraud, cyberattacks,
unauthorized transactions, system errors, human error, misinterpretation of
laws and regulations, litigation or disputes with clients, inappropriate sales
practice behaviour, or property damage are just a few examples of events
likely to cause financial loss, harm the Bank's reputation, or lead to
regulatory penalties or sanctions.
Although operational risk cannot be eliminated entirely, it can be managed in
a thorough and transparent manner to keep it at an acceptable level. The
Bank's operational risk management framework is built on the concept of three
lines of defence and provides a clear allocation of responsibilities to all
levels of the organization, as mentioned below.
Operational Risk Management Framework
The operational risk management framework is described in the Operational Risk
Management Policy, which is derived from the Risk Management Policy. The
operational risk management framework is aligned with the Bank's risk appetite
and is made up of policies, standards, and procedures specific to each
operational risk, which fall under the responsibility of specialized groups.
Effective management of operational risk contributes to the operational
resilience of the Bank, which ensures the implementation of an efficient
approach in this respect.
The Operational Risk Management Committee (ORMC), a subcommittee of the GRC,
is the main governance committee overseeing operational risk matters. Its
mission is to provide oversight of the operational risk level across the
organization to ensure it aligns with the Bank's established risk appetite
targets. It implements effective frameworks for managing operational risk,
including policies and standards, and monitors the application thereof.
The segments use several operational risk management tools and methods to
identify, assess, manage and monitor their operational risks and control
measures. With these tools and methods, the segments can:
· recognize and understand the inherent and residual risks to which
their activities and operations are exposed;
· identify how to manage and monitor the identified risks to keep them
at an acceptable level;
· proactively and continuously manage risks;
· obtain an integrated view of risk posture and the action plans that
need to be put in place to achieve risk appetite targets, by combining the
results of these various tools in the risk profile.
Operational Risk Management Tools and Methods
Operational Risk Taxonomy
With the aim of developing a common language for the Bank's operational risk
universe, an operational risk taxonomy has been established. It is comparable
to the Basel taxonomy and based on eight risk categories and two risk themes.
Collection and Analysis of Data on Internal Operational Events
The Operational Risk Unit applies a process, across the Bank and its
subsidiaries, for identifying, collecting, and analyzing data on internal
operational events. This process helps determine the Bank's exposure to the
operational risks and operational losses incurred and assess the effectiveness
of internal controls. It also helps limit operational events, keep losses at
an acceptable level and, as a result, reduce potential capital charges and
lower the likelihood of damage to the Bank's reputation. These data are
processed and saved in a centralized database and are periodically the subject
of a quality assurance exercise.
Analysis and Lessons Learned from Operational Events Observed in Other Large
Businesses
By collecting and analyzing media-reported information about significant
operational incidents, in particular incidents related to fraud, information
security, and theft of personal information experienced by other
organizations, the Bank can assess the effectiveness of its own operational
risk management practices and reinforce them, if necessary.
Self-Assessment of Operational Risk
Self-assessment of operational risk gives each business unit and corporate
unit the means to proactively identify and assess the new or major operational
risks to which they are exposed, evaluate the effectiveness of monitoring and
mitigating controls, and develop action plans to keep such risks at acceptable
levels. The self-assessment is done on an ongoing basis through quarterly
monitoring and in-depth analysis, or when significant changes are made to
products, services, operations, markets, technological systems or business
processes, which helps anticipate factors that could hinder performance or the
achievement of objectives.
Key Risk Indicators
Key risk indicators are used to monitor the main operational risk exposure
factors and track how risks are evolving in order to proactively manage them.
The business units and corporate units define the key indicators associated
with their main operational risks and assign tolerance thresholds to them.
These indicators are monitored periodically and, when they show a significant
increase in risk or when a tolerance threshold is exceeded, they are sent to
an appropriate level in the hierarchy and action plans are implemented as
required.
Scenario Analysis
Scenario analysis, which is part of a Bank-wide stress testing program, is an
important and useful tool for assessing the impacts related to potentially
serious events. It is used to define the risk appetite, set risk exposure
limits, and engage in business planning. More specifically, scenario analysis
provides management with a better understanding of the risks faced by the Bank
and helps it make appropriate management decisions to mitigate potential
operational risks that are inconsistent with the Bank's risk appetite.
Insurance Program
To protect itself against any material financial losses arising from
unforeseeable operational risk exposure, the Bank also has adequate insurance,
the nature and amount of which meet its coverage requirements.
Operational Risk Reports and Disclosures
Operational events for which the financial impact exceeds tolerance thresholds
or that have a significant non-financial impact are submitted to appropriate
decision-making levels. Management is obligated to report on its management
process and to remain alert to current and future issues. Reports on the
Bank's risk profile, highlights, and emerging risks are periodically
submitted, on a timely basis, to the ORMC, the GRC, and the RMC. This
reporting enhances the transparency and proactive management of the main
operational risk factors.
Regulatory Compliance Risk
Regulatory compliance risk is the risk of the Bank or of one of its employees
or business partners failing to comply with the regulatory requirements in
effect where it does business, both in Canada and internationally. Regulatory
compliance risk is present in all of the daily operations of each Bank
segment.
The Bank faces an increasingly complex environment of regulatory requirements,
as governments and regulatory authorities continue to implement major reforms
aimed at strengthening the stability of the financial system and protecting
key markets and participants. Numerous factors are creating significant
pressure on human resources and the need for technological innovation,
including the expansion of the Bank's international activities, increasingly
complex international sanctions in a constantly evolving geopolitical
environment, the growing interconnectivity of regulatory risks, and the
changing expectations of the many regulatory bodies.
A situation of regulatory non-compliance can adversely affect the Bank's
reputation and result in penalties and sanctions and/or restrictions on
business activities, as well as increased oversight by regulators.
Organizational Structure of Compliance
Compliance is an independent oversight function within the Bank. The Senior
Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering
Officer serves as both chief compliance officer (CCO) and chief anti-money
laundering officer (CAMLO) for the Bank and its subsidiaries and foreign
centres. She is responsible for implementing and updating the Bank's programs
for regulatory compliance management, regulatory requirements related to
AML/ATF, international sanctions, and the fight against corruption. The CCO
and CAMLO has a direct relationship with the Chair of the RMC and meets with
her at least once every quarter. She can also communicate directly with senior
management, leaders, and directors of the Bank and of its subsidiaries and
foreign centres.
Regulatory Compliance Framework
The Bank operates in a highly regulated industry. To ensure sound management
of regulatory compliance, the Bank favours proactive approaches and
incorporates regulatory requirements into its day-to-day operations.
Such proactive management also provides reasonable assurance that the Bank is
in compliance, in all material respects, with the regulatory requirements in
effect where it does business, both in Canada and internationally.
The implementation of a regulatory compliance risk management framework across
the Bank is entrusted to the Compliance Service, which has the following
mandate:
· implement policies and standards that ensure compliance with
current regulatory requirements, including those related to AML/ATF, to
international sanctions, and to the fight against corruption;
· develop compliance and AML/ATF training programs for Bank
employees, leaders, and directors;
· exercise independent oversight and monitoring of the
programs, policies, and procedures implemented by the management of the Bank,
its subsidiaries, and its foreign centres to ensure that the control
mechanisms are sufficient, respected, and effective;
· report relevant compliance and AML/ATF matters to the Bank's
Board and inform it of any significant changes in the effectiveness of the
risk management framework.
The Bank holds itself to high regulatory compliance risk management standards
in order to earn the trust of its clients, its shareholders, the market, and
the general public.
In addition, the Bank has an organization-wide AML/ATF Program designed to
prevent the use of its products and services for money laundering and
terrorist financing purposes. The Bank also applies the International
Sanctions Program, which is designed to ensure that all financial products and
activities comply with the applicable economic sanctions, as well as an
Anticorruption Program aimed at preventing acts of corruption in the
organization. Controls are in place to monitor and detect financial
transactions that are suspected of being linked to money laundering or the
financing of terrorist activities, or that are in contravention of
international sanctions, and to report them to the applicable regulatory
authorities.
The main regulatory developments that have been monitored over the past year
are described below.
Reform of the Official Languages Act (federal law)
The purpose of Bill C-13, An Act to amend the Official Languages Act, to enact
the Use of French in Federally Regulated Private Businesses Act and to make
related amendments to other Acts is to provide a new legal framework and
support the official languages of Canada. It modernizes the Official Languages
Act by giving new powers to the Commissioner (compliance agreements, orders,
penalties, etc.) to protect the language rights of Canadians. It also
introduces a new law that confers rights and obligations on federal businesses
regarding language of service (consumers) and language of work in Quebec and
in other regions of Canada with a strong francophone presence. The bill was
assented to on June 20, 2023. The amendments to the Official Languages Act
then came into effect, with the new Act coming into effect by order-in-council
at a later date. A consultation was initiated by Canadian Heritage to obtain
industry feedback on application of the new law. The comments received will be
used to set the rules of a new regulation, in particular to align the new
obligations in regions with a strong French-speaking presence.
Amendments to the Charter of the French Language (Quebec)
An Act respecting French, the official and common language of Québec
(formerly Bill 96) made amendments to the Charter of the French Language and
other legislation. The objectives consist mainly of strengthening the presence
and use of the French language in Quebec and affirming that French is the only
official language of Quebec. In June 2024, the government published a new
Regulation respecting the language of commerce and business that gives
detailed information on the new requirements for contracts of adhesion and
commercial advertising (assented to in July 2024). The last provisions
relating to commercial advertising will come into effect on June 1, 2025.
Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances
On July 5, 2023, the Financial Consumer Agency of Canada (FCAC) published,
with immediate effect, its Guideline on Existing Consumer Mortgage Loans in
Exceptional Circumstances. This guideline sets out the FCAC's expectations for
federally regulated financial institutions (FRFIs) to contribute to the
protection of consumers of financial products and services by providing
tailored support to natural persons with an existing residential mortgage loan
on their principal residence who are experiencing severe financial stress, as
a result of exceptional circumstances, and are at risk of mortgage default.
These exceptional circumstances include the current combined effects of high
household indebtedness, the rapid rise in interest rates in recent years, and
the increased cost of living. The FCAC expects FRFIs to consider all available
mortgage relief measures and to adopt an approach that reflects the personal
circumstances of consumers and their financial needs. On September 1, 2023,
the FCAC also published instructions for banks to file their reports with the
FCAC relating to the implementation of the Guideline on Existing Consumer
Mortgages in Exceptional Circumstances.
An Act to implement certain provisions of the budget tabled in Parliament on
March 28, 2023 concerning external complaints bodies (ECBs)
Bill C-47, enacted in June 2023, amends the Bank Act and gives the Minister of
Finance the power to designate only one ECB to address consumer complaints
involving banks. These amendments require a bank that is a subject of a
complaint received by the ECB to provide the designated ECB, without delay,
with all information in its possession or control that relates to the
complaint. The Minister of Finance may also increase the FCAC's oversight and
enforcement powers with respect to the ECB, and allow the FCAC to conduct a
special audit of the ECB. The Ombudsman for Banking Services and Investments
(OBSI) was selected as the exclusive ECB, and all banks not already conducting
business with the OSBI were required to complete a transfer by November 1,
2024.
Budget Implementation Act, 2023, No. 1 and Criminal Interest Rate Regulations
On December 23, 2023, the federal government released its Criminal Interest
Rate Regulations for public consultation. The purpose of these draft
regulations is to implement the amendments to the Criminal Code proposed in
the Budget Implementation Act, No. 1, 2023, which will change the calculation
method from one based on an effective annual rate to a method based on an
annual percentage rate and lower the criminal interest rate from an APR of 45%
to 35%. Implementation is scheduled for January 1, 2025.
Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Activities
Changes to reporting forms resulting from amendments made to the regulations
set out in the Proceeds of Crime (Money Laundering) and Terrorist Financing
Act (AML/ATF) have been implemented in accordance with the requirements of the
Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
Protection of Personal Information
Given changing technologies and societal behaviours, privacy and the
protection of personal information is a topical issue in Canada. Recent
regulatory measures around the world reflect a desire to implement a stronger
legislative framework in the areas of confidentiality and use of personal
information. In Quebec, most of the obligations of the new Act 25, An Act to
modernize legislative provisions as regards the protection of personal
information, came into effect in September 2023. Act 25 has introduced
substantial changes regarding the protection of personal information, mainly
by promoting transparency, enhancing data confidentiality levels, and
providing a framework for the collection, use, and sharing of personal
information. In addition, the Regulation respecting the anonymization of
personal information came into force in May 2024, and the final component of
Law 25 concerning the data portability right came into force in September
2024. The Regulation sets out the criteria to be met when a company anonymizes
personal information in order to use it for serious and legitimate purposes,
rather than destroying it. As for the data portability right, it enables
individuals to have information communicated to them in a structured, commonly
used technological format. At the federal level, Bill C-27, tabled in June
2022, enacts three new laws: the Consumer Privacy Protection Act, the Personal
Information and Data Protection Tribunal Act, the Artificial Intelligence and
Data Act. The latter act is the first bill designed to regulate artificial
intelligence in Canada. Still at the federal level, the Consumer-Driven
Banking Act was enacted on June 20, 2024. This law establishes Canada's first
legislative framework for an open banking system, which aims to enable
consumers and small businesses to transfer their financial data between
financial institutions and accredited financial applications in a secure and
user-friendly manner.
