REG - Nat Bank of Canada - Financial Statements - Part 2 <Origin Href="QuoteRef">NA.TO</Origin> - Part 3
29/10/2014 15:46
- Part 3: For the preceding part double click ID:nRSb1668Qb
4,858 4,858
Due to clients, dealers and brokers − − 2,442 2,442 2,442 2,442
Liabilities related to transferred receivables − 6,819 8,504 8,593 15,323 15,412
Other liabilities 109 − 2,345 2,345 2,454 2,454
Subordinated debt − − 2,426 2,450 2,426 2,450
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) Including embedded derivative financial instruments.
Establishing Fair Value
Fair value is established in accordance with a rigorous control framework. The fair value of existing and new products is
determined and validated by functions independent of the risk-taking team. Fair value matters are reviewed by valuation
committees made up of experts from various support functions.
For financial instruments classified in Level 3 of the fair value hierarchy, the Bank has documented the policies and
controls in place to ensure that fair value is measured appropriately, reliably and consistently. Valuation methods and
assumptions are reviewed on a regular basis.
NOTE 3 - Fair Value of Financial Instruments (cont.)
Hierarchy of Fair Value Measurements
Financial instruments recorded at fair value on the Consolidated Balance Sheet are classified using a fair value hierarchy
that reflects the significance of the inputs used in making the measurements. For additional information, see Note 3 to the
audited annual consolidated financial statements for the year ended October 31, 2013. During the nine-month periods ended
July 31, 2014 and 2013, there were no significant transfers of financial instruments between Levels 1 and 2.
As at July 31, 2014
Level 1 Level 2 Level 3 Total financial assets/liabilities at fair value
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canada 4,322 5,058 − 9,380
Provinces − 8,234 − 8,234
Municipalities and school boards − 487 − 487
U.S. Treasury, other U.S. agencies and other foreign governments 1,864 − − 1,864
Other debt securities − 3,748 1,212 4,960
Equity securities 19,258 1,416 33 20,707
25,444 18,943 1,245 45,632
Available-for-sale
Securities issued or guaranteed by
Canada 133 4,555 − 4,688
Provinces − 3,142 − 3,142
Municipalities and school boards − 303 − 303
U.S. Treasury, other U.S. agencies and other foreign governments 128 − − 128
Other debt securities − 303 87 390
Equity securities 210 123 149 482
471 8,426 236 9,133
Securities purchased under reverse repurchase agreements and
securities borrowed − 415 − 415
Loans and acceptances − 2,581 − 2,581
Other
Derivative financial instruments 61 5,976 49 6,086
25,976 36,341 1,530 63,847
Financial liabilities
Deposits − 2,548 2 2,550
Other
Obligations related to securities sold short 10,705 5,544 − 16,249
Derivative financial instruments 60 4,241 69 4,370
Liabilities related to transferred receivables − 6,175 − 6,175
Other liabilities − 88 − 88
10,765 18,596 71 29,432
As at October 31, 2013
Level 1 Level 2 Level 3 Total financial assets/liabilities at fair value
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canada 5,476 5,080 − 10,556
Provinces − 10,654 − 10,654
Municipalities and school boards − 367 − 367
U.S. Treasury, other U.S. agencies and other foreign governments 689 − − 689
Other debt securities − 2,784 1,305 4,089
Equity securities 15,929 1,670 46 17,645
22,094 20,555 1,351 44,000
Available-for-sale
Securities issued or guaranteed by
Canada 143 5,517 − 5,660
Provinces − 2,617 − 2,617
Municipalities and school boards − 302 − 302
U.S. Treasury, other U.S. agencies and other foreign governments 390 − − 390
Other debt securities − 253 77 330
Equity securities 209 65 171 445
742 8,754 248 9,744
Loans and acceptances − 1,588 − 1,588
Other
Derivative financial instruments 239 5,609 56 5,904
23,075 36,506 1,655 61,236
Financial liabilities
Deposits − 1,978 73 2,051
Other
Obligations related to securities sold short 11,415 7,494 − 18,909
Derivative financial instruments 330 4,454 74 4,858
Liabilities related to transferred receivables − 6,819 − 6,819
Other liabilities − 109 − 109
11,745 20,854 147 32,746
NOTE 3 - Fair Value of Financial Instruments (cont.)