Employment Equity Act
Amendments to the Employment Equity Regulationsintroduced new pay transparency
reporting obligations, among other things, under the Employment Equity Act.
The amendments came into effect on January 1, 2021 and created new pay gap
reporting obligations for affected employers, which were required to be
included in employer annual reports (which were due by June 1, 2022). The
aggregate wage gap data for each employer was publicly posted in the winter of
2023 (and updated annually thereafter). The purpose of the Employment Equity
Act is to achieve equality in the workplace so that no person shall be denied
employment opportunities or benefits for reasons unrelated to ability and, in
the fulfilment of that goal, to correct the conditions of disadvantage in
employment experienced by women, Indigenous Peoples, persons with
disabilities, and members of visible minorities by giving effect to the
principle that employment equity means more than treating persons in the same
way but also requires special measures and the accommodation of differences.
The Act is currently the subject of consultations on its modernization.
Pay Equity Act
Under the federal Pay Equity Act, which came into effect on August 31, 2021,
employers with more than ten employees are required to develop a pay equity
plan that identifies and corrects gender-based wage gaps within three years
(i.e., no later than September 3, 2024). The purpose of the Act is to achieve
pay equity through proactive means by redressing the systemic gender-based
discrimination in the compensation practices and systems of employers that is
experienced by employees who occupy positions in predominantly female job
classes. This Act seeks to ensure that employees receive equal compensation
for work of equal value, while taking into account the diverse needs of
employers and then to maintain pay equity through proactive means. Employers
with over 100 employees must prepare (and maintain) their pay equity plan in a
joint employer-employee pay equity committee.
Recovery and Resolution Planning
As part of the regulatory measures used to manage systemic risks, D-SIBs are
required to prepare recovery and resolution plans. A recovery plan is
essentially a roadmap that guides the recovery of a bank in the event of
severe financial stress; conversely, a resolution plan guides its orderly
wind-down in the event of failure when recovery is no longer an option. The
Bank improves and periodically updates its recovery and resolution plans to
prepare for these high-risk, but low-probability, events in accordance with
the guidelines of the CDIC, which are frequently updated. In addition, the
Bank and other D-SIBs continue to work with the CDIC to maintain a
comprehensive resolution plan that would ensure an orderly winding down of the
Bank's operations. These plans are approved by the Board and submitted to the
national regulatory agencies.
Internal Revenue Code (Section 871(m) - Dividend Equity Payments)
Section 871(m) of the U.S. Internal Revenue Code (IRC) aims to ensure that
non-U.S. persons pay tax on payments that can be considered dividends on U.S.
shares when these payments are made on certain derivative instruments. The
derivative instruments for which the underlyings are U.S. shares (including
U.S. exchange-traded funds) or "non-qualified indices" are therefore subject
to the withholding and reporting requirements. Given that discussions are
ongoing in the industry, the effective date of certain aspects of this
regulation, as well as some of the obligations of Qualified Derivatives
Dealers under section 871(m) of the IRC and the Qualified Intermediary
Agreement, have been postponed until January 1, 2027.
U.S. Foreign Account Tax Compliance Act and Common Reporting Standard
The U.S. law addressing foreign account tax compliance (Foreign Account Tax
Compliance Act or FATCA) and the Common Reporting Standard (CRS), both
incorporated into the Income Tax Act(Canada), are intended to counter tax
evasion internationally through the automatic exchange of tax information
reported annually by Canadian financial institutions to the Canada Revenue
Agency (CRA), which then relays the information to the relevant tax
authorities. CRA also publishes guidance documents on the due diligence and
reporting obligations imposed under FATCA and CRS. These documents are amended
periodically to reflect any regulatory changes, such as the recent amendments
to CRS made by OECD, the adoption of which was proposed in the 2024 Federal
Budget, for 2026 and subsequent years.
Proposed Rules on Sales and Exchanges of Digital Assets by Brokers
In June 2024, the U.S. Department of the Treasury published final regulations
on broker sales and exchanges of digital assets. Brokers will be required to
report the gross proceeds from sales of digital assets effected on or after
January 1, 2025. Reporting the adjusted basis will be required for sales
effected on or after January 1, 2026.
Reform of Interest Rate Benchmarks
As part of the transition related to the reform of interest rate benchmarks in
Canada, the CDOR (Canadian Dollar Offered Rate) was discontinued on June 28,
2024 and replaced with the CORRA (Canadian Overnight Repo Rate Average). A
forward-looking rate, the 1-month and 3-month Term CORRA has also been
available for certain financial products since September 5, 2023. For
additional information, see the Basis of Presentation section in Note 1 to the
Consolidated Financial Statements.
One-Day Settlement Cycle
In May 2024, the normal settlement cycle for certain securities transactions
in Canada and the U.S. was shortened from two business days after the trade
date (T+2) to one business day after the trade date (T+1). The shorter
settlement cycle is expected to reduce credit and counterparty risk, lower the
cost of collateral, increase market liquidity and provide faster access to
financing. Canada and the U.S. moved to T+1 over the weekend of May 25 and 26,
2024, with May 24 being the last date on which securities were traded under
the T+2 cycle. However, the first trading day at T+1 was different in the
United States due to Memorial Day. Canada and the U.S. had identical trade
settlement cycles on May 30, 2024.
The CSA adopted amendments to National Instrument 24-101 - Institutional Trade
Matching and Settlement and its companion policy (the "amendments") that came
into force on May 27, 2024. These amendments were adopted to: (i) address the
transition to T+1, and (ii) permanently repeal the exception reporting
requirements in Part 4 of NI 24-101. The CSA also proposed amendments to
National Instrument 81-102 - Investment Funds to facilitate a mutual fund's
decision to voluntarily shorten its trade settlement cycle for purchases and
redemptions to T+1. The Canadian Investment Regulatory Organization (CIRO) has
published amendments to the Universal Market Integrity Rules and the
Investment Dealer and Partially Consolidated Rules to support the securities
industry's transition to the T+1 settlement cycle.
Consolidation of the Rules of the Canadian Investment Regulatory Organization
(CIRO)
A consolidation of CIRO rules has been underway since October 2023 and is
being carried out in five consultation phases. Phases 1 to 3 have been
published. It is expected that Phase 4 will be published in the fall of 2024,
with the fifth and final consultation phase published in early 2025. The entry
into force of this new set of rules has yet to be confirmed by CIRO. These
rules will apply to investment dealers and mutual fund dealers.
Accessible Canada Act
The Act was adopted in June 2019. The purpose of the Act is to make Canada a
barrier-free country by January 1, 2040. The Bank published its accessibility
plan on May 31, 2023 and its first progress report on May 30, 2024 on its
website at nbc.ca.
Amendments to National Instrument 31-103 - Registration Requirements,
Exemptions and Ongoing Registrant Obligations - Client Relationship Model
(Phase 3)
In April 2023, the CSA published the final version of changes designed to
enhance disclosure requirements on the cost of investment funds and to impose
new disclosure requirements on the cost and performance of individual variable
insurance contracts (segregated fund contracts). All dealers, advisers,
registered investment fund managers, and insurers offering segregated fund
contracts are affected by these new requirements, which will come into effect
on January 1, 2026.
National Instrument 91-507 - Trade Repositories and Derivatives Data Reporting
The CSA has published the final version of amendments intended to simplify the
reporting of OTC derivatives data and harmonize it with global standards. The
amendments will come into force on July 25, 2025.
National Instrument 93-101 - Derivatives: Business Conduct
This instrument, which came into force on September 28, 2024, sets out the
fundamental obligations for OTC derivatives dealers and advisors. NI 93-101
meets international standards, including fair dealing, conflicts of interest,
suitability, reporting non-compliance and recordkeeping. The business conduct
rule is intended to help protect market participants by improving
transparency, increasing accountability, and promoting responsible business
conduct in OTC derivatives markets.
Regulation respecting complaint processing and dispute resolution in the
financial sector
On February 15, 2024, the Autorité des marchés financiers (AMF) published
the final version of the regulation. Investment dealers who are members of
CIRO are exempt from application of the regulation for their activities in
Quebec when they are subject to equivalent CIRO rules and these rules are
approved by the AMF. The AMF must confirm that CIRO's rules are equivalent and
that the exemption applies. The regulation will come into force on July 1,
2025.
Client and Order Identifiers
On December 7, 2023, the Montréal Exchange published the final version of
changes to client and order identifiers. These rules introduce client
identifiers and markers to identify orders when entered on the Electronic
Trading System. The Exchange has extended the timeline for Participants to
ensure compliance with the client and order identifiers requirements, and has
established a compliance deadline of March 31, 2025.
Reputation Risk
Reputation risk is the risk that the Bank's operations or practices will be
judged negatively by the public, whether that judgment is with or without
basis, thereby adversely affecting the perception, image, or trademarks of the
Bank and potentially resulting in costly litigation or loss of income.
Reputation risk generally arises from a deficiency in managing another risk.
The Bank's reputation may, for example, be adversely affected by
non-compliance with laws and regulations or by process failures. All risks
must therefore be managed effectively in order to protect the Bank's
reputation.
The Bank's corporate culture continually promotes the behaviours and values to
be adopted by employees. Ethics are at the heart of everything we do. To
fulfill our mission, put people first, and continue to build a strong bank, we
must maintain the highest degree of work ethic. Our Code of Conduct outlines
what is expected from each employee in terms of ethical behaviour and rules to
be followed as they carry out their duties.
Reputation Risk Management Policy
Approved by the GRC, the reputation risk policy covers all of the Bank's
practices and activities. It sets out the principles and rules for managing
reputation risk within our risk appetite limits along the following five focal
points: clients, employees, community, shareholders and governance, all of
which represent Bank stakeholders. The policy is supplemented by specific
provisions of several policies and standards, such as the policy on managing
risks related to major changes, the business continuity and crisis management
policy, and the investment governance policy.
Strategic Risk
Strategic risk is the risk of a financial loss or of reputational harm arising
from inappropriate strategic orientations, improper execution, or ineffective
response to economic, financial, or regulatory changes. The corporate
strategic plan is developed by the Senior Leadership Team, in alignment with
the Bank's overall risk appetite, and approved by the Board. Once approved,
the initiatives of the strategic plan are monitored regularly to ensure that
they are progressing. If not, strategies could be reviewed or adjusted if
deemed appropriate.
In addition, the Bank has a specific Board-approved policy for strategic
investments, which are defined as purchases of business assets or acquisitions
of significant interests in an entity for the purposes of acquiring control or
creating a long-term relationship. As such, acquisition projects and other
strategic investments are analyzed through a due diligence process to ensure
that these investments are aligned with the corporate strategic plan and the
Bank's risk appetite.
Environmental and Social Risk
Environmental and social risk is the possibility that environmental and social
matters would result in a financial loss for the Bank or affect its business
activities. Environmental risk consists of many aspects, including the use of
energy, water, and other resources; climate change; and biodiversity. Social
risk includes, for example, considerations relating to human rights,
accessibility, diversity, equity and inclusion, our human capital management
practices, including work conditions and the health, safety and well-being of
our employees.
A rapidly changing global regulatory environment, increased expectations and
scrutiny from regulatory agencies and other associations, and potential
imbalances among their requirements represent challenges, as do stakeholders'
expectations and their differing views about the Bank's environmental and
social priorities and actions. The Bank's reputation could also be affected by
its action or inaction or by a perception of inaction or inadequate action on
environmental and social matters, particularly regarding the progress made.
All these factors can lead to greater exposure to reputation risk, regulatory
compliance risk, and strategic risk. We monitor the evolution of these
factors, analyze them, and update our procedures on an ongoing basis.
Governance
Our ESG governance structure is based on all levels of the organization being
involved in achieving our objectives and meeting our commitments, including
the Board, which exercises an ESG oversight role. Together with management,
the Board, through its committees, oversees the execution of the Bank's ESG
strategy, which is structured around nine ESG principles that are approved by
the Board. These ESG principles have been incorporated into the Bank's
strategic priorities. The Board ensures that ESG criteria are incorporated
into the Bank's long-term strategic objectives, and it monitors the
development and integration of ESG initiatives and principles into our
day-to-day activities. Furthermore, the Board's various committees monitor
environmental and social risks in accordance with their respective mandates.
They are supported by management in the performance of their duties.
Environmental and social issues are now central to the Bank's decision-making
process. ESG factors continue to be incorporated into the Bank's processes, in
line with its strategy and the principles approved by the Board. ESG
indicators have been added to the various monitoring dashboards and are
gradually being integrated into the Bank's risk appetite framework. Reports on
the ESG indicators and on the Bank's ESG commitments are being periodically
presented to the internal committees and to the Board committees tasked with
overseeing them. The Bank has an environmental policy that expresses its
determination to preserve the environment in the face of human activity, both
in terms of our own activities and the benefits to the community. It has also
adopted an internal ESG policy to better reflect ESG issues in its corporate
strategy and to define the key guidelines and responsibilities for ESG
management and governance at the Bank.
The Bank's Code of Conduct outlines what is expected from each employee in
their professional, business, and community interactions. It also provides
guidance on adhering to the Bank's values, on the day-to-day conduct of the
Bank's affairs, and on relationships with third parties, employees, and
clients to create an environment conducive to achieving the Bank's One
Mission, namely, to have a positive impact on people's lives. In addition, our
Human Rights Statement outlines how the Bank applies its principles in its
activities and relationships with its stakeholders, in every role it plays in
society. The Bank's commitment on modern slavery outlines the governance
structure, risk management and control measures deployed by the Bank in this
regard.
Risk Management
Identifying, assessing, mitigating and monitoring environmental and social
risks are part of the Bank's risk management framework and risk appetite
framework. For some years now, the Bank has been integrating ESG risk into its
risk management policy framework. The Bank has also added a statement to its
risk appetite about its commitment to achieving its ESG objectives through
target indicators. Other risk management policies and standards also support
more comprehensive environmental and social risk management. Given its
importance, climate risk has been more fully integrated, and a climate risk
management standard has been developed. In addition, the concept of climate
risk has been incorporated into the Internal Capital Adequacy Assessment
Process risk inventory register.
As a key player in the financial industry, the Bank has demonstrated its
commitment to environmental and social groups and associations such as the
United Nations Principles for Responsible Banking, PCAF, and NZBA. The
frameworks and methodologies developed by these groups may evolve, which could
lead the Bank to reconsider its membership therein. In addition, their efforts
to develop such frameworks and objectives could raise competition-related
concerns.
As part of its PCAF and NZBA commitments, the Bank has continued to quantify
its financed GHG emissions in addition to working on defining interim
reduction targets for carbon-intensive sectors. However, it should be
remembered that the need to make an orderly and fair transition to a
low-carbon economy means that the Bank's decarbonization efforts must be
gradual. The Bank takes concrete steps to meet its commitments and to move its
plan forward, notably by quantifying the financial impacts of environmental
and social risk. Furthermore, the Bank is committed to transparently
communicating information about its progress and its signatory commitments by
periodically publishing performance reports.
With respect to its own activities, the Bank is pursuing its commitment to
reduce its carbon footprint and offsets a portion of its GHG emissions
(including for business travel by employees). The Bank has implemented a
global responsible procurement strategy and has adopted a Supplier Code of
Conduct that describes its expectations of suppliers to uphold responsible
business practices. By adopting this code, the Bank is manifesting its
intention to do business with suppliers that incorporate environmental, social
and governance issues into their operations and throughout their supply
chains. Before entering into a relationship with a third party, the business
segment conducts due diligence to assess the risk. Responsible sourcing
criteria have also been integrated into the purchasing and supplier selection
practices for the new head office construction project. The Bank is aiming for
LEED v4((1)) Gold and WELL((2)) Wellness certifications.
The Bank is mindful about the accuracy of the information it provides in the
context of increased disclosure and the risks associated with greenwashing and
socialwashing. However, our ability to set and achieve our environmental and
social objectives, priorities, and targets depends on several assumptions and
factors, many of which are beyond the Bank's control and whose effects are
difficult to predict. Many of these assumptions, data, indicators, measures,
methodologies, scenarios and other standards continue to evolve, and may
differ significantly from those used by others, from those we may use in the
future, or from those that may be imposed in the future by governmental or
other authorities in this area. We may therefore be obliged to redefine
certain objectives, priorities, or targets or revise data to reflect changes
in methodologies or the quality of the available data. It is also possible
that the Bank's predictions, targets, or projections prove to be inaccurate,
that its assumptions may not be confirmed, and that its strategic objectives
and performance targets will not be achieved within the deadlines.
These past few years also saw the emergence of a new environmental risk issue,
i.e., the potential financial repercussions of climate change on biodiversity,
ecosystems, and ecosystemic services. Financial system participants were
called upon by the PRB Biodiversity Community initiative of the United Nations
Environment Programme Finance Initiative (UNEP-FI), of which the Bank is a
member. As this environmental risk issue begins to emerge, the Bank will
continue to closely monitor the various initiatives and contribute to
deliberations about potentially incorporating this issue into both investment
and credit-granting decisions. The Risk Management Group closely monitors
changes in trends and calculation methods and actively participates in various
industry discussion groups. In addition, an internal "Nature" working group
has been set up. This group is responsible for developing expertise and
sharing best practices.
To proactively ensure the strategic positioning of its entire portfolio, the
Bank continues to support the transition to a low-carbon economy while closely
monitoring the related developments and implications. Doing so involves
ongoing and stronger adaptation efforts as well as additional mitigation
measures for instances of business interruptions or disruptions caused by
major incidents such as natural disasters or health crises. Such measures
include the business continuity plan, the operational risk management program,
and the disaster risk management program. To ensure regulatory compliance
and sound risk management, the Bank has introduced new processes and continues
to improve existing ones, in addition to working on optimizing its data and
control architecture to include ESG data.
(1) Criteria of the LEED (Leadership in Energy and Environmental Design)
certification system. LEED certification involves satisfying climate criteria
and adaptation characteristics that will help limit potential physical climate
risks.
(2) The WELL Standard, administered by the International WELL Building
Institute, recognizes environments that support the health and well-being of
the occupants.
New Regulatory Developments
On March 13, 2024, the Canadian Sustainability Standards Board (CSSB)
published its first set of proposed Canadian Sustainability Disclosure
Standards (CSDS) in the form of exposure drafts. CSDS 1 - General Requirements
for Disclosure of Sustainability-related Financial Information, and CSDS 2 -
Climate-related Disclosures, are aligned with IFRS S1 - General Requirements
for Disclosure of Sustainability related financial Information and IFRS S2 -
Climate Related Disclosures (IFRS S2), but propose a later effective date and
extend transition relief for certain disclosure requirements. CSDS will be
applicable to D‑SIBs at the end of fiscal 2026, and transitional relief
measures will postpone certain disclosure requirements to the end of fiscal
2028. Disclosure under CSDS will be on a voluntary basis until mandated by the
CSA.
On March 20, 2024, OSFI published a new version of guideline B-15 entitled
Climate Risk Management, the required disclosures of which more closely align
with those of the International Sustainability Standards Board's final version
of IFRS S2. Most of the B-15 disclosure requirements will take effect for
D-SIBs at the end of fiscal 2024, while other disclosure requirements will
take effect in fiscal 2025 or later. At the same time, OSFI also released new
Climate Risk Returns that will collect standardized data on emissions and
exposures. The data collected by OSFI will support its climate risk
supervisory activities. It also continues to monitor updates and future
developments.
On December 16, 2022, the European Union published the Corporate
Sustainability Reporting Directive (CSRD), which has come into force gradually
since January 1, 2024. The CSRD requires companies falling within its scope to
use the European Sustainability Reporting Standards (ESRS), which specify the
information to be reported and, when relevant, the structure in which that
information should be reported. It sets specific deadlines for companies to
comply with disclosure requirements, depending on their size and
classification. During 2024, the Bank carried out work to assess its
disclosure obligations under these new regulations. In order not only to
comply with the new requirements, but also to reap the benefits in terms of
strategic development and performance, the Bank has begun to reflect on the
appropriate governance and structure required to carry out this project.
Tightening the Rules on Greenwashing (C-59)
Bill C-59 amended the Competition Act to include provisions prohibiting
misleading environmental benefit claims. These provisions are designed to
prohibit claims about the environmental benefits of a product or company that
are not based on adequate and proper testing. These changes also provide for
private rights of action from mid-2025. The Competition Bureau has launched a
public consultation to develop guidance on the application of the new
provisions of the Act, and the Bank is following these developments closely.
Material Accounting Policies and Accounting Estimates
A summary of the material accounting policies used by the Bank is presented in
Note 1 to the Consolidated Financial Statements of this Annual Report. The
accounting policies discussed below are considered critical given their
importance to the presentation of the Bank's financial position and operating
results and require subjective and complex judgments and estimates on matters
that are inherently uncertain. Any change in these judgments and estimates
could have a significant impact on the Bank's Consolidated Financial
Statements.
The geopolitical landscape (notably the Russia-Ukraine war and the clashes
between Israel and Hamas), inflation, climate change, and high interest rates
continue to create uncertainty. As a result, establishing reliable estimates
and applying judgment continue to be substantially complex. Some of the Bank's
accounting policies, such as measurement of expected credit losses (ECLs),
require particularly complex judgments and estimates. See Note 1 to the
Consolidated Financial Statements for a summary of the most significant
estimation processes used to prepare the Consolidated Financial Statements in
accordance with IFRS Accounting Standards and the valuation techniques used to
determine carrying values and fair values of assets and liabilities. The
uncertainty regarding certain key inputs used in measuring ECLs is described
in Note 8 to the Consolidated Financial Statements.
Classification of Financial Instruments
At initial recognition, all financial instruments are recorded at fair value
in the Consolidated Balance Sheet. At initial recognition, financial assets
must be classified as subsequently measured at fair value through other
comprehensive income, at amortized cost, or at fair value through profit or
loss. The Bank determines the classification based on the contractual cash
flow characteristics of the financial assets and on the business model it uses
to manage these financial assets. At initial recognition, financial
liabilities are classified as subsequently measured at amortized cost or as at
fair value through profit or loss.
For the purpose of classifying a financial asset, the Bank must determine
whether the contractual cash flows associated with the financial asset are
solely payments of principal and interest on the principal amount outstanding.
The principal is generally the fair value of the financial asset at initial
recognition. The interest consists of consideration for the time value of
money, for the credit risk associated with the principal amount outstanding
during a particular period, and for other basic lending risks and costs as
well as of a profit margin. If the Bank determines that the contractual cash
flows associated with a financial asset are not solely payments of principal
and interest, the financial assets must be classified as measured at fair
value through profit or loss.
When classifying financial assets, the Bank determines the business model used
for each portfolio of financial assets that are managed together to achieve a
same business objective. The business model reflects how the Bank manages its
financial assets and the extent to which the financial asset cash flows are
generated by the collection of the contractual cash flows, the sale of the
financial assets, or both. The Bank determines the business model using
scenarios that it reasonably expects to occur. Consequently, the business
model determination is a matter of fact and requires the use of judgment and
consideration of all the relevant evidence available to the Bank at the date
of determination.
A financial asset portfolio falls within a "hold to collect" business model
when the Bank's primary objective is to hold these financial assets in order
to collect contractual cash flows from them and not to sell them. When the
Bank's objective is achieved both by collecting contractual cash flows and by
selling the financial assets, the financial asset portfolio falls within a
"hold to collect and sell" business model. In this type of business model,
collecting contractual cash flows and selling financial assets are both
integral components to achieving the Bank's objective for this financial asset
portfolio. Financial assets are mandatorily measured at fair value through
profit or loss if they do not fall within either a "hold to collect" business
model or a "hold to collect and sell" business model.
Fair Value of Financial Instruments
The fair value of a financial instrument is the price that would be received
to sell a financial asset or paid to transfer a financial liability in an
orderly transaction in the principal market at the measurement date under
current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial
assets and offered prices for financial liabilities, provide the best evidence
of fair value. A financial instrument is considered quoted in an active market
when prices in exchange, dealer, broker or principal‑to‑principal markets
are accessible at the measurement date. An active market is one where
transactions occur with sufficient frequency and volume to provide quoted
prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another
valuation technique that maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs. The chosen valuation technique
incorporates all the factors that market participants would consider when
pricing a transaction. Judgment is required when applying a large number of
acceptable valuation techniques and estimates to determine fair value. The
estimated fair value reflects market conditions on the measurement date and,
consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at initial
recognition is the transaction price, i.e., the fair value of the
consideration received or paid. If there is a difference between the fair
value at initial recognition and the transaction price, and the fair value is
determined using a valuation technique based on observable market inputs or,
in the case of a derivative, if the risks are fully offset by other contracts
entered into with third parties, this difference is recognized in the
Consolidated Statement of Income. In other cases, the difference between the
fair value at initial recognition and the transaction price is deferred in the
Consolidated Balance Sheet. The amount of the deferred gain or loss is
recognized over the term of the financial instrument. The unamortized balance
is immediately recognized in net income when (i) observable market inputs can
be obtained and support the fair value of the transaction, (ii) the risks
associated with the initial contract are substantially offset by other
contracts entered into with third parties, (iii) the gain or loss is realized
through a cash receipt or payment, or (iv) the transaction matures or is
terminated before maturity.