Financial Instruments Classified in Level 3
The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant
input that is not observable in the markets or when there is a lack of liquidity in certain markets. The valuation
technique may also be based, in part, on observable market inputs. The following table shows the significant unobservable
inputs used for the fair value measurements of financial instruments classified in Level 3 of the hierarchy.
As at July 31, 2014
Fair value Primary valuation techniques Significant unobservable inputs Range of input values
Financial assets
Securities
Restructured notes of the master asset vehicle Liquidity premium(2)(3) 1.50% to 6.70%
(MAV) conduits and other restructured notes 1,272 Internal model(1) Credit spread(2)(3) 22 Bps to 603 Bps(4)
Equity securities and other debt securities 209 Various(5) Various(5) Various(5)
Other Long-term volatility(6)(7) 13% to 33%
Derivative financial instruments 49 Option pricing model Long-term correlation(6)(7) (24)% to 80%
1,530
Financial liabilities
Deposits Long-term volatility(6)(7) 13% to 24%
Structured deposit notes 2 Option pricing model Long-term correlation(6)(7) (4)% to 77%
Other Long-term volatility(6)(7) 13% to 33%
Derivative financial instruments 69 Option pricing model Long-term correlation(6)(7) (24)% to 77%
71
(1) For a description of the valuation techniques, see Note 6 to the audited annual consolidated financial statements
for the year ended October 31, 2013 and Note 5 to these unaudited interim condensed consolidated financial statements.
(2) There is no predictable correlation between the liquidity premium and the credit spread.
(3) An increase (decrease) in this unobservable input generally results in a decrease (increase) in fair value.
(4) Bps or basis point is a unit of measure equal to 0.01%.
(5) In the absence of an active market, the fair value of these securities is estimated based on an analysis of the
investee's financial position and results, risk profile, economic outlook and other factors. Given the nature of the
analysis in respect of each investment, it is not practical to quote a range of values for significant unobservable
inputs.
(6) An increase (decrease) in long-term volatility is generally associated with an increase (decrease) in long-term
correlation.
(7) An increase (decrease) in this unobservable input generally results in an increase (decrease) in fair value.
The Bank performs sensitivity analyses for fair value measurements of financial instruments classified in Level 3,
substituting the unobservable inputs with one or more reasonably plausible alternative assumptions. For the sensitivity
analysis of investments in restructured notes of the MAV conduits, see Note 5. For private equity securities classified in
Available-for-sale securities, the Bank varies significant unobservable market inputs, such as net asset value or projected
future cash flows, and establishes a reasonable fair value range that could result in a $17 million increase or decrease in
the fair value recorded as at July 31, 2014 (a $17 million increase or decrease as at October 31, 2013). For other
financial instruments classified in Level 3, sensitivity analyses result in a negligible change in fair value.
Change in the Fair Value of Financial Instruments Classified in Level 3
The Bank may hedge the fair value of financial instruments classified in the various levels through inverse hedge
positions. Gains and losses for financial instruments classified in Level 3 presented in the following tables do not
reflect the inverse gains and losses on financial instruments used for economic hedging purposes that may have been
classified in Level 1 or 2 by the Bank. In addition, the Bank may hedge the fair value of financial instruments classified
in Level 3 using other financial instruments classified in Level 3. The effect of these hedges is not included in the net
amount presented in the following tables. The gains and losses presented hereafter may therefore comprise changes in fair
value based on observable and unobservable inputs.