In certain cases, measurement adjustments are recognized to address factors
that market participants would use at the measurement date to determine fair
value but that are not included in the measurement technique due to system
limitations or uncertainty surrounding the measure. These factors include, but
are not limited to, the unobservable nature of inputs used in the valuation
model, assumptions about risk such as market risk, credit risk, or valuation
model risk and future administration costs. The Bank may also consider market
liquidity risk when determining the fair value of financial instruments when
it believes these instruments could be disposed of for a consideration below
the fair value otherwise determined due to a lack of market liquidity or an
insufficient volume of transactions in a given market. The measurement
adjustments also include the funding valuation adjustment applied to
derivative financial instruments to reflect the market implied cost or
benefits of funding collateral for uncollateralized or partly collateralized
transactions.
IFRS Accounting Standards establish a fair value measurement hierarchy that
classifies the inputs used in financial instrument fair value measurement
techniques according to three levels. The fair value measurement hierarchy has
the following levels:
Level 1
Inputs corresponding to unadjusted quoted prices in active markets for
identical assets and liabilities and accessible to the Bank at the measurement
date. These instruments consist primarily of equity securities, derivative
financial instruments traded in active markets, and certain highly liquid debt
securities actively traded in over-the-counter markets.
Level 2
Valuation techniques based on inputs, other than the quoted prices included in
Level 1 inputs, that are directly or indirectly observable in the market for
the asset or liability. These inputs are quoted prices of similar instruments
in active markets; quoted prices for identical or similar instruments in
markets that are not active; inputs other than quoted prices used in a
valuation model that are observable for that instrument; and inputs that are
derived principally from or corroborated by observable market inputs by
correlation or other means. These instruments consist primarily of certain
loans, certain deposits, derivative financial instruments traded in
over-the-counter markets, certain debt securities, certain equity securities
whose value is not directly observable in an active market, liabilities
related to transferred receivables, and certain other liabilities.
Level 3
Valuation techniques based on one or more significant inputs that are not
observable in the market for the asset or liability. The Bank classifies
financial instruments in Level 3 when the valuation technique is based on at
least one significant input that is not observable in the markets. The
valuation technique may also be partly based on observable market inputs.
Financial instruments whose fair values are classified in Level 3 consist of
investments in hedge funds, certain derivative financial instruments, equity
and debt securities of private companies, certain loans, certain deposits
(structured deposit notes), and certain other assets (receivables).
Establishing fair value is an accounting estimate and has an impact on the
following items: Securities at fair value through profit or loss, certain
Loans, Securities at fair value through other comprehensive income,
Obligations related to securities sold short, Derivative financial
instruments, financial instruments designated at fair value through profit or
loss, and financial instruments designated at fair value through other
comprehensive income in the Consolidated Balance Sheet. This estimate also has
an impact on Non-interest income in the Consolidated Statement of Income of
the Financial Markets segment and of the Other heading. Lastly, this estimate
has an impact on Other comprehensive income in the Consolidated Statement of
Comprehensive Income. For additional information on the determination of the
fair value of financial instruments, see Notes 4 and 7 to the Consolidated
Financial Statements.
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a three-stage impairment
approach to measure the expected credit losses (ECL) on all debt instruments
measured at amortized cost or at fair value through other comprehensive income
and on loan commitments and financial guarantees that are not measured at fair
value. ECLs are a probability-weighted estimate of credit losses over the
remaining expected life of the financial instrument. The ECL model is forward
looking. Measurement of ECLs at each reporting period reflects reasonable and
supportable information about past events, current conditions, and forecasts
of future events and economic conditions. Judgment is required in making
assumptions and estimates, determining movements between the three stages, and
applying forward-looking information. Any changes in these assumptions and
estimates, as well as the use of different, but equally reasonable, estimates
and assumptions, could have an impact on the allowances for credit losses and
the provisions for credit losses for the year. All business segments are
affected by this accounting estimate. For additional information, see Note 8
to the Consolidated Financial Statements.
Determining the Stage
The ECL three-stage impairment approach is based on the change in the credit
quality of financial assets since initial recognition. If, at the reporting
date, the credit risk of non-impaired financial instruments has not increased
significantly since initial recognition, these financial instruments are
classified in Stage 1, and an allowance for credit losses that is measured, at
each reporting date, in an amount equal to 12-month expected credit losses, is
recorded. When there is a significant increase in credit risk since initial
recognition, these non-impaired financial instruments are migrated to
Stage 2, and an allowance for credit losses that is measured, at each
reporting date, in an amount equal to lifetime expected credit losses, is
recorded. In subsequent reporting periods, if the credit risk of a financial
instrument improves such that there is no longer a significant increase in
credit risk since initial recognition, the ECL model requires reverting to
Stage 1, i.e., recognition of 12-month expected credit losses. When one or
more events that have a detrimental impact on the estimated future cash flows
of a financial asset occurs, the financial asset is considered credit-impaired
and is migrated to Stage 3, and an allowance for credit losses equal to
lifetime expected credit losses continues to be recorded or the financial
asset is written off. Interest income is calculated on the gross carrying
amount for financial assets in Stages 1 and 2 and on the net carrying amount
for financial assets in Stage 3.
Assessment of Significant Increase in Credit Risk
In determining whether credit risk has increased significantly, the Bank uses
an internal credit risk grading system, external risk ratings, and
forward-looking information to assess deterioration in the credit quality of a
financial instrument. To assess whether or not the credit risk of a financial
instrument has increased significantly, the Bank compares the probability of
default (PD) occurring over its expected life as at the reporting date with
the PD occurring over its expected life on the date of initial recognition and
considers reasonable and supportable information indicative of a significant
increase in credit risk since initial recognition. The Bank includes relative
and absolute thresholds in the definition of significant increase in credit
risk and a backstop of 30 days past due. All financial instruments that are
more than 30 days past due since initial recognition are migrated to Stage 2
even if other metrics do not indicate that a significant increase in credit
risk has occurred. The assessment of a significant increase in credit risk
requires significant judgment.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of all expected
cash shortfalls over the remaining expected life of the financial instrument,
and reasonable and supportable information about past events, current
conditions, and forecasts of future events and economic conditions is
considered. The estimation and application of forward-looking information
requires significant judgment. Cash shortfalls represent the difference
between all contractual cash flows owed to the Bank and all cash flows that
the Bank expects to receive.
The measurement of ECLs is primarily based on the product of the financial
instrument's PD, loss given default (LGD) and exposure at default (EAD).
Forward-looking macroeconomic factors such as unemployment rates, housing
price indices, interest rates, and gross domestic product (GDP) are
incorporated into the risk parameters. The estimate of expected credit losses
reflects an unbiased and probability-weighted amount that is determined by
evaluating a range of possible outcomes. The Bank incorporates three
forward-looking macroeconomic scenarios in its ECL calculation process: a base
scenario, an upside scenario, and a downside scenario. Probability weights are
assigned to each scenario. The scenarios and probability weights are
reassessed quarterly and are subject to management review. The Bank applies
experienced credit judgment to adjust the modelled ECL results when it becomes
evident that known or expected risk factors and information were not
considered in the credit risk rating and modelling process.
ECLs for all financial instruments are recognized under Provisions for credit
losses in the Consolidated Statement of Income. In the case of debt
instruments measured at fair value through other comprehensive income, ECLs
are recognized under Provisions for credit losses in the Consolidated
Statement of Income, and a corresponding amount is recognized in Other
comprehensive income with no reduction in the carrying amount of the asset in
the Consolidated Balance Sheet. As for debt instruments measured at amortized
cost, they are presented net of the related allowances for credit losses in
the Consolidated Balance Sheet. Allowances for credit losses for
off-balance-sheet credit exposures that are not measured at fair value are
included in Other liabilities in the Consolidated Balance Sheet.
Purchased or Originated Credit-Impaired Financial Assets
On initial recognition of a financial asset, the Bank determines whether the
asset is credit-impaired. For financial assets that are credit-impaired upon
purchase or origination, the lifetime expected credit losses are reflected in
the initial fair value. In subsequent reporting periods, the Bank recognizes
only the cumulative changes in these lifetime ECLs since initial recognition
as an allowance for credit losses. The Bank recognizes changes in ECLs under
Provisions for credit losses in the Consolidated Statement of Income, even if
the lifetime ECLs are less than the ECLs that were included in the estimated
cash flows on initial recognition.
Definition of Default
The definition of default used by the Bank to measure ECLs and transfer
financial instruments between stages is consistent with the definition of
default used for internal credit risk management purposes. The Bank considers
a financial asset, other than a credit card receivable, to be credit-impaired
when one or more events that have a detrimental impact on the estimated future
cash flows of the financial asset have occurred or when contractual payments
are 90 days past due. Credit card receivables are considered credit-impaired
and are fully written off at the earlier of the following dates: when a notice
of bankruptcy is received, a settlement proposal is made, or contractual
payments are 180 days past due.
Write-Offs
A financial asset and its related allowance for credit losses are normally
written off in whole or in part when the Bank considers the probability of
recovery to be non-existent and when all guarantees and other remedies
available to the Bank have been exhausted or if the borrower is bankrupt or
winding up and balances owing are not likely to be recovered.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are
tested for impairment when events or changes in circumstances indicate that
their carrying value may not be recoverable. At the end of each reporting
period, the Bank determines whether there is an indication that premises and
equipment or intangible assets with finite useful lives may be impaired.
Goodwill and intangible assets that are not available for use or that have
indefinite useful lives are tested for impairment annually or more frequently
if there is an indication that the asset might be impaired.
An asset is tested for impairment by comparing its carrying amount with its
recoverable amount. The recoverable amount must be estimated for the
individual asset. Where it is not possible to estimate the recoverable amount
of an individual asset, the recoverable amount of the cash-generating unit
(CGU) to which the asset belongs will be determined. Goodwill is always tested
for impairment at the level of a CGU or a group of CGUs. A CGU is the smallest
identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets. The
Bank uses judgment to identify CGUs.
An asset's recoverable amount is the higher of fair value less costs to sell
and the value in use of the asset or CGU. Value in use is the present value of
expected future cash flows from the asset or CGU. The recoverable amount of
the asset or CGU is determined using valuation models that consider various
factors such as projected future cash flows, discount rates, and growth rates.
The use of different estimates and assumptions in applying the impairment
tests could have a significant impact on income. If the recoverable amount of
an asset or a CGU is less than its carrying amount, the carrying amount is
reduced to its recoverable amount and an impairment loss is recognized under
Non-interest expenses in the Consolidated Statement of Income.
Management exercises judgment when determining whether there is objective
evidence that premises and equipment or intangible assets with finite useful
lives may be impaired. It also uses judgment in determining to which CGU or
group of CGUs an asset or goodwill is to be allocated. Moreover, for
impairment assessment purposes, management must make estimates and assumptions
to determine the recoverable amount of non-financial assets, CGUs, or a group
of CGUs. For additional information on the estimates and assumptions used to
calculate the recoverable amount of an asset or CGU, see Note 12 to the
Consolidated Financial Statements.
Any changes to these estimates and assumptions may have an impact on the
recoverable amount of a non-financial asset and, consequently, on impairment
testing results. These accounting estimates have an impact on Premises and
equipment, Intangible assets and Goodwill reported in the Consolidated Balance
Sheet. The aggregate impairment losses, if any, are recognized under
Non-interest expenses - Other in the given business segment.
Employee Benefits - Pension Plans and Other Post-Employment Benefit Plans
The expense and obligation of the defined benefit component of the pension
plans and other post-employment benefit plans are actuarially determined using
the projected benefit method prorated on service. The calculations incorporate
management's best estimates of various actuarial assumptions such as discount
rates, rates of compensation increase, health care cost trend rates, mortality
rates, and retirement age.
Remeasurements of these plans represent the actuarial gains and losses related
to the defined benefit obligation and the actual return on plan assets,
excluding the net interest determined by applying a discount rate to the net
asset or net liability of the plans. Remeasurements are immediately recognized
in Other comprehensive income and are not subsequently reclassified to net
income; these cumulative gains and losses are reclassified to Retained
earnings.
The use of different assumptions could have a significant impact on the
defined benefit asset (liability) presented under Other assets (Other
liabilities) in the Consolidated Balance Sheet, on the pension plan and other
post-employment benefit plan expenses presented under Compensation and
employee benefits in the Consolidated Statement of Income, as well as on
Remeasurements of pension plans and other post-employment benefit plans
presented in Other comprehensive income. All business segments are affected by
this accounting estimate. For additional information, including the
significant assumptions used to determine the Bank's pension plan and other
post-employment benefit plan expenses and the sensitivity analysis for
significant plan assumptions, see Note 25 to the Consolidated Financial
Statements.
Income Taxes
The Bank makes assumptions to estimate income taxes as well as deferred tax
assets and liabilities. This process involves estimating the actual amount of
current taxes and evaluating tax loss carryforwards and temporary differences
arising from differences between the values of items reported for accounting
and for income tax purposes. Deferred tax assets and liabilities, presented
under Other assets and Other liabilities in the Consolidated Balance Sheet,
are calculated according to the tax rates to be applied in future periods.
Previously recorded deferred tax assets and liabilities must be adjusted when
the date of the future event is revised based on current information. The Bank
periodically evaluates deferred tax assets to assess recoverability. In the
Bank's opinion, based on the information at its disposal, it is probable that
all deferred tax assets will be realized before they expire.
This accounting estimate affects Income taxes in the Consolidated Statement of
Income for all business segments. For additional information on income taxes,
see Notes 1 and 26 to the Consolidated Financial Statements.
Litigation
In the normal course of business, the Bank and its subsidiaries are involved
in various claims relating, among other matters, to loan portfolios,
investment portfolios, and supplier agreements, including court proceedings,
investigations or claims of a regulatory nature, class actions, or other legal
remedies of varied natures.
More specifically, the Bank is involved as a defendant in class actions
instituted by consumers contesting, inter alia, certain transaction fees or
who wish to avail themselves of certain legislative provisions relating to
consumer protection. The recent developments in the main legal proceeding
involving the Bank are as follows:
Defrance
On January 21, 2019, the Quebec Superior Court authorized a class action
against the National Bank and several other Canadian financial institutions.
The originating application was served to the Bank on April 23, 2019. The
class action was initiated on behalf of consumers residing in Quebec. The
plaintiffs allege that non-sufficient funds charges, billed by all of the
defendants when a payment order is refused due to non-sufficient funds, are
illegal and prohibited by the Consumer Protection Act. The plaintiffs are
claiming, in the form of damages, the repayment of these charges as well as
punitive damages.
It is impossible to determine the outcome of the claims instituted or which
may be instituted against the Bank and its subsidiaries. The Bank estimates,
based on the information at its disposal, that while the amount of contingent
liabilities pertaining to these claims, taken individually or in the
aggregate, could have a material impact on the Bank's consolidated results of
operations for a particular period, it would not have a material adverse
impact on the Bank's consolidated financial position.
Provisions are liabilities of uncertain timing and amount. A provision is
recognized when the Bank has a present obligation (legal or constructive)
arising from a past event, when it is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation, and
when the amount of the obligation can be reliably estimated. The recognition
of a litigation provision requires the judgment of the Bank's management in
assessing the existence of an obligation, the timing and probability of loss,
and estimates of potential monetary impact. Provisions are based on the Bank's
best estimates of the economic resources required to settle the present
obligation, given all available information and relevant risks and
uncertainties, and, when it is significant, the effect of the time value of
money. However, the actual amount required to settle litigation could be
significantly higher or lower than the amounts recognized, as the actual
amounts depend on a variety of factors and risks, notably the degree to which
proceedings have advanced when the amount is determined, the presence of
multiple defendants whose share of responsibility is undetermined, including
that of the Bank, the types of matters or allegations in question, including
some that may involve new legal frameworks or regulations or that set forth
new legal interpretations and theories.
The Bank regularly assesses all litigation provisions by considering the
development of each case, the Bank's past experience in similar transactions,
and the opinion of its legal counsel. Each new piece of information can alter
the Bank's assessment as to the probability and estimated amount of loss and
therefore the extent to which it adjusts the recorded provision.
Structured Entities
In the normal course of business, the Bank enters into arrangements and
transactions with structured entities. Structured entities are entities
designed so that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when voting rights relate solely to
administrative tasks and the relevant activities are directed by means of
contractual arrangements. A structured entity is consolidated when the Bank
concludes, after evaluating the substance of the relationship and its right or
exposure to variable returns, that it controls that entity. Management must
exercise judgment in determining whether the Bank controls an entity.
Additional information is provided in the Securitization and Off-Balance-Sheet
Arrangements section of this MD&A and in Note 29 to the Consolidated
Financial Statements.
Accounting Policy Changes
IFRS 17 - Insurance Contracts
On November 1, 2023, the Bank adopted the accounting standard IFRS 17 -
Insurance Contracts (IFRS 17). IFRS 17 affects how an entity accounts for its
insurance contracts and how it reports financial performance in the
Consolidated Income Statement, in particular the timing of revenue recognition
for insurance contracts. The current Consolidated Balance Sheet presentation,
under which items are included and reported in Other assets and Other
liabilities, respectively, was changed.
IFRS 17 introduces three approaches to measure insurance contracts: the
general model approach, the premium allocation approach, and the variable fee
approach. The general model approach, which is primarily used by the Bank,
measures insurance contracts based on the present value of estimates of the
expected future cash flows necessary to fulfill the contracts, including a
risk adjustment for non-financial risk as well as the contractual service
margin (CSM), which represents the unearned profits that are recognized as
services are provided in the future. The premium allocation approach is
applied to short-term contracts, and insurance revenues are recognized
systematically over the coverage period. For all measurement approaches, if
contracts are expected to be onerous, losses are recognized immediately.
At the transition date, November 1, 2022, the Bank applied two of the three
transition approaches available under IFRS 17: the full retrospective approach
and the fair value approach. For most groups of contracts, the fair value
approach was applied considering that the full retrospective approach was
impracticable, since reasonable and supportable information for applying this
approach was not available without undue cost or effort.
Impacts of IFRS 17 Adoption
The IFRS 17 requirements have been applied retrospectively by adjusting the
Consolidated Balance Sheet balances on the date of initial application, i.e.,
November 1, 2022. The impacts of IFRS 17 adoption have been recognized
through an adjustment to Retained earnings as at November 1, 2022. The
following information presents the impacts on the Consolidated Balance Sheets
as at November 1, 2022 and as at October 31, 2023:
Consolidated Balance Sheets
As at 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 contract assets and
liabilities stood at $109 million ($89 million as at November 1, 2022).
The following information presents the impacts on the Consolidated Statement
of Income for the comparative fiscal year:
Consolidated Statement of Income - Increase (Decrease)
Year ended October 31, 2023
Non-interest income - Insurance revenues, net (112)
Total revenues (112)
Compensation and employee benefits (27)
Occupancy (3)
Technology (7)
Professional fees (1)
Other (10)
Non-interest expenses (48)
Income before provisions for credit losses and income taxes (64)
Income before income taxes (64)
Income taxes (18)
Net income (46)
Future Accounting Policy
Changes
The Bank closely monitors both new accounting standards and amendments to
existing accounting standards issued by the IASB. The following standards have
been issued but are not yet effective. The Bank is currently assessing the
impact of applying these standards on the Consolidated Financial Statements.
Effective Date - November 1, 2026
Amendments to the Classification and Measurement of Financial Instruments
In May 2024, the IASB issued Amendments to the Classification and Measurement
of Financial Instruments, which affects certain provisions of IFRS 9 -
Financial Instruments and IFRS 7 - Financial Instruments: Disclosures.
Specifically, the amendments apply to the derecognition of financial
liabilities settled through electronic transfer, to the classification of
certain financial assets, to disclosures regarding equity instruments
designated at fair value through other comprehensive income, and to
contractual terms that could change the timing or amount of contractual cash
flows. These amendments must be applied retrospectively for annual periods
beginning on or after January 1, 2026. Earlier application is permitted.
Effective Date - November 1, 2027
IFRS 18 - Presentation and Disclosure in Financial Statements
In April 2024, the IASB issued a new accounting standard, IFRS 18 -
Presentation and Disclosure in Financial Statements (IFRS 18). This new
standard replaces the current IAS 1 accounting standard on presentation of
financial statements. IFRS 18 presents a new accounting framework that will
improve how information is communicated in financial statements, in particular
performance-related information in the Consolidated Statement of Income, and
that will introduce limited changes to the Consolidated Statement of Cash
Flows and the Consolidated Balance Sheet. IFRS 18 must be applied
retrospectively for annual periods beginning on or after January 1, 2027.
Earlier application is permitted.
Additional Financial
Information
Table 1 - Quarterly Results
(millions of Canadian dollars, except per share amounts) 2024
Total Q4 Q3 Q2 Q1
Statement of income data
Net interest income((1)) 2,939 784 769 635 751
Non-interest income((2)) 8,461 2,160 2,227 2,115 1,959
Total revenues 11,400 2,944 2,996 2,750 2,710
Non-interest expenses((3)) 6,054 1,592 1,541 1,472 1,449
Income before provisions for credit losses and income taxes 5,346 1,352 1,455 1,278 1,261
Provisions for credit losses 569 162 149 138 120
Income taxes((4)) 961 235 273 234 219
Net income 3,816 955 1,033 906 922
Non-controlling interests (1) − − (1) −
Net income attributable to the Bank's shareholders and 3,817 955 1,033 907 922
holders of other equity instruments
Earnings per common share
Basic $ 10.78 $ 2.69 $ 2.92 $ 2.56 $ 2.61
Diluted 10.68 2.66 2.89 2.54 2.59
Dividends (per share)
Common $ 4.32 $ 1.10 $ 1.10 $ 1.06 $ 1.06
Preferred
Series 30 1.2770 0.3869 0.3870 0.2515 0.2516
Series 32 0.9598 0.2400 0.2399 0.2400 0.2399
Series 38 1.7568 0.4392 0.4392 0.4392 0.4392
Series 40 1.4545 0.3636 0.3636 0.3637 0.3636
Series 42 1.7640 0.4410 0.4410 0.4410 0.4410
Return on common shareholders' equity((5)) 17.2 % 16.4 % 18.4 % 16.9 % 17.1 %
Total assets 462,226 453,933 441,690 433,927
Subordinated debt((6)) 1,258 1,254 1,237 749
Net impaired loans excluding POCI loans((5)) 1,144 959 864 677
Number of common shares outstanding (thousands)
Average - Basic 339,733 340,479 340,215 339,558 338,675
Average - Diluted 342,839 344,453 343,531 342,781 341,339
End of period 340,744 340,523 340,056 339,166
Per common share
Book value((5)) $ 65.74 $ 64.64 $ 62.28 $ 61.18
Share price
High $ 134.23 134.23 118.17 114.68 103.38
Low 86.50 111.98 106.21 101.24 86.50
Number of employees - Worldwide (full-time equivalent) 29,196 29,250 28,665 28,730
Number of branches in Canada 368 369 369 368
(1) For fiscal 2024, Net interest income included an amount of
$14 million to reflect the amortization of the issuance costs of the
subscription receipts issued as part of the agreement to acquire CWB.
(2) For fiscal 2024, Non-interest income included a gain of $174 million
upon the remeasurement at fair value of the interest already held in CWB as
well as a $3 million loss to reflect the management of the fair value changes
related to the CWB acquisition (2023: $91 million gain upon the fair value
remeasurement of the interest in TMX).
(3) For fiscal 2024, Non-interest expenses included $18 million in CWB
acquisition and integration charges (2023: $86 million in premises and
equipment and intangible asset impairment losses, $35 million in litigation
expenses, a $25 million expense related to changes to the Excise Tax Act, and
$15 million in provisions for contracts).
(4) Income taxes expense for fiscal 2023 had included $24 million
related to the Canadian Government's 2022 tax measures.
(5) See the "Glossary" on pages 130 to 133 for details on the
composition of these measures.
(6) Represents long-term financial liability.
(7) Certain comparative figures for 2023, have been adjusted to reflect
accounting policy changes arising from the adoption of IFRS 17. For additional
information, see Note 2 to the Consolidated Financial Statements.