Nine months ended July 31, 2014
Securitiesat fair value through profit or loss Available-for-salesecurities Loans Derivative financialinstruments (1) Deposits
Fair value as at October 31, 2013 1,351 248 − (18) (73)
Total realized and unrealized gains (losses) included in
Net income(2) 102 6 − 11 (4)
Total realized and unrealized gains (losses) included in
Other comprehensive income − 9 − − −
Purchases 9 18 − − −
Sales (206) (39) − − −
Issuances − − − − 1
Settlements and other (11) (7) − − −
Transfers into Level 3(3) − 1 − (9) (8)
Transfers out of Level 3(3) − - − (4) 82
Fair value as at July 31, 2014 1,245 236 − (20) (2)
Change in unrealized gains and losses included in net income
with respect to financial assets and liabilities
held as at July 31, 2014(4) 101 − − 11 (4)
Nine months ended July 31, 2013
Securitiesat fair value through profit or loss Available-for-salesecurities Loans Derivative financialinstruments (1) Deposits
Fair value as at October 31, 2012 1,326 270 (3) (36) (73)
Total realized and unrealized gains (losses) included in
Net income(5) 175 6 − − (2)
Total realized and unrealized gains (losses) included in
Other comprehensive income − 10 − − −
Purchases 32 4 − − −
Sales (39) (38) − − −
Issuances − − − (7) (30)
Settlements and other (111) (13) 3 1 (1)
Transfers into Level 3(3) − − − (1) (3)
Transfers out of Level 3(3) − − − 5 59
Fair value as at July 31, 2013 1,383 239 − (38) (50)
Change in unrealized gains and losses included in net income
with respect to financial assets and liabilities
held as at July 31, 2013(6) 174 − − − (2)
(1) The derivative financial instruments include assets and liabilities presented on a net basis.
(2) Total net gains included in Non-interest income was $115 million.
(3) During the nine-month periods ended July 31, 2014 and 2013, certain financial instruments were transferred into
and out of Level 3 due to changes in the availability of observable market inputs resulting from changing market
conditions.
(4) Total unrealized gains included in Non-interest income was $108 million.
(5) Total net gains included in Non-interest income was $179 million.
(6) Total unrealized gains included in Non-interest income was $172 million.
NOTE 4 - FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS
The Bank chose to designate certain financial instruments at fair value through profit or loss according to criteria
presented in Note 1 to the audited annual consolidated financial statements for the year ended October 31, 2013. In
accordance with its risk management strategy, which allows the Bank to eliminate or significantly reduce measurement or
recognition disparity resulting from measuring financial assets and liabilities on different bases, the Bank designated
certain debt securities, certain securities purchased under reverse repurchase agreements, and certain liabilities related
to transferred receivables at fair value through profit or loss. The fair value of liabilities related to transferred
receivables does not include credit risk, as the holders of these liabilities are not exposed to the Bank's credit risk.
The Bank also designated certain hybrid financial instruments with one or more embedded derivatives, such as restructured
notes of the MAV conduits, certain deposits, and certain loans at fair value through profit or loss. There is no exposure
to credit risk on the loans to the extent that they are fully collateralized.
Information about the financial assets and financial liabilities designated at fair value through profit or loss is
provided in the following tables.
Carrying value as at July 31, 2014 Change in the total fair value (including the change in the fair value attributable to credit risk) for the quarter ended July 31, 2014 Change in the total fair value (including the Change in fair valuesince the initial recognition of the instrument
change in the fair value attributable to
credit risk) for the nine months endedJuly 31,
2014
Financial assets designated at fair value through profit or loss
Securities 2,689 56 94 422
Securities purchased under reverse repurchase agreements 415 − − −
Loans 83 (7) (8) 2
3,187 49 86 424
Financial liabilities designated at fair value through profit or loss
- More to follow, for following part double click ID:nRSb1668QdRecent news on National Bank of Canada
See all newsREG - Nat Bank of Canada - Publication of Suppl.Prospcts
AnnouncementREG - Nat Bank of Canada - Report to Shareholders Part 2
AnnouncementREG - Nat Bank of Canada - Report to Shareholders Part 1
AnnouncementREG - Nat Bank of Canada - Press Release Q1 2025
AnnouncementREG - Nat Bank of Canada - Publication of Suppl.Prospcts
Announcement