2023((7)) 2022
Total Q4 Q3 Q2 Q1 Total Q4 Q3 Q2 Q1
3,586 735 870 882 1,099 5,271 1,207 1,419 1,313 1,332
6,472 1,825 1,620 1,564 1,463 4,381 1,127 994 1,126 1,134
10,058 2,560 2,490 2,446 2,562 9,652 2,334 2,413 2,439 2,466
5,753 1,597 1,404 1,362 1,390 5,230 1,346 1,305 1,299 1,280
4,305 963 1,086 1,084 1,172 4,422 988 1,108 1,140 1,186
397 115 111 85 86 145 87 57 3 (2)
619 97 145 167 210 894 163 225 248 258
3,289 751 830 832 876 3,383 738 826 889 930
(2) - (1) (1) - (1) - - (1) -
3,291 751 831 833 876 3,384 738 826 890 930
$ 9.33 $ 2.11 $ 2.35 $ 2.37 $ 2.49 $ 9.72 $ 2.10 $ 2.38 $ 2.56 $ 2.67
9.24 2.09 2.33 2.34 2.47 9.61 2.08 2.35 2.53 2.64
$ 3.98 $ 1.02 $ 1.02 $ 0.97 $ 0.97 $ 3.58 $ 0.92 $ 0.92 $ 0.87 $ 0.87
1.0063 0.2516 0.2516 0.2515 0.2516 1.0063 0.2516 0.2516 0.2515 0.2516
0.9598 0.2400 0.2399 0.2400 0.2399 0.9598 0.2400 0.2399 0.2400 0.2399
1.7568 0.4392 0.4392 0.4392 0.4392 1.1125 0.2781 0.2781 0.2782 0.2781
1.3023 0.3637 0.3636 0.2875 0.2875 1.1500 0.2875 0.2875 0.2875 0.2875
1.2375 0.3094 0.3093 0.3094 0.3094 1.2375 0.3094 0.3093 0.3094 0.3094
16.3 % 14.1 % 16.1 % 17.2 % 17.9 % 18.8 % 15.3 % 17.9 % 20.7 % 21.9 %
423,477 425,936 417,614 418,287 403,740 386,833 369,570 366,680
748 748 748 1,497 1,499 1,510 764 766
606 537 477 476 479 301 293 287
337,660 338,229 337,916 337,497 336,993 337,099 336,530 336,437 337,381 338,056
340,768 341,143 341,210 340,971 340,443 340,837 339,910 339,875 341,418 342,318
338,285 338,228 337,720 337,318 336,582 336,456 336,513 338,367
$ 60.40 $ 58.53 $ 57.45 $ 55.76 $ 55.24 $ 54.29 $ 52.28 $ 49.71
$ 103.58 103.58 103.28 103.45 99.95 $ 105.44 94.37 97.87 104.59 105.44
84.97 84.97 94.62 92.67 91.02 83.12 83.12 83.33 89.33 94.37
28,916 28,901 28,170 27,674 27,103 26,539 25,823 25,417
368 372 374 378 378 384 385 385
Table 2 - Overview of Results
Year ended October 31
(millions of Canadian dollars) 2024 2023((1)) 2022 2021 2020
Net interest income((2)) 2,939 3,586 5,271 4,783 4,255
Non-interest income((3)) 8,461 6,472 4,381 4,144 3,672
Total revenues 11,400 10,058 9,652 8,927 7,927
Non-interest expenses((4)) 6,054 5,753 5,230 4,903 4,616
Income before provisions for credit losses and income taxes 5,346 4,305 4,422 4,024 3,311
Provisions for credit losses 569 397 145 2 846
Income before income taxes 4,777 3,908 4,277 4,022 2,465
Income taxes((5)) 961 619 894 882 434
Net income 3,816 3,289 3,383 3,140 2,031
Non-controlling interests (1) (2) (1) − 42
Net income attributable to the Bank's
shareholders and holders of other equity instruments 3,817 3,291 3,384 3,140 1,989
(1) Certain comparative figures for 2023 have been adjusted to reflect
accounting policy changes arising from the adoption of IFRS 17. For additional
information, see Note 2 to the Consolidated Financial Statements.
(2) For fiscal 2024, Net interest income included an amount of $14
million to reflect the amortization of the issuance costs of the subscription
receipts issued as part of the agreement to acquire CWB.
(3) For fiscal 2024 Non-interest income included a gain of $174 million
upon the remeasurement at fair value of the interest already held in CWB as
well as a $3 million loss to reflect the management of the fair value changes
of the CWB acquisition (2023: gain of $91 million to reflect the fair value
remeasurement of the equity interest in TMX; 2021: $33 million gain following
a remeasurement of the previously held equity interest in Flinks and a $30
million loss related to the fair value remeasurement of the Bank's equity
interest in AfrAsia; 2020: $24 million foreign currency translation loss on a
disposal of subsidiaries.)
(4) For fiscal 2024 Non-interest expenses included acquisition and
integration charges of $18 million related to the CWB transaction. For fiscal
2023, Non-interest expenses had included impairment losses on premises and
equipment and intangible assets of $86 million (2021: $9 million; 2020: $71
million), $35 million in litigation expenses, a $25 million expense related to
changes to the Excise Tax Act, and $15 million in provisions for contracts. In
fiscal 2020, Non-interest expenses had included $48 million in severance pay
and a $13 million charge related to Maple Financial Group Inc. (Maple).
(5) Income taxes for 2023 had included an amount of $24 million related
to the Canadian government's 2022 tax measures.
Table 3 - Changes in Net Interest Income
Year ended October 31
(millions of Canadian dollars) 2024 2023 2022 2021 2020
Personal and Commercial
Net interest income 3,587 3,321 2,865 2,547 2,420
Average assets((1)) 158,917 148,511 140,300 126,637 115,716
Average interest-bearing assets((2)) 153,980 141,458 133,543 120,956 110,544
Net interest margin((2)) 2.33 % 2.35 % 2.15 % 2.11 % 2.19 %
Wealth Management
Net interest income on a taxable equivalent basis 833 778 594 446 442
Average assets((1)) 9,249 8,560 8,440 7,146 5,917
Financial Markets
Net interest income on a taxable equivalent basis((3)) (2,449) (1,054) 1,258 1,262 971
Average assets((1)) 195,881 180,837 154,349 151,240 125,565
USSF&I
Net interest income 1,303 1,132 1,090 907 807
Average assets((1)) 27,669 23,007 18,890 16,150 14,336
Other
Net interest income((3)(4)) (335) (591) (536) (379) (385)
Average assets((1)) 65,546 69,731 71,868 62,333 56,553
Total
Net interest income 2,939 3,586 5,271 4,783 4,255
Average assets((1)) 457,262 430,646 393,847 363,506 318,087
(1) Represents an average of the daily balances for the period.
(2) See the Glossary section on pages 130 to 133 for details on the
composition of these measures.
(3) For fiscal 2024, the Net interest income of the Financial Markets
segment was grossed up by $70 million (2023: $324 million; 2022: $229
million; 2021: $175 million; 2020: $202 million), and the Net interest income
of the Other heading was grossed up by $9 million (2023: $8 million; 2022: $5
million; 2021: $6 million; 2020: $6 million). The effect of these adjustments
is reversed under the Other heading of segment disclosures. In light of the
enacted legislation with respect to Canadian dividends, the Bank did not
recognize an income tax deduction or use the taxable equivalent basis method
to adjust revenues related to affected dividends received after January 1,
2024 (for additional information, see the Income Taxes section).
(4) For fiscal 2024, Net interest income included an amount of $14
million to reflect the amortization of the issuance costs of the subscription
receipts issued as part of the agreement to acquire CWB.
Table 4 - Non-Interest Income
Year ended October 31
(millions of Canadian dollars) 2024 2023((1)) 2022 2021 2020
Underwriting and advisory fees 419 378 324 415 314
Securities brokerage commissions 194 174 204 238 204
Mutual fund revenues 638 578 587 563 477
Investment management and trust service fees 1,141 1,005 997 900 735
Credit fees 195 183 155 164 147
Revenues from acceptances, letters of
credit and guarantee 265 391 335 342 320
Card revenues 212 202 186 148 138
Deposit and payment service charges 294 300 298 274 262
Trading revenues (losses)((2)) 4,299 2,677 543 268 544
Gains (losses) on non-trading
securities, net((3)) 318 70 113 151 93
Insurance revenues, net((1)) 73 59 158 131 128
Foreign exchange revenues, other than trading 225 183 211 202 164
Share in the net income of associates and
joint ventures 8 11 28 23 28
Other((4)) 180 261 242 325 118
8,461 6,472 4,381 4,144 3,672
Canada 7,055 5,700 4,299 3,992 3,574
United States 191 98 18 106 5
Other countries 1,215 674 64 46 93
Non-interest income as a % of total revenues 74.2 % 64.3 % 45.4 % 46.4 % 46.3 %
(1) Certain comparative figures for 2023 have been adjusted to reflect
accounting policy changes arising from the adoption of IFRS 17. For additional
information, see Note 2 to the Consolidated Financial Statements.
(2) For fiscal 2024, Trading revenues (losses) included a $3 million
loss related to the management of the fair value changes related to the CWB
acquisition.
(3) For fiscal 2024, Gains (losses) on non-trading securities, net
included a gain of $174 million upon the remeasurement at fair value of the
equity interest already held in CWB.
(4) For fiscal 2023, Other had included a gain of $91 million to reflect
the remeasurement at fair value of the equity interest in TMX (2021:
$33 million gain following a remeasurement of the previously held equity
interest in Flinks and a $30 million loss related to the fair value
remeasurement of the Bank's equity interest in AfrAsia; 2020: $24 million
foreign currency translation loss on a disposal of subsidiaries).
Table 5 - Trading Activity Revenues
Year ended October 31
(millions of Canadian dollars) 2024 2023 2022 2021 2020
Net interest income (loss) related to trading activity((1)) (3,076) (1,816) 682 777 522
Taxable equivalent basis((2)) 70 321 229 171 202
Net interest income (loss) related to trading activity (3,006) (1,495) 911 948 724
on a taxable equivalent basis((2))
Non-interest income related to trading activity((1)) 4,327 2,696 548 282 625
Taxable equivalent basis((2)) 306 247 48 8 57
Non-interest income related to trading activity 4,633 2,943 596 290 682
on a taxable equivalent basis((2))
Trading activity revenues((1)) 1,251 880 1,230 1,059 1,147
Taxable equivalent basis((2)) 376 568 277 179 259
Trading activity revenues on a taxable equivalent basis((2)) 1,627 1,448 1,507 1,238 1,406
Trading activity revenues by segment
on a taxable equivalent basis((2))
Financial Markets
Equities 1,018 904 979 685 706
Interest rate and credit 573 417 367 357 430
Commodities and foreign exchange 198 173 156 128 132
1,789 1,494 1,502 1,170 1,268
Other segments (162) (46) 5 68 138
1,627 1,448 1,507 1,238 1,406
(1) See the Glossary section on pages 130 to 133 for details on the
composition of these measures.
(2) See the Financial Reporting Method section on pages 14 to 20 for
additional information on non-GAAP financial measures. The taxable equivalent
basis presented in this table is related to trading portfolios. The Bank also
uses the taxable equivalent basis for certain investment portfolios, and the
amounts stood at $9 million for fiscal 2024 (2023: $11 million; 2022:
$5 million; 2021: $10 million; 2020: $6 million). In light of the enacted
legislation with respect to Canadian dividends, the Bank did not recognize an
income tax deduction or use the taxable equivalent basis method to adjust
revenues related to affected dividends received after January 1, 2024 (for
additional information, see the Income Taxes section).
Table 6 - Non-Interest Expenses
Year ended October 31
(millions of Canadian dollars) 2024 2023((1)) 2022 2021 2020
Compensation and employee benefits((1)(2)) 3,725 3,425 3,284 3,027 2,713
Occupancy((1)) 189 178 157 147 151
Amortization - Premises and equipment((3)) 177 172 155 152 140
Technology((1)) 708 646 589 557 510
Amortization - Technology((4)) 338 432 326 314 366
Communications 56 58 57 53 58
Professional fees((1)(5)) 316 256 249 246 244
Advertising and business development 175 168 144 109 103
Capital and payroll taxes 36 37 32 52 73
Other((1)(6)) 334 381 237 246 258
Total 6,054 5,753 5,230 4,903 4,616
Canada 5,464 5,213 4,760 4,478 4,195
United States 238 226 209 203 209
Other countries 352 314 261 222 212
Efficiency ratio((7)) 53.1 % 57.2 % 54.2 % 54.9 % 58.2 %
(1) Certain comparative figures for 2023 have been adjusted to reflect
accounting policy changes arising from the adoption of IFRS 17. For additional
information, see Note 2 to the Consolidated Financial Statements.
(2) For fiscal 2020, Compensation and employee benefits had included $48
million in severance pay.
(3) For fiscal 2023, Amortization - Premises and Equipment expense had
included $11 million in impairment losses.
(4) For fiscal 2023, Amortization - Technology expense had included $75
million in intangible asset impairment losses (2021: $9 million; 2020: $71
million).
(5) For fiscal 2024, Professional fees included acquisition and
integration charges of $18 million related to the CWB transaction.
(6) For fiscal 2023, Other expenses had included $35 million in
litigation expenses, a $25 million expense related to changes to the Excise
Tax Act, and $15 million in provisions for contracts. For fiscal 2020, Other
expenses had included a $13 million charge related to Maple.
(7) See the Glossary section on pages 130 to 133 for details on the
composition of these measures.
Table 7 - Provisions for Credit Losses((1))
Year ended October 31
(millions of Canadian dollars) 2024 2023 2022 2021 2020
Personal Banking((2))
Stage 3 196 119 75 65 147
Stages 1 and 2 28 38 9 (77) 121
224 157 84 (12) 268
Commercial Banking
Stage 3 106 48 13 26 76
Stages 1 and 2 19 40 − 26 103
POCI (14) (7) − − −
111 81 13 52 179
Wealth Management
Stage 3 − (1) 1 1 4
Stages 1 and 2 (1) 3 2 − 3
(1) 2 3 1 7
Financial Markets
Stage 3 34 3 1 78 99
Stages 1 and 2 20 36 (24) (102) 210
54 39 (23) (24) 309
USSF&I
Stage 3 144 76 48 13 46
Stages 1 and 2 26 53 12 (2) 41
POCI 12 (16) 6 (26) (7)
182 113 66 (15) 80
Other
Stage 3 − − − − −
Stages 1 and 2 (1) 5 2 − 3
(1) 5 2 − 3
Total provisions for credit losses
Stage 3 480 245 138 183 372
Stages 1 and 2 91 175 1 (155) 481
POCI (2) (23) 6 (26) (7)
569 397 145 2 846
Average loans and acceptances 234,180 215,976 194,340 172,323 159,275
Provisions for credit losses on impaired loans
excluding POCI loans((3)) as a % of average loans and acceptances((3)) 0.20 % 0.11 % 0.07 % 0.11 % 0.23 %
Provisions for credit losses
as a % of average loans and acceptances((3)) 0.24 % 0.18 % 0.07 % − % 0.53 %
(1) The Stage 3 category presented in this table represents provisions
for credit losses on loans classified in Stage 3 of the expected credit loss
model and excludes POCI loans (impaired loans excluding POCI loans). The
Stages 1 and 2 category represents provisions for credit losses on
non-impaired loans. The POCI category represents provisions for credit losses
on POCI loans.
(2) Includes credit card receivables.
(3) See the Glossary section on pages 130 to 133 for details on the
composition of these measures.
Table 8 - Change in Average Volumes((1))
Year ended October 31
(millions of Canadian dollars) 2024 2023 2022 2021 2020
Average Rate Average Rate Average Rate Average Rate Average Rate
volume % volume % volume % volume % volume %
$ $ $ $ $
Assets
Deposits with financial institutions 31,429 4.92 40,824 4.09 42,042 1.03 40,294 0.31 24,966 0.44
Securities 146,911 1.94 126,182 1.93 111,863 1.77 116,023 1.25 97,025 1.63
Securities purchased under reverse
repurchase agreements and
securities borrowed 17,607 9.61 19,533 6.61 16,255 2.08 11,559 0.90 16,408 1.39
Residential mortgage loans 89,621 4.47 82,884 3.95 75,712 2.90 68,297 2.93 59,801 3.13
Personal loans 46,039 5.92 44,829 5.44 42,723 3.82 38,434 3.16 36,273 3.68
Credit card receivables 2,532 13.58 2,325 13.17 2,133 12.81 1,864 13.47 1,995 14.62
Business and government loans 86,899 7.08 69,599 6.49 58,947 3.63 50,216 3.06 47,272 4.13
POCI loans 528 20.26 545 21.98 493 32.68 686 22.64 1,073 16.45
Average interest-bearing assets((1)) 421,566 4.70 386,721 4.30 350,168 2.69 327,373 2.13 284,813 2.66
Other assets 35,696 43,925 43,679 36,133 33,274
457,262 4.37 430,646 3.90 393,847 2.43 363,506 1.93 318,087 2.38
Liabilities and equity
Personal deposits 91,976 2.48 84,262 2.03 72,927 0.67 68,334 0.42 63,634 0.87
Deposit-taking institutions 4,936 4.17 4,997 3.81 5,695 0.88 6,522 0.09 6,494 0.63
Other deposits 218,693 4.88 195,311 4.15 180,307 1.28 161,373 0.68 137,253 1.26
315,605 4.17 284,570 3.51 258,929 1.10 236,229 0.58 207,381 1.12
Subordinated debt 1,083 5.72 937 5.16 960 3.70 758 3.22 759 3.25
Obligations other than deposits((2)) 85,837 4.31 90,194 3.43 81,659 1.13 80,808 0.67 70,973 1.12
Average interest-bearing liabilities((1)) 402,525 4.23 375,701 3.51 341,548 1.25 317,795 0.69 279,113 1.19
Other liabilities 28,695 30,698 30,209 28,195 23,400
Equity 26,042 24,247 22,090 17,516 15,574
457,262 3.73 430,646 3.07 393,847 1.09 363,506 0.61 318,087 1.04
Net interest margin((3)) 0.64 0.83 1.34 1.32 1.34
(1) See the Glossary section on pages 130 to 133 for details on the
composition of these measures.
(2) Average obligations other than deposits represent the average of the
daily balances for the fiscal year of obligations related to securities sold
short, obligations related to securities sold under repurchase agreements and
securities loaned, and liabilities related to transferred receivables.
(3) Calculated by dividing net interest income by average assets.
Table 9 - Distribution of Gross Loans and Acceptances by Borrower Category
Under
Basel Asset Classes
As at October 31
(millions of Canadian dollars) 2024 2023 2022 2021 2020
$ % $ % $ % $ % $ %
Residential mortgage((1)) 104,665 42.8 99,910 44.1 95,575 46.0 89,035 48.5 81,543 49.2
Qualifying revolving retail((2)) 4,148 1.7 4,000 1.8 3,801 1.8 3,589 2.0 3,599 2.2
Other retail((3)) 17,919 7.3 16,696 7.4 14,899 7.2 12,949 7.0 11,569 7.0
Agriculture 9,192 3.8 8,545 3.8 8,109 3.9 7,357 4.0 6,696 4.0
Oil and gas 1,913 0.8 1,826 0.8 1,435 0.7 1,807 1.0 2,506 1.5
Mining 2,062 0.9 1,245 0.5 1,049 0.5 529 0.3 756 0.5
Utilities 12,528 5.1 12,427 5.5 9,682 4.6 7,687 4.2 6,640 4.0
Non-real-estate construction((4)) 1,864 0.8 1,739 0.8 1,935 0.9 1,541 0.8 1,079 0.7
Manufacturing 8,064 3.3 7,047 3.1 7,374 3.6 5,720 3.1 5,803 3.5
Wholesale 3,145 1.3 3,208 1.4 3,241 1.6 2,598 1.4 2,206 1.3
Retail 4,229 1.7 3,801 1.7 3,494 1.7 2,978 1.6 2,955 1.8
Transportation 3,253 1.3 2,631 1.2 2,209 1.1 1,811 1.0 1,528 0.9
Communications 2,542 1.0 2,556 1.1 1,830 0.9 1,441 0.8 1,184 0.7
Financial services 12,775 5.2 11,693 5.1 10,777 5.2 8,870 4.8 7,476 4.4
Real estate and real-estate-construction((5)) 30,848 12.6 25,967 11.5 22,382 10.8 18,195 9.9 14,171 8.6
Professional services 3,871 1.6 3,973 1.7 2,338 1.1 1,872 1.0 1,490 0.9
Education and health care 3,487 1.4 3,700 1.6 3,412 1.6 4,073 2.2 3,800 2.3
Other services 7,356 3.0 6,898 3.0 6,247 3.0 5,875 3.2 5,296 3.2
Government 1,853 0.8 1,727 0.8 1,661 0.8 1,159 0.6 1,160 0.7
Other 8,268 3.4 6,478 2.9 5,790 2.8 4,137 2.3 3,586 2.1
POCI loans 391 0.2 560 0.2 459 0.2 464 0.3 855 0.5
244,373 100.0 226,627 100.0 207,699 100.0 183,687 100.0 165,898 100.0
(1) Includes residential mortgage loans on one- to four-unit dwellings
(Basel definition) and home equity lines of credit.
(2) Includes lines of credit and credit card receivables.
(3) Includes consumer loans and other retail loans but excludes SME
loans.
(4) Includes civil engineering loans, public-private partnership loans,
and project finance loans.
(5) Includes residential mortgages on dwellings of five or more units
and SME loans.
Table 10 - Impaired Loans
As at October 31
(millions of Canadian dollars) 2024 2023 2022 2021 2020
Gross impaired loans
Personal Banking 327 220 176 169 287
Commercial Banking 451 296 206 244 333
Wealth Management 16 13 21 23 8
Financial Markets 122 110 167 162 134
USSF&I 736 385 242 64 55
Gross impaired loans excluding POCI loans((1)) 1,652 1,024 812 662 817
Gross POCI loans 391 560 459 464 855
2,043 1,584 1,271 1,126 1,672
Net impaired loans((2))
Personal Banking 203 145 104 106 206
Commercial Banking 302 140 89 107 184
Wealth Management 11 8 15 16 2
Financial Markets 78 30 91 14 43
USSF&I 550 283 180 40 30
Net impaired loans excluding POCI loans((1)) 1,144 606 479 283 465
Net POCI loans 485 670 551 553 921
1,629 1,276 1,030 836 1,386
Allowances for credit losses on impaired loans 508 418 333 379 352
excluding POCI loans((1))
Allowances for credit losses on POCI loans (94) (110) (92) (89) (66)
Allowances for credit losses on impaired loans 414 308 241 290 286
Impaired loan provisioning rate excluding POCI loans((1)) 30.8 % 40.8 % 41.0 % 57.3 % 43.1 %
Gross impaired loans excluding POCI loans as a % 0.68 % 0.45 % 0.39 % 0.36 % 0.49 %
of loans and acceptances((1))
Net impaired loans excluding POCI loans as a % 0.47 % 0.27 % 0.23 % 0.15 % 0.28 %
of loans and acceptances((1))
(1) See the Glossary section on pages 130 to 133 for details on the
composition of these measures.
(2) Net impaired loans are presented net of allowances for credit losses
on Stage 3 loan amounts drawn and on POCI loans.
Table 11 - Allowances for Credit Losses
Year ended October 31
(millions of Canadian dollars) 2024 2023 2022 2021 2020
Balance at beginning 1,377 1,131 1,169 1,343 755
Provisions for credit losses 569 397 145 2 846
Write-offs (421) (199) (233) (192) (294)
Disposals (2) − − (14) −
Recoveries 56 47 40 44 44
Exchange rate and other movements (6) 1 10 (14) (8)
Balance at end 1,573 1,377 1,131 1,169 1,343
Composition of allowances:
Allowances for credit losses on impaired loans excluding 508 418 333 379 352
POCI loans((1))
Allowances for credit losses on POCI loans (94) (110) (92) (89) (66)
Allowances for credit losses on non-impaired loans 927 876 714 708 872
Allowances for credit losses on off-balance-sheet
commitments and other assets 232 193 176 171 185
(1) See the Glossary section on pages 130 to 133 for details on the
composition of these measures.
Table 12 - Deposits
As at October 31
(millions of Canadian dollars) 2024 2023 2022 2021 2020
$ % $ % $ % $ % $ %
Personal 95,181 28.5 87,883 30.5 78,811 29.6 70,076 29.1 67,499 31.3
Business and government 232,730 69.8 197,328 68.5 184,230 69.1 167,870 69.7 143,787 66.6
Deposit-taking institutions 5,634 1.7 2,962 1.0 3,353 1.3 2,992 1.2 4,592 2.1
Total 333,545 100.0 288,173 100.0 266,394 100.0 240,938 100.0 215,878 100.0
Canada 300,642 90.1 257,732 89.4 238,239 89.5 216,906 90.0 195,730 90.7
United States 8,908 2.7 9,520 3.3 9,147 3.4 9,234 3.8 8,126 3.7
Other countries 23,995 7.2 20,921 7.3 19,008 7.1 14,798 6.2 12,022 5.6
Total 333,545 100.0 288,173 100.0 266,394 100.0 240,938 100.0 215,878 100.0
Personal deposits as a %
of total assets 20.6 20.8 19.5 19.7 20.4
Glossary
Acceptances
Acceptances and the customers' liability under acceptances constitute a
guarantee of payment by a bank and can be traded in the money market. The Bank
earns a "stamping fee" for providing this guarantee.
Allowances for credit losses
Allowances for credit losses represent management's unbiased estimate of
expected credit losses as at the balance sheet date. These allowances are
primarily related to loans and off-balance sheet items such as loan
commitments and financial guarantees.
Assets under administration
Assets in respect of which a financial institution provides administrative
services on behalf of the clients who own the assets. Such services include
custodial services, collection of investment income, settlement of purchase
and sale transactions, and record-keeping. Assets under administration are not
reported on the balance sheet of the institution offering such services.
Assets under management
Assets managed by a financial institution and that are beneficially owned by
clients. Management services are more comprehensive than administrative
services and include selecting investments or offering investment advice.
Assets under management, which may also be administered by the financial
institution, are not reported on the balance sheet of the institution offering
such services.
Available TLAC
Available TLAC includes total capital as well as certain senior unsecured debt
subject to the federal government's bail-in regulations that satisfy all the
eligibility criteria in OSFI's Total Loss Absorbing Capacity (TLAC) Guideline.
Average interest-bearing assets
Average interest-bearing assets include interest-bearing deposits with
financial institutions and certain cash items, securities, securities
purchased under reverse repurchase agreements and securities borrowed, and
loans, while excluding customers' liability under acceptances and other
assets. The average is calculated based on the daily balances for the period.
Average interest-bearing assets, non-trading
Average interest-bearing assets, non-trading, include interest-bearing
deposits with financial institutions and certain cash items, securities
purchased under reverse repurchase agreements and borrowed securities, and
loans, while excluding other assets and assets related to trading activities.
The average is calculated based on the daily balances for the period.
Average volumes
Average volumes represent the average of the daily balances for the period of
the consolidated balance sheet items.
Basic earnings per share
Basic earnings per share are calculated by dividing net income attributable to
common shareholders by the weighted average basic number of common shares
outstanding.
Basis point (bps)
Unit of measure equal to one one-hundredth of a percentage point (0.01%).
Book value of a common share
The book value of a common share is calculated by dividing common
shareholders' equity by the number of common shares on a given date.
Common Equity Tier 1 (CET1) capital ratio
CET1 capital consists of common shareholders' equity, less goodwill,
intangible assets, and other capital deductions. The CET1 capital ratio is
calculated by dividing total CET1 capital by the corresponding risk-weighted
assets.
Compound annual growth rate (CAGR)
CAGR is a rate of growth that shows, for a period exceeding one year, the
annual change as though the growth had been constant throughout the period.
Derivative financial instruments
Derivative financial instruments are financial contracts whose value is
derived from an underlying interest rate, exchange rate, equity price,
commodity price, credit instrument or index. Examples of derivatives include
swaps, options, forward rate agreements, and futures. The notional amount of
the derivative is the contract amount used as a reference point to calculate
the payments to be exchanged between the two parties, and the notional amount
itself is generally not exchanged by the parties.
Diluted earnings per share
Diluted earnings per share are calculated by dividing net income attributable
to common shareholders by the weighted average number of common shares
outstanding after taking into account the dilution effect of stock options
using the treasury stock method and any gain (loss) on the redemption of
preferred shares.
Dividend payout ratio
The dividend payout ratio represents the dividends of common shares (per share
amount) expressed as a percentage of basic earnings per share.
Economic capital
Economic capital is the internal measure used by the Bank to determine the
capital required for its solvency and to pursue its business operations.
Economic capital takes into consideration the credit, market, operational,
business and other risks to which the Bank is exposed as well as the risk
diversification effect among them and among the business segments. Economic
capital thus helps the Bank to determine the capital required to protect
itself against such risks and ensure its long-term viability.
Efficiency ratio
The efficiency ratio represents non-interest expenses expressed as a
percentage of total revenues. It measures the efficiency of the Bank's
operations.
Fair value
The fair value of a financial instrument is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction in
the principal market at the measurement date under current market conditions
(i.e., an exit price).
Gross impaired loans as a percentage of total loans and acceptances
This measure represents gross impaired loans expressed as a percentage of the
balance of loans and acceptances.
Gross impaired loans excluding POCI loans
Gross impaired loans excluding POCI loans are all loans classified in Stage 3
of the expected credit loss model excluding POCI loans.
Gross impaired loans excluding POCI loans as a percentage of total loans and
acceptances
This measure represents gross impaired loans excluding POCI loans expressed as
a percentage of the balance of loans and acceptances.
Hedging
The purpose of a hedging transaction is to modify the Bank's exposure to one
or more risks by creating an offset between changes in the fair value of, or
the cash flows attributable to, the hedged item and the hedging instrument.
Impaired loans
The Bank considers a financial asset, other than a credit card receivable, to
be credit-impaired when one or more events that have a detrimental impact on
the estimated future cash flows of the financial asset have occurred or when
contractual payments are 90 days past due. Credit card receivables are
considered credit-impaired and are fully written off at the earlier of the
following dates: when a notice of bankruptcy is received, a settlement
proposal is made, or contractual payments are 180 days past due.
Leverage ratio
The leverage ratio is calculated by dividing Tier 1 capital by total exposure.
Total exposure is defined as the sum of on-balance-sheet assets (including
derivative financial instrument exposures and securities financing transaction
exposures) and off-balance-sheet items.
Liquidity coverage ratio (LCR)
The LCR is a measure designed to ensure that the Bank has sufficient
high-quality liquid assets to cover net cash outflows given a severe, 30-day
liquidity crisis.
Loans and acceptances
Loans and acceptances represent the sum of loans and of the customers'
liability under acceptances.
Loan-to-value ratio
The loan-to-value ratio is calculated according to the total facility amount
for residential mortgages and home equity lines of credit divided by the value
of the related residential property.
Master netting agreement
Legal agreement between two parties that have multiple derivative contracts
with each other that provides for the net settlement of all contracts through
a single payment, in the event of default, insolvency or bankruptcy.
Net impaired loans
Net impaired loans are gross impaired loans presented net of allowances for
credit losses on Stage 3 loan amounts drawn.
Net impaired loans as a percentage of total loans and acceptances
This measure represents net impaired loans as a percentage of the balance of
loans and acceptances.
Net impaired loans excluding POCI loans
Net impaired loans excluding POCI loans are gross impaired loans excluding
POCI loans presented net of allowances for credit losses on amounts drawn on
Stage 3 loans granted by the Bank.
Net interest income from trading activities
Net interest income from trading activities comprises dividends related to
financial assets and liabilities associated with trading activities and
interest income related to the financing of these financial assets and
liabilities, net of interest expenses.
Net interest income, non-trading
Net interest income, non-trading, comprises revenues related to financial
assets and liabilities associated with non-trading activities, net of interest
expenses and interest income related to the financing of these financial
assets and liabilities.
Net interest margin
Net interest margin is calculated by dividing net interest income by average
interest-bearing assets.
Net stable funding ratio (NSFR)
The NSFR ratio is a measure that helps guarantee that the Bank is maintaining
a stable funding profile to reduce the risk of funding stress.
Net write-offs as a percentage of average loans and acceptances
This measure represents the net write-offs (net of recoveries) expressed as a
percentage of average loans and acceptances.
Non-interest income related to trading activities
Non-interest income related to trading activities consists of realized and
unrealized gains and losses as well as interest income on securities measured
at fair value through profit or loss, income from held-for-trading derivative
financial instruments, changes in the fair value of loans at fair value
through profit or loss, changes in the fair value of financial instruments
designated at fair value through profit or loss, certain commission income,
other trading activity revenues, and any applicable transaction costs.
Office of the Superintendent of Financial Institutions (Canada) (OSFI)
The mandate of OSFI is to regulate and supervise financial institutions and
private pension plans subject to federal oversight, to help minimize undue
losses to depositors and policyholders and, thereby, to contribute to public
confidence in the Canadian financial system.
Operating leverage
Operating leverage is the difference between the growth rate for total
revenues and the growth rate for non-interest expenses.
Provisioning rate
This measure represents the allowances for credit losses on impaired loans
expressed as a percentage of gross impaired loans.
Provisioning rate excluding POCI loans
This measure represents the allowances for credit losses on impaired loans
excluding POCI loans expressed as a percentage of gross impaired loans
excluding POCI loans.
Provisions for credit losses
Amount charged to income necessary to bring the allowances for credit losses
to a level deemed appropriate by management and is comprised of provisions for
credit losses on impaired and non-impaired financial assets.
Provisions for credit losses as a percentage of average loans and acceptances
This measure represents the provisions for credit losses expressed as a
percentage of average loans and acceptances.
Provisions for credit losses on impaired loans as a percentage of average
loans and acceptances
This measure represents the provisions for credit losses on impaired loans
expressed as a percentage of average loans and acceptances.
Provisions for credit losses on impaired loans excluding POCI loans
Amount charged to income necessary to bring the allowances for credit losses
to a level deemed appropriate by management and is comprised of provisions for
credit losses on impaired financial assets excluding POCI loans.
Provisions for credit losses on impaired loans excluding POCI loans as a
percentage of average loans and acceptances or provisions for credit losses on
impaired loans excluding POCI loans ratio
This measure represents the provisions for credit losses on impaired loans
excluding POCI loans expressed as a percentage of average loans and
acceptances.
Return on average assets
Return on average assets represents net income expressed as a percentage of
average assets.
Return on common shareholders' equity (ROE)
ROE represents net income attributable to common shareholders expressed as a
percentage of average equity attributable to common shareholders. It is a
general measure of the Bank's efficiency in using equity.
Risk-weighted assets
Assets are risk weighted according to the guidelines established by OSFI. In
the Standardized calculation approach, risk factors are applied directly to
the face value of certain assets in order to reflect comparable risk levels.
In the Advanced Internal Ratings-Based (AIRB) Approach, risk-weighted assets
are derived from the Bank's internal models, which represent the Bank's own
assessment of the risks it incurs. In the Foundation Internal Ratings-Based
(FIRB) Approach, the Bank can use its own estimate of probability of default
but must rely on OSFI estimates for the loss given default and exposure at
default risk parameters. Off-balance-sheet instruments are converted to
balance sheet (or credit) equivalents by adjusting the notional values before
applying the appropriate risk-weighting factors.
Securities purchased under reverse repurchase agreements
Securities purchased by the Bank from a client pursuant to an agreement under
which the securities will be resold to the same client on a specified date and
at a specified price. Such an agreement is a form of short-term collateralized
lending.
Securities sold under repurchase agreements
Financial obligations related to securities sold pursuant to an agreement
under which the securities will be repurchased on a specified date and at a
specified price. Such an agreement is a form of short-term funding.
Structured entity
A structured entity is an entity created to accomplish a narrow and
well-defined objective and is designed so that voting or similar rights are
not the dominant factor in deciding who controls the entity, such as when any
voting rights relate solely to administrative tasks and the relevant
activities are directed by means of contractual arrangements.
Taxable equivalent basis
Taxable equivalent basis is a calculation method that consists of grossing up
certain revenues taxed at lower rates (notably dividends) by the income tax to
a level that would make it comparable to revenues from taxable sources in
Canada. The Bank uses the taxable equivalent basis to calculate net interest
income, non-interest income and income taxes.
Tier 1 capital ratio
Tier 1 capital ratio consists of Common Equity Tier 1 capital and Additional
Tier 1 instruments, namely, qualifying non-cumulative preferred shares and the
eligible amount of innovative instruments. The Tier 1 capital ratio is
calculated by dividing Tier 1 capital, less regulatory adjustments, by the
corresponding risk-weighted assets.
TLAC leverage ratio
The TLAC leverage ratio is an independent risk measure that is calculated by
dividing available TLAC by total exposure, as set out in OSFI's Total Loss
Absorbing Capacity (TLAC) Guideline.
TLAC ratio
The TLAC ratio is a measure used to assess whether a non-viable Domestic
Systemically Important Bank (D-SIB) has sufficient loss-absorbing capacity to
support its recapitalization. It is calculated by dividing available TLAC by
risk weighted assets, as set out in OSFI's Total Loss Absorbing Capacity
(TLAC) Guideline.
Total capital ratio
Total capital is the sum of Tier 1 and Tier 2 capital. Tier 2 capital consists
of the eligible portion of subordinated debt and certain allowances for credit
losses. The Total capital ratio is calculated by dividing Total capital, less
regulatory adjustments, by the corresponding risk-weighted assets.
Total shareholder return (TSR)
TSR represents the average total return on an investment in the Bank's common
shares. The return includes changes in share price and assumes that the
dividends received were reinvested in additional common shares of the Bank.
Trading activity revenues
Trading activity revenues consist of the net interest income and the
non-interest income related to trading activities. Net interest income
comprises dividends related to financial assets and liabilities associated
with trading activities, and some interest income related to the financing of
these financial assets and liabilities net of interest expenses and interest
income related to the financing of these financial assets and liabilities.
Non-interest income consists of realized and unrealized gains and losses as
well as interest income on securities measured at fair value through profit or
loss, income from held-for-trading derivative financial instruments, changes
in the fair value of loans at fair value through profit or loss, changes in
the fair value of financial instruments designated at fair value through
profit or loss, realized and unrealized gains and losses as well as interest
expense on obligations related to securities sold short, certain commission
income, other trading activity revenues, and any applicable transaction costs.
Value-at-Risk (VaR)
VaR is a statistical measure of risk that is used to quantify market risks
across products, per types of risks, and aggregate risk on a portfolio basis.
VaR is defined as the maximum loss at a specific confidence level over a
certain horizon under normal market conditions. The VaR method has the
advantage of providing a uniform measurement of financial instrument-related
market risks based on a single statistical confidence level and time horizon.
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